TaxTMI 
TaxTMI 
2002 (4) TMI 943
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....e sheet-anchor in support of Respondents' presentation before this Court in the instant appeal to the effect that the surety is entitled to the securities given to the creditor, both before and after the contract of surety and in the event the same stands dissipated then and in that event there is cessation of liability to the extent of such dissipation or extinction. An indeed bold proposition but the same stands accepted by the High Court and hence the appeal before this Court. Before, however, adverting to the issue as above, it would be rather convenient to note certain decisions of this Court as well as of the English Court for further appreciation of the matter. In State of Madhya Pradesh v. Kaluram (1967 (1) SCR 266 = AIR 1967 SC 1105) this Court pointedly stated that the expression "security" in the Section is not used in any technical sense; it includes all rights which the creditor has against the property on the date of the contract. In Kaluram (supra) this Court also lent its approval of Hannen, J. in Wulff and Billing v. Jay, (1872 (7) QB 756), wherein the learned Judge stated the law as follows :- " I take it to be established that the defendant ....
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....ntual remedy. If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged. 140. Rights of surety on payment or performance. - Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor." A reference to a Full Bench judgment of the Madras High Court at this juncture would also be very apposite. In A.L.S.P.PL. Subramania Chettiar (d) and Anr. v. Moniam P.Narayanaswami (AIR 1951 Madras (FB) 48), the High Court stated in paragraph 12 as below :- "Unhampered by judicial decisions also, on a fair reading of the provisions of the Contract Act, I am inclined to hold that as the liability of the surety is co-extensive with that of the principal debtor, if the latter's liability is scaled down in an amended decree, or otherwise extinguished in whole or....
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....s the issue of penal interest decreed the suit as noticed above. (c) The decree however stood challenged by the respondent herein inter alia on two several counts: the first being the factum of intervention of law to wit the Nationalisation Act and on the second the existing provisions of Sections 140 and 141 of the Contract Act: The High Court however answered the same in the affirmative and in favour of the defendants in the suit and hence the petition for special leave before this Court and the subsequent grant of leave by this Court. Incidentally, the introduction of the Nationalisation Act has obviously weighed with the High Court in particular the mechanism provided in terms of Sections 20 and 21 of the Act. Before however adverting thereto certain further factual details ought to be noticed for correct appreciation of the matter in its proper perspective. The facts disclose: Having intended to set up another spinning unit at Mahe (Pondicherry State), the first respondent approached the appellant/plaintiff for financial assistance and obtained sanction for Term Loan Facility for ₹ 35,00,000/-. Pending legal formalities, the appellant/plaintiff granted ₹ 15,00....
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....standing and unrealised from the principal debtors. According to the plaintiff, they granted additional loan of ₹ 17,00,000/- to meet the urgent financial need of the first defendant on the same terms and conditions as contained in the memorandum dated 2.11.1964. The first defendant executed a deed of further charge dated 4.5.1965 once again creating a mortgage. This document created a mortgage over Mahe unit and another deed of further charge dated 29.4.1965 over its Cannanore Unit. Defendants 2 to 6 and late K. Damodaran also executed a personal guarantee on 8.12.1964 undertaking a joint several liability to repay the sum of ₹ 62,00,000/-. Out of the second loan of ₹ 17,00,000/-; ₹ 13,00,000/- were paid on 8.12.1964 and ₹ 6,00,000/- were paid on 2.6.1965 at Madras. At the request of the first defendant, on their representations about the financial difficulties, the plaintiff revised the schedule of repayment with effect from 15.10.1966 under four separate deeds of modifications dated 31.7.1968; 31.7.1968; 27.1.1970 and 27.1.1970 respectively. Indian Rupee was devalued on 6.6.1966 which increased the liability of the plaintiff under the Deferred Pay....
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.... being that the documents allegedly executed by them were all executed only in their capacity as the Directors of the Company. Late Damodaran and defendants 2 to 6 were partners of the firm Messrs Damodaran and Company, which functioned as the Managing Agents of the first defendant Company till 31.1.1966. The system of Managing agents, however, was discontinued with effect from 31.3.1966 in accordance with the provisions and notifications under the Companies Act, 1956. The only business task which the firm of defendants 2 to 6 and Damodaran carried on was the business of working of the first defendant Company. According to these defendants, the bargaining task of the transactions between the first defendant and the plaintiff-Corporation was the relationship of managing agency existing between the firm Damodaran & Co. and the first defendant-Company. The statutory termination of the managing agency system and consequential severance of relationship between the firm Damodaran & Co. and the first defendant-company resulted in frustration of the contract between the plaintiff on the one hand and the defendants 1 to 6 on the other. Thus, according to these defendants, the contractual ob....
