Sri Raju Chilukuri vs. Canara Bank

Held

The Court held that the guarantor's liability is joint and several, co-extensive with the principal debtor as recognized by the Indian Contract Act, 1872. There cannot be a policy of primary and secondary liability to compel the bank to exhaust remedies against the principal debtor first. The Court found that the borrower's proposals for One Time Settlement (OTS) in 2017 and 2020 did not constitute a valid tender, as no amount was tendered or refused, and there were no practical steps towards gradual dissolution of liability. The Court observed that it could not retrospectively formulate a scheme for OTS. The Court noted that while principles of marshalling might be considered if the borrower's properties were sufficient to cover the debt, this was not the case. The Court found no prejudice caused to the bank by the guarantor's prayer to proceed against the borrower's property first, but this did not alter the bank's right to recover. The Court dismissed the borrower's petition and disposed of the guarantor's petition.

Facts

Two writ petitions were filed before the High Court of Karnataka. W.P.No.3254/2020 was filed by Meka Sathyanarayana (guarantor/surety) challenging a sale notice dated 12.12.2019 issued by the Recovery Officer-1, DRT-1, Bengaluru. W.P.No.8896/2020 was filed by Raju Chilukuri (borrower) seeking to quash orders dated 09.09.2019 and 16.09.2019 passed by the Recovery Officer-1, DRT-1, Bengaluru, and for redelivery of scheduled properties. The borrower had availed a loan of Rs. 9.00 crores from Canara Bank on 22.03.2016. The loan was secured by hypothecation of stock and book debt, and collateral security of 'A' schedule property (borrower's) and 'B' schedule property (guarantor's). The Debt Recovery Tribunal allowed OA No.108/2018 for Rs.10,61,51,520/- plus interest, and the bank took physical possession of both properties. The borrower had proposed a One Time Settlement (OTS) in 2017 and again in 2020.

Key Issues

1. Whether the action taken by the respondent bank and recovery officer is violative of the principles of natural justice by not providing an opportunity to the petitioner (guarantor) before issuing the auction sale notice and proceeding against the guarantor's property instead of the borrower's property? (Question of law and fact) 2. Whether the order passed by the respondent bank and recovery officer is in violation of the principles of natural justice, and whether the seizure of the residential property was done without following due process of law? (Question of law and fact) 3. Whether the borrower's offer for a One Time Settlement (OTS) made in 2017 and 2020 should be considered, and if so, what is its effect on the recovery proceedings? (Question of law and fact) Petitioner (guarantor) argued that principles of natural justice were violated, and the bank should proceed against the borrower's property first. The borrower argued for quashing of orders, redelivery of properties, and consideration of his OTS proposals, citing financial difficulties due to GST and Covid-19. The lender bank argued that it is entitled to proceed with execution as per the award, and the liability of the surety is co-extensive with the principal borrower, relying on the Supreme Court decision in State Bank of India Vs M/s.Index Port Regd. and others.