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REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4043 OF 2015 (Arising out of SLP(C) No.10173 of 2011)

Central Bank of India          … Appellant :Versus:

C.L. Vimla & Ors.             … Respondents WITH

CIVIL APPEAL NOS. 4044-4046 OF  2015 (Arising out of SLP(C) Nos.14188-14190 of 2011)

M.A. Krishnamurthy          … Appellant :Versus:

C.L. Vimla & Ors.             … Respondents

J U D G M E N T Pinaki Chandra Ghose, J. 1. Leave granted. 2. These appeals, by special leave, arise from the Judgment and Order dated 23.12.2010 passed by the Division Bench of the High Court of Karnataka at  Bangalore  in  Writ  Petition  No.3531  of  2007,

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Writ Petition No.17320 of 2007 and Writ Petition No.17544 of 2007, whereby Writ Petition No.3531 of 2007 filed by C.L. Vimla was allowed while Writ Petition Nos.17320 and 17544 of 2007 filed by the auction  purchaser  and  Central  bank  of  India respectively, were dismissed.   3. The facts material to the present case are that Respondent No.1 C.L. Vimla who is a senior citizen aged about 85 years, is the guarantor. The appellant Central Bank of India is the Bank to whom the property involved in the present case, was  mortgaged.  The  property  involved  in  the present  case  is  a  residential  house  which  was purchased by the husband of C.L. Vimla, namely, C.L.Narsimhaiah  Shetty,  under  a  sale  deed  dated 10.06.1997. She is in possession of the property along  with  other  family  members.  Her  husband, during  his  life  time,  executed  a  Will  dated 31.05.1995  bequeathing  his  undivided  share  in favor of his sons equally and while settling the property he granted life interest in favour of the guarantor. However, he has not authorized her to

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sell or mortgage the property. The property was mortgaged  in  favour  of  Central  Bank  of  India (hereinafter  referred  to  as  “the  Bank”)  for raising  a  loan  of  Rs.17,50,000/-  for  family business.  The  business  suffered  loss. Consequently,  as  the  respondents  were  unable  to repay  the  mortgage  amount,  the  Bank  filed  O.A. No.309/2002  before  the  Debt  Recovery  Tribunal, Bangalore. The Debt Recovery Tribunal referred the case for settlement before Lok Adalat. The High Court  Legal  Services  Committee  considered  the reference  and  passed  an  award  whereunder  the borrower  have  agreed  to  pay  Rs.33,50,000/-  as final settlement of the claim of the Bank. This settlement  was  not  within  the  knowledge  of  the guarantor C.L. Vimla as she had not signed the joint memo. One of her sons N. Surya Bhagavan has signed it. Her advocate has also signed the Joint Memo. It was only on 5.4.2006 when she learnt that the  property  has  been  ordered  to  be  sold  by auction.  She  also  learnt  about  the  signing  of Joint Memo by N.Surya Bhagavan and the Bank. So

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she filed Writ Petition No.6625 of 2006 before the High  Court  of  Karnataka  for  setting  aside  the award dated 20.03.2004 of the Lok Adalat, as far as she was concerned. The High Court by an order dated  1.06.2006,  dismissed  the  writ  petition  on the ground of laches. Thereafter, she filed Writ Appeal No.899 of 2006, which was permitted to be withdrawn with liberty to approach the Lok Adalat for appropriate relief. Thereafter, the guarantor approached the Lok Adalat by filing an application under Order 9 Rule 13 read with Sections 21 and 25 of  Legal  Services  Authority  Act,  1987  on 03.10.2006.  4. During  pendency  of  the  writ  petition,  the Recovery Officer conducted auction on 5.10.2006. The guarantor filed an interim application being I.A. 1464/2006 on 17.10.2006 before the DRT for setting  aside  the  same.  The  office  of  the  DRT raised an objection stating that the application amounted to an appeal. The Guarantor requested the DRT on 2.11.2006 not to confirm the sale since her case was pending before the Lok Adalat at High

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Court. The copy of the bid sheet did not contain the  full  particulars  of  the  auction  purchasers. Thus,  she  moved  an  application  seeking  stay  of delivery  of  property.  On  28.11.2006,  the  DRT directed the Recovery Officer not to deliver the property  to  the  auction  purchaser  until  further orders.  In  the  meanwhile,  the  auction  purchaser filed  the  applications  seeking  vacation  of  the Interim orders. On 22.01.2007, the interim order was  vacated  by  the  DRT  in  the  absence  of  the appellant.  Thus,  the  guarantor  continued  in possession till 31.1.2007. The auction purchaser moved an application on 01.02.2007 for recalling the order dated 22.01.2007. On 5.02.2007, the High Court  Lok  Adalat  permitted  the  appellant  to request  the  DRT  to  defer  the  proceedings.  An application made in this regard was dismissed on 22.2.2007.  The  High  Court  Lok  Adalat  held  on 5.2.2007 that the guarantor not being a party to the joint memo to referring the matter to the Lok Adalat, the decree is not binding on her. While the  guarantor  was  agitating  her  right  in  the