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....had three several parts : I. Whether the mortgage deeds executed by the defendants are not capable of being enforceable in law ? II. Whether defendant Nos.3 to 6 (presently respondent Nos.4, 6, 7 and 8 in the petition) are liable under the Contract of Guarantee ? III. Whether the liability of defendant Nos.2 to 6 (presently respondent Nos.2, 3, 4 and 6 in the petition) stood discharged on account of the latches on behalf of the plaintiff ? Apart from the issue of penal interest, the trial Court answered all the issues noted above, in favour of the plaintiff. There was, however, one additional issue which stood considered by both the trial Court as well as the appellate Court to wit, the effect of the Nationalisation Act (Sick Textile Undertakings (Taking Over of Management) Act, 1972) and it is on this score the trial Court stated as below :- "So far as the assets that were taken over by the Government are concerned, compensation had been fixed in the Act and further considered by the Commissioner for the Sick Textile Mills and in fact the plaintiff has been paid major portion of the compensation during the pendency of the suit. There is absolutely no question of frustrat....
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....invested with all the rights which the creditor had against the principal debtor at the time when the contract for suretyship is entered into, whether the surety knows of the existence of such security or not and if the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. On the facts of the instant case, when it is conceded that a substantial part of the claim has been realised by the creditor (plaintiff) from the assets of the Company by way of compensation and the creditor has lost all such securities which the principal debtor (Company) had created in its favour and on which security alone it had advanced loans to the Company, it is possible as the learned counsel for the appellants has suggested, to think that the creditor has lost the security and thus, had fallen in a position that unless it is held that the surety is discharged to the extent of the value of the security, the sureties cannot be put in the same position as the creditors upon the security of the principal debtor." The High Court further went on to observe "We have no information, however, as to the extent ....
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....or. The observation of this Court obtained its sustenance from Section 128 of the Indian Contract Act, which in no uncertain terms prescribes, as noticed above, that the liability of the surety is co-extensive with that of the principal debtor. The statutory provision of the Indian Contract Act, however, records such unless, of course, it is otherwise provided by the Contract. Let us, therefore, at this juncture, consider the recording of the contract of guarantee which reads as below :- 1. If at any time default shall be made in the payment of the principal interest or any other moneys for the time being due to the Corporation upon the security of the Deeds of Mortgage for ₹ 35,00,000/- dated 30th April, 1963 and 2nd May, 1963 and the Deeds of Further Charge and equitable mortgage in connection with the loan of ₹ 17,00,000/- aggregating ₹ 52,00,000/- (Rupees fifty two lacs only) the Guarantors on demand shall pay to the Corporation the whole of such principal interest and other moneys which shall then be due to the Corporation as aforesaid and will indemnify and keep indemnified the Corporation against all loss of principal interest or other moneys secured by th....
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....tlement or a benefit on to a surety on every security which the creditor has against the principal debtor at the time of entering into the Contract of Guarantee between the parties undoubtedly, a very attractive proposition at this juncture- thus it becomes rather imperative to note Section 141 of the Contract Act in extenso for the purposes of appreciation of the rival submissions made in regard thereto. Section 141 of the Indian Contract Act, 1872 reads as under : "141. Surety's right to benefit of creditor's securities A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security." Before we engulf ourselves into the wider issue as to the effect of Section 141, be it noted that Mr. Anand in elucidation of his submission strongly relied upon a decision of the Court of Queens Bench in England in the case of Baily v. De Crespigny (LR (1....
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....haracter that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, they will not be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened. It is on this principle that the act of God is in some cases said to excuse the breach of a contract. The Latin Maxim referred to in the English judgment "lex non cogit ad impossibilia" also expressed as "impotentia excusat legem" in common English acceptation means, the law does not compel a man to do that which he cannot possibly perform. There ought always thus to be an invincible disability to perform the obligation and the same is akin to the Roman Maxim "nemo tenetur ad impossibilia" In Broom's Legal Maxims the state of the situation has been described as below :- "It is, then, a general rule which admits of ample practical illustration, that impotentia excusat legem ; where the law creates a duty or charge, and the party is disabled to perform it, without any default in him, and has no remedy over, there the law wil....
