Guarantee enforceability, co-surety liability, estate-limited guarantor liability, and interest recalculation under loan and RBI terms

Guarantee bonds executed pursuant to sanction terms and a board resolution were treated as supported by sufficient consideration, with past benefit to the principal debtor accepted as valid consideration for the surety. A surety was not discharged on the basis that co-sureties had not joined, because no proved agreement barred enforcement until another person signed. The liability of a deceased guarantor survived against the estate, but not personally against legal representatives beyond inherited assets. The loan documents were read as agreeing to quarterly rests, compound interest, and penal interest on overdue sums. Interest was then checked against applicable Reserve Bank limits, leading to a downward modification of the decree only to the extent of excess under the term-loan account.

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Issues: (i) whether the guarantee bonds were unenforceable for want of consideration; (ii) whether the surety was discharged under the rule against enforcing a guarantee until the intended co-sureties joined; (iii) whether the legal representatives of the deceased guarantor were liable only to the extent of the estate inherited; (iv) whether the borrower had agreed to levy compound interest and penal interest with quarterly rests on all three loan accounts; and (v) whether the interest charged exceeded the Reserve Bank of India circulars applicable to the small-scale industrial unit.

Issue (i): whether the guarantee bonds were unenforceable for want of consideration.

Analysis: A guarantee given pursuant to the sanction terms and the board resolution was supported by sufficient consideration. Section 127 of the Indian Contract Act, 1872 was applied broadly, and past benefit to the principal debtor was treated as good consideration for the surety. The execution of the bonds after disbursement did not by itself invalidate them.

Conclusion: The guarantee bonds were valid and enforceable, against the guarantor.

Issue (ii): whether the surety was discharged under the rule against enforcing a guarantee until the intended co-sureties joined.

Analysis: Section 144 of the Indian Contract Act, 1872 applies only where there is a proved contract that the creditor shall not act on the guarantee until another named person joins as co-surety. The evidence and the wording of the guarantee deeds did not establish any such understanding. The deeds contemplated individual guarantees with joint and several liability if more than one guarantor signed.

Conclusion: The surety was not discharged under Section 144, and liability continued.

Issue (iii): whether the legal representatives of the deceased guarantor were liable only to the extent of the estate inherited.

Analysis: A deceased surety's liability survives against his estate, but legal representatives cannot be made personally liable beyond the estate that devolved upon them. The decree against them therefore required qualification.

Conclusion: The legal representatives were liable only to the extent of the estate of the deceased guarantor.

Issue (iv): whether the borrower had agreed to levy compound interest and penal interest with quarterly rests on all three loan accounts.

Analysis: The loan documents, promissory notes, hypothecation deed, and related agreements showed agreement to quarterly interest, quarterly rests, and overdue interest. The Court treated the language of the documents as sufficient to constitute an agreement for compounding, including for the term loan, and upheld the levy of penal interest on overdue amounts.

Conclusion: The agreement for compound interest, quarterly rests, and penal interest was proved.

Issue (v): whether the interest charged exceeded the Reserve Bank of India circulars applicable to the small-scale industrial unit.

Analysis: The applicable Reserve Bank of India circulars controlled the permissible rates. The claim under the term-loan account had to be reduced after recalculation, while the overdraft and packing credit claims were substantially within the prescribed limits after adjustment. The plaintiff could not enlarge the decree in appeal beyond the amount claimed, and the trial decree required modification only to the extent of the excessive term-loan component.

Conclusion: The challenge partly succeeded, and the decretal amount was reduced to the extent of the excess under the term-loan account.

Final Conclusion: The appeals succeeded in part, the decree against two defendants was set aside, the liability of the deceased guarantor's legal representatives was confined to the inherited estate, and the monetary decree was modified downward after applying the contractual terms and the Reserve Bank of India limits.

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