IN THE HIGH COURT OF GUJARAT AT AHMEDABAD FIRST APPEAL No. 814 of 1984 For Approval and Signature:
HONOURABLE MR.JUSTICE JAYANT PATEL Sd/-
HONOURABLE MR.JUSTICE C.L. SONI Sd/-
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========================================= GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD.
Versus RAJIT SUBODHBHAI SHAH & 3 =========================================A ppearance :
MR RD DAVE for the Appellant MR KH KAJI for the Respondents ========================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE C.L. SONI Date : 19/07/2012 CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE C.L. SONI)
1. This appeal is against the judgment and decree dated 29.4.1983 passed in Civil Suit No.913 of 1977 by learned Judge, 3rd Court, Ahmedabad.
2. The appellant is the original plaintiff, who had sanctioned loan of Rs.8,00,000/- in favour of Jahangir Vakil Mill Company Ltd. (defendant No.1) in the month of February 1970. The appellant had also furnished bank guarantee in favour of defendant No.1 to Punjab National Bank for a sum of Rs.7,00,000/-. Necessary agreements between the appellant and the said mill company were entered into. Loan of Rs.8 lakhs was disbursed in different installments. Respondent Nos.1 and 2 (defendant Nos.2 and 3) were Directors of the Mill Company and they executed a deed of guarantee, whereby each of the guarantors agreed to repay the financial assistance paid to Mill Company by the appellant. Loan of Rs.8 lakhs advanced by the appellant was to be paid by 16 installments. Loan amount was to be paid in equal half yearly installments, payable on or before 15th of June or 15th of December every year and the first of such installments was to be paid on 15th day of June or 15th day of December, which immediately followed the expiry of 24 months from the date of disbursement of the first installment of the loan. First installment of the loan was disbursed on 18.2.1970 Thus, first installment of repayment was to be made on 15th June 1972.
3. The Mill Company did not make repayment of any installment. The appellant, therefore, filed Civil Suit No.913 of 1977 in the City Civil Court at Ahmedabad for recovery of Rs.22,13,305.96 ps. with interest at the rate of 3 ½ % over the bank rate subject to the minimum of 9 ½ % till payment is made. The suit was filed against the mill company as defendant No.1, respondent Nos.1 and 2 as defendant Nos.2 and 3, Gujarat State Textile Corporation Ltd. as defendant No.4, National Textile Corporation Ltd. (New Delhi) as defendant No.5 and National Textile Corporation Ltd. (Gujarat) as defendant No.6. As stated in the plaint, in August 1978, Central Government had exercised the powers under Section 18-A of the Industries (Development and Regulation) Act, 1951 and authorized defendant No.4 to take over management of the mill company (defendant No.1). Defendant No.4 had accordingly, taken over the management of the mill company. The Sick Undertakings (Taking over of Management) Act, 1972, then came into force in 31st October 1972 and in pursuance thereof, defendant No.4 was entrusted with management of the unit of defendant No.1. Thereafter, Sick Textile Undertakings (Nationalization) Act, 1974 came into force on 21st September 1974 and the mill company was nationalized and stood vested with the defendant No.5 and subsequently, with defendant No.6 through the Central Government. Defendant Nos.4 to 6, therefore, were joined as party defendants in the suit and according to the appellant-plaintiff, they had become liable to discharge the dues of the defendant No.1 mill company.
4. In the suit, amendment was carried out under the order of the Court, wherein it is stated that the Central Government appointed defendant No.4 in August 1974 as authorized Controller under Section 184 of the Industries (Development and Regulation) Act, 1951 and the Government of Gujarat had, thereafter, issued notification under Sections 3 and 4 of the Bombay Relief Undertakings (Special Provisions) Act, 1958, declaring the industrial unit of the mill company-defendant No.1 as relief undertaking. By virtue of the said notification, the claims of the appellant against the defendants were stayed and suspended. Under the provisions of Section 4(b) of the Bombay Relief Undertakings (Special Provisions) Act, 1958, the period of limitation for enforcement of the right stood extended because of the exclusion of the period during which the said right remained under suspension. It is further the case of the appellant-plaintiff that its right to claim against the defendants was revived only after promulgation of the Sick Textile (Nationalization) Ordinance 1974 on 21.9.1974 and of the Nationalization Act on 21.12.1974. Therefore, the suit of the plaintiff against the defendant No.1 mill company and the defendant Nos.2 and 3 is not barred by law of limitation. It is also specific claim of the appellant- plaintiff in the suit that the guarantee executed by the respondents was a continuing guarantee and therefore, the suit against them is not barred by law of limitation.
5. Defendant Nos. 2 and 3 filed their written statement at Exh.18 and defendant Nos.4,5 and 6 also filed their written statement. On the basis of the pleadings, following issues at Exh.92 were framed.
“(1) It is proved that the plaintiff is a Company, incorporated under the Companies Act, 1956, as averred in the Plaint ?
(2) It is proved that Defendants Nos.(2) and (3) had personally guaranteed to the Plaintiff, for the repayment of the Loan given by the Plaintiff to Defendant No.(1) ?
(3) It is proved that the Defendant No.(1) had executed a Deed of Mortgage, whereby the properties of Defendant No.(1) were mortgaged to the Plaintiff ?
(4) Does the Plaintiff prove that a sum of Rs.22,13,305.96 p. is due and payable by Defendant No.(1) to it, as on March 15,1977 ?
(5) Has the suit been filed within the period of Limitation ?
(6) Do the Defendant prove that the suit is not maintainable, as contended by them in their written Statements ?
(7) Do the Defendants prove that this Court has no jurisdiction, as contended by them in their Written Statements ?
(8) Do defendants Nos. (2) and (3) prove that the guarantee Agreement relied upon by the Plaintiff, is illegal, inoperative and not binding to them, as contended in their Written Statements ?
(9) Do Defendant Nos.(2) and (3) prove that there has been frustration of the contract, resulting in their discharge from their liability, as contended in their additional Written Statement Ex.87 ?
(10) Do Defendant Nos.(2) and (3) prove that they have been discharged from their liability as Guarantors, as contended in their Written Statements ?
(11) Do Defendant Nos.(2) and (3) prove that the Plaintiff cannot enforce the suit agreement against them, as contended in paragraph (13) of their Written Statements, Exhibits (18) and (26) ?
(12) Do Defendant Nos.(2) and (3) prove that, in the event of the suit against Defendant No.(1) abating, the same will also abate against them ?
(13) Does the Plaintiff prove its claim against Defendants Nos.
(2) and (6) or any of them ?
(14) What order and Decree ?
Answers to the above-said issues are as under:-
(1) YES,
(2) YES,
(3) YES,
(4) On the calculation of the interest supplied by the Plaintiff, only a sum of Rs.14,10,238.00 is found due by Defendant No.(1) to the Plaintiff.
