REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.137 OF 2007

M/S. H.D.F.C. … APPELLANT VERSUS

GAUTAM KUMAR NAG & ORS. … RESPONDENTS

J U D G M E N T Aftab Alam, J.

1. This appeal is directed against the judgment  and order dated August 9, 2005, of the Delhi High  Court by which it allowed the appeals of the two  respondents  (defendant  Nos.2  and  3  respectively  before the trial court), set aside the judgment and  decree passed by the trial court and permitted the  appellants to file their written statements within  four weeks from the date of the judgment, directing  further  that  the  trial  court  would  then  proceed  

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with the suit and dispose it of in accordance with  law.  2. The  appellant  M/s.  Housing  Development  and  Finance Corporation (in short “HDFC”) instituted a  suit  under  Order  XXXVII  of  the  Code  of  Civil  Procedure,  1908,  for  realisation  of  its  dues  against defendant No.1 (the borrower; not before  this  Court)  and  the  two  respondents  (defendant  Nos.2 & 3) who were the guarantors to the loan.  According to the case of the appellant-plaintiff,  defendant No.1 who was the owner of a plot of land  approached the appellant-plaintiff for a loan for  constructing  a  house  on  the  plot.  The  loan  was  sanctioned on October 29, 1997, and on December 9,  1997, defendant No.1 executed the Loan Agreement  and a promissory note in favour of the appellant.  In  addition,  defendant  No.1  also  created  an  equitable mortgage in favour of the plaintiff by  depositing the title deeds of the plot in question.  The other two defendants, respondents before this  

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Court, stood guarantee for repayment of the loan  and executed the letters of guarantee on December  9,  1997.  On  the  execution  of  the  necessary  documents the loan was disbursed to defendant No.1  in two instalments. 3.  The loan amount, along with interest at the  rate of 15% per annum was to be repaid in equalised  monthly instalments over a period of 180 months and  in case of default, according to the terms of the  loan,  the  outstanding  would  attract  additional  interest @ 18% per annum. 4.  The defendants defaulted in payment of the  EMIs and as a result, a large sum was outstanding  against  them.  The  defendants  did  not  pay  the  instalments despite letters and reminders. Hence,  the plaintiff invoked the guarantees  vide letter  dated  October  22,  1998,  and  intimated  the  two  respondents that in case of failure to make the  payment,  legal  proceedings  would  be  instituted  against  them.  Despite  the  aforesaid  letter  and  

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legal notices sent on behalf of the appellant, the  defendants did not pay the outstanding amount of  Rs.4,37,350/-, and the plaintiff was thus left with  no option but to institute the suit for realisation  of its dues. 5. Defendant  No.1  did  not  appear  in  the  suit  despite  notice.  The  two  defendants-respondents,  however, appeared before the trial court and filed  separate  applications  under  Order  XXXVII  Rule  3  sub-rule (5) of the Code of Civil Procedure for  permission to defend the suit.    6. The defendants’ applications were based on a  number of grounds but we may only advert to the one  that seems to have weighed with the High Court. It  was  contended  on  behalf  of  the  respondents  that  since the plaintiff-appellant had got a promissory  note  executed  in  its  favour  by  the  borrower- defendant No.1 and had further made the borrower  create  an  equitable  mortgage  in  its  favour  by  deposit of title deeds, they would be absolved of  

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their  liability  in  terms  of  Section  139  of  the  Contract Act. According to the respondents, their  plea  gave  rise  to  a  triable  issue  and  they,  accordingly,  sought  permission  to  file  their  written statements and contest the suit.  The trial  court by its judgment and order examined all the  pleas, including the one based on Section 139 of  the Contract Act and found and held that none of  the pleas raised by the defendants gave rise to any  substantial  defence  against  the  claim  of  the  plaintiff.  Accordingly, it dismissed the petitions  filed by the defendants-respondents by order dated  April 29, 2005, and proceeded to decree the suit of  the appellant-plaintiff for a sum of Rs.4,54,669/-  along  with  cost  and  pendente lite and  future  interest @ 10% per annum on the decretal amount  from the date of filing of the suit till the date  of realization.  7. In appeal the Delhi High Court, as noted above,  set aside the order and decree passed by the trial  

