IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.BALAKRISHNAN NAIR & THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN MONDAY, THE 5TH APRIL 2010 / 15TH CHAITHRA 1932 WA.No. 2002 of 2006(A) ---------------------- AGAINST THE JUDGEMENT/ORDER IN OP.666/1996 Dated 15/02/2006 .................... APPELLANT(S): PETITIONER ------------------------ DR.M.I.ITTY, 35/130, KANNAMTHODATH LANE, ERNAKULAM, KOCHI-16. BY SRI.P.GOPINATHA MENON, SR. COUNSEL SRI.A.M.SHAFFIQUE, SENIOR ADVOCATE SRI.E.K.NANDAKUMAR SRI.A.K.JAYASANKAR NAMBIAR RESPONDENT(S): --------------- 1. KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM. 2. DEPUTY TAHSILDAR, REVENUE RECOVERY (K.F.C.), ERNAKULAM. 3. VILLAGE OFFICER, ERNAKULAM, KANAYANNUR TALUK. 4. VILLAGE OFFICER, AIKKANAD SOUTH, KUNNATHUNADU. GOVERNMENT PLEADER SMT.R.BINDU R2 TO R4 SRI.M.M.SAYED MUHAMMED, SC, KFC FOR R1 THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 22-2-2010, THE COURT ON 05/04/2010 DELIVERED THE FOLLOWING: “C.R” K.BALAKRISHNAN NAIR & P.N.RAVINDRAN, JJ. ----------------------------------------- W.A.No.2002 of 2006 ----------------------------------------- Dated this the 5th day of April, 2010 JUDGMENT Ravindran,J. The appellant in this Writ Appeal is the first petitioner in O.P.No.666 of 1996 and the respondents are the respondents therein. By judgment delivered on 15-2-2006, the learned single Judge dismissed the writ petition. Aggrieved thereby the first petitioner therein has filed this writ appeal. The brief facts of the case are as follows. 2. The appellant was the Managing Director of Southern Organics Private Limited, a company incorporated under the Companies Act, 1956. The said company had availed a loan of Rs.8,30,000/- from the Kerala Financial Corporation, the first respondent herein. The loan was secured by a mortgage of the immovable assets of the company as per mortgage deed registered as document No.2790 of 1978 of the Sub Registrar's Office, Edappally and by hypothecation of the plant and machinery. The company and its Directors, including the appellant, had executed Ext.R1(a) agreement dated 28.8.1978 undertaking to repay the loan in seventeen half yearly instalments commencing from W.A.No.2002 of 2006 -:2:- 10-7-1981 and ending with 10-7-1989. Thereafter, an additional loan of Rs.3,40,000/- was availed in the year 1980. Thereupon the appellant in his capacity as the Managing Director of the company, executed Ext.R1 (b) agreement dated 15-9-1980 undertaking to repay the said loan in seventeen half yearly instalments commencing from 10-7-1981 and ending with 10.7.1989. Besides the aforesaid two agreements the appellant and the other Directors of the company had executed Ext.R1(c) deed of guarantee dated 17-9-1980 personally guaranteeing repayment of the money payable by the company to the Corporation. 3. The company did not repay the loan in time and was in default. The Kerala Financial Corporation, (hereinafter referred to as the Corporation” for short) thereupon initiated proceedings under the Kerala Revenue Recovery Act, 1968 against the company, its Directors and their assets. The Directors thereupon forwarded a proposal for rehabilitation. The repayment of loan was thereafter rescheduled and the revenue recovery proceedings were withdrawn. Even thereafter, the loan was not repaid in time. While matters stood thus, by order passed on 27-8-1990 in C.P.No.6 of 1990 this Court ordered winding up of the company. Pursuant to the order of winding up passed by this Court, possession of the assets of the company was taken over by the Official Liquidator attached to this Court. The Corporation did not choose to stand outside W.A.No.2002 of 2006 -:3:- the winding up. The Official Liquidator attached to this Court brought the properties of the company, that were offered as security for the loan, for sale. The Corporation thereafter moved the Official Liquidator claiming payment of the sum of Rs.47,02,769.40 being the amount then outstanding in the loan account. The Official Liquidator admitted the claim only to the extent of Rs.38,32,219.80. Aggrieved thereby the Corporation filed M.C.A.No.19 of 1993 in C.P.No.6 of 1990. By Ext.P2 order passed on 18-8-1993 the learned company Judge of this Court held that the adjudication made by the Official Liquidator does not call for any interference. It was held that the Corporation can claim payment of interest after the date of winding up only if there is a surplus in the hands of the Official Liquidator, after payment in full of all the claims admitted to proof. The Corporation challenged Ext.P2 by filing M.F.A.No.1311 of 1993 in this Court. 