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

Delhi HC held that plaintiff's forbearance in not recovering leased equipment from defendant's factory premises constituted mere forbearance under Section 137 of Indian Contract Act, not loss of security under Section 141, and thus did not discharge the guarantor. Court distinguished between passive inactivity and active loss of security, noting creditor has no obligation of active diligence unless contracted. Decree granted against primary defendant for Rs. 1,20,49,597.24 with interest, and against guarantor limited to Rs. 109.75 lacs per guarantee deed terms.

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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.

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