Adverse inference cannot be drawn to discharge guarantors based on documents never produced or proven to be executed.

The Appellant bank (originally State Bank of Saurashtra) filed a suit in 1985 to recover ₹3,89,54,766.30 from Maharana Mills Ltd. (Defendant No. 1) and its Directors/Guarantors (Defendants Nos. 2-4)

The bank provided financial assistance based on hypothecation letters and personal guarantees executed in 1972 and 1982

The mill closed in 1983

The Directors contended that they had executed and submitted "revival documents" to the bank in 1985, which allegedly superseded previous liabilities and included a promise by the bank not to sue

The Trial Court decreed the suit only against the company but dismissed it against the Directors, drawing an "adverse inference" against the bank for failing to produce these alleged revival documents despite the bank's witness stating they were not in the bank's records

1. Whether the Trial Court erred in law by drawing an adverse inference against the bank to discharge the personal liability of the Directors (Guarantors)

2. Whether the non-production of alleged "revival documents" by the bank constitutes a withholding of evidence when the bank denied their existence in its files

3. Whether the Directors proved the execution and delivery of documents that legally extinguished their prior guarantees

The court applied Section 114, Illustration (g) of the Indian Evidence Act, 1872, regarding the presumption that evidence which could be produced and is not would be unfavourable to the person withholding it

It referenced Order XI Rule 14 and Order XII Rule 6 of the CPC concerning the production of documents and judgments on admissions

The court further scrutinized Section 133 of the Indian Contract Act, 1872, which discharges a surety when there is a variance in the terms of the contract without the surety’s consent

Precedents such as National Insurance Co. Ltd. v. Jugal Kishore and Gopal Krishnaji Ketkar v. Mohamed Haji Latif were cited to define the limits of "adverse inference" and the duty of a party to produce best evidence.

The High Court found the Trial Court’s "minimum adverse inference" logically inconsistent and perverse. The Trial Court had decreed the suit against the Company while simultaneously holding that "revival documents" existed and were withheld, which should have logically affected the claim against the Company as well

The court noted that the Directors' evidence (a Peon's delivery book) was inconclusive and did not specify the nature or contents of the documents delivered

Crucially, the bank’s witness deposed that no such documents existed in their records, and a previous application by the defendants for production (Exh. 47) had been rejected by the Trial Court itself

The High Court held that a court cannot draw an adverse inference based on a presumption of "variation of terms" (under Sec 133, Contract Act) when the documents themselves are not before the court to prove such variation

The court modified the decree, holding Defendants Nos. 1 to 4 jointly and severally liable to pay ₹3,62,15,577.61 with 12% interest per annum from the date of the suit until realization. The appeal was dismissed against Defendant No. 5 (IDBI) for lack of service. The operation of the judgment was stayed for four weeks