INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. BISHWANATH JHUNJHUNWALA

The Judgment of the Court was delivered by ~ D ~ DALVEER BHANDARI, J. 1. This appeal is directed against the judgment of the High Court of Calcutta in Civil Revisional Jurisdictior. dated 10.9.1999 in C.O. No. 1581 of 1999. E

2Copy pinpoint2. 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 Maileables Limited (hereinafter F referred to as ·"the borrower company").

3Copy pinpoint3. 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 G 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 H -·

394 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.

A 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.

4Copy pinpoint4. A deed of personal guarantee was executed by the B 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 c guarantor notwithstanding that any security or securities comprised in any instrument(s) executed by the borrower .... in favour of the· Industrial Reconstruction.Bai1k of India Ltd. (for short, IRBI) at the time when the proceedings are taken against the guarantor on this guarantee, be outstanding or un-realized or lost"

5Copy pinpoint5. 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."

6Copy pinpoint6. 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 ~ F crores was executed on 21.03.1995 on behalN>f 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 I

G also executed on behalf of the borrower company in respect .' )-

of the said second short term working capital loan. .>-- r

7Copy pinpoint7. The borrower company committed defaults in the ---'r'- payment/repayment of the principal amount of the loan as well as interest, liquidated damages and other moneys. Some of H the cheques issued on behalf of the borrower company by the ... -

INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 395 BISHWANATH JHUNJHUNWALA [D,A.LVEER BHANDARI, J.]

respondent were dishonored for want of funds. Consequently, A the proceedings started against the respondent under section 138 of the Negotiable Instruments Act, 1881 are pending before the court.

8Copy pinpoint8. In view of the defaults committed by the borrower B company, the appellant on 18.01.1997 issued a demand notice to the borrower company recalling the entire loans and calling l-' 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 c 1.1.1997 till repayment.

9Copy pinpoint9. 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. D The respondent was not made a party to the sa.id 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 E IRBI Act are parrmateria with the provisions of sections 31 and 32 of the State Financial Corporations Act, 1951 . . -'. 10. A notice was jssued on 20.3.1997 to the respondent invoking the personal guarantee given by him and calling upon F him to pay the sum of Rs.5.40 crores together with further interest and liquidated damages from 1.1.1997 till repayment.

11Copy pinpoint11. 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 G -""(- 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 H

396 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A encumbering any of the said assets in any manner.

12Copy pinpoint12. 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 Institution~ Act, 1993 in the Debts Recovery Tribunal, Calcutta. The appellant in the said B 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. '-of

13Copy pinpoint13. The responder.ton 20.3.1998 also filed an application c 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.

14Copy pinpoint14. The Presiding Officer of the Debts Recovery Tribunal, Calcutta on 18.05.1999 relying on State\ Bank of India v. -- lndexport Registered & Others, AIR 1992 SC_1JAO 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 farced 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. ~ F

15Copy pinpoint15. The respondent on 29.5.1999 filed an application under Article 227 of the Constitution of India fo the High Court of Calcutta against the order dated 18.5.1999 passed by the Debts Recovery Tribunal, Calcutta. G

16Copy pinpoint16. The High Court of Calcutta by the impugned judgment allowed the application filed by the respondent under Article ~r-- 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 H

INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 397 BISHWANATH JHUNJHUNWALA [DALVEER BHANDARI, J.)

appellant against the said judgment/order has filed this appeal. A

17Copy pinpoint17. Mr. tst·Gupta, learned senior counsel appearing for the appellant s bmitted that the appellant bank is fully justified in initiating proceedings against the borrower company as well as its guarantor before the different courts. B

18Copy pinpoint18. 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. c

19Copy pinpoint19. Mr. Gupta, in support of his submission, placed ,eliance 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. D -I 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." .-..(-

20Copy pinpoint20. In State Bank of India v. Mis. lndexport Registered {supra), this Court held that the decree holder bank can execute the decree against the guarantor without proceeding against the principal borrower. Guarantor's liability is co-extensive with H

398 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A 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 B 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 cah be executed earlier. There is nothing in law which ·'4' provides such a composite decree to be first executed only c 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".

21Copy pinpoint21. The term "co-extensive" has been defined in the celebrated book of Polack & Mulla on Indian Contract and D Specific Relief Act, Tenth Edition, at page 728 as under: ~

"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 E reason of the credit~r'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." F

22Copy pinpoint22. 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." -'r

23Copy pinpoint23. In Ha/sbury's Laws of Englana; 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

INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 399 BISHWANATH JHUNJHUNWALA [DALVEER BHANDARI, J.]

surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for''.

24Copy pinpoint24. 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 alternative. Both the principal debtor and the surety are liable at the same time to v the creditors.

25Copy pinpoint25. A Division Bench of the High Court of Karnataka, in The Hukumchand Insurance Co. Ltd. v. The Bank of Baroda c & 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:- j "The question as to the liability of the surety, its extent and --11 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." 4

26Copy pinpoint26. 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.

27Copy pinpoint27. Mr. Gupta also asserted that the remedy under section G ~- 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 H

400 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A withdrawal of suit pending before the Debts Recovery Tribunal ~ under ORT 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 B discretion.

29Copy pinpoint29. In A.P. State Financial Corporation v. Mis Gar Re- Rolling Mills & Another (1994) 2 SCC 647 this Court observed 4- , that the right vested in the corporation under section 29 of the Act is besides the right already possessed at common law to c 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 installment or any advance or breach of an agreement, the Corporation has two D 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 E further held that the doctrine of election is not applicable to this case.

30Copy pinpoint30. 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 F 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. G

31Copy pinpoint31. Consequently, the appeal is allowed and the impugned judgment of the High Court of Calcutta is set aside. The -r appellant shall be entitled to costs of Rs.50,000/-.

K.K.T. Appeal allowed. H