Supreme Court of India
INDUSTRIAL FINANCE CORPORATION OF INDIA LTD.versusTHE CANNANORE SPINNING AND WEAVING MILLS LTD. AND ANR.
- Citation
- 2002 INSC 194
- Decided
- 12 April 2002
- Disposal
- Appeal(s) allowed
- Bench
- U C BANERJEE
Holding
A guarantor’s liability under a contract of guarantee remains enforceable despite the statutory nationalisation of the principal debtor’s assets, unless the creditor voluntarily parts with the security without the guarantor’s consent.
Summary
The Industrial Financial Corporation of India (IFCI) advanced term loans to Cannanore Spinning and Weaving Mills Ltd. (the principal debtor) secured by mortgages and a Deferred Payment Guarantee (DPG). When the debtor defaulted, IFCI sought payment from the guarantors (defendants 2‑6 and the deceased K.D.) and also filed a suit under the Sick Textile Undertakings (Nationalisation) Act, 1974 after the government took over the debtor's assets. The guarantors argued that the nationalisation discharged their liability because the creditor had lost the securities without their consent, invoking Sections 139, 140 and 141 of the Contract Act and the doctrine of frustration under Section 56. The Supreme Court held that the guarantee is an independent contract; the guarantors’ liability is strict and is not discharged by the statutory transfer of assets unless the creditor voluntarily parts with the security, which did not occur. The Court rejected the claim of frustration and affirmed that the nationalisation Act does not extinguish the guarantors’ obligations. Consequently, the appeal was allowed and the trial court’s decree in favour of IFCI was restored.
Issues considered
- The effect of the Sick Textile Undertakings (Nationalisation) Act, 1974 on the liability of a guarantor under a contract of guarantee.
- Whether the creditor’s loss of security without the guarantor’s consent discharges the guarantor under Sections 139, 140 and 141 of the Contract Act, 1872.
- The applicability of the doctrine of frustration (Section 56, Contract Act) to the guarantee contract in view of the statutory takeover of the debtor’s assets.
- The interpretation of the phrase ‘creditor loses’ in Section 141 – whether it requires a voluntary act by the creditor.
Legislation cited
- Indian Contract Act, 1872s. 128, s. 130, s. 131, s. 132, s. 133, s. 134, s. 135, s. 136, s. 137, s. 138, s. 139, s. 140, s. 141, s. 144, s. 56
Subjects
contract of guaranteesurety liabilitydischarge of guarantorSection 141 Contract ActnationalisationSick Textile Undertakings Actstrict liabilityfrustration doctrinecreditor's rights
Judgment
INDUSTRIAL FINANCE CORPORATION OF INDIA LTD. A
v.
THE CANNANORE SPINNING AND WEA YING
MILLS LTD. AND ORS.
APRIL 12, 2002
B
[UMESH C. BANERJEE AND Y.K. SABHARWAL, JJ.]
Contract Act, 1872: Section 56, 139, 140 and 141.
Principal Debtor obtained loan from creditor-Default in payment of C
instalments-Nationalisation of sick units-Contract of Guarantee between
creditor and sureties-Discharge o~Held, Guarantor/surety has strict liability
towards creditor and creditor's right of action against surety is presumed
unless such discharge is· through the voluntary act of creditor without the
consent of the surety/guarantor-Sick Textile Undertakings (Taking over of D
Management) Act, 1972--Sick Textile Undertakings Nationalisation Act, 1974-
Sections 5 and 29.
Doctrine of Frustration-Applicability of-Held, it cannot be invoked as
principal debtor failed to pay to the creditor the entire sum due-On facts
held, Guarantee stands invoked since the contract of guarantee is an E
independent contract having no correlation with the Nationalisation Act.
Interpretation of Statutes : Legislation-Where the words are clear the
or·~-
Court cannot demur the same on the ground that Legislature must have intended
them otherwise.
F
Legal Maxims :
"Lex non cogit ad impossiblia"; "impotentia excus'at Legem"; "nemo
tenetur ad impossibilia"-Meaning and applicability of
Respondent-Mills, the principal· Debtor, had approached the Industrial G
Financial Corporation for loan to set up new units. Principal Debtor had
. deposited the title deeds and also executed a deed of hypothecation in respect
of movable assets and promissory note for the entire loan amount. Besides,
Principal Debtor-1st Respondent also executed a mortgage deed for the entire
loan amount as security for the repayment of the loan which also included H
1093
1094 SUPREME COURT REPORTS [2002] 2 S.C.R.
A Deferred Payment Guarantee (DPG) facility. This was followed by an
equitable mortgage by the deposit of title deeds by the Debtor as security for
DPG facility in addition to promissory note for the said amount. Defendants
-
·2 to 6 and· one K.D. (Since deceased), executed a deed of mortgage in their
individual capacity as surety for joint and several liability. They also executed
B a deed of counter guarantee in their individual capacity undertaking a joint
and several liability for the prompt repayment of loan instalments. According
to the Creditor-plaintiff, the conditions of guarantee inter alia contained a
clause that the guarantee would stand enforceable against defendants 2 to 6
and K.D. notwithstanding the security specified in the security documents or
any of them. Subsequently, at the request of the principal debtor-first
C defendant, plaintiff revised the schedule of repayment.
In the meanwhile, there was devaluation of Indian rupee which increased
the liability of the plaintiff under the DPG and contingent liability on account
of default of the defendant was also increased. The 1st defendant-principal
debtor repaid certain amount towards the loan .and also towards interest
D under the DPG. The Central Government took over the management of the
Mills of Defendant No.1 under the Industrial Development and Regulation
Act. The foreign supplier' invoked the DPG against the Plaintiff as the first
defendant defaulted in payment of further instalments. First defendant-
principal debtor acknowledged the liability but failed to repay. However,
E Defendants 2 to 6 the sureties, repudiated their liability.
Further, with the enactment of the Sick Textiles Undertaking
(Nationalisation) Act, two of the units of Defendant No. 1-Principal Debtor
were nationalised. Therefore, properties and management of these Units stood
transferred and vested in the Central Government, free from all
F encumbrances and charges. But in view of Section 6 of the Act, the liabilities
of the first Defendant continued and remained alive and therefore, enforceable
against the first defendant. Defendants 2 to 6 and K.D. served as Agents
. between the plaintiff and the first defendant-Company. Creditor-plaintiff filed
a suit preferring the claim before the trial court in terms of Nationalisation
Act. Trial Court decreed the suit in favour of plaintiff-creditor. Aggrieved,
G defendants-principal debtor and sureties moved the High Court.)ligh Court
held that the suits against sureties must fall Hence this appeal
The appellant inter a/ia contended that the factum of liability of the
security being co-extensive with that of principal debtor discharge of principal
H debtor by operation of law does not absolve the surety of his liability.
