(Prayer: This MFA is filed u/s. 32(9) of SFC act against the judgement dated: 16.1.2007 passed in Misc.No.435/99 on the file of the VI Addl. City Civil judge, Bangalore, allowing the petition filed u/s. 31(1) (aa) and 32(1) of SFC act, for recovery of money.)
1. This appeal is filed questioning the order dated 16.1.2007 passed by VI Addl. City Civil Court in Misc.No.435/1999 holding that the appellant is also liable to pay the sum as ordered, jointly or severally.
2. The records reveal that respondent No.1 herein sanctioned a loan of Rs.70.00 lakhs in favour of respondent No.2 herein. The loan agreement dated 6.3.1996 was executed by respondent No.2 and respondent No.1. Third and fourth respondents herein executed surety agreement dated 6.3.1006 giving collateral security of schedule I and II properties. The appellant executed a 'letter of comfort' dated 2.3.1996 as per Ex-P14. Respondent No.2 committed default and did not repay the amount as agreed. Hence, respondent No.1 invoked surety agreement dated 6.3.1996 given by respondent Nos.3 and 4 by issuing notice dated 16.9.1998. Respondent Nos.3 and 4 did not pay the amount despite the notice. Thus a petition came to be filed by respondent No.1 herein under Sections 31(1) (aa) and 32(1) of State Financial Corporation Act(SFC Act), 1951, for a direction to respondent Nos.3 and 4 to pay the amount of Rs.1,03,90,000/- and for sale of secured properties described in schedule I and II of the petition. A direction is also sought that the appellant alongwith respondent Nos.2 and 4 herein shall pay the said amount with interest jointly and severally. After hearing, the impugned order is passed by the Court below holding that respondent No.2 company is due to pay a sum of Rs.1,03,90,000/- as on 30.6.1998. It is further held that appellant and respondent Nos.2 to 4 herein are jointly and severally liable to pay the said amount. Further directions are also issued.
3. Sri. K.G. Raghavan, learned Senior Advocate appearing on behalf of the appellant submits that Ex-P14-the 'letter of comfort' is wrongly interpreted and treated as 'letter of guarantee' by the Court below and the same has resulted in mis-carriage of justice. He further submits that Ex-P14 nowhere mandates the appellant that he should repay the dues of respondent No.2, in case, respondent No.2 or the guarantors i.e., respondent Nos.3 and 4 fail to repay the loan amount to respondent No.1. In other words, according to him, Ex-P14 is not a letter of guarantee, but, is mere a letter of comfort.
Said submissions are opposed by Sri. D.S. Joshi, learned counsel appearing on behalf of respondent No.1. He contended that Ex-P14 though titled as 'letter of comfort' is clearly a 'letter of guarantes', inasmuch as, the wordings used in the said document amply reveal that the appellant has undertaken to repay the loan of respondent No.2, in case of non-payment of loan by respondent No.2 or respondent Nos.3 and 4 herein.
4. In order to decide this matter, the relevant document to be considered is Ex-P14, which reads thus:-
'We understand you have sanctioned a Corporate loan of Rs.75.00 lacs (Rupees Seventy Five lacs only)., vide your letter ACCTS/CL/7842/95-96 dated 29.02.1996, to M/s. Dominion Chemical Industries Limited, Hosur Road, Bommanahalli, Bangalore-560 068.
M/s. Dominion Chemical Industries Limited, is one our Associate Companies, we hereby confirm that it is our normal practice to see that all our associates companies meet their financial and contractual obligations and this end we will undertake all reasonable steps to ensure that M/s. Dominion Chemical Industries Limited, conducts its operations efficiently to meet its obligations in the usual course of business.
We are convinced that the company concerned has the capabilities to fully cater to its financial commitments.'
The aforementioned document makes it amply clear that the company which has obtained loan i.e., respondent No.2, is one of the associate companies of the appellant. The appellant has confirmed that it is its normal practice to see that their associate companies meet their financial and contractual obligations and that appellant will undertake all reasonable steps to ensure that M/s. Dominion Industries Limited (Debtor company) conducts its operation efficiently to meet its obligations in the usual course of business. The said document further states that the appellant is convinced that the debtor company has the capabilities to fully cater to its financial commitments.