4. It appears the Official Liquidator did not disburse even the admitted amount to the Corporation. The Corporation therefore initiated fresh proceedings under the Kerala Revenue Recovery Act, 1968 for realisation of the sum of Rs.71,78,000/- with future interest thereon at the rate of 19.75% per annum. Ext.P4 demand notice dated 18-11-1995 was thereupon issued to the appellant and the other Directors. They filed O.P.No.18767 of 1995 in this Court contending that they are liable W.A.No.2002 of 2006 -:4:- only for the amount that may be found due from the principal debtor and not for the entire amount. While matters stood thus, the Official Liquidator paid over the sum of R.38,32,219.80 to the Corporation. In view of the said development, O.P.No.18767 of 1995 was disposed of by Ext.P5 judgment delivered on 11-12-1995 recording the undertaking given by the Corporation that the then existing demand notices will be withdrawn and a revised demand notice issued after giving credit to the amount received from the Official Liquidator. The Corporation thereafter issued Ext.P6 demand notices under Sections 7 and 34 of the Kerala Revenue Recovery Act, 1968 demanding payment of the sum of Rs.33,45,780.20 together with interest thereon @ 19.75% from 1.6.1995. The petitioner, Sri.K.R.Vijayan, another Director and the legal heirs of yet another Director (late E.M.Varkey) thereupon filed O.P.No.666 of 1996 in this Court challenging Ext.P6 demand notices and seeking the following reliefs:- (i) to issue a writ of certiorari or other appropriate writ, order or direction quashing Ext.P6 notice. (ii) to issue a writ in the nature of mandamus directing the respondents to forbear from taking any action pursuant to Ext.P6 notice in default of payment of the amount claimed under the impugned notice. (iii) to issue a writ in the nature of prohibition restraining respondents from taking any action invoking W.A.No.2002 of 2006 -:5:- RR proceedings under the Kerala Revenue Recovery Act to recover if any of the amounts due from the petitioners. (iv) to issue appropriate writ, order or direction including stay of operation of Ext.P6 notice, till the disposal of the Original Petition. 5. They contended, inter alia, that the provisions of the Kerala Revenue Recovery Act, 1968 cannot be invoked to recover the amounts due under the loan agreements/deed of guarantee, that the demand made in Ext.P6 is excessive and exorbitant and that as the Corporation had participated in the winding up and their claim was admitted only to the tune of Rs.38,32,219.80 by the Official Liquidator appointed by this Court in the winding up proceedings, they are not liable to pay any further amount to the Corporation. It was contended that the rights of the creditor (Kerala Financial Corporation) stand concluded by the order passed by the learned company Judge upholding the decision of the Official Liquidator and therefore the Corporation is not entitled to recover any further amount from the company or its Directors/guarantors. It was contended that as the adjudication made by the Official Liquidator as regards the amount which the Corporation is entitled to get was upheld by this Court in another jurisdiction, the Corporation is not entitled to recover any amount besides the amount admitted by the Official W.A.No.2002 of 2006 -:6:- Liquidator, from the company or its Directors/guarantors. 6. While O.P.No.666 of 1996 and M.F.A.No.1311 of 1993 were was pending, the Official Liquidator made a further payment of Rs.7,79,218.80 by way of interest to the Corporation on 23-6-1998. Upon that payment being made, the appellant herein filed C.A.No.273 of 1999 in C.P.No.6 of 1990 praying for an order directing the Official Liquidator to return the capital to the contributories. He contended that the Official Liquidator had declared 100% dividend to all the creditors who were included in the final list of creditors before the initial payment of Rs.38,32,219.80, that thereafter, after obtaining the orders of this Court, the Official Liquidator has paid a further sum of Rs.7,79,218.80 to the Corporation by way of interest calculated at the rate of 4% per annum for the period from the date of winding up till the date of declaration of the dividend, that after payment to the creditors, the Official Liquidator is in possession of sufficient funds for payment to the contributories and therefore, the Official Liquidator may be directed to return the capital to the contributories. M.F.A.No.1311 of 1993 and C.A.No.273 of 1999 in C.P.No.6 of 1990 were heard and disposed of by a Division Bench of this Court by Ext.P7 judgment delivered on 20-9-2002. The Division Bench held that with the payment of the sum of Rs.7,79,218.80 by way of interest calculated at the rate of 4% per W.A.No.2002 of 2006 -:7:- annum, the amount due to the Corporation has already been paid. The Division Bench accordingly declined to interfere with Ext.P2 order passed by the learned company Judge and dismissed the appeal. Relying on the decision of the Division Bench of this Court in M.F.A.No.1186 of 1997 (Federal Bank v. Official Liquidator, 2002 (3) KLT 663), it was held that it is only if there is any surplus amount left in the hands of the Official Liquidator after paying off all the secured creditors including those covered by Section 529A of the Companies Act that even a secured creditor who has obtained a decree can realise interest in excess of 4%. Relying on Ext.P7 judgment, the petitioners contended that as the amounts due to the Corporation have already been paid as noticed therein, the liability of the principal debtor does not survive and therefore, the sureties cannot be proceeded against. 