14 Dec 2009

Liability of Surety: The law revisited

In a recent decision the Supreme Court has restated the law relating to the extent and proportion of liability of a guarantor/surety. Referring to a wide array of decisions on the issue, the Supreme Court reiterated the legal position that the liability of the surety/guarantor is co-extensive with the principal debtor, unless it is otherwise provided by the contract and that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety/guarantor.

The Supreme court discussed these decisions as under;

In Bank of Bihar Ltd. v. Damodar Prasad & Another (1969) 1 SCR 620 ... the court referred to a judgment in Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji (1869) 6 Bombay High Court Reports 241, in which the Division Bench of the Bombay High Court held as under:
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."
This Court, while approving the said judgment, observed that, “the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.”
20. In State Bank of India v. M/s. Indexport Registered (supra), this Court held that the decree holder bank can execute the decree against the guarantor without proceeding against the principal borrower. Guarantor’s liability is coextensive with that of the principal debtor. In that case, this court further observed that, “the execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree holder. The question arises, whether a decree which is framed as a composite decree as a matter of law, must be executed against the mortgage property first or can a money decree, which covers whole or part of the decretal amount covering mortgage decree can be executed earlier. There is nothing in law which provides such a composite decree to be first executed only against the principal debtor. The court further observed that “the liability of the surety is co-extensive with the principal debtor, unless it is otherwise provided by the contract”.
21. The term “co-extensive” has been defined in the celebrated book of Polock & Mulla on Indian Contract and Specific Relief Act, Tenth Edition, at page 728 as under:
“Co-extensive. - Surety's liability is co-extensive with that of the principal debtor.
A surety's liability to pay the debt is not removed by reason of the creditor's omission to sure the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surely though the principal has not been sued.”
22. In Chitty on Contracts, 24th Edition, Volume 2 at page 1031 paragraph 4831 it is stated as under, “Conditions precedent to liability of surety.- Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor.”
23. In Halsbury's Laws of England, Fourth Edition,Vol. 20, paragraph 159 at page 87 it has been observed that "it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for”.
24. A Division Bench of the Bombay High Court in Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath and Ors. AIR 1940 Bombay 247 held that the liability of the surety is co-extensive, but is not in the alternative. Both the principal debtor and the surety are liable at the same time to the creditors.
25. A Division Bench of the High Court of Karnataka, in The Hukumchand Insurance Co. Ltd. v. The Bank of Baroda & Others AIR 1977 Kant 204 had an occasion to consider the question of liability of the surety vis-a-vis the principal debtor. The court held as under:-
“The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety which is coextensive with that of the former are really separate liabilities, although arising out of the same transaction. Notwithstanding the fact that they may stem from the same transaction, the two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously.”
26. The case of the respondent has never been that the liability of the guarantor is only contingent and if remedies against the principal debtor failed to satisfy the dues of the decree holder, then only the bank can proceed against the guarantor.
30. The legal position as crystallized by a series of cases of this court is clear that the liability of the guarantor and principle debtors are co-extensive and not in alternative. When we examine the impugned judgment in the light of the consistent position of law, then the obvious conclusion has to be that the High Court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay further proceedings in O.A. 156 of 1997.

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