R.C. Chavan, J.
1. This first appeal, filed by the borrower/guarantor challenging the decree passed against him by the learned Civil Judge, Senior Division, Nagpur, was taken up for disposal at the stage of admission in view of the orders passed on 17th August, 2005.
2. The appeal arises out of the following facts:
On 25th September, 1984 the plaintiff Bank sanctioned to defendant No. 1/ present respondent No. 2, a proprietary concern, owned by the appellant's brother, a demand cash credit limit of Rs. 1,00,000/- and cash credit limit of Rs. 1,40,000/-. The appellant, who was arrayed as defendant No. 2 in the suit, stood as a guarantor and executed necessary agreement of guarantee. A sum of Rs. 4,02,115,11 was found to be due in this loan account. This amount was not paid by the borrower in spite of the demand. Hence, the plaintiff Bank filed suit claiming recovery of the amount jointly and severally from both the principal debtor and the guarantor/appellant.
3. Apart from filing written statement, the borrower defendant No. 1 had also made a counter-claim. The present appellant also filed written statement contending that the plaintiff Bank should recover the loan from the property of defendant No. 1. It was also contended that the guarantee was only for the period of three years and, therefore, the appellant was not liable.
4. On these pleadings the learned trial Judge framed necessary issues and received evidence tendered by the parties. The borrower/defendant No. 1 did not tender any evidence in spite of the fact that he had filed counter-claim. The plaintiff and appellant/original defendant No. 2 tendered evidence. During pendency of the suit, on 26th February, 1996, the appellant filed an application at Exhibit 67 for direction to attach property of defendant No. 1 which was hypothecated to the Bank and also for appointment of receiver. The Bank gave reply at Exhibit 73 stating that defendant No. 1 did not leave any hypothecated property but all the same the Bank did not have any objection for appointment of receiver or such other orders as the Court may pass. The application, however, remained undecided though the appellant filed another application on 1st April, 2000 praying to the Court that application Exhibit 67 may be decided.
5. After considering the evidence tendered, the learned trial Judge decreed the suit against both the defendants directing them to pay the decretal sum with interest @ 15% per annum from the date of suit till realisation. Aggrieved thereby the guarantor has preferred this appeal contending that he stood discharged due to failure of the plaintiff to effect recovery from other securities which the plaintiff had. It was stated that under Section 141 of the Contract Act if a creditor loses or parts with security available to it, surety is discharged. The decree was also challenged on the question of awarding interest @ 15% per annum.
6. I have heard the learned Counsel for the appellant/guarantor and the respondent/plaintiff Bank. None appeared for the borrower, though served.
7. Relying on the decision of the Supreme Court in State Bank of Saurashtra v. Chitranjan Rangnath : [1980]3SCR915 , the learned Counsel for the appellant, submitted that since the plaintiff Bank had neglected in taking steps to attach property, which was hypothecated, the appellant was discharged from his liability, in view of the provisions of Section 141 of the Indian Contract Act. In the case of State Bank of Saurashtra borrower had pledged some oil tins, over which godown keeper of the Bank had control. The High Court held that the Bank was negligent in not securing the pledged goods in order to liquidate the debt and, therefore, discharged the guarantor. The Bank took the matter to the Supreme Court and pressed in aid Clauses 5, 7 and 13 and the letter of guarantee executed by the guarantor. Clauses which came up for consideration before the Supreme Court quoted in para 14 of the judgment can be reproduced as under:
5. You shall, in any case, be at liberty and without my/our further assent or knowledge, at any time, to grant to the customer or any person liable with or for him, whether as guarantor or otherwise, any time or indulgence and to determine, enlarge or vary its credit and to vary, exchange or take other securities or release any other securities held or to be held by you for or on account of the moneys intended to be hereby secured or any part thereof or to renew any bills, notes or other negotiable security and to compound or make any other arrangements with the customer or any person so liable with or for the customer as you may think fit without discharging or in any manner affecting my/our liability under this guarantee.
