2002 (4) TMI 943 - SC - Indian Laws

Supreme Court restores Trial Court decree, upholds guarantors' liability despite debtor's nationalization.

The Supreme Court set aside the High Court's judgment, restoring the Trial Court's decree. It held that the liability of the guarantors under the Contract ... - Issues Involved:1. Enforceability of mortgage deeds executed by the defendants.2. Liability of defendant Nos. 3 to 6 under the Contract of Guarantee.3. Discharge of liability of defendant Nos. 2 to 6 due to plaintiff's actions.Issue-wise Summary:I. Enforceability of Mortgage Deeds:The Trial Court resolved this issue in favor of the plaintiff, but the High Court was approached on the grounds that the plaintiff allowed appropriation of the securities without the consent of the sureties and due to the intervention of the law, all assets of the first defendant Company vested in the Central Government. The High Court cited Sections 140 and 141 of the Indian Contract Act, noting that the surety is entitled to all the securities of the creditor and if the creditor loses or parts with such security, the surety is discharged to the extent of the value of the security. The High Court concluded that the plaintiff must be in a position to deliver the securities to the sureties before claiming against them.II. Liability of Defendant Nos. 3 to 6 under the Contract of Guarantee:The Trial Court found in favor of the plaintiff, holding that the liability of the guarantors was co-extensive with that of the principal debtor. The Supreme Court, referencing the case of Maharashtra State Electricity Board v. Official Liquidator, stated that the liability of the surety remains even if the principal debtor is discharged by operation of law. The Contract of Guarantee explicitly stated that the guarantors would not be released by any act or omission of the Corporation or by any other matter that would otherwise release the sureties under the law.III. Discharge of Liability due to Plaintiff's Actions:The Trial Court stated that the introduction of the Sick Textile Undertakings (Nationalisation) Act, 1974, had no effect on the liability to make the payment. The High Court, however, held that the plaintiff allowed appropriation of securities without the consent of the sureties. The Supreme Court disagreed, stating that the liability of the guarantor is strict and continues unless the discharge is through the act of the creditor without the surety's consent. The Supreme Court noted that the Nationalisation Act did not discharge the liability of the principal debtor but only shifted the charge to the compensation.Effect of Nationalisation Act:The Supreme Court observed that Sections 3, 4, 5, and 20 of the Sick Textile Undertakings (Nationalisation) Act, 1974, indicate that the liability of the principal debtor continues and is not discharged. The Supreme Court referenced a Three-Judge Bench decision in Punjab National Bank v. State of U.P., which held that the liability of the guarantor continues despite the nationalization of the principal debtor's assets.Conclusion:The Supreme Court set aside the High Court's judgment, restored the decree passed by the Trial Court, and held that the liability of the guarantors under the Contract of Guarantee continues despite the nationalization of the principal debtor's assets. The filing of the Civil Suit was not barred by the Nationalisation Act, and the plaintiff's claim could proceed.