SCI (2009.08.18) in Industrial Investment Bank of India Limited Vs. Biswanath Jhunjhunwala [(2009) 9 SCC 478, CIVIL APPEAL NO. 4613 OF 2000] held that.
“the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract”.
Excerpts of the Order;
# 14. Mr Gupta, in support of his submission, placed reliance on a judgment of this Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [AIR 1969 SC 297 : (1969) 1 SCR 620] , AIR p. 298, para 5. In that case, the Court referred to a judgment in Lachhman Joharmal v. Bapu Khandu [(1869) 6 Bom HCR 241] in which the Division Bench of the Bombay High Court held as under: (Lachhman case [(1869) 6 Bom HCR 241], Bom HCR p. 242) -
“The court is of opinion 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.”
# 15. This Court, while approving the said judgment, observed that: (Damodar Prasad case [AIR 1969 SC 297: (1969) 1 SCR 620] , AIR p. 299, para 6)
“6. … The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.”
# 16. In SBI v. Indexport Registered [(1992) 3 SCC 159 : AIR 1992 SC 1740] this Court held that the decree-holder bank can execute the decree against the guarantor without proceeding against the principal borrower. The guarantor's liability is coextensive with that of the principal debtor.
# 17. In that case, this Court further observed that: (Indexport case [(1992) 3 SCC 159 : AIR 1992 SC 1740] , SCC p. 164, para 10)
“10. … The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises whether a decree which is framed as a composite decree, as a matter of law, must be executed against the mortgage property first or can a money decree, which covers whole or part of decretal amount covering mortgage decree can be executed earlier. There is nothing in law which provides such a composite decree to be first executed only against the [principal debtor] [Ed.: The word in the original is “property”—however the import is the same: that a composite decree can be executed both against the principal debtor or the sureties.].”
The Court further observed that (Indexport case [(1992) 3 SCC 159 : AIR 1992 SC 1740] , SCC p. 165, para 13) “the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract”. [Ed.: This is the verbatim text of Section 128 of the Contract Act, 1872.]
# 18. The term “coextensive” has been defined in the celebrated book of Pollock & Mulla on Indian Contract and Specific Relief Act, 10th Edn., at p. 728 as under:
“Coextensive.—Surety's liability is coextensive with that of the principal debtor.
A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued.”
# 19. In Chitty on Contracts, 24th Edn., Vol. 2 at pp. 1031-32, para 4831 it is stated as under:
“4831. Conditions precedent to liability of surety.— Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor.”
# 20. In Halsbury's Laws of England, 4th Edn., Vol. 20, para 159 at p. 87 it has been observed that:
“159. … It is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for.”
# 21. A Division Bench of the Bombay High Court in Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247] held that the liability of the surety is coextensive, but is not in the alternative. Both the principal debtor and the surety are liable at the same time to the creditors. A Division Bench of the High Court of Karnataka, in Hukumchand Insurance Co. Ltd. v. Bank of Baroda [AIR 1977 Kant 204] had an occasion to consider the question of liability of the surety vis-à-vis the principal debtor. The Court held as under: (AIR p. 208, para 12)
“12. … The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety which is coextensive with that of the former are really separate liabilities, although arising out of the same transaction. Notwithstanding the fact that they may stem from the same transaction, the two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously.” … …
# 27. The legal position as crystallised by a series of cases of this Court is clear that the liability of the guarantor and principal debtors is coextensive and not in alternative. When we examine the impugned judgment in the light of the consistent position of law, then the obvious conclusion has to be that the High Court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay further proceedings in OA No. 156 of 1997. Consequently, the appeal is allowed and the impugned judgment of the High Court of Calcutta is set aside. The appellant shall be entitled to costs of Rs.50,000.”
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