Guarantors Fail To Claim Their Rights Under Contract Act Although Courts Have Recognised These Rights


Recently, after going through my Articles on certain website {namely (1) Director’s Personal Guarantee-A Void Agreement and (2) Personal Guarantee-A Void Agreement}, one visitor informed me that, on the contrary, commenting on his case regarding enforcement of his personal guarantee by the Bank, a well known Supreme Court Advocate has expressed that “as you have signed a personal guarantee, there is no hope of success”. In this background, I thought it fit to quote some cases where the Court has accepted the Guarantor’s rights under Contract Act, although in some cases the Guarantor has failed to claim his rights.

(1) A five judge of Privy Council in Raghunath Prasad vs Sarju Prasad (AIR 1924 PC 60; Decided on 18 December, 1923) has, inter alia, observed as follows:

“9. Evidence was taken in the case. It is sufficient to say that the defendants gave no evidence at all. It is quite plain that no Court can accept a  story thus unproved by its author as establishing a case either of mental distress or of undue influence under the Indian Contract Act. The only case which the appellant has is the case derived from the contents of the mortgage itself.”

(2) A Division Bench of Hon’ble High Court of Punjab & Haryana in Union of India, Ministry of Food and Agriculture (Department of Food), New Delhi vs Pearl Hosiery Mills and Ors. {AIR 1961 P H 281; Decided on 24 November, 1960} has observed and held as follows:

“10. The trial Judge held that the suit was not bad for misjoinder of parties and causes of action, that the plaintiff-firm was duly registered under the Indian Partnership Act and could file the present suit, that defendant No. 2 had neither actively nor impliedly consented to the variations in the terms of the original contract, dated the 3rd July, 1954, that defendants Nos. 1 and 3 had made such variations in the terms of the original contract which resulted in the discharge of the surety bond executed by defendant No. 2, that since the surety-bond of defendant No. 2 was discharged, the indemnity bond executed by the plaintiff in favour of defendant No. 2 also stood discharged, that under the law it was not necessary that the variations in the contract should have resulted in prejudice to the surety, and consequently questions whether the variations were made in the interest of and for the benefit of defendant No. 1 and whether those variations had in any way prejudiced defendant No. 2, did not arise….

25. Moreover, I am of the opinion that the provisions of Section 133 of the Indian Contract Act are not subject to a contract to the contrary between the parties to the contract. This section is in unqualified terms. It was not necessary to put in the words 'notwithstanding any contract to the contrary' in this section, because wherever the legislature wanted that the terms of the contract between the parties should take precedence over the provisions of any section, the words 'in the absence of any contract to the contrary' or 'in the absence of any special contract' have been inserted in that particular section as has been done in Sections 152 and 163 of this Act.

34. I am of the view that the finding of the trial Court on issue No. 4 is correct, namely, that the surety bond executed by defendant No. 2 in favour of defendant No. 3 stands discharged, because of the variations having been made in the terms of the original contract, dated the 3rd July, 1954, without the consent of the surety (defendant No. 2).”

(3) Further, a Division Bench of Hon’ble Madras High Court in A.V. Varadarajulu Naidu (Decd.) vs K.V. Thavasi Nadar {AIR 1963 Mad 413; Decided on 3 January, 1963} has, inter alia, held as follows.

“15. After examination of the relevant authorities, they held that, in the absence of special circumstances like fraudulent representation, or in the absence of other features from which a Court can infer a contract to be one of indemnity, as defined under Section 124 of the Indian Contract Act the liability of the surety is only ancillary and rests only on a valid obligation on the part of the party whose debt or obligation is guaranteed.

16. We are of the opinion that, where the liability of the principal is held to be not enforceable, on the ground of the contract being illegal there is no question of the surety being made liable.”  

(4) Further, A three judge bench of Hon’ble Supreme Court in State of Madhya Pradesh vs Kaluram {1967 AIR 1105, 1967 SCR (1) 266; Decided on 5 September, 1966} has, inter alia, held as follows.

“The expression "security" in s. 141 is not used in any technical sense; it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability: he is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of the surety, the latter is, by the express provision contained in s. 141, discharged to the extent of the value of the security lost or parted with. The State had a charge over the goods sold as well as the right to remain in possession till payment of the instalments. When the goods were removed by Jagatram that security was lost and to the extent of the value of the security lost the surety stood discharged.”  