(5) It has not been filed within the period of limitation as against Defendants Nos.(2) and (3).
(6) NO.
(7) NO.
(8) NO.
(9) NO.
(10) NO.
(11) NO.
(12) NO.
(13) Claim of the Plaintiff against Defendants Nos.4-5-6 is not at all proved. The claim against Defendant Nos.2-3 though can be said to have been proved, the same cannot be decreed as it is time-barred.
(14) AS PER FINAL ORDER AND DECREE.”
6. The appellant –plaintiff examined Shri Harakhchand Mohanlal Doshi, as its witness No.1 at Exh.104, who was serving as Deputy Manager (Accountant) at the relevant time with the plaintiff company. The plaintiff also produced on record terms and conditions of the loan at Exh.105, document Exh.107 executed by defendant No.3 promising to execute mortgage deed, power of attorney in favour of the plaintiff at Exh.108 and personal guarantee of defendant Nos.2 and 3 (respondent Nos.1 and 2 herein), which is described as continuing security at Exh.109. The plaintiff also produced mortgage deed at Exh.110, executed by and on behalf of the mill company. The plaintiff also examined its second witness Shri Anilkumar Tulsidas at Exh.115, who was also at the relevant time Deputy Manager (Accountant), who produced the ledger account in respect of the defendant No.1 Mill company, showing the amount of loan disbursed and the amount due and payable by the mill company. The plaintiff further examined one Shri Ramakant Jaishankar Pandya at Exh.122 as witness No.3, who was at the relevant time serving as Manager (Accountant). On behalf of the defendant mill company, defendant No.3 Gunvant Mangaldas, Director, was examined at Exh.145. The said witness has stated that he and defendant No.1 Subhodh Mangaldas stood as guarantor.
7. On the basis of the above-said evidence, the learned Judge came to the conclusion that sum of Rs.14,10,238/- is found to be payable by defendant No.1, however, the suit against the defendant Nos.2 and 3 was time barred. So far as defendant Nos.4,5 and 6 are concerned, the learned Judge came to the conclusion that the claim of the plaintiff against the said defendants was not proved. Learned Judge, thus, dismissed the suit against the defendant Nos.2 and 3 on the ground of limitation and also dismissed the suit against the other defendant Nos.4,5 and 6 by holding that against them, the suit claim was not proved. However, this appeal is filed only against defendant Nos.2 and 3- the guarantors.
8. Learned advocate Shri R.D. Dave for the appellant submitted that the guarantee executed by the respondents was a continuing guarantee and therefore, the limitation for filing the suit against the respondents was required to be reckoned from the date of issuance of the demand notice by the appellant. He submitted that the demand notice was dated 3.6.1976 and the suit was filed against the respondents on 24.7.1977 and therefore, the suit against the respondents was filed within the time limit. Shri Dave, further argued that the first installment for repayment of the loan was due and payable on 15.6.1972 and therefore, liability of defendant No.1 to repay the entire loan was continuing liability till the last installment was to be paid and therefore, the guarantee executed by the respondents was to continue till the last installment was due and payable by defendant No.1 mill company and therefore, the guarantee given by the respondents was a continuing guarantee and the limitation for filing the suit could not be said to have been over on completion of 3 years from the date of first installment but the limitation would be reckoned from the date of the demand notice issued by the appellant i.e. 3.6.1976 and therefore, the suit filed by the appellant against the respondents was within time.
9. Learned advocate Shri Dave further submitted that by virtue of the notification issued by the State Government under the Bombay Relief Undertakings (Special Provisions) Act, 1958, the right and claim of the appellant for recovery of the loan amount from the defendant No.1 company was suspended and therefore, the plaintiff’s claim even against the respondents stood suspended as liability of surety is coextensive with the principal debtor. He submitted that the right of the plaintiff against the defendants came to be revived only after promulgation of the Sick Textile (Nationalization) Ordinance 1974 on 21.9.1974 and the Sick Textile (Nationalization) Act, on 21.12.1974 and since from the said date, the right was revived and since the demand notice was issued on 3.6.1976, the suit of the plaintiff was required to be treated within the period of limitation.
10. Learned advocate Shri Dave, in support of his submissions, has cited the following authorities :-
(1) In the case of Syndicate Bank Vs. Channaveerappa Beleri and Others, reported in AIR 2006 SC 1874,
(2) In the case of State Bank of India Vs. Gemini Industries and others reported in 2001 (1) GLH 627,
(3) In the case of C.P. Sreelal Vs. District Collector, Thiruvananthapuram and others reported in AIR 2007 Kerala 131,
(4) In the case of Indian Bank, Madras Vs. The State of Tamil Nadu and others reported in AIR 2002 Madras 423,
(5) In the case of Sita Ram Gupta Vs. Punjab National Bank and others reported in (2008)5 SCC 711.
Relying on all the above-said authorities, learned advocate Shri Dave has submitted that the guarantee given by the respondents for all the purposes was a continuing guarantee. Reading the terms of the guarantee, intention of the parties could well be gathered and the respondents in unequivocal terms have guaranteed for repayment of full loan amount irrespective of time limit. Whether a particular guarantee is a continuing guarantee or not, could be carved out from the terms of the guarantee itself and the intention of the parties derived from the said terms. As per his submission, the guarantors very clearly intended to pay the loan amount till the entire dues under the loan sanctioned by the appellant is cleared.
