# or·~- INDUSTRIAL FINANCE CORPORATION OF INDIA LTD v. THE CANNANORE SPINNING AND WEA YING MILLS LTD. AND ORS

- **Citation:** [2002] 2 S.C.R. 1093
- **Court:** Supreme Court of India
- **Decided:** 2002-04-12
- **Case number:** Civil Appeal No. 3239 of 1995
- **Bench:** Umesh C. Banerjee, Y.K. Sabharwal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/or-industrial-finance-corporation-of-india-ltd-v-the-cannanore-spinning-and-wea-18414
- **Pages:** 29

## Headnote

Contract Act, 1872: Section 56, 139, 140 and 141.
B
Principal Debtor obtained loan from creditor-Default in payment of C
instalments-Nationalisation of sick units-Contract of Guarantee between
creditor and sureties-Discharge o~Held, Guarantor/surety has strict liability
towards creditor and creditor's right of action against surety is presumed
unless such discharge is· through the voluntary act of creditor without the
consent of the surety/guarantor-Sick Textile Undertakings (Taking over of D
Management) Act, 1972--Sick Textile Undertakings Nationalisation Act, 1974Sections 5 and 29.
Doctrine of Frustration-Applicability of-Held, it cannot be invoked as
principal debtor failed to pay to the creditor the entire sum due-On facts
held, Guarantee stands invoked since the contract of guarantee is an E
independent contract having no correlation with the Nationalisation Act.
Interpretation of Statutes : Legislation-Where the words are clear the
Court cannot demur the same on the ground that Legislature must have intended
them otherwise.
Legal Maxims :
"Lex non cogit ad impossiblia"; "impotentia excus'at Legem"; "nemo
tenetur ad impossibilia"-Meaning and applicability of
F
Respondent-Mills, the principal· Debtor, had approached the Industrial G
Financial Corporation for loan to set up new units. Principal Debtor had
. deposited the title deeds and also executed a deed of hypothecation in respect
of movable assets and promissory note for the entire loan amount. Besides,
Principal Debtor-1st Respondent also executed a mortgage deed for the entire
loan amount as security for the repayment of the loan which also included H
1093
1094
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A Deferred Payment Guarantee (DPG) facility. This was followed by an
equitable mortgage by the deposit of title deeds by the Debtor as security for
DPG facility in addition to promissory note for the said amount. Defendants
· 2 to 6 and· one K.D. (Since deceased), executed a deed of mortgage in their
individual capacity as surety for joint and several liability. They also executed
B a deed of counter guarantee in their individual capacity undertaking a joint
and several liability for the prompt repayment of loan instalments. According
to the Creditor-plaintiff, the conditions of guarantee inter alia contained a
clause that the guarantee would stand enforceable against defendants 2 to 6
and K.D. notwithstanding the security specified in the security documents or
any of them. Subsequently, at the request of the principal debtor-first
C defendant, plaintiff revised the schedule of repayment.
In the meanwhile, there was devaluation of Indian rupee which increased
the liability of the plaintiff under the DPG and contingent liability on account
of default of the defendant was also increased. The 1st defendant-principal
debtor repaid certain amount towards the loan .and also towards interest
D under the DPG. The Central Government took over the management of the
Mills of Defendant No.1 under the Industrial Development and Regulation
Act. The foreign supplier' invoked the DPG against the Plaintiff as the first
defendant defaulted in payment of further instalments. First defendantprincipal debtor acknowledged the liability but failed to repay. However,
E Defendants 2 to 6 the sureties, repudiated their liability.
Further, with the enactment of the Sick Textiles Undertaking
(Nationalisation) Act, two of the units of Defendant No. 1-Principal Debtor
were nationalised. Therefore, properties and management of these Units stood
transferred and vested in the Central Government, free from all
F encumbrances and charges. But in view of Section 6 of the Act, the liabilities
of the first Defendant continued and remained alive and therefore, enforceable
against the first defendant. Defendants 2 to 6 and K.D. served as Agents
. between the plaintiff and the first defendant-Company. Creditor-plaintiff filed
a suit preferring the claim before the trial court in terms of Nationalisation
Act. Tri

## Text

_Characters 0–39,895 of 75,097. This is a partial read: ask again with offset=39895 for what follows._

or·~-
INDUSTRIAL FINANCE CORPORATION OF INDIA LTD.
A
v.
THE CANNANORE SPINNING AND WEA YING
MILLS LTD. AND ORS.
APRIL 12, 2002
[UMESH C. BANERJEE AND Y.K. SABHARWAL, JJ.]
Contract Act, 1872: Section 56, 139, 140 and 141.
B
Principal Debtor obtained loan from creditor-Default in payment of C
instalments-Nationalisation of sick units-Contract of Guarantee between
creditor and sureties-Discharge o~Held, Guarantor/surety has strict liability
towards creditor and creditor's right of action against surety is presumed
unless such discharge is· through the voluntary act of creditor without the
consent of the surety/guarantor-Sick Textile Undertakings (Taking over of D
Management) Act, 1972--Sick Textile Undertakings Nationalisation Act, 1974Sections 5 and 29.