INDUSTRIAL FINANCIAL CORPN. 01' IND I AL TD. v CANNANORE SPINNING AND WEAVING MILLS LTD
1095
Allowing the appea~ the Court A
HELD : 1.1. A plain reading of the Contract of Guarantee reveals that
it does not provide any contra note pertaining to the liability of the surety so
as to create an exception within the meaning of Section 128 of the Indian
Contract Act (ll 10-E, F)
B
1.2. It is noted from the Contract of guarantee 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 whereof the Statute has provided both the
~
creditor and the guarantor some relief as specified in the contract Act Section
, 141 thus involves an issue of deliberate action on the part of the creditor and c
not a mere fortuitous situation beyond the control of the creditor.
[lll4-D-E,)
China and South Sea Bank Ltd v. Tan. (1989) 3 All ER 839 and Ha/sbury's
Laws of England, Fourth Edition (para 335), referred to.
D
1.3. The liability of the guarantor cannot but be stated to be a strict
liability and even if the priQcipal debtor is discharged from his liability unless
such discharge is through the act of the creditor without consent of the surety/
guarantor, the creditor's right of action against the surety is preserved.
(1116-E) E
State Bank ofSaurashtra v. Chitranjan Rangnath Raja and Anr., [1980) 4
SCC 516 and State of Madhya Pradesh v. Kaluram, [1967) l SCR 266 AIR
(1967) SC ll 05, distinguished .
• • Krishan Ta/war v. Hindustan Commercial Bank Ltd and Anr., AIR (1957)
F
Punjab310 and Reesv. Barrington Whiteand Tudor's L.C. 4th, Edn. atP. 1002,
referred to.
2.1. There can be no doubt that a man may by an absolute contract
bind himself to perform acts which subsequently becomes impossible, or to
pay damages for the non-performance and the interpretation is to be placed
G
upon an unqualified undertaking, where the event which causes the
impossibility was or mighthave been anticipated and guarded against in the
- contract, or where the impossibility arises from the act or default of the
promissor. But where the event is of such a character 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, H
..
1096 SUPREME COURT REPORTS [2002] 2 S.C.R.
A 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. (1112-A-CJ
2.2. Where the law creates a duty or charge, and the party is disabled
B to perform it, without any default in him, and has no remedy over, there the
law will in general excuse him and though impossibility of performance is in ·
general no excuse for not performing an obligation which a party has expressly
undertaken by contract, yet when the obligation is one implied by law,
impossibility of performance is a good excuse. (1112-F, G]
c Broom's Legal Maxims, referred to.
2.3. The fact situation in the instant case has to be assessed to ascertain
existence of such impossibility or not. The rights created under Statute cannot
stand obliterated without cogent reasons and not on mere frivolity. In any
D event, the right conferred in terms of a deed of guarantee cannot but be stated
to be an independent right which stands recognised by the Statute and thus
cannot in any manner be whittled down without a just cause. [1113-B, CJ
2.4. The Contract Act itself has recognised the doctrine of frustration
and encompassed within its ambit an exhaustive arena of force majeure under
-
E 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. (1119-B, CJ
Naihati Jute Mills v. Khyaliram, AIR (1968) SC 522, relied on.
F
F.A. Tamplin Steamship Co. Ltd v. Anglo-Maxican Petroleum Products Co.
Ltd, (1916) 2 AC 397 and Davis Contractors v. Fareham U.D.C., (1956) AC
696, referred to.
2.5. On a true perspective of Section 56 of the Contract Act, three
G essential conditions appear to be the realistic interpretation of the Statute,
the conditions being (i) a valid and subsisting contract between the parties;
(ii) there must be some part of the contract yet to be performed; and (iii) the
contract after it is entered into becomes impossible of performance. Leaving
aside the first condition, the second and the third one cannot have any manner .
H of application in the contextual facts of the instant case. [1120-B, CJ
INDUSTRIAL FINANCIAL CORPN. Of INDIA l. TD. v CANNANORE SPINNING AND WEA \!ING M!l.LS LTD I 097
3. The intent of the Law makers is quite candid and apparent by reason A
of the particular use of expression to wit, (i) 'or without the consent of the
surety'; and (ii) 'parts with such security'. 'if creditor loses' has to be
attributed a meaning that is to say without there being any voluntary act on
the part of the creditor, it cannot possibly be said to be in unison with the
other part of the Statute-obviously it shall have to be read as a voluntary act B
by reason whereof he loses the security and which thus tantamount to be
without the consent of the 'surety' and the coma read in its proper sphere
after the word 'loses' and 'surety' stands out to be significant since the same
qualifies only the latter part of the second limb, namely, parting with such
security. The expression 'creditor loses' cannot mean and imply an involuntary
.... act but by reason of an act which is attributable to the creditor. The second
alternative, parting with security without the knowledge of the surety is a
C
contra situation, but affords a meaning to the words used in the first para, to
wit 'the creditor loses'. Section 141 of the Contract Act would lose its efficacy
and the Act would render itself totally nugatory. A definite volition is required
to come within the ambit of Section 141. The heading of Section 141 also lends
assistance in interpreting the statutory intent since heading always serves as D
a guide to depict the intention. [1113-F, H; 1114-A-C[
4. A bare perusal of some of the provisions of the Sick Textile
Undertakings (Nationalisation) Act will indicate that there is no discharge of
the liability of principal debtor, leave alone that of surety. Sections 3, 4, 5 E
and 20 of the Act, if read together, would depict that the liability of the owner
of the undertaking/the debtor continues and it is only that the claim against
the security which stands discharged by reason of the statutory shift of the
charge on to the compensation. The liability of the principal debtor does not
in any way come to an end, neither that of the guarantor. 11116-F, GJ
Punjab National Bank v. State of UP. and Ors., relied on.
F
Pradip Chandra Parija and Ors. v. Pramod Chandra Patnaik and Ors.,
[2002) 1 sec 1, followed.
5.1. When the words of the Legislation are clear, Court must give effect
to them as they stand and cannot demur on the ground that the Legislature G
must have intended otherwise. [1118-H)
5.2. In the instant case, the provision of the Nationalisation Act are
otherwise clear and categorical as to the extent of its applicability and the
state of affairs upon introduction of the Legislation need not dilate thereon.
[1119-AJ H
1098 SUPREME COURT REPORTS [2002] 2 S.C.R.
A Patheja Bros. Forging and Stamping andAnr. v. ICICI Ltd and Ors., [2000]
6 sec 545, relied on.
