1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO.8895 OF 2009 Jog Fabricators Pvt Ltd. .. Petitioner versus Jog Software Solutions Ltd & Ors. .. Respondents Dr.Veerendra Tulzapurkar, Sr.Counsel with Mr.Phiroze Palkhivala and Mr.Vinayak Vengurlekar i/by M/s.Crawford Bayley & Co for the petitioner. Mr.P.K.Dhakephalkar, Sr.Counsel i/by Mr.P.G.Chavan for the respondents no. 1and 2 CORAM : A.S.OKA, J. DATE ON WHICH JUDGMENT IS RESERVED : 24th February 2010. DATE ON WHICH JUDGMENT IS PRONOUNCED : 12th March 2010. JUDGMENT: . On 18th January 2010, the petition was ordered to be heard finally at the stage of admission. The challenge by the petitioner in this writ petition under Article 227 of the Constitution of India is to the judgment and order dated 28th August 2009 which has the effect of granting unconditional leave to the 1st and 2nd respondents (1st and 2nd defendants) to defend the suit. 2. The petitioner-company filed a summary suit under Order XXXVII of the Code of Civil Procedure, 1908. A prayer was made in the suit for passing a decree in the sum of Rs.6,92,72,993/-. Out of the said amount ,a decree was sought jointly and severally against 1st and 2nd respondents in the sum of Rs. 2 2,30,90,998/- and a decree was sought against the 1st respondent in the sum of Rs.4,61,81,995/-. A prayer for grant of interest was made on sum of Rs. 4,47,44,236/- at the rate of 16% per annum from 1st March 2009 till actual realisation. The prayer for interest was made against the 1st respondent. 3. It stated in the plaint that both the petitioner and the 1st defendant-1st respondent are companies registered under the Companies Act, 1956. The 2nd respondent is a Director of the 1st respondent who along with his relatives has 91.99% equity share holding in the 1st respondent-company. The 1st respondent- company was desirous of borrowing amounts from Andhra Bank and the Vidya Sahakari Bank Ltd. Therefore, according to the petitioner, a request was made by the 2nd respondent to the petitioner to become guarantor for repayment of the loan which was to be obtained by the 1st respondent-company. It was represented that the 2nd respondent has also agreed to stand as a guarantor for repayment of the loan payable by the 1st respondent. The case made out in the plaint is that the petitioner agreed to stand as a guarantor and offered its land situated at Baner, Pune, more particularly described in paragraph 5 of the plaint (hereinafter referred as to said land) as a collateral security for the amounts which the 1st respondent intended to borrow from both the banks. It is further averred in the plaint that after the petitioner executing necessary guarantee and creating a mortgage in respect of said land in favour of Andhra bank, the said bank released the loan to the 1st respondent. The 2nd respondent along with the 3rd respondent stood as guarantors for the repayment of the amount by the 1st respondent. The 3rd respondent (3rd defendant) is one Mr.Madhav Vishnu Jog. In the cause-title of the plaint it is stated that the petitioner has filed a suit through the said Mr.Madhav Vishnu Jog who has been impleaded as 3rd respondent-3rd defendant. 3 It is stated that the 2nd respondent was holding a residential flat which was later on gifted by him to his wife with a view to defeat the claim of the banks. It is stated that in the year 2002, the Vidya Sahakari Bank Ltd also granted loan to the 1st respondent and a pari- passu charge with the Andhra Bank was kept on all securities extended by the petitioner and 1st to 3rd respondents to Andhra Bank. 4. As the 1st respondent committed defaults, Andhra Bank filed a recovery proceeding before the Debt Recovery Tribunal against the respondents. The said Vidya Sahakari Bank Ltd also proceeded against the petitioner being the guarantor. The said Bank allegedly proceeded under the provisions of section 156 of the Maharashtra Co-operative Societies Act, 1960. The said land was attached and was put to auction at the instance of the said Vidya Sahakari Bank Ltd. The case of the petitioner is that the offer received during the auction sale was much less than the realistic value, the petitioner raised an objection to the sale. It is the case of the petitioner that thereafter along with the said bank the petitioner negotiated for sale of the said land with a company for a better price which was again less than the market value. It is stated that accordingly the said land was sold. It is disclosed that out of the sale proceeds a sum of Rs. 4,07,86,124.20/- went to Andhra Bank and a sum of Rs.1,04,58,112/- went to the said Vidya Sahakari Bank. According to the petitioner in the balance-sheets of the 1st respondent dated 31st March 2007 and 31st March 2008 , a sum of Rs. 4,47,44,263/- has been shown as the liability of the 1st respondent to the petitioner. In paragraph 14 of the Plaint , the petitioner has stated that claim was being restricted in the present suit to a sum of Rs.4,47,44,236/- by reserving right to recover balance of Rs.65,00,000/- from the defendants. 