Industrial Investment Bank Of India Ltd vs Bishwanath Jhunjhunwala

Industrial Investment Bank of India Ltd. .. Appellant

Versus

Biswanath Jhunjhunwala .. Respondent

JUDGMENT

Dalveer Bhandari, J.

1. This appeal is directed against the judgment of the High

Court of Calcutta in Civil Revisional Jurisdiction dated

10.9.1999 in C.O. No. 1581 of 1999.

2. Briefly stated the facts are as follows:

The appellant Industrial Investment Bank of India Ltd.

(hereinafter referred to as "the appellant") on 27.9.1994

sanctioned the first short term working capital loan of Rs.3

crores in favour of Modern Malleables Limited (hereinafter

referred to as "the borrower company").

2 3. The loan agreement was entered into between the

appellant and the borrower company on 03.10.1994 in respect

of the first short term working capital loan of Rs.3 crores.

The said loan agreement was signed on behalf of the borrower

company by the respondent as a Director of the borrower

company. On the same day, demand promissory note for

Rs.3 crores was executed on behalf of the borrower company

in favour of the appellant. The same was executed on behalf

of the borrower company by the respondent as the Director of

the borrower company. A deed of undertaking to create

mortgage in respect of its various immovable properties was

also executed on behalf of the borrower company by the

respondent.

4. A deed of personal guarantee was executed by the

respondent on 03.10.1994 in respect of the said loan granted

by the appellant in favour of the borrower company. The

relevant clauses of the said deed of guarantee are reproduced.

"7. This guarantee shall be enforceable against the guarantor notwithstanding that any security or securities comprised in any instrument(s) executed by the borrower in favour of the Industrial Reconstruction Bank of India Ltd. (for short, IRBI) at the time when the proceedings are taken against 3

the guarantor on this guarantee, be outstanding or un-realized or lost."

5. Clause 11 of the deed of personal guarantee reads as

under:

"11. To give effect to this guarantee, the IRBI may act as though the guarantors were the principal debtor to the IRBI."

6. The appellant sanctioned the second term working

capital loan of Rs.3 crores on 15.03.1995 in favour of the

borrower company. The Demand Promissory Note for Rs.3

crores was executed on 21.03.1995 on behalf of the borrower

company by the respondent as the Director of the borrower

company in favour of the appellant. A deed of undertaking to

create mortgage in respect of its immovable properties was

also executed on behalf of the borrower company in respect of

the said second short term working capital loan.

7. The borrower company committed defaults in the

payment/repayment of the principal amount of the loan as

well as interest, liquidated damages and other moneys. Some

of the cheques issued on behalf of the borrower company by

the respondent were dishonored for want of funds. 4

Consequently, the proceedings started against the respondent

under section 138 of the Negotiable Instruments Act, 1881 are

pending before the court.

8. In view of the defaults committed by the borrower

company, the appellant on 18.01.1997 issued a demand

notice to the borrower company recalling the entire loans and

calling upon the borrower company to pay the total sum of

Rs.5.40 crores together with further interest at the rate of 17%

per annum and liquidated damages at the rate of 2.1% from

1.1.1997 till repayment.

9. The appellant on 18.03.1997 filed an application in the

High Court of Calcutta under section 40 of the Industrial

Reconstruction Bank of India Act, 1984 (for short "IRBI Act")

for attachment and sale of the assets of the borrower

company. The respondent was not made a party to the said

application, inasmuch as there was no scope for seeking any

relief against the guarantor under an application under

section 40 of the IRBI Act. Hence, a prayer was made for

attachment of the assets of the borrower company. The

provisions of section 40 of the IRBI Act are pari materia with 5

the provisions of sections 31 and 32 of the State Financial

Corporations Act, 1951.

10. A notice was issued on 20.3.1997 to the respondent

invoking the personal guarantee given by him and calling

upon him to pay the sum of Rs.5.40 crores together with

further interest and liquidated damages from 1.1.1997 till

repayment.

11. The High Court on the said application filed by the

appellant on 31.03.1997 under section 40 of the IRBI Act

appointed a Receiver for the purpose of taking symbolic

possession of the assets mentioned in Schedules `A', `B', `C'

and `D' to the said application and also for making an

inventory of the same. The High Court issued an order of

injunction restraining the borrower company from parting with

the possession, disposing of or alienating or otherwise

encumbering any of the said assets in any manner.

12. The appellant on 17.7.1997 filed an application against

the respondent under section 19 of the Recovery of Debts Due

to Bank and Financial Institutions Act, 1993 in the Debts

Recovery Tribunal, Calcutta. The appellant in the said 6

application has prayed for a certificate against the said

respondent for a sum of Rs.5.40 crores along with further

interest and liquidated damages.

13. The respondent on 20.3.1998 also filed an application in

the Debts Recovery Tribunal, Calcutta for stay of further

proceedings in the case filed by the appellant in the same

Tribunal, inter alia, on the ground that the rights of the

appellant against the respondent as guarantor did not

crystallize till the rights of the appellant against the borrower

company are established.

14. The Presiding Officer of the Debts Recovery Tribunal,

Calcutta on 18.05.1999 relying on State Bank of India v.

Indexport Registered & Others, AIR 1992 SC 1740

dismissed the application filed by the respondent for stay of

further proceedings in the case filed against him and held that

the appellant cannot be forced to exhaust remedy elsewhere

and then to proceed against the guarantor and further that

the liability of a guarantor is co-extensive with that of the

principal debtor.

7

15. The respondent on 29.5.1999 filed an application under

Article 227 of the Constitution of India in the High Court of

Calcutta against the order dated 18.5.1999 passed by the

Debts Recovery Tribunal, Calcutta.

