2016 (11) TMI 1762 - HC - Indian Laws

Forbearance in not recovering leased equipment doesn't discharge guarantor under Section 137 Indian Contract Act

Canbank Financial Services Ltd. Versus SFL Industries Ltd. & Anr

Delhi HC held that plaintiff's forbearance in not recovering leased equipment from defendant's factory premises constituted mere forbearance under Section ... Suit for recovery - liability of defendants under the lease agreement and guarantee deed - applicability of Section 141 and Section 137 of the Indian Contract Act, 1872 - Whether the choice exercised by the plaintiff of not taking such action would be “mere forbearance” within the meaning of Section 137 or an act on the part of the plaintiff of “losing or parting with such security” within the meaning of Section 141? - HELD THAT:- Considering the facts and circumstances of the present case i.e. the agreement between the parties, the practicality of removing the leased equipment from the factory premises of the defendant No.1 and the value of such leased equipment even if had been taken into custody / possession, the same would fall within the meaning of “mere forbearance” in Section 137 and not of “losing or parting with the security” within the meaning of Section 141. A Division Bench of the High Court of Karnataka in Karnataka Bank Ltd. Vs. Gajanan Shankararao Kulkarni [1976 (7) TMI 174 - KARNATAKA HIGH COURT] held that mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient in itself to discharge the surety, because the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor and because in the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the security, so long as the surety himself remains inactive. The action / inaction of the plaintiff on account of which the defendant No.2 claims to have been discharged do not fall within the ambit of Section 141 of the Contract Act and are within the ambit of Section 137 of the Contract Act. As far as the contention of the counsel for the defendant No.2, of Section 446 of the Companies Act is concerned, on 26th October, 2016 it is already prima facie observed that once permission under Section 22(1) of SICA has been granted and the order of winding up is in pursuance to the order of BIFR, Section 446 of the Companies Act would not be applicable. The plaintiff is entitled to a decree against the defendants as sought. However, having found the Deed of Guarantee executed by the defendant no.2 to be limiting the amount to be recovered thereunder to Rs. 109.75 lacs, the decree insofar as against the defendant no.2 has to be limited to the said amount - a decree is passed in favour of the plaintiff and against the defendant no.1 for recovery of Rs. 1,20,49,597.24p with pendente lite and future interest at the rate of 2% per annum compounded with monthly rests. Application disposed off. Issues Involved:1. Liability of defendants under the lease agreement and guarantee deed.2. Applicability of Section 141 and Section 137 of the Indian Contract Act, 1872.3. Requirement of permission under Section 446 of the Companies Act, 1956.4. Calculation of the amount claimed by the plaintiff.Issue-wise Detailed Analysis:1. Liability of Defendants Under the Lease Agreement and Guarantee Deed:The plaintiff filed a suit for recovery of Rs. 1,20,49,597.24 with interest from the defendants, based on a lease agreement dated 12th December 1990, and subsequent supplementary agreements. The defendant no.1 was provided lease finance for installing plant and machinery, and defendant no.2 stood as guarantor for the transaction. The plaintiff claimed that the defendants failed to maintain financial discipline and did not pay the lease rentals, despite acknowledging their liability. The defendant no.2 argued that the suit against him as guarantor was not maintainable since the principal borrower (defendant no.1) was wound up, and the plaintiff had not taken steps to enforce its charge against the securities. However, the court found that the guarantee deed executed by defendant no.2 was valid and enforceable, and defendant no.2 was jointly and severally liable with defendant no.1.2. Applicability of Section 141 and Section 137 of the Indian Contract Act, 1872:Defendant no.2 contended that he was discharged from liability under Section 141 of the Contract Act, as the plaintiff failed to enforce its security rights against the principal debtor. The court held that the leased equipment was not a security under the lease agreement, as no charge was registered with the Registrar of Companies. The court further observed that the plaintiff's inaction amounted to 'mere forbearance' under Section 137, which does not discharge the surety. The court emphasized that the plaintiff was not obliged to take possession of the leased equipment and could choose any remedy against the principal debtor.3. Requirement of Permission Under Section 446 of the Companies Act, 1956:The defendant no.2 raised the issue of whether the plaintiff required permission under Section 446 of the Companies Act to proceed with the suit, given that defendant no.1 was wound up. The court observed that since permission under Section 22(1) of SICA had been granted, and the winding-up order was pursuant to BIFR's order, Section 446 was not applicable. The court cited precedents supporting this view and noted that the winding-up process was over, rendering the question of Section 446 moot.4. Calculation of the Amount Claimed by the Plaintiff:Defendant no.2 challenged the credibility of the plaintiff's claim amount, citing discrepancies in the amounts stated at different times. However, the court noted that the defendant no.2 had not computed the amounts as per the interest rates stipulated in the agreements, indicating the arbitrary nature of the argument. The court found no merit in the challenge to the claim amount and determined that the plaintiff was entitled to a decree for the claimed amount against the defendants.Conclusion:The court decreed in favor of the plaintiff, awarding Rs. 1,20,49,597.24 with interest against defendant no.1 and Rs. 109.75 lacs against defendant no.2, based on the limitation in the guarantee deed. The plaintiff was also entitled to costs of the suit from both defendants jointly and severally.