IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA O.S.A. No.10 of 2002. Judgment reserved on: 27.08.2008. Date of decision: 15th September, 2008. H.P.S.I.D.C. ....Appellant/Plaintiff -Versus- M/s.Manson India pvt.Ltd. and others ….Respondents/Defendants Coram: The Hon’ble Mr.Justice Deepak Gupta,Judge. The Hon’ble Mr.Justice V.K.Ahuja, Judge. Whether approved for reporting? Yes For the Appellant: Mr.Ajay Kumar, Advocate For the Respondents: Mr.R.L.Sood, Senior Advocate with Mr.Arjun Lal, Advocate for respondents 2&3. Deepak Gupta, J. This Appeal is directed against the judgment and decree dated 19.4.2000 passed by a learned Single Judge of this Court whereby he dismissed the suit filed by the appellant (hereinafter referred to as the plaintiff) against the respondents (hereinafter referred to as the defendants) for recovery of Rs.23,77,049.55 alongwith interest and costs etc. Briefly stated the facts giving rise to the present case are that the defendant No.1 M/s.Manson (India) Pvt.Ltd. is a Company incorporated under the Indian Companies Act, 1956. It is not disputed that defendants 2&3 were the Directors of the said Company and they applied for grant of term loan of Rs.21.49 lakhs 2 for setting up an industrial unit. It is not disputed that an amount of Rs.14.74 lacs as loan was sanctioned in favour of defendant No.1 on 24.3.1984 and further loan amount of Rs.6.75 lakhs was sanctioned on 10.10.1985. Loan documents were duly executed and the defendants 2&3 on behalf of the Company executed loan documents on 30.7.1985 and 22.11.1985. The defendants also executed personal deeds of guarantee on 30.7.1985 and 22.11.1985 in favour of the plaintiff Corporation promising to indemnify the plaintiff for repayment of the principal amount, interest and other moneys due to the plaintiff from the defendant No.1 in connection with the loan. According to the plaintiff the defendant had created equitable mortgage by deposit of title deeds with the HPFC which was impleaded as proforma defendant No.4. The plaintiff, on the basis of the aforesaid documents filed the suit for recovery of the amount. According to the plaintiff, a notice had been served upon the defendants to pay the entire outstanding amount of loan plus interest on 26.7.1988 within 30 days of the notice failing which the entire loan would be recalled. The plaintiff further alleges that the industrial unit was financed jointly by the plaintiff and defendant No.4. Since the defendant was in default of payment of the loan advanced by defendant No.4, the HPFC in exercise of the powers vested in it under Section 29 of the State Financial Corporation Act, 1951 issued a take over notice and took over the entire mortgaged/hypothetic assets on 30.12.1988. These assets were sold by the HPFC for Rs.44 lakhs and out of this amount of Rs.44 lakhs the HPFC gave some amount to the plaintiff and 3 thereafter the balance due from the defendant to the plaintiff was Rs.20,53,729/- which had swollen to Rs.23,77,049.55 as on 31.7.1992. The defendants 2&3 who are father and son and were the original directors of the Company contested the suit on various grounds. According to them, they, with the knowledge and consent of the plaintiff Corporation and other financial institutions had transferred their shares in defendant No.1 Company to M/s.Goverdhan Dass, Bhajan Lal and Ramesh Kumar in January, 1987 and thereafter their personal guarantees had been discharged. According to the defendants the new Directors had taken over the Company with the approval of the plaintiff and therefore they stood absolved of the guarantees executed by them. They also alleged that in fact the suit should have been filed against Bhajan Lal and Ramesh Kumar. It was pleaded that the suit was not within limitation. Various other grounds were raised. The learned Single Judge held that the cause of action arose in favour of the plaintiff on 10.3.1988 when the default in payment of installment took place and the loan was recalled. Therefore, the suit should have been filed on or before 10.3.1991. Since the suit was actually filed on 17th September, 1992 it was held to be time barred. The learned Single Judge rejected the plea of the plaintiff that the suit was within time from the date when the assets were sold by the HPFC. While holding so the learned Single Judge relied upon a judgment of a Division Bench of this Court in case HPFC vs. Tek Chand and others, Latest HLJ 2003 (HP) 889. 4 The learned Single Judge also went on to hold that the defendants 2&3 were absolved of their liabilities due to novation of contract, since according to him, the defendants 2&3 had transferred their rights in the defendant No.1 Company after having obtained approval from the plaintiff. He, therefore, held that the suit was also bad for non-joinder of new Directors and that the plaintiff Corporation was estopped from filing the suit. On these grounds the suit was dismissed. Hence, the present appeal. We have heard Sh.Ajay Kumar, learned counsel for the plaintiff and Sh.R.L.Sood, learned senior counsel appearing on behalf of the defendants 2&3. Sh.Ajay Kumar has basically raised two contentions before us. First that as per the terms and conditions of the loan documents the management of the Company could not have been changed without taking prior approval of the plaintiff. Sh.Ajay Kumar has urged that the judgment in Tek Chand’s case relied by the learned Single Judge has been set-aside by the Apex Court in Civil Appeal No. 1971 of 1998, HPFC vs. Smt.Pawna and other connected matters decided on 18.12.2003 and therefore contends that the judgment is liable to be set-aside. He also contends that by unilaterally transferring their shares in the Company without the prior approval of the plaintiff, the