IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 22.02.2010 CORAM: THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN O.P.Nos.867 and 983 of 2007 and O.P.Nos.7 and 123 of 2008 D.Dhanushkoti No.127/1, East Veli Street Madurai. .. Petitioner in all these O.Ps. versus 1. Sundaram Finance Ltd. No.21, Pattulos Road Chennai-600 002. 2. M/s.Sri Theepa Pressed Components (P) Ltd. Rep. by its Managing Director 3. Mrs.A.N.Vallammai Achi @ A.N.Valliammai 4. S.P.Annamalai 5. S.Jayaraman Arbitrator V Block No.107 Anna Nagar Chennai-40. .. Respondents-1 to 5 in all these O.Ps. ----- PRAYER: Original Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 to quash the award passed by the Arbitrator dated 10.5.2007. ----- For petitioner : Mr.R.Subramanian For 1st respondent : Mr.T.Srinivasaraghavan ORDER There are four Original Petitions at the instance of the guarantor, challenging the individual awards passed by the learned Arbitrator. The petitioner herein is the guarantor in all these hire purchase agreements. The facts herein are common in all these Original Petitions and hence a common order is passed. For the purpose of convenience, the facts as stated in O.P.No.867 of 2007 are referred herein. 2. An agreement was entered into as early as 14.12.1999 between the second respondent company and the first respondent company for hire purchase of certain machineries. The agreement contained clauses on repayment on the machinery taken on hire purchase. The first instalment was to commence on 14.12.1999 and the last one ended on 14.11.2002 for a total sum of Rs.13,85,500/-. The petitioner herein stood as a guarantor for the due compliance of the terms by the second respondent. Apart from the petitioner herein, Directors of the company were also shown as guarantors. Admittedly, the borrowing company, second respondent herein, committed default in paying the instalments, particularly after the seventh instalment. Hence the first respondent sent notices to the second respondent as well as to the guarantors and called upon them to pay the defaulted amount . In spite of the demand made, the borrowing company as well as the guarantors, including the petitioner, failed to make the payment. Clause 18 of the agreement is the relevant provision on arbitration which states that all disputes, differences and claims arising out of the hire purchase agreement be settled by arbitration in accordance with the provisions of Indian Arbitration Act, 1940 or any statutory amendments thereof, as applicable to the proceedings, before the Arbitrator. Clause 16 of the agreement states that the guarantor guaranteed the due performance and observance of the agreement by the hirer and agreed to pay on demand any moneys due or which might become due and payable by the hirer to the owner under the agreement. Clause 17 states that any time or indulgence granted to the hirer or owner shall not prejudice the owner's right against the guarantors or relieve the guarantors from the guarantee and the liability of the guarantors will continue until the owner has any claim against the hirer in respect of the agreement. 3. It is seen from the records that the first respondent herein filed a claim petition for a sum of Rs.11,87,829.40 as on 5.12.2001 which included additional finance charges, bank charges and other expenses after granting the rebate on the additional finance charges received. 4. On notice, the petitioner herein filed a reply statement contending that he was induced to execute the guarantee by the first respondent herein and that the guarantee was signed with blanks in the form remaining unfilled at the time of execution. The blanks were filled after the execution. The petitioner pointed out that the first respondent and the borrower colluded in committing fraud on the petitioner, that as none of the machineries stated in the first schedule of the guarantee was ever purchased and that he was so informed by the so called vendor Naidu Agencies, Ludiana, that the question of the first respondent ever repossessing the machinery did not arise. 5. In the course of the proceedings before the Arbitrator, documents were marked through C.W.1 The documents marked included the report filed by the Advocate Commissioner under Exs.C23, C24, C25 and C26. By order dated 18.11.2005, this Court passed a common order granting sanction to the first respondent to sell the machineries seized. The said order is marked as Ex.C27. 6. It is seen from the award that in spite of the several adjournments granted to the borrowing company and to the two Directors who stood as guarantors, no proof affidavit was filed nor any witnesses examined and hence, they were set ex parte. 7. As already pointed out, as far as these O.Ps. are concerned, they are at the instance of the guarantor and not by either the borrower or the two of the Directors who stood as the other guarantors. The petitioner herein was examined as R.W.1 and Exs.C30 to C32 were marked through him which are the hire purchase agreements executed between the first respondent and the second respondent. On going through the various documents, particularly regarding the evidence through the proof affidavit dated 29.4.2006 from C.W.2 Narayanan, Deputy Manager (Legal), learned Arbitrator referred to the details of the machinery and pointed out that the said petition elaborated on the details of the machinery seized, value of the machinery sold and the details of the machinery not repossessed. In the proof affidavit, C.W.2 stated that the seized machineries were entrusted to the first respondent and on his application, the sale of the machineries were