The Supreme Court in a majority decision (2:1) dismissed an appeal of Abdul Ghaffar Adamjee and others and held that the Sponsors' Undertaking is clearly a contract of indemnity and the sponsor directors are liable for any amount that is not recoverable from the company.
A three-member bench, headed by Justice Mushir Alam and comprising Justice Faisal Arab and Justice Munib Akhtar, on 31-12-2018 after hearing the arguments had reserved the judgement, which was released on Thursday. Justice Munib Akhtar wrote a dissenting note.
The judgement said: "The only avenue left for respondent No. 1 (National Investment Trust) is to recover the loss from appellants [Abdul Ghaffar Adamjee, Salma Adamjee, and Akbar Adamjee, sponsoring Directors of Adamjee Polycrafts Limited] in their capacity as indemnifiers under Sponsors' Undertaking.
The National Investment Trust (NIT) was one of the two major financial institutions which provided finance to Adamjee Polycrafts Limited for setting up of its Polypropylene Film Manufacturing Plant in Hub Industrial Trading Estate, Lesbela, Balochistan. The other financial institution was PICIC, which provided a long-term finance of Rs 95,000,000. The NIT provided a markup based short-term financial facility of Rs 22,500,000 under an agreement of finance executed on 23.02.1988 repayable by 30.06.1990.
The company made certain repayments to the NIT between 1990 and 1993 but failed to settle its account and Rs 18,500,000 remained outstanding. After giving ample opportunities to the company to pay off its dues, the NIT filed a recovery suit in the banking court in the year 1996. Along with the company its sponsor directors were also sued (defendants No.2 to 4).
The suit of respondent No. 1 was decreed in the sum of Rs 18,500,000 along with a mark-up at the rate of 15% per annum on the basis of banking law then prevailing. Apart from the company, the decree was executable also against the appellants, who were treated as guarantors under Sponsors' Undertaking executed contemporaneously with the agreement of finance.
The appellants appealed before the division bench of the Sindh High Court which failed vide impugned judgment dated 04.10.2016. Therefore they approached the apex court.
As the recovery proceedings were pending, the company went into liquidation the respondent No. 1 therefore, turned to the appellants for recovery in their capacity as guarantors under Sponsors' Undertaking which they had executed.
The appellants resisted the recovery on the ground that their undertaking does not make them personally liable to pay any defaulted sum owed by the company.
The appellants case whether the Sponsors' Undertaking furnished by them is a contract of guarantee and make them personally liable to settle the decretal amount on account of inability of the liquidated company to discharge its financial obligation under the Agreement of Finance dated 23.02.1988.
The court noted that the clause 1 of Sponsors' Undertaking refers to the investment made by respondent No. 1 in the company under the agreement of finance dated 23.02.1998 and the clause states that respondent No. 1 has agreed to make the investment on the condition that the appellants furnish this guarantee.
It also noted that the clause 6 of the undertaking stipulates that the appellants shall indemnify and keep respondent No. 1 always safe, harmless and indemnified and clause 7 stipulates that appellants' obligations are joint and several and binding on them until the investment made by respondent No. 1 in the company is fully satisfied.
The judgement said that the very object emerges from clauses 6 and 7 of the Sponsors' Undertaking cannot be ignored by confining its scope only to the appellants' commitments made in clauses 1 to 4. Hence it cannot be said that the appellants did not give personally assurance to respondent No. 1 that in the event it becomes impossible for it to recover from the company, it can have recourse against them for the loss so incurred.
It observed that the Sponsors' Undertaking was executed by the appellants contemporaneously with the agreement of finance dated 23.02.1988 so it can be conveniently said that both the documents were part of the same scheme under which respondent No. 1 provided finance to the company. "Should the object emerging from clauses 6 and 7 of the Sponsors' Undertaking be allowed to be frustrated merely because it contains certain other commitments in the form of clauses 1 to 4 which relate only to proper management and running of the company by the appellants?"
When the real purpose of executing a document becomes evident, then in what order various covenants are arranged cannot be made basis to frustrate it by excluding such covenants from its scope that matter the most.
Regarding the question whether the Sponsors' Undertaking is a contract of guarantee or indemnity, it said that a guarantor under a contract of guarantee takes upon himself the responsibility to fulfill a promise or discharge a liability of a third person and by virtue of Section 128 of the Contract Act his liability becomes co-extensive with that of third person unless the parties provide otherwise.
In a contract of indemnity the indemnifier undertakes to save a party from the loss caused to it either by his own conduct or by the conduct of a third party who has made certain commitments to the other party, hence he becomes liable only when the loss caused to the other party is finally determined and all possible recoveries have been effected from the party that caused the loss.
Dismissing the appeal the apex court said that the respondent No. 1 can seek execution of its decree.
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