6. On introduction of the Sick Textile Undertaking (Nationalisation) Act,
1974 in terms ofwhich the entire assets stand vested has been taken recourse
to as the supervening event and the contract of guarantee has thus become
B incapable of being performed for reasons beyond the control of the
guarantors, having due regard to the statutory provisions, as appears from
Section 141 of the Contract Act-undoubtedly the shift and variation cannot
but be attributed to be well imagined but irrespective of the same and in either
of the situations (i.e. the plea before the High .GOurt or the plea before this
C Court),· the doctrine of frustration as envisaged in terms of Section 56 of the
Contract Act does not and cannot have any manner of application in the
contextual facts. It is on the failure of the principal debtor to pay the entire
s~m due, the guarantee stands invoked-the Contract of Guarantee has no co-
relation with that of the Nationalisation Act neither is dependent thereon: it
is an independent contract and in all fairness has to be honoured to fulfil the .
D contractual obligation between the surety and the creditor.
[1120-G, H; 1121-A, BJ
7. A Civil Suit stands filed and thereafter the claim preferred before
the Commissioner of Payments in. terms of the Nationalisation. The right of
a claimant to proceed before the Commissioner and to file a suit to recover
E the amount due to him cannot be taken away, though the Claimant would
not be entitled to recover any amount at both the ends. The filing of the Civil
Suit thus is not barred. [1121-D, E]
Oriental Coal Co. Ltd., Calcutta v. Mis. Mohan/al Kishanlal and Anr., AIR
F (1984) Born. 174 and Barakar Coal Co. Ltd. v. N.C. Mehta 81 Cal WN 380:
AIR (1977) NOC 198 (Cal), approved.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3239 of
1995.
G From the Judgment ahd Order dated 18.1.94 of the Chennai High Court
in O.S.A. No. 200 of 1994.
C.A. Sundaram, Ms. Anuradha Dutt, Ms. Ekta Kapil and Ms. - ...
Vijayalakshmi Menon for the Appellant.
Mahendra Anand, Roy Abraham, Ms. Baby Krishnan, Rajiv Mehta,
H R. Rahim and Ms. Anita Pandey for the Respondents.
INDIJSTRJAL FINANCIAL CORPN OF INDIA LTO. e CANNANORE SPINNING AND WEAVING MILLS LTD. [BANERJEE. J.) 1099
The Judgment of the Court was delivered by A
BANERJEE, J. The general rule of equity expounded by Sir Samuel
Romilly as counsel and accepted by the Court of Chancery in Crythorne v.
Swinburne, (1807) 14 Yes. 160, that the surety will be entitled to every
remedy which the creditor has against the principal debtor, including the
enforcement of every security stands statutorily recognised and incorporated B
in Section 141 of the Indian Contract Act as regards the discharge ofa surety
from liability, when the creditor parts with or loses the security held by him
with, however, an insignificant variation to the effect that the surety is entitled
" to the securities given to the creditor, both before and after the contract of
surety.
c
It is on this score thus Section 141 of the Act ought to be noticed at
some length more so by reason of the same being the 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 D
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. E
In State of Madhya Pradesh v. Ka/uram [1967] I 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 Wu!ff and Billing v. F
., Jay, (1872) 7 QB 756, wherein the learned Judge stated the law as follows:-
- " .......... ! take it to be established that the defendant became surety
upon the faith of there being some real and substantial security pledged,
as well as his own credit, to the plaintiff; and he was entitled, therefore, G
to the benefit of that real and substantial security in the event of his
being called on to fulfil his duty as a surety, and to pay the debt for
-. which he had so become surety. He will, however, be discharged
from his liability as surety if the creditors have put it out of their
power to hand over to the surety the means of recouping himself by
the security given by the principal. That doctrine is very clearly H
1100 SUPREME COURT REPORTS [2002] 2 S.C.R.
'A expressed in the notes in Rees v. Barrington, 2 White and Tudor's
L.C., (4th Ed.) at p. 1002 'As a surety, on payment of the debt, is
entitled to all the securities of the creditor, whether he is aware of
their existence or not, even though they were given after the contract
of suretyship, ifthe creditor, who has had, or ought to have had, them
in all full possession or power, loses them or permits them to get into
B 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
c stood in his hands"' - and it is on this score this Court, relying on the
aforesaid, in Kaluram (supra) observed that "The surety is entitled on
payment of the debt or performance of all that he is liable for to the
benefit of the rights of the creditor against the principal debtor which
arise out of the transaction which gives rise to the right or liability.
The surety is therefore on payment of the amount due by the principal
D debtor entitled to be put in the same position in which the creditor
stood in relation to the principal debtor. If the creditor has lost or
parted with the security without the consent of the surety, the latter
is by the express provision contained in Section 141, discharged to
the extent of the value of the security lost or parted with. "
E (Emphasis Supplied)
At this juncture, it would also be convenient to note the true effect of
Sections 139 and 140 of the Indian Contract Act, 1872 as 'well, which read
as under:
F "139. Discharge of surety by creditor's act or omission impairing
surety's eventual 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.
G
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
H which the creditor had against the principal debtor."
INDUSTRIAL FINANCIAL CORPN OF INDIA LTO 1• CANNANORE SPINNING AND WEA VINO MILLS LTD_ [BANERJEE. J.J } } 0}
A reference to a Full Bench judgment of the Madras High Court at this A
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 B
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 in part by statute, the liability of
the surety also is pro tanto reduced or extinguished. Paragraph 192 of
Halsbury's Laws of England, Vol. 16, 1935 Edn., contains the
following passage :
c
"Whatever expressly or impliedly discharges the principal debtor from
liability usually discharges the surety also by implication, as his
position is thereby altered without his consent, notwithstanding that
the alteration is accomplished by operation of law. He is therefore
D
discharged where he can establish that the alteration changes the
nature of his liability, but not otherwise."
This shows that extinction of a debt in whole or in part by operation
of law will do, and that the creditor need not take any part in realising
the principal debtor from his liability. Mr. Ramachandra Aiyar relied E
on a passage in para 195 which runs as follows :
"Though an alteration in the position of the surety by the principal
debtor's discharge, or otherwise, accompanied by the operation of
law, may discharge him this is not always the case."
But this passage will not, in my opinion, help the appellant in this F
case as the exceptions given there relate to the release of the principal
debtor's liability under the law of limitation, bankruptcy laws, etc.
(which merely bar the remedy) and not to the extinction of the principal
debtor's liability, as here under the Madras Agriculturists' Relief Act."
Having noted the decisions as above it would be rather convenient to
G
have the factual details at this juncture since facts are required to be assessed
~- in its proper prospective and while assessing the same if it is so found that
the assessment of the factual matrix fully fits in with the statutory requirement
noticed hereinbefore no exception can be taken to the judgment under appeal.
Let us thus refer the facts as below: H
1102 SUPREME COURT REPORTS [2002) 2 S.C.R.
A (a) Presently we are not called upon to dilate in detail the factual
element, excepting where it is so required by reason of the decree
obtained by the plaintiff/appellant for the balance of principal and
interest treating the principal and interest as on 31.3 .1974 l\S Rs.
48,50,000 and Rs. 22,36,707.95 with subsequent interest at the contract
rate with"out penal rate of interest from 1.4.1994, with proportionate
B costs.
