IN THE HIGH COURT OF PUNJAB AND HARAYANA AT CHANDIGARH Civil Writ Petition No.2713 of 2009 (O&M) Date of Decision: December 20, 2011 Shri Kundanmal Dabriwala ….Appellant Versus Haryana Financial Corporation and another ….Respondents CORAM: HON’BLE MR. JUSTICE HEMANT GUPTA HON’BLE MR. JUSTICE G.S. SANDHAWALIA Present: Shri Anand Chhibbar, Advocate, and S/Shri Lalit Thakur and Rakesh Kumar, Advocates, for the petitioner. Shri Kamal Sehgal, Advocate, for respondent No.1. Shri Arjun Pratap Atma Ram, Advocate, for respondent No.2. HEMANT GUPTA, J. The challenge in the writ petition is to a show cause notice dated 7.10.2008 (Annexure P.1) served upon the petitioner to pay a sum of Rs.83,58,671/- under Section 32(G) of the State Financial Corporation Act, 1951 (for short `the SFC Act’). The challenge is on the basis that once the principal debtor has settled its loan account with the Corporation, the petitioner, who is a guarantor, cannot be made liable to pay any amount over and above the amount paid by the principal debtor. It is the case of the petitioner that the liability of the guarantor is co-extensive with that of the principal debtor and not exceeding the liability of the principal debtor. Once the Corporation has settled its loan account with the principal debtor, the guarantor cannot be saddled with any additional liability. The facts leading to the issuance of the said show cause notice are that the petitioner is a Promoter Director of M/s Dabriwala Steels and Civil Writ Petition No.2713 of 2009 (O&M ) [2] Engineering Company Ltd. The aforesaid Company had set up a mini steel plant at Faridabad. The Company was owner of two plots i.e. Plot No. 136, Sector 24, Faridabad and Plot No.142, Sector 24, Faridabad. The company stopped its production on 27.4.1985 due to financial constraints. The Company invoked the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short `the SICA’). The Board for Industrial and Financial Reconstruction (for short `the BIFR’), constituted under the aforesaid Act, recommended the winding up of the Company on 25.5.1993. The appeal against such recommendation of the BIFR was dismissed by the Appellate Authority Industrial & Financial Reconstruction (for short `the AAIFR’) on 6.12.1994. The challenge to the aforesaid order before the Delhi High Court remained unsuccessful when the writ petition was dismissed on 16.12.1996. On the recommendation of the BIFR, this Court passed an order of winding up on 24.2.1995 in CP No. 31 of 1995. The Official Liquidator attached to this Court was directed to take into his custody or control all the properties and effects and all papers and books of the Company. The Haryana Financial Corporation (for short ‘the Corporation’) sought permission of this Court to sell the land, building, fixtures, plants and machinery of the Company situated at Plot No 136, Sector 24, Faridabad as a secured creditor having first charge over the said plot, which was allowed on 21.7.1995. The State Bank of India was holding second charge against the said property. In pursuance of such permission, all movable and immovable assets lying at Plot No.136, Sector 24, Faridabad was sold with the sale being affirmed by this Court on 17.9.2004 for the total sum of Rs.4.10 crores. The State Bank of India sought sale of plot No. 142, Sector 24, Faridabad, mortgaged to it to realize its dues. This Court permitted the Official Liquidator to sell plot No. 142, Sector 24, Faridabad in association with the secured creditors vide order dated 9.2.2006. Civil Writ Petition No.2713 of 2009 (O&M ) [3] The petitioner along with the other share holders of the Company filed a petition under Sections 391 and 394 of the Companies Act, 1956 before this Court for revival of the Company by submitting a Rehabilitation Scheme. The majority share holders in the Company in liquidation proposed to the State Bank of India for settlement in terms of One Time Settlement Scheme, as per the guidelines issued by the Reserve Bank of India. The Bank agreed to accept Rs.4,85,00,000/- as against the total claim of Rs.22,96,34,254/-. This Court directed the Official Liquidator vide order dated 02.11.2007 to disburse an amount of Rs.4,05,00,000/- to State Bank of India as full and final payment i.e. out of sale proceeds of plot No.136, Sector 24, Faridabad. Balance Rs.80 lacs were to be pumped in by the ex-management. On account of One Time Settlement in the total sum of Rs.4,85,00,000/-, which the Bank received, the Bank satisfied its claim. The petitioner also approached the Corporation for a settlement but the settlement proposal was rejected. In the aforesaid order dated 02.11.2007, the Official Liquidator was also directed to adjudicate the claim of creditors and file his report before this Court. It was in pursuance of such direction, the Corporation submitted its claim. The Official Liquidator submitted his report to the High Court relying upon the report of the Chartered Accountant (Annexure P.10). The Official Liquidator adjudicated such claim and found that a sum of Rs.13,92,223/- is due and payable as against the total claim of Rs.60,69,525/- of the Corporation. It was observed that no amount of interest can be charged by the financial institution after the date of winding up i.e. 