Doctrine of Frustration-Applicability of-Held, it cannot be invoked as
principal debtor failed to pay to the creditor the entire sum due-On facts
held, Guarantee stands invoked since the contract of guarantee is an E
independent contract having no correlation with the Nationalisation Act.
Interpretation of Statutes : Legislation-Where the words are clear the
Court cannot demur the same on the ground that Legislature must have intended
them otherwise.
Legal Maxims :
"Lex non cogit ad impossiblia"; "impotentia excus'at Legem"; "nemo
tenetur ad impossibilia"-Meaning and applicability of
F
Respondent-Mills, the principal· Debtor, had approached the Industrial G
Financial Corporation for loan to set up new units. Principal Debtor had
. deposited the title deeds and also executed a deed of hypothecation in respect
of movable assets and promissory note for the entire loan amount. Besides,
Principal Debtor-1st Respondent also executed a mortgage deed for the entire
loan amount as security for the repayment of the loan which also included H
1093
1094
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A Deferred Payment Guarantee (DPG) facility. This was followed by an
equitable mortgage by the deposit of title deeds by the Debtor as security for
DPG facility in addition to promissory note for the said amount. Defendants
· 2 to 6 and· one K.D. (Since deceased), executed a deed of mortgage in their
individual capacity as surety for joint and several liability. They also executed
B a deed of counter guarantee in their individual capacity undertaking a joint
and several liability for the prompt repayment of loan instalments. According
to the Creditor-plaintiff, the conditions of guarantee inter alia contained a
clause that the guarantee would stand enforceable against defendants 2 to 6
and K.D. notwithstanding the security specified in the security documents or
any of them. Subsequently, at the request of the principal debtor-first
C defendant, plaintiff revised the schedule of repayment.
In the meanwhile, there was devaluation of Indian rupee which increased
the liability of the plaintiff under the DPG and contingent liability on account
of default of the defendant was also increased. The 1st defendant-principal
debtor repaid certain amount towards the loan .and also towards interest
D under the DPG. The Central Government took over the management of the
Mills of Defendant No.1 under the Industrial Development and Regulation
Act. The foreign supplier' invoked the DPG against the Plaintiff as the first
defendant defaulted in payment of further instalments. First defendantprincipal debtor acknowledged the liability but failed to repay. However,
E Defendants 2 to 6 the sureties, repudiated their liability.
Further, with the enactment of the Sick Textiles Undertaking
(Nationalisation) Act, two of the units of Defendant No. 1-Principal Debtor
were nationalised. Therefore, properties and management of these Units stood
transferred and vested in the Central Government, free from all
F encumbrances and charges. But in view of Section 6 of the Act, the liabilities
of the first Defendant continued and remained alive and therefore, enforceable
against the first defendant. Defendants 2 to 6 and K.D. served as Agents
. between the plaintiff and the first defendant-Company. Creditor-plaintiff filed
a suit preferring the claim before the trial court in terms of Nationalisation
Act. Trial Court decreed the suit in favour of plaintiff-creditor. Aggrieved,
G defendants-principal debtor and sureties moved the High Court.)ligh Court
held that the suits against sureties must fall Hence this appeal
The appellant inter a/ia contended that the factum of liability of the
security being co-extensive with that of principal debtor discharge of principal
H debtor by operation of law does not absolve the surety of his liability.
-
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INDUSTRIAL FINANCIAL CORPN. 01' IND I AL TD. v CANNANORE SPINNING AND WEAVING MILLS LTD
1095
Allowing the appea~ the Court
A
HELD : 1.1. A plain reading of the Contract of Guarantee reveals that
it does not provide any contra note pertaining to the liability of the surety so
as to create an exception within the meaning of Section 128 of the Indian
Contract Act (ll 10-E, F)
B
1.2. It is noted from the Contract of guarantee that though it is not a
contract regarding a primary transaction, but it is an independent transaction
containing independent and reciprocal obligations. It is on principal to
principal basis and by reason whereof the Statute has provided both the
~
creditor and the guarantor some relief as specified in the contract Act Section c
,
141 thus involves an issue of deliberate action on the part of the creditor and
not a mere fortuitous situation beyond the control of the creditor.
[lll4-D-E,)
China and South Sea Bank Ltd v. Tan. (1989) 3 All ER 839 and Ha/sbury's
Laws of England, Fourth Edition (para 335), referred to.
D
1.3. The liability of the guarantor cannot but be stated to be a strict
liability and even if the priQcipal debtor is discharged from his liability unless
such discharge is through the act of the creditor without consent of the surety/
guarantor, the creditor's right of action against the surety is preserved.
(1116-E) E
State Bank of Saurashtra v. Chitranjan Rangnath Raja and Anr., [1980) 4
SCC 516 and State of Madhya Pradesh v. Kaluram, [1967) l SCR 266 AIR
(1967) SC ll 05, distinguished .
