Navnit Talwar vs Bank Of Baroda And Ors.

Ranjit Singh, J

The appellant-guarantor, for a loan facility availed by principal borrower, namely, Reinz-Tablros Ltd., claims his discharge from his liability on the ground that the amount as settled by the O.L. stands realized from the principal debtor. This pure question of law which arises for consideration in these two Appeals therefore is whether the guarantor is liable to be proceeded against for recovery of dues independently when amount is realized from the principal borrower in liquidation proceedings.

In Appeal (No. 308/2013), the appellant has impugned the order passed by the Tribunal below in an Appeal filed by the appellant-guarantor under Section 30 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short, RDDBFI Act). During the pendency of this Appeal, the Bank came up with the objection that the appellant-guarantor had not challenged the order passed in the Original Application and hence he would lose his locus to impugn the order passed by the Recovery Officer (R.O.) in recovery proceedings. The Counsel for the appellant initially maintained that he would not be required to challenge the order passed in the Original Application, but subsequently, has filed another Appeal (Inward No. 117/2013) to impugn the order passed in the Original Application as well. The Appeal therefore is filed with the delay of 1005 days is accompanied by application seeking condonation of delay. Since the basic issue is on the ground of liability of the guarantor and is under consideration in Appeal No. 308 of 2013, the delay in filing the Appeal to challenge order in Original Application should not matter much. It is taken to have been condoned.

The challenge in both the Appeals, of course, is on the ground that the appellant being a guarantor would be discharged from his liability once the principal debtor is relieved of its liability in view of the order passed in the liquidation proceedings. This was the precise challenge raised in the Appeal before the Tribunal below which, after due consideration, has been rejected.

The facts noticed, in brief, to get a hang of the ground of the challenge are that Bank of Baroda instituted a Suit against principal borrower Reinz Talbros and guarantors for recovery of the credit facilities allowed to the principal borrower, by filing Original Application 54/2002. The Original Application was allowed and Recovery Certificate was issued on 15th April, 2011 for a sum of Rs. 7,57,77,191.16 along with pendente lite and future interest @ 14% p.a. with quarterly rests from 5th April, 2002 till recovery.

The principal borrower company was ordered to be wound up vide order passed by the Hon'ble High Court of Delhi and the O.L. attached to the High Court was appointed as O.L. of the Company. The O.L. took charge of the assets and sold the same. The Company Judge directed Bank of Baroda, the sole secured creditor, to file its claim before the O.L. The claim filed before the O.L. was, settled for an amount of Rs. 7,56,02,575/- on 29th February, 2008. As per the appellant-guarantor, Bank of Baroda never challenged the claim so settled by the O.L. and thus this claim became final.

The appellant would also refer to some statements made on behalf of Bank of Baroda before the Hon'ble Delhi High Court that its claim be settled in view of Sections 529,529-A and 530 of the Companies Act. The Bank accordingly received an amount of Rs. 7,18,85,000/- which, as per the appellant, would be the entire amount claimed and thus the Bank would be entitled to proceed against the guarantor as its claim against principal borrower has been fully satisfied.

Despite the above position, the Bank proceeded further to recover the amount from the appellant, being guarantor, and the Recovery Officer issued notice to the appellant. The appellant-guarantor appeared before the Recovery Officer and pleaded before him that the Bank had received the entire claim raised by it before the O.L. The Recovery Officer, however, did not listen to these pleas and proceeded to effect recovery from the appellant. Aggrieved against this action of the Recovery Officer, the appellant approached the Delhi High Court by invoking its Company jurisdiction by moving C.A. 451/2013 against the order passed by the Recovery Officer. The High Court, however, disposed of the said application with the observation that the appellant may invoke the appellate jurisdiction to seek redressal of his grievance. The appellant, accordingly, had challenged the order dated 14th March, 2013 passed by the Recovery Officer to continue with the recovery proceedings on the ground that this was contrary to law and in violation of various orders passed by the High Court of Delhi in Company Petition. The appellant had also pleaded that action of the Bank was in violation of the principle laid down in Article 22 of the Constitution of India besides being bound by principles of estoppel. The plea by appellant was that the Bank had received its amount after adjudication by the O.L. and thereafter it was not entitled to continue the recovery proceedings against the appellant-guarantor.

