Case Note & Summary
The petitioner, Tamil Nadu Industrial Investment Corporation Limited (TIIC), a State Financial Corporation, filed an original petition under Sections 31(a), 31(aa) and 32 of the State Financial Corporations Act, 1951, seeking recovery of Rs.12,18,39,232.60 from the respondents, who were the principal borrower company (M/s.Pulsar Electronics Ltd) and its guarantors (respondents 2 to 8). The company had availed a term loan of Rs.60 lakhs in 1987 for setting up a factory, hypothecating machinery and depositing title deeds of the factory site. The guarantors executed deeds of continuing guarantee. The company defaulted, and TIIC took possession of the mortgaged assets in 1994. Meanwhile, a winding up petition was filed against the company, and the Official Liquidator took charge and liquidated the assets. TIIC participated in the winding up proceedings and received Rs.55 lakhs from the Official Liquidator. Claiming a balance of Rs.12,18,39,232.60 as on 18.09.2011, TIIC filed the present petition against the company and the guarantors. The third respondent (V.P.Raman) died and the petition against him abated. The sixth and seventh respondents (S.Padmanabhan and Padmaja Financial Services) contested the petition, arguing that they were discharged as guarantors because TIIC had taken possession of the securities and participated in the winding up, thereby impairing the securities and causing loss. They also contended that the petition was barred by limitation and that the claim was excessive. The Court examined the provisions of the SFC Act and the law of guarantee. It held that the liability of guarantors is joint and several and independent of the principal debtor's liquidation. The guarantors cannot claim discharge merely because the creditor received some amount from the Official Liquidator. The Court found that the guarantors had executed continuing guarantees and that TIIC's actions did not amount to variance in the contract of guarantee or loss of securities so as to discharge the guarantors under Sections 134, 135 or 139 of the Contract Act. The Court also held that the petition was within limitation, as the cause of action arose when the loan became due and the last payment from the Official Liquidator was received in 2009, and the petition was filed within three years thereafter. The Court upheld the claim for interest at 16% per annum from the date of petition till realization, as per the loan agreement. Accordingly, the Court allowed the petition and directed the respondents 2, 4 to 8 (the surviving guarantors) to pay jointly and severally the sum of Rs.12,18,39,232.60 with interest at 16% per annum from the date of petition till realization, along with costs.
Headnote
A) State Financial Corporations Act, 1951 - Recovery of loan from guarantors - Sections 31(a), 31(aa), 32 - The petitioner, a State Financial Corporation, sought recovery of balance loan amount from guarantors after the principal borrower company was wound up and the Corporation received Rs.55 lakhs from the Official Liquidator. The Court held that the liability of guarantors is joint and several and independent of the principal debtor's liquidation; the guarantors cannot claim discharge merely because the creditor received some amount from the Official Liquidator. The petition under Section 31(a) and 31(aa) is maintainable against the guarantors for enforcement of the claim without a decree. (Paras 1-10) B) Contract Act, 1872 - Guarantee - Continuing guarantee - Discharge of guarantor - Sections 128, 134, 135, 139 - The guarantors argued that they were discharged because the creditor (TIIC) took possession of the mortgaged assets and participated in the winding up proceedings, thereby impairing the securities. The Court rejected this contention, holding that the guarantors had executed deeds of continuing guarantee and that the creditor's actions did not amount to variance in the contract of guarantee or loss of securities so as to discharge the guarantors under Sections 134, 135 or 139 of the Contract Act. The guarantors remained liable for the balance amount. (Paras 11-20) C) Limitation Act, 1963 - Applicability to proceedings under SFC Act - Article 137 - The petition was filed on 18.09.2011 claiming balance amount after the company's liquidation. The Court noted that the cause of action arose when the loan became due and the guarantors failed to pay; however, the petition was within limitation as the last payment from the Official Liquidator was received in 2009 and the petition was filed within three years thereafter. (Paras 21-25) D) Interest - Contractual rate of interest - 16% p.a. - The Court upheld the claim for interest at 16% per annum from the date of petition till realization, as per the loan agreement, holding that the rate is not penal or unconscionable and is in line with the contractual terms. (Para 26)
Issue of Consideration
Whether the guarantors (respondents 2 to 8) are liable to pay the balance loan amount claimed by TIIC after the principal borrower company was wound up and TIIC received Rs.55 lakhs from the Official Liquidator, and whether the petition under Sections 31(a), 31(aa) and 32 of the State Financial Corporations Act, 1951 is maintainable against the guarantors.
Final Decision
The Court allowed the petition and directed the respondents 2, 4, 5, 6, 7 and 8 (the surviving guarantors) to pay jointly and severally a sum of Rs.12,18,39,232.60 with interest at 16% per annum from the date of petition (18.09.2011) till the date of realization, along with costs of the petition.
Law Points
- Liability of guarantors under State Financial Corporations Act
- 1951 is joint and several and independent of the principal borrower's liquidation
- Guarantors cannot claim discharge merely because the creditor received some amount from the Official Liquidator
- Section 31(a) and 31(aa) of SFC Act provide for enforcement of claims against guarantors without need for a decree
- Interest rate of 16% p.a. as per contract is enforceable unless penal or unconscionable
- Guarantors are estopped from challenging the principal debtor's liability after having executed guarantee deeds.
