Case Note & Summary
The petitioner, Dena Bank, filed a writ petition challenging the order of the Debts Recovery Appellate Tribunal (DRAT) dated 27.10.2015, which dismissed the bank's appeal against the order of the Debts Recovery Tribunal (DRT) dated 13.1.2015. The DRT had dismissed the bank's Original Application No.1164 of 2000 seeking recovery of Rs.67,17,573/- with interest from the respondents, who were guarantors. The bank had sanctioned a loan of Rs.25,000/- each to 400 members of Samta Charmodhyog Cooperative Society Ltd., aggregating to Rs.1 Crore, under a guarantee agreement executed on 15.3.1995 between the society, the respondents (as guarantors), and the bank. The bank claimed that the respondents guaranteed the repayment of loans advanced to the society members. However, the DRT found that the guarantee agreement did not create a valid contract of guarantee because the principal debtors (the society members) were not parties to the agreement. The DRT held that there was no privity of contract between the bank and the guarantors, and the guarantee was unenforceable. The DRAT upheld this decision. The High Court, in its judgment, agreed with the DRT and DRAT, holding that the guarantee agreement was not enforceable as the bank had not established the liability of the principal debtors. The court noted that the guarantee was a continuing security but the bank failed to prove that the loans were actually disbursed to the members or that the society was the principal debtor. The court dismissed the writ petition, affirming the orders of the lower tribunals.
Headnote
A) Contract Law - Guarantee - Privity of Contract - Sections 126, 128 Indian Contract Act, 1872 - The bank sued guarantors for recovery of loan advanced to members of a society, but the guarantee agreement was executed by the society and the guarantors, not by the individual borrowers. The court held that there was no privity of contract between the bank and the guarantors as the principal debtor was not a party to the guarantee. The guarantee was void and unenforceable. (Paras 3-6) B) Banking Law - Recovery of Debts - Liability of Guarantor - Sections 19, 22 Recovery of Debts Due to Banks and Financial Institutions Act, 1993 - The bank's original application before DRT was dismissed as the guarantee agreement did not create a valid obligation. The court upheld the DRT's finding that the bank failed to prove the debt against the principal debtor, and thus the guarantors could not be held liable. (Paras 7-9)
Issue of Consideration
Whether the guarantee agreement executed by the respondents was enforceable against them when the loan was advanced to members of a society and not to the principal debtor named in the agreement.
Final Decision
The High Court dismissed the writ petition, upholding the orders of the DRT and DRAT. The court held that the guarantee agreement was not enforceable as there was no privity of contract between the bank and the guarantors, and the bank failed to establish the liability of the principal debtor.
Law Points
- Guarantee contract requires privity between creditor and guarantor
- Guarantor's liability is co-extensive with principal debtor
- Bank cannot recover from guarantors without establishing principal debtor's liability