Bank of Baroda came up with the stand that it was entitled to recover the full amount decreed by the Tribunal while allowing the Original Application. As per the Bank, the guarantor would not be discharged from his liability due to any part payment or any payment having been made by the O.L. It was stated that the amount received from the O.L. was appropriated by the Bank against the decretal amount and the Bank was proceeding to recover the balance amount which the Bank could so recover from the appellant who was a guarantor. The Bank in its response would also point out that it had agreed for sale of the mortgaged property by the O.L. without prejudice to its rights and this fact was duly reflected in the proceedings recorded on 21st September, 2006. As per the Bank, the liability of the guarantor was independent, co-extensive, joint and several for which he had executed the deed of guarantee and so the Bank was entitled to recover the balance decretal amount from the appellant.

The undisputed facts in this case are that the borrower Company went into liquidator as ordered by the Hon'ble Delhi High Court and was wound up on 25th February, 2002. After appointment of O.L., the Company Judge directed the O.L. to invite claims against the Company. In the order dated 21st May, 2009 in C.A. 1030/2008, it is recorded that a sum of Rs. 7,56,02,576/- and Rs. 8,34,04,285/- were found admissible by the O.L. and the Bank prayed for prorata disbursement. The Bank had requested for sale of the industrial area property at Loni Road belonging to the Company under liquidation. This property was sold and the sale was accepted by the Company Judge. The Company Judge has recorded in its order dated 27th November, 2012 that the admitted claim of Bank of Baroda (secured creditor) stood paid. The order reads as under:

"Submission of the Bank is that he has not been paid full amount in his capacity as a secured creditor learned Counsel for the Official Liquidator points out that the claim of the Bank has already been admitted for Rs. 7,56,02,575/- which entire amount has since been paid to the Bank, and if the Bank has any grievance, he is permitted to file an Appeal against the order of the Official Liquidator, if so advised."

It is thus clear that the Bank had pleaded before the Court that it had not been paid the full amount as secured creditor. The Counsel for the appellant, however, would point out the Bank never filed any Appeal against this order and it ought to have done so if it had any grievance against the payment so made. The appellant accordingly would plead that the Company Judge had clearly recorded that the entire amount had been paid and thus the claim of the Bank was found to have been satisfied. The plea accordingly was that the Bank was not entitled to proceed with the recovery against the appellant.

The Counsel for the appellant had placed reliance on various judgments like Union Bank of India v. Chairperson, DRAT, II (2012) BC 67 : 2011 (8) A.D.J. 506; Kundanmal Dabriwala v. Haryana Financial Corporation, II (2013) BC 614 (DB) : Civil Writ Petition No. 2713/2009 (O. & M.), decided on 20th December, 2011 and Anil Kumar v. Haryana Financial Corporation, AIR 2011 P. & H. 140.

On the other hand, Counsel for the Bank had relied on judgments like in the case of Dr. M.I. Itty v. Kerala Financial Corporation, W.A. No. 2002/2006 (A), decided on 5th April, 2010; Syndicate Bank v. Channa Veerappa Beleri, III (2006) SLT 518 : 11 (2006) BC 579 (SC) : (2006) 11 SCC 506 and Federal Bank v. Official Liquidator, I (2003) BC 209 (DB) : 2002 (3) K.L.T. 663. Reliance was also placed on the cases of Radha Thiagarajan v. South Indian Bank Ltd., I.L.R. 1986 (1) Ker. 370 and Industrial Finance Corporation of India Ltd. v. Cannanore Spinning & Weaving Ltd., III (2002) SLT 185 : II (2002) BC 439 (SC) : (2002) 5 S.C.C. 54.

