Supreme Court of India (08.08.1968) in Bank of Bihar Ltd. v. Damodar Prasad & Anr, [Civil Appeal No. 1109 of 1965] referring to the judgment of the Bombay High Court in “Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji, [(1869) 6 Bombay High Court Reports 241] held as under:
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt." It was further held:
"The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down."
Excerpts of the order;
The Trial Court decreed the suit against both the defendants. While passing the decree, the Trial Court directed that the "plaintiff bank shall be at liberty to enforce its dues in question against defendant No. 2 only after having exhausted its remedies against defendant No. 1". The plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.
The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agreed to pay and satisfy the liabilities of the principal debtor upo Rs. 12,000/- and interest thereon two days after demand. The bond provided that the plaintiff would be at liberty to enforce and to recover upon the guarantee notwithstanding any other guarantee security or remedy which the Bank might hold or be entitled to in respect of the amount secured
The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under sec. 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
Before payment 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. As Lord Eldon observed in Wright V. Simpson(1). "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor." In the absence of some special equity the surety has no fight to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. (1) 6 Ves. Jun. 714. 734: 31 E.R. 1272, 1282. 622
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."
The injunction upon the creditor not to proceed against the surety until the creditor has exhausted his remedies against the principal is of the vaguest character. It is not stated how and when the creditor would exhaust his remedies against the principal. Is the creditor to ask for imprisonment of the principal ? Is he bound to discover at his peril all the properties of the principal and sell them; and if he cannot, does he lose his remedy against the surety ? Has he to file an insolvency petition against the principal ? The Trial Court gave no reasons for this extraordinary direction.
The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.
The Trial Court decreed the suit against both the defendants. While passing the decree, the Trial Court directed that the "plaintiff bank shall be at liberty to enforce its dues in question against defendant No. 2 only after having exhausted its remedies against defendant No. 1". The plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.
The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agreed to pay and satisfy the liabilities of the principal debtor upo Rs. 12,000/- and interest thereon two days after demand. The bond provided that the plaintiff would be at liberty to enforce and to recover upon the guarantee notwithstanding any other guarantee security or remedy which the Bank might hold or be entitled to in respect of the amount secured
The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under sec. 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
Before payment 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. As Lord Eldon observed in Wright V. Simpson(1). "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor." In the absence of some special equity the surety has no fight to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. (1) 6 Ves. Jun. 714. 734: 31 E.R. 1272, 1282. 622
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."
The injunction upon the creditor not to proceed against the surety until the creditor has exhausted his remedies against the principal is of the vaguest character. It is not stated how and when the creditor would exhaust his remedies against the principal. Is the creditor to ask for imprisonment of the principal ? Is he bound to discover at his peril all the properties of the principal and sell them; and if he cannot, does he lose his remedy against the surety ? Has he to file an insolvency petition against the principal ? The Trial Court gave no reasons for this extraordinary direction.
The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.
The impugned direction cannot be justified under O. XX r. 11 (1). Assuming that apart from O. XX r. 11 ( 1 ) the Court had the inherent power under s. 151 to direct postponement of execution of the decree, the ends of justice did not require such postponement.
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