4 5. The 1st respondent applied for leave to defend. The first contention raised is that the petitioner was never a guarantor to the loans taken by the 1st respondent from the aforesaid banks. As a contract of guarantee was not in existence , the suit was not maintainable as a summary suit. It was contended that both the petitioner and 1st respondent-companies are part of the companies owned by the Jog family business. It is alleged that late Mr.V.M.Jog and his family has various companies. It is alleged that all decisions pertaining to the group of companies are being taken by the Karta of Jog family. It is alleged that establishment of the companies has been made with the only intention of managing the family business effectively with reference to the tax management. It is submitted that the amount paid by the petitioner was nothing but effective management of funds from different pockets of the family and the amount is paid by the petitioner in order to satisfy the liability of one of the family business. It was contended that there was a family arrangement between the members of the Jog family. It is alleged that after taking into consideration the amount paid by the petitioner by sale of the said land , the family arrangement was made and considering the said amount , the 2nd respondent has accepted the a lesser amount from the family. He submitted that the petitioner voluntarily agreed to dispose of the said land and voluntarily paid the proceeds of sale to the said banks. An application was filed by the 2nd respondent for seeking leave to defend by raising similar contentions. 6. By the impugned order, the learned trial Judge held that there were triable issues and the status of the petitioner as guarantor was seriously challenged. The 5 trial Court also referred to the family arrangement. The trial Court observed that though liability of an amount was shown in the balance-sheets of the 1st respondent, corresponding balance-sheets of the petitioner were not produced. The trial Court directed that the trial of the suit shall be concluded within a period of three months and time of only ten days was granted to file written statement. 7. The learned senior counsel appearing for the petitioner submitted that the learned trial Judge purported to grant conditional leave subject to condition that trial would be concluded within a period of three months. He submitted that if the trial Court intended to grant conditional leave, the same ought to have been made subject to condition regarding deposit of a substantial amount. He submitted that in any case the liability was admitted and the 1st and 2nd respondents have no defence. He submitted that the suit is based on a Contract of Guarantee. He placed reliance on decision of the Court of Appeal in Re Conley (Trading as Caplan & Conley) dated February 11,14,15, March 17, 1938. He submitted that a person who provides a pledge or security for performance of another’s obligation makes himself, by means of that pledge or security, surety for that other just as much as if he pledges his personal credit. He submitted that the word guarantor is wide enough to cover a person who, without entering into any personal obligation gives or deposits the property belonging to him as a security for performance of some act or payment by a third party. He also placed reliance on a decision of Chancery Division in the case of Smith Vs. Wood. He pointed out that in the case of the Jagjivandas Jethalal Vs. King Hamilton & Co (AIR 1931 Bombay 337), a Division Bench of this Court held that the provisions of the Contract Act are not exhaustive and therefore one has to consider apart from 6 the said Act what the general law is. The learned counsel pointed out that the view taken by the Court of Appeal in the case of Smith Vs. Wood (supra) has been adopted by the Division Bench. Lastly, he relied upon a decision of the Allahabad High Court in the case of Mathura Das and others Vs. Secretary of State and another (AIR 1930 Allahabad 848) and submitted that a contract of guarantee need not necessarily be in writing. It may be express or it may be tacit or implied and may be inferred from the course of conduct of the parties concerned. He submitted that this is a case where admittedly the property of the petitioner which was given as a security was sold in discharge of the liability of the 1st respondent and therefore inference can be drawn that the petitioner was a guarantor. He submitted that liability has been admitted by the 1st respondent and therefore , impugned order could not have been passed virtually granting unconditional leave. He submitted that the impugned order is perverse. 