7. The first respondent/Corporation resisted the writ petition contending, inter alia, that the liability of the guarantors subsists even after the winding up of the company and that under the loan agreements/deed of guarantee they are entitled to proceed against the appellant and the other Guarantors for realisation of the balance amount due from the principal debtor. The learned single Judge dismissed the writ petition holding that the liability of the surety is not extinguished with the winding up order passed by this Court and that on the terms of W.A.No.2002 of 2006 -:8:- the loan agreements/deed of guarantee, the sureties are liable for the entire amount due from the principal debtor after giving credit to the payments made by the Official Liquidator. The first petitioner, aggrieved thereby, has filed this writ appeal. 8. We heard Sri.P.Gopinath Menon, the learned counsel appearing for the appellant, Sri.M.M.Sayed Muhammed, the learned Standing Counsel appearing for the Corporation and Smt.R.Bindu, the learned Government Pleader appearing for respondents 2 to 4. The learned counsel for the appellant contended that the liability of the guarantors stood extinguished, when, in the winding up proceedings, the Corporation, a secured creditor, chose to prove its debt before the Official Liquidator and the Official Liquidator admitted the claim only to the extent of Rs.38,32,219.80. The learned counsel for the appellant further contended that as Ext.P2 order passed by the learned company Judge affirming the decision of the Official Liquidator was upheld by the Division Bench of this Court by Ext.P7 judgment in M.F.A.No.1311 of 1993, the Corporation cannot have any further claim against the company and therefore, as the principal debtor is not liable to pay any further amount to the Corporation, the appellant, a guarantor, cannot be held liable. Reliance was placed on Sections 128, 134 and 141 of the Indian Contract Act, 1872 in support of the said contention. The learned W.A.No.2002 of 2006 -:9:- counsel for the appellant also referred to and relied on the decision of the Division Bench of this Court in Federal Bank v. Official Liquidator, 2002 (3) KLT 663 to contend for the position that with the payments made by the Official Liquidator the claim of the Corporation stood satisfied and that in the absence of any surplus in the hands of the Official Liquidator the claim of the Corporation for interest in excess of 4% cannot be considered. He also relied on the decision of the Apex Court in Syndicate Bank v. Channaveerappa Beleri and others, (2006) 11 SCC 506 to contend that as the Corporation never made a demand on the guarantors while the claim was alive as against the principal debtor, no demand can thereafter be made against the guarantors since the claim against the principal debtor is no longer alive. 9. Per contra, the learned standing counsel appearing for the Corporation contended that the adjudication made by the Official Liquidator in the winding up proceedings does not relieve the guarantors of their obligations under the loan agreements/deed of guarantee and that on the terms of the loan agreements/deed of guarantee, the Corporation is entitled to proceed against the guarantors as if they are the principal debtors. The learned standing counsel for the Corporation also referred to and relied on the decision of a Division Bench of this Court in Radha Thiagarajan v. South Indian Bank Ltd., ILR 1986 (1) W.A.No.2002 of 2006 -:10:- Kerala 370 and of the Apex Court in Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. and others, (2002) 5 SCC 54, to contend that the order winding up the company, does not discharge the sureties. 10. We have considered the rival submissions made at the Bar by the learned counsel appearing on either side. We have also gone through the pleadings and the materials on record. It is not in dispute that when the company was ordered to be wound up, the sum of Rs.47,02,769.40 was payable to the Corporation. The winding up order was passed on 27-8-1990. The Corporation did not choose to stand outside the winding up. Instead, it participated in the winding up proceedings and submitted proof of its claim with the Official Liquidator. The claim of the Corporation before the Official Liquidator was for the sum of Rs.47,02,769.40, which included interest after the winding up to the tune of Rs.8,65,549.60 and Rs.873.96 being the T.A. and D.A. paid to the nominee Directors. The Official Liquidator rejected the claim for interest after the winding up and