TaxTMI 
TaxTMI 
TaxTMI 
2011 (12) TMI 421
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....e liability of the principal debtor. Once the Corporation has settled its loan account with the principal debtor, the guarantor cannot be saddled with any additional liability. 2. The facts leading to the issuance of the said show-cause notice are that the petitioner is a promoter-director of M/s. Dabriwala Steels and Engineering Co. Ltd. The aforesaid company had set up a mini steel plant at Faridabad. The company was the owner of two plots, i.e., Plot No. 136, Sector 24, Faridabad and Plot No. 142, Sector 24, Faridabad. The company stopped its production on April 27, 1985, due to financial constraints. The company invoked the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short "the SICA"). The Board for Industrial and Financial Reconstruction (for short "the BIFR"), constituted under the aforesaid Act, recommended the winding up of the company on May 25, 1993. The appeal against such recommendation of the BIFR was dismissed by the Appellate Authority for Industrial and Financial Reconstruction (for short "the AAIFR") on December 6, 1994. The challenge to the aforesaid order before the Delhi High Court remained unsuccessful when the writ petition....
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....he creditors and file his report before this court. It was in pursuance of such direction, the Corporation submitted its claim. The official liquidator submitted his report to the High Court relying upon the report of the chartered accountant (annexure P10). The official liquidator adjudicated such claim and found that a sum of Rs. 13,92,223 is due and payable as against the total claim of Rs. 60,69,525 of the Corporation. It was observed that no amount of interest can be charged by the financial institution after the date of winding up, i.e., February 24, 1995. Such report was accepted on May 8, 2008, by this court. This court granted liberty to any creditor aggrieved of adjudication of the claims by the official liquidator to prefer an appeal. No appeal was preferred by the Corporation. But on July 29, 2008, counsel for the Corporation made a statement that it has no objection for the revival of the company. This court passed the following order : "Mr. Kamal Sehgal, counsel for respondent No. 4 (HSIDC) states that the Corporation's liability has been discharged and the Corporation has no objection to the scheme of revival and withdrawal of the order of l....
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....,600 with further interest with effect from October 1, 2007. The HFC was itself the first secured creditor in respect of Plot No. 136 and the State Bank of India was only a second secured creditor. The report of the official liquidator records the fact that the court had directed the disbursement of Rs. 4.05 crores to the State Bank of India as full and final payment of the claims against the company and Rs. 10,82,255 as the amount payable in satisfaction of the award of the claims of the workmen by virtue of the order of the Industrial Tribunal/Labour Court-II. Drawing help from the report of the Chartered Accountant M/s. A. K. Chadda and Co., the official liquidator has examined the claims of HFC vide its claim dated May 26, 2005, Income-tax Department vide its claim dated March 23, 2006, Excise Taxation Office vide its claim dated March 31, 2008 and HSEB vide its claim dated May 27, 1996. The claim adjudicated has been tabulated as follows : Name of the creditor Amount claimed (Rs.) Claim adjudicated (Rs.) Haryana Financial Corporation 60,69,525 13,92,223 . . . . . . . . . . . . XIV. Final disposition ....
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....he above question, the following are the relevant provisions of the Indian Contract Act, 1872 (for short "the Act") : "126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor'.-A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety' ; the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called for 'creditor'. A guarantee may be either oral or written. 128. Surety's liability.-The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. 134. Discharge of surety by release or discharge of principal debtor.-The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. 135. Discharge of surety wh....
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....r. Section 135 of the Indian Contract Act discharges the surety, when the creditor compounds with the principal debtor. 13. The hon'ble Supreme Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [1969] 39 Comp. Cas. 133 held the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. In the absence of some special equity the surety has no right to restrain an action against him 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. Where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. The court quoted with approval 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. The judgment of the Supreme Court in State Bank of India v. Indexport Registered [1992] 75 Comp. Cas. 1 ; is also to the same effect....