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property, the sale conducted is not valid in law, so she sought for setting aside the sale.  5. In Writ Petition No.17320 of 2007, the auction purchaser  contends  that  he  is  the  auction purchaser in the auction conducted by the Recovery Officer in pursuance of order passed by DRT in OA No.309  of  2002  and  as  per  Certificate  No.3264 issued by DRT on 5.10.2006. The auction purchaser has purchased the property for Rs.3.27 crores. In pursuance of the deposit the sale was confirmed on 15.11.2006.  6. The High Court of Karnataka, in the impugned judgment, has dealt with the issues individually. The Court had framed issues on the inherent power of the Lok Adalat, the action of the Debt Recovery Tribunal  (DRT)  in  deciding  the  interim applications  filed  by  the  guarantor  and  the possession by the auction purchaser and payment of solatium  to  the  Central  Bank  of  India.  On  the issue of the inherent power of the Lok Adalat, the High Court after relying on a number of decisions held that as the guarantor was not a party to the

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Joint Memo, the decree would not be binding on her. Regarding the validity of the sale, the High Court held that the sale was not done as per the mandate of the sale proclamation which said that the  sale  was  to  be  conducted  part  by  part  and stopped as soon as the decree amount was realized. Thus, the High Court held that the auction was violative of Order 21 Rule 64. It also rejected the plea for solatium of 20% of the Central Bank of India.  7. The learned counsel for the appellant contends that the respondent cannot seek recalling of the settlement  which  was  entered  into  between  the Lender  and  the  Borrower.  The  appellant  contends that  there  is  no  provision  under  the  Legal Services  Authority  Act,  1987  (“the  Act”,  for short) which entitles the Lok Adalat to set-aside or adjudicate on its own orders. Under Section 21 of the Act of 1987 the awards of the Lok Adalat are given the status of a decree of a Civil Court and  finality  is  given  to  them.  Under  Section 21(2), no appeal lies to any Court against the

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award. The High Court has erred in upholding that the settlement entered into between the Bank and Borrower  can  be  recalled  at  the  behest  of  the Guarantor after 3 years of the settlement order being passed. The High Court has not appreciated Clause  2  of  the  Form  of  Guarantee  that  was executed by Respondent No.1 in favour of the Bank. She cannot escape liability merely on the ground of being unaware, after 3 years, when a letter dated  26.12.2006  was  written  by  the  learned counsel for the respondents to the learned counsel for the Bank, making an offer to settle the matter by  paying  Rs.33.50  Lakhs  as  per  award  dated 20.03.2004.  The  High  Court  has  failed  to appreciate  that  Respondent  No.1  and  her  family members  had  availed  loan  for  business  purposes. They were unable to repay the loan amount. Thus, it  is  apparent  that  various  proceedings  were initiated by Respondent No.1 with a mala fide and fraudulent  intent  to  stall  the  recovery proceedings. The High Court failed to appreciate that  huge  amounts  exceeding  Rs.52,45,967/-  were

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due, as on 20.03.2004, to a public institution and inspite of expiry of more than 10 years the Bank has not realized the amounts due. The High Court also  failed  to  appreciate  that  the  sale  of mortgaged property was effected under provisions of Income Tax (Certificate proceedings) Rules. The sale was effected as per Rule 60 and Rule 61. The High Court failed to appreciate that the mortgaged property  comprised  of  a  residential  house,  car shed, vacant portico and open space and it was not possible  to  sell  only  a  portion  thereof.  The learned  counsel  for  the  appellant  finally concluded that the High Court was not justified in rejecting the request made by the appellant that if for any reason the Court came to the conclusion that  the  auction  of  the  property  is  to  be set-aside, 20 per cent of the bid money should be awarded to the appellant Bank as solatium.    8. The learned counsel for Respondents contends that the appellant has suppressed material facts, that  the  award  passed  by  the  Lok  Adalat  was without  her  consent  and  further,  the  sale

