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Central Bank of India v. Virudhunagar Steel Rolling Mills Ltd. & Ors.

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 3654 of 2006)Decided 29 Dec 2015
Civil Appeal No. 3654 of 2006
Justice Vikramajit Sen · Justice Shiva Kirti Singh

Background

The Central Bank of India gave a steel company credit facilities of about 12 lakh rupees. Three of the company's directors signed personal guarantees dated 30 August 1974, capping their liability at 12 lakh rupees. The bank later sued to recover about 3.94 lakh rupees, which included debts that existed before the guarantees were signed. The trial court decreed the suit against the company but not against the directors, and the High Court upheld that result.

Decision Breakdown

The Supreme Court dismissed the bank's appeal and affirmed the concurrent findings of the lower courts. The guarantee deeds did not mention any debts that existed before 30 August 1974, so the directors guaranteed only later transactions. The account had also been dormant after that date, so there were no later dealings for which they could be held liable. The Court applied the contra proferentem rule, under which an unclear document is read against the party who drafted it, and here that was the bank. The Court added that a guarantor can still be held liable for past debts if they clearly agreed to that in writing.

Lesson Learnt

A personal guarantee covers only what it clearly says it covers. A bank that wants a guarantor to cover existing debts must put that in writing, and any ambiguity in the bank's own document will be read against the bank.

Official source (sci.gov.in)View Judgment (PDF)

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