I
~
(b) The Trial Court resolved almost every issue in favour of the
plaintiff except however as regards the issue of penal interest decreed
the suit as noticed above.
c (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
D
leave before this Court and the subsequent grant of leave by this
Court.
E
Incidentally, the introduction of the ~ationalisation 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
F
State), the first respondent approached the appellant/plaintiff for
financial assistance and obtained sanction for Term Loan Facility for
Rs. 35,00,000. Pending !~gal formalities, the appellant/plaintiff granted
Rs. 15,00,000 as interim loan on 25.3.1963 on. which date the first
respondent deposited the title deeds of certain immoveable properties
G with the plaintiffs branch at Madras and thus, agreed to create an
equitable mortgage thereby. The first respondent also executed a deed
of hypothecation in respect of moveable assets such as plant,
machineries, etc. and a promissory note for the said amount of Rs.
15,00,000. This, however, later was merged in the Term Loan amount
of Rs. 35,00,000 secured by a deed of mortgage executed by the first
H
INDUSTRIAL FINANCIAL '.::ORPN. OF INDJA LTD. v. CANN ANORE SPINNING AND WEAVING MILLS LTD. [BANERJEE. J.1 } } 03
respondent on 2.5.1963. The first respondent executed a legal mortgage A
under a document registered with the then Notary of Pondicherry as
security for the repayment of the entire term lean of Rs. 35,00,000 on
30.4.1963, which also included the deferred payment guarantee facility
of Rs. 5,62,230.40. This was followed by an equitable mortgage by
the deposit of title deeds in respect of the moveables at Cannanore as B
security for the Deferred Payment Guarantee facility for Rs.
5,62,230.40 on 3.8.1963, in addition to a promissory note for the said
amount. The first defendant also executed bipartite agreement
embodying the terms and conditions contained in the memorandum
of final terms and conditions for the Deferred Payment Guarantee
1
amount. c
That Defendants 2 to 4 in suit and one K. Damodaran (since deceased)
executed a deed of mortgage in their individual capacity guaranteeing joint
and several liability for the repayment of the loan advanced to the first·
defendant under the deed of guarantee dated 25.3.1963. On 8.12.1964
defendants 2 to 4 and Damodaran and defendants 5 to 6 executed a similar D
deed of guarantee for the total sum of Rs. 52,00,000; Rs. 17,00,000 having
'• been granted as further Term Loan by the plaintiffs. Defendants 2 to 6 and
K. Damodaran also executed a deed of counter guarantee in their individual
capacity undertaking a joint and several liability for the prompt repayment of
the instalments by the first defendant on 3.8.1963. Defendants 5 to 6 also E
executed a separate deed of counter guarantee on 29.4.1965. According to
the plaintiff, the conditions of counter guarantee contained inter alia a clause
that the guarantee would stand enforceable against defendants 2 to 6 and late
K. Damodaran, notwithstanding that the security specified in the security
documents or any of them, be outstanding and unrealised from the principal
debtors. i:;'
According to the plaintiff, they granted additional loan of Rs. 17,00,000
to meet the urgent financial need of the first defendant on the same terms and
conditions as contained in the rnemorandum dated 2.11.J 964. The first
defendant executed a deed of further charge dated 4.5.1965 once again creating G
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 Rs. 62,00,000. Out
of the second loan of Rs. 17,00,000; Rs.13,00,000 were paid on 8.12.1964
and Rs. 6,00,000 were paid on 2.6. 1965 at Madras. At the request of the first H
1104 SUPREME COURT REPORTS [2002] 2 S.C.R.
A 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. l.l 970 and
27.1.1970 respectively.
Indian Rupee was devalued on 6.6.1966 which increased the liability of
B the plaintiff under the Deferred Payment Guarantee by Rs. 2,37,580.33.
According to the plaintiff, in terms of the bi partite agreement read with
amendatory agr,eement, the above increase also became the liability of
defendants l to 6, for which the plaintiff again obtained an equitable mortgage
by deposit of title deeds pertaining to the Cannanore and Mahe Units on
C l l. 7.1970. The total contingent liability on account of the default at that time J..
was worked out at Rs. 1, 11, 199 .11 the total Deferred Payment Guarantee
thus increased to Rs. 6, 73,429 .51.
The plaintiff-corporation has stated that the first defendant repaid only
Rs. 3,50,000 towards the first loan and the additional loan advanced by the
D plaintiff and certain amounts towards interest due on the two loans and under
the Deferred Payment Guarantee, the total interest paid was Rs. 16,03,224.47.
The Central Government, however, took over the management of Mahe and
Cannanore Units under the Industrial Development and Regulation Act. The
foreign suppliers involred the Deferred Payment Guarantee against the Plaintiff,
E as the first defendant paid instalments under the Deferred Payment Guarantee
contract to the foreign suppliers upto January, 1972 and thereafter defaulted
to pay any installment. As a result of this default of the first defendant, the
plaintiff was obliged to make the installment payment to the foreign suppliers.
According to the plaintiff, the first defendant acknowledged the liability
F but failed to repay. Defendants 2 to 6, however, repudiated their liability on
21.12.1974 .
Incidentally, the Sick Textile Undertakings (Nationalisation) Ordinance
was promulgated under which the two Units of the first defendant at Cannanore
G and Mahe were nationalised. The Ordinance was replaced by Act 57of1974.
All properties and the management of the undertakings of the first defendant
stood transferred and vested in the Central Government free .from all
encumbrances and charges with effect from 1.4.1974. But, in terms of Section
6, according to the plaintiff-corporation of the said Act, the liabilities of the
first defendant incurred prior to 1.4.1974 continue and remain alive and
H enforceable against the first defendant.
INOUSTRJALFINANClfJ..COl\J'N. Of INl>IA LTD. •. CANNANORESPINNING ANO WEAVING MILLS LTD. [BANEIUEE, J.J 11 OS
The first defendant had not filed any written statement. Defendants 2 A
to 6 together, defendants 4 and 5 together and third defendant alone, filed
their respective written statement, the common defence 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 finn Messrs Damodaran and Company, which functioned
as the Managing Agents of the first defendant Company till 31.1.1966. The B
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 finn 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 C
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 D
defendants 1 to 6 on the other. Thus, according to these defendants, the
contractual obligations have become incapable of being performed in the
same capacity in which the parties entered into contract with the plaintiff.