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proceedings  were  null  and  void.  Originally  the partnership  firm  called  Satyashree  Silks  had raised a loan of Rs.17.5 lakhs from Central Bank of India. The Counsel for the Respondents contends that she has got nothing to do with the firm. When the matter was pending before the DRT, N. Surya Bhagavan, Respondent No.2 signed a Joint Memo for referring  the  matter  to  the  Lok  Adalat.  The counsel for the Respondents stated that Joint Memo was not signed by the Respondents. No notice was issued  on  the  Joint  Memo  to  the  Respondents. Before  the  Lok  Adalat,  Respondents  alleges  that the Joint Memo was filed whereunder the partners of  Satyashree  Silks  would  repay  the  sum  of Rs.33,50,000/-. The learned counsel contends that N. Surya Bhagavan had no authority to enter into a contract on behalf of the Respondents. After lapse of two years, the property was attached and notice of  proclamation  for  sale  was  published  on  the ground of non-payment of amount. It was only at this juncture that the Respondents came to know of the  settlement.  As  soon  as  the  answering

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respondent came to know of the proclamation and auction sale notice of the property, she preferred a writ petition before the Karnataka High Court, being W.P. No.6625/2006. The High Court dismissed the writ petition by its order dated 01.06.2006. The Respondents thereafter preferred a writ appeal being  W.A.  No.899/2006  and  the  High  Court permitted  the  Respondents  to  approach  the  Lok Adalat for recalling of the award passed. 9. Learned  counsel  for  the  respondents  further contends that when the recall application of the respondents was pending before the Lok Adalat, the appellant  published  sale  proclamation.  In  the proclamation it was stated specifically that the property would be put for sale in lots, and it was further directed that if the amount is realized from sale of 1st lot, the sale would be stopped immediately.  As  per  the  contention  of  the Respondents,  this  vital  document  had  been suppressed. As per the sale proclamation itself, it is clear that the dues as on that day were only Rs.52,45,967.  On  that  very  day  the  auction  was

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finalized  for  Rs.3.27  crores  when  actually  the worth of the property was more than 5 crores. The auction sale was a collusive sale.    10. We  have  heard  the  learned  counsel  for  the parties. 11. We are of the opinion that the questions that need  to  be  decided  by  us  are  regarding  the liability of the guarantor under Section 128 of the Indian Contract Act, 1872. The legislature has succinctly  stated  that  the  liability  of  the guarantor  is  co-extensive  with  that  of  the principal debtor unless it is otherwise provided by the contract. This Court has decided on this question, time and again, in line with the intent

of the legislature.  In  Ram Kishun and Ors. v. State of U.P. and Ors., (2012) 11 SCC 511, this Court has held that “in view of the provisions of Section 128 of the Contract Act, the liability of

the guarantor/surety is co-extensive with that of

the debtor.”  The only exception to the nature of the liability of the guarantor is provided in the

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Section  itself,  which  is  only  if  it  stated explicitly to be otherwise in the Contract.  12. In the case of Ram Kishun (supra), this Court has also stated that it is the prerogative of the Creditor alone whether he would move against the principal debtor first or the surety, to realize the loan amount. This Court observed:

“Therefore, the creditor has a right to obtain a decree against the surety and the principal debtor. The surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor for the reason that it is the business  of  the  surety/guarantor  to  see whether the principal debtor has paid or not. The surety does not have a right to dictate terms to the creditor as to how he should make the recovery and pursue his remedies against the principal debtor at his instance”.

Thus, we are of the view that in the present case the guarantor cannot escape from her liability as a guarantor for the debt taken by the principal debtor.  In  the  loan  agreement,  which  is  the contract before us, there is no clause which shows that  the  liability  of  the  guarantor  is  not co-extensive with the principal debtor. Therefore

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Section 128 of the Indian Contract Act will apply here without any exception.  13. After  a  thorough  reading  of  the  Form  of Guarantee  for  Advances  &  Credit  Generally,  our attention  has  been  drawn  to  Clause  2  where Respondent No.1, C.L. Vimala and one of her sons N.  Ramesh  Babu,  have  stated  under  the  relevant part of the clause as under:

“2)……in relation to the subject matter of this guarantee or any judgement or award obtained by you against the principal debtor shall be binding on us….”

14. This Court has held in United Bank of India

v. Bengal Behar Construction Company Ltd. and

others, (1998) 8 SCC 653, that the Clauses in the letter of guarantee are binding on the guarantors as follows:

“In view of the above, the question regarding confirmation  of  the  decree  against  the guarantors now needs to be settled. ……………… we see no reason why the guarantors should not be made liable under the letters of guarantee, the terms whereof clearly stipulate that on the failure of the principal debtor to abide by the contract, they will be liable to pay the amount due from the principal debtor by the appellants.  Clause 15 of the letter of guarantee,  in  terms  states  that  any  action settled or stated between the bank and the principal debtor or admitted by the principal debtor shall be accepted by the guarantors as

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conclusive  evidence.  In  view  of  this stipulation in the letter of guarantee, once the decree on admission is passed against the principal debtor, the guarantors would become liable  to  satisfy  the  decree  jointly  and severally.”

