2015 (5) TMI 13 - SC - Indian Laws

Supreme Court: Guarantor's Liability, Auction Sale Validity, Equity & Good Conscience

The Supreme Court held that the guarantor's liability is co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act, ... Validity of auction sale - Sale of property mortgaged with bank - Property mortgaged by guarantor without having the right to do it - Held that:- Legislature has succinctly stated that the liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. This Court has decided on this question, time and again, in line with the intent of the legislature. In Ram Kishun and Ors. v. State of U.P. and Ors., [2012 (5) TMI 569 - SUPREME COURT], this Court has held that 'in view of the provisions of Section 128 of the Contract Act, the liability of the guarantor/surety is co-extensive with that of the debtor.' The only exception to the nature of the liability of the guarantor is provided in the Section itself, which is only if it stated explicitly to be otherwise in the Contract. - in the present case the guarantor cannot escape from her liability as a guarantor for the debt taken by the principal debtor. In the loan agreement, which is the contract before us, there is no clause which shows that the liability of the guarantor is not co-extensive with the principal debtor. Therefore Section 128 of the Indian Contract Act will apply here without any exception. Sale was confirmed on 15th November, 2006. The sale certificate was also issued in favour of the auction purchaser after paying the requisite stamp duty and registration fees which, as pointed out to us on behalf of the auction purchaser, to the tune of ₹ 30,73,800/-. It is also not in dispute that auction purchaser was put in possession of the property and is still in possession of the property since the sale certificate was issued and registration was made in his favour. It is submitted on behalf of the auction purchaser that he has purchased the property by availing private borrowing for the said property and he is paying nearly ₹ 5 lakhs per month as interest. Therefore, in our opinion, the equity and good conscience also has to play a role in the matter in question on the given facts and after considering the conduct of the respondents (C.L. Vimla and others) in the matter. - since the auction purchaser has already paid the full amount of sale consideration and is in possession of the property in question for more than about 8 years, for equity and good conscience, we do not intend to interfere with his possession and we, therefore, set aside the order passed by the High Court - Decided in favour of Appellant. Issues Involved:1. Liability of the guarantor under Section 128 of the Indian Contract Act, 1872.2. Validity of the Lok Adalat award and its binding nature on the guarantor.3. Validity of the auction sale conducted by the Recovery Officer.4. Request for solatium by the Central Bank of India.5. Equity and good conscience in favor of the auction purchaser.Detailed Analysis:1. Liability of the Guarantor under Section 128 of the Indian Contract Act, 1872:The judgment emphasizes that the liability of the guarantor is co-extensive with that of the principal debtor as per Section 128 of the Indian Contract Act, 1872. The court cited Ram Kishun and Ors. v. State of U.P. and Ors., which states that 'the liability of the guarantor/surety is co-extensive with that of the debtor.' The court concluded that the guarantor, C.L. Vimla, cannot escape her liability for the debt taken by the principal debtor, as there was no clause in the loan agreement indicating otherwise.2. Validity of the Lok Adalat Award and Its Binding Nature on the Guarantor:The High Court had held that the Lok Adalat's award was not binding on the guarantor since she was not a party to the Joint Memo. However, the Supreme Court disagreed, noting that Clause 2 of the Form of Guarantee explicitly states that any judgment or award obtained by the Central Bank of India against the principal debtor would bind the guarantor. The court held that the mere fact of ignorance cannot be a valid ground for the guarantor to escape liability, especially when she and her son, who signed the joint memo, were residing in the same house.3. Validity of the Auction Sale Conducted by the Recovery Officer:The High Court had set aside the auction sale, stating that it was not conducted as per the mandate of the sale proclamation, which required the sale to be conducted part by part and stopped as soon as the decree amount was realized. The Supreme Court, however, noted that the auction purchaser had acted in good faith, paid the full amount of the sale consideration, and was in possession of the property. The court emphasized that setting aside the sale would be inequitable given the auction purchaser's bonafide participation and subsequent financial commitments.4. Request for Solatium by the Central Bank of India:The High Court had rejected the plea for solatium of 20% by the Central Bank of India. The Supreme Court did not specifically address this issue in detail but implied that the bank's request was not justified given the circumstances and the conduct of the parties involved.5. Equity and Good Conscience in Favor of the Auction Purchaser:The Supreme Court highlighted the principle of equity and good conscience, noting that the auction purchaser had already paid the full amount of the sale consideration, incurred additional costs for stamp duty and registration, and was in possession of the property for about eight years. The court emphasized that it would be unjust to disturb the auction purchaser's possession, especially when the principal debtors were not prepared to pay back the amount to the bank and did not defend themselves properly.Conclusion:The Supreme Court set aside the High Court's order, holding that the auction purchaser's possession should not be interfered with due to equity and good conscience. The appeals were allowed, reaffirming the auction sale's validity and the guarantor's liability under the loan agreement.