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Karnataka State Industrial Investment And Development Corporation Ltd. v/s State Bank Of India & Another

Company & Directors' Information:- INDUSTRIAL INVESTMENT BANK OF INDIA LIMITED. [Under Liquidation] CIN = U65923WB1997GOI083429

Company & Directors' Information:- THE KARNATAKA BANK LIMITED [Active] CIN = L85110KA1924PLC001128

Company & Directors' Information:- INDUSTRIAL DEVELOPMENT AND INVESTMENT CO PVT LTD [Active] CIN = U65990MH1941PTC003300

Company & Directors' Information:- THE INDIA COMPANY PRIVATE LIMITED [Active] CIN = U74999TN1919PTC000911

Company & Directors' Information:- K V DEVELOPMENT AND INVESTMENT CO PVT LTD [Active] CIN = U65922MH1979PTC021155

Company & Directors' Information:- INDIA CORPORATION PRIVATE LIMITED [Active] CIN = U65990MH1941PTC003461

Company & Directors' Information:- R N B J INVESTMENT AND DEVELOPMENT PVT LTD [Strike Off] CIN = U65990MH1982PTC028451

Company & Directors' Information:- S P INVESTMENT AND DEVELOPMENT COMPANY PVT LTD [Strike Off] CIN = U67121ML1988PTC003133

Company & Directors' Information:- KARNATAKA INDUSTRIAL PRIVATE LIMITED [Strike Off] CIN = U29222KA1974PTC002711

Company & Directors' Information:- BANK OF KARNATAKA LIMITED [Amalgamated] CIN = U99999KA1901PLC000935

Company & Directors' Information:- KARNATAKA INDUSTRIAL COMPANY LIMITED [Strike Off] CIN = U33130KA1916PLC000063

    RFA No. 493/1999

    Decided On, 03 February 2004

    At, High Court of Karnataka


    For The Appellants : Sri. Ashok B. Hinchigeri, Advocate. For The Respondents: C/R-1, R-2, S. Krishna Swamy, Notice held sufficient.

Judgment Text

Tirath S. Thakur, J.

This appeal arises out of a Judgment and Decree passed by the Addl. City Civil Judge at Bangalore whereby O.S. 2768/1992 for recovery of money based on a counter guarantee furnished by the defendant appellant has been decreed with interest and costs.

2. M/s. Skottie (India) Pvt. Ltd. is a company incorporated and registered under the Companies Act with its registered office at Bangalore. The company appears to have approached Karnataka State Financial Corporation (hereinafter referred to as ‘KSFC’) for financial assistance to enable the former to establish a medium scale industrial unit at Belagola Industrial area at Mysore. That request was granted by the KSFC and a loan of a sum of Rs. 30 lakhs sanctioned in its favour. The proposed industrial unit it appears was to be set up with the help of M/s. Skottie Electronics Inc. USA. In terms of the collaboration agreement entered into between the two, Skottie (India) Pvt. Ltd. would acquire the technical know how for the proposed units from its American collaborators upon payment of a fee prescribed for the same.

3. It was in connection with the payment of the fee for the transfer of technical know how and for the advance payment to he made towards purchase of machinery that the KSFC released a sum of Rs.3,45,000/- in favour of Skottie (India) Pvt. Ltd. after obtaining a bank guarantee for a sum of Rs.3,70,000/- from the plaintiff - State Bank of India. The Bank had according to its version given a guarantee to the KSFC on the strength of a counter guarantee given to it by the defendant/Karnataka State Industrial Investment Development Corporation Ltd. - appellant in the present appeal. The said guarantee was in the form of an assurance contained in its letter dt. 12th May, 1990 in which the appellant had unconditionally undertaken to counter guarantee the repayment of all the amounts paid to the KSFC by the plaintiff bank under the bank guarantee dt. 5th of June, 1980 furnished by the latter.