The Tribunal, after analyzing the judgments relied upon by both the sides, has held that the Recovery Officer was justified in proceeding against the guarantor for recovery of the balance amount. While coming to this conclusion, the Tribunal has noticed the guarantee deed wherein the appellant had waived the right conferred upon sureties by Sections 133, 134, 135, 139 and 141 of the Indian Contract Act. The Tribunal has accordingly held that the appellant is bound by the contract and cannot claim his discharge. The present Appeal is accordingly filed to challenge the order passed by the Tribunal below.

I have considered the submissions advanced and have gone through the case laws cited before me as well as before the Tribunal below. The Counsel for the appellant had relied upon two judgments passed by the High Courts whereas we have the advantage of views expressed by the Supreme Court on this issue. Therefore, there may not be much need to confine oneself to the views expressed by the High Courts.

Let us first notice the view of Hon'ble Supreme Court in the case of Bank of Bihar Ltd. v. Dr. Damodar Prasad, 1968 (SLT Soft) 304. : AIR 1969 SC 297 and State Bank of India v. Indexport Registered, II (1992) BC 243 (SC) : AIR 1992 SC 1740. The Court while dealing with liability of surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. The Supreme Court has held that in the absence of any special equity, the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. It is further observed that where the creditor has obtained a decree against the surety and principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. The legal position crystallized is that the liability of the guarantors and the principal debtor is coextensive and not in alternative. Even the High Court in the case of Kundanmal Dabriwala (supra) has noticed this position of law.

In the cases of Maharashtra State Electricity Board, Bombay v. The Official Liquidator, 1982 (SLT Soft) 194-AIR 1982 SC 1497 and Industrial Finance Corporation of India Ltd. v. Cannanore Spinning & Weaving Mills Ltd. (supra), this question has been thoroughly considered by the Apex Court. View expressed is that creditor Corporation had a right to recover from the guarantor the amount due and payable by the principal debtor in terms of the guarantee.

In the case of Maharashtra Electricity Board (supra), the company had entered into a contract with the Electricity Board to supply the goods before it was ordered to be wound up by High Court of Kerala. One of the terms found in the tender was that the intending supplier of goods should pay as earnest money and/or security to the Electricity Board along with every tender a sum approximately equivalent to 10% of the estimated price of the goods in question. There was, however, a provision for exempting payment of such earnest money or security deposit in case of those tenderers who would keep a sum of Rs. 50,000/- either in cash or in any form approved by the Electricity Board and one such approved form was a Bank guarantee. Any Bank guarantee given by any such intending tenderer in lieu of the cash deposit made was to be deemed to be equivalent to the cash deposit made on date of the guarantee and the Electricity Board could realize the Bank guarantee amount or any part of it at its will on any day irrespective of whether any tender had been made by the person concerned during the period or not.

The company in liquidation had offered a Bank guarantee not exceeding Rs. 50,000/- given by Canara Bank. The original period was one year. This period, however, was extended. The Company was wound up and O.L. was appointed when the Bank made a claim to the extent of Rs. 1,64,353/-. The Company Judge issued an order restraining the Electricity Board from realizing the amount from the Bank. Appeal was filed before the Division Bench of the High Court against the order, which was dismissed. In the SLP filed, the principal question which arose for determination was to the effect of liquidation proceedings on the right of the Electricity Board to receive a sum of Rs. 50,000/- as per the terms of the Bank guarantee. The Supreme Court has spoken thus in this regard:

"The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. of the guarantor. Under 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. A surety is no doubt discharged under Section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal-debtor, but a discharge which the principal debtor may secure by operation of law in Bankruptcy (or in liquidation proceedings in the case of a Company) does not absolve the surety of his liability (See Jagannath Ganeshram Agarwala v. Shivnarayan Phagirath, A.I.R. 1940 Bom. 247. See also in Fitzgeorge Ex parte Robson, (1906) 1 K.B. 462)...."

