Director/Managing Director does not automatically become personally liable merely because they are signatories

In Ajoy Khanderia vs Barclays Bank, the Respondent bank while approaching the DRT for recovery of loan from a borrower, also impleaded the Plaintiff as Pawnee/pledgor contending that as he had been as the Managing Director of the borrower, the signatory to the loan documents and had personally pledged shares of the borrowing company held by him as collateral security for the loan, he was personally liable to pay the outstanding amount to the bank.

Therefore the question before the High Court was whether by virtue of Section 176 of the Indian Contract Act, 1872, the pawnor, even if different from borrower or the principal debtor, becomes liable for payment of entire debt, even if has not furnished any guarantee for repayment of the entire debt i.e. over and above the value of the pawned goods.

The Bank referring to M/S Transcore vs Union of India & Anr., Appeal (civil) 3228 of 2006, argued as per Section 2(f) of the SARFAESI Act  that borrower includes a pledgor.  In the present case the pledged shares of value since the same are not listed with any stock exchange. As per Section 176 of the Indian Contract Act a pledge can sue the pledgor for the debt secured by the pledge while retaining the pledged goods(shares). It is not obligatory on the part of the pledge to sell the pledged goods. 

The Delhi High Court agreeing with the Plaintiff observed that in Supreme Court, in State of Maharashtra Vs. M.N. Kaul AIR 1967 SC 1634, while answering the question whether the guarantee subject matter thereof was enforceable, held, 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 was further held that only when there is ambiguity, is the guarantee to be interpreted contra proferentem i.e. against the guarantor. It was however again emphasised that the cardinal rule is that the guarantor must not be made liable beyond the terms of his agreement.

Also the Bank had filed their application under DRT act and therefore cannot without just cause borrow definitions from a different act just because it suits them.

Director/Managing Director of the respondent no.2 Company and/or for the reason of being the signatory of the documents executed by the respondent no.2 Company in favour of the respondent no.1 Bank, does not become personally liable. 

Significantly, none of the provisions preceding or following Section 176 of the Indian Contract Act, 1872, provide for the pawnor, by virtue of the pledge, even if not otherwise liable for the payment of debt, by a legal fiction becoming so liable for payment for debt, even beyond the value of the pawned goods. Section 176 also does not provide so, as would have been the case that the legislature intended so. In the absence of any such express provision in law, we hesitate to, merely on the basis of Section 176 hold that a pawnee can recover from the pawnor anything beyond the value of the goods which the pawnor has pledged, unless the pawnor has separately from the pledge also made himself liable for the debt. Sections 172 to 179 are in the context of the pawnor as the borrower and the pawnee as the lender and do not contemplate a situation of a pawnor being different from the borrower.

Needless to state, the pawnee, in the said suit has to show the pawnor to be liable for the debt or for the promise being enforced. If the pawnor has not made himself liable for the debt and has promised only recovery by the pawnee of the value of the pawned goods, the pawnee, in the said suit, cannot recover anything more. The second part of Section 176, when provides .... the pawnor is still liable to pay the balance. refers to recovery of the balance in the suit referred to in the first part of Section 176; if in the suit as aforesaid, there is no possibility of recovery of anything more than the value of the pawned goods, the question of the pawnee recovering anything more does not arise.