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....s include as a matter of fact, both voluntary and involuntary act or acts of the creditor, expression would mean and imply, both and the same is an inescapable conclusion when read in contradistinction with Sections 134 and 139 of the Act. Mr. Sundaram, on the other hand, with equal felicity of expression contended that the words noticed above cannot but mean involvement of some voluntary act of the creditor, as otherwise it loses its efficacy and placed in juxtaposition with the second limb of the Section would lead to an utter absurdity. The intent of the law makers is quite candid and apparent by reason of the particular user of expression to wit, (i.) 'or without the consent of the surety'; and (ii) 'parts with such security'. It has been contended that the true intent of the statute cannot be derived from reading in part only and it is one of the golden rule of statutory interpretation that the statutory provision be read in its entirety rather than a word or words in isolation of others 'if creditor loses' has to be attributed a meaning as being stated by Mr. Anand, that is to say without there being any voluntary act on the part of the creditor, it ca....
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....ue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgage securities to the surety. If the creditor chose to exercise his power of sale over the mortgage security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor. The creditor is not obliged to do anything. If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and if the surety decamps abroad the creditor loses his money. If disaster strikes the debtor and the mortgaged securities but the surety remains capable ....
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....s full possession or power, loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor, by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands." This Court in Kaluram's case (supra) in its Three-Judge Bench judgment upon approval has been pleased to take note of the situation that subject to certain variations Section 141 of the Contract Act incorporates the Rule of English Law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him. Incidentally, the decision in Kaluram (supra) as also a later decision of this Court in State Bank of Saurashtra v. Chitranjan Rangnath Raja & Anr. (1980 (4) SCC 516) was dealing with a contra situation and came to a conclusion that by reason of the deliberate act of the principal debtor or the creditor and without the knowledge, consent and approval of the surety, question of further liability would not a....
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....hort "the Act"). The appellant filed suit for recovery against the guarantors and the principal-debtor of the amount claimed by it. The following preliminary issue was, on the pleadings of the parties, framed : "Whether the claim of the plaintiff is not maintainable in view of the provisions of Act 57 of 1974 as alleged in para 25 of the W.S. of defendant No.2?" The trial court as well as the High Court both came to the conclusion that in view of the provisions of Section 29 of the Act, the suit of the appellant was not maintainable. We have gone through the provisions of the said Act and in our opinion the decision of the Courts below is not correct. Section 5 of the said Act provides for the owner to be liable for certain prior liabilities and Section 29 states that said Act have a overriding effect over all other enactments. This Act only deals with the liabilities of a company which is nationalized and there is no provision therein which in any way affects the liability of a guarantor who is bound by the deed of guarantee executed by it. The High Court has referred to a decision of this Court in Maharashtra State Electricity Board, Bombay v. The Officia....
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....it abundantly clear that when the words of the Legislation are clear, the Court must give effect to them as they stand and cannot demur on the ground that the Legislature must have intended otherwise. The provisions of the Nationalisation Act as noticed above, are otherwise clear and categorical as to the extent of its applicability and the state of affairs upon introduction of the Legislation on the Statute Book and we need not dilate thereon. Mr. Anand lastly contended that as a matter of fact by reason of the non-availability of the security in terms of Section 141, the Contract of Guarantee cannot but be termed to stand frustrated and it is in this context, Section 56 of the Contract Act has been taken recourse to. It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non- performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome. The decision of the Court of Appeal in F.A. Tamplin Steamship Co. Ltd. v....
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.... reason of which the assets of a debtor company stand vested on the State. In terms of the provisions of the Nationalisation Act, there was appointed a Commissioner of Payments and by reason of the factum of the Appellant herein being a secured creditor, lodged its claim before the Commissioner of Payments in its entirety. The Commissioner of Payments, however, in terms of the provisions of the Nationalisation Act itself allowed a major portion of the claim but as regards the remainder, expressed its inability to pass any order and the remainder or the balance of the claim stands out to be the subject matter of the present proceedings. Incidentally, there exists some departure and shift from the case made out before the High Court and the case before this Court since the frustration was said to have occurred by reason of statutory termination of the Managing Agency System. (Damodaran & Company, being the Managing Agent of the principal-debtor) It has been the definite contention before the High Court that the contractual obligation by reason of severance of relationship between Damodaran and the principal-debtor the contract had become incapable of being performed in the same capac....