BANK OF BIHAR LTD. versus DAMODAR PRASAD & ANR.

BANK OF BIHAR LTD.

DAMODAR PRASAD & A'.'IR.

U/?llS/ 8, 1968

[S, M. S!KRI, R. S. BACHAWAT AND K. S. HEGDE, JJ.J

Code of Civil Procedure, (5 of 1908) 0. XX r. 11(1)-Dlrection to creditor to en/ore<' derre<· against surl•ry after exhausting rt'mcdies against principal-If ;11sri(i..?d.

The appcllant-crcdito'.' lent moncv' In the fir-,1 ri.:~rondcnt on the guarantee of the second respondent.· l'hc appellant filed suit agaimt the respondents for recovery of the amount due. and the suit v.•as decreed. While passing the decree, the Trial Cou·rt directed that the appellant would not he at liberty to enforce the decree ar,;!inst the second respondent until he had cxh:1ustcd his remedies againc;1 the fir~t respondent. The appellant challcngr.;d this direction. "I'hc H!gh c·ourt ,fi~mi .. scd !he ;1ppeal. Jn appeal on certificate, this Court:-

HELD :-The direction must be set aside.

ln the absence of some special equity the surety ha~ no right to fC,i;.-train execution against him until the creditor has exhausted his remedies againsl the principal. f'or making an order under O.XX r. 11 ( 1) of C.P.<~. the court must give specific reasons. The direction po5tponing payment of the arnount decreed n1llo;t be clear and -specific. The injunc-tion upon the t."'rcdilor not to proceed against the surety until the creditor has c..'\hauslcd hi.-; remedies against the principal was of the vagut.8t char;1ctcr. lt ,,,.-as not stated how and when the creditor would exhaust his rcmcdie5 <1~ain'.'it the principal. [622 A, F-GJ It is the duty of the surety to pay the dccrctal amount. On such pay-n1cn1 he will be suhrogatc<l to the rir:ht<> of the creditor under s. 140 of the Indi;in C.-0n1r;1ct Act. and he may then 'recover the amount from the principal. The very object of the guarantee is defeated if the creditor jc; askc<l to postpone his remedies against the su~ty. In the present ca~e the creditor is hanking cornp~1ny. guarantee is collateral security usually taken hy hanker. The security \\'ill become useleit-; if his rig.ht" again<>t the surety can be so easily cut do"·n. 'rhe impugned direction cannot h:! justified under O.XX r. 11 ( 1). Assum in~ that apart fron1 O.XX r. 11 ( 1) the Court had the inherent p<l\\·er under "· 151 to direct postponement of the execution of the decree. the ends of justice did not require o;;uch po .. tponcment. (62~ A-CJ

l.achhnMn .lnhr.rhnal v. Rapu Khnnrfrt and Surrty Tuknran1 Khandoii. (1869) 4 Bon1 Jligh Court Reportc;, ~41.

CIVIL APPELLATE JURISDlCTIO!'< : Civil Appeal No. I 109 of 1965.

Appeal from the judgment and decree dated December '.l, 1962 of the Patna Hi!!h Court in ApPCal from Original Decree No. 300 of 1959. -

S. Mitra and R. C. Prasad, for the appellant.

K. K. Sinha, for respondent No. 2.

The Judgment of the Court was delivered by

Bachawat, J. The plaintiff Bank lent moneys to defendant No. 1 Damodar Prasad on the guarantee of defendant No. 2 Paras Nath Sinha. On the date of the suit Damodar Prasad was indebt-ed to the plaintiff for Rs. 11,723.56 nP on account of principal. and Rs. 2, 7 69. 3 7 nP on account of interest. In spite of demands neither he nor the guarantor paid the dues. The plaintiff filed suit against them in the Court of the Subordinate Judge, 1st Court, Patna claiming decree for the amount clue. The Trial Court decr~d 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 ctirection. The High Court dismissed the appeal. The plain-tiff has filed the present appeal after obtaining certificate.

The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agrood to pay and satisfy the liabili-ties of the principal debtor upo Rs. 12,000/- and interest thereon two days af(er demand. The bond provided that the plaintiff would be at liberty to enforce and to recover upo,n the guarantee· notwitb:standing 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 deb-tor 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 dem.ands. Under sec. 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety. is co-extensive 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 ~reditor an~ ask him to pnrsue his remedies against the principal m the first mstance. As Lord Eldon observed in Wright v. Simpson('). "But the surety is guarantee; and it is his business to see whether the principal pays, and not that o[ the creditor." Tn the absence of some special equity the surety has no-right to restram an action against hin1 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.

Likewise where the creditor has obtained decree against the surety and the principal, the surety has no right to restr:iin cxccu· lion against him until the creditor has exhausted his remedies against the principal. In Lachlunan Joharima/ v. Bapu Khandu and Surety Tukaram Khandoji(') the judge of the Court of Small Causes, Ahmedabad, solicited the opinion of the lfoillbay High Court on the subject of the liability of sureties. The creditors having obtained decrees in two suits in the Court of Small Causes againsl the principals and sureties presented applications !or the. imprisonment of the sureties before levying execution against the principals. The judge stated that the practice of his court had been to restrain judgment creditor from recovering from surety until he had exhausted his remedy against the principal but in his view the surety should be liable to imprisonment whik the prin-cipal was at large. Couch. C.J. and Melvcll, J. agreed with this opini_on and observed :-·"The court is of opinion that creditor is not bound 10 exhaust his remedy against the principal debtor before suing the surety and that when decree is obtained against surety, it may be enforced in the s;une manner a.> decree for any other debt." It is no1v suggested that under Order XX r. 11 (I ) and sec. 151 of the Code of Civil Procedure the Court passing the decree had the power to impose the condition that the judgmrnt-crcditor would not be at liberty to enforce the decree aga·inst the sure!,. until the creditor has exhausted his remedies against the principal. Order XX r. I ! ( 1 ) provides that "where and in so far as decree is for the payment of money, the Court may for any sufficient reason at the time of passing the decree order that payment of the amount decreed shall be postponed or shall be maqe by instal· ments. with or without interest, notwithstanding anything contain· ed in the contract under which the money is payahlc." For mak· ing an order under 0. XX r. 11 (I) the Court must give sufli-cient reasons. ll1c direction postponing payment of the amount decreed must he clear and specific. The injunction upon the cre-ditor not to proceed against the surety until the creditor has ex-liausted his remedies against the principal is of the vaguest cha-racter. 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 [0 ]Is he bound to discover at his peril all the properties of the· principal and sell them: and if he cannot, docs he lose his remedy against the surety" Has he to file an insolvency petition against the principal [0 ]TI1c Trial Court gave no reasons for this extraordinary direction. The Court re-jected the prayer of the principal debtor for payment of the decretal amount in instalments as there was no evidence to <lww

that he could not pay the decretal amount in one lump sum. It is therefore said that the principal was solvent. But the solvency of the principal is not sufficient ground for restraining execu-tion of the decree against the surety. It is the duty of the surety to pay the decretal amount. On such payment he will be subro-gated to the rights of the creditor under sec. 140 of the Indian Contract Act, and he may then recover the amount from the prin-cipal. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the pre-sent case the creditor is banking company. guarantee is collateral security usua!ly taken by 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 0. XX r. 11 ( 1). Assuming that apart from 0. 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.

In the result, the appeal is allowed, the direction of the court· below that the "plaintiff-bank shall be at liberty to enforce its dues in question against defendant No. 2 only after having ex-hausted its remedies against defendant No. 1" is set aside. The respondent Dr. Paras Nath Sinha shall pay to the appellant costs in this Court and in the High Court.

Appeal allowed_