4. The borrower M/s. Skottie (India) Pvt. Ltd. appears to have failed in its attempt to set up the proposed industrial unit and become a chronic defaulter. This forced the KSFC to invoke the bank guarantee furnished by the plaintiff bank in O.S.1088/85 instituted for that purpose. The said suit was upon contest eventually decreed by the City Civil Court, Bangalore, in terms of its Judgment and Decree dt. 27th Oct. 1989 directing the plaintiff bank to pay a sum of Rs.3,70,000/- with interest at the rate of15% p.a. from sum Sept. 1983 up to the date of full payment apart from reimbursement of all costs incurred by the KSFC in connection therewith. Consequent upon the passing of the said decree, the plaintiff bank had to pay a sum of Rs.7,53,592.95 to the KSFC on the 31st Jan. 1990 in full and final settlement of the claim made by the KSFC under the bank guarantee dt. 5th June, 1980. Reimbursement of the decretal amount was thereafter claimed by the plaintiff’ bank from the defendant/appellant herein on 12.12.90 in terms of notice marked EX.P-6. The defendant did not however respondent favourably to that demand forcing the bank to file R.F.A. 2768/92 in which the bank claimed a total sum of Rs.9,99434/- on the following counts:

i) Decretal amount paid to the KSFC as directed in O.S. 1088/85 Rs. 7,53,592.95

ii) Towards interest on the said amount of Rs.7,53,592.95 from 31.1.1990 to 2.4.1992 Rs.2AS,592.00

iii) Legal charges Rs. 250.00Total Rs.9,99,434.95

The appellant contested the suit by filing a written statement in which it was interalia alleged that the letter by which the counter guarantee had been given to the plaintiff bank was itself without the authority of law. It was inter alia asserted that an officer of the defendant/appellant might have issued letter dt. 12th May 1990, informing the plaintiff bank that the defendant was wining to provide a counter guarantee but the issuance of any such letter did not constitute a valid counter guarantee in favour of the bank. The written statement went on to state that the Corporation had at no point of time executed any counter guarantee as alleged by the plaintiff. A plea regarding the suit being barred by limitation was also raised. On the basis of these pleadings the trial Court framed the following issues:

1. Whether the plaintiff proves that defendant No.1 had given a counter guarantee when it had given guarantee to KS.F.C Oil behalf of defendant No.2 as contended?

2. Whether the plaintiff proves that the KS.F.C. has invoked the bank guarantee given by it and encashed the same?

3. Whether the plaintiff proves that both the defendant are liable to reimburse the same, as per the suit claim?

4. Whether the defendant No. 1 proves that the suit is barred by limitation?

5. Whether the plaintiff proves cause of action for the suit?

6. Whether the plaintiff is entitled for the relief sought for?

7. What order or decree?

5. In support of its case, the plaintiff bank examined Sri. S. Mallikarjun, apart from placing reliance upon documents marked Exs.P-1 to P-IO. On behalf of the defendant/appellant, H. Venkatesh Murthy was examined as a witness apart from marking a few documents in support of their defence. By the Judgment impugned in this appeal the trial Court has answered the issues in favour of the plaintiff and decreed the suit in toto as already mentioned earlier. The trial Court has held that the defendant/appellant had provided a counter guarantee to the plaintiff bank and that the said counter guarantee was legally valid enforcing the plaintiff to recover from the defendant the suit amount with interest at the rate of 15% per annum from the date of the suit till realization of the amount. The present appeal filed by the defendant assails the correctness of the findings recorded by the trial Court and the decree passed pursuant to the same as already noticed earlier.

6. Appearing for the appellant Mr. Hinchigeri argued that the plaintiff had not proved the case set up by it and that there was no counter guarantee executed by the appellant. Elaborating that submission he contended that a counter guarantee document like any other document creating rights and obligations for the parties ought to have been executed on a properly stamped paper and duly registered in order to be effective and legally enforceable. No such document having been executed in the instant case, the claim made by the Bank purely on the strength of a letter written by one of the officers of the Corporation could not be decreed. In as much as the trial Court had remained oblivious of the legal requirements argued Mr. Hinchigeri, it had committed a mistake which required to be corrected in appeal.

7. The plaintiff/respondent had as noticed earlier placed reliance upon a communication addressed to its Branch Manager at Bangalore by the Secretary and Administrative Officer of the appellant corporation. This letter which was marked Ex.P-1 in the course of the trial clearly constitutes a counter guarantee in favour of the bank and may therefore, be extracted in extenso:



FH -11/1926/80-81

Date: 12-5-1980

The Branch Manager,

State Bank of India,

Post Bag.5310,

St. Mark’s Road,


Dear Sir,

Please refer to your letter No.C & 1/5/6 dated 10-5-1980 - M/s. Skottie India (Pvt) Ltd. Guarantee.