24.02.1995. Such report was accepted on 08.05.2008 by this Court. This Court granted liberty to any creditor aggrieved of adjudication of the claims by the Official Liquidator to prefer an appeal. No appeal was preferred by the Corporation. But on 29.07.2008, the counsel for the Corporation made a statement that it has no objection for the revival of the Company. This Court passed the following order:- Civil Writ Petition No.2713 of 2009 (O&M ) [4] “Mr. Kamal Sehgal, counsel for respondent No.4 (HSIDC) states that the Corporation’s liability has been discharged and the Corporation has no objection to the scheme of revival and withdrawal of the order of liquidation. As per the report of the Official Liquidator bearing No. OLR No. 10 of 2008 filed in CP No. 740 of 2007 dated 12.4.2008, it is clearly mentioned that Shri Ashok Gupta, Assistant General Manager of the Haryana Financial Corporation and Rakesh Kumar, L.O. Head, who were present informed the Official Liquidator that the amount due on the date of winding up order was Rs.2,41.044/- as principal outstanding, Rs.4,41,843/- as misc. expenses and interest of Rs.7,10,969/- i.e. a total of Rs.13,93,856/-. The Official Liquidator, after considering the claim held that an amount of Rs.13,92,223/- was due to the Haryana Financial Corporation, as an unsecured creditor. It is not denied that the aforementioned amount has been received by the Haryana Financial Corporation under orders of this Court. Mr. Puneet Gupta, counsel for the Haryana Financial Corporation, states that the Haryana Financial Corporation, has no objection to the revival of the Company, but reserves its right upon revival to seek satisfaction of the mortgage deed, in accordance with law. At the request of counsel for the parties, adjourned to 30.7.2008.” The revival petition came up for final hearing on 19.3.2009 before this court and in a judgment reported as 2009(3) PLR 159 Shri Kundanmal Dabriwala and others v. M/s Dabriwala Steels and Engineering Company Limited (In Liqn.), the claim of the creditor including that of Corporation was adjudicated upon. The basic challenge was that the procedure prescribed i.e. the meetings of the secured and other creditors have not been held. In respect of the claim of the Financial Corporation, it was observed as under:- “XII Answers as regards objection from HFC and in respect of all other sundry claims: 23. The objection coming from HFC, who is the third respondent, is with regard to the disbursement of Rs.4.05 crores to the State Bank of India as including the claim by the State Bank of India against yet another company, even apart the amount due by the company in liquidation to the State Civil Writ Petition No.2713 of 2009 (O&M ) [5] Bank of India. The contention by the Ex-Directors of the company that the HFC had itself admitted to OTS at Rs.2.50 lacs was specifically denied. HFC had made a demand for Rs.85,57,600/- with further interest w.e.f. 01.10.2007. The HFC was itself the first secured creditor in respect of the Plot No.136 and the State Bank of India was only a second secured creditor. 24. The report of the Official Liquidator records the fact that the Court had directed the disbursement of Rs.4.05 crores to the State Bank of India as full and final payment of the claims against the company and Rs.10,82,255/- as the amount payable in satisfaction of the award of the claims of the workmen by virtue of order of the Industrial Tribunal/Labour Court-II. Drawing help from the report of the Chartered Accountant M/s A.K. Chadda & Co., the Official Liquidator has examined the claims of HFC vide its claim dated 26.05.2005, Income Tax Department vide its claim dated 23.03.2006, Excise Taxation Office vide its claim dated 31.03.2008 and HSEB vide its claim dated 27.05.1996. The claim adjudicated has been tabulated as follows:- Name of the creditor Amount claimed Claim Adjudicated Haryana Financial Rs.60,69,525/- Rs.13,92,223/- Corporation xx xx xx XIV.Final Disposition: (i) to (iii) xx xx xx (iv) The amounts as adjudged by the Official Liquidator and found expressed in the report are approved and the amounts detailed in the report shall become payable by the company.” The Corporation has not challenged the aforesaid order though the said order is subject matter of challenge by other aggrieved persons including the auction purchaser, who was the highest bidder of plot No.136, Sector 24, Faridabad. The factual position, as asserted by the petitioner in the writ petition is not controvered by the counsel for the Corporation, but it is asserted that the Specified Authority has adjudicated that an amount of Rs.83,55,421/- with future interest from 15.4.2008 is recoverable and that the recovery certificate has been rightly issued. It is inter-alia pleaded to the following effect:- Civil Writ Petition No.2713 of 2009 (O&M ) [6] “…..It is further submitted here that even at the time when revival order was passed the counsel for the respondent Corporation stated that the Corporation has no objection to revival, but the Corporation reserves its right upon revival to seek satisfaction of mortgage deed in accordance with law. Since the respondent-Corporation was not paid the entire loan amount recoverable from the company, the respondent Corporation