16. The High Court of Calcutta by the impugned judgment

allowed the application filed by the respondent under Article

227 of the Constitution of India and stayed further

proceedings in O.A. No. 156 of 1997 filed by the appellant

against the respondent in the Debts Recovery Tribunal,

Calcutta. The appellant against the said judgment/order has

filed this appeal.

17. Mr. J. L. Gupta, learned senior counsel appearing for the

appellant submitted that the appellant bank is fully justified

in initiating proceedings against the borrower company as well

as its guarantor before the different courts.

18. Mr. Gupta also submitted that the liability of the

guarantor and the principal debtor are co-extensive and not in

alternative. He also submitted that sections 29, 31 and 32 of

the State Financial Corporations Act are pari materia with

sections 39, 40 and 41 of the IRBI Act.

8

19. Mr. Gupta, in support of his submission, placed reliance

on a judgment of this Court in Bank of Bihar Ltd. v.

Damodar Prasad & Another (1969) 1 SCR 620. In that

case, the court referred to a judgment in Lachhman

Joharimal v. Bapu Khandu and Tukaram Khandoji (1869)

6 Bombay High Court Reports 241, in which the Division

Bench of the Bombay High Court 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."

This Court, while approving the said judgment, observed

that, "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."

20. In State Bank of India v. M/s. Indexport Registered

(supra), this Court held that the decree holder bank can

execute the decree against the guarantor without proceeding 9

against the principal borrower. Guarantor's liability is co-

extensive with that of the principal debtor. In that case, this

court further observed that, "the execution of the money

decree is not made dependent on first applying for execution of

the mortgage decree. The choice is left entirely with the decree-

holder. The question arises, whether a decree which is framed

as a composite decree as a matter of law, must be executed

against the mortgage property first or can a money decree,

which covers whole or part of the decretal amount covering

mortgage decree can be executed earlier. There is nothing in

law which provides such a composite decree to be first

executed only against the principal debtor. The court further

observed that "the liability of the surety is co-extensive with

the principal debtor, unless it is otherwise provided by the

contract".

21. The term "co-extensive" has been defined in the

celebrated book of Polock & Mulla on Indian Contract and

Specific Relief Act, Tenth Edition, at page 728 as under: 10

"Co-extensive. - Surety's liability is co-extensive with that of the principal debtor.

A surety's liability to pay the debt is not removed by reason of the creditor's omission to sure the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surely though the principal has not been sued."

22. In Chitty on Contracts, 24th Edition, Volume 2 at page

1031 paragraph 4831 it is stated as under,

"Conditions precedent to liability of surety.- Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor."

23. In Halsbury's Laws of England, Fourth Edition,Vol. 20,

paragraph 159 at page 87 it has been 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".

24. A Division Bench of the Bombay High Court in

Jagannath Ganeshram Agarwala v. Shivnarayan

Bhagirath and Ors. AIR 1940 Bombay 247 held that the

liability of the surety is co-extensive, but is not in the 11

alternative. Both the principal debtor and the surety are liable

at the same time to the creditors.

25. A Division Bench of the High Court of Karnataka, in The

Hukumchand Insurance Co. Ltd. v. The Bank of Baroda &

Others AIR 1977 Kant 204 had an occasion to consider the

question of liability of the surety vis-a-vis the principal debtor.

The court held as under:-

"The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety which is co- extensive with that of the former are really separate liabilities, although arising out of the same transaction. Notwithstanding the fact that they may stem from the same transaction, the two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously."

26. The case of the respondent has never been that the

liability of the guarantor is only contingent and if remedies

against the principal debtor failed to satisfy the dues of the

decree holder, then only the bank can proceed against the

guarantor.

12

27. Mr. Gupta also asserted that the remedy under section

19 of the Recovery of Debts Due to Bank and Financial

Institutions Act, 1993 is not in derogation of section 40 of the

IRBI Act.

28. In Transcore v. Union of India & Another (2008) 1

SCC 125, this Court in great detail examined whether

withdrawal of suit pending before the Debts Recovery Tribunal

under DRT Act is not a pre-condition for taking recourse to the

Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002. This court held

that it is for the bank or the financial institution to exercise its

discretion.

29. In A.P. State Financial Corporation v. M/s Gar Re-

Rolling Mills & Another (1994) 2 SCC 647 this Court

observed that the right vested in the corporation under section

29 of the Act is besides the right already possessed at common

law to institute a suit or the right available to it under section

31 of the Act. In that case, it was further observed that on a

conjoint reading of sections 29 and 31 of the said Act, it

appears that in case of default in repayment of loan or any 13

installment or any advance or breach of an agreement, the

Corporation has two remedies available to it against the

defaulting industrial concern, one under section 29 and

another under section 31. Since, the corporation must be

held entitled and given full protection by the court to recover

its dues it cannot be bound down to adopt only one of the two

remedies provided under the Act. The Court further held that

the doctrine of election is not applicable to this case.

30. The legal position as crystallized by a series of cases of

this court is clear that the liability of the guarantor and

principle debtors are co-extensive and not in alternative.

When we examine the impugned judgment in the light of the

consistent position of law, then the obvious conclusion has to

be that the High Court under its power of superintendence

under Article 227 of the Constitution of India was not justified

to stay further proceedings in O.A. 156 of 1997.

31. Consequently, the appeal is allowed and the impugned

judgment of the High Court of Calcutta is set aside. The

appellant shall be entitled to costs of Rs.50,000/-. 14

.................................J. (Dalveer Bhandari)

.................................J. (H.L. Dattu) New Delhi;

August 18, 2009.