defendants cannot plead that they are absolved of their liability and personal guarantees given by them. On the other hand Sh.R.L.Sood, learned senior counsel for the defendants has raised a preliminary objection with regard to the maintainability of the appeal. He also contends that the suit is not 5 within limitation. According to Sh.R.L.Sood, Article 37 of the Limitation Act is applicable and since the plaintiff has neither pleaded nor proved waiver the suit cannot be held to be within limitation. He submits that the judgment of the Apex Court in HPFC vs. Smt.Pawna and others has no applicability to the facts of the present case. He also contends that defendants 2&3 have sold their shares in the Company on the assurance being given by the Managing Director of the Corporation which was approved by the Board of Directors of the Plaintiff Corporation and hence defendants 2&3 were absolved of their personal guarantees. We shall first deal with the Preliminary objection raised by Sh.R.L.Sood. This appeal was first filed on 6th September, 2000. It was barred by 103 days. Some objections were raised by the Registry and as per the then prevailing practice the appeal was returned to the counsel for removing the objections. Objection No.6 raised was that in para 4 of the prayer clause of the application the words ‘RFA’ has been mentioned. It appears that the Registry was of the view that instead of the words ‘RFA’ the wods ‘OSA’ should have been mentioned. All other objections except this objection were removed and the appeal was re-filed within a few days. Since objection No.6 had not been removed the appeal was again returned to the counsel and notification with regard to the return was issued in the cause list on 6.10.2000. This appeal was thereafter re-filed after a delay of 8 months and 22 days on 30th June, 2001. An application was filed for condoning the delay in re-filing the appeal. In this application it was mentioned that due to over-sight the file of the 6 case was mixed up and kept in decided matters and this fact was discovered only in the 2nd week of June, 2001 when the plaintiff made inquiry about the case. This application was allowed without issuing notice to the respondents by a Division Bench of this Court on 25.7.2001. Sh.R.L.Sood, has urged that the maximum period allowed under the Rules for re-filing of a document is 40 days and in case the re-filing is not done within 40 days then a valuable right accrues in favour of the other side and the other side has a right to contest the said application. Reliance has been placed by him on a judgment of this Court in State of H.P. vs. Piare Lal, 1992(2) Sim.L.C. 184. Sh.R.L.Sood, further contends that since the application was allowed without giving an opportunity of hearing to the respondents he has a right to contest the application even at this stage. In this behalf he has placed reliance on the judgments of the Punjab and Haryana High Court in Om Sarup vs. Gur Narain and others, Vol.LXVII-1965 PLR 634 and Prithvi Raj vs. Smt.Kamal Kanta, Vol.LXXXII-1980 PLR 155. The matter is not so simple. As noted above the original appeal was time barred. After the delay in re-filing the appeal was condoned, notice was issued to the respondents in the application filed by the plaintiff-appellant under Section 5 of the Limitation Act for condoning the delay in filing the appeal. This application was allowed on 24th June, 2002. At that stage also a submission was made by the learned counsel for respondents 2&3 that the order dated July 25, 2001 needs to be recalled since the same had been 7 passed without issuing any notice to respondents 2&3. This Court held that the said application already stands decided and that the Court was only dealing with the main application for condonation of delay. The Court observed as follows: “At this stage, a submission urged by Mr.R.L.Sood, learned counsel appearing for respondents 2 and 3, needs to be noted. He submitted that so far the order passed on CMP No.82 of 2001 on July 25, 2001 is concerned, it needs to be recalled as no notice of the said application was issued to his clients and this has prejudiced them. When a reference is made to the said order, the matter stood disposed of on that very day. It was only thereafter that notice in CMP(M) No.387 of 2001, was issued, which we have disposed of today. In these circumstances, it is for respondents No.2 and 3 to proceed further in the matter as is permissible under law.” Admittedly, the respondents 2&3 have not taken any action in terms of the orders of the Court. They could have either filed an application for recalling of the earlier order dated 25.7.2001 or they could have challenged the order before the Apex Court. This they did not do. As far back as on June 24, 2002 the respondents 2&3 were aware that the Court had not accepted their contention to recall the order dated 25.7.2001. It was therefore incumbent upon them to have taken some appropriate steps in the matter. Even otherwise we are of the considered view that no party should suffer for the fault of its counsel. The averments made in CMP No.82 of 2001 clearly show that the delay in re-filing occurred due to some mistake in the office of the counsel. The appellant cannot suffer for the same. We are also of the view that the objection of the Registry was extremely minor. Only the description of the appeal had not been properly given in the prayer clause. No 8 party should be shut out from arguing its appeal on merits on such a technicality. We therefore reject this contention of Sh.R.L.Sood. Now we shall take up the question as to whether the defendants 2&3 were absolved of their personal guarantees. In this regard we may first make reference to the relevant clauses in the agreement of guarantee. The clauses are identical in both the sets of documents. The deed of guarantees are Exts.DW-2/P14 and DW- 2/P15. Clauses 3,4,5,6 and 12 of the guarantee deed read as follows: “3.the Guarantors have read the loan agreement and Agreement of hypothecation mortgage deed and will observe and perform all the terms, conditions and covenants contained therein in the same manner which the industrial concern is liable for due observance and performance of the said terms, conditions and covenants. 