In Cannanore Spinning & Weaving Mills case (supra), the Court has viewed that release of principal debtor's liability under the law of limitation, Bankruptcy laws, etc. (which merely bar the remedy) does not lead to the extinction of the principal debtor's liability.

This issue has again been considered by the Hon'ble Supreme Court in the case of Punjab National Bank v. State of U.P., II (2001) SLT 642 : (2002) 5 SCC 80. The Court after noticing the law laid down in the case of Maharashtra State Electricity (supra), has held that the principle of the aforesaid decision is equally applicable in this case before the Court. It is observed that the right of the appellant Bank to recover money from respondents who stood as guarantors arose out of the terms of guarantee which are not in any way superseded brought to naught merely because the appellant may not be able to recover money from the principal borrower.

The Division Bench of Kerala High Court in the case of Dr. M.L. Itty (supra) has considered this question in detail after making reference to various precedents. This case apparently is identical to the present case. The company in this case had availed certain loan facilities from Kerala Financial Corporation. The director of the Company had executed guarantee undertaking to repay the loan in seventeen half-yearly instalments commencing from 10th July, 1981 and ending on 10th July, 1989. The Company did not repay the loan and made default when Kerala Financial Corporation initiated proceedings under Kerala Revenue Recovery Act against the Company, its director and their assets. The director forwarded a proposal for rehabilitation and the repayment of the loan was thereafter rescheduled. Recovery proceedings were withdrawn. The loan even was not repaid in time after being rescheduled. While the matter stood thus, the Court on 27th August, 1990 ordered winding up of the Company and the possession of the Company's assets were taken over by the O.L. attached to the Court. The O.L. brought the properties of the Company for sale. Financial Corporation did not choose to stand outside the winding up and approached the O.L. for payment of outstanding loan amount. Against the claim of Rs. 47,02,769.40, the O.L., admitted the claim of Rs. 38,32,219.80. Aggrieved against the same, the Corporation filed an application in the Company petition, but the Company Judge ruled that no interference was called for in the order passed by the O.L. While holding so, the Court observed that the Corporation can claim payment of interest after winding up only if there is surplus in the hands of O.L. after payment of all the claims admitted to proof. The Company challenged this order as well. Though the O.L. did not disburse even the admitted amount, the Corporation initiated fresh proceedings for realization of Rs. 71,78,000/- with future interest at the rate of 19.75% p.a. and issued demand notice to the Directors. They filed petition in the Court contending that they were liable only for the amount that may found due from the principal debtor and not the entire debt. While the matter stood thus, the O.L. paid the sum of Rs. 38,32,219.80 to the Corporation. The petition filed by the guarantor-directors was disposed of by recording the undertaking that then existing demand notices will be withdrawn and revised demand notice issued after giving credit for the amount received. The Corporation issued fresh demand notice together with interest at the rate of 19.75% p.a. The guarantor-directors then challenged the fresh demand notice on various grounds. One of the contentions was that the amount could not be recovered as the Corporation having participated in winding up where its claim to the tune of Rs. 38,32,219.80 was admitted, stood paid and thus the guarantors would not be liable to pay any further amount to the Corporation. Plea raised was that the right of the Corporation to recover the amount stood satisfied and concluded by the order passed by the Company Judge upholding the decision of O.L. as regards the amount and so the Corporation was not entitled to recover the amount from the Directors/guarantors. During the pendency of this case, the O.L. had made some further payment by way of interest. The Director appellant before the Court sought return of the capital to all the creditors. The O.L. thereafter paid a further sum to the Corporation by way of interest calculated at the rate of 4% p.a. The Division Bench accordingly declined to interfere in the order passed by the Company Judge and it was that held that only if there was any surplus amount left in the hands of O.L. after paying the secured creditor that the secured creditor who had obtained a decree could realize interest in excess of 4% p.a.