We write to inform you that our Corporation would be willing to provide the necessary counter guarantee in respect of guarantee requested by you from M/s. Skottie India (Pvt.) Ltd. for a sum of Rs. 3.65 lakhs. We understand that the said guarantee will be given by you to KSFC to enable the Company to draw a sum of Rs. 3.65 lakhs. Our Board Meeting is scheduled to be held on the 23rd instant, after getting the necessary resolution from the Board we shall be in a position to execute the counter guarantee.

In order that the Company may not be put into any difficulty we request you kindly to treat this letter itself as the necessary counter guarantee and proceed on that basis to issue the guarantee. (emphasis supplied)

Thanking you,

Yours faithfully,



Secretary & Administrative

Officer I/C”

8. Although the above communication makes a mention about the matter being taken to the Board of Directors of the company scheduled to be held on 23rd May, 1980, so that a proper resolution could be passed and a suitable document of counter guarantee executed in favour of the Bank, the letter specifically instructs the Bank to treat the request as constituting a counter guarantee by itself and proceed on that basis to issue a guarantee which the KSFC was demanding from the plaintiff. It is not the case of the appellant that the matter when taken to the Board of Directors, the latter had declined to approve the grant of a counter guarantee by the Corporation. Neither in the written statement nor in the oral testimony of the witness examined on behalf of the Corporation has any mention been made about the resolution which the Board of Directors had passed on the subject whether a guarantee should or should not be furnished to the Bank. That apart, the plaintiff has placed reliance upon Ex.P-9 which purports to be the deed of counter guarantee signed by the Chairman and the Managing Director of the appellant Corporation specifically containing a provision to the following effect:

“1. We shall keep the Bank harmless and indemnified from and against all claims, demands, damages, losses, costs and expenses which may be made against or sustained by the Bank or for which the Bank may become liable to reason of the Rank having executed the said guarantee or otherwise in connection there with and we agree to pay the Bank at its Bangalore Office on demand and without demur any amount which the Bank mar be called upon to pay under or by virtue of the said guarantee together with all costs, charges and expenses which may be incurred by the Bank or become payable by the Rank in connection therewith and any payment made by the Bank on deemed from the said Company he deemed to be an amount which the Bank, has been called upon to pay under the said guarantee.”

(emphasis supplied)

It is not in the light of the above two documents the existence and genuineness whereof has not been disputed before us open to the Corporation to argue that no counter guarantee had in fact been furnished to the bank or that the officers who had signed the communication as also the document of counter guarantee Ex.P-l and EX.P-9 were not legally competent to do so. The argument that for counter guarantee to be valid, the same ought to be duly stamped and registered feebly advanced by Mr. Hinchigeri was rightly given up by him. S.126 of the Contract Act which defines a “contract of guarantee” interalia provides that guarantee may either be oral or written. Any such guarantee could, even in the absence of a stamped document duly registered be enforceable in law. The trial Court was therefore, perfectly justified in holding that a counter guarantee had been furnished by the appellant to the plaintiff for the realization of the amount which the Bank may have been called upon to pay in terms of the guarantee which it had in turn furnished to the KSFC.

9. Mr. Hinchigeri next argued that the Skottie (India) Pvt. Ltd. was also a signatory to the deed of counter guarantee marked EX.P-9 and was therefore, a co-surety within the meaning of 8.146 of the Contract Act. It was submitted that the plaintiff bank had allowed the suit to be dismissed for default against Skottie (India) Pvt. Ltd. which absolved the appellant of any obligation under the said deed. There is in our opinion no merit in that contention either. S. 126 of the Contract Act defines “contract of guarantee”, “surety”, “principal debtor” and “creditor”. The person who gives the guarantee is in terms of the said provision caned the surety. The person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. Skottie (India) Pvt. Ltd. was in the instant case the principal debtor as it was for the default of the said company that a guarantee was furnished by the bank which was counter guaranteed by the appellant corporation. It is true that Skottie (India) Pvt. Ltd. had also signed the guarantee deed marked EX.P-9 but the mere signature of the principal borrower on the document of counter guarantee did not constitute the principal borrower into a guarantor. It is difficult to see how the principal borrower could be the borrower and guarantor both. The very meaning assigned to the expressions’ surety’, ‘principal debtor’ and creditor’ under S.126 envisages the existence of a third person in the case of whose default the surety undertakes to perform the promise or discharge the liability. There is no question of the principal debtor himself guaranteeing the payment of the amount borrowed by him on his own default. The liability of the principal debtor arises and remains enforceable not because of any contract of guarantee but because it is he who has received the consideration which terms the very basis of any such liability. The signature of the principal debtor on the deed of counter guarantee therefore, does not transform the principal debtor into a surety within the meaning of S. 126. That being so, the dismissal of the suit against the Skottie (India) Pvt. Ltd. would not affect the enforcement of liability of the appellant as a surety. Sec. 146 of the Contract Act envisages a situation where 2 or more persons are sureties for the same debt or duty either jointly or severally and whether under the same or different contracts, with or without the knowledge of each other. What is important is that there must be two sureties for the same debt or duly. In the instant case, since Skottie (India) Pvt Ltd. Did not constitute a surety the provisions of S.146 are not attracted. The dismissal of the suit against Skottie (India) Pvt. Ltd. therefore, does not in any way affect the liability of the appellant as a surety who was in the facts and circumstances of the case the only surety against whom the plaintiff could have brought a suit for enforcement of the liability flowing the from counter guarantee.