11. In reply to the above-said arguments advanced by learned advocate Shri Dave, learned advocate Shri K.H. Kaji for the respondents submitted that the guarantee given by the respondents could not be termed as a continuing guarantee. He submitted that though the language used in the guarantee is that of continuing guarantee but still such guarantee could be enforced till the dues could be legally claimed from the principal debtor. He further submitted that the first installment was due and payable on 15.6.1972 and counting three years from the said date, the dues could be legally claimed upto 14.6.1975 from the principal debtor. He submitted that suspension of the right and claim of the plaintiff because of the notification under the Bombay Relief Undertakings (Special Provisions) Act, 1958 cannot apply to the respondents as the respondents were simply guarantors. Under the said Act, claim and right of the creditor only against the principal debtor would get suspended and not against the guarantors. So far as the guarantors are concerned, the claim and right of the plaintiff to recover the dues remained in force continuously from 15.6.1972 for 3 years and such claim would not be revived against the respondents with principal debtor. He further submitted that the guarantee executed by the guarantors cannot otherwise be called as continuing guarantee as it does not satisfy the ingredients of the provisions of Section 129 of the Contract Act. Relying on the provisions of Section 129 of the Contract Act, learned advocate Shri Kaji submitted that the guarantee, which extends to a series of transaction, can only be called as ‘continuing guarantee’. Whereas, in the present case, the guarantee was to repay one amount of loan advanced by the appellant company. He submitted that simply because the loan amount was made payable in different installments, that itself would not be sufficient to bring the transaction of loan into series of transaction. As per his submission, it was only one transaction of loan and therefore, the guarantee executed by the respondents cannot be said to be a continuing guarantee. He further submitted that the appellant is not a Bank, which maintains a continuing account so as to extend financial assistance, like cash credit facility, etc. and therefore, the loan advanced by the appellant cannot be compared with the financial assistance given by the Bank. In case of the Bank, many a times, the Bank continues the financial assistance floating and permitting loanee to continue to enjoy financial assistance and in such case, there can be said to be a series of transaction. So far as the appellant is concerned, it was only one loan transaction and therefore, it cannot be said to be a series of transaction and the guarantee executed in respect of the said loan transaction cannot be said to be a continuing guarantee. He further submitted that the liability of guarantors could not be said to be extended with the principal debtor by virtue of stay or suspension under the notification issued under the Bombay Relief Undertakings (Special Provisions) Act, 1958 and therefore, on expiry of 3 years from the date of first installment, the respondents ceased to be liable under the guarantee to repay the loan advanced to the principal debtor. He thus submitted that the learned Judge has not committed any error in dismissing the suit against the respondents on the ground that the suit against the respondents was time barred. He ultimately urged to dismiss this appeal and to confirm the judgment and decree passed by the learned Trial Judge.
12. Before we deal with the rival contentions of the learned counsel for both the parties, we may refer to the relevant terms of the guarantee executed by the respondents.
“1. This Guarantee shall be continuing security binding on us and our respective personal representatives until the expiration of three calender months from the receipt by the Corporation of a notice in writing to discontinue it and notwithstanding the discontinuance by or any release or granting of time or indulgence to us this Guarantee shall remain a continuing security and if discontinued by notices this Guarantee shall nevertheless continue to be available (subject to the aforesaid limit of total amount) for and shall extend for all indebtedness and liabilities of the principal to you at the date of receipt of such notice whether then certain or contingent and whether then payable forthwith or at some future time or times and all guarantees signed by the Principal and delivered to you and that in the event of any one of us or both of us dying or becoming under disability the liability of the executors, administrators or legal representatives of the person dying and of his estate shall continue until the expiration of three calender months from the receipt by the Corporation of a written notice given by such legal representatives to determine this Guarantee. You shall be at liberty on receipt of any such notice as contemplated in this Clause at any time within the three calender months to appropriate all payments subsequently made to you by the Principal and not expressly appropriated to the account without prejudice to our respective estate's liability to the extent aforesaid.
2. The Guarantee is additional and without prejudice to any securities or obligations which you may now or hereinafter have from us or any of us, from the Principal or from any one else in respect of any indebtedness or liabilities hereby guaranteed and all rights and remedies in respect thereof are reserved.
3. This Guarantee shall be continuing Guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payments from time to time made to the Corporation or any settlement of any accounts or by reason of the account being brought to a credit at any time or from time to time. The Guarantee shall continue in force notwithstanding the discharge of the Principal by operation of law or by the death of any of us or both of us and shall cease only on payment of the amount guaranteed hereunder by us.
4. We expressly agree that the Corporation shall have full discretionary power, without our further assent or knowledge and without discharging or in any way affecting our respective liability under this Guarantee, from time to time AND at any time to negotiate with the Principal and settle and/or alter the terms and conditions, to promise to grant time or indulgence to or not to sue the Principal or any person liable with or for the Principal, whether as Guarantors or otherwise or compound or make any other arrangements with the Principal or any person so liable with or from the Principal as the Corporation may think fit and to hold over, renew, vary, exchange or release in whole or in part and from time to time any securities held or to be held by the Corporation for or on account of the moneys and liabilities intended to be hereby secured or any part thereof. We also jointly and severally agree that we shall not be discharged from our liability by your releasing the Principal debtor or by any act or omission of yours the legal consequences of which may be to discharge the Principal debtor or any act or omission of yours which would, but for this present provision, be inconsistent with our rights as sureties or by your omission to do any act, which, but for this present provision, your duty to us would have required you to do. We hereby consent to each and every of the acts mentioned above as you may think fit. Moreover, though as between the Principal debtor and us,we are sureties only, we agree that as between yourselves and ourselves, we are Principal debtors jointly with the Principal and accordingly we shall not be entitled to any of the rights conferred on sureties by Sections 133, 134, 135, 139 and 141 of the Contract Act ”
13. We may also refer the following judgments relied by learned advocate Shri Dave.
(1) In the case of Syndicate Bank Vs. Channaveerappa Beleri and Others, reported in AIR 2006 SC 1874, the Hon'ble Supreme Court has held as under:-
“9. A guarantor's liability depends upon the terms of his contract. A 'continuing guarantee' is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim may be even time- barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract.
11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand.
12. We will examine the meaning of the words 'on demand'. As noticed above, the High Court was of the view that the words 'on demand' in law have a special meaning and when an agreement states that an amount is payable on demand, it implies that it is always payable, that is payable forthwith and a demand is not a condition precedent for the amount to become payable. The meaning attached to the expression 'on demand' as 'always payable' or 'payable forthwith without demand' is not one of universal application. The said meaning applies only in certain circumstances. The said meaning is normally applied to promissory notes or bills of exchange payable on demand. We may refer to Articles 21 and 22 in this behalf. Article 21 provides that for money lent under an agreement that it shall be payable on demand, the period of limitation (3 years) begins to run when the loan is made. On the other hand, the very same words 'payable on demand' have a different meaning in Article 22 which provides that for money deposited under an agreement that it shall be payable on demand, the period of limitation (3 years) will begin to run when the demand is made. Thus, the words 'payable on demand' have been given different meaning when applied with reference to 'money lent' and 'money deposited'. In the context of Article 21, the meaning and effect of those words is 'always payable' or payable from the moment when the loan is made, whereas in the context of Article 22, the meaning is 'payable when actually a demand for payment is made'.
13. What then is the meaning of the said words used in the guarantee bonds in question? The guarantee bond states that the guarantors agree to pay and satisfy the Bank 'on demand'. It specifically provides that the liability to pay interest would arise upon the guarantor only from the date of demand by the Bank for payment. It also provides that the guarantee shall be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the borrower. The terms of guarantee, thus, make it clear that the liability to pay would arise on the guarantors only when a demand is made. Article 55 provides that the time will begin to run when the contract is 'broken'. Even if Article 113 is to be applied, the time begins to run only when the right to sue accrues. In this case, the contract was broken and the right to sue accrued only when a demand for payment was made by the Bank and it was refused by the guarantors. When a demand is made requiring payment within a stipulated period, say 15 days, the breach occurs or right to sue accrues, if payment is not made or is refused within 15 days. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or right to use accrues, when the demand is served on the guarantor.
