TMI Blog2019 (11) TMI 1169X X X X Extracts X X X X X X X X Extracts X X X X ..... consent, in the terms of the contract between the principal debtor and the creditor to constitute a discharge of a surety under Section 133 of the Act of 1872. The ratio of Canonnore Spinning and Weaving Mills Ltd [ 2002 (4) TMI 943 - SUPREME COURT ] being binding precedents and the factual scenarios obtaining therein being same as that obtaining in the present case, the ratio laid down therein are applied in the facts of the present case, wherein it was being held that a definite volition on the part of the creditor is required to take place for the guarantor to stand discharged in terms of section 141 of the Act of 1872. It has held that, the liability of the guarantor cannot but be stated to be a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor s right of action against the surety is preserved. The issue is answered in the negative and against the writ petitioner - no relief can be granted to the writ petitioner - petition dismissed. - W.P. No. 10147 (W) of 2019 - - - Dated:- 13-11-2019 - DEBANGSU BASAK, J. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said that, the guarantor, that is, the petitioner, has any liability towards the first respondent. In support of such contentions, he has relied upon Sections 135, 139 and 145 of the Contract Act, 1872. According to him, the creditor having made a composition of the debt due from the principal debtor, the same discharged the surety. The composition was made without the consent and approval of the petitioner. In the facts of the present case therefore, the petitioner as the guarantor did not have any liability towards the loan granted by the first respondent to the company. Moreover, the conduct of the first respondent is inconsistent with the right of the petitioner as the guarantor, and that, the same amounts to discharge the liabilities of the petitioner from the contract of guarantee. According to him, the first respondent as the guarantor having agreed and assented to the Resolution Plan before the National Company Law Tribunal, such conduct releases the petitioner from the guarantee. Even if the first respondent had not agreed or assented to the Resolution Plan, then also the Resolution Plan as sanctioned by the National Company Law Tribunal exercising jurisdiction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Electricity Board Bombay v. Official Liquidator High Court, Ernakulum and Anr.), All India Reporter 1988 Calcutta page 18 (United Bank of India v. Modern Stores (India) Ltd.) and All India Reporter 2002 Supreme Court page 1814 (Industrial Finance Corporation of India Ltd. v. Canonnore Blending and Weaving Mills Ltd. and Ors.) in support of his contentions. 5. Learned Senior Advocate appearing for the first respondent has relied upon a decision of the National Company Appellate Tribunal rendered in Company Appeal (80) (Insolvency) No. 164 of 2018 (Lalit Mitra and Ors. v. Sharan Bio Medicine and Ors.) and 2018 Volume 17 Supreme Court Cases page 394 (State Bank of India v. Ramakrishnan Anr.) with regard to Section 14 of the Code of 2016 and the liability of a guarantor. 6. Learned Senior Advocate appearing for the first respondent has submitted that, a contract of guarantee is an independent contract. According to him, Section 14(3) of the Code of 2016 provides that, there will be no moratorium in respect of proceedings against a guarantor during the Corporate Insolvency Resolution process of a corporate debtor while a moratorium against a corporate debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank was extended on August 1, 2019 on the prayer of the bank. Despite such opportunities being granted, the bank has chosen not to file an affidavit. Learned senior advocate appearing on behalf of the bank has on instructions submitted that, the bank did not want to file any affidavit in opposition and that the writ petition can be heard and decided on the basis of the writ petition itself. 10. The petitioner was a director of Divya Jyoti Sponge Iron Private Limited. Such company enjoyed credit facilities from various banks including the first respondent herein. Such credit facilities were secured inter alia by the personal guarantee given by the petitioner. The petitioner has given a personal guarantee to the first respondent for due repayment of the credit facilities enjoyed by the company from the first respondent. 11. The first respondent filed an application under section 7 of the Code of 2016 for initiating Corporate Insolvency Resolution process in respect of the company before the National Company Law Tribunal, Kolkata Bench Kolkata being CP (IB) No. 363/KB/2017. Such application was admitted by the National Company Law Tribunal, Kolkata by an order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. On receipt of the payment of their dues, the banks/Fls shall satisfy the charge over the assets of the DJSIPL which have been provided as security against the facilities availed from the secured financial lenders, to make the security in line with the restructured loan/facilities; 1.17.8 All encumbrances, charges, security interests etc. created on the assets of the Corporate Debtor from the secured financial creditor shall stand released on the Cut-Off Date . 1.17.14 All claims, rights of promoter/promoter group against the Corporate Debtor, unless covered in the Resolution Plan, shall stand irrevocably and unconditionally extinguished ............... 