• •
Krishan Ta/war v. Hindustan Commercial Bank Ltd and Anr., AIR (1957) F
Punjab310 and Reesv. Barrington Whiteand Tudor's L.C. 4th, Edn. atP. 1002,
referred to.
2.1. There can be no doubt that a man may by an absolute contract
bind himself to perform acts which subsequently becomes impossible, or to
pay damages for the non-performance and the interpretation is to be placed G
upon an unqualified undertaking, where the event which causes the
impossibility was or mighthave been anticipated and guarded against in the
contract, or where the impossibility arises from the act or default of the
-
promissor. But where the event is of such a character that it cannot reasonably
..
be supposed to have been in the contemplation of the contracting parties when
the contract was made, they will not be held bound by general words which, H
1096
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A though large enough to include, were not used with reference to the possibility
of the particular contingency which afterwards happened. It is on this
principle that the act of God is in some cases said to excuse the breach of a
contract. (1112-A-CJ
2.2. Where the law creates a duty or charge, and the party is disabled
B to perform it, without any default in him, and has no remedy over, there the
law will in general excuse him and though impossibility of performance is in ·
general no excuse for not performing an obligation which a party has expressly
undertaken by contract, yet when the obligation is one implied by law,
impossibility of performance is a good excuse. (1112-F, G]
c
Broom's Legal Maxims, referred to.
2.3. The fact situation in the instant case has to be assessed to ascertain
existence of such impossibility or not. The rights created under Statute cannot
stand obliterated without cogent reasons and not on mere frivolity. In any
D event, the right conferred in terms of a deed of guarantee cannot but be stated
to be an independent right which stands recognised by the Statute and thus
cannot in any manner be whittled down without a just cause. [1113-B, CJ
2.4. The Contract Act itself has recognised the doctrine of frustration
and encompassed within its ambit an exhaustive arena of force majeure under
E which non-performance stands excused by reason of an impediment beyond
its control which could neither be foreseen at the time of entering into the
contract nor can the effect of the supervening event could be avoided or
overcome. (1119-B, CJ
F
Naihati Jute Mills v. Khyaliram, AIR (1968) SC 522, relied on.
F.A. Tamplin Steamship Co. Ltd v. Anglo-Maxican Petroleum Products Co.
Ltd, (1916) 2 AC 397 and Davis Contractors v. Fareham U.D.C., (1956) AC
696, referred to.
2.5. On a true perspective of Section 56 of the Contract Act, three
G essential conditions appear to be the realistic interpretation of the Statute,
the conditions being (i) a valid and subsisting contract between the parties;
(ii) there must be some part of the contract yet to be performed; and (iii) the
contract after it is entered into becomes impossible of performance. Leaving
aside the first condition, the second and the third one cannot have any manner .
H of application in the contextual facts of the instant case. [1120-B, CJ
--
-
....
INDUSTRIAL FINANCIAL CORPN. Of INDIA l. TD. v CANNANORE SPINNING AND WEA \!ING M!l.LS LTD
I 097
3. The intent of the Law makers is quite candid and apparent by reason A
of the particular use of expression to wit, (i) 'or without the consent of the
surety'; and (ii) 'parts with such security'. 'if creditor loses' has to be
attributed a meaning that is to say without there being any voluntary act on
the part of the creditor, it cannot possibly be said to be in unison with the
other part of the Statute-obviously it shall have to be read as a voluntary act B
by reason whereof he loses the security and which thus tantamount to be
without the consent of the 'surety' and the coma read in its proper sphere
after the word 'loses' and 'surety' stands out to be significant since the same
qualifies only the latter part of the second limb, namely, parting with such
security. The expression 'creditor loses' cannot mean and imply an involuntary
act but by reason of an act which is attributable to the creditor. The second C
alternative, parting with security without the knowledge of the surety is a
contra situation, but affords a meaning to the words used in the first para, to
wit 'the creditor loses'. Section 141 of the Contract Act would lose its efficacy
and the Act would render itself totally nugatory. A definite volition is required
to come within the ambit of Section 141. The heading of Section 141 also lends
assistance in interpreting the statutory intent since heading always serves as D
a guide to depict the intention. [1113-F, H; 1114-A-C[
4. A bare perusal of some of the provisions of the Sick Textile
Undertakings (Nationalisation) Act will indicate that there is no discharge of
the liability of principal debtor, leave alone that of surety. Sections 3, 4, 5 E
and 20 of the Act, if read together, would depict that the liability of the owner
of the undertaking/the debtor continues and it is only that the claim against
the security which stands discharged by reason of the statutory shift of the
charge on to the compensation. The liability of the principal debtor does not
in any way come to an end, neither that of the guarantor. 11116-F, GJ
Punjab National Bank v. State of UP. and Ors., relied on.
Pradip Chandra Parija and Ors. v. Pramod Chandra Patnaik and Ors.,
[2002) 1 sec 1, followed.