14. We have to, however, enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due and recoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non compliance. Where guarantor becomes liable in pursuance of a demand validly made in time the creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time-barred. To clarify the above, the following illustration may be useful:
"Let us say that a creditor makes some advances to a borrower between 10-4-1991 and 1-6-1991 and the repayment thereof is guaranteed by the guarantor undertaking to pay on demand by the creditor, under a continuing guarantee dated 1-4-1991. Let us further say a demand is made by the creditor against the guarantor for payment on 1-3-1993. Though the limitation against the principal debtor may expire on 1-6-1994, as the demand was made on 1-3-1993 when the claim was 'live' against the principal debtor, the limitation as against the guarantor would be 3 years from 1-3-1993. On the other hand, if the creditor does not make a demand at all against the guarantor till 1-6-1994 when the claims against the principal debtor get time-barred, any demand against the guarantor made thereafter say on 15-9-1994 would not be valid or enforceable.
Be that as it may.
15. The respondents have tried to contend that when the operations ceased and the accounts became dormant, the very cessation of operation of accounts should be treated as a refusal to pay by the principal debtor, as also by the guarantors and, therefore the limitation would begin to run, not when there is a refusal to meet the demand, but when the accounts became dormant. By no logical process, we can hold that ceasing of operation of accounts by the borrower for some reason, would amount to a demand by the Bank on the guarantor to pay the amount due in the account or refusal by the principal debtor and guarantor to pay the amount due in the accounts.”
(2) In the case of Sita Ram Gupta Vs. Punjab National Bank and others, reported in (2008)5 SCC 711, the Hon'ble Apex Court has held as under:-
“6. The learned counsel appearing for the appellant, relying on Section 130 of the Act, sought to argue that in view of the fact that Section 130 clearly provides for revocation of a continuing guarantee as to future transactions by notice to the creditor and as in the present case, the guarantee was revoked long before the loan was given and the suit filed, the appellant was not liable to pay the decretal amount to the Bank. Accordingly, he submitted that the High Court was not Justified in reversing the Judgment of the trial court and in decreeing the suit against the appellant. This submission of the learned counsel for the appellant was seriously contested by Mr. Dhruv Mehta, the learned counsel appearing on behalf of the Bank. According to Mr. Mehta, the submission of the learned counsel for the appellant cannot be accepted in view of the clause in the agreement of guarantee itself, as noted herein- earlier. Before we proceed further and in order to decide the submissions made on behalf of the parties before us, it would be appropriate to reproduce Section 130 of the Act, which reads as under: -
“Revocation of continuing guarantee - A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor."
7. We have carefully examined the submissions made on behalf of the parties and also the relevant clauses in the agreement of guarantee. In our view, the High Court was perfectly justified in holding that the appellant was liable to pay the decretal amount to the Bank in view of the clause, as mentioned herein earlier, in the agreement of guarantee itself. The agreement of guarantee clearly provides that the guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time, the said accounts may show no liability against the borrower or may even show a credit in his favour but shall continue to be a guarantee and remain in operation in respect of all subsequent transactions. This was an agreement entered into by the appellant with the Bank, which is binding on him. Therefore, the question arises whether the statutory provision under Section 130 of the Act shall override the agreement of guarantee. In our view, the agreement cannot be said to be unlawful nor the parties have alleged that it was unlawful either before the Trial Court or before the High Court. Let us, therefore, keep in mind that the agreement of guarantee entered into by the appellant with the Bank was lawful.
10. Keeping this principle in mind, we now look at the clause in the agreement of guarantee, as noted herein-earlier. There cannot be any dispute that the appellant had clearly agreed that the guarantee that he had entered into with the Bank was a continuing guarantee and the same was to continue and remain in operation for all subsequent transactions. Having entered into the agreement in the manner indicated above, in our view, it was, therefore, not open to the appellant to turn around and say that in view of Section 130 of the Act, since the guarantee was revoked before the loan was advanced to defendant Nos. 1 to 4 and 6, he was not liable to pay the decretal amount as a guarantor to the Bank as his guarantee had already stood revoked. In this view of the matter, we are not in a position to accept the submissions of the learned counsel for the appellant and we hold that in view of the nature of guarantee entered into by the appellant with the Bank, the statutory provision under Section 130 of the Act shall not come to his help. The findings arrived at by the High Court while deciding the first appeal were that the amount shown due in the accounts of the Bank against the appellant and the defendants was neither cleared by the defendants nor by the appellant. Therefore, even if a letter was written to the Bank by the appellant on 31st of July, 1980 withdrawing the guarantee given by him, it was contrary to the clause in the agreement of guarantee, as noted herein- earlier. Therefore, it was not open to the appellant to revoke the guarantee as the appellant had agreed to treat the guarantee as a continuing one and was bound by the terms and conditions of the said guarantee. For this reason, it is difficult to accept the submissions of the learned counsel for the appellant that in view of the statutory provision under Section 130 of the Act, after the revocation of the guarantee by the appellant, he was not liable to pay the decretal amount to the Bank. No other point was raised by the learned counsel for the appellant. Accordingly, there is no merit in this appeal. The appeal is thus dismissed. There will be no order as to costs.
(3) In the case of C.P. Sreelal Vs. District Collector, Thiruvananthapuram and others, reported in AIR 2007 Kerala 131, the Kerala High Court has held as under:-
8. We are of opinion that the resolution of the dispute involved would essentially depend upon the answer to two questions, specifically raised by counsel for the KFC as to whether the guarantee executed by the appellant is a continuing guarantee and as to whether the limitation starts to run only when a demand is made by KFC for payment as per the guarantee and not before. Therefore, we have to first consider the nature of the guarantee executed by the appellant.
9. Before that, let us see the Article of the Schedule to the Limitation Act under which limitation has to be reckoned. According to us, the relevant Section is Section 55 of the Limitation Act, which reads as under:
Description of suit Period of Limitation Time from which period begins to run 9A. The question then arises as to whether the guarantee given by the appellant is a continuing guarantee. 'Continuing Guarantee' is defined by Section 129 of the Indian Contract Act, 1872 thus :
"129. Continuing Guarantee - A guarantee which extends to a series of transaction is called a "continuing guarantee"."
10. Although it may be argued that the present case does not extend to a series of transaction, the Supreme Court and this Court have held that a guarantee which extends to all indebtedness and liabilities of the principal debtor to the creditor would also be continuing guarantee which decisions we shall shortly discuss in relation to applicability to facts of this case. Before that, we may also note the meaning of 'continuing guarantee' in Black's Law Dictionary, Seventh Edition Page 712, which reads thus:
"Continuing Guarantee. A guarantee that governs a course of dealing for an indefinite time or by a succession of credits. Also termed open guarantee."
