OMPs No.126&127/2001 Page 1 of 25 *IN THE HIGH COURT OF DELHI AT NEW DELHI + OMP No.126/2001 % Date of decision: 30.07.2009 M/S POYSHA OXYGEN PVT. LTD. .…Petitioner Through: Mr. P. Mishra, Sr. Advocate with Mr. Sandeep Sharma, Advocate. Versus SH. ASHWINI SURI & OTHERS ... Respondents Through: Mr. Sanjeev Anand with Mr. D. Nishant and Mr. Anuj Bedi, Advocates for Respondents No.2&3. AND OMP No.127/2001 M/S GOYAL MG GASES PVT. LTD. ….. Petitioner Through: Mr. P. Mishra, Sr. Advocate with Mr. Sandeep Sharma, Advocate. Versus SH. ASHWINI SURI & OTHERS ..... Respondents Through: Mr. Sanjeev Anand with Mr. D. Nishant and Mr. Anuj Bedi, Advocates for Respondents No.2&3. CORAM :- HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW 1. Whether reporters of Local papers may be allowed to see the judgment? Yes 2. To be referred to the reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? RAJIV SAHAI ENDLAW, J. 1. Both petitions under Section 34 of the Arbitration Act, 1996 arise out of a common arbitral award dated 31st July, 2000 in the claims preferred by each of the petitioners against the respondents OMPs No.126&127/2001 Page 2 of 25 (common in both the cases). The petitioners had before the arbitrator, preferred claims, besides against the respondents, also against M/s Ganga Automobiles Ltd. (which is not a party hereto). Identical questions being involved in the two petitions, they are taken up together for consideration. 2. To appreciate the challenge to the arbitral awards, it is deemed expedient to set out certain facts. 3. On 14th February, 1997 the following documents were executed in each case:- (a). An Inter Corporate Deposit Agreement between M/s Ganga Automobiles Ltd. and the petitioner in each case. In the said agreements, identical in language, M/s Ganga Automobiles Ltd. is described as the borrower and the petitioner in each case as the lender. The language of the said agreements is inter-alia as under: “Whereas the borrower is at present in need of financial assistance for the usual business operations of the company and had approached the lender for the same by way of Inter Corporate Deposits. And whereas lender has agreed to grant to the borrower the required Inter Corporate Deposit herein after referred to as “ICD” (of Rs.1 crores in favour of petitioner M/s Poysha Oxygen Pvt. Ltd. and Rs.2.70 crores in favour of petitioner M/s Goyal MG Gases Ltd.) on the above representation of the borrower, for a period of 90 days at an interest rate of ……………. In view of the above consideration lender has advanced on this day the sum of (Rs. 1 crores in case of petitioner M/s Poysha Oxygen Pvt. Ltd. and Rs.2.70 crores in case of petitioner M/s Goyal MG Gases Ltd.) to the borrower as ICD for a period of 90 days at an interest rate of 30% per annum payable…………… the receipt of which is hereby expressly and specifically admitted by the borrower as well as by a separate money receipt” (b). Deeds of personal guarantee were executed separately by the respondent No.1 Sh. Ashwini Suri, respondent No.2 Sh. G. Sagar Suri in favour of each of the petitioners and for amounts aforesaid OMPs No.126&127/2001 Page 3 of 25 with respect to each of the petitioners. The terms of the said deeds, which are also identical and in so far as relevant for the present purposes are as under:- “Whereas the lender has considered to grant to M/s Ganga Automobiles Ltd……….. an Inter Corporate Deposit of Rs…………… vide ICD agreement dated 14th February, 1997 for the usual business operation of the borrower company and in consideration of the representations made by the guarantor to the lender, the lender has agreed to provide the deposit mentioned herein above. In consideration of the premise, the guarantor hereby unconditionally, absolutely and irrevocably guarantees to and agrees with the lender as follows………………. In the event of any default on the part of the borrower in payment/repayment of any of the monies referred to above or in the event of any default on the part of the borrower to comply with or perform any of the terms conditions and covenants contained in the ICD Agreement the guarantor shall, upon demand, forthwith pay to the lender without demur all the amounts payable by the borrower under the ICD Agreement”. (c). Deed of corporate guarantee with respect to amount of ICD agreement with each petitioner was also executed by the respondent No.3 M/s. Delhi Auto & General Finance Pvt. Ltd. (Delhi Auto). The terms thereof relevant for the present purposes were as under:- “Whereas the lender has considered to grant to the borrower an Inter Corporate Deposit of Rs……………….. vide ICD Agreement dated 14th February, 