5.1. When the words of the Legislation are clear, Court must give effect
F
to them as they stand and cannot demur on the ground that the Legislature G
must have intended otherwise. [1118-H)
5.2. In the instant case, the provision of the Nationalisation Act are
otherwise clear and categorical as to the extent of its applicability and the
state of affairs upon introduction of the Legislation need not dilate thereon.
[1119-AJ H
1098
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A
Patheja Bros. Forging and Stamping andAnr. v. ICICI Ltd and Ors., [2000]
6 sec 545, relied on.
6. On introduction of the Sick Textile Undertaking (Nationalisation) Act,
1974 in terms ofwhich the entire assets stand vested has been taken recourse
to as the supervening event and the contract of guarantee has thus become
B incapable of being performed for reasons beyond the control of the
guarantors, having due regard to the statutory provisions, as appears from
Section 141 of the Contract Act-undoubtedly the shift and variation cannot
but be attributed to be well imagined but irrespective of the same and in either
of the situations (i.e. the plea before the High .GOurt or the plea before this
C Court),· the doctrine of frustration as envisaged in terms of Section 56 of the
Contract Act does not and cannot have any manner of application in the
contextual facts. It is on the failure of the principal debtor to pay the entire
s~m due, the guarantee stands invoked-the Contract of Guarantee has no corelation with that of the Nationalisation Act neither is dependent thereon: it
is an independent contract and in all fairness has to be honoured to fulfil the .
D contractual obligation between the surety and the creditor.
[1120-G, H; 1121-A, BJ
7. A Civil Suit stands filed and thereafter the claim preferred before
the Commissioner of Payments in. terms of the Nationalisation. The right of
a claimant to proceed before the Commissioner and to file a suit to recover
E the amount due to him cannot be taken away, though the Claimant would
not be entitled to recover any amount at both the ends. The filing of the Civil
Suit thus is not barred. [1121-D, E]
Oriental Coal Co. Ltd., Calcutta v. Mis. Mohan/al Kishanlal and Anr., AIR
F (1984) Born. 174 and Barakar Coal Co. Ltd. v. N.C. Mehta 81 Cal WN 380:
AIR (1977) NOC 198 (Cal), approved.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3239 of
1995.
G
From the Judgment ahd Order dated 18.1.94 of the Chennai High Court
in O.S.A. No. 200 of 1994.
C.A. Sundaram, Ms. Anuradha Dutt, Ms. Ekta Kapil and Ms.
Vijayalakshmi Menon for the Appellant.
Mahendra Anand, Roy Abraham, Ms. Baby Krishnan, Rajiv Mehta,
H R. Rahim and Ms. Anita Pandey for the Respondents.
- ...
., -
-.
INDIJSTRJAL FINANCIAL CORPN OF INDIA L TO. e CANNANORE SPINNING AND WEAVING MILLS LTD. [BANERJEE. J.) 1 099
The Judgment of the Court was delivered by
A
BANERJEE, J. The general rule of equity expounded by Sir Samuel
Romilly as counsel and accepted by the Court of Chancery in Crythorne v.
Swinburne, (1807) 14 Yes. 160, that the surety will be entitled to every
remedy which the creditor has against the principal debtor, including the
enforcement of every security stands statutorily recognised and incorporated B
in Section 141 of the Indian Contract Act as regards the discharge ofa surety
from liability, when the creditor parts with or loses the security held by him
with, however, an insignificant variation to the effect that the surety is entitled
"
to the securities given to the creditor, both before and after the contract of
surety.
It is on this score thus Section 141 of the Act ought to be noticed at
some length more so by reason of the same being the sheet-anchor in support
c
of Respondents' presentation before this Court in the instant appeal to the
effect that the surety is entitled to the securities given to the creditor, both
before and after the contract of surety and in the event the same stands D
dissipated then and in that event there is cessation of liability to the extent
of such dissipation or extinction. An indeed bold proposition but the same
stands accepted by the High Court and hence the appeal before this Court."
Before, however, adverting to the issue as above, it would be rather convenient
to note certain decisions of this Court as well as of the English Court for
further appreciation of the matter.
E
In State of Madhya Pradesh v. Ka/uram [1967] I SCR 266 ~AIR 1967
SC 1105) this Court pointedly stated that the expression "security" in the
Section is not used in any technical sense; it includes all rights which the
creditor has against the property on the date of the contract. In Kaluram
(supra) this Court also lent its approval of Hannen, J. in Wu!ff and Billing v. F
Jay, (1872) 7 QB 756, wherein the learned Judge stated the law as follows:-
" .......... ! take it to be established that the defendant became surety
upon the faith of there being some real and substantial security pledged,
as well as his own credit, to the plaintiff; and he was entitled, therefore, G
to the benefit of that real and substantial security in the event of his
being called on to fulfil his duty as a surety, and to pay the debt for
which he had so become surety. He will, however, be discharged
from his liability as surety if the creditors have put it out of their
power to hand over to the surety the means of recouping himself by
the security given by the principal. That doctrine is very clearly H
'A
B
c
D
E
F
G
H
1100
SUPREME COURT REPORTS
[2002] 2 S.C.R.