also effected. However, in respect of the Contract RQ 0001, the machineries were not seized by the Advocate Commissioner and hence, the assets were not available for sale. Going through the various averments as well as the evidence of the parties herein, learned Arbitrator ultimately pointed out that the petitioner herein never denied about the contract that was executed in his capacity as the guarantor. The guarantee portion is incorporated in the hire purchase agreement Ex.C31 dated 14.12.1999, wherein the petitioner had signed as a guarantor. It was further pointed out that the petitioner had admitted about the execution of the guarantee agrement and having so signed the same, he cannot deny his liability arising out of the said contract. Learned Arbitrator pointed out that the contract was more like a refinance agreement in which the financier need not purchase the machinery. In the circumstances, going by the various facts as evident by the documents, the award was passed directing the petitioner and the borrower and the two other Director guarantors to pay a sum of Rs.11,87,829.40 with interest at 18% per annum from 5.12.2001 till the date of realisation including the cost of the proceedings. Aggrieved by the said award and the similar award passed in respect of other agreements, the petitioner has come before this Court. 8. Learned counsel appearing for the petitioner mainly raised a legal plea based on Sections 140 and 141 of the Indian Contract Act. He pointed out that in terms of the said provisions, the surety is entitled to the benefit of the security which the creditor company has against the principal debtor at the time of agreement and that he becomes the creditor to step into the shoes of the refinance company. In the circumstances, whether the surety is aware of the existence of the security or not, if the creditor loses or parts with the security without the consent of the surety, the surety would get discharged to the extent of the value of the security. He referred to Section 139 of the Indian Contract Act, as per which, if the creditor does any act which is inconsistent with the rights of the surety, then to that extent, the surety gets discharged. On the scheme of Sections 139, 140 and 141 of the Indian Contract Act, learned counsel for the petitioner pointed out that as per the report of the Advocate Commissioner as well as the evidence of the first respondent, if the machineries in respect of which the guarantee has been made is not available, then the question of proceeding against the petitioner as a guarantor does not arise. Hence, the liability automatically ends with the non-existence of the security on account of the refinance company, parting with the security; with the result, that the guarantor/surety has nothing to proceed against. In this connection, he referred to the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram), AIR 1980 SC 1528 (State Bank of Saurashtra Vs. Chitranjan Rangnath Raja) and 1999 (3) CTC 109 (State Bank of India Vs. Kasim), and also referred to Clause 18 of the agreement. He further pointed out to Sections 20 and 21 of the Indian contract Act and submitted that in the face of the mistaken impression of law as to the availability of procedure under the 1940 Act, the question of following the procedure under the 1996 Act does not arise at all. The mistaken impression of law is a mistake of fact; consequently, the said Clause 18 under the agreement has to fail. 9. Learned counsel further pointed out that the case of the petitioner herein is that the machineries alleged to have been the subject matter of the hire purchase agreement was never in existence to proceed against the petitioner as a guarantor. He referred to the counter, particularly with reference to the enquiry made with the supplier that there was never a supply from the said vendor to create a liability or charge on the property and thereby the proceeding against the petitioner as a guarantor has to fail. He pointed out that when the bills were not produced and not available and a specific case was made by the first respondent in terms of Section 19 of the Arbitration and Conciliation Act, 1996 and the provisions of the Indian Evidence Act are not applicable to a proceeding under the Arbitration and Conciliation Act, the learned Arbitrator ought to have accepted the plea of the petitioner. In the circumstances, in the absence of any material produced by the first respondent to prove that the machines were available, the question of fastening the liability on the petitioner does not arise. He also pointed out that the first respondent had the machineries repossessed which are now advertised for sale. When that being the case, the inaction on the part of the first respondent company to proceed against the borrower is a circumstance which must be taken note of by this Court for the purpose of granting the relief in this petition. Learned counsel referred to the decision reported in (2003) 2 CTC 282 (ONGC Vs. Saw Pipes Ltd.) in paragraph 38 of the judgment that when an award had been made contrary to the provisions of the Act, the said award is liable to be set aside as one contrary to public policy. 