1997 for the usual business operations of the borrower company and in consideration of the representations made by the guarantor to the lender, the lender has agreed to provide the deposit mentioned herein below:- And whereas in case of default by the borrower in repayment of the facilities given to them as mentioned herein above and on the request of the lender this deed of guarantee and indemnity is being executed in favour of the lender and shall remain in existence till all the monies, liabilities, damages and other obligations ………….. to the lender is met out by the borrower to the entire satisfaction of the lender. The guarantor hereby agrees and undertakes to make without delay, demur or protest on first demand the payment of any or all of the obligations that may become payable at any point of time even if the borrower in any OMPs No.126&127/2001 Page 4 of 25 way refuses, defaults, denies, disputes or fails to pay or reimburse the due amounts to the guarantor or to lender or otherwise.” 4. Needless to mention that all the aforesaid documents contained an arbitration clause. 5. Disputes and differences having arisen between the parties, an arbitrator was appointed and the petitioner in each of the cases claiming default of M/s Ganga Automobiles Ltd. and the respondents herein as guarantors preferred claims against them. 6. The respondents herein as well as M/s Ganga Automobiles Ltd. filed a joint reply to the claims of each of the petitioner. It was inter- alia their case that a fortnight before 14th February, 1997 the representatives of the petitioners had a meeting with Sh. Ashwini Suri and Sh. G. Sagar Suri i.e respondents No.1&2 herein and had promised to provide them a temporary loan of Rs.2.70 crores and Rs.1 crore respectively provided corporate guarantee was given for that purpose by the respondent No.3 Delhi Auto and also personal guarantees are given by the respondents No.1&2 Sh. Ashwini Suri & Sh. G. Sagar Suri; negotiations in that respect continued for ten days and ultimately on 14th February, 1997 each of the petitioners got executed an agreement titled as Inter Corporate Deposit Agreement from M/s Ganga Automobiles Ltd. stating therein that each of the petitioners had agreed to grant to the said M/s Ganga Automobiles Ltd. Inter Corporate Deposit of Rs.2.70 crores and Rs.1 crores respectively. It was further the defence of the respondents and M/s Ganga Automobiles Ltd. that on the basis of the promise of the petitioners to advance the temporary loans of Rs.2.70 crores and Rs.1 crore the respondents executed the guarantee papers aforesaid OMPs No.126&127/2001 Page 5 of 25 which were to be valid and operative only if the petitioner had paid the said sum of Rs.2.70 crores and Rs.1 crore respectively and not otherwise; that the said monies were never advanced by the petitioners and thus the consideration for the documents executed on 14th February, 997 did not materialize and therefore the said documents became inoperative and void ab initio. 7. The petitioners filed replications in which it was inter-alia the case of the petitioners that they had prior to 14th February, 1997 lent monies to M/s First Maruti Leasing Co. Inc. a unit of M/s W.E. Indian Adventures Pvt. Ltd. and M/s Ganga Automobiles Ltd. was the guarantor for repayment of the said monies; that upon default by the aforesaid M/s First Maruti Leasing Co. Inc., the petitioners had threatened action/legal proceedings and the loan was restructured and M/s Ganga Automobiles Ltd. became the principal borrower for the monies already due and executed Inter Corporate Deposit Agreement aforesaid and the respondents became the guarantors. It was thus the case of the petitioners that there was consideration for the documents executed on 14th February, 1997 in the form of past transaction and the documents executed on that date were not without consideration. 8. From the arbitral record, it appears that witnesses were examined and cross examined before the arbitrator. However, it appears that during the pendency of the arbitration proceedings M/s Ganga Automobiles Ltd. was ordered to be wound up and the counsel for the official liquidator was appearing for M/s Ganga Automobiles Ltd. and the counsel earlier appearing for the respondents herein OMPs No.126&127/2001 Page 6 of 25 and M/s Ganga Automobiles Ltd. continued to appear for the respondents. 9. The arbitrator has in the award held that the Inter Corporate Deposit Agreement executed by M/s Ganga Automobiles Ltd. in favour of the petitioners was for consideration. The arbitrator for holding M/s Ganga Automobiles Ltd. liable to both the petitioners has held that it is an admitted fact that as on 14th February, 1997 the said M/s Ganga Automobiles Ltd. owed Rs.2.70 crores and Rs.1 crore respectively to the petitioners on the basis of previous agreements and further that in terms of the previous agreements, M/s Ganga Automobiles Ltd. was a guarantor and in the transaction on 14th February, 1997 it became the principal borrower. The arbitrator has further found that the respondent No.1 herein Sh. Ashwini Suri being the Managing Director of M/s Ganga Automobiles Ltd. was aware of the transaction in question and of the existing liability of M/s Ganga Automobiles Ltd. and further found that in case fresh documents were not to be executed, the petitioners would have immediately taken legal steps for recovery of admitted liabilities. The arbitrator held “forbearance to enforce legal right is good consideration”. 10. The arbitrator further held that though in the documents executed on 14th February, 1997 there was no reference to existing liability being taken over by M/s Ganga Automobiles Ltd. as principal borrower but the issuance of cheques and letter by M/s Ganga Automobiles Ltd. made it evident that the consideration for the new agreements was past existing liability. The arbitrator thus held the OMPs No.126&127/2001 Page 7 of 25 Inter Corporate Deposit Agreement executed by M/s Ganga Automobiles Ltd. to be for valid consideration. 11. Having held so, the arbitrator proceeded to determine the liability of respondents as guarantors. It was observed that the deeds of guarantee themselves did not at all indicate that the petitioners were not to advance Rs.2.70 crores and Rs.1 crore to M/s Ganga Automobiles Ltd. and also did not indicate that the consideration for the agreements was past existing liability. The arbitrator further held that the respondent No.2 Sh. G. Sagar Suri and respondent No.3 Delhi Auto cannot be presumed to be aware that the transaction of 14th February, 1997 was based on past existing liability of M/s Ganga Automobiles Ltd. The arbitrator then referred to illustration (c) of Section 127 of the Contract Act and held “Thus a past consideration is not a sufficient consideration of a contract of guarantee”. Reference is also made in the award to Sections 142 & 143 of the Contract Act laying down that any guarantee obtained by means of misrepresentation is invalid. The award also refers to the resolution of the board of directors of the respondent No.3 Delhi Auto (though not found by me on arbitral record) permitting the company to become guarantor for loan to be taken by M/s Ganga Automobiles Ltd. from the petitioners. The arbitrator observed that the said resolution did not permit the respondent No.3 Delhi Auto to become guarantor for any past liability of M/s Ganga Automobiles Ltd. The arbitrator thus held the deed of guarantees executed by respondent No.2 Sh. G. Sagar Suri and No.3 Delhi Auto & General Finance Pvt. Ltd. to be void. OMPs No.126&127/2001 Page 8 of 25 12. As far as the respondent No.1 Sh. Ashwini Suri is concerned the arbitrator held him liable to petitioner M/s Goyal MG Gases Pvt. Ltd. for Rs.2.70 crores but held deed of personal guarantee executed by him in favour of petitioner M/s Poysha Oxygen Pvt. Ltd. also to be void for the same reasons as applicable to the other respondents. 13. The senior counsel for the petitioners has made a short submission. He has contended that the award is contrary to public policy because the claims have been allowed against M/s Ganga Automobiles Ltd. from which nothing can be recovered, having been ordered to be wound up and have been declined against the respondents from whom alone the monies could be recovered. It is argued that the arbitrator has thus left the petitioners with a paper decree; umbilical cord of the documents executed by all the respondents was stated to be the monies which the arbitrator also has found to have been advanced by the petitioners to the respondents. Contradiction is also pointed out in the award, in at one place holding forbearance to be a good consideration and at another place holding otherwise. It is further argued that once the monetary award had been made against the principal borrower, the award is unfair in holding the guarantees to be bad. It is further contended that there are inconsistencies and contradictions in allowing the claim against respondent Sh. Ashwini Suri in one case and disallowing it in the other, and it is further contended that what is good against Sh. Ashwini Suri in the case in which he has been held liable is good against him in the other case, as well as against the other guarantors in both cases. Reference is also made to a letter dated 14th February, 1997 of the petitioner M/s Goyal MG Gases Pvt. Ltd. to M/s Ganga Automobiles Ltd. in reference to the OMPs No.126&127/2001 Page 9 of 25 discussions with the respondent Sh. G. Sagar Suri. It is argued that the intent of the parties was to provide security and which has been defeated in the award. The senior counsel though admitting bad drafting of the documents urged that the same cannot be permitted to be used as fig leaf of defence. He thus argued that the corporate veil should be pierced and the award dismissing the claims against respondents Sh. G. Sagar Suri and M/s Delhi Auto and Sh. Ashwini Suri (in once case) be set aside. 14. Per contra, the counsel for the petitioner has contended that the arbitrator has decided in terms of the documents between the parties and no error can be found with the award. He has reiterated illustration (c) to Section 127 and has stated that the respondent Sh. Ashwini Suri had been held liable to the petitioner M/s Goyal MG Gases Pvt. Ltd. because of the peculiarity of that transaction and which is not so in the transaction with petitioner M/s Poysha Oxygen Pvt. Ltd. 15. The senior counsel for the petitioner has in rejoinder urged for setting aside of the award on the grounds of morality. 16. Since the arbitrator has in declining the claims against the respondents relied only on illustration (c) to Section 127 of the Contract Act, even though neither any law in that respect is mentioned in the award nor has any been cited, it was felt necessary to check the same. i. Reference may first be made to the judgment of the Division Bench of Karnataka High Court in Jayakunvar Manilal Shah Vs. Syndicate Bank OMPs No.126&127/2001 Page 10 of 25 MANU/KA/0365/1991. It was held that the words “anything done……. for the benefit of the principal debtor” in Section 127 are wide enough to cover the past transaction also; it is not necessary that conferment of a benefit upon the principal debtor by the creditor must be contemporaneous with the execution of surety bond, in order to provide consideration for the agreement of guarantee. Reference was made to Halsbury's Laws of England 4th Edition at Para-117 inter-alia to the effect that the consideration for a promise of guarantee need not be contemporaneous with the agreement of guarantee and need not appear in writing. Reference was also made to Jagadindranath Roy v. Chandranath (1904) 31 Calcutta 242 where the surety bond was executed two years after the deed and it was held that the demand for fresh surety was made and the surety became a fresh surety in order to save the principal debtor from the results of failure to comply with the demand of the creditor and as such the execution of the surety resulted in advantage to the debtor and therefore was sufficient consideration for execution of the surety bond. With reference to illustration (c) to Section 127 (Supra) it was held, that the same cannot cut down the amplitude of Section 127 and though an illustration to a section could not be readily assumed to be repugnant thereto, reliance was placed on Shambhu Nath Mehra Vs. The State of Ajmer MANU/SC/0023/1956 holding that an illustration does not exhaust the full content of OMPs No.126&127/2001 Page 11 of 25 the section which it illustrates but equally it can neither curtail nor expand its ambit. ii. Illustration (c) to Section 127 also came up for consideration before the Division Bench of the Gujarat High Court in State Bank of India Vs. Smt. Kusum Vallabhdas Thakkar MANU/GJ/0303/1991. It was held that this kind of illustration would apply to a total stranger and volunteer who for no consideration whatsoever, agrees to pay in default of payment by the principal debtor. It was held that only in those cases the agreement would be void for being without consideration. In the facts of the case, it was held that anything done for the benefit of principal debtor is a sufficient consideration to the surety and owing to the relationship of the principal debtor and the creditor in that case, it was held that there was consideration and illustration (c) of Section 127 could not come in the way. Reference was also made to Chitty on Contracts-General Principles, 25th Edition, paras 176 and 177 where the promise not to enforce a valid claim against the debtor or a third person was held to be a sufficient consideration for a counter-promise by the debtor or a third person i.e to give security for the debt or to do some other act. iii. Reference may next be made to the judgment of the Division Bench of the Bombay High Court in Union Bank of India Vs. Avinash P. Bhonsle MANU/MH/0923/1991. A reference