expressed in the notes in Rees v. Barrington, 2 White and Tudor's
L.C., (4th Ed.) at p. 1002 'As a surety, on payment of the debt, is
entitled to all the securities of the creditor, whether he is aware of
their existence or not, even though they were given after the contract
of suretyship, ifthe creditor, who has had, or ought to have had, them
in all full possession or power, loses them or permits them to get into
the possession of the debtor, or does not make them effectual by
giving proper notice, the surety to the extent of such security will be
discharged. A surety, moreover, will be released if the creditor, by
reason of what he has done, cannot, on payment by the surety, give
him the securities in exactly the same condition as they formerly
stood in his hands"' - and it is on this score this Court, relying on the
aforesaid, in Kaluram (supra) observed that "The surety is entitled on
payment of the debt or performance of all that he is liable for to the
benefit of the rights of the creditor against the principal debtor which
arise out of the transaction which gives rise to the right or liability.
The surety is therefore on payment of the amount due by the principal
debtor entitled to be put in the same position in which the creditor
stood in relation to the principal debtor. If the creditor has lost or
parted with the security without the consent of the surety, the latter
is by the express provision contained in Section 141, discharged to
the extent of the value of the security lost or parted with. "
(Emphasis Supplied)
At this juncture, it would also be convenient to note the true effect of
Sections 139 and 140 of the Indian Contract Act, 1872 as 'well, which read
as under:
"139. Discharge of surety by creditor's act or omission impairing
surety's eventual remedy. If the creditor does any act which is
inconsistent with the rights of the surety, or omits to do any act which
his duty to the surety requires him to do, and the eventual remedy of
the surety himself against the principal debtor is thereby impaired,
the surety is discharged.
140. Rights of surety on payment or performance. -Where a guaranteed
debt has become due, or default of the principal debtor to perform a
guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights
which the creditor had against the principal debtor."
INDUSTRIAL FINANCIAL CORPN OF INDIA L TO 1• CANNANORE SPINNING AND WEA VINO MILLS LTD_ [BANERJEE. J.J
} } 0}
A reference to a Full Bench judgment of the Madras High Court at this A
juncture would also be very apposite. In A.L.S.P.Pl. Subramania Chettiar (d)
and Anr. v. Moniam P. Narayanaswami, AIR (1951) Madras (FB) 48) , the
.....
High Court stated in paragraph 12 as below :
"Unhampered by judicial decisions also, on a fair reading of the
provisions of the Contract Act, I am inclined to 'hold that as the B
liability of the surety is co-extensive with that of the principal debtor,
if the latter's liability is scaled down in an amended decree, or
otherwise extinguished in whole or in part by statute, the liability of
the surety also is pro tanto reduced or extinguished. Paragraph 192 of
Halsbury's Laws of England, Vol. 16, 1935 Edn., contains the c
following passage :
"Whatever expressly or impliedly discharges the principal debtor from
liability usually discharges the surety also by implication, as his
position is thereby altered without his consent, notwithstanding that
the alteration is accomplished by operation of law. He is therefore D
discharged where he can establish that the alteration changes the
nature of his liability, but not otherwise."
This shows that extinction of a debt in whole or in part by operation
of law will do, and that the creditor need not take any part in realising
the principal debtor from his liability. Mr. Ramachandra Aiyar relied E
on a passage in para 195 which runs as follows :
"Though an alteration in the position of the surety by the principal
debtor's discharge, or otherwise, accompanied by the operation of
law, may discharge him this is not always the case."
But this passage will not, in my opinion, help the appellant in this F
case as the exceptions given there relate to the release of the principal
debtor's liability under the law of limitation, bankruptcy laws, etc.
(which merely bar the remedy) and not to the extinction of the principal
debtor's liability, as here under the Madras Agriculturists' Relief Act."
Having noted the decisions as above it would be rather convenient to G
have the factual details at this juncture since facts are required to be assessed
~-
in its proper prospective and while assessing the same if it is so found that
the assessment of the factual matrix fully fits in with the statutory requirement
noticed hereinbefore no exception can be taken to the judgment under appeal.
Let us thus refer the facts as below:
H
1102
A
B
c
D
SUPREME COURT REPORTS
[2002) 2 S.C.R.
(a) Presently we are not called upon to dilate in detail the factual
element, excepting where it is so required by reason of the decree
obtained by the plaintiff/appellant for the balance of principal and
interest treating the principal and interest as on 31.3 .197 4 l\S Rs.
48,50,000 and Rs. 22,36,707.95 with subsequent interest at the contract
rate with"out penal rate of interest from 1.4.1994, with proportionate
costs.
(b) The Trial Court resolved almost every issue in favour of the
plaintiff except however as regards the issue of penal interest decreed
the suit as noticed above.