The Corporation resisted the writ petition contending that the liability of guarantors subsisted even after winding up of the Company and that under loan agreement/deed of guarantee, they were entitled to proceed against the guarantors for realization of the balance amount. The writ petition was dismissed by a learned Single Judge holding that the liability of the surety is not extinguished with the winding up order passed by the said Court and the surety was liable for entire amount due from the principal debtor after giving credit of the payment made by O.L. Writ Appeal was thus filed.

The Counsel appearing for the appellant had contended that the liability of the guarantors extinguished when in the winding proceedings the Corporation chose to prove is debt before the O.L. and the O.L. admitted the claim only to the extent of Rs. 38,32,219.80. Since this order was upheld by the Company Judge and further approved by Division Bench, it was pleaded that the Corporation could not have any further claim against the Company and since the principal debtor is not liable to pay any further claim, the appellant as guarantor could not be held liable. The appellant sought support from the provisions of Sections 128, 134 and 141 of the Indian Contract Act in this regard. Reference was made to the case of Federal Bank v. Official Liquidator (supra), to contend that with the payments made by the O.L. the claim of the Corporation stood satisfied and that in the absence of any surplus in the hands of the O.L. the claim of the Corporation for interest in excess of 4% could not be considered. Relying on the case of Syndicate Bank v. Channaveerappa Beleri (supra), the plea was that the Corporation never made any demand on the guarantors while the claim was alive as against the principal debtor, and so no demand could thereafter be made against the guarantors since the claim against the principal debtor was no longer alive.

The Counsel appearing for the Corporation on the other hand, contended that adjudication made by the O.L. in the winding up proceedings would not relieve the guarantors of their obligations under the loan agreement/deed of guarantee and that on the terms of the loan agreement/deed of guarantee, the Corporation was entitled to proceed against the guarantors as if they were principal debtors. In this regard, the Counsel for the Corporation placed reliance on the case of Radha Thiagarajan v. South Indian Bank Ltd. (supra) and Cannanore Spinning & Weaving Mills Ltd. (supra) to contend that the order of winding up of the Company does not discharge the sureties. This view has been noticed above as well.

The Court has taken note of the contentions raised by the Counsel for the appellant that principal debtor being no longer liable after winding up, the appellant guarantor could not be held liable. In this regard, reference was made to Section 128 of the Contract Act. The plea also was that the right of surety to proceed against the principal debtor recognized under Sections 140 and 141 of the Contract Act has been lost. While considering these submissions, the Court has made reference to the clause of guarantee deed and has noticed that in the guarantee deed executed by the appellants, they had undertaken to personally guarantee repayment of all moneys at any time payable by the borrower Company to the Corporation in respect of the additional loan and also guaranteed the payment and discharge of all liabilities of the borrower Company to the Corporation. The Court has also noticed the finding of the Single Judge that the guarantors had agreed to indemnify and keep indemnified the Corporation against all loss of the principal and interest and that guarantors personally guaranteed the Corporation the repayment of all money at any time payable by the borrower, while dismissing the writ petition. The Court has then referred to a Division Bench decision in the case of Aypunni Mani v. Deassy Kochouseph, 1965 K.L.T. 1266, where while interpreting Section 128 of the Contract, Act, the Court had held:

"7 .....It appears to us, that Section 128 of the Indian Contract Act, sketches the ambit of liability of the surety when it enacts that the liability of the surety when it enacts that the liability is co-extensive with that of the principal debtor. It has nothing to do with the consequences of recovery of the debt. Such being the scope and intendment of the section, we feel that a statutory reduction or extinguishment of the principal debtor's liability will operate as a protanto reduction, or extinguishment of the surety's debt. A reduction of extinguishment of the debt, is quite different from its unenforceability against the principal debtor by operation of the law of Bankruptcy of the statute of Limitation."