Their further case is that the first defendant-Company has not defaulted till
they were in the capacity of Managing Agents of the Company. Only after .E
the termination of the managing agency system, the business of the first
defendant-Company suffered seriously and the first defendant became a
defaulter from 15. l 0.1968. Apart from technical grounds, these defendants
have alleged that the plaintiff is guilty of gross prejudice of the various terms
and conditions of the deed of mortgage and the deeds of first charge which
has resulted in the impairment of the remedy of the surety or guarantee F
against the principal debtor. They have alleged that the plaintiff had allowed
the first defendant to sell some valuable machineries belonging to the company
without getting the sale proceeds properly appropriated towards the principal
amount due to the plaintiff under the mortgage deeds. This the plaintiff did
although the second defendant had notified the intended sale of the machineries G
to it and requested it to invoke the power under the deeds of mortgage. They
have further alleged that had the plaintiff taken over the management of the
company under the provisions of the Industrial Development and Regulations
· Act at the earliest date of default, the nationalisation of the two units of the
first defendant under the Sick Textile Undertakings (Nationalisation) Act,
1974 would not have occurred and the plaintiff would have realised its entire H
1106 SUPREME COURT REPORTS [2002] 2 S.C.R.
A claim from the units. The further defence on which we shall have to pay a
little more attention has been raised in the written statement which is mainly
on the question of entertainability of any suit on behalf of the plaintiff against
the defendants, when all assets of the first defendant Company have vested
in the Government of India under · the Sick Textile Undertakings
B (Nationalisation) Act.(hereinafter referred to as 'the Act') and the compensation
for the vesting of the Mills in the Government has already been declared. The
plea raised in this behalf is that the plaintiff being a secured creditor of the
owner of the Mills is bound to put forward all the claims and receive payment
out of the compensation amount fixed under the Act.
C The principal issue with which the parties went into trial 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,
D 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 ?
E
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
F 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
G the pendency of the suit. There is absolutely no question offrustration
of any contract b~tween the plaintiff and the defendants. The plaintiff,
being in the position of a creditor, has nothing to do with the loss or
profit in the business of the first defendant or with the nationalisation
of the undertakings of the first defendant."
H It is the definite finding of the trial Court that introduction of the Act
INDUSTRIAL FINANCIAL CORPN_ OF INDIA LTD.~- CANNANORE SPINNING AND WEAVING MIU.S LTD. (BANERJEE, J.I 1107
of 1972 in the Statute Book has had no effect whatsoever as regards the A
liability to make the payment and the trial Court had the following statutory
provision (Section 5 of the Nationalisation Act as above) to note in support
of its finding:
"5. Owner to be liable for certain prior liabilities (l) Every liability,
other than the liability specified in sub-section (2) of the owner of a B
sick textile undertaking, in respect of any period prior to the appointed
day, shall be the liability of such owner and shall be enforceable
against him and not against the Central Government or the National
Textile Corporation."
The Court recorded that the aforesaid provision has been engrafted in
c
the Statute to protect the rights of the plaintiff.
The records depict that the High Court, however, was approached in
appeal basically on two counts as below :-
(l) There is error both in fact and in law in accepting the case of
D
the plaintiff inspite of such acts of the plaintiff that it allowed
appropriation of the securities without the consent of the sureties
and inspite of specific objection in this behalf by the second
defendant appellant; and
E
(2) Because ofthe'intervention of the law, all the assets of the first
defendant Company stood vested in the Central Government /
and what has been protected by Section 5(1) of the Act is not
such interest as that of the plaintiff but only such liabilities
which are specified in Sub-Section (2) thereof. Upon specific
reliance on to Sections 140 and 141 of the Indian Contract Act F
(noticed above) , the High Court stated "Section 140 and 141
of the Indian Contract Act together safeguard the interests of
the surety on the payment or performance by the principal
debtor and in respect of the security which the creditor has
against the principal debtor. Where a guaranteed debt has G
become due, on default of the principal debtor to perform a
guaranteed duty and the surety is required thus to meet the
guarantee, 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 at the time when the contract
for suretyship is entered into, whether the surety knows of the H
.-
1108 SUPREME COURT REPORTS (2002) 2 S.C.R.
A 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
B 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
c 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,
D however, as to the extent of the security that the company had provided to
the plaintiff or the extent of the discharge of the debt covered by the sureties
of ea~h individual guarantor and it is not possible thus to work out the
equities which must always be the first action of the court in the cases of the
sureties who for the reason either ofthe default of the principal debtor or for
E the default of the creditor and/or matters-beyond the control of all concerned,
are put to make good all legal claims of the creditor. Such equities as are
envisaged under Section 140 and 141 of the Indian Contract Act , in our
view, are not available to the plaintiff so that it may, after realising the claims
from the appellants (sureties), come to have the benefit of the securities. In
the view that we have taken, we do not think, any further argument on either
F side is required to be examined by us, as the ·view that we have taken above
is enough to hold that the plaintiff, that is to say, the creditor must be in a
position to deliver the securities which he had against the principal debtor to
the sureties before it (plaintiff) takes its claim against the sureties. This, in
our view, 'is enough to hold that the present suit against the sureties must
fail."
G
It is this finding which is under challenge before this Court under
Article 136 of the Constitution and this Court on 6th March, 1995 granted --...
special leave to appeal upon condonation of a short delay involved in the
filing of the petition. Before dealing with the respective contentions, this
H Court records its appreciation for the assistance rendered by the two learned
lNDUSTRIAL FINANCIAL CORPN. OF JNDIA LTD.~. CANNANORE SPINNING AND WEAVING MILLS LTD. !BANERJEE, l.] 11 09
senior advocates, Mr. C.A. Sundararn and Mr. Mahendra Anand, appearing A
for the appellants and respondents respectively before this Court.
Felicitous as always, Mr. Sundararn drawing inspiration from a decision
of this Court in Maharashtra State Electricity Board, Bombay v. Official
Liquidator, High Court, Ernakulam and Anr., [1982] 3 SCC 358 contended
that by reason of the factum of the liability of the surety being co-extensive B
with !hat of the principal debtor and a discharge which the principal debtor
may secure by operation of law, the same does not absolve the surety of his
liability. In Maharashtra State Electricity Board (supra) this Court categorically
recorded a finding that the principal debtor being in liquidation would not
have any effect on the liability of the guarantor. The observation of this C
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 : D
I. 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 Rs. 35,00,000 dated 30th Aprii 1963 and 2nd May, 1963
and the Deeds of Further Charge and equitable mortgage in E
connection with the loan of Rs. 17,00,000 aggregating Rs.
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 p
Corporation against all loss of principal interest or other moneys
secured by the Mortgage c!ated 30th April, 1963 and 2nd May
- 1963 and Deeds of Further Charge and equitable mortgage and
all costs, charges and expenses whatsoever which the
Corporation may incur by reason of any default on the part of
the Company, its successors or assigns. G
2. The Corporation shall have the fullest liberty without effecting
this guarantee to postpone for any time or from time to time the
exercise of the power of sale or any other power or powers
conferred by the Deeds of Mortgage and Further Charge and to
exercise the same at anytime and in any manner and either to H
'•
1110 SUPREME COURT REPORTS (2002) 2 S.C.R.
A enforce or forbear to enforce the covenants for payment of
principal or interest or any other covenants contained or implied
in the Deeds of Mortgage and Further Charge or any other
remedies or securities available to the Corporation AND the
Guarantors shall not be released by any exercise by the
Corporation of its liberty with reference to the matters aforesaid
B or any of them or by reason of time being given to the Company,
its successors or assigns or of any other forbearance act or
omission on the part of the Corporation or any other indulgence
by the Corporation to the Company or by any other matter or J...
thing whatsoever which under the law relating to sureties would
c but for this provision have the effect of so releasing the
Guarantors.