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....f Funds (P.) Ltd. v. P. Narasimha, AIR 2008 AP 38 and Union Bank of India v. Chairperson, Debts Recovery Appellate Tribunal [2011] 167 Comp Cas 1 (All). 16. In Pamidi Somaiah (supra), the Andhra Pradesh High Court has examined the question as to whether the decree holder can proceed against the surety when the principal debtor's liability stands discharged as the suit abated on account of non-impleading of legal heirs of deceased principal debtor. After considering the provisions of section 134 of the Indian Contract Act, 1872, the court held to the following effect (page 21 of 108 Comp Cas): "Though in all the above decisions, it was held that the liability of the surety is co-extensive with that of the principal debtor and the creditor decree holder need not proceed against the principal debtor before proceeding against the surety, either by way of suit or for the recovery of the decretal amount, in none of the above decisions, the present position exist, where a suit against the principal debtor had abated by an act of omission on the part of the creditor. As a result of the omission on the part of the creditor in bringing the legal representatives on record, the surety's righ....
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....tion of law. The decision of the Supreme Court in Maharashtra State Electricity Board v. Official Liquidator, High Court, Ernakulam, AIR 1982 SC 1497 ; [1983] 53 Comp Cas 248, therefore, does not help the petitioner-bank. On the other hand, the submission of Sri R.P. Agarwal, learned counsel for the respondents that the liability of the surety gets automatically terminated when liability of principal debtor is extinguished, deserves to be accepted." 19. Shri Kamal Sehgal, learned counsel for the Corporation argued that section 134 or 135 have no application in the present case, as the claim of the Corporation was slashed by an operation of law. It is argued that though the liability of the surety is co-extensive with the principal debtor, but such principle does not affect the right of the creditor to recover the amount scaled down by operation of law such as bankruptcy laws. Therefore, the fact that the principal debtor stands absolved by virtue of an order passed by the company court, will not absolve the surety of its liability in terms of the fact that he stood as a guarantor. He relies upon Maharashtra State Electricity Board v. Official Liquidator [1983] 53 Comp. Cas. 248 (S....
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....ity, as hereunder the Madras Agriculturists' Relief Act." 21. In the said judgment, it was also held to the following effect (page 699 of 110 Comp Cas) : "Adverting to the contract of guarantee be it noted that though it is not a contract regarding a primary transaction : but it is an independent transaction containing independent and reciprocal obligations. It is on principal to principal basis and by reason wherefor the statute has provided both the creditor and the guarantor some relief as specified in this chapter of the Contract Act (between sections 130 and 141). Section 141 thus involves an issue of a deliberate action on the part of the creditor and not a mere fortuitous situation beyond the control of the creditor . . . In Halsbury's Laws of England-Fourth edition (paragraph 335), it has been, relying upon four rather old decisions of the Court of Appeal, Wheatley v. Bastow [1855] 7 De G M & G 261, 279, 280 per Turner L. J., Hardwick v. Wright [1865] 35 Beav. 133 ; Polak v. Everett [1876] 1 QBD 669, 675 (CA), per Balckburn J., Carter v. White [1884] 25 Ch. D 666, 670 (CA), categorically stated 'a transaction which causes....
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....No. 1 is liable to the creditor. In Garner's Motors Ltd., (supra), referred to by the Bombay High Court, there were two companies called Sentinel Waggon Works Ltd. and Garner's Motors Ltd., who were jointly liable to pay certain debts. One of the companies, i.e., Sentinel Waggon Works Ltd., defaulted and entered into a scheme of arrangement. The other debtor sought to rely upon the scheme of arrangement to absolve itself of liability. It was held to the following effect : "...The liquidators contend that Garner's Motors Ltd., was discharged from its liability by the fact that on March 23, 1936, a scheme of arrangement between Sentinel Waggon Works Ltd., and its creditors was sanctioned by the court under section 153 of the Companies Act, 1929. It is settled law that accord and satisfaction between a creditor and one of several debtors, who are jointly and severally liable to the creditor, discharges the other debtors unless it appears from the terms of the agreement or the surrounding circumstances that the creditor intended to reserve his rights against them. The law is in my opinion correctly stated in Halsbury's Laws of England (second edition), Volume ....
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....rincipal debtor unless it is otherwise provided by contract. It is a settled principle of law that the surety's liability is only accessory and secondary. Under the express provisions of section 128 his liability is made only co-extensive with that of the principal debtor. That can only mean that his liability, is no less or no more than that of the principal debtor. If the amount payable by the principal debtor is discharged in part, the surety's liability also is pro tanto reduced... Section 140 of the Contract Act, says that the surety, on discharging a debt would only get all the rights which the creditor had against the principal debtor. So, if the creditor could not recover any portion of the debt from the principal debtor, owing to scaling down under the Madras Agriculturists' Relief Act, it follows that the surety could not also recover that portion of the debt. That would be very unjust to the surety and would land him in unexpected and unmerited loss by the Madras Agriculturists' Relief Act intervening and scaling down the debt. The Madras Agriculturists' Relief Act in our opinion, therefore, to prevent such injustice to the surety, intended to extinguish the portion of t....