(Emphasis supplied)

Thus, we see no reason why the Joint Memo, which states compromise arrived at between the Central Bank of India and the principal debtors, would not bind  C.L.  Vimla  when  under  Clause  (2)  she  has admitted that any judgment or award obtained by the Central Bank of India against the principal debtor would bind the parties.  15. The mere fact of ignorance cannot be a valid ground. The respondent, C.L. Vimala and her son, N.Surya Bhagavan who signed the joint memo, were residing in the same house. We see no reason why the Respondent would not know of the joint memo, when  she  could  have  by  reasonable  means  made herself aware of the proceedings.  16. It  appears  that  respondent  No.1  Smt.  C.L. Vimla filed writ petitions one after the other, being Writ Petition No.6625 of 2006 filed on 1st

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June, 2006, and another writ petition, being Writ Petition No.8186 of 2006, was filed by her two sons on 20th  June, 2006. The said writ petitions were also dismissed by the High Court. Smt.C.L. Vimla  had  life  interest  of  1/6th share  in  the property in question. It is not in dispute that Smt.C.L.  Vimla  was  residing  with  her  son respondent No.3 and was under his care and custody and  it  appears  from  the  facts  that  the  said respondent  No.3  categorically  stated  before  the State Legal Services Authority on his behalf and on  behalf  of  other  defendants,  including  his mother,  the  respondent  No.1,  in  respect  of  the settlement dated 20th March, 2004. We have further noticed that the Court on a number of occasions granted time to deposit the amount to meet the liabilities of the bank by the respondents. But it appears that, time and again, they have failed to comply with the orders.  17. The  respondent  Nos.3  to  8  who  were  actual owners of the property in dispute have remained ex-parte throughout, i.e. from the date of filing

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of Miscellaneous Petition dated 29th April, 2006, challenging  the  award  dated  20th March,  2004. Respondent No.1 had the only right of residence in respect of the property in question. She did not dispute the fact that she was the guarantor in the transaction by which her sons took loan from the Central Bank. It is also not in dispute that the property was mortgaged with the Bank. 18. We cannot brush aside the fact that respondent Nos.4, 6 & 7 filed a claim petition before the Recovery  Officer  on  4th January,  2007  claiming their share of balance of sale proceedings after adjustment of the dues of the Central Bank which shows  that  the  parties  to  the  dispute  have accepted the award passed by the Lok Adalat. It appears to us that the High Court did not consider the said facts and further it has escaped from the mind of the High Court that the auction purchaser has  purchased  the  auctioned  property  for  sale consideration  of  Rs.3.27  crores  and  25%  of  the sale consideration was duly paid on 5th October, 2006  and  furthermore  on  19th October,  2006,  the

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balance amount of sale consideration was duly paid by the auction purchaser. We have further noted that the sale was confirmed on 15th November, 2006. The sale certificate was also issued in favour of the auction purchaser after paying the requisite stamp duty and registration fees which, as pointed out to us on behalf of the auction purchaser, to the  tune  of  Rs.30,73,800/-.  It  is  also  not  in dispute  that  auction  purchaser  was  put  in possession  of  the  property  and  is  still  in possession  of  the  property  since  the  sale certificate was issued and registration was made in his favour. It is submitted on behalf of the auction  purchaser  that  he  has  purchased  the property  by  availing  private  borrowing  for  the said property and he is paying nearly Rs.5 lakhs per month as interest. Therefore, in our opinion, the equity and good conscience also has to play a role in the matter in question on the given facts and  after  considering  the  conduct  of  the respondents (C.L. Vimla and others) in the matter. In these circumstances, we feel that it would not

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be proper for us at this stage to set aside the sale, as has been done by the High Court without taking  into  consideration  all  these  facts. Further, the High Court has failed to appreciate these  facts  and  wrongly  held  that  the  auction purchaser  is  a  party  to  the  negligence  of  the Recovery  Officer  and,  accordingly,  the  sale  was set aside. In our opinion, the auction purchaser had nothing to do in holding the auction. Rather he  deposited  the  money  after  bonafidely participating  in  the  auction  and,  in  fact, suffered  for  long  time  to  pay  a  price  by participating in auction proceedings.  19. In  these  circumstances,  we  further  noticed that the principal debtors were not prepared to pay back the amount to the Bank and did not choose to defend themselves properly. The conduct of the principal debtors also cannot be overlooked by us. 20. Accordingly, we set aside the order passed by the High Court and hold that since the auction purchaser has already paid the full amount of sale consideration and is in possession of the property

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in  question  for  more  than  about  8  years,  for equity and good conscience, we do not intend to interfere with his possession and we, therefore, set aside the order passed by the High Court, and allow these appeals.         

……………………………………………………J (J. CHELAMESWAR)

……………………………………………………J (PINAKI CHANDRA GHOSE)

New Delhi; April 28, 2015.