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2011 SCC OnLine Kar 4012 : (2013) 176 Comp Cas 292 : (2012) 1 Kant LJ 187
(DB) : (2012) 1 AIR Kant R 301 : (2012) 113 AIC 358 : AIR 2012 Kar 65 :
(2012) 4 KCCR 2903 (DB)

In the Karnataka High Court

(BEFORE MOHAN SHANTANAGOUDAR AND K. GOVINDARAJULU, JJ.)

United Breweries (Holding) Ltd.

Versus
Karnataka State Industrial Investment and Development
Corporation Ltd. and Others
M.F.A. No. 4243 of 2007
Decided on August 16, 2011

Page: 293

The Judgment of the Court was delivered by

MOHAN SHANTANAGOUDAR, J.:— This appeal is filed questioning the order dated
January 16, 2007, passed by VI Additional City Civil Court in Misc. No. 435 of 1999
holding that the appellant is also liable to pay the sum as ordered, jointly or severally.
2. The records reveal that respondent No. 1 herein sanctioned a loan of Rs. 70 lakhs
in favour of respondent No. 2 herein. The loan agreement dated March 6, 1996, was
executed by respondent No. 2 and respondent No. 1. The third and fourth respondents
herein executed surety agreement dated March 6, 1996, giving collateral security of
Schedules I and II properties. The appellant executed a “letter of comfort” dated
March 2, 1996, as per exhibit P14. Respondent No. 2 committed default and did not
repay the amount as agreed. Hence, respondent No. 1 invoked surety agreement
dated March 6, 1996, given by respondents Nos. 3 and 4 by issuing notice dated
16/9/1998. Respondents Nos. 3 and 4 did not pay the amount despite the notice.
Thus, a petition came to be filed by respondent No. 1 herein under sections 31(1)(aa)
and 32(1) of the State Financial Corporations Act, 1951 (“the SFC” Act), for a direction
to respondents Nos. 3 and 4 to pay the amount of Rs. 1,03,90,000 and for sale of
secured properties described in Schedules I and II of the petition. A direction is also

Page: 294

sought that the appellant along with respondents Nos. 3 and 4 herein shall pay the
said amount with interest jointly and severally. After hearing, the impugned order is
passed by the court below holding that respondent No. 2 company is due to pay a sum
of Rs. 1,03,90,000 as on 30/6/1998. It is further held that the appellant and
respondents Nos. 2 to 4 herein are jointly and severally liable to pay the said amount.
Further, directions are also issued. Sri K.G. Raghavan, the learned senior advocate
appearing on behalf of the appellant submits that exhibit P14 the “letter of comfort” is
wrongly interpreted and treated as “letter of guarantee” by the court below and the
same has resulted in miscarriage of justice. He further submits that exhibit P14
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nowhere mandates the appellant that he should repay the dues of respondent No. 2, in
case, respondent No. 2 or the guarantors, i.e., respondents Nos. 3 and 4 fail to repay
the loan amount to respondent No. 1. In other words, according to him, exhibit P14 is
not a letter of guarantee, but, is a mere letter of comfort.

3. The said submissions are opposed by Sri D.S. Joshi, learned counsel appearing
on behalf of respondent No. 1. He contended that exhibit P14 though titled as “letter
of comfort” is clearly a “letter of guarantee”, inasmuch as, the wordings used in the
said document amply reveal that the appellant has undertaken to repay the loan of
respondent No. 2, in case of non-payment of loan by respondent No. 2 or respondents
Nos. 3 and 4 herein.
4. In order to decide this matter, the relevant document to be considered is exhibit
P14 which read thus:
“We understand you have sanctioned a corporate loan of Rs. 75 lakhs (rupees
seventy five lakhs only) vide your letter ACCTS/CL/7842/95-96, dated February 29,
1996, to M/s. Dominion Chemical Industries Ltd., Hosur Road, Bommanahalli,
Bangalore-560068.
M/s. Dominion Chemical Industries Ltd., is one of our associate companies. We
hereby confirm that it our normal practice to see that all our associates companies
meet their financial and contractual obligations and this end we will undertake all
reasonable steps to ensure that M/s. Dominion Chemical Industries Ltd., conducts
its operations efficiently to meet its obligations in the usual course of business.
We are convinced that the company concerned has the capabilities to fully cater
to its financial commitments.”

