TaxTMI 
TaxTMI 
1984 (12) TMI 267
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....974) (the "Nationalisation Act"). Defendants Nos. 2 and 3 (also referred to as "the sureties") executed in favour of the bank a continuing guarantee in respect of the overdraft account which the first defendant had with the bank and under which the plaint amount is alleged to be still outstanding from the first defendant as the principal debtor and defendants Nos. 2 and 3 as the sureties. The third defendant died during the pendency of the suit and additional defendants Nos. 4 to 16 were impleaded as the legal representatives of the third defendant. The second defendant is also one of his legal representatives. The suit against the first defendant was dismissed in view of the alternative remedy available to the plaintiff under the Nationalisation Act, but it was decreed against defendants Nos. 2 and 3 in the sum of Rs. 84,514.32 together with interest, subject to the direction that the liability of the legal representatives of the third defendant should be decided at the stage of execution. The management of the textile mill (hereinafter referred to as "the undertaking") was assumed by the Central Government under section 18A of the 1951 Act with effect from July 14, 1972. Subse....
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....as the plaintiff has not challenged that part of the decree. On that ground alone, whatever right the plaintiff had against the first defendant, he says, became extinct and to that extent defendants Nos. 2 and 3, being sureties, were fully exonerated. Counsel submits that the only remedy which the bank has is to prove its claims under the Nationalisation Act and it has no remedy by means of a suit as against the principal debtor or the sureties. Sri Ramesh Babu, appearing for the bank, submits with much learning and skill that the Nationalisation Act does not extinguish the obligations of the principal debtor or the sureties or affects the rights of the creditor, but provides for a mode of payment to the various creditors from out of the compensation awarded to the former owner of the nationalised undertaking. That remedy, under the Act, is without prejudice to the contractual rights and obligations of the parties. He says that the discharge granted to the owner under the Nationalisation Act is only to the extent to which the claims of the creditors are admitted and for the balance amount, the owner remains fully liable in terms of the contract. He further submits that in so far....
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....rley : "...such a release (which is subject to a reservation) is not to be construed as absolute, but only as a covenant not to sue. That being so, the remedy is gone as between the debtor and creditor, inasmuch as the creditor cannot sue the debtor ; but as against all other persons the rights of the creditor are reserved..." Green v. Wynn [1869] Law Rep 4 Ch App Cas. 204. The law on this aspect is stated by the Privy Council in Mahanth Singh v. U. Ba Yi, AIR 1939 PC 110, at pages 111, 112, 113 as follows: "A surety is discharged if the creditor, without his consent, either releases the principal debtor or enters into a binding arrangement with him to give him time. In each case, the ground of the discharge is that the surety's right to pay the debt at any time and after paying it, to sue the principal in the name of the creditor is interfered with. To hold that in such cases the creditor still retained his right against the surety, and that the surety on his part could still sue the principal debtor, would mean that the release or grant of time was of no effect inasmuch as the debtor would still be liable at any moment to an action at the suit of the surety. Where an ....
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....D 666 ; Sankara Kalana v. Virupakshapa Ganeshapa [1883-84] ILR 7 Bom 146, Krishto Kishori Chowdhrain v. Radha Romun Munshi [1886] ILR 12 Cal 330, Subramania Aiyar v. Gopala Aiyar [1909-11] ILR 33 Mad 308 and Dil Mohammad v. Sain Das, AIR 1927 Lah 396. Referring to the rule laid down by Lord Eldon in Samuell v. Howarth [1817] 3 Mer 272, 279, Lord Diplock says in Moschi v. Lep Air Services Ltd. [1972] 2 WLR 1175, 1183 (HL): "........that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligation to the creditor. This is because the creditor by altering the debtor's obligation to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast, the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee ; for this does not affect the guarantor's equitable right to compel the debtor to perfo....
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....ety. One striking illustration of the latter is where the law itself, as in the case of the Madras Agriculturists Relief Act, 1938 (Act IV of 1938) (considered in A. L.S.P.PL. Subramania Chettiar v. Moniam P. Narayanaswami Gounder, AIR 1951 Mad 48 [FB] or the Agriculturists Debt Relief Act (Kerala), 1958 (Act 31 of 1958) (considered in Mani v. Kochuouseph [1965] KLT 1266), is found to provide that the debt due from the principal debtor is partly or wholly extinguished, and not merely barred. In such a case, the liability of the surety is pro tanto extinguished. The question, therefore, is whether in the present case, on account of the Nationalisation Act, there was an extinguishment of the whole or part of the principal debt due from the first defendant and whether defendants Nos. 2 and 3 were pro tanto released from their liability. We shall presently consider the relevant provisions of the Nationalisation Act, but before we do so, we shall briefly consider the effect of the two earlier statutes. Section 18A of the 1951 Act enables the Central Government to take over by notified order the management of the whole or any part of the undertaking and exercise such functions of c....