( c) The decree however stood challenged by the respondent herein
inter alia on two several counts: the first being the factum of
intervention of law to wit the Nationalisation Act and on the second
the existing provisions of Sections 140 and 141 of the Contract Act:
The High Court however answered the same in the affirmative and in
favour of the defendants in the suit and hence the petition for special
leave before this Court and the subsequent grant of leave by this
Court.
Incidentally, the introduction of the ~ationalisation Act has obviously
weighed with the High Court in particular the mechanism provided in terms
E of Sections 20 and 21 of the Act.
F
G
H
Before however adverting thereto certain further factual details ought
to be noticed for correct appreciation of the matter in its proper perspective.
The facts disclose:
Having intended to set up another spinning unit at Mahe (Pondicherry
State), the first respondent approached the appellant/plaintiff for
financial assistance and obtained sanction for Term Loan Facility for
Rs. 35,00,000. Pending !~gal formalities, the appellant/plaintiff granted
Rs. 15,00,000 as interim loan on 25.3.1963 on. which date the first
respondent deposited the title deeds of certain immoveable properties
with the plaintiffs branch at Madras and thus, agreed to create an
equitable mortgage thereby. The first respondent also executed a deed
of hypothecation in respect of moveable assets such as plant,
machineries, etc. and a promissory note for the said amount of Rs.
15,00,000. This, however, later was merged in the Term Loan amount
of Rs. 35,00,000 secured by a deed of mortgage executed by the first
,-·
I
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1
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INDUSTRIAL FINANCIAL '.::ORPN. OF INDJA LTD. v. CANN A NORE SPINNING AND WEAVING MILLS LTD. [BANERJEE. J.1
} } 03
respondent on 2.5.1963. The first respondent executed a legal mortgage A
under a document registered with the then Notary of Pondicherry as
security for the repayment of the entire term lean of Rs. 35,00,000 on
30.4.1963, which also included the deferred payment guarantee facility
of Rs. 5,62,230.40. This was followed by an equitable mortgage by
the deposit of title deeds in respect of the moveables at Cannanore as B
security for the Deferred Payment Guarantee facility for Rs.
5,62,230.40 on 3.8.1963, in addition to a promissory note for the said
amount. The first defendant also executed bipartite agreement
embodying the terms and conditions contained in the memorandum
of final terms and conditions for the Deferred Payment Guarantee
amount.
That Defendants 2 to 4 in suit and one K. Damodaran (since deceased)
executed a deed of mortgage in their individual capacity guaranteeing joint
c
and several liability for the repayment of the loan advanced to the first·
defendant under the deed of guarantee dated 25.3.1963. On 8.12.1964
defendants 2 to 4 and Damodaran and defendants 5 to 6 executed a similar D
deed of guarantee for the total sum of Rs. 52,00,000; Rs. 17,00,000 having
been granted as further Term Loan by the plaintiffs. Defendants 2 to 6 and
K. Damodaran also executed a deed of counter guarantee in their individual
capacity undertaking a joint and several liability for the prompt repayment of
the instalments by the first defendant on 3.8.1963. Defendants 5 to 6 also E
executed a separate deed of counter guarantee on 29.4.1965. According to
the plaintiff, the conditions of counter guarantee contained inter alia a clause
that the guarantee would stand enforceable against defendants 2 to 6 and late
K. Damodaran, notwithstanding that the security specified in the security
documents or any of them, be outstanding and unrealised from the principal
debtors.
i:;'
According to the plaintiff, they granted additional loan of Rs. 17,00,000
to meet the urgent financial need of the first defendant on the same terms and
conditions as contained in the rnemorandum dated 2.11.J 964. The first
defendant executed a deed of further charge dated 4.5.1965 once again creating G
a mortgage. This document created a mortgage over Mahe unit and another
deed of further charge dated 29.4.1965 over its Cannanore Unit. Defendants
2 to 6 and late K. Damodaran also executed a personal. guarantee on 8.12.1964
undertaking a joint several liability to repay the sum of Rs. 62,00,000. Out
of the second loan of Rs. 17,00,000; Rs.13,00,000 were paid on 8.12.1964
and Rs. 6,00,000 were paid on 2.6. 1965 at Madras. At the request of the first H
1104
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A defendant, on their representations about the financial difficulties, the plaintiff
revised the schedule of repayment with effect from 15.10.1966 under four
separate deeds of modifications dated 31. 7. 1968; 31. 7 .1968; 27. l.l 970 and
27.1.1970 respectively.
Indian Rupee was devalued on 6.6.1966 which increased the liability of
B the plaintiff under the Deferred Payment Guarantee by Rs. 2,37,580.33.
According to the plaintiff, in terms of the bi partite agreement read with
amendatory agr,eement, the above increase also became the liability of
defendants l to 6, for which the plaintiff again obtained an equitable mortgage
by deposit of title deeds pertaining to the Cannanore and Mahe Units on
C l l. 7.1970. The total contingent liability on account of the default at that time
was worked out at Rs. 1, 11, 199 .11 the total Deferred Payment Guarantee
thus increased to Rs. 6, 73,429 .51.