8. The learned senior counsel appearing for the 1st and 2nd respondents pointed out that the record relating to sanction of loan by the two banks shows that the petitioner was never a guarantor. Moreover, the 2nd and 3rd respondents were admittedly the guarantors. He pointed out that the 3rd respondent-3rd defendant is a person who has instituted the suit on behalf of the petitioner. He submitted that even assuming that liability for payment of certain amount is shown in the accounts of the 1st respondent, that by itself is not sufficient to prove existence of contract of guarantee. He submitted that the suit is based on contract of guarantee which is not at all in existence and therefore the suit was not maintainable as a summary suit. He pointed out that the petitioner has voluntarily sold the said land. He pointed out the family arrangement which is on 7 record of the trial Court shows that the petitioner and the 1st respondent- companies belong to Jog family and under the family settlement , the 2nd respondent has taken a lesser amount. He submitted that no interference was called for with the discretionary order of the trial Court. The learned senior counsel appearing for the petitioner submitted that copies of the accounts of the petitioner have been placed on record which show corresponding liability of the 1st respondent. He submitted that the liability admitted in the accounts of the 1st respondent could not have been over-looked by the trial Court on the ground that the petitioner has not produced accounts. 9. I have given careful consideration to the submissions. As contended by the learned senior counsel appearing for the petitioner, the summary suit is founded on the contract of guarantee. The submission is that guarantee can be inferred and the act of providing security by the petitioner for performance of the obligations of the 1st respondent itself proves that there was a guarantee. It must be noted at this stage that in paragraph 6 of the plaint , it is averred as under: “The plaintiff submits that accordingly, after the plaintiff’s executing the necessary guarantee and creating a mortgage in favour of Andhra Bank on the aforesaid land at Baner as a collateral security, Andhra Bank extended loans to the defendant No.1.” (emphasis added) Thus, the specific case of the petitioner is that the petitioner executed the necessary guarantee. No such guarantee allegedly executed is placed on record. To the affidavit-in-reply of the 1st respondent, copies of the letters dated 5th November 2001 and 18th April 2002 respectively issued by Andhra Bank and the Vidya Sahakari Bank Ltd addressed to the 1st respondent have been annexed. The said letters have been issued by the banks for intimating the sanction of the 8 credit facilities to the 1st respondent. The terms and conditions on which credit facilities were sanctioned have been incorporated in the said letters. In both the letters , the names of the 2nd and 3rd respondents have been mentioned as guarantors and it is not stated that the petitioner was a guarantor. In the letter dated 5th November 2001, there is a reference to the collateral security of the said land of the petitioner. Even in the second letter of Vidya Sahakari Bank Ltd, there is a reference to pari-passu charge on the said land. Both the said letters issued by the said two banks disclose the names of the guarantors and conspicuously, the name of the petitioner is not shown. 10. Reliance was placed by the 1st and 2nd defendants on the family arrangement which shows that there were six family companies of the Jog family. The share-holding of the families of the 2nd and 3rd respondents have been set out in the family arrangement. The amounts to be paid in future under the family settlement by the 2nd and 3rd respondents have been set out. The family arrangement on record signed by the 2nd and 3rd respondents prima facie shows that both the petitioner and 1st respondent-companies appear to be companies controlled Jog family consisting of the 2nd respondent and 3rd respondent. As stated earlier, the 3rd respondent has filed the suit on behalf of the petitioner. 11. Reliance was placed on entries in the accounts of the 1st respondent- company which show that the 1st respondent-company is liable to pay a sum of Rs.4,47,44,236/- to the petitioner. There is no dispute that land held by the petitioner was sold and sale proceeds were appropriated towards the repayment of the loan advanced to the 1st respondent. However, the core issued is whether 9 the petitioner was a guarantor as the suit is filed as a summary suit based on section 140 of the Contract Act. The documents referred above show that both the banks did not treat the petitioner as a guarantor. The defence of the 1st respondent is that there was a family arrangement. The defence is that property of one family business has been sold for the discharge of the debt of the other family business. The document