3. The Guarantors will observe and perform all the terms,
conditions and covenants contained in the Deeds of Mortgage
and Further Charge which bear on the payment by the Company
D of the principal interest or any other money for the time being
due to the Corporation in such manner in which the Company
is liable for the due observance and perfonnance of the said ~
terms, conditions and covenants.
.E
4. The guarantee herein contained shall be enforceable against the
Guarantors notwithstanding that the securities specified in the
...
Deeds ofMortgage and Further Charge or any of them shall at
the time when proceedings are taken against the Guarantors
hereunder be outstanding or unrealised. The Contract of
Guarantee thus on a plain reading does not provide any contra "I'
note· pertaining to the liability of the surety so as to create an
F exception within the meaning of Section 128 of the Indian
Contract Act. It is on this score that Mr. Anand relying on the
language of Section 141, with his persuasive eloquence
contended that the Statute, in fact, has conferred a right or
entitlement or a benefit on to a surety on every security which · ....
the creditor has against the principal debtor at the time of
G
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
··.J
Act in extenso for the purposes of appreciation of the rival
submissions made in regard thereto. Section 141 of the Indian
H Contract Act, 1872 reads as under :
INDUSTRIAL FINANCIAL CORPN. OF !NOIA LTD.~. CANNANORE SPINNING ANO WEAVING MILLS LTD [BANERJEE. J.J 1111
"141. Surety's right to benefit of creditor's securities. A surety is A
'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 iuch security, the surety is discharged to the extent of the B
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 (1869) IV QB 180). The facts in C
Baily's case depict that th~ 1efendant, in 1840, demised by deed certain
premises to the plaintiff for a long term of years, and the defendant covenanted
that "neither he nor his assigns would, during the term, permit any messuage,
& c., to be built on a paddock fronting the demised premises;" alleging as
breaches, (I), that the defendant during the term permitted a railway station
to be built on the paddoc~ (2) that the defendant assigned the paddock to a D
railway company, who erJcted the railway station on the paddock. Plea : that
after the making of the lease the railway company required to take the paddock
under powers given them by an Act of Parliament of I 862, for purposes for
- which they were by the Act empowered to take the same; that the paddock
was land which the company were empowered to take compulsorily for the
purposes of the undertaking authorized by the Act; and that the company
under the powers so conferred did compulsorily purchase and take the paddock,
E
and that the assignment by the defendant to the company was the assignment
in completion of such compulsory purchase; that the company afterwards
built on the paddock the erections complained of, which were erections
reasonably required for the purposes of the undertaking authorized by the F
Act.
It is on the basis of the fact situation of the matter in Queens Bench
decision that Hannen, J. speaking for _the Bench stated as below :
"The substantial question, therefore, raised on this record is whether
G
the defendant is discharged from his covenant by the subsequent act of
Parliament, which put it out of his power to perform it.
We are of opinion that he is so discharged on the principle expressed
in the maxim "lex non cogit ad impossibilia." H
1112 SUPREME COURT REPORTS [2002] 2 S.C.R.
A We have first thus to consider as to the exact meanings of the words
or expressions used in the covenant between the parties. There can be no
doubt that a man may by an absolute contract bind himself to perform which
subsequently however becomes impossible, or to pay damages for the non-
performance and this interpretation is to be placed upon an unqualified
B undertaking, where the event which causes the impossibility was or might
have been anticipated and guarded against in the contract, or where the
impossibility arises from the act or default of the promissor.
But where the event is of such a character that it cannot reasonably be
supposed to have been in the ~ontemplation of the contracting parties when
C 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
D 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
E
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 will in general excuse him (t):
and though impossibility of performance is in general no excuse for
F not performing an obligation which a party has expressly undertaken
by contract, yet when the obligation is one implied by law,
impossibility of performance is a good excuse. Thus in a case in
which consignees of a cargo were prevented from unloading a ship
promptly by reason of a dock strike, the Court, after holding that in
G the absence of an express agreement to unload in a specified time
there was implied obligation to unload within a re~nable time, held
that the maxim lex non cogit ad impossibi/ia applied, and Lindley,
L.J., said : "We have to do with implied obligations, and I am not
aware of any case in which an obligatiOn to pay damages is ever cast
by implication upon a person for not doing that which is rendered
H impossible by causes beyond his control".
INDUSTRIAL FINANCIAL CQRPN_ OF !NOIA L TO. v. CANNANORE SPINNING AND WEAVING MILLS Lm (BANERJEE.J.I 1113
This effort to search out the meaning of the Latin Maxim has been only A
to identify the situation which prompted the learned Judge of the Queens
Bench to come to the conclusion as above. There, thus, has to be an
impossibility of performance of the obligation. The fact situation presently
under consideration before us thus has to be assessed whether in fact there
was any such impossibility or not. Let us be quite candid about laying down
the principles that rights created under Statute cannot stand obliterated without B
cogent reasons and not on mere frivolity. In any event, the right conferred in
terms of a deed of guarantee cannot but be stated to be an independent right
which stands recognised by the Statute and thus cannot in any manner be
whittled down without a just causa. Baily's decision (supra) in our view does
not lend any assistance in the fact situation of the matter under consideration. C
- There was in fact an impossibility of performance which prompted the Court
to excuse the guarantor from its performance by reason of the impossibility
of the situation and for reasons that the same stood beyond the control of the
guarantor. The situation presently however, is not so.