The plaintiff-corporation has stated that the first defendant repaid only
Rs. 3,50,000 towards the first loan and the additional loan advanced by the
D plaintiff and certain amounts towards interest due on the two loans and under
the Deferred Payment Guarantee, the total interest paid was Rs. 16,03,224.47.
The Central Government, however, took over the management of Mahe and
Cannanore Units under the Industrial Development and Regulation Act. The
foreign suppliers involred the Deferred Payment Guarantee against the Plaintiff,
E as the first defendant paid instalments under the Deferred Payment Guarantee
contract to the foreign suppliers upto January, 1972 and thereafter defaulted
to pay any installment. As a result of this default of the first defendant, the
plaintiff was obliged to make the installment payment to the foreign suppliers.
According to the plaintiff, the first defendant acknowledged the liability
F but failed to repay. Defendants 2 to 6, however, repudiated their liability on
21.12.1974 .
Incidentally, the Sick Textile Undertakings (Nationalisation) Ordinance
was promulgated under which the two Units of the first defendant at Cannanore
G and Mahe were nationalised. The Ordinance was replaced by Act 57of1974.
All properties and the management of the undertakings of the first defendant
stood transferred and vested in the Central Government free . from all
encumbrances and charges with effect from 1.4.1974. But, in terms of Section
6, according to the plaintiff-corporation of the said Act, the liabilities of the
first defendant incurred prior to 1.4.1974 continue and remain alive and
H enforceable against the first defendant.
J..
INOUSTRJALFINANClfJ..COl\J'N. Of INl>IA LTD.•. CANNANORESPINNING ANO WEAVING MILLS LTD. [BANEIUEE, J.J 11 OS
The first defendant had not filed any written statement. Defendants 2 A
to 6 together, defendants 4 and 5 together and third defendant alone, filed
their respective written statement, the common defence being that the
documents allegedly executed by them were all executed only in their capacity
as the Directors of the Company. Late Damodaran and defendants 2 to 6
were partners of the finn Messrs Damodaran and Company, which functioned
as the Managing Agents of the first defendant Company till 31.1.1966. The B
system of Managing agents, however, was discontinued with effect from
31.3.1966 in accordance with the provisions and notifications under the
Companies Act, 1956. The only business task which the finn of defendants
2 to 6 and Damodaran carried on was the business of working of the first
defendant Company. According to these defendants, the bargaining task of C
the transactions between the first defendant and the plaintiff-Corporation was
the relationship of managing agency existing between the firm Damodaran &
Co. and the first defendant-Company. The statutory termination of the
managing agency system and consequential severance of relationship between
the firm Damodaran & Co. and the first defendant-company resulted in
frustration of the contract between the plaintiff on the one hand and the D
defendants 1 to 6 on the other. Thus, according to these defendants, the
contractual obligations have become incapable of being performed in the
same capacity in which the parties entered into contract with the plaintiff.
Their further case is that the first defendant-Company has not defaulted till
they were in the capacity of Managing Agents of the Company. Only after .E
the termination of the managing agency system, the business of the first
defendant-Company suffered seriously and the first defendant became a
defaulter from 15. l 0.1968. Apart from technical grounds, these defendants
have alleged that the plaintiff is guilty of gross prejudice of the various terms
and conditions of the deed of mortgage and the deeds of first charge which
has resulted in the impairment of the remedy of the surety or guarantee F
against the principal debtor. They have alleged that the plaintiff had allowed
the first defendant to sell some valuable machineries belonging to the company
without getting the sale proceeds properly appropriated towards the principal
amount due to the plaintiff under the mortgage deeds. This the plaintiff did
although the second defendant had notified the intended sale of the machineries G
to it and requested it to invoke the power under the deeds of mortgage. They
have further alleged that had the plaintiff taken over the management of the
company under the provisions of the Industrial Development and Regulations
· Act at the earliest date of default, the nationalisation of the two units of the
first defendant under the Sick Textile Undertakings (Nationalisation) Act,
1974 would not have occurred and the plaintiff would have realised its entire H
1106
SUPREME COURT REPORTS
[2002] 2 S.C.R.
A claim from the units. The further defence on which we shall have to pay a
little more attention has been raised in the written statement which is mainly
on the question of entertainability of any suit on behalf of the plaintiff against
the defendants, when all assets of the first defendant Company have vested
in the Government of India under · the Sick Textile Undertakings
B (Nationalisation) Act.(hereinafter referred to as 'the Act') and the compensation
for the vesting of the Mills in the Government has already been declared. The
plea raised in this behalf is that the plaintiff being a secured creditor of the
owner of the Mills is bound to put forward all the claims and receive payment
out of the compensation amount fixed under the Act.
C
The principal issue with which the parties went into trial had three
D
E
several parts .:
I.