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....r can proceed against the surety although the debt has been recovered".' Spencer J. remarks in the same case : 'Ordinarily the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided for... An illustration of the effect of section 128 of the Contract Act occurs in Shek Sulaiman v. Shivram Bhijai, (12 Bom 71), where it was observed that if an amount recoverable by a plaintiff, from a defendant debtor is diminished in appeal, the surety's engagement, being one of indemnity, would diminish in like proportion. So, if the sum recoverable became zero, owing to the decree being reversed, the surety's liability would also be reduced to nothing.' It is obvious that in a case like this, where the decree is amended under section 19 of the Madras Agriculturists' Relief Act, and the amount recoverable by a plaintiff from the principal debtor is diminished in appeal, the surety's engagement, being one of indemnity, would diminish in like proportion ; and if the sum recoverable from the principal debtor becomes zero, under the amended decree the surety's liability would al....
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....o be recovered from him, and so nothing to be recovered from the surety, who has only guaranteed the same debt, as was due from the principal debtor his engagement, being merely accessory to the principal obligation. It is clear to me therefore that the Bench ruling in Sami Iyer v. Ramaswami Chettiar, AIR 1923 Mad 340, represents the correct state of the law regarding this matter and that Subramanian Chettiar v. Batcha Rowther, AIR 1942 Mad 145, was wrongly decided. I may add that the same Bench which decided Subramanian Chettiar v. Batcha Rowther, AIR 1942 Mad 145 was a party to the decision in Pachigolla Satyanarayanamurthi v. Karatam Sathiraju, AIR 1942 Mad 525 and that they decided therein that a non-agriculturist purchaser of mortgaged property was entitled to redeem the mortgage as a whole after having, the debt scaled down, They remarked: 'It is therefore not correct to say, as was argued for the appellant, that the court, by allowing the mortgagors to redeem the mortgage as a whole, was conferring a benefit upon a non-agriculturist, contrary to the intendment of the Madras Agriculturists' Relief Act. On the other hand, if the purchaser in such circ....
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....s liability, as here under the Madras Agriculturists' Relief Act." 27. It may be noticed that in most of the cases, reference is made to the quotes from the Halsbury's Laws of England, Second Edition. In Halsbury's Laws of England, Fourth Edition, (Volume 20 reprint) in paragraph No. 610, it is said to the following effect : "610. Bankruptcy.-A contract is not a rule discharged by the bankruptcy of any of the parties to it. A mere declaration of insolvency by one of the parties does not entitle the other to treat the contract as being at an end, but if the declaration is made under circumstances which show an intention not to carry out the contract or an inability to do so the position is different ; and if one party gives notice to the other of his insolvency and does nothing to show that he intends to stand by the contract the other party may be entitled to assume repudiation of the contract and either to insist upon performance or to treat the contract as at an end." 28. In paragraph No. 590 it is said to the following effect : "590. Compositions with creditors.-Although an agreement whereby a creditor accepts part of his deb....
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....of arrangement sanctioned by this court on March 19, 2009. Such scheme is binding on all the creditors including non consenting creditors such as the Corporation. Under section 135 of the Act, a contract between the creditor and the principal debtor by which the creditor compounds with the principal debtor, discharges the surety. It shall include a binding arrangement sanctioned by the court under section 391 of the Companies Act. It is a case of a deemed and binding contract though by operation of law, but such contract extinguishes the liability of the principal debtor. With such extinction of the liability of the principal debtor, the surety cannot recover the amount of debt paid, from the debtor. Therefore, it cannot be said that the surety will continue to be liable for payment of debt due to the creditor prior to settlement. 32. The judgment of the Bombay High Court is helpful to the argument raised by Shri Sehgal, but we prefer to follow the later Full Bench judgment of the Madras High Court in A. L. S. P. PL. Subramania Chettiar (supra). Similar is the view of a single Bench of the Allahabad High Court in Chairperson, Debts Recovery Appellate Tribunal (supra). 33. Thus, w....