(5) Further, Hon’ble Supreme Court in Amrit Lal Goverdhan Lalan vs State Bank of Travancore & Ors {1968 AIR 1432, 1968 SCR (3) 724: Decided on 11 April, 1968} has, inter alia, held as follows.

“Upon the evidence adduced by the parties in this case we are satisfied that there was shortage of goods of the value of Rs. 35,690 brought about by the negligence of the Bank or for some other reason and to that extent there must be deemed to be a loss by the Bank of the securities which the Bank had at the time when the contract of surety was entered into. It follows therefore that the principle of s. 141 of the Indian Contract Act applies to this case and the surety is discharged of the liability to the Bank to the extent of Rs. 35,690.”

(6) Still further, a Division Bench of Hon’ble High Court of Karnataka in T. Raju Setty vs Bank of Baroda {AIR 1992 Kant 108; Decided on 20 December, 1990} has observed thus:

“15.1. It is open to a party to a surety bond to give up his rights available under Chapter VIII of the Act provided the contract is not either illegal or forbidden by law. In the absence of any fraud pleaded and proved, such contract cannot also be termed as opposed to the provisions contained in Section 23 of the Act.”

(7) Also, a three judge bench of Hon’ble Supreme Court in State Bank of India vs Indexport Registered And Ors {1992 AIR 1740 ; 1992 SCR (2)1031; Decided on 30 April, 1992} has, inter alia, held as follows.

The guarantor in the present suit never took any plea to the effect that his liability is only contingent if remedies against the principle debtor fail to satisfy the dues of the decree-holder. If such a plea had been taken and the court trying the suit had considered the plea and gave any finding in favour of the guarantor, then it would have been a different position. But in the present case, on the face of the decree, which has become final, the court cannot construe it otherwise than its tenor. No executing court can go beyond the decree. All such pleas as to the rights which the guarantor had, had to be taken during trial and not after the decree while execution is being levied.”

(8) Also, a single judge bench of Hon’ble Bombay High Court in Central Bank of India vs M/S. Multi Block Private Ltd. and Ors. {AIR 1997 Bom 109; Decided on 16 January, 1997} has observed thus:

“29. There is nothing wrong if the plaintiffs are the creditor takes steps to ensure security for the recovery of the amount advanced to the debtors. In the instant case, this is what has exactly been done. The Defendants have not made available before the Court any material that there was any compulsion or force used by the plaintiffs in compelling them to sign the guarantee bonds. The evidence is absolutely wanting in this respect. Therefore, it will be legitimate and proper to hold that the transaction the both the suits was simple, a transaction of the willing debtor approaching the financial institution like the plaintiffs and seeking benefit of loan facilities.”

(9) Further, Hon’ble Allahabad High Court in Punjab National Bank vs IVth Additional District Judge, {1999 (3) AWC 2385; Decided on 28 May, 1999} has, inter alia, held as follows.

“11. However, where the Bank has filed suit for recovery of loan against principal debtor as well as sureties, it is entirely on a different footing. The relief claimed against principal debtor and surety, where the liability is one and the same, cannot be said to be separate or distinct. In other words, if principal debtor has no liability to repay an alleged debt, there will be no obligation of sureties to pay the said amount. The liability of a surety, therefore, is the same, which is sought to be discharged by claiming money from the principal debtor. To this extent, liability of the principal debtor and sureties is co-extensive and the decree is indivisible. It will be preposterous to say that though principal debtor, has no obligation to pay in law, but still the sureties should discharge a non-existent liability. Besides it, if decree against sureties is allowed to stand, there is possibility of conflicting decree being passed which may cause embarrassment to the Court.”

(10) Also, Hon’ble Supreme Court in Sita Ram Gupta Vs Punjab National Bank and Ors {(2008) 5 SCC 711; Date of Judgment: 10/03/2008} has, inter alia, held as follows.

“6. Therefore, the question arises whether the statutory provision under Section 130 of the Act shall override the agreement of guarantee. In our view, the agreement cannot be said to be unlawful nor the parties have alleged that it was unlawful either before the Trial Court or before the High Court. Let us, therefore, keep in mind that the agreement of guarantee entered into by the appellant with the Bank was lawful.

 (11) Further, Hon’ble Supreme Court in Karnataka State Financial Corporation Vs N. Narasimahaiah & Ors {2008 AIR 1797, 2008 (5) SCC 176; Decided on 13/03/2008} has, inter alia, held as follows.