7. To the extent that you may obtain satisfaction of the whole of your claim against the customer, I/we agree that you may enforce and recover upon this guarantee the full amount hereby guaranteed and interest thereon notwithstanding any such proof or composition as aforesaid, and notwithstanding any other guarantee, security or remedy, guarantees, securities or remedies which you may hold or be entitled to in respect of the sum intended to be hereby secured or any part thereof, and notwithstanding any charges or interest which may be debited in your account current with the customer, or in any other account upon which the customer may be liable.
13. Should the customer be a limited company, corporate or unincorporated body, committee, firm, partnership, trustees or debtors on a joint account, the provisions hereinbefore contained shall be construed and take effect where necessary as if the words importing the singular number included also the plural number. This my/our guarantee shall remain effective notwithstanding any death, retirement, change, accession or addition as fully as if the person or persons constituting or trading or acting as, such body, committee, firm, partnership, trustees, or debtors on joint account, at the date of the customer's default or at any time previously, was or were the same as at the date hereof. And further you may recover against me/us to the extent hereinbefore, mentioned notwithstanding that any security given or to be given to you may be void, defective, or informal, or notwithstanding that the customer being a limited company, corporate or unincorporated body or committee, may exceed its borrowing powers or that the borrowing from you may have been ultra vires.
After considering these clauses the Court observed in para 19 as under:
It is difficult to entertain a contention that Section 141 would not be attracted and the surety would not be discharged even if it is found that a creditor has taken more than one security on the basis of which advance was made and the surety gave personal guarantee on the good faith of other security being offered by the principal debtor which itself may be a consideration for the surety offering his personal guarantee and the creditor by its own negligence lost one of the securities. Acceptance of such a contention would tantamount to putting a premium on the negligence of the creditor to the detriment of the surety who is usually described as a preferred debtor. Should a Court by its construction of such letter of guarantee enable the creditor to act negligently and yet be not in any manner accountable? Was the guarantee a guarantee against proper performance of the contract evidencing advance of loan and methods of its repayment, or a guarantee covering Bank's utter negligence in failing to exercise the care of a prudent man which one would expect in management of one's own affairs?
8. In the context of this decision, it would be necessary to examine the clauses of agreement of guarantee executed by the appellant in favour of the Bank, which is at Exhibit 111. Clause 5 of the Agreement in Saurashtra Bank's case (supra) is analogous to Clause 6 in Exhibit 111. Clause 13 has no relevance to the question to be decided in the present case. Clause 7 in the Saurashtra Bank's case is, however, altogether different from Clause 7 in the agreement of guarantee at Exhibit 111. For the sake of comparison it can be reproduced as under:
Clause (7): That the guarantee hereby given is independent and distinct from any security that the Bank has taken or may take in any manner whatsoever whether it be by way of hypothecation pledge and/or mortgage and/or any other charge over goods, book debts, movables and other assets and/or any other property movable or immovable and that the Guarantor(s) has/ have not given the guarantee upon any understanding, faith or belief that the Bank has taken and/or may, hereafter, take any or other such security and that notwithstanding the provision of Sections 140 and 141 of the Indian Contract Act, 1872, or any other section of that Act or any other law, the guarantor(s) will not claim to be discharged to any extent because of the Bank's failure to take any or other such security or in requiring or obtaining any or other such security or losing for any reason whatsoever including reasons attributable to its default and negligence benefit of any or other such security or any rights to any or other such security that have been or could have been taken.
9. It may be seen that Clause (7) in Saurashtra Bank's case (supra) is corollary to Clause (5) therein, which refers to compounding or other arrangements with the customer. Clause (7) enjoins that the Bank may enforce the guarantee notwithstanding any such composition. It may be seen that Clause (7) in Exhibit 111 does not refer to any composition. It clearly seeks to take the contract out of the provisions of Sections 140 and 141 of the Contract Act and provides that, notwithstanding the provisions of Sections 140 and 141 the guarantor will not claim to be discharged to any extent because of Bank's failure to take any other security or even losing for any reason whatsoever including default or negligence on the part of the Bank, benefit of any other such security. Because of this sweeping phraseology used in Clause (7) the parties must be taken to have contracted out of rigor of Section 141 of Contract Act. Since such clause was not being considered in Saurashtra Bank's case, observation of the Supreme Court, that it would be difficult to entertain the contention that Section 141 would not be attracted, would be inapplicable to the present case.
10. First, it has to be observed that there is nothing to show that the Bank had, before filing of the suit, allowed any security furnished by the principal borrower to be lost. Secondly when during pendency of the suit, the appellant filed application Exhibit 67 for appointment of receiver, etc., the Bank had not opposed the application. The Bank had only pointed out that there were no hypothecated goods to be attached for the purpose of effecting recovery. The Bank cannot be held responsible for failure of the appellant to secure orders from the Court on application Exhibit 67.
11. In view of this, since Clause (7) of the agreement at Exhibit 111 squarely answer the argument of the appellant based on the hypothesis that the plaintiff followed the security to be lost, the decree cannot be assailed on this count.
12. Though the appellant had pleaded in the written statement that his guarantee was only for the period of three years it may be seen from Exhibit 112 dated 22nd May, 1987 that the appellant had acknowledged and confirmed the guarantee dated 23rd September, 1985 by the said revival letter. The suit was filed on 13th September, 1989 i.e. within three years of 22nd May, 1987 and, therefore, this plea is not open to the appellant.
13. The learned Counsel for the appellant next submitted that the learned trial Judge and the Judge of first Appellate Court were in error in awarding interest @ 15% per annum on the amounts adjudged. It may be seen from Exhibit 107, 'general agreement in respect of working capital finance' that the rate of interest agreed was @ 15% per annum. The guarantee which appellant had signed at Exhibit 111 was in respect of the agreements executed by the principal borrower which were specifically enumerated in the document. In view of this, there can be no doubt that the contractual rate of interest was @ 15% per annum and the Bank was entitled to claim the same. Relying on the judgment in Ashutosh v. State of Rajasthan IV : AIR2005SC3434 , the learned Counsel for the appellant submitted that the Court need not have awarded interest at such a heavy rate in view of the fact that the rates of interest are falling. In para 24 of the judgment, the Court had observed that though the interest was claimed at 18% per annum by the State, Court should not shut its eyes at the prevailing Bank rate for fixed deposits and for lending which is not more than 6-7%.
14. According to the learned Counsel this decision is authority for the proposition that the Court must take into consideration the prevailing lending rate while awarding interest pendente lite and post-decretal interest, whatever may be the agreed rate of interest. The facts in Ashutosh's case (supra) which the Supreme Court was considering were altogether different. The Court was not considering the question of recovery of loan advanced by a Bank for commercial purpose. The original amount due in that case was Rs. 37,593/-, interest agreed at 18% per annum up to 17th October, 1992 i.e. prior to institution of the proceeding amounted to Rs. 61,890/-. the interest pendente lite came to Rs. 87,950/-. Thus, the total interest came to Rs. 1,49,848/-. In this context the Court observed that while it must do justice, justice must be tampered with mercy, and therefore, without tampering with the contractual rate of interest, it awarded a global sum of Rs. 1,00,000/- in place of Rs. 1,49,848/- towards the entire component of interest. It is clear from the discussion that the Court was not laying down any binding precedent but was simply making an adjustment to make the decree less harsh. Therefore, the judgment cannot be an authority for the proposition that it is open for the Courts to freely deviate from the contractual rate of interest even in case of commercial lending, particularly in the face of provisions of Section 34 of the CPC.
15. The learned Counsel for the appellant rightly submitted that Section 34 of the CPC does not prescribe that interest shall be awarded at the contractual rate. Proviso to Clause (1) Section 34 only enables the Court to award interest in excess of 6% per annum, and restricts grant of interest so as not to exceed the contractual rate. The learned Counsel, therefore, submitted that the interest pendente lite and post-decretal interest can be less than 15% per annum, should Court so decide, particularly in the case of the appellant, who is not the principal borrower, and who has established his bona fides by pointing to the Trial Court necessity to appoint a receiver to look after the assets of defaulting borrower.
16. The learned Counsel for the respondent Bank drew my attention to the decision of Central Bank of India v. Ravindra I : AIR2001SC3095 , where the Court had elaborately considered the scope of provision of Section 34 of the CPC and the power of the Court to award interest pendente lite in suit arising from Banking transactions. After considering the entire scheme and all relevant aspects, the conclusions of the Court were crystallised in para 55 of the judgment. It may be useful to reproduce Clauses 4 and 8 of para 55, as also Clauses 1 and 2 of para 58 of the said judgment, as under:
55. (1) xxx xxx xxx
(2) xxx xxx xxx
(3) xxx xxx xxx
(4) Capitalisation method is founded on the principle that the borrower failed to make payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the borrower capitalised it should appear that the borrower had an opportunity of making the payment on the date of entry or within a reasonable time or period of grace from the date of debit entry or the amount falling due and thereby avoiding capitalisation. Any debit entry in the account of the borrower and claimed to have been capitalised so as to form an amalgam of the principal sum may be excluded on being shown to the satisfaction of the Court that such debit entry was not brought to the notice of the borrower and/or he did not have the opportunity of making payment before capitalisation and thereby excluding its capitalisation.
(5) xxx xxx xxx
(6) xxx xxx xxx
(7) xxx xxx xxx
(8) Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC de hors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced, the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner....
58(1) Subject to a binding stipulation contained in a voluntary contract between the parties and/or an established practice or usage interest on loans and advances may be charged on periodical rests and also capitalised on remaining unpaid. The principal sum actually advanced coupled with the interest on periodical rests so capitalised is capable of being adjudged as principal sum on the date of the suit.
(2) The principal sum so adjudged is such principal sum within the meaning of Section 34 of the CPC, 1908 on which interest pendente lite and future interest i.e. post decree interest at such rate and for such period which the Court may deem fit, may be awarded by the Court.
17. It may be seen that while the Court undoubtedly upheld capitalisation of unpaid interest, the Court had also observed that debit entry in the account of borrower shown to have been capitalised may be excluded on the borrower's showing to the satisfaction of the Court that such debit entry was not brought to the notice of the borrower and that he did not have opportunity of making payment before capitalisation and thereby avoiding capitalisation. It is not clear whether the respondent Bank, in the instant case, had taken any such care of bringing debit entry first to the notice of the borrower before capitalising it, giving a reasonable opportunity to the borrower to liquidate the claim and avoid capitalisation. However, since the borrower too has not pointed out that any item capitalised was not correct, it may not be necessary to go into this aspect.
18. Clause 8 of para 55 of the judgment in Central Bank of India's case empowers the Court, if it finds in a given case that, in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decretal interest at a lower rate or may even decline awarding such interest. The Supreme Court, however, cautions that such discretion shall be exercised fairly, judiciously and not in an arbitrary or fanciful manner.
19. The claim in this case would have to be examined on the touchstone of the observations of the Supreme Court in Clause 8 of para 55 of the judgment in Central Bank's case. The statement of account of the borrower is at Exhibit 113 in the record of the Trial Court. It shows that against the loan of Rs. 2,40,000/- a total amount repaid over the course of the year was Rs. 2,75,780/-. In spite of this payment, the borrower was left with liability to pay Rs. 4,02,115/-. Thus, the proposition, principal and interest in the amount claimed is almost 3 : 2 i.e. 2/5th of the claim about Rs. 1,60,000/- is interest capitalised, while 3/5th of the claim is principal sum. Bearing in mind this proportion as also the fact that interest about Rs. 1,60,000/- had to be capitalised in spite of payment of interest of Rs. 2,75,780/- it may be reasonable to reduce the interest from 15% per annum to 10% per annum, so far as liability of the appellant is concerned. In view of this, the appeal may have to be allowed to this small extent. Following order is, therefore, passed.
20. The appeal is partly allowed.
The decree, insofar as it relates to interest payable by the appellant from the date of suit till realisation, is modified and the appellant/defendant shall pay to the plaintiff Bank interest 10% per annum on Rs. 4,02,115.11 from the date of suit till realisation.
There shall be no modification in the decree insofar as liability of principal borrower/respondent No. 2 to pay interest 15% per annum on the decretal sum.
Decree be drawn up accordingly.