Bank of Bihar Ltd. v. Damodar Prasad & Anr.

Key Legal Principles

Section 128 of the Indian Contract Act provides that the liability of the surety is co-extensive with that of the principal debtor unless the contract provides otherwise.

Therefore:

1. The creditor may proceed against the principal debtor.

2. The creditor may proceed against the surety.

3. The creditor may proceed against both.

4. There is ordinarily no requirement to exhaust the remedy against the principal debtor before proceeding against the surety.

5. The surety cannot ordinarily demand that the creditor first realise the debt from the principal debtor.

6. After the surety pays the creditor, the surety obtains rights against the principal debtor by virtue of Section 140 of the Contract Act.

Summary (English)

1. Core Issue

Whether a creditor/bank must first exhaust its remedies against the principal borrower before proceeding against the guarantor/surety.

2. Held

No.

The liability of the surety is co-extensive with that of the principal debtor, subject to the terms of the contract of guarantee.

The creditor is not required to first proceed against the principal debtor or exhaust remedies against the principal debtor before enforcing the guarantee.

The surety cannot ordinarily restrain the creditor from proceeding against him merely because the principal debtor is solvent or because the creditor has another remedy available against the principal debtor.

3. Facts

The Bank of Bihar had advanced money to a firm against security including a personal guarantee.

The borrower committed default.

The bank obtained a decree and sought to execute it against the surety, Damodar Prasad.

The surety resisted execution on the ground that the creditor should first proceed against the principal debtor.

The Supreme Court rejected this contention.

The Court explained that the very purpose of a guarantee would be defeated if the creditor were compelled to postpone its remedy against the surety until after exhausting remedies against the principal debtor.

4. Legal Principle

Section 128 of the Indian Contract Act provides that the liability of the surety is co-extensive with that of the principal debtor unless the contract provides otherwise.

Therefore:

1. The creditor may proceed against the principal debtor.

2. The creditor may proceed against the surety.

3. The creditor may proceed against both.

4. There is ordinarily no requirement to exhaust the remedy against the principal debtor before proceeding against the surety.

5. The surety cannot ordinarily demand that the creditor first realise the debt from the principal debtor.

6. After the surety pays the creditor, the surety obtains rights against the principal debtor by virtue of Section 140 of the Contract Act.

5. Important Reasoning

The Court emphasised that the surety's obligation is not merely a secondary remedy that becomes enforceable only after the creditor has unsuccessfully proceeded against the principal debtor.

The guarantee is itself a security for the creditor.

If the creditor were required to first exhaust every remedy against the principal debtor, the commercial purpose of obtaining a guarantee would be substantially weakened.

The Court therefore held that the creditor is entitled to enforce the guarantee without first exhausting remedies against the principal debtor.

6. Practical Relevance to Co-operative Banks

This is one of the most useful foundational principles for a co-operative bank dealing with loan guarantees.

Suppose a co-operative bank sanctions a loan of ₹50 lakh to a borrower and obtains a personal guarantee from a guarantor.

The borrower defaults.

The guarantor argues:

"First recover the entire amount from the borrower. Only if the borrower does not pay should you proceed against me."

That proposition is generally incorrect.

The bank can rely on Section 128 and this judgment to contend that the guarantor's liability is co-extensive with that of the principal debtor, subject to the terms of the guarantee agreement.

The bank therefore need not necessarily:

- first sue the borrower;

- first obtain a decree against the borrower;

- first sell the borrower's property;

- first exhaust the borrower's assets; or

- wait until recovery proceedings against the borrower completely fail

before enforcing the guarantee.

7. Important Limitation

The guarantee agreement must always be examined.

Section 128 itself says that the surety's liability is co-extensive "unless it is otherwise provided by the contract."

Therefore, a contractual limitation, cap, condition or other agreed term may affect the extent of the guarantor's liability.

Also, the creditor cannot recover more than the amount legally due merely by proceeding against multiple liable parties.

8. Practical Use in Banking Litigation

For a co-operative bank, this judgment can be used when:

1. A guarantor seeks dismissal of recovery proceedings on the ground that the borrower has not first been proceeded against.

2. A guarantor argues that the bank must first sell the mortgaged property.

3. A guarantor argues that the bank must first exhaust the principal borrower's assets.

4. A guarantor seeks to restrain execution of a decree against him.

5. The bank is deciding whether to proceed simultaneously against the borrower and guarantor.

6. A written guarantee is being enforced as an independent security for the loan.

The core proposition is:

"Proceeding against the surety is not required to be postponed until the creditor has exhausted its remedies against the principal debtor."