In reference to the second limb of Section 141, in particular the words D
"the creditor loses" -Mr. Anand contended that the legislature has been rather
candid in not incorporating any reservation or qualification for the word
•·
- 'lose'. In continuation thereof it was submitted that the same would thus
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 E
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 F
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 G
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 cannot possibly be said to be in unison with
the other part of the Statute obviously it shall have to be read as a voluntary
act by reason whereof he loses the security and which thus tantamounts to be
without the consent of the surety. The expression 'or' in between the words H
-~
1114 SUPREME COURT REPORTS [2002] 2 S.C.R.
A 'creditor loses' and 'without the consent of the surety' and the coma read in
its proper sphere after the word 'loses' and 'surety' stands out to be significant
since the same qualifies only the latter part of the second limb, namely,
parting with such security. The expression 'creditor loses' cannot mean and
imply an involuntary act but by reason of an act which is attributable to the
B creditor. The second alternative, parting with security without the knowledge
of the surety is a contra situation, but affords a meaning to the words used
in the first para, to wit, 'the creditor loses'. Section 141 of the Contract Act
would lose its efficacy and the Act would render itself totally nugatory if the
meaning is to be attributed in the manner as suggested by Mr. Anand. A
definite volition is required to come within the ambit of Section 141. The
C heading of Section 141 also lends, though not normally a part of the statutory
provision, assistance in interpreting the statutory intent since heading always
serves as a guide to depict the intention. 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
D .Statute has provided both the creditor and the guarantor some relief as specified
in this Chapter of Cor:itract Act (between Sections 130 to 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. It is in this
context strong reliance was placed on a decision of the Privy Council in
E China and South Sea Bank Ltd v. Tan, [1989] 3 All ER 839, wherein Lord
Templeman speaking for the Council stated the law as below :-
"In the present case the security was neither surrendered nor lost nor
imperfect nor altered in condition by reason of what was don~ by
creditor. The creditor had three sources of repayment. The creditor
F could sue 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
G 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 ..
c~editor is paid in full and the surety, having paid the whole of the
H debt is entitled to a transfer of the mortgaged securities to procure
-·
·I
..
INDUSTRIAL FINANCIAL CORPN_OF INDIALTD." CANNANORESPINNlNG AND WEAVING MILLS LTD !BANERJEE. J_I 11 15
recovery of the whole or part of the sum he has paid to the creditor. A
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 of repaying the debt then the creditor loses nothing. The surety B
contracts to pay if the debtor does not pay and the surety is bound by his
contract. If the surety, perhaps less indolent or less well protected than the
creditor, is worried that the mortgaged securities may decline in value then
the surety may request the creditor to sell and if the creditor remains idle then
the surety may bustle about, pay off the debt, take over the benefit of the C
.. securities and sell them. No creditor could carry on the business of lending
if he could become liable to a mortgagee and to a surety or to either of them
for a decline in value of mortgaged property, unless the creditor was personally
responsible for the decline. Applying the rule as specified by Pollock CB in
Wattsv. Shuttleworth(l860) 5 H&N235 at247-248, 157ER1171at1176,
• it appears to their Lordships that in the present case the creditor did not act D
injurious to the surety, did not act inconsistent with the rights of.the surety
and the creditor did not omit any act which his duty enjoined him to do. The
creditor was not under a duty to exercise his power of sale over the mortgaged
securities at any particular time or at all."
In Halsbury's Laws of England Fourth Edition (para 335), it has been, E
relying upon four rather old decisions of the Court of Appeal, Wheatley v.
Bastow, (!855) 7 De GM & G 261 at 279-280 per Turner LJ; Hardwick v.
Wright, (!865) 35 Beav 133; Polak v. Everett, (1876) 1 QBD 669 at 675,
C.A. per Blackburn J, Carter v. White, (!883) 25 ChD 666 at 670, CA.,
categorically stated "A transaction which causes no loss of securities, or a p
loss not attributable to the fault of the creditors, will not discharge the
guarantor."
The interpretation offered by Mr. Anand as regards Section 141 of the
Act also stands decried and negated by the Punjab High Court in Krishan
Ta/war v. Hindustan Commercial Bank ltd and Anr., AIR (l 957) Punjab G
310. The basic situation stands very well elucidated in Rees v. Barrington 2
White & Tudor's L.C., 4th Edn.at p. 1002, wherein the effect of Section 141
stands expressed as below :-
"As a surety, on payment of the debt, is entitled to all the securities
of the creditor, whether he is aware of their existence or not, even H
1116
...though they were given after the contract of suretyship, if the creditor
SUPREME COURT REPORTS [2002] 2 S.C.R.
A
who has had, or ought to have had, them in his 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
B 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
C 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 and Anr.. [1980) 4 SCC 516 was
dealing with a contra situation and came to a conclusion that by reason of the
D deliberate act of the principal debtor or the creditor and without the knowledge, 0
consent and approval of the surety, question of further liability would not
arise and in the contextual facts discharged the guarantor the situation
presently, however, is converse thereto by reason of the fact that it is not by
any definite act of the creditor or the debtor but by an operation of law for
E .which none of the parties had any control. Significantly, it may be stated that
the liability of the guarantor cannot but be stated to the a strict liability and
even if the principal debtor is discharged from his liability unless such
discharge is through the act of the creditor without consent of the surety/
guarantor, the creditor's right of action against the surety is preserved.
F Turning attention to the effect· of the Sick Textile Undertakings
(Nationalisation) Act, 1974, a bare perusal of some of the provisions will
indicate that there is no discharge of the liability of principal debtor, leave
alone that of the surety. Sections 3, 4, 5 and 20 of the Act of 1974, if read
to~ether, would depict that the liability of the owner of the undertaking/the
G debtor continues and it is only that the claim against the security which
stands discharged by reason of the statutory shift of the charge on to the
compensation. The liability of the principal debtor does not in any way come
-
to an end neither that of the guarantor. It is in this context, a recent Three-
Judge Bench decision of this Court in Civil Appeal No. 15521 of (1996)
Punjab National Bank v. State of UP. and Ors. is of utmost relevance since
H the same pertains to the involvement of the same Act of 1974 and together
INDUSTRIAL FINANCIAL COR.PN. OF INDIA LTI>.~- CANN ANORE SPINNING AND WEAVING MILLS LTD. [BANERJEE. J.J 111 7
with the issues as regards the liability of the guarantor and principal debtor. A
Since the order as passed by this Court is rather short, we feel it inclined to
quote the order in its entirety. The order reads as below :-
"The appellant had, after respondent No.4's management was
taken over by the U.P. State Textile Corporation Ltd. (respondent
No.3) under the Industries (Development and Regulation) Act, B
advanced some money to the said respondent No. 4. In respect of the
advance so made, respondents 1, 2 and 3 executed deeds of guarantee
undertaking to pay the amount due to the Bank as guarantors in the
event of the principal borrower being unable to pay the same.
Subsequently, respondent No.3 which had taken over the C
management of respondent No.4 became sick and proceedings were
initiated under the Sick Textile Undertakings (Nationalisation) Act,
1974 (for short "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 D
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?"
E
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 F
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 G
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 Official liquidator, High Court, Ernaku/am and Anr.,
AIR 1982 SC 1497 where the liability of the guarantor in a case
where liability of the principal debtor was discharged under the
insolvency law or the company law, was considered. It was held in H
1118 SUPREME COURT REPORTS [2002) 2 S.C.R.
A this case that in view of the unequivocal guarantee such liability of
the guarantor continues and the creditor can realize the same from
guarantor in view of the language of Section 128 of the Contract Act
as there is no discharge under Section 134 of that Act.
In our opinion, the principle of the aforesaid decision of this .