4.The Guarantee herein contained shall be enforceable against the Guarantors both jointly and severally notwithstanding that the securities specified in the agreement and Agreement of hypothecation/mortgage deed or any of them shall at the time when proceedings are taken against the Guarantors hereunder be outstanding or un-realized. 5.In order to give effect to the guarantee herein contained the Corporation shall be entitled to act as if the Guarantors are the principal debtors to the Corporation for all payments and covenants guaranteed by them as aforesaid to the Corporation. 6.the guarantee contained in this deed is a continuing one for all amounts advanced or to be hereinafter advanced by the Corporation to the Industrial concern under the loan agreement and agreement of hypothecation/mortgage deed as also for all interest, costs and other money which may from time to time become due and remain unpaid to the Corporation thereunder. xxxxxxxxxxx 12.the Guarantee herein contained shall not be determined or in any way prejudiced, by any change in the constitution of the industrial concern, or in that of the Corporation or by the Guarantors or any of them ceasing to be Directors of the industrial concern.” 9 Reference also has to be made to Clause VII.5 of the loan document Ext.DW-2/P10 and Ext.DW-2/P11 which reads as follows: “5.Except with the prior written consent of HPMIDC the Company shall not- (a) Acquire shares in any Company or other body corporate of interest in any partnership firm or set up or purchase any property concern. (b) Transfer its undertaking or any of its properties and assets or except in the ordinary course of business, part with any of its other assets including machinery stores and machinery spares, both present and future; (c) Create any mortgage, charge or lien on or other interest, in its undertaking properties and assets in any manner and for any purpose save and except as provided in Schedule III hereto; (d) Undertake any general trading activities other than the sale of products arising out of its manufacturing operations; (e) (i)Change the existing incumbents of the office of, or appoint or reappoint any person as its whole-time Chairman, Managing Director whole-time Director or Manager (as defined in the Companies Act, 1956) which appointment or re-appointment shall be on such terms and conditions as may be approved by HPMIDC. (ii)change the existing incumbents of the office of, or appoint any person(s) as consultant(s) unless it is for a specific assignment.” On a perusal of the aforesaid clauses it is apparent that the loanees were not entitled to change the management of the Company or even change the share holding of the Company or transfer its interest in the Company except with the prior written consent of the plaintiff. The whole case of the respondents is that the Managing Director of the Company had orally permitted them to transfer their shares to Bhajan Lal and Ramesh Kumar. Sh.R.L. Sood has made reference to a number of documents which do indicate that the 10 defendants 2&3, the original promoters, may have had some talks with the Managing Director for changing the management of the Company and for permission to transfer their share holding in the name of Bhajan Lal and Ramesh Kumar. This is evidenced by the memorandum placed before the Board of the plaintiff Ext.PW-2/D-4. However, it is apparent that any agreement between the original promoters and Bhajan Lal and Ramesh Kumar could not be binding on the plaintiff unless the same had been approved in writing by the plaintiff. At the instance of the parties, we have gone through the noting sheets some of which have been exhibited as Exts.PW-2/D-13 to Ext.PW-2/D-20. It is apparent from a perusal of the notings made on the file that no written consent had been given by the plaintiff to the original promoters to change the management of the Company. The law is absolutely clear that even the Managing Director of the Corporation cannot bind the Corporation. Decisions on behalf of the Corporation are taken by its Board. The proposal may have been pending since the year 1987 but the fact remains that the proposal for change of the management was placed before the Board only in May, 1988 and after approval the same was conveyed to the promoters on 24th June, 1988. This approval was conditional and one of the conditions was that the new promoters would execute all guarantees and undertakings and the Company would clear all defaults of the HPSIDC. On behalf of the old promoters it has been vehemently contended that no duty was cast upon the original promoters to get the fresh deeds of guarantee executed from the new promoters. It 11 has been urged that it was for the plaintiff to have ensured that fresh guarantee deeds are executed by the new promoters. We are unable to accept this argument. The original promoters want to be relieved of a contract entered into by them in writing with the plaintiff. They unilaterally, without waiting for the prior written approval as was required under the agreement entered into between the parties, transferred their interest in the Company to the new directors and changed the management of the defendant No.1 Company without obtaining the permission in writing of the plaintiff. They