Whether the mortgage deeds executed by the defendants are
not capable of being enforceable in law ?
II.
Whether defendant Nos.3 to 6 (presently respondent Nos.4, 6,
7 and · 8 in the petition) are liable under the Contract of
Guarantee?
III.
Whether the liability of defendant Nos.2 to 6 (presently
respondent Nos.2, 3, 4 and 6 in the petition) stood discharged
on account of the latches on behalf of the plaintiff ?
Apart from the issue of penal interest, the trial Court answered all the
issues noted above, in favour of the plaintiff. There was, however, one
additional issue which stood considered by both the trial Court as well as the
appellate Court to wit, the effect of the Nationalisation Act (Sick Textile
Undertakings (Taking Over of Management) Act, 1972) and it is on this
F score the trial Court stated as below :-
G
"So far as the assets that were taken over by the Government are
concerned, compensation had been fixed in the Act and further
considered by the Commissioner for the Sick Textile Mills and in fact
the plaintiff has been paid major portion of the compensation during
the pendency of the suit. There is absolutely no question offrustration
of any contract b~tween the plaintiff and the defendants. The plaintiff,
being in the position of a creditor, has nothing to do with the loss or
profit in the business of the first defendant or with the nationalisation
of the undertakings of the first defendant."
H
It is the definite finding of the trial Court that introduction of the Act
INDUSTRIAL FINANCIAL CORPN_ OF INDIA LTD.~- CANNANORE SPINNING AND WEAVING MIU.S LTD. (BANERJEE, J.I 1107
of 1972 in the Statute Book has had no effect whatsoever as regards the A
liability to make the payment and the trial Court had the following statutory
provision (Section 5 of the Nationalisation Act as above) to note in support
of its finding:
"5. Owner to be liable for certain prior liabilities (l) Every liability,
other than the liability specified in sub-section (2) of the owner of a B
sick textile undertaking, in respect of any period prior to the appointed
day, shall be the liability of such owner and shall be enforceable
against him and not against the Central Government or the National
Textile Corporation."
The Court recorded that the aforesaid provision has been engrafted in c
the Statute to protect the rights of the plaintiff.
The records depict that the High Court, however, was approached in
appeal basically on two counts as below :-
(l)
(2)
There is error both in fact and in law in accepting the case of
the plaintiff inspite of such acts of the plaintiff that it allowed
appropriation of the securities without the consent of the sureties
and inspite of specific objection in this behalf by the second
defendant appellant; and
Because ofthe'intervention of the law, all the assets of the first
D
E
defendant Company stood vested in the Central Government
/
and what has been protected by Section 5(1) of the Act is not
such interest as that of the plaintiff but only such liabilities
which are specified in Sub-Section (2) thereof. Upon specific
reliance on to Sections 140 and 141 of the Indian Contract Act F
(noticed above) , the High Court stated "Section 140 and 141
of the Indian Contract Act together safeguard the interests of
the surety on the payment or performance by the principal
debtor and in respect of the security which the creditor has
against the principal debtor. Where a guaranteed debt has G
become due, on default of the principal debtor to perform a
guaranteed duty and the surety is required thus to meet the
guarantee, the surety upon payment or performance of all that
he is liable for, is invested with all the rights which the creditor
had against the principal debtor at the time when the contract
for suretyship is entered into, whether the surety knows of the H
.-
1108
A
B
c
SUPREME COURT REPORTS
(2002) 2 S.C.R.
existence of such security or not and if the creditor loses or
without the consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security.
On the facts of the instant case, when it is conceded that a
substantial part of the claim has been realised by the creditor
(plaintiff) from the assets of the Company by way of
compensation and the creditor has lost all such securities which
the principal debtor (Company) had created in its favour and
on which security alone it had advanced loans to the Company,
it is possible as the learned counsel for the appellants has
suggested, to think that the creditor has lost the security and
thus, had fallen in a position that unless it is held that the surety
is discharged to the extent of the value of the security, the
sureties cannot be put in the same position as the creditors
upon the security of the principal debtor."
The High Court further went on to observe "We have no information,
D however, as to the extent of the security that the company had provided to
the plaintiff or the extent of the discharge of the debt covered by the sureties
of ea~h individual guarantor and it is not possible thus to work out the
equities which must always be the first action of the court in the cases of the
sureties who for the reason either ofthe default of the principal debtor or for
E the default of the creditor and/or matters-beyond the control of all concerned,
are put to make good all legal claims of the creditor. Such equities as are
envisaged under Section 140 and 141 of the Indian Contract Act , in our
view, are not available to the plaintiff so that it may, after realising the claims
from the appellants (sureties), come to have the benefit of the securities. In
the view that we have taken, we do not think, any further argument on either
F side is required to be examined by us, as the ·view that we have taken above
is enough to hold that the plaintiff, that is to say, the creditor must be in a
position to deliver the securities which he had against the principal debtor to
the sureties before it (plaintiff) takes its claim against the sureties.