Page: 295

5. The aforementioned document makes it amply clear that the company which has
obtained loan, i.e., respondent No. 2 is one of the associate companies of the
appellant. The appellant has confirmed that it is its normal practice to see that their
associate companies meet their financial and contractual obligations and that
appellant will undertake all reasonable steps to ensure that M/s. Dominion Industries
Ltd. (debtor company) conducts its operations efficiently to meet its obligations in the
usual course of business. The said document further states that the appellant is
convinced that the debtor company has the capabilities to fully cater to its financial
commitments.
6. The said letter of comfort nowhere reveals that the appellant stood as guarantor
for the loan disbursed by respondent No. 1 in favour of respondent No. 2. It merely
states that the associate company (debtor company) will meet the financial and
contractual obligations and that the appellant herein undertakes all reasonable steps
to ensure that the debtor company conducts its operations efficiently to meet its
obligations in the usual course of business. The comfort letter is more in the nature of
recommendatory letter. If a person has not stood as guarantor or surety, he cannot be
treated a guarantor or surety without there being a specific undertaking by him that
he would discharge the liability of the third person, in case of his default. In this
context, it is relevant to note the provisions of section 126 of the Indian Contract Act,
1872, which read thus:
“126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’.—A
‘contract of guarantee’ is a contract to perform the promise, or discharge the
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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.”
7. From the above, it is clear that the contract of guarantee is a contract to perform
the promise or discharge the liability of a third person in case of his default. If the
entire document in question, i.e., exhibit P14 is read as a whole, the same nowhere
reveals that the appellant has entered into a contract or an agreement with
respondent No. 1 to discharge the liability of respondent No. 2 herein (principal
debtor) in case of its default.
8. The apex court in the case of State of Maharashtra v. Dr. M.N. Kaul reported in
AIR 1967 SC 1634; [1968] 38 Comp Cas 1, while dealing with the aspect of the
enforceability of the guarantee has observed thus (page 4 of 38 Comp Cas):

Page: 296

“The question is whether this guarantee is enforceable. That depends upon the
terms under which the guarantor bound himself. Under the law he cannot be made
liable for more than he has undertaken. It is often said that a surety is a favoured
debtor, for in the expressive phrase of Lord Westbury L.C. in Blest v. Brown, [1862]
4 De G.F. and J. 367 at page 376:
‘you bind him to the letter of his engagement.
Beyond the proper interpretation of that engagement you have no hold upon
him.’
These observations have been recalled in cases of guarantee and suretyship by
the Judicial Committee and also this court. See for example Pratapsing Moholalbhai
v. Keshavlal Harilal Setalvad, 62 I.A. 23 at page 33; AIR 1935 PC 21 at page 24
and M.S. Anirudhan v. Thomco's Bank Ltd., [1963] 33 Comp Cas 185; [1963]
(Supp) 1 SCR 63 at page 77; AIR 1963 SC 746 at page 752. To this there are some
exceptions. In case of ambiguity when all other rules of construction fail the courts
interpret the guarantee contra proferentem, that is, against the guarantor or use
the recitals to control the meaning of the operative part where that is possible. But
whatever the mode employed, the cardinal rule is that the guarantor must not be
made liable beyond the terms of his engagement.”
(emphasis1 supplied)
9. From the above, it is clear that the question as to whether the deed in question
is a deed of guarantee or not depends upon the terms under which the guarantor
binds himself. Under law, he cannot be made liable for more than what he has
undertaken. In our considered opinion, there is no ambiguity in exhibit P14. Under
exhibit P14 the appellant has not undertaken that he would repay the loans of
respondent No. 2, in case, if respondent No. 2 fails to discharge its liability. Therefore,
the appellant cannot be made liable for more than what it has undertaken. It is not in
dispute that respondent No. 1 herein has insisted on “letter of comfort” of appellant
herein while disbursing the loan in favour of respondent No. 2 herein. Accordingly, the
appellant herein being the holding company has given letter of comfort as suggested
by the first respondent.
10. All through, respondent No. 1 as well as other parties including the appellant
has understood the document exhibit P14 as a “letter of comfort”, plain and simple. In
the cross-examination of PW1 witness for respondent No. 1), he has clearly admitted
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that the appellant has not undertaken under exhibit P14 that he would repay the
amount in case

Page: 297

respondents Nos. 2 to 4 herein commit default in payment of the loan. In the light of
clear admission of PW1 and having regard to the language employed in exhibit P14, it
is clear that the appellant has not undertaken that it would repay the loan amount in
case of default by respondents Nos. 2 and 4 herein.

11. In this context, we may usefully refer to the definition of “letter of comfort”, as
found in P. Ramanatha Aiyar's Advanced Law Lexicon, which reads thus:
“Letter of comfort.—A document that indicates one party's intention to try to
ensure that another party complies with the terms of a financial transaction without
guaranteeing performance in the event of default.”
(emphasis1 supplied)
12. Form the material on record, it is clear that the letter of comfort merely
indicates the appellant's assurance that respondent No. 2 would comply the terms of a
financial transaction without guaranteeing performance in the event of default.
13. Since we find that the appellant has not bound himself for repaying the loans
due to first respondent corporation in the event of default by respondents Nos. 2 and
4, the impugned order in so far as it relates to fixing liability on appellant is liable to
set aside. Accordingly, the same is set aside. Rest of the order passed against
respondents Nos. 2 to 4 continues to remain.
14. Appeal is allowed-in-part accordingly.
———
1 Here printed in italics.
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