By Dr. K. Shivaram, Ajay R. Singh, Advocates
New Page 1
26 Guarantor — Liability : Rights of
corporation to make recovery only against defaulting industrial concern and not
against surety or guarantor : State Financial Corporation Act, 1951, S. 29 and
S. 31.
AP Rocks Private Limited is an industrial concern. It
approached the appellant Corporation for grant of loan in the form of
non-convertible debenture.
Respondents who were Directors of Company executed deeds of
guarantee, agreeing to guarantee repayment/redemption by the company to the
Corporation of the said non-convertible debenture subscription together with
interest, etc. The said Company also executed a deed of hypothecation, whereby
and whereunder its plants and machinery were hypothecated. A collateral security
agreement was also executed. The ‘Industrial Concern’ allegedly committed
defaults.
The appellant-Corporation in exercise of its power u/s.29 of
the Act directed that the possession of the said properties of the guarantors be
taken over.
The Karnataka High Court held that the appellant-Corporation
could not have proceeded against the guarantors u/s.29 of the Act.
The Court observed that the heading of S. 29 states ‘Rights
of financial corporation in case of default’. The default contemplated thereby
is of the industrial concern. Such default would create a liability on the
industrial concern. Such a liability would arise inter alia when the
industrial concern makes any default in repayment of any loan or advance or any
instalment thereof under the agreement. In the eventualities contemplated u/s.29
of the Act, the Corporation shall have the right to take over the management or
possession or both of the industrial concern. It confers an additional right as
the words ‘as well as’ are used which confer a right on the corporation to
transfer by way of lease or sale and realise the property pledged, mortgaged,
hypothecated or assigned to the Corporation. S. 29 nowhere states that the
Corporation can proceed against the surety even if some properties are mortgaged
or hypothecated by it. The right of the financial corporation in terms of S. 29
must be exercised only on a defaulting party. There cannot be any default as is
envisaged in S. 29 by a surety or a guarantor. The liabilities of a surety or
the guarantor to repay the loan of the principal debtor arises only when a
default is made by the latter. The words ‘as well as’ play a significant role.
It confers two different rights but such rights are to be enforced against the
same person, viz., the industrial concern.
The liability of a surety is made co-extensive with the
liability of the principal debtor only by virtue of S. 128 of the Contract Act.
The rights and liabilities of a surety and the principal borrower otherwise are
different and distinct.
An implied power of Corporation to proceed against a surety
or guarantor cannot be read in S. 29 on principle that a construction which
effectuates the legislative intent and purpose must be adopted. A statutory
authority may have an implied power to effectuate exercise of substantive power,
but the same never means that if a remedy is provided to take action against one
in a particular manner, it may not only be exercised against him, but also
against the other in the same manner.
Therefore, the intention of the Parliament in enacting S. 29
and S. 31 was not similar. Whereas S. 29 consists of the property of the
industrial concern, S. 31 takes within its sweep both the property of the
industrial concern and that of the surety. None of the provisions control each
other. The Parliament intended to provide an additional remedy for recovery of
the amount in favour of the Corporation by proceeding against a surety only in
terms of S. 31 and not u/s.29 thereof.
[ Karnataka State Financial Corporation v. N.
Narasimahaiah & Ors., AIR 2008 Supreme Court 1797]