issued notice dated 7.10.2008 under Section 32 (G) of the State Financial Corporation Act, 1951 against the promoters/guarantors/directors of the Company in liquidation.” xx xx xx “……It is further submitted here that the debt of guarantee executed by the petitioner with the respondent Corporation is a separate independent contract. Hence the petitioner cannot take the benefit of a separate contract with the Company. The petitioner has not brought the above stated facts before this Hon’ble Court hence the present writ petition deserves dismissal.” We have heard learned Counsel for the parties and with their assistance gone through the provisions of Statute and the law applicable. We find that the question requires to be examined is:- “Whether the revival scheme submitted by the Petitioner under Section 391 and 394 of the Companies Act, 1956 and accepted by court amounts to compounding with the principal debtor leading to the discharge of the surety within the meaning of Section 134 and 135 of the Contract Act, 1872?” To consider the above question, the following are the relevant provisions of the Indian Contract Act, 1872 (for short “the Act”):- “126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’ – A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee 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 for ‘creditor’. A guarantee may be either oral or written. Civil Writ Petition No.2713 of 2009 (O&M ) [7] 128. Surety’s liability – The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. 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. The Petitioner has sought revival of the Company- principal debtor under Sections 391 & 394 of the Companies Act. Section 391 of the Companies Act, relevant for the present case, reads as under: “391. Power to compromise or make arrangements with creditors and members – (1) Where a compromise or arrangement is proposed - (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them, The Court may, on the application of the company or of any creditor or member of the company or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be to be called, held and conducted in such manner as the Court directs. (2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed under the rule made under Section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being Civil Writ Petition No.2713 of 2009 (O&M ) [8] wound up, on the liquidator and contributories of the company (emphasis supplied..).” As per Section 128 of the Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Section 134 of the Contract Act deals with discharge of surety by any contract between the creditors and the principal debtor, by which the principal debtor is released. The surety also discharged by an act or omission of the creditor. Section 135 of the Contract Act discharges the surety, when creditor compounds with the principal debtor. The Hon’ble Supreme Court in The Bank of Bihar Ltd. v. Dr. Damodar Prasad and another, AIR 1969 SC 297, held the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. Where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. The court quoted with approval that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt. The judgment of the Supreme Court in State Bank of India v. Messers. Indexpot Registered and others, AIR 1992 SC 1740, is also to the same effect. In Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, it was held to the following effect: “18. The term “co-extensive” has been defined in the celebrated book of Pollock & Mulla on Indian Contract and Specific Relief Act, 10th Edn., at p. 728 as under: Civil Writ Petition No.2713 of 2009 (O&M ) [9] “Co-extensive.—Surety's liability is co-extensive with that of the principal debtor. A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued.” 19. In Chitty on Contracts, 24th Edn., Vol. 2 at pp. 1031-32, para 4831 it is stated as under: “4831. Conditions precedent to liability of surety.— Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor.” 20. In Halsbury's Laws of England, 4th Edn., Vol. 20, para 159 at p. 87 it has been observed that: “159. … It is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for.” xxx xxx xxx 27. The legal position as crystallized by a series of cases of this Court is clear that the liability of the guarantor and principal debtors is coextensive and not in alternative.” Learned counsel for the petitioner relies upon the provisions of Section 134 of the Act to contend that the petitioner stands discharged by the act and omission of the Corporation in terms of second part of Section 134 of the Act. It is also contended that in terms of Section 135 of the Contract Act, the petitioner also stands discharged, as the Corporation is deemed to have compromised with the principal debtor. The liability of the surety does not survive after the settlement with the principal debtor in proceedings under Section 391 and 394 of the Companies Act, 1956. Reference is also made to Syndicate Bank, Tangutur Branch, Tangutur, Prakasam District v. Pamidi Somaiah (died) and another, AIR 2002 Andhra Pradesh 12; Kurnool Chief Funds P. Ltd. v. Narasimha (P.) AIR 2008 Andhra Pradesh 38 and Union Bank of India v. Chairperson, Debts Recovery Appellate Tribunal and others, (2011)167 Company