TMI Blog2011 (12) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Corporation has settled its loan account with the principal debtor, the guarantor cannot be saddled with any additional liability – In favor of petitioner - CIVIL WRIT PETITION NO. 2713 OF 2009 (O & M) - - - Dated:- 20-12-2011 - HEMANT GUPTA AND G.S. SANDHAWALIA, JJ. Anand Chhibbar, Lalit Thakur and Rakesh Kumar for the Petitioner. Kamal Sehgal and Arjun Pratap Atma Ram for the Respondent. JUDGMENT Hemant Gupta, J . The challenge in the writ petition is to a show-cause notice dated October 7, 2008 (annexure P1) served upon the petitioner to pay a sum of Rs. 83,58,671 under section 32G of the State Financial Corporations Act, 1951 (for short "the SFC Act"). The challenge is on the basis that once the principal debtor has settled its loan account with the Corporation, the petitioner, who is a guarantor, cannot be made liable to pay any amount over and above the amount paid by the principal debtor. It is the case of the petitioner that the liability of the guarantor is co-extensive with that of the principal debtor and not exceeding the liability of the principal debtor. Once the Corporation has settled its loan account with the principal debtor, the guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under sections 391 and 394 of the Companies Act, 1956, before this court for revival of the company by submitting a rehabilitation scheme. The majority shareholders in the company in liquidation proposed to the State Bank of India for settlement in terms of one-time settlement scheme, as per the guidelines issued by the Reserve Bank of India. The bank agreed to accept Rs. 4,85,00,000 as against the total claim of Rs. 22,96,34,254. This court directed the official liquidator vide order dated November 2, 2007, to disburse an amount of Rs. 4,05,00,000 to the State Bank of India as full and final payment, i.e., out of sale proceeds of plot No. 136, Sector 24, Faridabad. Balance Rs. 80 lakhs were to be pumped in by the ex-management. On account of one-time settlement in the total sum of Rs. 4,85,00,000 which the bank received, the bank satisfied its claim. The petitioner also approached the Corporation for a settlement but the settlement proposal was rejected. In the aforesaid order dated November 2, 2007, the official liquidator was also directed to adjudicate the claim of the creditors and file his report before this court. It was in pursuance of such direction, the Corporation sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Co. Ltd. (in liquidation), In re [2010] 157 Comp. Cas. 530/[2011] 105 SCL 186 (Punj. Har.), the claim of the creditor including that of the Corporation was adjudicated upon. The basic challenge was that the procedure prescribed, i.e., the meetings of the secured and other creditors have not been held. In respect of the claim of the Financial Corporation, it was observed as under (page 549) : "XII. Answers as regards objection from HFC and in respect of all other sundry claims : The objection coming from HFC, who is the third respondent, is with regard to the disbursement of Rs. 4.05 crores to the State Bank of India as including the claim by the State Bank of India against yet another company, even apart from the amount due by the company in liquidation to the State Bank of India. The contention by the ex-directors of the company that the HFC had itself admitted to OTS at Rs. 2.50 lakhs was specifically denied. HFC had made a demand for Rs. 85,57,600 with further interest with effect from October 1, 2007. The HFC was itself the first secured creditor in respect of Plot No. 136 and the State Bank of India was only a second secured creditor. The report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /directors of the company in liquidation... It is further submitted here that the debt of guarantee executed by the petitioner with the respondent-Corporation is a separate independent contract. Hence the petitioner cannot take the benefit of a separate contract with the company. The petitioner has not brought the above stated facts before this hon'ble court hence the present writ petition deserves dismissal." 9. We have heard learned counsel for the parties and with their assistance gone through the provisions of statute and the law applicable. We find that the question requires to be examined is : "Whether the revival scheme submitted by the petitioner under sections 391 and 394 of the Companies Act, 1956 and accepted by court amounts to compounding with the principal debtor leading to the discharge of the surety within the meaning of sections 134 and 135 of the Indian Contract Act, 1872 ?" 10. To consider the above question, the following are the relevant provisions of the Indian Contract Act, 1872 (for short "the Act") : "126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor'.-A 'contract of guarantee' is a contract to perform the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company :" (emphasis supplied). 12. As per section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Section 134 of the Indian Contract Act deals with discharge of surety by any contract between the creditors and the principal debtor, by which the principal debtor is released. The surety also discharged by an act or omission of the creditor. Section 135 of the Indian Contract Act discharges the surety, when the creditor compounds with the principal debtor. 