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State Bank of India Vs. Stephen Aranha and Ors. - (High Court of Delhi) (29 Aug 2023)

Liability of a guarantor would arise on the failure on the part of the principal borrower to honour its commitment; prior to that, it is a contingent liability



The Petitioner ('SBI') has filed the present petition impugning an order passed by the learned Debts Recovery Appellate Tribunal ('the DRAT').SBI had extended financial assistance to Respondent no.2 (M/s Altos India Ltd.) which was both fund based and non-fund based. It is SBI's case that, the facilities extended to Respondent no.2 were guaranteed by promoters and directors, including Respondent no.1. The controversy, in the present appeal, is confined to the liability of SBI's claim against respondent no.1 as a guarantor for the financial facility extended to Respondent no.2.

It is SBI' case that although Respondent no.1 was required to be released of his guarantee in terms of the sanction letter(s) but SBI had not issued any communication or executed any document for releasing Respondent no.1 of his liability as a guarantor.

The failure to execute any document of release, is not material. It is not disputed that, Respondent no.1 furnished the guarantee in compliance with the terms and conditions as stipulated by SBI. Thus, it was on a clear understanding that, the guarantee would subsist till the second charge was created on the fixed asset. Since it is not disputed that that second charge was created, Respondent no.1 would stand absolved of his liability as the guarantor.

SBI also relies on various letters confirming the balance outstanding as of the end of the financial years. The said letters were issued on the letterhead of Respondent no.2 Company.

The letter was issued for the purpose of confirming the balance outstanding against the working capital demand loan extended by SBI to Respondent no.2. The letter is on the letterhead of respondent no.2. It is also clear that it refers to the books of Respondent no.2. The said letter also acknowledges the liability to the bank for payment of interest accrued or to be accrued. The tenor of the letter clearly indicates that it is an acknowledgment of the "outstanding(s)" by the debtor and does not purport to acknowledge the obligation of a guarantor. The liability of a guarantor would arise on the failure on the part of the principal borrower to honour its commitment; prior to that, it is a contingent liability. Indisputably, the books of the guarantor would not reflect any liability owed to SBI till a demand in this regard is raised.

The balance confirmation letters were signed by Respondent no.1 who was also, at the material time, a director of Respondent no.2. There is no infirmity with the decision of the learned DRAT in holding that the acknowledgement letters does not make Respondent no.1 liable as a guarantor. Present Court find it difficult to accept that notwithstanding that such liability had ceased on the second charge of the fixed asset of Respondent no.2 being created in favour of SBI, respondent no 1 would be liable as a guarantor on the basis of the letters for confirmation of the outstanding balance.

There is no infirmity with the decision of the learned DRAT that, any letter of acknowledgment of debt, would not revive Respondent no.1's liability as a guarantor after he stood relieved. Petition dismissed.


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