If ‘No Debt Due’, No Liability Is Incurred By The Guarantor

Essential Feature Of Guarantee-Recoverable Debt Necessary: The purpose of a guarantee being to secure the repayment of a debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee. A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor and the surety. This was so held by the House of Lords in the Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as 1836.

            ‘The payment of the overdraft of  a banker’s customer was guaranteed by the defendant. The overdrafts were contrary to a statute, which not only imposed penalty upon the parties to such drafts but also made them void. The customer having defaulted, the surety was sued for the loss.’

But he was held not liable. The court said that “If there is nothing due, no balance, the obligation to make that nothing good amounts itself to nothing. If no debt is due, if the banker is forbidden from having any claim against his customer, there is no liability incurred by the co-obligers.” [Swan v. Bank of Scotland {(1836) 10 Bligh NS 627 per Lord Brougham; See also Lima Leitao & Co v. Union of India, AIR 1968 Goa 29; Agencia National v. Chowgule & Cia, AIR 1967 Goa 88}]

‘No Debt Due’ situation arises when the borrower has filed a counter claim against the Bank for the loss and damages suffered by him due to wrong doings of the Bank for an amount more than the claim of the Bank. At that stage, and until the counter claim is adjudicated and finally decided, no liability is incurred by the guarantor also, because the existence of a recoverable debt is essential. (END)

Note: the views expressed are my personal and a view point only.

Author:

Narendra Sharma, Consultant (Legal)

E-mail: nkdewas@yahoo.co.in