After making reference to judgments in the case of Maharashtra State Electricity Board (supra), Punjab National Bank Limited v. Sri Bikram Cotton Mills, 1969 (SLT Soft) 386 : (1970) 2 SCR 462; Radha Thiagarajan (supra) and to the case of Punjab National Bank v. State of U.P. (supra) besides some English judgments, the Court has upheld the finding given by the Single Judge of the Court to the effect that the adjudication made by the O.L. in the winding up proceedings did not absolve the sureties of their obligations arising under the loan agreements/deed of guarantee. The Court has observed that the appellant and other sureties can at best only contend that they were liable only for the balance amount payable by the Company after giving credit to the payments made by the O.L. in the winding proceedings.

Thus the Court has fully relied upon the law laid down in Maharashtra State Electricity Board case (supra). The Court did not rely on the case of Sri Bikram Cotton Mills (supra) in view of the unequivocal language of the letter of guarantees in the case before the Court. In this case surety's liability was limited to the ultimate balance found due from the principal debtor and said balance had not been ascertained before institution of the Suit.

Notice may now be taken of the case of Radha Thiagarajan's case (supra), where the Court had held:

"10. The discharge of principal debtor will not discharge the surety where it is not brought about by the voluntary act of the creditor, but by the operation of law, such as the bar under the statute of limitations or by reason of Bankruptcy or liquidation of the principal debtor (See Cartger v. White, (1884) 25 Ch. D. 666). In re London Chartered Bank of Australia, (1893) 3 Ch. 540), Ex parte Jocobs, Inre Jacobs (1875) 10 Ch. App. Cas 211, Fitz George. In re Robson, Ex. parte [(1905) 1 K.B. 462], Re Gamar Motors Ltd., [(1937) 1 All E.R., 671] and, Bank of India Ltd. R.F. Cowasjee, A.I.R. 1955 W.A. No. 2002 of 2006 Bom. 419, 431). See also "Rowlatt on Principal and Surety", 4th Edn. p. 177; William W. Story, M. Treaties on the Law of Contracts; Vol. II, para 869. As stated by Mckay, J.:

"The discharge of the principal which discharges a surety must be a discharge by some act or negligence of the creditor, and a discharge by operation of law being, as it is, against the consent and beyond the power of the creditor, does not discharge the surety."

Philipps v. Solomon, (42 Gre. 192) (quoted by Brand op. cit para 168). But if the contract under the debt became due is not enforceable by reason of the substantive law (as opposed to some procedural regulation) and is therefore void ab initio-void from its very inception-[Section 2(g) of the Contract Act], as for example, a contract with an alien enemy, or has become illegal in the course of its performance [Section 2(j) of the Contract Act], as for example, a contract with one who had been an alien friend, but later came an alien enemy, the debt in such cases of voidness or nullity is extinguished and not merely barred, and so is the obligation of the surety. The "nullity of the principal obligation necessarily induces the nullity of the accessory": Ferry v. Burchard, (21 Cenn. 597), per Storrs. J. (quoted by Brandt op. cit. Vol. I, para 379): see also Mahanth Singh v. U. Ba Yi, A.I.R. 1939 P.C. 110 at 113). While the bar of limitation or the law of insolvency or liquidation or other requirements of procedural law making the contract unenforceable, but without extinguishing rights and remedies, will leave the obligation of the surety unimpaired, the intervention of substantive law destroying rights and obligations wholly or partly will to the extent of such extinguishment release the surety. One striking illustration of the latter is where the law itself, as in the case of Madras Agriculturists' Relief Act, 1938 (Act IV of 1938) [considered in Subramania v. Narayanaswami, A.I.R. 1951 Mad. 48 (F.B.)], or the Agriculturists Debt Relief Act, (Kerala), 1958 (Act 31 of 1958) considered in Mani v. Kochuouseph, (1965 K.L.T. 1266), is found to provide that the debt due from the principal debtor is partly or wholly extinguished, and not merely barred. In such a case the liability of the surety is pro tanto extinguished."