the claim for TA and DA. The Official Liquidator admitted the claim of the Corporation only to the tune of Rs.38,32,219.80, which included interest at the contract rate upto the date of the winding up. The claim for the balance sum of Rs.8,70,549.60 was not admitted. Though the Corporation questioned the decision of W.A.No.2002 of 2006 -:11:- the Official Liquidator before the learned company Judge, by filing M.C.A.No.19 of 1993, under Rule 164 of the Companies (Court) Rules, 1959, the said application was dismissed by Ext.P2 order passed on 18.8.1993. The learned company Judge rejected the claim of the Corporation for interest after the winding up on the short ground that the question of payment of interest after winding up would arise only if there is any surplus amount left in the hands of the Official Liquidator after payment in full of all the claims admitted to proof. The Corporation challenged Ext.P2 order by filing M.F.A.No.1311 of 1993. In that appeal they claimed payment of the interest that was declined by the Official Liquidator. While the said appeal was pending, on 23-6-1998 the Official Liquidator paid a further sum of Rs.7,79,218.80 by way of interest to the Corporation calculated at the rate of 4% per annum. M.F.A.No.1311 of 1993 was finally heard and dismissed by Ext.P7 judgment on 20-9-2002, wherein the Division Bench of this Court held that the Corporation can claim interest in excess of 4% only if there is any surplus left in the hands of the Official Liquidator after satisfying the claims of all the secured creditors including those covered by Section 529A of the Companies Act, 1956. It was held that the amounts due have already been paid. Ext.P2 order passed by the learned company Judge was accordingly affirmed. W.A.No.2002 of 2006 -:12:- 11. The main contention raised by the learned counsel for the appellant is that as the company, which is the principal debtor, is no longer liable after its winding up and dissolution, the appellant, one among the guarantors, cannot be held liable for the debt of the company. Reliance is placed on Section 128 of the Indian Contract Act, 1872 in support of the said contention. It is also contended that as the company, which is the principal debtor, has been wound up and is no longer in existence and its assets have been sold, the right of the surety to proceed against the principal debtor recognised under sections 140 and 141 of the Indian Contract Act, 1872 has been lost. In such circumstances, it cannot be said that the sureties are liable to be proceeded against, it is contended. Ext.R1(a) loan agreement entered into between the company and the Corporation on 28-8-1978 is one executed by the appellant herein in his capacity as the Director of the company. The appellant and other Directors have executed the said loan agreement in their capacity as Guarantors also. Sub-clauses (1), (2) and (5) of Clause 27 of Ext.R1(a) loan agreement read as follows:- “27. In consideration of the Corporation having agreed to lend and advance the loan hereinbefore mentioned to the Borrower Company as aforesaid, the Guarantors hereby agree and covenant with the Corporation as follows:- W.A.No.2002 of 2006 -:13:- 1) If at any time default shall be made by the Borrower company in the payment to the Corporation of the principal, interest and other moneys due to the Corporation upon the security of othis hypothecation, the Guarantors on demand will pay to the Corporation the whole of such principal interest and other moneys which shall then be due to the Corporation as aforesaid And in the event of their failure to pay the same the Corporation shall be entitled to recover the same with interest from the Guarantors jointly and severally, personally and from their properties, And the Guarantors will indemnify and keep indemnified the Corporation against all loss of principal or interest or other moneys secured by this Hypothecation and all costs charges and expenses whatsoever which the Corporation may incur by reason of any default on the part of the Borrower company. 2) The Corporation shall have the fullest liberty without the further assent and knowledge of the Guarantors and without affecting the guarantee herein contained to allow at its discretion any variation of the terms and conditions for utilisation of the loan amount of the Borrower company or any other terms and conditions hereinbefore contained or to postpone for any time or from time to time the exercise of the power of sale or any other power or powers conferred on it by these presents and in any manner and either to enforce or forbear to enforce the covenants for payment to the Corporation of principal or interest or W.A.No.2002 of 2006 -:14:- other moneys or any other covenants contained or implied in the Hypothecation or any other remedies available to the Corporation And the Guarantors shall not be released by any exercise by the Corporation of its liberty with reference