“12. If special provisions are made in derogation to the general right of a citizen, the statute, in our opinion, should receive strict construction. “

14. Section 29 of the Act nowhere states that the corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it. The right of the financial corporation in terms of Section 29 of the Act must be exercised only on a defaulting party. There cannot be any default as is envisaged in Section 29 by a surety or a guarantor. The liabilities of a surety or the guarantor to repay the loan of the principal debtor arises only when a default is made by the latter.

18. Apart from the defences available to a principal borrower under the provisions of the Indian Contract Act, a surety or a guarantor is entitled to take additional defence. Such additional defence may be taken by the guarantor not only against the corporation but also against the principal debtor. He, in a given situation, would be entitled to show that the contract of guarantee has come to a not. Ordinarily, therefore, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction. In the absence of any express provision in the statute, a person being in lawful possession cannot be deprived thereof by reason of default on the part of a principal borrower.

19. Furthermore, construction of a statute would not depend upon a contingency. A statute must be interpreted having regard to the constitutional provisions as also human rights.

30. Right of property, although no longer a fundamental right, is still a constitutional right. It is also human right. In absence of any provision either expressly or by necessary implication, depriving a person therefrom, the court shall not construe a provision leaning in favour of such deprivation. Recently, this Court in P.T. Munichikkanna Reddy & Ors. v. Revamma & Ors. [(2007) 6 SCC 59] dealing with adverse possession opined:

"Human rights have been historically considered in the realm of individual rights such as, right to health, right to livelihood, right to shelter and employment etc. but now human rights are gaining a multifaceted dimension. Right to property is also considered very much a part of the new dimension. Therefore, even claim of adverse possession has to be read in that context. The activist approach of the English Courts is quite visible from the judgement of Beaulane Properties Ltd. v. Palmer [2005 (3) WLR 554 : 2005 EWHC 817 (Ch.)] and JA Pye (Oxford) Ltd v. United Kingdom [2005] ECHR 921 [2005] 49 ERG 90, [2005] ECHR 921], The court herein tried to read the Human Rights position in the context of adverse possession. But what is commendable is that the dimension of human rights has widened so much that now property dispute issues are also being raised within the contours of human rights."

31. A surety may be a Director of the Company. He also may not be. Even if he is a close relative of the Director or the Managing Director of the Company,  the same is not relevant. A Director of the Company is not an industrial concern. He in his capacity as a surety would certainly not be. A juristic person is a separate legal entity. Its veil can be lifted or pierced only in certain situations. [See Salomon v. Salomon and Co. [1897 AC 22], Dal Chand and Others v. Commissioner of Income Tax, Punjab (1944) 12 ITR 458, Juggilal Kamlapat v. Commissioner of Income Tax, U.P. (1969) 1 SCR 988 = 1969 (73) ITR 702 and Kapila Hingorani v. State of Bihar (2003) 6 SCC 1]

32. In a case where a court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round. Only because a speedy remedy is provided for that would itself lead to the conclusion that the provisions of the Act have to be extended although the statute does not say so. The object of the Act would be a relevant factor for interpretation only when the language is not clear and when two meanings are possible and not in a case where the plain language leads to only one conclusion.”

(12) Still further, Hon’ble Supreme Court in Industrial Investment Bank of India Ltd vs Bishwanath Jhunjhunwala {(2009) 9 SCC 478; IV 2009 BC 574 (SC); Decided on 18 August, 2009} has, inter alia, held as follows.

“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.”

(13) Recently, a 2 judge bench of hon’ble Supreme Court in H.B. Basavaraj (Dead) by LRs. Vs. Canara Bank {(2010) 12 SCC 458; AIR SCW 7567; Decided on 28.10.2009} held as follows:

“4. It was submitted that the dates mentioned in Exhibits p-19 and p-20 were in fact inserted at a later date after the forms were signed by the surety. The arguments regarding the practice of the banks to make persons sign blank acknowledgments from beforehand in order to extend the time of limitation at the time of filing of suits seems to be without merit. Even if we acknowledge the fact that banks might be in a dominant position, there was absolutely no evidence to show that the bank had in fact exercised its dominant power to force the surety into entering the contract that he ultimately did. If the appellant had been interested in insisting upon this matter then the least he could have done was to have entered the witness box and facilitated a method of clearing the air about it. Nor was there any explanation adduced at a later stage explaining the reason for the surety not entering evidence on his behalf. In the absence of any conclusive evidence to point to the entering of dates at a later stage, we cannot find any difficulty in rejecting the aforesaid contentions of the appellants. (END)

Note: Italics and underline supplied by me in all above paragraphs.

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