10. Per contra, learned counsel appearing for the first respondent pointed out that the relief sought for under Section 139 of the Indian Contract Act is totally unsustainable, having regard to the fact that the Advocate Commissioner's report does not show that the machineries are not available at all. All that the Advocate Commissioner's report states is that some of the machineries were under hypothecation to the Bank. However, after dismantling the machines and examining the machines, he had noted that symbolic possesssion of the machineries had already been taken by another Bank. As regards making a distinction between non-availability of machinery and a fictitious transaction, learned counsel pointed out that the machineries were very much available with the second respondent and the mere fact that possession had not been taken does not mean as to non- availability of the machines or that the machines are lost by the creditor. He also referred to the provisions of Sections 140 and 141 of the Indian Contract Act only to emphasize on the fact that the first respondent had not parted with the machinery nor had lost it by any conscious act. In the circumstances, he placed reliance on the decision reported in AIR 1976 Madras 211 (J.H.Agarwal Vs. State Bank of India) and AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.) that in the context of the latter decision reported in AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.), which considered the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram), as well as AIR 1980 SC 1528 (State Bank of Saurashtra Vs. Chitranjan Rangnath Raja), that the question of considering the claim of the petitioner does not arise. He also pointed out that the machinery are very much available and the Advocate Commissioner's report also amply testified the availability of the machinery. 11. As regards the claim of the petitioner that it is only a loan agreement, he pointed out to the distinction between a refinance agreement and a hire purchase agreement and in any event, the finance company continues to be a secured creditor as per the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram). Referring to the contention of the petitioner as regards Clause 18 of the agreement, and the Arbitration Act, 1940, he pointed out that that the parties have agreed to go by the procedure as available under the Arbitration Act, 1940. The said Clause 18 would amply go to show that the parties had agreed for resolution of disputes by arbitration and go as per the procedure referred to under the Arbitration Act, 1940. In the circumstances, Section 85(2) of the Arbitration Act would amply protect the claim of the first respondent for reference to arbitration. In any event, the mere reference to Arbitration Act, 1940, per se, did not put an end to the intention of the parties to have the issue resolved through arbitration. 12. Learned counsel for the petitioner, however, pointed out that the relevancy of the decision reported in AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.) has to be seen in the context of the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram). He also made reference to Section 19 of the Arbitration Act that when the consistent case of the petitioner is that there was no sale at all, the question of ignoring the stand of the petitioner, particularly making reference to the letter of Naidu Agencies, assumes significance. 13. Heard the learned counsel for both sides. 14. A reading of the award dated 10.5.2007 shows that the learned Arbitrator considered the contentions of the petitioner, particularly with reference to the claim that the machineries were not supplied by Naidu Agencies; that the second respondent never denied the contracts that he had with the first respondent and that all the three contracts have come into existence simultaneously. The guarantee clause was incorporated in the hire purchase contract itself and that the petitioner herein signed as a guarantor. The guarantee is an integral part of the transaction. Learned Arbitrator pointed out that the petitioner, in his evidence, questioned the transaction as one brought in by fraud, misrepresentation and collusion. Considering the serious nature of the allegations, with the burden on the petitioner to prove the same by cogent material evidence, except for making oral allegations, there was no proof forthcoming from the petitioner. Quite apart from that, as regards the purchase of the machinery, the allegation of the petitioner is that they were not in existence at any point of time. Learned Arbitrator pointed out that except for making the statement, there was hardly any material to substantiate that the machineries, as such, were never there and that the agreement was only an agreement on payment without any security created. Leaving aside for a moment that Section 19 of the Arbitration Act does not insist on a strict compliance of the provisions of the Indian Evidence Act, yet, in the absence of any proof filed from the side of the supplier to support the claim of the petitioner as regards non-supply of machinery, rightly, learned Arbitrator rejected the plea of the petitioner. 15. This takes us to the reply statement of the learned counsel based on Section 139, 140 and 141 of the Indian Contract Act. Sections 139, 140 and 141 of the Indian Contract Act read as follows: " Section 139 - Discharge of surety by creditors act or omission impairing suretys eventual remedy: If the creditor does any act which is inconsistent with the rights 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. Section 140 - Rights of surety on payment or performance: Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. Section 141 - Suretys right to benefit of creditors securities: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security." 