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court  and  directed  it  to  allow  the  defendants- respondents  to  file  their  written  statement  and  proceed to try the suit from that stage.  The High  Court noted that relying upon Section 139 of the  Contract  Act,  a  contention  was  raised  by  the  respondents  that  for  recovery  of  its  loan  from  defendant  No.1,  the  principal  borrower,  the  plaintiff  should  have  taken  recourse  first  by  either  seeking  to  give  effect  to  the  promissory  note  or  by  enforcing  the  equitable  mortgage.  Neither of these remedies which were open to the  plaintiff were taken recourse to and the recovery  was  sought  to  be  made  straightaway  from  the  appellants.  The High Court further held that the  trial Judge fell into error in holding that Section  139 of the Contract Act had no application to the  facts of the case.  According to the High Court,  this  was  beyond  the  scope  of  deciding  an  application for leave to defend.  The High Court  observed  that  the  question  was  not  about  the  

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correctness or otherwise of the defence raised by  the appellants and what was required to be looked  into by the trial Judge was whether a triable issue  was made out or not. If a triable issue was made  out,  then  leave  to  defend  ought  to  have  been  granted and thereafter the defence raised by the  appellants could have been adjudicated on merits.  The  correctness  of  the  defence  raised  by  the  defendants could not have been looked into by the  trial Judge at the time of deciding the application  for leave to defend. In support of its view, the  High Court relied upon a decision of this Court in  M/s Mechelec Engineers & Manufacturers v. M/s Basic  Equipment Corporation, (1976) 4 SCC 687. 8. In  our  view,  the  High  Court  was  completely  wrong in holding that the respondents were able to  make out a triable issue on the basis of Section  139 of the Contract Act. It is well established  that the liability of the guarantor is equal to and  co-extensive  with  the  borrower  and  it  is  highly  

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doubtful that the guarantor can avoid his liability  simply on the basis of the promissory note made out  or an equitable mortgage created by the borrower in  favour of the lender. However, in the facts of this  case,  this  question  does  not  even  arise.  A  reference to the deed of guarantee executed by the  two  respondents  would  have  made  the  position  completely clear but unfortunately the attention of  the  High  Court  was  not  drawn  to  the  relevant  clauses in the deed of guarantee.   9. The two respondents executed identical deeds of  guarantee  of  which  clauses  (2)  and  (3)  read  as  follows:-

“(2)I  hereby  accord  my  consent  to  the  terms  of  the  said  Loan  Agreement  and/or  any  instrument  or  instruments  that  may  hereafter be executed by the Borrower/s in  your favour as aforesaid, being by mutual  consent  between  you  and  him/them  in  any  respect  varied  or  modified  without  requiring my consent or approval thereto  and I agree that my liability under this  Guarantee shall in no manner be affected  by such variations and modifications and I  expressly give up all my rights as surety  under  the  provisions  of  the  Indian  Contract Act, 1872 in that behalf.  

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(3) You  shall  have  the  fullest  liberty  without  in  any  way  affecting  this  Guarantee  and  discharging  me  from  my  liability thereunder to postpone for any  time or from time to time the exercise of  any  power  of  (sic.)  powers  reserved  or  conferred  on  you  by  the  said  Loan  Agreement or any instrument or instruments  that  may  hereafter  be  executed  by  the  Borrower/s in your favour and to exercise  the same at any time and in any manner and  either  to  enforce  or  forbear  to  enforce  payment of principal or interest or other  monies due to you by the Borrower/s or any  of the remedies or securities available to  you or to grant any indulgence or facility  to  the  Borrower/s  AND  I  SHALL  not  be  released  by  any  exercise  by  you  of  you  (sic.)  liberty  with  reference  to  the  matters  aforesaid  or  any  of  them  or  by  reason  of  time  being  given  to  the  Borrower/s  or  of  any  other  forbearance,  act or omission on your part or any other  indulgence by you to the Borrower/s or by  any other matter or thing whatsoever which  under the law relating to sureties would  but for this provision have the effect of  so  releasing  me  AND  I  hereby  waive  all  suretyship an (sic.) other rights which I  might otherwise be entitled to enforce or  which  but  for  this  provision  have  the  effect of releasing me.”

(emphasis added) 10. In light of the expressed stipulations, in the  guarantee,  any  reliance  on  Section  139  of  the  

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Contract Act is evidently futile and of no avail.  In our view, therefore, the impugned judgment of  the High Court is unsustainable and is fit to be  set aside.  We, accordingly, set aside the impugned  judgment of the High Court and restore the order  and decree passed by the trial court. 11. In the result the appeal is allowed but in the  facts of the case, there will be no order as to  costs.   

………………………………………………………J. (Aftab Alam)

………………………………………………………J. (Ranjana Prakash Desai)

New Delhi; January 20, 2012.  

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