This principle has subsequently been repeatedly recognised by the Supreme Court, including in State Bank of India v. Indexport Registered, (1992) 3 SCC 159 and Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478. The Supreme Court has also recently referred to Bank of Bihar as the established principle concerning the co-extensive liability of principal debtor and surety.

Summary (Kannada)

ಮುಖ್ಯ ಪ್ರಶ್ನೆ:

Bank ಅಥವಾ creditor ಮೊದಲು principal borrower ವಿರುದ್ಧ ತನ್ನ ಎಲ್ಲಾ remediesಗಳನ್ನು exhaust ಮಾಡಿದ ನಂತರ ಮಾತ್ರ guarantor/surety ವಿರುದ್ಧ recovery ಮಾಡಬೇಕೇ?

ಉತ್ತರ:

ಇಲ್ಲ.

Guarantee contractನ termsಗೆ ಒಳಪಟ್ಟು suretyಯ liability principal debtorನ liabilityಗೆ co-extensive ಆಗಿರುತ್ತದೆ.

ಆದ್ದರಿಂದ creditor principal borrower ವಿರುದ್ಧ ಮೊದಲು ಎಲ್ಲಾ recovery remediesಗಳನ್ನು ಮುಗಿಸಬೇಕೆಂಬ ಕಡ್ಡಾಯವಿಲ್ಲ.

ಪ್ರಕರಣದ ವಾಸ್ತವಾಂಶಗಳು:

Bank of Bihar borrowerಗೆ ಹಣವನ್ನು ಸಾಲವಾಗಿ ನೀಡಿತ್ತು ಮತ್ತು personal guarantee ಕೂಡ ಪಡೆಯಲಾಗಿತ್ತು.

Borrower default ಮಾಡಿದ ನಂತರ bank recoveryಗಾಗಿ ಕ್ರಮ ಕೈಗೊಂಡಿತು ಮತ್ತು decree ಪಡೆಯಿತು.

Bank guarantor ಆದ Damodar Prasad ವಿರುದ್ಧವೂ decree execute ಮಾಡಲು ಪ್ರಯತ್ನಿಸಿತು.

Guarantor, "ಮೊದಲು principal debtorನಿಂದ ಹಣವನ್ನು recover ಮಾಡಬೇಕು; ನಂತರ ಮಾತ್ರ ನನ್ನ ವಿರುದ್ಧ ಕ್ರಮ ಕೈಗೊಳ್ಳಬಹುದು" ಎಂದು ವಾದಿಸಿದನು.

Supreme Court ಈ ವಾದವನ್ನು ತಿರಸ್ಕರಿಸಿತು.

Section 128ರ ಪ್ರಕಾರ suretyಯ liability principal debtorನ liabilityಗೆ co-extensive ಆಗಿರುವುದರಿಂದ creditor ತನ್ನ remedy against suretyಯನ್ನು borrower ವಿರುದ್ಧದ remedies ಮುಗಿಯುವವರೆಗೆ ಮುಂದೂಡಬೇಕಾಗಿಲ್ಲ ಎಂದು Court held ಮಾಡಿತು.

ಕಾನೂನು ತತ್ವ:

1. Creditor principal debtor ವಿರುದ್ಧ ಕ್ರಮ ಕೈಗೊಳ್ಳಬಹುದು.

2. Creditor surety ವಿರುದ್ಧ ಕ್ರಮ ಕೈಗೊಳ್ಳಬಹುದು.

3. ಅಗತ್ಯವಿದ್ದರೆ ಇಬ್ಬರ ವಿರುದ್ಧವೂ ಕ್ರಮ ಕೈಗೊಳ್ಳಬಹುದು.

4. Principal debtor ವಿರುದ್ಧದ ಎಲ್ಲಾ remediesಗಳನ್ನು ಮೊದಲು exhaust ಮಾಡುವುದು ಸಾಮಾನ್ಯವಾಗಿ ಅಗತ್ಯವಿಲ್ಲ.

5. Surety creditorಗೆ ಹಣ ಪಾವತಿಸಿದ ನಂತರ Section 140 ಅಡಿಯಲ್ಲಿ principal debtor ವಿರುದ್ಧ rights ಪಡೆಯುತ್ತಾನೆ.

ಸಹಕಾರಿ ಬ್ಯಾಂಕಿಗೆ ಪ್ರಾಯೋಗಿಕ ಅರ್ಥ:

ಒಂದು co-operative bank ₹50 ಲಕ್ಷ ಸಾಲವನ್ನು borrowerಗೆ ನೀಡಿದೆ ಮತ್ತು personal guarantorನ guarantee ಪಡೆದಿದೆ ಎಂದು ಪರಿಗಣಿಸೋಣ.

