1. ' Brief facts of the case are that the defendant No,13 was allowed an overdraft limit of Rs,1 Million in or about 1979 which was subsequently enhanced in 1980 to Rs,3 Million and in 1981 to Rs,10 Million.
2. This limit was renewed in 1982 and again in 1983. The defendant No,13 fully availed of the said over draft facility and as security for the same executed a Demand Promissory Note, dated 11-1-1983 in favour of the plaintiffs for payment of Rs,10 Million with interest at the rate of 14%. As collateral security the defendant No,13 executed a Registered Deed of Mortgage, dated 11-1-1983 in favour of the plaintiffs to secure repayment of Rs,10 Million together with interest rests,, costs, charges and expenses on its factory at Lahore, the first charge thereon having been created in favour of PICIC for foreign currency loan. The defendants Nos.1 to 10 who were the directors of defendant No,13 at the relevant time personally guaranteed the repayment of the said facility of Rs,10 Million by executing a common letter of guarantee, dated 11-1-1983.
3. ' The plaintiffs granted the defendant No,13 additional loan of Rs,2.200 Million against the Security of further collateral charge on the mortgage property mentioned earlier as well as personal guarantees of the directors. This loan was disbursed on 14-5-1983. As security the defendant No,13 executed a Demand Promissory Note, dated 14-5-1983. In addition the plaintiffs accommodated the defendant No,13 at their request for excess drawing in over draft account subject to maximum of Rs,12,800 Million. The defendants Nos.1 to 4 and 9 to 12 who were the directors of defendant No,13 company at the relevant time executed two separate common letters of guarantee, dated 11-12- 1983 to repay the afore said over draft and loan. All this was secured by defendant No,13 in terms of sanction by further Deed of Registered Collateral Mortgage, dated 30-12-1984 creating further second charge on the factory of the defendant No,13 for Rs,5 Million, thus, making a total second mortgage security of Rs,10 Million, dated 11-1-1983.
4. ' The defendant No,13 were slack in repayment and by 1985 its liabilities had increased to 18.076 Million which was duly acknowledged by the defendant No,13. This outstanding amount continued to increase as no repayment were made by defendant No,13 after 1983 except a small sum of Rs,7,485.51 on 3-12-1986.
5. ' The management of defendant No,13 was changed on or about 21-3-1987. The new management acknowledged and confirmed the loan of Rs,2.200 Million and promised to pay it on demand with interest at the rate of 14% with quarterly rests. The outstanding amounts in the loan account had increased to Rs,38,49,760.48 by 26-11-1990. The defendant No,13 made a repayment of Rs,450,000 by monthly instalments of Rs,25,000 each commencing from 15-11-1989 but thereafter, no repayments were made. Consequently, the plaintiffs served a demand notice on the defendants vide their letter, dated 28-12-1992 for repayments of the over draft and loan liabilities.
6. ' The project of defendant No,13 stopped functioning in 1993. Consequently, PICIC, the main lender and the ICP led consortium and the plaintiffs agreed to a package deal for the relief of defendant No,13 by sale of the project of defendant No,13 to M/s. Taj Ali Shaikh and Associates for Rs,24.742 Million and the plaintiffs agreed to accept Rs,83,56,500 in full and final settlement of plaintiffs' all liabilities of bridge finance and debenture loan and at its syndicated loans the over draft and loan liability.. This package deal through sale of the project was approved by the Board of Directors of the plaintiffs bank on 30-4-1995 unanimously but it nevertheless resolved to file suits against the ex-directors/guarantors for the balance in the over draft and loans account of defendant No,13.
7. ' The plaintiffs through this suit claim only against the defendants Nos.4 to 12 (defendants Nos.1 to 3, having been deleted as per Court order, dated 13-2-1998) under, the main guarantees, dated 11-1- 1983, 14-5-1983 and 11-12-1983 for a total amount of Rs,69,957,104.
8. ' The defendants Nos.1 to 12 were granted leave to defend by order, dated 15-10-1997 and they filed their written statements.
9. ' The main contention of the learned counsel for the defendants is that the fact that the plaintiffs had accepted a certain sum in full and final settlement of their liabilities and had also written off the balance amount and waived the interest would mean that the guarantors, that is the defendants were discharged from their liabilities under the guarantee.
10. ' Based on the pleadings of the parties, the following issues were framed:
(1) Whether the suit was filed is incompetent in law?
(2) Whether the alleged agreement; dated 21-3-1987 between the outgoing management (sellers) and incoming management (purchasers) had the effect of discharging defendants Nos.1 to 4 as guarantors?
(3) Whether notwithstanding acceptance of Rs,8,356,500 by the plaintiffs bank towards full, and final settlement against liabilities from Defendant No,13 (proforma defendant) the defendants Nos.2 to 12 as guarantors are still jointly and severally liable to the plaintiffs for any further amount.
(4) Whether the alleged resignation of defendants Nos. 5 and 6 on 10-12-1983 as directors of defendant No,13 absolve them of their contractual obligation under common letters of guarantee (Annexures "D", "H", "K" & "L" to the plaint)? If so, to what extent?
(5) Whether the change of management in March, 1987 and the terms thereof were with the knowledge and permission of the plaintiff's bank? If so, to what effect?
(6) Whether the suit against defendant No,6 is barred under sections 134 and 135 of the Contract Act?
(7) Whether the personal guarantees of defendant No,6 stood substituted by the personal guarantees of defendant No,12. If so whether the suit is maintainable against defendant No,6?
(8) Whether the plaintiff is entitled to claim suit amount? If so, against which defendant?
(9) What should the decree be?
11. ' The learned counsels for the parties have agreed to have the matter decided as per documents on record and have led no evidence.
12. ' In view of the fact that no evidence has been led and also that the issue involved is very simple that is to say whether the defendants, the guarantors are discharged from their liabilities since the plaintiffs have entered into a settlement with the defendant No,13, the main borrower, I feel that there is no need to give my findings on the individuals issues.
13. ' Before examining the arguments advanced by the learned counsels it may be appropriate to reproduce the relevant portion of the resolution of Board of Directors of the plaintiffs bank, dated 30-4-1995.
14. "Resolved that keeping in view the decision of the ICP-led Consortium to dispose of the project against payment of Rs,24.742 Million out of which the share of Habib Bank Limited comes to Rs,8,356,500.00 and the recommendation of the Executive Committee the payment of Rs,8,356,500.00 be and is hereby accepted as full and final settlement of liabilities against M/s. Shafaq Lamps Corporation Limited, thereby writing off a sum of Rs,32.588 Million and waiving interest of Rs,27.386 Million.
15. ' Further resolved that legal action/filing of suit against ex-directors of the company as guarantors may be and is hereby initiated immediately on the basis of their personal guarantees."
16. ' From the above resolution it is clear that the plaintiffs had accepted a certain amount in full and final settlement of the liabilities of the defendant No,13 and that they had written off the balance amount and also had waived the interest. It is, therefore, surprising that the plaintiffs still wish to maintain a claim against the previous directors. The learned counsel for the plaintiffs submit that as per clause 4 of the letters of guarantee the guarantees in question were agreed to be treated as continuous securities and the settlement of liabilities was executed only as against the defendant No,13, who according to him, are proforma defendants here. He further argues that the Board of the plaintiffs had clearly resolved that they would not waive their claim against the guarantors. The learned counsel relies on the provisions of section 135 of the Contract Act and also on the cases of "A.R. Krishnaswa mi Ayyar and another v. Travancore National Bank Limited (AIR 1940 Madras 437), Ram Ranjan Rakshit v. The Chief Administrator Rehabilitation Finance Administration, New Delhi and others (AIR 1960 Calcutta 416).
17. ' In so far as the defendants are concerned they have maintained that once the management of defendant No,13 company was changed they had nothing further to do with the said company and that the liabilities in respect of the finance facility provided by the plaintiffs were transferred to the new directors. In any case they emphasise the fact that since the principal debtor is no longer liable in view of the settlement with the plaintiffs they too are not liable under the guarantee and the plaintiffs cannot maintain this suit against them.
18. ' It may be appropriate here to reproduce the sections 134, 135 and 137 of the Contract Act as both parties rely on these provisions of law.
19. "134. The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
135. A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principle debtor, discharges the surety, unless the surety assents to such contract.
137. Mere forbearance on the part of the creditor 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."
20. ' A plain reading of the above sections would show that section 134 lays down the principle that a surety is discharged if there is an agreement between the creditor and the principal debtor whereby the principal debtor is released. Section 135 deals with a situation where the creditor and the principal debtor entered into an arrangement whereby the creditor gives time or promises not to sue the principal debtor, the surety is discharged unless the surety is a party to such agreement.
21. However, section 137 appears to, on the face of it, counter the aforesaid provisions inasmuch as it states that if the creditor decides to accommodate the principal debtor and withhold, the enforcement of the remedy available to him against the principal debtor, it does not result in discharging of the surety.
22. The provisions of sections 134 and 135 are clear and they are based on principle of justice and equity. It is obvious, that regardless of what is mentioned in the letters of guarantees by the guarantors, the fact remains that the guarantors liability is a secondary liability in respect of the loan advanced or accommodation made by the creditor to the principal debtor. It is not an independent and a personal liability that the guarantor undertakes. His liability only arises if the creditor is unable to recover from the principal debtor. Consequently, in case the creditor decides to enter into an arrangement with the principal debtor whereby the principal debtor is absolved from any liability with regard to the loans or facility availed by him then it is difficult to see as to how the guarantors would continue to be liable unless they were parties to such agreement between the principal debtor and the creditor. However, if the creditor enters into an arrangement with the principal debtor only in respect of part of the amount of outstanding loan then perhaps the argument can be built up that the guarantor could be liable for the balance but even then the question would arise whether the guarantor was privy to such new arrangement between the creditor and the principal debtor. Even though on the face of it section 137 would tend to curtail the freedom of the guarantor consequent upon an arrangement between the principal debtor and creditor but the wording of this section would show that this would occur only if the creditor forbears to avail of his remedies against principal debtor. There is considerable difference between the language of section 137 and the other two sections. What section 137 deals with is accommodation with respect to seeking of remedy by the creditor as against the principal debtor whereas the other sections deal with a settlement between the principal debtor and creditor.
23. Consequently, in this case not only has the plaintiffs settled with defendant No,13 in respect of all its liabilities by accepting a certain sum in full and final settlement but has also written off all the balance amounts that may be due from the defendant No,13 to the plaintiffs and has waived all interests. This would mean that defendant No,13 is free of all liabilities for the amounts that were loaned or the facilities that were provided to them by the plaintiffs. It is in acknowledgement of this fact that the plaintiffs have stated that the defendant No,13 in this case are only proforma defendant. That is to say that the plaintiffs have no claim against the defendant No,13 in respect of the facilities provided by them to the defendant No,13. Under the circumstances, as per the provisions of section 134 and section 135 of the Contract Act, it would seem that the guarantors, that is the defendants 1 to 12 would also be absolved from all liabilities in respect of the guarantee that they furnished to secure the loan advances to the defendant No,13. In my view this and this alone would the true construction of sections 134 and 135 of the Contract Act. The result of the above discourse is that I would dismiss this suit with no order as to costs. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.