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....n 9 provides, in consideration of the retrospective operation of sections 3, 4 and 5, for payment of a further amount at the rate specified in section 6 of the Sick Textile Undertakings (Taking Over of Management) Act, 1972, and also for payment of interest. Section 8 says that the amount shall be paid in cash and in the manner specified in Chapter VI which contains sections 17 to 26. Section 17 provides for the appointment of Commissioners of Payments in respect of different areas. Section 18 says that the Central Government shall, within 30 days from the date specified, pay in cash to the concerned Commissioner, for payment to the owner, such amount as is specified in the First Schedule and also the amount payable in terms of section 9. Section 19 says that the National Textile Corporation is entitled to receive, up to the specified date, to the exclusion of all other persons, any amount due to the undertaking realised after the appointed day, i.e., April 1, 1974, even if such realisations pertain to a period prior to that day. As a result of this and the earlier provisions, the owner is deprived of all the assets of the undertaking, including the amounts realised subsequent t....
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....ch loans. Section 21 (d) specifically provides that no lower category will be paid unless there is a surplus left after meeting all the demands of the immediately higher category. Section 22 deals with the examination of claims. It says that the Commissioner must, on receipt of the claims, arrange them in the order of priority specified in the Second Schedule and examine them in accordance with that order. If, on an examination of the claims, the Commissioner comes to the conclusion that the amount paid to him is not sufficient to meet the liabilities specified in any lower category, it will not be necessary for him to examine the liabilities in respect of such lower category. Sub-section (1) of section 23 refers to the admission or rejection of claims. Sub-section (3) says that every claimant should file proof of his claim within the date specified by the Commissioner, failing which such claimant would be excluded from the benefit of the disbursement made by the Commissioner. Such date has to be notified in the manner provided under sub-section (2). Sub-section (4) says : "(4) The Commissioner shall, after such investigation as may, in his opinion, be necessary and after ....
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....erms of section 23(4), and it is only to that extent the liability stands discharged and not any further. The discharge under the section has, therefore, no effect upon any claim which has been rejected in part or whole, and, in regard to any such claim, the remedy against the owner has to be pursued outside the statute. Section 25 says that any balance left with the Commissioner out of the moneys paid to him in relation to the undertaking, after meeting the liabilities specified in the Second Schedule, must be disbursed by him to the owner, provided the Commissioner is satisfied as to the right of such person to receive the whole or any part of the amount. In the event of any doubt or dispute as to his right, the matter has to be referred by the Commissioner to the competent court and the Commissioner shall make the disbursement in accordance with the decision of that court. Section 27 refers to assumption by the Central Government and discharge by the National Textile Corporation of the liability of the owner arising in the post-take-over management period out of any items specified in category I of the Second Schedule which refers to loans advanced by a bank or any other inst....
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....this effect of releasing a surety. This was a well-recognised principle of the common law even before it was adopted by the statute : English v. Darley [1800] 2 Bos &P 61, 62 (cited in [1947] 63 LQR355); Ex parte Jacobs, In re Jacobs [1875] Law Rep 10 Ch App 211; See Rowlatt, op cit. p. 173. The same is the position in liquidation proceedings. The dissolution of a company does not release the surety : See the principles stated in Ex parte Jacobs: Jacobs, In re [1875] Law Rep 10 Ch App 211 ; London Chartered Bank of Australia, In re [1893] 3 Ch 540, 546-547 ; Fitzgeorge, In re: Ex parte Robson [1905] 1 KB 462 ; Garner Motors Ltd., In re [1937] 1 All ER 671 (Ch D) and Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath, [1941] 11 Comp. Cas. 11 ; AIR 1940 Born 247. In both these events, the principal debtor is released personally. The creditor's right to sue is converted into a right to prove and he thus retains his nexus, though of a different character, with the principal debtor which can be enforced (see Stremit Industries Ltd. v. Gardner, [1970] 92 WN (NSW) 435, 436-437). The insolvency of an individual (or the liquidation of a company) thus results in a release of the principal....
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....thus recover from the principal debtor whatever sum the surety has rightfully paid under the guarantees (see sections 140, 141 and 145 of the Contract Act). Furthermore, when there is an actual accrued debt and the surety is liable and admits liability for the amount guaranteed, he has a right to compel the principal debtor to relieve him from his liability by paying off the debt: Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd. [1909] 2 Ch 401. It is true that the plaintiff has not appealed against that part of the decree rejecting its claim against the first defendant. But the claim was not rejected on merits, but on the sole ground of the alternative remedy available under the Nationalisation Act. Consequently, as pointed out by the Supreme Court in Daryao v. State of U.P., AIR 1961 SC 1457, 1466, a rejection solely on the ground of alternative remedy does not constitute a bar. In any event, such rejection does not debar the plaintiff's right of enforcing its claim against the sureties. Mere forbearance on the part of the plaintiff to sue the principal debtor, or to enforce its remedies against it by way of appeal, in the absence of any provision in the guarantee to the cont....