The decision of Mrs. Margaret Lalitha Samuel v. Indo Commercial Bank Ltd. (AIR 1979 SC 102) throws some light on as to what is a continuing guarantee. In paragraph 10 of that judgment, the Supreme Court has observed thus :
"10. We may first consider the question of limitation. As already mentioned by us, the submission of Shri Bal was that every item of an overdraft account was an independent loan, limitation for the recovery of which was determined by Art. 57 of the Schedule to the Limitation Act, 1908. Limitation, according to the learned counsel, started to run from the date of each loan. He relies on Basanta Kumar Mitra v. Chota Nagpur Banking Association Ltd. (AIR 1948 Pat 18); Brojendra Kishore Roy Chowdhury v. Hindustan Co-operative Insurance Society Ltd. (ILR 44 Cal 978) : (AIR 1918 Cal 707, National and Grindlays Bank Ltd. v. Tikam Chand Daga (AIR 1964 Cal 358) and Uma Shankar Prasad v. Bank of Bihar Ltd. (AIR 1942 Pat 201). In our view, it is unnecessary for the purposes of the present case to go into the question of the nature of an overdraft account. The present suit is in substance and truth one to enforce the guarantee bond executed by the defendant. In order to ascertain the nature of the liability of the defendant, it is necessary to refer to the precise terms of the guarantee bond rather than embark into an enquiry as to the nature of an overdraft account. Exhibit 57 is the guarantee bond executed by the defendant and her husband on 23rd Oct. 1944. It is addressed to the Indo Commercial Bank Ltd. Madras, and is in the following terms :
"Dear Sirs, In consideration of your having agreed to allow overdraft accommodation up to Rs. 10,00,000 (Rupees Ten Lakhs only) to the Modern Hindustan Food Products Ltd., Poona. We, C.B. Samuel and M.
L. Samuel, the undersigned do hereby jointly and severally guarantee to you, the Indo-Commercial Bank Limited the re-payment of all money, which shall at any time be due to you from the said Modern Hindustan Food Products Ltd., on the general balance of their accounts with you or on any account whatever such balances to include all interest, charges, commission and other expenses which you may charge as bankers and also the due payment at maturity of any promissory note or other negotiable instrument on the security or in respect of which any credit or advance shall be made.
And we hereby declare that this guarantee shall be a continuing guarantee to the extent at any one time for Rs. 10,00,000 (Rupees Ten Lakhs only) and shall not be considered wholly or partially satisfied by the payment at any one time or at different times of any sums of money due on such general balance of account but shall extend and cover and be a security for every and all further sums at any time due to you thereon. And we further declare that you may grant to the Modern Hindustan Food Products Ltd., any indulgence without discharging our liability."
The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Art. 115 of the Schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J. C. Shah, J. speaking for the Court, said :
"On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever.......... We are not concerned in this case with the period of limitation for the amount repayable by the Company to the bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond........ We held that the suit to enforce the liability is governed by Art. 115 and the cause of action arises when the contract of continuing guarantee is broken, and in the present case we are of the view that so long as the account remained live account, and there was no refusal on the part of defendant to carry out her obligation, the period of limitation did not commence to run."
We agree with the view expressed by Shah, J. The intention and effect of a continuing guarantee such as the one with which we are concerned in this case was considered by the Judicial Committee of the Privy Council in Wright v. New Zealand Farmers Co- operative Association of Canterbury Ltd. (1939 AC 439). The second clause of the guarantee bond in that case was in the following terms :
"This guarantee shall be a continuing guarantee and shall apply to the balance that is now or may at any time hereafter be owing to you by the William Nosworthy and Robert Nosworthy on their current account with you for goods supplied and advance made by you as aforesaid and interest and other charges as aforesaid."
A contention was raised in that case that the liability of the guarantor was barred in respect of each advance made to the Nosworthys on the expiration of six years from the date of advance. The Judicial Committee of the Privy Council expressed the opinion that the matter had to be determined by the true construction of the guarantee. Proceeding to do so, the judicial committee observed (at p. 449) :
"It is no doubt a guarantee that the Association will be repaid by the Nosworthys advance made and to be made to them by the Association together with interest and charges, but it specifies in col. 2 how that guarantee will operate namely, that it will apply to (i.e. the guarantor guarantee repayment of) the balance which at any time thereafter is owing by the Nosworthys to the Association. It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee by the excess of the total debits over the total credits. If that be the true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debit was incurred is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and sued for had been constituted."
Later it was again observed (at p. 450) :
"That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during a continuance of the guarantee, by the surplus of the total debits over the total credits, and accordingly at the date of the counter claim the Association's claim against the plaintiff for payment of the unpaid balance due from the Nosworthy, with interest, was not statute- barred."
(Emphasis supplied) Although one may say that in that case, the Supreme Court was considering a case of over draft which may involve a series of transactions coming within the definition under Section 129 of the Contract Act, a Division Bench of this Court has, in the decision of Union of Bank of India, Ernakulam v.
T. J. Stephen (AIR 1990 Kerala 180) has applied this decision to facts of a case which are almost identical to that of the present case. Paragraphs 12 to 15 of the said decision is directly applicable to this case, which read thus :
"12. Here, the question is, what is the real content and width of the contract of guarantee executed by defendants 2 and 3. It has to be understood from the contract of guarantee executed by defendants 2 and 3. Admittedly, it is a continuing guarantee and the main clause of the guarantee stipulates that this guarantee shall be a continuing security binding on defendants 2 and 3. When in the agreement, defendants 2 and 3 unequivocally agree that they undertake a guarantee that it shall be a continuing security, the Court has to examine as to what is the exact meaning purpose and nature of this obligation of the guarantor. For what purpose, the security is given is made clear in Ext. A1 agreement. The security is for whatever amount that is due to the Bank from the principal-debtor. So long as the agreement Ext. A2 is alive and in force defendants 2 and 3 are liable for the amount due to the Bank because they have secured the amount by executing the agreement. The effect of such an agreement has been considered very clearly by the Supreme Court in AIR 1979 SC 102 (Margarnet Lalita v. Indo Commercial Bank Ltd.). The Supreme Court observed thus :-
"In the case of a continuing guarantee and an undertaking by the defendant to pay any amount that may be due by a company to a Bank on the general balance of its account or any other account, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation for a suit to enforce the bond could not be said to have commenced running. Limitation would only run from the date of breach under Art. 115."