B Court is equally applicable in the present case. The right of the
appellant to recover money from respondents l, 2 and 3 who stood
guarantors arises out of the tenns of the deeds of guarantee which are
not in any way superseded or brought to a naught merely because the
appellant may not be able to recover money from the principal-
c borrower. It may here be added that even as a result of the
Nationalisation Act the liability of the principal-borrower does not
come to an end. It is only the mode of recovery which is referred to
in the said Act.
For the aforesaid reasons, this appeal is allowed, the preliminary
D issue framed by the trial Court is decided in favour of the appellant
and the case is remanded to the trial Court for decision on merits. No
costs.
~
IA No.3 filed in this Court by respondent No.3 under Section 22 J.-
of the Sick. Industrial Companies (Industrial Provisions) Act, 1995, is
E dismissed as withdrawn with liberty to the appellant to move the
appropriate application before the trial Court."
A faint attempt has been made during the course of hearing that the
F
decision of the Puiyab National Bank (supra) may not have a binding effect
by reason of this being an order only and not a detailed judgment. We are,
however, unable to record our concurrence therewith.
""'I" ..
The Three-Judge Bench decision in Punjab National Bank (supra)
categorically dealt with the issue as to the effect of the Act of 1974 and this t
i.
Bench records its respectful concurrence therewith, apart from the same being )-
a binding precedent in the normal circumstances, in terms of a Constitution l
G '"
Bench decision of this Court in Pradip Chandra Parija and Ors. v. Pramod
Chandra Patnaik and Ors., [2002) I SCC I. In any event, this Court in no t=I-
uncertain terms in Patheja Bros. Forging & Stamping and Anr. v. ICICI Ltd. .
and Ors., [2000) 6 SCC 545 made it abundantly clear that when the words
'
<,.
of the Legislation are clear, the Court must give effect to them as they stand
(
H and cannot demur on the ground that the Legislature must have intended
'
..
INDUSTRIAL FINANCIAL CORPN_ OF lNDIA LTD ' C ANNANORE SPINNING AND WEAVING MILLS l.TO. [BANERIEE.J.! 11 19
otherwise. The provisions of the Nationalisation Act as noticed above, are A
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 B
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 C
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. Anglo-Maxican Petroleum Products Co. Ltd., (1916-2 AC 397)
(which stands quoted (with approval by this Court) in Naihati Jute Mills v.
Khyaliram, AIR (1968) SC 522, seems to have settled the law on the same. D
Lord Lorebum in Tamplin Steamship stated :
"A court can and ought to examine the contract and the circumstances
in which it was made, not of course to vary, but only to explain it,
in order to see whether or not from the nature of it the parties must E
have made their bargain on the footing that a particular thing or a
state of things would continue to exist. And if they must have done
so, then a term to that effect would be implied; though it be not
expressed in the contract."
Lord Lorebum went on to observe :-
• F
"It is in my opinion the true principle, for no court has ,an absolving
power, but it can infer from the nature of the contract and the
surrounding circumstances that a condition which was not expressed
was a foundation on which the parties contracted ........ Were the altered
conditions such that, had they thought of them, they would have G
taken their chance of them, or such that as sensible men they would
have said, "if that happens, of course, it is all over between us."
In Davis Contractors' decision Davis Contractors v. Fareham U.D.C.:
(1956) AC 696, an oft-cited deoision as regards the doctrine of frustration,
Lord Radcliffe formulated the doctrine of frustration in the manner following:- H
1120 SUPREME COURT REPORTS [2002] 2 S.C.R.
A "Frustration occurs whenever the law recognises that without default
of either party a contractual obligation has become incapable of being
performed because the circumstances in which performance is called
for would render it a thing radically different from that which was
undertaken by the contract."
B Needless to record that on a true perspective of Section 56 of the
Contract Act, three essential conditions appear to be the rea1istic interpretation
of the Statute. The conditions being (i) a valid and subsisting contract between
the parties; (ii) there must be some part of the contract yet to be performed;
and (iii) the contract after it is entered into becomes impossible of performance.
c Leaving aside the first condition, the second and the third one cannot,
in our view, have any manner of application in the contextual facts.
Recapitulating the facts briefly, the Nationalisation Act came into force in the
year 1974 by 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
D 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
E 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)
F lt 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 capacity in which the parties had entered into the contract with
the appellant herein. The case made out before this Court, however, is a
' I
G complete departure therefrom and as a matter of fact introduction· of the
Legislation of 1974 in terms of which the entire assets stand vested has been
taken recourse to as the supervening event and the contract of guarantee has
thus become incapable of being performed for reasons beyond the control of
the guarantors, having due regard to the statutory provisions, as appears from
Section 141 of the Contract Act undoubtedly the shift and variation cannot
H but be attributed to be well imagined but irrespective of the same and in
INDUSTRIAL FINANCIAL CORPN OF INDlALTD o· CANNANORESl'INNlNG AND WEAVJNG ~!ILLS L Tl) !BANERJEE. 1 j 1121
either of the situations (i.e. the plea before the High Court or the plea before A
this Court) , the doctrine of frustration as envisaged in terms of Section 56
of the Contract Act does not and cannot have any manner of application in
the contextual facts. It is on the failure of the principal debtor to pay the
entire sum due, the guarantee stands invoked the Contract of Guarantee has
no co-relation with that of the Nationalisation Act neither is dependent thereon B
: it is an independent contract and in all fairness has to be honoured to fulfil
the contractual obligation between the surety and the creditor. Taking recourse
to Section 141 by the surety, in our view, is utterly misplaced and we need
not dilate once again, since we have already dealt with the issue hereinbefore
in this judgment, except recording that doctrine of frustration as contended
cannot be invoked having regard to the provisions of Section 141 of the C
Contract Act.
On the factual score, a Civil Suit stands filed and thereafter the claim
was preferred before the Commissioner of Payments in terms of the
Nationalisation Act. The right of a claimant to proceed before the
Commissioner and to file a suit to recover the amount due to him cannot, in D
our view, on a perusal of the Statute, be taken away, though the Claimant
would not be entitled to recover any amount at both the ends. The amount
paid by the Commissioner would stand reduced to the extent of payment by
the Commissioner. The filing of the Civil Suit thus is not barred as has been
contended by Mr. Anand that once the claim stands paid, though partially, E
question of proceeding with the suit would not arise. It is in this context, we
concur with the findings of the Bombay High Court in Oriental Coal Co.
ltd, Calcutta v. Mis Mohan/al Kisanlal and Anr., AIR (1984) Born. 174 and
record our approval and similar concurrence also goes to the decision of the
Calcutta High Court in Barakar Coal Co. ltd v. N.C. Mehta, 81 Cal WN
380: AIR (I 977) NOC 198 (Cal). F
Jn the premises aforesaid, we are unable to record our concurrence with
the judgment under appeal and the same is thus set aside and the decree as
passed by the learned Single Judge stands restored. Each party, however, will
pay and bear its own costs.
G
S.K.S. Appeal allowed.
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