Borrower default ಮಾಡಿದನು.

Guarantor:

"ಮೊದಲು borrowerನಿಂದ ಸಂಪೂರ್ಣ ಹಣವನ್ನು recover ಮಾಡಿ. ನಂತರ ಮಾತ್ರ ನನ್ನ ವಿರುದ್ಧ ಕ್ರಮ ಕೈಗೊಳ್ಳಬಹುದು"

ಎಂದು ಹೇಳಿದರೆ, ಆ ವಾದವನ್ನು ಸಾಮಾನ್ಯವಾಗಿ Section 128 ಮತ್ತು ಈ judgmentನ ಆಧಾರದ ಮೇಲೆ ವಿರೋಧಿಸಬಹುದು.

Bankಗೆ ಸಾಮಾನ್ಯವಾಗಿ ಮೊದಲು:

- borrower ವಿರುದ್ಧ suit ಹಾಕುವುದು;

- borrower ವಿರುದ್ಧ decree ಪಡೆಯುವುದು;

- mortgaged property ಮೊದಲು ಮಾರಾಟ ಮಾಡುವುದು;

- borrowerನ ಎಲ್ಲಾ assets ಮೊದಲು exhaust ಮಾಡುವುದು;

- borrower ವಿರುದ್ಧದ recovery proceedings ಸಂಪೂರ್ಣ ವಿಫಲವಾಗುವವರೆಗೆ ಕಾಯುವುದು

ಅಗತ್ಯವಿಲ್ಲ.

ಮುಖ್ಯ ಮಿತಿ:

Guarantee agreementನ terms ಅನ್ನು ಸದಾ ಪರಿಶೀಲಿಸಬೇಕು.

Section 128 ಸ್ವತಃ "unless it is otherwise provided by the contract" ಎಂದು ಹೇಳುತ್ತದೆ.

ಆದ್ದರಿಂದ guarantee deedನಲ್ಲಿ liability cap, limitation, condition ಅಥವಾ ಬೇರೆ contractual restriction ಇದ್ದರೆ ಅದನ್ನು ಪರಿಗಣಿಸಬೇಕು.

ಹಾಗೆಯೇ ಒಂದೇ debtಗಾಗಿ borrower ಮತ್ತು guarantor ಇಬ್ಬರ ವಿರುದ್ಧ ಕ್ರಮ ಕೈಗೊಂಡರೂ bankಗೆ ಕಾನೂನಿನ ಪ್ರಕಾರ due amountಗಿಂತ ಹೆಚ್ಚಿನದನ್ನು double recovery ರೂಪದಲ್ಲಿ ಪಡೆಯುವ ಹಕ್ಕಿಲ್ಲ.

ಸಹಕಾರಿ ಬ್ಯಾಂಕಿನ litigationನಲ್ಲಿ ಬಳಕೆ:

ಈ judgment ಅನ್ನು ಕೆಳಗಿನ ಸಂದರ್ಭಗಳಲ್ಲಿ ಬಳಸಬಹುದು:

1. Guarantor, borrower ವಿರುದ್ಧ ಮೊದಲು recovery ಮಾಡಿಲ್ಲ ಎಂದು recovery proceeding ತಡೆಯಲು ಪ್ರಯತ್ನಿಸಿದಾಗ.

2. Bank ಮೊದಲು mortgaged property ಮಾರಾಟ ಮಾಡಬೇಕು ಎಂದು guarantor ವಾದಿಸಿದಾಗ.

3. Borrowerನ assets ಮೊದಲು exhaust ಮಾಡಬೇಕು ಎಂದು guarantor ಹೇಳಿದಾಗ.

4. Decree execution ಅನ್ನು guarantor ವಿರುದ್ಧ ತಡೆಯಲು ಪ್ರಯತ್ನಿಸಿದಾಗ.

5. Borrower ಮತ್ತು guarantor ಇಬ್ಬರ ವಿರುದ್ಧ simultaneous recovery ಕ್ರಮ ಕೈಗೊಳ್ಳುವಾಗ.

6. Written guarantee ಅನ್ನು loan securityಯಾಗಿ enforce ಮಾಡುವಾಗ.

ಮುಖ್ಯ takeaway:

"Principal debtor ವಿರುದ್ಧ creditor ತನ್ನ ಎಲ್ಲಾ remediesಗಳನ್ನು exhaust ಮಾಡುವವರೆಗೆ surety ವಿರುದ್ಧ recovery ಕ್ರಮವನ್ನು ಮುಂದೂಡಬೇಕೆಂಬ ಕಾನೂನು ಇಲ್ಲ."