The Court in the case of Radha Thiagarajan (supra) has also considered the issue from the angle where the right of the surety to proceed against the principal debtor recognized in Sections 140 and 141 of the Indian Contract Act stand impaired or lost where the assets of the company are sold in the winding up proceedings and therefore the sureties would not be liable to be proceeded against. Relying on the observation made in the Industrial Finance Corporation's case (supra) where the Court interpreting Section 141 of the Indian Contract Act has held that there was no deliberate act on the part of principal debtor which led to the loss of the security and the security was lost not by any definite act of the creditor or the debtor, but by the operation of law over which none of the parties had any control, it cannot be said that the surety is discharged. The Court has accordingly held that the guarantors cannot be heard to contend that as the security offered by the Company, the principal debtor, has been lost, they are discharged to the extent of the value of the security.

These judgments of the Apex Court referred to above will be complete answer to the issue raised in the present case.

The ratio of law laid down in Kundanmal Dabriwala (supra) pressed by the appellant otherwise may not apply in view of the question posed and considered by the Court. Here the Bank had accepted the agreed amount in terms of one-time settlement as proposed by the majority of the shareholders when the Company was under liquidation. During these proceedings, an attempt was made for revival of the Company. The Court had thus formulated the questions which required to be examined in the case as "Whether the revival scheme submitted by the Petitioner under Sections 391 and 394 of 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 Contract Act, 1872".

Thus, the issue considered in the case was in the background as noted above, apparently is not relevant and applicable to decide the issue in the present case before this Tribunal. The Division Bench in this case has otherwise held that case which leads to extinction of principal debtor's liability in terms of scheme of arrangement sanctioned by the Court on 19th March, 2009 and such scheme is binding on all the creditors including non-consenting creditors such as the Corporation. The Court has observed that under Section 135 of the Contract Act, a contract between the creditor and the principal debtor by which the creditor compounds with the principal debtor, discharges the surety. The judgment passed by the Bombay High Court was ignored by the Court and it preferred to follow Full Bench decision of the Madras High Court to conclude that scheme of arrangement sanctioned by Company Court in exercise of jurisdiction under Section 391 of the Companies Act is binding on all creditors including the non-consenting creditors. Such scheme extinguishes the remaining claim of the creditor and on extinction of the claim of the creditor, the surety would stand discharged. The Division Bench in this case has so discharged the surety on the ground that it cannot step into the shoes of creditor and sue the debtor for the recovery of the amount paid by the surety in terms of Sections 139 and 140 of the Indian Contract Act.

The clear-cut distinction in the present case is that there was no compounding by the Bank. In any case, the appellant being guarantor had waived his rights as surety under Sections 133, 134, 135, 139 and 141 of the Contract Act. That would make a major distinction. A brief reference to the guarantee deed would show that guarantee was a continuing guarantee and was not to be considered wholly or partially satisfied or exhausted by any payment from time-to-time. Paragraph 3 of the guarantee deed reads as under:

"3. This Guarantee shall be a continuing guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payments from time-to-time made to the Bank or any settlement of any account or by reason of the account being brought to a credit at any time or from time-to-time or its being drawn upto the full extent or exceeding the full extent of the limit from time-to-time and its being or reducing or extinguished and thereafter re-opened. The Guarantee shall continue in force notwithstanding the discharge of the Principal by operation of law or my death or the death of any one of us and shall cease only on payment of the amount guaranteed hereunder either by me or any of us."