to the matters aforesaid or any of them or by reason of time being given to the Borrower company or any other person liable with or for it or any other forbearance act or omission on the part of the Corporation or any other indulgence granted or shown by the Corporation to the Borrower company or any other person liable with or for it or by any other matter or thing whatsoever which under the law relating to sureties would but for this provision have the effect of so releasing the guarantors. xx xx xx 5) In order to give effect to the guarantee herein contained the Corporation shall be entitled to act as if the Guarantors were the principal debtors to the Corporation for all the payments and covenants guaranteed by them as aforesaid to the Corporation.” (emphasis supplied) 12. In Ext.R1(c) deed of guarantee executed by the appellant and other Directors as guarantors, they had undertaken to personally guarantee repayment of all moneys at any time payable by the borrower company to the Corporation in respect of the additional loan and also guaranteed payment and discharge of all the liabilities of the borrower company to the Corporation. It is also stipulated that the guarantee is W.A.No.2002 of 2006 -:15:- one for all the amounts advanced by the Corporation to the borrower company. The relevant provisions of Ext.R1(c) deed of guarantee read as follows:- “NOW THIS DEED WITNESSETH and it is hereby covenanted agreed and declared (the Guarantors contracting jointly and severally) as follows:- (1) That in consideration of the Corporation agreeing at the request of the Guarantors to grant the said loan to the Borrower company the Guarantors personally guarantee to the Corporation the repayment of all moneys at any time payable by the Borrower company to the Corporation in respect of the said loan and also the payments and discharge of all the indebtedness and liabilities of the Borrower company to the Corporation for all the expenses payable to or incurred by the Corporation in relation thereto. (2) That the Guarantors agree that the Guarantee herein contained is independent and distinct from the security that the Corporation has taken or may take by way of Equitable Mortgage and/or hypothecation of movables or in any other manner over any other property from the Borrower company and that the Guarantors will not claim to be discharged to any extent because of the Corporation's failure to secure or obtain the necessary security aforesaid or requiring, acquiring or obtaining any other security or losing for any other reason W.A.No.2002 of 2006 -:16:- whatsoever including reasons attributable to its default and negligence any other security that has been or could have been taken. (3) That the Guarantors further agree that if the Borrower company shall become insolvent, bankrupt, enter into liquidation (compulsory or voluntary) or make any arrangement or composition with creditors, the Corporation may (notwithstanding payment to the Corporation by the Guarantors or any other person of the whole or any part of the amount hereby secured) rank as creditor and prove against the estate of the Borrower company for the full amount of all the Corporation's claim against the Borrower company or agree to and accept any composition in respect thereof and the Corporation may receive and retain the whole of the dividends, composition or other payments thereon to the exclusion of all rights of the guarantors for the Borrower company, in competition with the Corporation until all the Corporation's claims are fully satisfied and the Guarantors will not be paying off the amount payable by the Borrower company or any part thereof or otherwise prove or claim against the estate of the Borrower company until the whole of the Corporation's claims against the Borrower company have been satisfied and the Corporation may enforce and recover payment from the Borrower company of the full amount payable by the Borrower company notwithstanding any such proof of composition as W.A.No.2002 of 2006 -:17:- aforesaid. (4) The Corporation shall have the fullest liberty without in any way affecting this guarantee and discharging the Guarantors from their liability hereunder, to postpone for any time or from time to time the exercise of the power of sale or any other powers conferred by the said equitable mortgage and/or hypothecation and to exercise the same at any time and in any manner and either to enforce or forbear to enforce the covenants for payment of principal or interest or any other covenants contained in or implied by the said securities or any other remedies or securities available to the Corporation or to grant any indulgence or facility to the Borrower company and the Guarantors shall not be released by any exercise by the Corporation of its liberty with reference to the matters aforesaid or any of them or by reason of time being given to the Borrower company or any other forbearance act or omission on the