10. It was then argued by Mr. Hinchigeri that the suit filed by the plaintiff was barred by limitation. He urged that the KSFC had placed a demand for encashment of the guarantee furnished by the plaintiff bank in the year 1983. The plaintiff bank had in turn raised a similar demand against the Corporation on the basis of the counter guarantee. The period of limitation according to the learned counsel therefore, ought to be reckoned from the date the said demand was made in the year 1983. So reckoned the suit filed by the ‘plaintiff was barred by limitation. There is in our opinion no merit in that contention also. It is true that the KSFC had raised a demand against the plaintiff bank on the basis of the guarantee furnished by it in the year 1983 but it is also true that pursuant to the said demand, the bank had not made any payment. The bank had in fact successfully evaded to make the payment demanded by the KSFC under the guarantee eventually forcing the KSFC to file a suit against it. It was only pursuant to the decree passed in the said suit that the bank was eventually forced to pay up the amount covered by the guarantee together with interest The contingency which could give rise to any cause of action in favour of the bank on the basis of any such payment therefore, must be deemed to have taken place only on the 31st of Jan. 1990, when the bank liquidated the liability in terms of the decree passed against it. The suit filed by the bank against the defendant/appellant was admittedly within 3 years from the said date and was therefore, within the period of limitation prescribed for the same.

11. It was lastly argued by Mr. Hinchigeri that the trial Court was not justified in awarding interest against the defendant appellant at the rate of 15% per annum for the pre decree period or till realization. He submitted that the counter guarantee furnished by the appellant was in any case limited to the principal amount of Rs. 3,70,000/- and did not include any liability that may have accrued on account of the interest on the same. Alternatively, he submitted that the award on interest at 15% per annum pendente lite was excessive and deserved to be suitably reduced. The counter guarantee furnished by the appellant did not specify any particular amount the reimbursement of which was guaranteed. As is evident from a careful reading of the passage earlier extracted from the counter guarantee, the Corporation had agreed to pay the bank on demand and without demur any amount which the bank may be called upon to pay under or by virtue of the

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guarantee furnished by it. The expression “any amount which the bank may be called upon to pay” is in our opinion wide enough to include not only the principal amount guaranteed by the bank but also the interest accrued on the same. Even otherwise, although letter marked Ex. P-l did not specify the details, the counter guarantee was all pervading in nature. The only reasonable and logical interpretation that can be given to the counter guarantee evidenced by Ex.P-l is that the Corporation had undertaken to pay to the bank any amount that might have become payable in terms of the guarantee furnished by it to the KSFC including any amount payable towards interest under the said document. We have therefore, no hesitation in rejecting the contention urged on behalf of the appellant that the guarantee was limited only to the principal amount of Rs.3,70,000/- and did not extend to the amount of interest that was to accrue on the said amount. 12. There is however, merit in the alternative contention urged by Mr. Hinchigeri. The rate of interest awarded by the trial Court pendente lite and until realization appears to us to be on the higher side. While we do not see any justification for reducing the rate of interest for the pre- suit period, we are of the view that the prevailing rate of interest and the rates that were prevalent during the period the claim was on trial before the Court, interest at the rate of 10% per annum should sufficiently meet the ends of justice. We accordingly, allow this appeal but only in part and to the limited extent that interest payable by the defendant/appellant on the suit amount from the date of institution of the suit until realization shall be at the rate of 10% per annum simple and not 15% per annum as directed by the trail court. The decree passed by the trail court shall therefore, stand modified but only to that limited extent. The parties are left to bear their own costs.