Guarantors discharged from liability after settlement acceptance. Exemplary costs imposed on Bank.

The High Court upheld the Appellate Tribunal's decision that the guarantors were discharged from liability after the Bank accepted a settlement amount. The Court dismissed the writ petitions and imposed exemplary costs on the Bank for continuing the case despite the settlement agreement.

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Issues Involved:
1. Validity of the order dated 18th February, 2011 passed by the Debts Recovery Appellate Tribunal.
2. Discharge of guarantors' liability upon settlement with the principal debtor.
3. Applicability of Section 134 of the Contract Act regarding discharge of surety.
4. Imposition of exemplary costs on the Bank.

Summary:

Issue 1: Validity of the Order Dated 18th February, 2011
The Bank filed Writ Petition Nos. 29076 and 29083 of 2011 to quash the order dated 18th February, 2011 passed by the Chairperson of the Debts Recovery Appellate Tribunal in Appeal Nos. 614 and 663 of 2005. The appeals were filed against the Tribunal's order dated 10th August, 2005 in T.A. No. 1415 of 2000, which allowed the Bank's claim against the guarantors but dismissed it against the Company.

Issue 2: Discharge of Guarantors' Liability
The Appellate Tribunal allowed the appeals, holding that once the Bank accepted Rs. 78,16,428.42 towards "full and final settlement of the claim" from the Official Liquidator, the liability of the principal debtor was discharged. Consequently, the guarantors' liability, being coextensive with that of the principal debtor u/s 128 of the Contract Act, was also discharged.

Issue 3: Applicability of Section 134 of the Contract Act
The Bank argued that the surety is not discharged u/s 134 of the Contract Act as there was no contract between the borrower and the Bank. However, the Court rejected this argument, stating that the Official Liquidator had stepped into the shoes of the Company, and the Bank had agreed to the settlement, thereby discharging the surety.

Issue 4: Imposition of Exemplary Costs
The Court noted that the Bank should have restrained itself from pursuing T.A. No. 1415 of 2000 after agreeing to the settlement amount. The Bank's failure to disclose the application and affidavit filed before the Company Judge warranted the imposition of exemplary costs. Consequently, the writ petitions were dismissed with costs of Rs. 25,000/- each.

Conclusion:
The High Court dismissed the writ petitions, upholding the Appellate Tribunal's order that the guarantors were discharged from liability due to the Bank's acceptance of the settlement amount. The Court imposed exemplary costs on the Bank for unnecessarily pursuing the matter.

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