Cases page 1 (Allahabad). Civil Writ Petition No.2713 of 2009 (O&M ) [10] In Syndicate Bank’s case (supra), the Andhra Pradesh High Court has examined the question as to whether the decree holder can proceed against the surety when the principal debtor’s liability stands discharged as the suit abated on account of non-impleading of legal heirs of deceased principal debtor. After considering the provisions of Section 134 of the Indian Contract Act, 1872, the Court held to the following effect:- “11. Though in all the above decisions, it was held that the liability of the surety is co-extensive with that of the principal Debtor and the creditor-Decree Holder need not proceed against the principal Debtor before proceeding against the surety, either by way of suit or against the principal Debtor before proceeding against the surety, either by way of suit or for the recovery of the decretal amount, but in none of the above decisions, the present position exists, where a suit against the principal Debtor had abated by an act of omission on the part of the creditor. As a result of the omission on the part of the creditor in bringing the legal representatives on record, the surety’s right that was provided under Section 140 of the Contract Act to proceed against the principal Debtor had been lost. Apart from that in terms of Section 134, the surety is discharged by the omission of the creditor in allowing the suit to abate against the principal Debtor and consequently in the discharge of the debt against the principal debtor.” In M/s Kurnool Chief Funds (P) Ltd.’s case (supra), the suit against the principal debtor was dismissed for default and the said decision became final. Thus, under law there was no liability surviving against the debtor for realization of the amount due to the creditor. It was held that once the liability of the principal debtor is extinguished, the surety’s liability gets automatically terminated. It was held to the following effect: “13. ….But in the present case, the suit against the principal debtor is dismissed for default and the decision became final. Therefore, under law, there is no liability surviving against D1 for realization of the amount due to the creditor. When once the liability of the principal debtor is extinguished, the sureties’ liability gets automatically terminated. Therefore, without making the principal debtor liable for payment of the amount to the creditor, the sureties cannot be made liable for recovery of the amount. When once the suit is decreed Civil Writ Petition No.2713 of 2009 (O&M ) [11] against the principal debtor and the sureties with joint and several liability, it is the option of the decree holder to go against any one of them irrespective of the fact whether he is principal debtor or a surety….” In Union Bank of India’s case (Supra) the learned Single Judge of Allahabad High Court was considering almost the same question as in the present case that is consequences of discharge of a principal debtor by the Bank before the Official Liquidator. The Court found that such settlement discharges the surety. It was held to the following effect: “16. The second submission of learned counsel for the bank that discharge of the principal borrower by operation of the bankruptcy law, will not discharge the guarantors is also without any force and needs to be rejected. The bank had accepted the amount towards full and final settlement of its claim submitted before the Company Judge and the principal borrower did not stand discharged because of operation of law. The decision of the Supreme Court in Maharashtra State Electricity Board, AIR 1982 SC 1497, therefore, does not help the petitioner-bank. On the other hand, the submission of Sri R.P.Agarwal, learned counsel for the respondents that the liability of the surety gets automatically terminated when liability of principal debtor is extinguished, deserves to be accepted.” Shri Kamal Sehgal, learned counsel for the Corporation argued that Sections 134 or 135 have no application in the present case, as the claim of the Corporation was slashed by an operation of law. It is argued that though the liability of the surety is co-extensive with the principal debtor, but such principle does not affect the right of creditor to recover the amount scaled down by operation of law such as bankruptcy laws. Therefore, the fact that the principal debtor stands absolved by virtue of an order passed by the Company Court, will not absolve the surety of its liability in terms of the fact that he stood as a guarantor. He relies upon Maharashtra State Electricity Board, Bombay v. The Official Liquidator, AIR 1982 Supreme Court 1497 and also on Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd and others, AIR Civil Writ Petition No.2713 of 2009 (O&M ) [12] 2002 Supreme Court 1841, to contend that Corporation has a right to recover from the guarantor the amount due and payable by the principal debtor in terms of the gurantee executed by the petitioner. In Maharashtra State Electricity Board’s case (supra), the Hon’ble Supreme Court held that the rights of the creditor are not affected in the event of operation of laws. It was held to the following effect: “The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank