M/S.H.D.F.C vs Gautam Kumar Nag & Ors

and order dated August 9, 2005, of the Delhi High

Court by which it allowed the appeals of the two

respondents (defendant Nos.2 and 3 respectively

before the trial court), set aside the judgment and

decree passed by the trial court and permitted the

appellants to file their written statements within

four weeks from the date of the judgment, directing

further that the trial court would then proceed

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with the suit and dispose it of in accordance with

law.

2. The appellant M/s. Housing Development and

Finance Corporation (in short "HDFC") instituted a

suit under Order XXXVII of the Code of Civil

Procedure, 1908, for realisation of its dues

against defendant No.1 (the borrower; not before

this Court) and the two respondents (defendant

Nos.2 & 3) who were the guarantors to the loan.

According to the case of the appellant-plaintiff,

defendant No.1 who was the owner of a plot of land

approached the appellant-plaintiff for a loan for

constructing a house on the plot. The loan was

sanctioned on October 29, 1997, and on December 9,

1997, defendant No.1 executed the Loan Agreement

and a promissory note in favour of the appellant.

In addition, defendant No.1 also created an

equitable mortgage in favour of the plaintiff by

depositing the title deeds of the plot in question.

The other two defendants, respondents before this

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Court, stood guarantee for repayment of the loan

and executed the letters of guarantee on December

9, 1997. On the execution of the necessary

documents the loan was disbursed to defendant No.1

in two instalments.

3. The loan amount, along with interest at the

rate of 15% per annum was to be repaid in equalised

monthly instalments over a period of 180 months and

in case of default, according to the terms of the

loan, the outstanding would attract additional

interest @ 18% per annum.

4. The defendants defaulted in payment of the

EMIs and as a result, a large sum was outstanding

against them. The defendants did not pay the

instalments despite letters and reminders. Hence,

the plaintiff invoked the guarantees vide letter

dated October 22, 1998, and intimated the two

respondents that in case of failure to make the

payment, legal proceedings would be instituted

against them. Despite the aforesaid letter and

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legal notices sent on behalf of the appellant, the

defendants did not pay the outstanding amount of

Rs.4,37,350/-, and the plaintiff was thus left with

no option but to institute the suit for realisation

of its dues.

5. Defendant No.1 did not appear in the suit

despite notice. The two defendants-respondents,

however, appeared before the trial court and filed

separate applications under Order XXXVII Rule 3

sub-rule (5) of the Code of Civil Procedure for

permission to defend the suit.

6. The defendants' applications were based on a

number of grounds but we may only advert to the one

that seems to have weighed with the High Court. It

was contended on behalf of the respondents that

since the plaintiff-appellant had got a promissory

note executed in its favour by the borrower-

defendant No.1 and had further made the borrower

create an equitable mortgage in its favour by

deposit of title deeds, they would be absolved of

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their liability in terms of Section 139 of the

Contract Act. According to the respondents, their

plea gave rise to a triable issue and they,

accordingly, sought permission to file their

written statements and contest the suit. The trial

court by its judgment and order examined all the

pleas, including the one based on Section 139 of

the Contract Act and found and held that none of

the pleas raised by the defendants gave rise to any

substantial defence against the claim of the

plaintiff. Accordingly, it dismissed the petitions

filed by the defendants-respondents by order dated

April 29, 2005, and proceeded to decree the suit of

the appellant-plaintiff for a sum of Rs.4,54,669/-

along with cost and pendente lite and future

interest @ 10% per annum on the decretal amount

from the date of filing of the suit till the date

of realization.

7. In appeal the Delhi High Court, as noted above,

set aside the order and decree passed by the trial

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court and directed it to allow the defendants-

respondents to file their written statement and

proceed to try the suit from that stage. The High

Court noted that relying upon Section 139 of the

Contract Act, a contention was raised by the

respondents that for recovery of its loan from

defendant No.1, the principal borrower, the

plaintiff should have taken recourse first by

either seeking to give effect to the promissory

note or by enforcing the equitable mortgage.

Neither of these remedies which were open to the

plaintiff were taken recourse to and the recovery

was sought to be made straightaway from the

appellants. The High Court further held that the

trial Judge fell into error in holding that Section

139 of the Contract Act had no application to the

facts of the case. According to the High Court,

this was beyond the scope of deciding an

application for leave to defend. The High Court

observed that the question was not about the

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correctness or otherwise of the defence raised by

the appellants and what was required to be looked

into by the trial Judge was whether a triable issue

was made out or not. If a triable issue was made

out, then leave to defend ought to have been

granted and thereafter the defence raised by the

appellants could have been adjudicated on merits.

The correctness of the defence raised by the

defendants could not have been looked into by the

trial Judge at the time of deciding the application

for leave to defend. In support of its view, the

High Court relied upon a decision of this Court in

M/s Mechelec Engineers & Manufacturers v. M/s Basic

Equipment Corporation, (1976) 4 SCC 687.

8. In our view, the High Court was completely

wrong in holding that the respondents were able to

make out a triable issue on the basis of Section

139 of the Contract Act. It is well established

that the liability of the guarantor is equal to and

co-extensive with the borrower and it is highly

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doubtful that the guarantor can avoid his liability

simply on the basis of the promissory note made out

or an equitable mortgage created by the borrower in

favour of the lender. However, in the facts of this

case, this question does not even arise. A

reference to the deed of guarantee executed by the

two respondents would have made the position

completely clear but unfortunately the attention of

the High Court was not drawn to the relevant

clauses in the deed of guarantee.

9. The two respondents executed identical deeds of

guarantee of which clauses (2) and (3) read as

follows:-

"(2) I hereby accord my consent to the

terms of the said Loan Agreement and/or

any instrument or instruments that may

hereafter be executed by the Borrower/s in

your favour as aforesaid, being by mutual

consent between you and him/them in any

respect varied or modified without

requiring my consent or approval thereto

and I agree that my liability under this

Guarantee shall in no manner be affected

by such variations and modifications and I

expressly give up all my rights as surety

under the provisions of the Indian

Contract Act, 1872 in that behalf.

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(3) You shall have the fullest liberty

without in any way affecting this

Guarantee and discharging me from my

liability thereunder to postpone for any

time or from time to time the exercise of

any power of (sic.) powers reserved or

conferred on you by the said Loan

Agreement or any instrument or instruments

that may hereafter be executed by the

Borrower/s in your favour and to exercise

the same at any time and in any manner and

either to enforce or forbear to enforce

payment of principal or interest or other

monies due to you by the Borrower/s or any

of the remedies or securities available to

you or to grant any indulgence or facility

to the Borrower/s AND I SHALL not be

released by any exercise by you of you

(sic.) liberty with reference to the

matters aforesaid or any of them or by

reason of time being given to the

Borrower/s or of any other forbearance,

act or omission on your part or any other

indulgence by you to the Borrower/s or by

any other matter or thing whatsoever which

under the law relating to sureties would

but for this provision have the effect of

so releasing me AND I hereby waive all

suretyship an (sic.) other rights which I

might otherwise be entitled to enforce or

which but for this provision have the

effect of releasing me."

(emphasis added)

10. In light of the expressed stipulations, in the

guarantee, any reliance on Section 139 of the

10 Contract Act is evidently futile and of no avail.

In our view, therefore, the impugned judgment of

the High Court is unsustainable and is fit to be

set aside. We, accordingly, set aside the impugned

judgment of the High Court and restore the order

and decree passed by the trial court.

11. In the result the appeal is allowed but in the

facts of the case, there will be no order as to

costs.

...............................................................J.

(Aftab Alam)

...............................................................J.

(Ranjana Prakash Desai)

New Delhi;

January 20, 2012.