The guarantor had agreed that the Banks shall have full discretionary power without further assent or knowledge and without discharging or in way affecting liability of the guarantor to negotiate with the principal and settle or alter the terms and conditions. The guarantor had given consent, to each and every of the acts mentioned in para. 4 of the deed and had further agreed as under:

"4 Moreover, though as between the principal debtor and me/us I am/we are sureties only. I/We agree that as between yourselves and me/us, I am/we are Principal debtor(s) jointly with him and accordingly I/we shall not be entitled to any of the rights conferred on sureties by Sections 133, 134, 135, 139 and 141 of the Indian Contract Act. And we further expressly agree that the Bank shall also have discretionary power without my/our further assent or knowledge or without discharging or in any way affecting my/our liability under the Guarantee from time to time and at any time to agree the variations of the terms and conditions of any letter of Credit that has been and/or may be opened for the benefit of the Principal to convert a documentary letter of credit into clear or open letter of credit and vice versa..."

In the case of Union Bank of India (supra), the Allahabad High Court has considered this question to hold that the settlement would discharge the surety. The relevant observation made by the Court is as under:

"16. 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 settlements 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, AIR 1982 SC 1497, therefore, does not help the Petitioner-Bank. On the other hand, the submission of Mr. 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."

This view of the Allahabad High Court may not have much relevance as the Bank in this case has never entered into any settlement with the principal borrower.

Even otherwise, it can be noticed that Section 126 of the Contract Act talks about a contract of guarantee being contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called surety. Section 128 of the said Act provides that the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Section 134 of the Contract Act deals with the discharge of a surety by release/discharge of principal debtor. As per this section, if the principal debtor is released by any act or omission on the part of the creditor, the legal consequence then is that the surety will be discharged. He will also be so discharged by any contract between the creditor and principal debtor. Section 135 of the Act talks of discharge of surety when creditor compounds with, gives time to, or agrees not to sue, the principal debtor.

The position of law that would emerge from the provisions of the Contract Act is that as per Section 128 of the Contract Act, the liability of surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. Section 134 talks of discharge of surety if principal debtor is released and Section 135 would lead to discharge of surety when the creditor compounds with the principal debtor.

The Hon'ble Supreme Court in the case of Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala, VI (2009) SLT 625 : IV (2009) BC 574 (SC) : (2009) 9 SCC 478, has considered the term 'co-extensive' by observing that this term has been defined in the celebrated book of Pollock & Mulla on Indian Contract and for Specific Relief Act, 10th Edn., at p. 278 as surety's liability is coextensive with that of the principal debtor. A surety's liability to pay the debt is not removed by reason of creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety and as Suit can be maintained against the surety though principal has not been sued. Chitty on Contracts, has held that prima facie the surety may be proceeded against without demand against and without proceeding against the principal debtor.

In Halsbury's Law of England, 4th Edn. Vol. 20, para 159 at p. 87, it is 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".

The legal position thus crystallized is clear that the liability of the guarantor and principal debtor is co-extensive and not in the alternative.

The High Court in the case of Kundanmal Dabriwala (supra) has made certain observations by referring to provisions of Sections 134 and 135 and other relevant provisions of the Contract Act in this regard. The view canvassed before the Court was that Sections 134 and 135 would have no application as the claim of the Corporation was slashed by an operation of law. The plea was that the liability of surety is co-extensive with that of the principal debtor but such principal does not affect the right of the creditor to recover the amount scaled down by operation of law such as Bankruptcy laws. In the present case no such issue, in my view, arose for consideration as the appellant-guarantor in this case had waived his rights. That rights. That being the position, which has been taken note of by the Tribunal below and so also had noticed Clause 9 of the deed of guarantee which provided:

"And this guarantee shall be applicable to the ultimate balance that may become due to the Bank from the principal and until repayment of such balance, the Bank shall be entitled to retain, realize or otherwise dispose of in such manner as the Bank may think fit any securities..."

The liability of the guarantor being co-extensive and he having waived the right available to him as surety under Sections 134 and 135 of the Contract Act and other connected sections cannot plead his discharge on the grounds as pleaded in the present Appeal.

The finding returned by the Tribunal below that the appellant is bound by the contract and cannot claim discharge is thus well reasoned and supported by law. Accordingly, no case for interference in the impugned order is made out. The Appeals are accordingly dismissed.