13. The hon'ble Supreme Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [1969] 39 Comp. Cas. 133 held the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. In the absence of some special equity the surety has no right to restrain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 134 of the Act to contend that the petitioner stands discharged by the act and omission of the Corporation in terms of second part of section 134 of the Act. It is also contended that in terms of section 135 of the Indian Contract Act, the petitioner also stands discharged, as the Corporation is deemed to have compromised with the principal debtor. The liability of the surety does not survive after the settlement with the principal debtor in proceedings under sections 391 and 394 of the Companies Act, 1956. Reference is also made to Syndicate Bank v. Pamidi Somaiah [2002] 108 Comp. Cas. 12 (AP); Kurnool Chief Funds (P.) Ltd. v. P. Narasimha , AIR 2008 AP 38 and Union Bank of India v. Chairperson, Debts Recovery Appellate Tribunal [2011] 167 Comp Cas 1 (All). 16. In Pamidi Somaiah ( supra ), the Andhra Pradesh High Court has examined the question as to whether the decree holder can proceed against the surety when the principal debtor's liability stands discharged as the suit abated on account of non-impleading of legal heirs of deceased principal debtor. After considering the provisions of section 134 of the Indian Contract Act, 1872, the court held to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case that is consequences of discharge of a principal debtor by the bank before the official liquidator. The court found that such settlement discharges the surety. It was held to the following effect (page 8) : "The second submission of learned counsel for the bank that discharge of the principal borrower by operation of the bankruptcy law will not discharge the guarantors is also without any force and needs to be rejected. The bank had accepted the amount towards full and final settlement of its claim submitted before the company judge and the principal borrower did not stand discharged because of operation of law. The decision of the Supreme Court in Maharashtra State Electricity Board v. Official Liquidator, High Court , Ernakulam, AIR 1982 SC 1497 ; [1983] 53 Comp Cas 248, therefore, does not help the petitioner-bank. On the other hand, the submission of Sri R.P. Agarwal, learned counsel for the respondents that the liability of the surety gets automatically terminated when liability of principal debtor is extinguished, deserves to be accepted." 19. Shri Kamal Sehgal, learned counsel for the Corporation argued that section 134 or 135 have no application in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mi Gounder AIR 1951 Mad 48. The said judgment was not found to be helpful in the said case for the reason that the exceptions therein relate to the release of the principal debtor's liability under the law of limitation, bankruptcy law, etc. It was held to the following effect (page 689 of 110 Comp Cas) : "But this passage will not, in my opinion, help the appellant in this case as the exceptions given there relate to the release of the principal debtor's liability under the law of limitation, bankruptcy laws, etc. (which merely bar the remedy) and not to the extinction of the principal debtor's liability, as hereunder the Madras Agriculturists' Relief Act." 21. In the said judgment, it was also held to the following effect (page 699 of 110 Comp Cas) : "Adverting to the contract of guarantee be it noted that though it is not a contract regarding a primary transaction : but it is an independent transaction containing independent and reciprocal obligations. It is on principal to principal basis and by reason wherefor the statute has provided both the creditor and the guarantor some relief as specified in this chapter of the Contract Act (between sections 130 and 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany to consider a scheme of reconstruction under section 153 of the Indian Companies Act, 1913. As per the scheme every creditor was to receive half the sum in cash and other half in the shape of preferential shares. Having received the benefits under the scheme, the plaintiff sought to recover the deficient amount from the defendants. The court considered Halsbury's Laws of England (2nd edition), Volume 5 ; Ex parte Jacobs : In re Jacobs [1875] 10 Ch. A 211 ; London Chartered Bank of Australia , In re [1893] 3 Ch. D 540 and Garner's Motors Ltd., In re [1937] 1 Ch. D 594 and held that the surety-defendant No. 1 is liable to the creditor. In Garner's Motors Ltd., ( supra ), referred to by the Bombay High Court, there were two companies called Sentinel Waggon Works Ltd. and Garner's Motors Ltd., who were jointly liable to pay certain debts. One of the companies, i.e., Sentinel Waggon Works Ltd., defaulted and entered into a scheme of arrangement. The other debtor sought to rely upon the scheme of arrangement to absolve itself of liability. It was held to the following effect : "...The liquidators contend that Garner's Motors Ltd., was discharged from its liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assumes statutory operation. 