The said letter of comfort nowhere reveals that the appellant stood as guarantor for the loan disbursed by respondent No.1 in favour of respondent No.2. It merely states that the associate company (debtor company) will meet the financial and contractual obligations and that the appellant herein undertaken all reasonable steps to ensure that the debtor company conducts its operations efficiently to meet its obligations in the usual course of business. The comfort letter is more in the nature of recommendatory letter. If a person has not stood as guarantor or surety, he cannot be treated a guarantor or surety without there being a specific undertaking by his that he would discharge the liability of the third person, in case of his default. In this context, it is relevant to note the provisions of Section 126 of Indian Contract Act, 1972, which read thus:-
'126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor':-
A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called 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'. A guarantee may be either oral or written.'
From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. If the entire document is question i.e., Ex-P14 is read as a whole, the same nowhere reveals that the appellant has entered into a contract or an agreement with respondent No.1 to discharge the liability of respondent No.2 herein (principal debtor) in case of its default.
The Apex Court in the case of STATE OF MAHARASHTRA Vs. DR. M.N. KAUL (DEAD) BY HIS LEGAL REPRESENTRTIVE AND ANOTHER reported in AIR 1967 SC 1634, while dealing with the aspect of the enforceability of the guarantee has observed thus:-
'The question is whether this guarantee is enforceable. That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken. It is often said that a surety is a favoured debtor, for in the expressive phrase of Lord Westbury L.C. in Blest V. Brown (1862) 4 De GF & J 367 at p. 376:
'you bind him to the letter of his engagement.
'Beyond the proper interpretation of that engagement you have no hold upon him.'
These observations have been recalled in cases of guarantee and suretyship by the Judicial Committee and also this Court. See for example Pratapsing Moholalbhai vs. Keshavlal Harilal Setalvad, 62 Ind App 23 at p.33=(AIR 1935 PC 21, at P.24) and M.S. Anirudhan v. Thomco’s Bank Ltd., 1963 Supp 1 SCR 63 at p.77= (AIR 1963 SC 746 at p.752). To this there are some exceptions. In case of ambiguity when all other rules of construction fall, the Courts interpret the guarantee contra proferentem that is, against the guarantor or use the recitals to control the meaning of the operative part where that is possible. But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement.'
From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken. In our considered opinion, there is no ambiguity in Ex-P14. Under Ex-P14, the appellant has not undertaken that he would repay the loans of respondent No.2, in case, if respondent No.2 fails to discharge its liability. Therefore, the appellant cannot be made liable for more than what is has undertaken. It is not in dispute that respondent No.1 herein has insisted on 'letter of comfort' of appellant herein while disbursing the loan in favour of respondent No.2 herein. Accordingly, the appellant herein being the holding company has given a letter of comfort as suggested by first respondent.
All through, respondent No.1 as well as other parties including the appellant has understood the document Ex.P14 as a 'letter of comfort', plain and simple. In the cross-examination of PW-1 (witness for respondent No.1), he has clearly admitted that the appellant has not undertaken under Ex-P14 that he would repay the amount in case the respondent Nos.2 to 4 herein commit default in payment of the loan. In the light of clear admission of PW-1 and having regard to the language employed in Ex-P14, it is clear that the appellant has not undertaken that it would repay the loan amount in case of default by respondent Nos.2 & 4 herein.
In this context, we may usefully refer to the definition of
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'letter of comfort', as found in P. Ramanatha Aiyar’s Advanced Law Lexicon, which reads thus:- Letter of comfort. A document that indicates one party’s intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default.' (Emphasis supplied) From the material on record, it is clear that the letter of comfort merely indicates the appellant’s assurance that the respondent No.2 would comply the terms of a financial transaction without guaranteeing performance in the event of default. Since we find that the appellant has not bound itself for repaying the loans due to first respondent Corporation in the event of default by respondent Nos.2 to 4, the impugned order insofar as it relates to fixing liability on appellant is liable to set-aside Accordingly, the same is set-aside, Rest of the order passed against respondent Nos.2 to 4 continue to remain Appeal is allowed-in-part accordingly.