in this judgment was OMPs No.126&127/2001 Page 12 of 25 made to Aniruddha Mitra Vs. The Administrator General of Bengal MANU/PR/0013/1949 holding that the purpose of illustration is to illustrate the section, such illustrations should not be read as extending the meaning or restricting operation of the section, especially so, when the effect would be to curtail a right which the plain words of the section would confer; the Division Bench thus held that the language of Section 127 was clear and unambiguous and the sweep of its text could not be curtailed by using Illustration (c) to impose limitation on the expression "anything done or any promise made for the benefit of the principal debtor" that it should be done at the time of giving the guarantee. It was held that the language is wide enough to include anything that was done or a promise made before giving the guarantee. iv. The question also came before the Division Bench of Andhra Pradesh High Court in Y. Venkatachalapathi Reddy Vs. Bank of India MANU/AP/0481/2002. Reference in this regard was made to the definition of consideration in Section 2 (d) of the Contract Act as “when at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise." It was similarly held that there being no ambiguity in the language of OMPs No.126&127/2001 Page 13 of 25 Section 127, illustration „c‟ could not be read as abridging or explaining the same. v. Another Division Bench of the Gujarat High Court in State Bank of India Vs. Premco Saw Mill AIR 1984 Gujarat 93 held that it is a settled legal position that if the document is stating some wrong consideration, oral evidence can be given to show that real consideration was other than what has been stated in the document. In that case also the guarantee deeds were executed as if the payments were to be made to the principal debtor in future when in fact the loans had already been advanced and they were not to be advanced afresh at the time of or subsequent to the agreement of guarantee. So ex facie the consideration mentioned in the guarantee deed was incorrect. However, the court found that consideration for which the guarantee was given was in the knowledge of the parties and the language of the guarantee bond was held to be immaterial. vi. As far as this court is concerned, I find that a single judge in Rattantrya Dhari Jain Vs. S. Avtar Singh ILR (1971) Delhi 284 held that Section 128 of the Contract Act says that anything done or any promise made can be a sufficient consideration to the surety; this was held to mean the contract with principal debtor already created to be a sufficient consideration for the surety. It was also held that contracts should be interpreted in the light of OMPs No.126&127/2001 Page 14 of 25 the Latin Maxim “Ut res magis quam vel pereat” i.e. in such a way so as to make it valid. vii. Recently another single judge of this court in Madan Lal Sobti Vs. Rajasthan State Industrial Development and Investment Corporation Limited MANU/DE/9636/2006 also had occasion to consider the said provision. In that case also, as in this case, the execution of the documents was not disputed. The plea was that the documents were got executed by misrepresenting and concealing material facts; it was the case that the mortgage in that case was created much after the date of sanction and disbursement of the loan in favour of the borrower, without any further facility being advanced at that stage; the mortgage was thus alleged to be null and void for lack of consideration. It was the plea that the consideration for a contract can be passed only once and thus the additional guarantee cannot be legally claimed and enforced in law unless fresh consideration is given and which was not so given in that case. Reliance was also placed on illustration (c) to Section 127 of the Act. This court found that the mortgage in that case came into being after the issuance of demand letters and failure of the borrower to clear the dues. It was held to be obviously a case of creation of mortgage arising from forbearance to sue and thus it was held that the mortgage could not be said to be without consideration. The court held that the mortgage in that case being to secure forbearance to sue against the borrower, the OMPs No.126&127/2001 Page 15 of 25 mortgagor could not be permitted to defeat the rights of the creditor and the courts ought not to permit the same. Thus it will be found that this court also laid emphasis on existence of consideration rather than on whether the deed of guarantee was executed contemporaneously or subsequent to the consideration. Thus the view of this court is not different from that of