'SHAMS MEHMOOD MIRZA, J.---This regular first appeal filed under section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (the Ordinance) calls into question judgment and decree dated 02.11.2007 passed by the banking court.
2. Brief facts of the case are that the respondent bank instituted a snit against the appellants for the recovery of Rs,1,381,753/- due under two cash finance facilities. The appellants contested the suit with appellants Nos. 1 and 2 and appellants Nos. 3 to 5 filing their separate and independent applications for leave to defend. The said applications for leave to defend were dismissed and consequently the suit filed by the respondent bank was decreed in its favour for a sum of Rs,1,165,307/-.
3. Having filed their separate applications for leave to defend and taking contradictory stance, the appellants nevertheless jointly filed the present appeal against the judgment and decree passed by the banking court. The perusal of the application for leave to defend filed by appellants Nos.1 and 2 shows that the requirements of section 10 of the Ordinance were not met in as much as although it was stated that an amount of Rs,5,200,000/- was availed and an amount of Rs,4,256,732/- was paid back, the details of the ailment and repayments were not furnished. It was however; admitted that an amount of Rs,4,097,607/- was payable to the plaintiff bank. Appellants Nos.3 to 5, on the other A hand, in their application for leave to defend pleaded discharge of their guarantees on account of release of pledge stocks by the respondent bank to appellants Nos.1 and 2 without their consent. It has been observed that release of pledge stocks was pleaded in the plaint and was not denied by appellant No,2 in his application for leave to defend. When the learned counsel for the appellants was questioned as to how a joint appeal was filed in view of the stand taken by appellants Nos.3 to 5 in their application for leave to defend, he took up the position that he would only plead and argue the appeal to the extent of the defense taken up by appellants Nos.3 to 5 with regard to the discharge of their guarantees.
4. The respondent bank had categorically, averred in the plaint that 1675 bags of Super Basmati Rice were delivered to appellant No,2 at his written request on the execution of trust receipts and that amounts were paid by defendant No,2 from 28.09.2005 to 24.02.2006 in respect of the cash finance (pledge) facility. The aforementioned facts are substantiated by request letter dated 30.06.2005 written by appellant No,2 and execution of trust receipt, which documents were appended 'with the suit. The only question that remains to be determined is that whether release of pledge stocks by the respondent bank to appellant Nos.1 and 2 discharged appellants Nos.3 to 5 from their liability as guarantors.
5. The guarantees executed by appellants Nos.3 to 5 are available .On the record and show that permission was granted to the respondent bank by the terms of the said guarantees to deal with the securities of the principal debtor without reference to the guarantors. Clause 4 of the guarantee is relevant to the issue in this appeal and reads as under: 'You may as you thing fit and without reference to me/us grant to the Customer time or another indulgence or make or accept any arrangement or composition with him in respect of any payment hereby guaranteed and also vary, renew, release, realize or in any way deal with any securities or rights now or hereafter held by you in respect of the sums due under the said agreement.
(emphasis supplied)
'It can be seen from the reading of the above clause that the scope of liability of the guarantor has been defined in extremely broad and wide terms, the effect of which is not to discharge the guarantor of his obligations or liability particularly if there has been some material variation in the principal debtor's obligation or where the creditor deals with the securities offered by the principal debtor.
6. Chapter VIII of the Contract Act, 1872 (the Act) deals with indemnity and guarantee. Section 128 thereof provides that the liability of a guarantor/surety is co-extensive with that of the principal debtor ,unless it is otherwise provided by the contract. It is thus apparent that the guarantor's liability stands on equal footing with that of the principal debtor and that the creditor can sue them jointly and singly. The provision of section 128 however makes such co-extensive liability subject to the terms of the contract. This qualification suggests that the parties to the contract may contract out of this provision. The real question is whether such authority is available to the parties with respect to the other provisions contained in Chapter VIII of the Act. In other words, can such a waiver control and govern the applicability of other provisions contained in Chapter VIII of the Act allowing the guarantor to vary and modify his rights available to him under the said provisions.
Sections 132 to 136 of the Act deal with liability of the surety and discharge of his liability. Section 137 provides that the creditor's forbearance to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary discharge the surety. Similarly, section 138 stipulates that where there are co-sureties, a release by the creditor of one of them does not discharge the others and neither does it free the surety so released from his responsibility to the other sureties. Section 139 deals with the discharge of surety by creditor's act or omission impairing surety's eventual remedy. Sections 140 and 141 deal with the rights of surety on payment of performance and surety's right to benefit of creditor's securities respectively.
7. Section 141 of the Act is relevant to the present case, which reads as under: 'A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
'In the present case, it is worth remembering that appellant No,2 approached the respondent bank with the request to release the pledged stocks as according to him it was losing its value and sought permission to sell the same for repayment to the respondent bank of the amounts under the cash finance (pledge) facility. Acceding to the said request, the respondent bank released the pledged stocks after appellant No,2 executed the trust receipt. It is also an admitted position that after the release of the pledged stocks, appellant No,2 paid amounts to the respondent bank from 28.09.2005 to 24.02.2006. By releasing the pledged stocks and getting payments in return, the respondent bank cannot be said to have lost or parted with the security which can in turn affect discharge of the surety sunder section 141 of the Act. The respondent bank had the right to be paid out of the security of the pledged stocks and by enforcing its right, it cannot be said that the respondent bank had lost or parted with the security or its rights therein. A fortiori, by releasing the pledged stocks, the respondent bank has not impaired any of the rights or remedies of appellants Nos.3 to 5 against appellant No,2. In case of payment by the surety of the amount of the finance facilities under the contract of guarantee, in terms of section 145 of the Act, he has a right to be indemnified and to recover from the principal debtor whatever sum he has originally paid under the guarantee. It has also been noted that there was no averment in the .Application for leave to defend by appellants Nos.3 to 5 that the transaction through which pledged stocks were released was in any way mala fide or that the stocks were sold for a lesser value. The actions of the respondent bank in releasing the pledged stocks to appellant No,2 and getting money in return was not inconsistent with or rendered nugatory the rights of the surety in any manner whatsoever.
Thus, in our considered opinion, the respondent bank did not loose or part with the security of appellant No,2 thus releasing or discharging appellants Nos.3 to 5 from their obligations under the contract of guarantee.
8. The question that was posed earlier in the judgment was whether section 128 of the Act would control the operation of other .Provisions of Chapter VIII as the expression "unless it is otherwise provided by the contract" used in the said section is missing in other provisions. In Citibank N.A. v.
Juggilal Kamlapat Jute Mills Co., AIR 1982 Delhi 487, it was held that it was not necessary for the legislature to provide the words 'in the absence of any contract' in section 133 or 135 or 141 of the Act because these sections themselves speak of consent of the surety regarding variance in the terms of the contract between the principal debtor and the creditor, composition with the principal debtor etc. The relevant passage reads as follows: 'On behalf of the defendants, reliance was placed on a Division Bench decision of the Punjab High Court in Union of India v. Pearl Hosiery Mills, where a contrary view has been taken. In this case, it was held in clear terms that the provisions of section 133 were not subject to a contract to the contrary between the parties to the contract. The said section was in unqualified terms. It was not necessary to put in the words "notwithstanding any contract to the contrary" in this section, because wherever the Legislature wanted that the terms of the contract between the parties should take precedent over the provisions of any section, the words "in the absence of any contract to the contrary" or "in the absence of any special contract" have been inserted in that particular section as has been done in Ss. 152 and 163 of the Contract Act and, therefore, this right could not be waived., With utmost respect, I have not been able to persuade myself to accept this view. In my opinion, there was no necessity for the Legislature to provide the words "in the. Absence of any contract" in section 133 or 141, because the sections themselves speck of consent of the surety, regarding variance in the terms of the contract between the principal debtor and the creditor, composition with the principal debtor, etc. In the presence of the words "without the surety's consent", the words "in the absence of any contract to the contrary" would have been surplus. With utmost respect, therefore, I would follow the Privy Council and the Madras judgments and hold that the rights conferred on the surety under section 133, 135 or 141 could be waived by specific agreement in the deed of guarantee. As a matter of fact, such an agreement would amount to consent within the meaning of those sections.
The afore-mentioned judgment is a clear authority for the proposition that the rights conferred on the surety under sections 133, 135 or 141 of the Act can be waived by specific agreement in the deed of guarantee and that such an agreement would amount to consent within the meaning of the aforesaid sections of the Act.
9. In Corporation Bank v. Mohandas Baliga ILR 1993 KAR 201, while referring to section 128 of the Act it was held that legal right available to the guarantor under the provisions of Chapter VIII of the Act can be given up at the time of execution of the contract of guarantee, provided such giving up of a legal right under any contract is not hit by section 23 of the Act. The relevant observations made in the judgment are as follows: 'We are of the view that as the provisions contained in Chapter VIII of the Act relate to Indemnity and Guarantee, they deal with one subject and they are to be read together. The liability of the surety as stated in general terms in section 128 of the Act is no doubt co-extensive with that of the principal debtor, but this liability is also subject to the terms of the contract; because section 128 of the Act itself specifically provides that the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Thus the liability of the surety is subject to the terms of the contract as may be arrived at between the parties. The words "unless it is otherwise provided in the contract" occurring in section 128 of the Act will also govern the other provisions contained in Chapter VIII of the Act and enable the surety to give up the rights available to him under sections 133, 134, 135, 139 and .141 of the Act. It is a settled legal position of law that a legal right can be given up provided such giving up of legal right under any contract is not hit by section 23 of the Act. Section 133 of the Act makes it clear that any variance made in the contract between the principal debtor and the creditor without the consent of the surety, discharges the surety as to transactions subsequent to variance. This consent of the surety can be obtained either at the time of contract is made between the principal debtor and the creditor to which the surety gives the guarantee for making any change or alteration in the contract to be made or not to claim any right or benefit under Chapter VIII of the Act. In other words, in the surety bond/guarantee-bond itself the surety can agree to waive his rights available to him under the various provisions contained in Chapter VIII of the Act. Such waiving of his right by the surety is permissible under section 133 read with section 128 of the Act.
10. We are in respectful agreement with the reasoning of the above judgments, which enunciate the correct position of law on the subject. Thus, the rights and obligation of a surety and the terms of the contract of guarantee have to be looked at in the context of the statutory provisions contained in the Act as interpreted in the above judgments. The provisions contained in Chapter VIII of the Act are closely interlinked and, therefore, must be read together and not in isolation.
These provisions clearly show that the rights available to the surety under Chapter VIII of the Act can be waived at the time of making the contract of guarantee or at any time thereafter. The rights of a surety under Chapter VIII of the Act relate to the agreement entered into by individuals and as such they have nothing to do with the public policy. The appellants of their own free will and volition entered into the agreements of guarantee and there is no averment in the application for leave to defend that these guarantees were obtained through fraud. The consideration, in the case of contract of guarantee, is the advancing of loan to the principal debtor with the-'object to secure the debt of the creditor. The consideration is neither unlawful nor the object of the agreement is unlawful as they are not forbidden by law. As stated earlier, the rights of a surety under Chapter VIII of the Act can be waived which waiver does not defeat any provision of law. It is, therefore, not possible to hold that the recitals in the agreement of guarantee waiving rights under Chapter VIII of the Act are opposed to public policy. In the light of the expressed stipulations in the deeds of guarantee executed by appellants Nos.3 to 5, any reliance on section 141 of the Act is entirely futile and of no avail to them.
11. Before parting with the judgment, we may also make reference to certain judgments from our jurisdiction which have taken a similar view as the afore-mentioned judgments from the Indian jurisdiction. In Mian Aftab A. Sheikh and others v. Messrs Trust Leasing Corporation Limited and another 2003 CLD 702, it was held as under: ' ....If variation or composition of the loan or time etc. As to its repayment was allowed by the creditor to the borrower and consent/assent in advance thereto was given by the guarantor in the letter of guarantee, subsequent to the date of guarantee, such variation, composition, extension, charge or indulgence being within the contemplation of the parties at the time of execution of guarantee did not effect discharge of the surety/guarantee from obligations under the guarantee.
And as such surety continued to be bound by the terms of the guarantee despite moratorium, enlargement of time, composition and variations between the creditor and principal borrower.
'Similarly, in a judgment reported as Amir Javed and another v. 'Al-Baraka Islamic Investment Bank and others 2005 ..CLD 178, it was held that:
8. It is evident from the perusal of the contract of guarantee that the appellants had signed and guaranteed the loan not being the guarantors only but as a principal debtor. Their liability to pay shall not stand discharged merely by resorting to section 133 of the Contract Act, 1872. The liability of the appellants besides being guarantor is also in their capacity as principal debtor.
9. The subsequent agreements do not absolve the appellants of their liability because the appellants have bound themselves by virtue of clause (10) of the Contract of Guarantee that their liability shall remain unaffected even in the event of modification, variation of the terms of facility, composition or other arrangements with the customer. The Contract of Guarantee is itself an independent agreement, the terms whereof bind the parties in isolation with main agreement.
12. The appellants have not been able to raise any good ground for interference in the judgment and decree passed by the banking court. I This appeal is accordingly dismissed.