of family arrangement prima facie shows that the Jog family was controlling various companies including the petitioner and the 1st respondent.The family arrangement is signed by a director of Petitioner (Mr. Madhav Jog) and the 2nd Respondent who is a director of the 1st respondent. There is a serious contest on the question whether the petitioner is a guarantor. The petitioner has come to the Court with a specific case that a guarantee was executed. However, no document of guarantee has been produced. Apart from this, the averments made in the plaint and in particular paragraphs 9 and 10 show that there was no attempt made by the petitioner to resist the sale or to challenge the order of attachment. In fact, averments made in paragraph 10 show that the petitioner took active role in the sale of the said land. The director of the petitioner-company who has filed the suit on behalf of the petitioner has been impleaded as a 3rd defendant as he himself is admittedly one of the guarantors. Therefore, there are several triable issues involved in the suit. The defence of the 1st and 2nd defendants cannot be said to be a moonshine defence. Mere fact that liability is shown in the accounts of the 1st respondent is not sufficient in as much as there is material on record to show that both the petitioner and the 1st respondent companies are controlled by the members of the Jog family and reliance is placed on family arrangement signed by the 2nd and 3rd respondents. Moreover, there is a serious doubt regarding the existence of contract of 10 guarantee. There are triable issues raised and there is a reasonable defence. 12. The Apex Court in the case of Mechelec Engineers & Manufacturers v. Basic Equipment Corporation, (1976) 4 SCC 687 has laid down the principles governing grant of leave to defend as under: “(a) If the defendant satisfies the court that he has a good defence to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend. (b) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence the plaintiff is not entitled to sign judgment and the defendant is entitled to uncon- ditional leave to defend. (c) If the defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he has a defence, yet, shews such a state of facts as leads to the inference that at the trial of the action be may be able to establish a defence to the plaintiff’s claim the plaintiff is not entitled to judg- ment and the defendant is entitled to leave to defend but in such a case the court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security. (d) If the defendant has no defence or the defence set-up is illusory or sham or practically moonshine then ordinarily the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend. (e) If the defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the plaintiff is entitled to leave to sign judgment, the court may protect the plaintiff by only allowing the de- fence to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition, and thereby show mercy to the defendant by enabling him to try to prove a defence.” The present case will be governed by the second clause. 13. In the aforesaid case, the Apex Court also dealt with the scope of interfer- ence by High Court with order granting unconditional leave. It is observed: “7. We need not dilate on the well established principles repeatedly laid down by this Court which govern jurisdiction of the High Courts under Sec- tion 115 CPC. We think that these principles were ignored by the learned Judge of the High Court in interfering with the discretionary order after a very detailed discussion of the facts of the case by the learned Judge of the High Court who had differed on a pure question of fact — whether the 11 defences could be honest and bona fide. Any decision on such a question, even before evidence has been led by the two sides, is generally hazard- ous. We do not think that it is fair to pronounce a categorical opinion on such a matter before the evidence of the parties is taken so that its effects could be examined. In the case before us, the defendant had denied, inter alia, liability to pay anything to the plaintiff for an alleged supply of goods. It is only in cases where the defence is patently dishonest or so un- reasonable that it could not reasonably be expected to succeed that the exercise of discretion by the trial court to grant leave uncondi- tionally may be questioned. In the judgment of the High Court we are unable to find a ground of interference covered by Section (emphasis added) In the circumstances, no fault can be found with grant of unconditional leave by the trial Court. Though clause 2 of operative part of the order may not be happily worded, there is no reason to find fault with the grant of unconditional leave to defend. 14. Hence, there is no merit in the petition and writ petition is rejected with no orders as to costs. (A.S.Oka, J.)