Before the institution of the suit, the guarantors did not withdraw their guarantee, or there was no occasion for the refusal on the part of the guarantors to carry out the obligation. The Supreme Court has said that so long as the account is a live account the guarantors are liable. Further, the Supreme Court has made it clear what exactly is a live account when it is said that a live account is one that is not settled, that means a live account is one which has not been discharged by payment or by other arrangement.
13. In this case, there is no dispute that the amount due to the Bank has not been paid by the principal- debtor or by the guarantors. So, in this case there is an undischarged live liability for which the guarantors have obliged by their agreement that they will be responsible for that liability of the principal-debtor.
(4) In the case of Indian Bank, Madras Vs. The State of Tamil Nadu and others, reported in AIR 2002 Madras 423, the Madras High Court has held as under:
16. The contract of guarantees is defined in S. 126 of the Indian Contract Act which runs as follows :-
"a "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written."
Continuing guarantee is defined in S. 129 as follows :-
"A guarantee which extends to a series of transactions is called a "continuing guarantee".
Whether in a particular case a guarantee is continuing or not is a question of the intention of the parties, as expressed by the language they have employed, understanding it fairly in the sense in which it is used; and this intention is best ascertained by looking to the relative position of the parties at the time the instrument is written.
17. In this case, special agreements viz., deeds of guarantee have been entered into between the parties. Now, we will have a look on the terms of the Deeds of Guarantee which reads as follows :-
In page 3 of Ex. P1, "The guarantee shall be a continuing guarantee and shall remain in full force until all the liabilities of Om Parasakthi Mills Limited of Rs.5,73,223.11 plus interest and the liabilities of the Authorised Controller in respect of various new facilities granted to him are discharged in full."
Similar terms are available in page 2 of Ex. P2 as follows :-
"We further agree that this guarantee will be a continuing guarantee and shall remain in full force and effect till all the liabilities of Om Parasakthi Mills Ltd. under the two medium term loans are fully discharged."
In page 3 of Ex. P3, Guarantee Deed, it is mentioned that "We, the undersigned the Tamil Nadu Textile Corporation Limited, hereby guarantee to the said Bank the payment on demand of all moneys at any time and from time to time hereafter due to the said Bank by the borrower in respect of the said accommodation with interest thereon at the rate of 12% per cent per annum from the date of demand and the due performance and observance by the borrower of all the terms pertaining to the accommodation aforesaid and the payment of all costs and expenses incurred by the said Bank in relation to the premises and we also agree to pay and make good to the said Bank on demand all losses, costs, damages and expenses occasioned to the said Bank by reasons of the non-payment of the said moneys, costs and expenses or any part thereof or the breach non-performance or non- observance of any of the terms aforesaid."
18. All the said three Deeds of Guarantee read together make it clear that they are continuing guarantees and the undertaking by the defendants is to pay any amount that may be due by the Mill. In the case of such a continuing guarantee it is so long as the account is a live account in the sense that it is not settled fully and there is no refusal on the part of the guarantor to carry out the obligation. In a similar circumstance, the Honourable Supreme Court of India, in Margaret Lalita v. Indo Commercial Bank Ltd., AIR 1979 SC 102, at para 10, has held as follows :-
"The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Art. 115 of the Schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J.C. Shah, J. speaking for the Court said :
"On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever ............. We are not concerned in this case with the period of limitation for the amount repayable by the Company to the Bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond............We hold that the suit to enforce the liability is governed by Art. 115 and the cause of action arises when the contract of continuing guarantee is broken, and in the present case we are of the view that so long as the account remained live account, and there was no refusal on the part of defendant to carry out her obligation, the period of limitation did not commence to run." We agree with the view expressed by Shah, J. The intention and effect of a continuing guarantee such as the one with which we are concerned in this case was considered by the Judicial Committee of the Privy Council in Wright v. New Zealand Farmers Co- operative Association of Canterbury Ltd., (1939 AC 439). The second clause of the guarantee bond in that case was in the following terms :
"This guarantee shall be a continuing guarantee and shall apply to the balance that is now or may at any time hereafter be owing to you by the William Nosworthy and Robert Nosworthy on their current account with you for goods supplied and advances made by you as aforesaid and interest and other charges as aforesaid."
A contention was raised in that case that the liability of the guarantor was barred in respect of each advance made to the Nosworthys on the expiration of six years from the date of advance. The Judicial Committee of the Privy Council expressed the opinion that the matter had to be determined by the true construction of the guarantee. Proceeding to do so, the Judicial Committee observed (at P. 449) :
"It is no doubt a guarantee that the Association will be repaid by the Nosworthys advance made and to be made to them by the Association together with interest and charges; but it specified in col. 2 how that guarantee will operate namely, that it will apply to (i.e. the guarantor guarantees repayment of) the balance which at any time thereafter is owing by the Nosworthys to the Association. It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits. If that be the true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debit was incurred is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and sued for had been constituted."
Later it was again observed (at P. 450) :
"That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during the continuance of the guarantee by the surplus of the total debits over the total credits, and accordingly at the date of the counter-claim the Association's claim against the plaintiff for payment of the unpaid balance due from the Nosworthys, with interest, was not statute-barred."
19. The said judgment is squarely applicable to the facts and circumstances of the instant case. The present suit is in substance and truth one to enforce the guarantee deeds is governed by Article 55 of the Limitation Act, 1963 which is equivalent to Article 115 of the Limitation Act, 1908. The appellant has pursued the statutory remedy before the Assistant Commissioner of payments constituted under The Sick Textile Undertaking (Nationalisation) Act, 1974 and recovered certain amounts. In respect of the unrecovered portion of the amount, they preferred C. M. A. No. 75 of 1979 which was also dismissed by the District Judge, Coimbatore. The trial Court also rightly held that the suit is valid since the same is "filed not against the Industrial Undertaking, but, against the guarantors on the strength of the guarantee agreements executed by them", which was not challenged by the defendants. The said guarantees are continuing guarantees, so long as the account is a live account i.e., not settled and there is no refusal on the part of the guarantors to carry out the obligation, hence the period of limitation could not be said to have commenced running. The limitation would only run from the date of breach under Article 55 of the Limitation Act, 1963. Both the accounts which were guaranteed by defendants 2 and 3 by the execution of the guarantee bonds continued to be a live account even after they ceased their business. The plaintiff has issued notices Ex. P4 dated 6-12-1979 and Ex. P5 dated 6-10-1982 invoking the guarantees and filed the suit on 1-11-1982 within three years from the said dates. The suit, which was filed on 1-11-1982, was, therefore, clearly within time under Article 55 of the Limitation Act. In this aspect, we disagree with finding of the learned single Judge.”
14. This Court in the case of State Bank of India Vs. Gemini Industries and Ors., reported in 2001(1) GLH 627 has held as under:
16. It could, very well, be seen that the guarantors have agreed that the guarantee shall be a continuing one notwithstanding that the said Cash Credit Account may at any time or from time to time be brought to credit until notice in writing that the same has been closed even by the plaintiff bank to the guarantors. Statutory definition as given in Section 129 of the Contract Act, and the illustration provided under the said section are also self-evident and supporting the plea of the plaintiff and rebutting the pleas advanced on behalf of defendant Nos. 6 and 7. It is, very, clear that defendant Nos.6 and 7, by virtue of the guarantee agreement dated, 17.11.1978, in respect of a cash credit facility of finance granted by the plaintiff bank to the debtors pursuant to an agreement executed by borrowers original defendant Nos. 1 to 5,dated 19.10.1978, in respect of an amount of Rs. 1 lakhs. In so far as the principal amount is concerned, the cash credit limit is prescribed to the extent of Rs. 1 lakh under the General Agreement and the guarantee given by the defendant Nos. 6 and 7 by virtue of guarantee agreement, Exh. 69, with reference to the General Agreement executed by the principal borrower. Therefore, we have not been able to comprehend the views recorded by the Trial Court in interpreting, Exh. 69, as limited guarantee and not as a continuing guarantee. There are as may as 15 clauses in the guarantee agreement, Exh.69. We have dispassionately and threadbare considered the entire tenor of the guarantee agreement, Exh. 69, and we have no hesitation in recording our clear and evident conclusion that the view of the Trial Court in not treating the, Exh.69, as a continuing guarantee is militating against the terms and clauses of the guarantee agreement, factually, and legally, in view of the provisions of Section 129 and 133 of the Act. So on both counts, contractually, as well as statutorily, the character, the nature and the type of guarantee agreement executed by the defendant Nos. 6 and 7 in favour of the plaintiff banks in relation to the General Agreement of cash credit loan account executed by the principal debtors is, undoubtedly, a continuing guarantee.
24. After referring to the correspondence the Hon'ble Supreme Court has further observed in para 10 and such following observations are pertinent and expedient.
"The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running limitation would only run from the date of breach under Art.115 of the Schedule to the Limitation Act, 1908."
Again the Hon'ble Supreme Court in para 12 at page 108 has observed as follows:-
"Thus far from repudiating her liability and breaking the contract of continuing guarantee, the defendant accepted her obligation under the guarantee bond in respect of the overdraft account which continued to be live at least upto 29th Sept. 1952. The suit which was filed on 8th November, 1954, was therefore clearly within time under Art.115 of the Schedule to the Limitation Act, 1908."
15. In light of the above, whether a guarantee in the present case can be said to be continuing guarantee or not, is required to be decided. Learned advocate Shri Kaji has argued that in view of the statutory provisions contained in Section 129 of the Contract Act, defining 'continuing guarantee', a guarantee which extends to a series of transaction can only be said to be a continuing guarantee. He submitted that if a guarantee is in respect of only one transaction and does not extend to more than one transaction, such guarantee can never be said to be a 'continuing guarantee'. We are however of the opinion that Section 129 of the Contract Act cannot be given a restricted meaning as canvassed by learned advocate Shri Kaji. In our view, wherever the guarantors have executed guarantee containing unequivocal terms and conditions to continue to remain liable towards all indebtedness and liabilities of the principal debtor till the same is fully paid up, such guarantee can also be said be a continuing guarantee. From the decision relied upon by the learned advocate for the appellant, as referred above by us, the principle of law settled is that if a guarantor has intended guarantee to be a continuing guarantee till last payment is made of the principal debtor and if terms of such guarantee deed are clear so as to gather intention of the guarantors about their agreement to continue to remain liable till the indebtedness and liabilities of the principal debtor are fully satisfied and exhausted, such guarantee can be said to be 'continuing guarantee'.
16. However, learned advocate Shri Kaji contends that the terms and conditions in the guarantee agreement run counter to the provisions of Section 129 of the Contract Act and they are contrary to the legislative intent of the provisions of Section 129 of the Contract Act, and therefore, they cannot be enforced in the court of law. To deal with this contention, we may first refer Section 23 of the Contract Act, which reads as under:-
“23. What consideration and objects are lawful, and what not.- The consideration or object of an agreement is lawful, unless-
it is forbidden by law, or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
In ease of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”
As per Section 23 of the Contract Act, consideration or object of any agreement is lawful unless, it is forbidden by law, or would defeat the provisions of any law or is fraudulent or it involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In the present case, in consideration of promise to advance loan facility to defendant No.1 company by the plaintiff, the respondents-guarantors have agreed to fully satisfy the debt. The object of the agreement of guarantee is to assist and to be helpful to the principal debtor to get loan facility and for that purpose, to stand by it as a guarantor for the purpose of satisfying and giving assurance to the appellant that the whole liability of fully paying up debt of the principal debtor will be on their shoulder, therefore, neither the consideration nor the object of the agreement of the guarantee in the present case is forbidden by law, or would tantamount to defeat the provisions of any law or is fraudulent or involves or implies injury to the person or property of another, or opposed to the public policy. Section 129 of the Contract Act does not prohibit or forbid any person from volunteering and agreeing to bind himself to remain continuously liable for the indebtedness and liability of the principal debtor till the same is fully discharged. Such agreement to continue to remain liable for indebtedness of the principal debtor till last payment is made, cannot be said to be either contrary to or opposed to the intent and purpose of Section 129 of the Contract Act nor can it be said to be opposed to the public policy because by such agreement, the guarantor is not to do any illegal act or any fraudulent act much less any immoral act. In fact, such agreement of continuing guarantee is to be read in aid to the purpose and intent of Section 129 of the Contract Act and therefore, such continuing guarantee is always enforceable at law. At this stage, reference is required to be made to a celebrated judgment, though not directly applicable in this case, in the case of Central Inland Water Transport Corporation Limited and Another Vs. Brojo Nath Ganguly and Another, reported in (1986)3 SCC 156, there, the Hon’ble Supreme Court was inter alia concerned with the issue as to whether the contracts which are unconscionable, unfair, unreasonable and opposed to public policy are void. The Hon’ble Supreme Court was dealing with the contract of employment. From the said judgment, observations made in para 75 and 93 are required to be reproduced:
“75. Under Section 19 of the Contract Act, when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. It is not the case of either of the contesting Respondents that there was any coercion brought to bear upon him or that any fraud or misrepresentation had been practised upon him. Under section 19A, when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused and the Court may set aside any such contract either absolutely or if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just. Sub-sec.(1) of S. 16 defines "Undue influence" as follows :
"16. 'Undue influence' defined. -
(1) A contract is said to be induced by 'undue influence' where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
The material provisions of sub-see. (2) of S. 16 are as follows :
"(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another (a) where he holds a real or apparent authority over the other "
We need not trouble ourselves with the other sections of the Contract Act except Ss. 23 and 24. Section 23 states that the consideration or object of an agreement is lawful unless inter alia the Court regards it as opposed to public policy. This section further provides that every agreement of which the object or consideration is unlawful is void. Under S. 24, if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object is unlawful, the agreement is void. The agreement is, however, not always void in its entirety for it is well settled that if several distinct promises are made for one and the same lawful consideration, and one or more of them be such as the law will not enforce, that will not of itself prevent the rest from being enforceable. The general rule was stated by Willes, J., in Pickering v. Ilfracombe Ry. Co. (1868) 3 CP 235 (at page 250) as follows :
"The general rule is that, where you cannot sever the illegal from the legal part of a covenant, the contract is altogether void; but where you can sever them, whether the illegality be created by statute or by the common law, you may reject the bad part and retain the good".