26. On the other hand, a Full Bench of the Madras High Court in a A. L. S. P. PL. Subramania Chettiar ( supra ) has considered the provisions of the Madras Agriculturists' Relief Act. The liabilities of an agriculturist debtor were scaled down under the said Act. The argument that the scaling down debt against the principal debtor does not absolve the surety, did not find favour with the court. It was held to the following effect (page 51) : "(6) Section 128 of the Contract Act, says that the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by contract. It is a settled principle of law that the surety's liability is only accessory and secondary. Under the express provisions of section 128 his liability is made only co-extensive with that of the principal debtor. That can only mean that his liability, is no less or no more than that of the principal debtor. If the amount payable by the principal debtor is discharged in part, the surety's liability also is pro tanto reduced... Section 140 of the Contract Act, says that the surety, on discharging a debt would only get all the rights wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accessory to a principal obligation that the extinction of the principal obligation necessarily induces that of the surety, it being the nature of an accessory obligation that it cannot exist without its principal". The learned Commentators add "the rule may also be put upon the less technical ground that if the release of the surety did not follow from that of the debtor, the latter's release would be purely illusory because the consequence would be that the surety on being compelled to pay would immediately turn round on the debtor. I find it impossible to hold that the creditor can proceed against the surety although the debt has been recovered".' Spencer J. remarks in the same case : 'Ordinarily the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided for... An illustration of the effect of section 128 of the Contract Act occurs in Shek Sulaiman v. Shivram Bhijai, (12 Bom 71), where it was observed that if an amount recoverable by a plaintiff, from a defendant debtor is diminished in appeal, the surety's engagement, being one of indemnity, would diminish in like proportion. So, if the sum recoverable became ze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arajan JJ.) that a statutory discharge of the whole or any part of a principal debtor's debt will not discharge the surety pro tanto as the creditor has taken no part in releasing the principal debtor from his liability. But it is, obvious that this position will not be valid when the debt itself has been extinguished as regards the principal debtor by the statute, as I have held to be the case under the Madras Agriculturists' Relief Act, and there is nothing to be recovered from him, and so nothing to be recovered from the surety, who has only guaranteed the same debt, as was due from the principal debtor his engagement, being merely accessory to the principal obligation. It is clear to me therefore that the Bench ruling in Sami Iyer v. Ramaswami Chettiar , AIR 1923 Mad 340, represents the correct state of the law regarding this matter and that Subramanian Chettiar v. Batcha Rowther, AIR 1942 Mad 145, was wrongly decided. I may add that the same Bench which decided Subramanian Chettiar v. Batcha Rowther , AIR 1942 Mad 145 was a party to the decision in Pachigolla Satyanarayanamurthi v. Karatam Sathiraju, AIR 1942 Mad 525 and that they decided therein that a non-agric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operation of law, may discharge him this is not always the case.' But this passage will not, in my opinion, help the appellant in this case as the exceptions given there relate to the release of the principal debtor's liability under the law of limitation, bankruptcy laws, etc. (which merely bar the remedy) and not to the extinction of the principal debtor's liability, as here under the Madras Agriculturists' Relief Act." 27. It may be noticed that in most of the cases, reference is made to the quotes from the Halsbury's Laws of England, Second Edition. In Halsbury's Laws of England, Fourth Edition, (Volume 20 reprint) in paragraph No. 610, it is said to the following effect : "610. Bankruptcy.-A contract is not a rule discharged by the bankruptcy of any of the parties to it. A mere declaration of insolvency by one of the parties does not entitle the other to treat the contract as being at an end, but if the declaration is made under circumstances which show an intention not to carry out the contract or an inability to do so the position is different ; and if one party gives notice to the other of his insolvency and does nothing to show that he intends to stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the broad and general principle inherent in any compromise or settlement entered into between the parties, the same being that it should not be unfair, contrary to the public policy, unconscionable or against the law." 31. Present is a case, which leads to extinction of the principal debtor's liability in terms of scheme of arrangement sanctioned by this court on March 19, 2009. Such scheme is binding on all the creditors including non consenting creditors such as the Corporation. Under section 135 of the Act, a contract between the creditor and the principal debtor by which the creditor compounds with the principal debtor, discharges the surety. It shall include a binding arrangement sanctioned by the court under section 391 of the Companies Act. It is a case of a deemed and binding contract though by operation of law, but such contract extinguishes the liability of the principal debtor. With such extinction of the liability of the principal debtor, the surety cannot recover the amount of debt paid, from the debtor. Therefore, it cannot be said that the surety will continue to be liable for payment of debt due to the creditor prior to settlement. 32. The judgment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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