1.17.16 All liabilities in relation of corporate guarantees, indemnities, etc. provided by the Corporate Debtor as on the Cut-off Date shall arise on the same 14. The Resolution Plan of the company as approved by the National Company Law Tribunal, Kolkata by the order dated March 13, 2018, in respect of the company, does not deal with the personal guarantee that the petitioner gave to the first respondent in respect of the credit facilities enjoyed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. 134. Discharge of surety by release or discharge of principal debtor .-The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. 135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor.- A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract. 139. Discharge of surety by creditor s act or omission impairing surety s eventual remedy.- If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. It recognises that a guarantee can be either oral or written. In the facts of the present case, although the contract of guarantee has not been produced by the parties, the parties agree that, the petitioner executed a contract of guarantee in writing in favour of the first respondent guaranteeing the due repayment of the credit facilities enjoyed by the company from the first respondent. 19. Section 128 of the Act of 1872 stipulates that, the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract. The onus is on the petitioner to establish that, the contract of guarantee provided anything to diminish the liability of the petitioner under the contract of guarantee excepting the liability of the petitioner being coextensive as that of the company. The petitioner, as noted above, has not produced the contract of guarantee and therefore has failed to establish that, the contract of guarantee contain any stipulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company under section 7 of the Code of 2016 before the National Company Law Tribunal, Kolkata. The Code of 2016 was enacted to consolidate and amend the laws relating to reorganisation and Insolvency Resolution of corporate persons, partnership firms and individuals in a time bound manner. The Code of 2016 was amended in 2018. Prior to the enactment of the Code of 2016, there were various statutes relating to insolvency and bankruptcy of corporate entities, partnership firms and individuals. The Code of 2016 brought the law governing insolvency of corporate persons, partnerships and individuals under one statute. The Code of 2016 is divided into five parts with each part containing a number of chapters. Section 7 of the Code of 2016 is under Part II which deals with Insolvency Resolution and liquidation for corporate persons, and Chapter II of Part II deals with Corporate Insolvency Resolution process. 24. Right to apply for insolvency does not arise out of a contract between the parties. It is a statutory right. Section 6 of the Code of 2016 specifies the persons who may initiate Corporate Insolvency Resolution process in respect of a corporate debtor. It stipulates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entirety of the claim of the financial creditor applying for initiation of the Corporate Insolvency Resolution process. In such a situation, no compromise takes place. In a given situation, the financial creditor applying for initiation of the Corporate Insolvency Resolution process may receive a portion of the claim as full and final settlement as against the corporate debtor, in accordance with the Resolution Plan approved under the Code of 2016. In neither of the two situations, can it be said that, the financial creditor entered into a voluntary compromise with the corporate debtor with regard to the quantum of the claim. 26. The Code of 2016 stipulates that, a Resolution Plan in respect of a corporate debt is required to be approved by a vote of not less than 66% of the voting share of the financial creditors. In a given case, the financial creditor applying for initiation of Corporate Insolvency Resolution process in respect of a corporate debtor may be holding more than 66% of the voting share of the financial creditors in respect of such corporate debtor. In such case, the best available Resolution Plan in respect of the corporate debtor may contemplate payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny effect on the liability of the guarantor. 29. The Division Bench of this Hon ble Court in Modern Stores (India) Ltd. (supra) has considered the interplay of sections 134 and 137 of the Act of 1872. It has applied the ratio laid down in Maharashtra State Electricity Board, Bombay (supra). It has held as follows: 18. Section 134 consists of two parts, The first part of the section speaks that the sureties are discharged by any contract between the creditor and the principal-debtor, by which the principal debtor is released. This part has no application to the present case as in this case there has not been any contract between the plaintiff being the creditor and the defendant No. 1 being the principal-debtor whereby the principal debtor was released. 19. The second part of Section 134 is to this effect. The sureties are discharged by any act or omissions of the creditor, legal consequence of which is the discharge of the principal-debtor. In this appeal we are to consider whether there has been any act or omission on the part of the appellant being the creditor and the consequence of such act or omission is the discharge of the defendant No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable, prefers to sue the more solvent of two sureties for the debt, this still more obviously, does not discharge the other Surety. 20. It will appear from Section 137 of the Contract Act that mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not discharge the surety. Therefore, it appears that mere forbearance on the part of the creditor to sue the principal debtor will not discharge the surety. It has been held by certain decisions that mere forbearance to sue may spring from a contract or there may be simple forbearance. If such forbearance springs from a contract that will be a case under Section 135 of the Contract Act but if the plaintiff forbears to sue the principal debtor within the period of limitation that itself would not discharge the surety. 21. Therefore, in our view, mere omission to sue the principal debtor or to proceed against the principal debtor in the suit will not operate as a discharge of the sureties. 30. The Supreme Court in Canonnore Spinning and Weaving Mills Ltd (supra) has considered discharge of liability of a guarantee under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note of Section 135 of the Act of 1872 and held that, a contract between the creditor and the principal debtor by which the creditor compounds with the principal debtor, discharges the surety. 34. In the facts of the present case, most respectfully, I am unable to accept and apply the ratio of Kundanmal Dabriwala (supra). Firstly, Kundanmal Dabriwala (supra) is not binding precedent upon me. Canonnore Spinning and Weaving Mills Ltd (supra), Maharashtra State Electricity Board, Bombay (supra) and Modern Stores (India) Ltd. (supra) are binding precedents on me. Secondly, the proposition that, as a binding arrangement sanctioned by Court under Section 391 of the Companies Act, 1956 being a deemed and binding contract through operation of law and if it extinguishes the liability of the principal debtor, the same has the effect of preventing the surety from recovering the amount of debt from the debtor and therefore, the creditor cannot recover from the surety, as observed by Kundanmal Dabriwala (supra), requires consideration. Theoretically, as the liability of the surety is coextensive as that of the principal debtor, the creditor can proceed solely against the surety and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act of 1872. An application under Section 7 of the Code of 2016 and the consequential orders that may be passed under the Code of 2016 cannot also be construed to be a discharge of the surety in terms of Section 139 of the Act of 1872. The implied promise recognised under Section 145 of the Act of 1872 is not impaired by any order that may be passed under the Code of 2016. As noted above, when, a financial creditor approaches the National Company Law Tribunal under the provisions of the Code of 2016, it does so, in exercise of statutory rights. Contractual obligations between the financial creditor and the surety are not obliterated or modified or suspended by the eventual outcome of such proceeding. 36. The Supreme Court in V. Ramakrishnan Anr. (supra) has considered the issue as to whether Section 14 of the Code of 2016 would apply to a personal guarantor of a corporate debtor. It has held that, Section 14 of the Code of 2016 does not apply to a personal guarantor. It has noted that, the object of the Code of 2016 is not to allow personal guarantors to escape from an independent and coextensive liability. It has held as follows:- . 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was brought into force on 23.11.2017 would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3), as stated hereinabove. This is what is meant by strengthening the Corporate Insolvency Resolution Process in the Statement of Objects of the Amendment Act, 2018. 22. Section 31 of the Act was also strongly relied upon by the Respondents. This Section only states that once a Resolution Plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety s consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The proviso to Article 254(2) provides that a law made by the State Legislature with the President's assent shall not prevent Parliament from making at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by a State Legislature. Thus, Parliament need not wait for the law made by the State Legislature with the President's assent to be brought into force as it can repeal, amend, vary or add to the assented State law no sooner it is made or enacted. We see no justification for inhibiting Parliament from repealing, amending or varying any State legislation, which has received the President's 25 assent, overriding within the State's territory, an earlier parliamentary enactment in the concurrent sphere, before it is brought into force. Parliament can repeal, amend, or vary such State law no sooner it is assented to by the President and that it need not wait till such assented-to State law is brought into force. This view finds support in the judgment of this Court in Tulloch [AIR 1964 SC 1284 : (1964) 4 SCR 461]. 80. Lastly, the definitions of the expressions laws inforce in Article 13(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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