“94. The normal rule of Common Law has been that a party who seeks to enforce an agreement which is opposed to public policy will be non-suited. The case of A. Schroeder Music Publishing Co. Ltd. v. Macaulay (1974 1 WLR 1308), however, establishes that where a contract is vitiated as being contrary to public policy, the party adversely affected by it can sue to have it declared void. The case may be different where the purpose of the contract is illegal or immoral. In Kedar Nath Motani v. Prahlad Rai (1960) 1 SCR 861 : (AIR 1960 SC 213) reversing the High Court and restoring the decree passed by the trial court declaring the appellants' title to the lands in suit and directing the respondents who were the appellants' benamidars to restore possession, this Court, after discussing the English and Indian law on the subject, said (at page 873) (of SCR) : (at Pp. 218-219 of AIR) :
"The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff's conduct, and he should not be allowed to circumvent the illegality by resorting to some subterfuge or by misstating the facts. It however, the matter is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the Court, the. plea of the defendant should not prevail."
The types of contracts to which the principle formulated by us above applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shock the conscience of the court. They are opposed to public policy and require to be adjudged void.”
From the above observations of the Hon’ble Supreme Court as also considering the provisions of Section 23 read with Section 129 of the Contract Act, it cannot be said that the terms and conditions of the guarantee in the present case are opposed to the public policy or otherwise illegal or immoral, which cannot be enforced in the court of law. Since the terms and conditions of the guarantee are for lawful consideration and for lawful object, they are in addition to the statutory provisions of Section 129 of the Act made for extending the guarantee to series of transactions. The Contract Act does not prohibit any party to agree for any additional terms and conditions unless the Competent Court finds that such conditions of the contract are against the public policy. In the present case, the respondents- guarantors have bound themselves by executing the guarantee deed that guarantee shall be continuing guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payments from time to time made to the Corporation or any settlement of any accounts or by reason of the account being brought to a credit at any time or from time to time. The guarantee shall continue in force notwithstanding the discharge of the Principal by operation of law or by the death of any of the guarantors or by both and shall cease only on payment of the amount guaranteed under the guarantee deed. At more than one places, the guarantors in their guarantee deed discloses their clear intention to continue to remain liable for indebtedness and liabilities of the principal debtor till the entire payment of the principal amount is made and account is fully settled. Therefore, from the terms of the guarantee and intention gathered from such terms, we hold that the guarantee in question executed by the respondents was and is a continuing guarantee. We do not find anything in such terms and conditions to be against the public policy and hence such terms and conditions of the continuing guarantee are enforceable at law.
17. Next question is whether even if guarantee is a continuing guarantee, could the appellant have maintained the suit against the respondents-guarantors if the suit was otherwise not time barred against the defendant No.1- principal debtor. Time limit for the suit against the defendant No.1 got extended by virtue of the notification issued by the State Government under the provisions of the Bombay Relief Undertakings (Special Provisions) Act, 1958. The claim and right of the appellant against the defendant No.1 was revived on 21.9.1974 when the Sick Textile (Nationalization) Ordinance 1974 was promulgated and thereafter on 21.12.1974 when the Nationalization Act came into force. Therefore, from 21.12.1974 till three years, the suit against the defendant No.1 would have been within time. Even apart from this, the loan account would have been fully settled when last installment was to be paid in the month of June 1979. Therefore, the respondents were liable till the date of last installment as the guarantee was a continuing guarantee. However, since the appellant issued demand notice during the aforesaid periods on 3.6.1976, the period of limitation against the respondents would be reckoned from 3.6.1976. The suit was filed on 24.7.1977 i.e. within the period of three years from the aforesaid date. Therefore, the suit filed by the appellant against the respondent was well within the time. In our view, learned Judge was not right in holding that Article 37 of the Limitation Act would apply. Article 37 of the Limitation Act reads as under:-
Description of suit Period of Limitation Time from which period begins to run 37. On promissory note Three years When the default or bond payable by is which made, provides that, if default unless where the be made in payment of payee or obligee one or more installments, waives the benefit the whole shall be due. of the provision and then when fresh default is made in respect of which there is no such waiver.
We have already discussed that present is a case of continuing guarantee and the respondents as guarantors would continue to be liable till last installment is paid. Article 37 speaks about the cause of action in respect of promissory note or bond payable by installment on happening of default in payment of one or more installments because of which whole amount under promissory note or bond shall be due and payable and from such default, unless payee waives benefit of the provisions, the time would start running. In the facts of the present case, Article 37 would not apply but Article 55 of the Limitation Act would apply. Article 55 of the Limitation Act is reproduced below:-
Description of suit Period of Limitation Time from which period begins to run Guarantee under the contract was a continuing guarantee and when the demand notice was issued and since no payment was made by the respondents, there was a breach of the contract of guarantee and as per Article 55 of the Limitation Act, time limit of three years would be reckoned from the date of demand notice. In view of the above, we are of the opinion that the facts of the case for the purpose of Limitation Act, would be governed by Article 55 of the Limitation Act and since the suit was filed within three years from the date of the demand notice, the suit filed by the appellant was within the time limit. The learned Judge has thus committed error in holding that the suit filed by the appellant against the respondents was time barred. The judgment and decree passed by the learned Judge dismissing the suit of the appellant against the respondents, therefore, cannot stand upon scrutiny of law.
18. Appeal is allowed. Judgment and decree dated 29.4.1983 in Civil Suit No.913 of 1977 insofar as the respondents are concerned is set aside. Consequently, the suit against the respondents is allowed. The appellant shall be entitled to recover Rs.14,10,233/- from the respondents (defendant Nos.2 and 3) with interest at the rate of 9% per annum from the date of the suit till the same is realized. Decree shall be drawn accordingly.
Sd/-
(JAYANT PATEL, J.) omkar Sd/-
(C.L. SONI, J.)