Are the Banks / Financial Institutions Above Law ?

Why a Bank does not agree to any of the rights conferred on sureties by section 133, 134, 135, 139 and 141 of Contract Act, and any Rule of Law or Equity?

A Case Study– Dena Bank (Letter of Guarantee):- Extracts of Paragraph nos.  4, 5, 6, 10 and 15 of Letter of Guarantee of Dena Bank are reproduced below–

1. Paragraph no. 4

“ …………. I/We also agree that I/We shall not be discharged from my/our liability by your releasing the Principal or by any act or omission of yours the legal consequence of which may be to discharge the Principal or by any act of yours which would but for this present provision be inconsistent with my/our rights as surety or by your omission to do any act, which, but for this present provision your duty to me/us would have required you to do. I/We hereby consent to each and every of the acts mentioned above as you may think fit. Moreover though as between the borrower and me/us, I am/We are sureties only, I/We agree that as between yourselves and me/us I am/We are borrowers jointly with him accordingly I/WE SHALL NOT BE ENTITLED TO ANY OF THE RIGHTS CONFERRED ON SURETIES BY SECTION 133, 134, 135, 139 AND 141 OF THE INDIAN CONTRACT ACT. ……… And for all the purposes of this claim the Principal is empowered to give consent on my/our behalf and any consent given by the Principal shall be deemed to have been given by me/us in all respects as if the same had been expressly given by me/us in writing.”

2. Paragraph no. 5

            “The Bank may recover against me/us to the extent herein before mentioned notwithstanding that the Principal or his agents, partners, directors or officers may have exceeded his or their powers or that the arrangements with the Bank may have been ultra vires and without being bound to enforce its claim against the borrower or any other person or other security held by the Bank. TheBank shall not be bound to inquire into powers of the Principal or his agents or partners, directors or officers purporting to act on behalf of the borrowers and all moneys dues or liabilities incurred shall be deemed to form part of the present guarantee notwithstanding that the Principal or his agents, partners, directors and officers may have exceeded his or their powers or the arrangement with the Bank may have been ultra vires.

3. Paragraph no. 6

            “I/We waive in the Bank’s favour ALL OR ANY OF MY/OUR RIGHTS AGAINST THE BANK OR THE PRINCIPAL as may be necessary to give effect to any of the provisions of this guarantee.”

4. Paragraph no. 10

            “…………. if the Principal shall become insolvent or go into liquidation or compound with his creditors, the Bank shall be at liberty without discharging my/our liability to make or assent to any compromises, compositions or arrangements or prove and to rank as creditor in respect of the amount claimable by the Bank or any items thereof ………………….. to the entire exclusion and SURRENDER OF MY/OUR RIGHTS AS SURETIES in competition with the Bank (and) ANY RULE OF LAW OR EQUITY TO THE CONTRARY NOTWITHSTANDING. And I/We shall not be paying off the sum guaranteed or any part thereof or upon any other ground prove or claim to prove in respect of the sum guaranteed or any part thereof or take advantage of any securities held by the Bank until the whole of your claim against the Principal has been satisfied.”

5. Paragraph no. 15

            “The guarantee hereby given is independent and distinct from any security that the Bank has taken or may take in any manner whatsoever whether it be by way of hypothecation/pledge and/or mortgage and/or any other charge over goods, movables, ……………………………… and I/We (and) the GUARANTOR WILL NOT CLAIM TO BE DISCHARGED TO ANY EXTENT BECAUSE OF THE BANK’S FAILURE TO TAKE ANY OF OTHER SUCH SECURITY or in requiring or obtaining any or other such security or losing for any reason whatsoever, INCLUDING REASONS ATTRIBUTABLE TO ITS DEFAULT AND NEGLIGENCE, benefit of any or other security or any of rights to any or other such security that have been or could have been taken.”(END)

Note: the views expressed are my personal and a view point only.

Author:

Narendra Sharma, Consultant (Legal)

E-mail: nkdewas@yahoo.co.in