16. As already pointed out, it is not denied by the petitioner as regards his status as a guarantor under the contract. The grievance of the petitioner herein is that the machineries were never available as a security to be proceeded against by the first respondent that the liability on the petitioner would be a reality. In this connection, learned counsel for the first respondent pointed out to the report filed by the Advocate Commissioner before this Court. A perusal of the said report, particularly in paragraph 12, shows that there was a resistance as regards the seizure of the machineries. Only one of the Directors who was a party to the proceeding, came to the factory. Thereafterwards, on identifying of the machineries, the Advocate Commissioner dismantled the machinery with the help of the persons who accompanied the first respondent. After dismantling the machinery and examining the machines, the Advocate Commissioner found that symbolic possession of the machinery had already been taken by another Bank. He fixed the machinery to its original position. He did not seize the machinery due to the above said reason. The report of the Advocate Commissioner only goes to show that the machinery, as such, was available for physical possession. However, physical possession was not taken over by the Advocate Commissioner for the reason that symbolic possession of the machinery had already been taken by another creditor Bank. In the background of the said report, it is difficult to accept the contention of the petitioner herein that there is no existence of such security or that the first respondent herein had lost the machinery or parted with the security without taking any necessary steps. In this connection, the decision reported in AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.), relied on by the learned counsel appearing for the first respondent, assumes significance. Referring to the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram) and also a later decision of the Apex Court reported in AIR 1980 SC 1528 (State Bank of Saurashtra Vs. Chitranjan Rangnath Raja), the Apex Court pointed out that the liability of the guarantor is a strict liability and even if the principal debtor is discharged from his liability, the creditor's right to proceed against the surety stands preserved. The Apex Court pointed out to the decision of the English Court reported in (1883) 25 Ch D 666 at 670 CA (Carter Vs. White) that a transaction which causes no loss of securities or a loss not attributable to the fault of the creditor, will not discharge the guarantor. Referring to the scope of Section 141 of the Act, the Apex Court pointed out that Section 141 thus involves an issue of a deliberation on the part of the creditor and not a mere fortuitous situation beyond the control of the creditor. In this connection, reliance was placed on the decision of the Privy Council in China and South Sea Bank Ltd. Vs. Tan [1989 (3) All ER 839] that the creditor is not obliged to do anything when the debtor goes into bankruptcy. If a disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt, then the creditor does not lose anything. The surety contracts to pay if the debtor does not pay and the surety is bound by his contract. As far as the present case is concerned, it stands no different from what had been stated by the Apex Court. 17. Learned counsel appearing for the petitioner further stated that the decision reported in AIR 1967 SC 1105 (State Bank of M.P. Vs. Kaluram), cannot, in any way, be overlooked. The decision reported in the said case as well as the one reported in AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.), particularly in paragraph 36, shows that the Apex Court referred to the decision reported in (1980) 4 SCC 516 (Saurashtra Vs. Chitranjan Rangnath Raja & another) and pointed out that by reason of the deliberate act of the principal debtor or the creditor and without the knowledge, consent and approval of the surety if the security is lost, then the question of liability of the surety would not arise. The decision reported in (1980) 4 SCC 516 (Saurashtra Vs. Chitranjan Rangnath Raja & another), however, showed a different fact situation. The Apex Court, in the decision reported in AIR 2002 SC 1841 (I.F.C.I. Ltd. Vs. Cannanore Spg. and Wvg. Mills Ltd.), considered the said decision and pointed out in paragraph 33, "Section 141 thus involves an issue of deliberate action on the part of the creditor and not a mere fortituous situation beyond the control of the creditor." The Supreme Court further pointed out "the expression "creditor loses" cannot mean and imply an involuntary act but by reason of an act which is attributable to the creditor. " 18. As for the facts in the present Original Petition, as already pointed out, when the Advocate Commissioner's report refers as to the availability of the machinery and in view of the fact that the property in question had already been a subject matter of charge at the hands of the Bank and hence possession not taken, it does not mean that the property which was offered as security stood discharged or not available to be proceeded against to result in the discharge of the petitioner. The Apex Court further pointed out in paragraph 33 to the decision of the Privy Council reported 1989 3 ALL ER 1839 China and South Sea Bank Ltd. Vs. Tan as follows: " 33. The creditor is not obliged to do anything. If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and if the surety decamps abroad the creditor loses his money. If disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing. The surety contracts to pay if the debtor does not pay and the surety is bound by his contract. If the surety, perhaps less indolent or less well protected than the creditor, is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities