IN THE BOMBAY HIGH COURT 

Pradip Sancheti with Chetan Kapadia instructed by M/s. Manilal Kher Ambalal and Co. for the plaintiff. 

Sailesh Shah with Ms. Kavita A. Shah instructed by A. G. Shah for the defendants. 

JUDGMENT 

F. I. REBELLO J. - The matter was heard before notification was issued under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and placed for orders, hence the present order. 

In a summons for judgment taken out by the plaintiffs, a financial institution, the defendants have filed their reply and have raised various defences. One of the averments in the affidavit was that Suit No. 1856 of 1996 filed against D. K. Chemoplast Limited, the principal debtor be stayed as it was declared sick by the Board for Industrial and Financial Reconstruction. The present defendants are guarantors for the said loan. Though the point was not specifically raised at the hearing, the issue arose as to whether the suit against guarantors who have given guarantee to a company against whom proceedings are pending under the Sick Industrial Companies (Special Provisions) Act, 1985, or orders passed therein can be continued or proceeded with. On behalf of the plaintiffs, their learned counsel points out that the matter is no longer in issue as it is covered by the judgment of the Division Bench of this court in Madalsa International Ltd. v. Central Bank of India [1998] 4 Bom CR 124; [2000] 99 Comp Cas 153. It is pointed out that in para. 22 of the said judgment the very issue which has arisen here has been decided and the Division Bench whilst answering the issue has observed as under (page 167) : 

"In the circumstances the words 'of any guarantee in respect of any loans, or advance granted to the industrial company' in the context will have to be read as the guarantee given by the industrial company itself and none else." 

The question therefore is whether the issue is concluded by the judgment of the Division Bench of this court. The appeal arose from an order of a learned single judge. The learned judge dismissed the chamber summons for stay of execution on the ground that on mere filing of proceedings by the company, section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, was not attracted. The other contention before the learned single judge was that proceedings against the guarantors should be stayed was not decided. The Division Bench in appeal in para. 8 was considering the issue whether proceedings for stay of execution are required to be allowed. What therefore was directly in issue was whether the decree could be executed against the guarantors. There was no suit pending either against the company or the guarantors as the suit had already been decreed and the chamber summons was taken out for stay of the proceedings in execution. The reference was rejected by the Board for Industrial and Financial Reconstruction. However, at the stage of hearing the appeal before the Division Bench, the company had filed an appeal under section 25 of the Sick Industrial Companies (Special Provisions) Act, 1985, which was pending. The findings of the learned single judge that the chamber summons had to be dismissed as mere filing of reference did not result in stay of proceedings was upheld. As an appeal had been preferred and as Proceedings had to be stayed if an appeal was pending the Division Bench proceeded to hear and dispose of the matter. A few additional facts which arose in Madalsa International Ltd. v. Central Bank, of India [2000] 99 Comp Cas 153 (Bom) need to be stated to find out what was being decided. A consent decree had been taken out against three defendants. In terms of the consent decree, if the defendants committed default or any breach of any terms, the court receiver was appointed as receiver with powers amongst others to sell the securities. Defendant No. 3 under the consent decree was to create a mortgage of property so also the other defendants. As no payment was made and as the decree was breached, the decree holder moved the receiver to take forcible possession of the properties for which he was appointed as receiver with power to sell. At that point of time section 22 (1) had been amended and section 22 (1) as amended read as under : 

"Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority." 

It was contended before the Division Bench that proceedings in "execution" includes proceedings in the suit. This arose because under the section as it stood before its amendment, proceedings for execution and the like against the properties of the "sick" company could not be proceeded with. After the amendment even suits cannot be filed or if filed cannot be proceeded with except by the consent of the Board or the Appellate Authority. As the decree was sought to be executed against the guarantors it was contended that the expression suit would include proceedings in execution on the premise that after the amendment no suit could be filed or proceeded with also against the guarantors. After considering the case law cited, the Division Bench held that proceedings in execution would not fall within the expression "suit". The Division Bench observed as under (page 166) : 

"The unamended section did not prohibit or suspend any suit for recovery of money or enforcement of any security against the industrial company and/or guarantee in respect of any loans or advances granted to the industrial company. It is extremely relevant that the word 'execution' is used in the unamended section while in the added portion by amendment the word 'suit' is used." 

Thereafter, the Division Bench proceeded to observe as under (page 166) : 

"The word 'suit' in the amended portion of section 22 cannot include in its ambit execution or execution proceedings. On this interpretation in fact even if the appeal is pending so far as the execution proceedings are concerned, excepting the properties of the industrial company, there cannot be any bar or impediment in proceeding further with the same." 

The Division Bench came to the conclusion that the word "suit" in the amended portion of section 22 cannot include in its ambit execution or execution proceedings. Once having so held, the Division Bench further proceeded to consider the question as to whether by the amendment proceedings by way of suit for recovery of money or for enforcement of any security against the industrial company are suspended and whether the proceedings against the guarantor is also suspended. It may be made clear that no suit was pending. What was pending were proceedings in execution and the Division Bench held that the expression suit would not include proceedings in execution. The issue therefore as to whether the words "of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with further" was not in issue and was not necessary to be decided for disposing of the issue in controversy in that matter unless it had been held that expression "Suit" includes also proceedings in execution. 

Under article 141 of the Constitution of India, the law declared by the Supreme Court is binding on all courts with the territory of India. There is no provision in the Constitution which provides that the law declared by a High Court is binding on the lower court. However, by judicial precedents the law declared by the High Court is to be followed by the courts and Tribunals subordinate to it and/or under its supervisory jurisdiction. In so far as this court is concerned, the court sits in Benches. In terms of the rules, certain work is to be heard by Division Benches, others by Benches constituting single judges. Under clause 15 of the Letters Patent of this court an intra court appeal is provided for against a "judgment" of a single judge. In other words, an appellate Bench as such is not a higher court but consisting of judges of the same court sitting as a Division Bench. Even here, it is an accepted judicial principle, if there is a judgment of a Bench normally a single judge would follow the said judgment. However, what is to be followed is the ratio decidendi of the judgment. To be the ratio decidendi amongst others the minimum requirements are 

(1) that the matter was directly in issue; 

(2) that the issue needs to have been decided; and 

(3) the matter has been decided by giving reasons. 

For case-law as to what would constitute ratio decidendi, useful reference may be made to the judgment in Maharashtra General Kamgar Union v.Cipla Ltd. [1996] II CLR 770. 

In so far as the judgment of the Division Bench of this court in Madalsa International Ltd. v. Central Bank of India [2000] 99 Comp Cas 153 (Bom) is concerned in my opinion, after the court had come to the conclusion that "suit" would not include execution, the issue whether after the amendment a suit against the guarantors in respect of the guarantees given for the loans taken by the company was not required to be decided as no suit against the guarantors was pending. That means that the said issue was not directly in issue and need not have been decided. It may also be pointed out that various provisions of the Indian Contract Act pertaining to guarantees were also not placed before the Division Bench for consideration when it held that the words mean guarantees given by the company itself. Therefore, those observations of the Division Bench would be obiter, which even would require to be followed if the view taken is one of the possible views. 

Is such an interpretation possible ? The language of the section requiring consideration is "and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company". After the amendment no suit for recovery of money against a company in respect of which proceedings are instituted can be filed or proceeded with. The language "any guarantee for any loans granted to the company" would fall within the expression a "suit for recovery of money against the company", if it is construed that the guarantees were guarantees given by the company, seems also not to have been brought to the attention of the Division Bench. Enforcement of a guarantee amongst other would mean a suit for recovery of money for the guarantee given. 

We may therefore have a look at the various situations which have been provided for under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985. The section before its amendment provided that no proceedings for winding up of the company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof, could lie or be proceeded with except with the consent of the Board or, as the case may be, with the Appellate Authority. After amendment, apart from the above, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with. Therefore, the expression "no suit for recovery of money" would take within its ambit also suits on guarantees given by the industrial company. Even otherwise the plain language of the section is "of any guarantee in respect of any loans, or advance granted to the industrial company". This can only mean guarantees in respect of loans advanced to the company. The Division Bench as pointed out earlier has held the expression to mean guarantee given by the industrial company itself and none else. The question of a principal giving a guarantee to oneself, with respect to the Division Bench, will not arise, if certain provisions of the Indian Contract Act itself are referred to and to which its attention was not invited. In fact before the Division Bench the facts as they stood were that the proceedings in execution were for forcible possession of properties by the receiver and not enforcement of guarantees. The word guarantee is not defined under the Sick Industrial Companies (Special Provisions) Act, 1985. It is also not defined under the Companies Act or the Industries (Development and Regulation) Act, 1951, in terms of section 3 (2)(a) and section 3 (2)(b) of the Sick Industrial Companies (Special Provisions) Act, 1985. Being a Central legislation therefore the definition of guarantee can be seen from the Indian Contract Act. Section 126 defines what is a contract of guarantee. It reads as under 

"A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety' the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written." 

bus a contract of guarantee requires a principal debtor, a surety and a creditor. Section 127 reads as under : 

"Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee." 

It is thus clear that the principal debtor and guarantors have to be distinct persons. A company, therefore, considering section 126 and section 127, cannot be a guarantor for itself as in that event there would be no principal debtor. Also the language of the section would be rendered otiose if the meaning assigned by the Division Bench is accepted. Suits for recovery of money against the company would also include suits in respect of guarantee given by it. The object of the legislation has also to be borne in mind. Section 128 makes the liability of the surety coextensive with that of the principal debtor, unless it is otherwise provided by a contract. Some other relevant sections are section 140 and section 141. Section 140 of the Indian Contract Act provides that where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. By virtue of section 141 a surety is entitled to the benefit of every security which the creditor has against the principal debtor. If the expression is construed in the manner it is sought to be construed the effect would be that the guarantor has to pay the debts but at the same time is not entitled to get the securities of the principal debtor or even move against the principal debtor without the permission of the Board or Appellate Authority. Therefore, if the section is read in its proper perspective it would mean that no suit for recovery of money can lie against the guarantors. The meaning assigned by the Division Bench, however, can encompass the expression "securities given by the company". For example in a case of an intercorporate loan the amount may be secured by mortgaging property. It is in this context that the word "security" will have to be read. In fact, in Madalsa International Ltd. v. Central Bank of India [2000] 99 Comp Cas 153 (Bom) the issue arose out of a consent decree for forcible possession of securities where a receiver was to stand appointed in the case of breach of terms of the consent decree. The expression guarantee in respect of the loan or advance granted to the industrial company if construed in this background means guarantee given by a guarantor to the industrial company which has taken a loan or advance. This obviously, cannot mean that the guarantor is the industrial company but a person distinct from the company. Any suit therefore filed for enforcing such a guarantee will also have to be stayed. The meaning assigned by the Division Bench also cannot be accepted for the following reasons. If the guarantee is for repayment of debt then that would be covered by the expression suit against the company. If it is contemplated that by the guarantee some securities are given, then that would be covered by securities of the industrial company. Therefore, it can only mean guarantee given by a person other than an industrial company. Also in its plain meaning and construing the various provisions of the Indian Contract Act including the rights of the guarantors, I am of the respectful opinion that the words cannot be read in a manner as was construed by the Division Bench in Madalsa International Ltd. v. Central Bank of India [2000] 99 Comp Cas 153 (Bom) and that the expression guarantee given for the loan to the industrial company, must mean guarantee given to the industrial company. Therefore, suits in respect of such guarantees for loans or advances cannot lie or be proceeded with. 

Normally, in the event a single judge comes to the conclusion that the law as interpreted by a Division Bench requires to be reconsidered the matter has to be referred. However, as pointed out what is to be considered is what is the ratio decidendi of the judgment. In the instant case, I have pointed out what was directly in issue was whether the expression 11 suit" would include "execution" proceedings. Considering the ratio decidenti of the judgment, I am of the opinion that there is no need for referring the matter as the issue was not directly in issue. It may also be noted that the law as interpreted by the Division Bench was before the judgment of the apex court in the case of Real Value Appliances Ltd. v. Canara Bank [1998] 93 Comp Cas 26; AIR 1998 SC 2064. By that judgment, the apex court reversed the decision of this court which was relied on by the Division Bench. The apex court has now held that once proceedings are registered all further proceedings in the suit must be stayed. 

Considering the above, I am clearly of the opinion that even proceedings against the guarantors for the enforcement of guarantees, given as guarantee for loan or advances to the company, in respect of which proceedings are registered under the Sick Industrial Companies (Special Provisions) Act, 1985, will have to be stayed. 

In view of the above, the various other contentions have not been discussed or disposed of. 

In the light of that the proceedings cannot be proceeded with. However as the relief sought is over Rs. 10 lakhs, the suit and all proceedings transferred to the Debt Recovery Tribunal.