cannot now take advantage of the fact that they have changed the management in breach of the contract. In this behalf it would be pertinent to note that a notice was sent on behalf of the original promoters to the plaintiff on 1.3.1988 in which they claimed that they stand absolved of their liability under the personal guarantees. Reply to this notice was sent by Sh.Prem Goel, Advocate on behalf of the plaintiff on 19.3.1988 vide Ext.DW-2/9 in which it was clearly stated that the personal guarantees of the original promoters can only be discharged after execution of necessary documents effecting change in management and execution of personal guarantees by new promoter Directors. The approval of the Board dated 2.6.1988 was conveyed in June, 1988 after this date. It is thus clear that the original promoters were aware that it is for them to have ensured that the fresh guarantees are given to secure the repayment of the loan. It has been urged on behalf of the original promoters that the plaintiff is not entitled to claim the suit amount since it has tacitly 12 approved the change in the management and transfer of the Company. Sh.R.L.Sood has drawn our attention to various documents which show that the plaintiff was in correspondence with the new set of Directors. It is also urged that no correspondence was addressed to the original promoters. It is further contended that there is nothing on record to show that any correspondence was sent to the original promoters at their residence which is stated to be House No.618, Sector 33, Chandigarh. There is sufficient material on record to show that letters were sent to the original promoters at their address i.e. House No.1587, Sector 33, Chandigarh. Even the notice sent by Sh.Lalit Suri gave this as the address of the defendants. They cannot be heard now to say that this is not their address. Be that as it may the fact remains that the original promoters were not entitled to transfer the management or change the share holding in the Company without the prior approval in writing of the plaintiff. Since this prior approval has not been given we cannot accept the submission of the respondents that they stood absolved of their personal liabilities under the deeds of guarantee. Lastly we come to the issue of limitation. Sh.Ajay Kumar has placed reliance on the judgment of the Apex Court in HPFC vs. Pawna and others (supra) wherein the Apex Court held as follows: “Whilst considering the question of limitation the Division Bench has given a very length judgment running into approximately 50 pages. However, they appear to have not noticed the fact that under Clause 7 an indemnity had been given. Therefore the premise on which the judgment proceeds i.e. that the loan transaction and the mortgage deed, are one composite transaction which was inseparable is entirely erroneous. It is settled law that a contract of indemnity and/or guarantee is an 13 independent and separate contract from the main contract. Thus the question which they required to address themselves, which unfortunately they did not, was when does the right to sue on the indemnity arose. In our view, there can be only one answer to this question. The right to sue on the contract of indemnity arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the Financial Corporation Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. It may be that on the Corporation taking action under Section 29 and on their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient.” Sh.Ajay Kumar has placed reliance on Clause 16 of the Hypothecation deed Ext.DW-2/P-11 which reads as follows: “16.In default of payment of any installment of the loan, interest, commitment charge or any other moneys due to the Corporation under this security the Corporation may at any time thereafter take possession of the machinery and equipment and the other assets hereby hypothecated or any of them or any part thereof and for that purpose enter into and upon the premises where they are or shall then be and the corporation may sue for recovery and receive and give effectual receipt for a sale or realize by public auction or private contract or otherwise dispose of deal with the same or any of them or any part thereof with the power to buy in at any sale by auction and to rescind or vary any contract for the sale without being answerable for any loss or diminution in price with power to give effectual receipts and discharge for the sale money and do all other acts and things for completing the sale or sales as the corporation shall think proper and to apply the net proceeds of such sale or sale in or towards the liquidation of the money due to the Corporation hereunder and to pay the surplus if any to the Borrower AND upon any sale the purchaser shall not be bound to see or enquire whether any such default has been made as aforesaid AND the Borrower hereby agrees to accept the amount of such sales and realizations and to pay all shortfall 14 or deficiency shown therein PROVIDED ALWAYS that nothing herein contained shall be deemed to negative, disqualify or prejudice the right of Corporation to recover from the Borrower the balance for the time being remaining due from the Borrower in respect of the said loan or any other moneys under the security notwithstanding that all or any of the machinery and equipment and the other assets hereby hypothecated have not been realized.” Sh.Ajay Kumar submits that since the property which was hypothecated with the plaintiff was sold by the HPFC only on 17.9.1991 the right to recover the balance amount accrues on the said date and the limitation will be 3 years from 17.9.1991 when the assets were sold. It is important to note that on 26.7.1988 the plaintiff had recalled the loan and called