Guarantors fail to claim their rights under Contract Act although Courts have recognised these right

Introduction

Recently, after going through my Articles on the 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 not much 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. (This is not a complete list)

(1) 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.”  

(2) 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.”  

(3) 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.”

(4) 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.”

(5) Still further, 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.”

Complied by:

Narendra Sharma

Consultant (Business Laws)

E-mail: nkdewas@yahoo.co.in