Holding

A guarantor’s liability is co‑extensive with that of the principal debtor and the High Court’s stay of the Debts Recovery Tribunal proceedings under Article 227 was not justified.

Summary

The Industrial Investment Bank of India Ltd. (the bank) granted two short‑term working capital loans to Modern Maileables Ltd., with the company's director, Bishwanath Jhunjhunwala, executing a personal guarantee. After the borrower defaulted, the bank initiated attachment proceedings against the company under s.40 of the Industrial Reconstruction Bank of India Act, 1984, and simultaneously filed a recovery suit against the guarantor before the Debts Recovery Tribunal under s.19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The guarantor sought a stay of the tribunal proceedings, arguing that the bank's right against him would not crystallise until its right against the borrower was established; the tribunal rejected the stay, but the Calcutta High Court, invoking its supervisory jurisdiction under Article 227 of the Constitution, stayed the tribunal proceedings. On appeal, the Supreme Court held that the guarantor’s liability is co‑extensive with that of the principal debtor and that the High Court was not justified in staying the tribunal proceedings. Consequently, the appeal was allowed and the High Court’s order set aside, allowing the bank to continue its recovery action against the guarantor.

Issues considered

The liability of a guarantor vis‑à‑vis the principal debtor – whether it is co‑extensive or conditional upon the principal debtor's liability.
Whether the High Court can, under Article 227, stay proceedings before a Debts Recovery Tribunal when the bank has initiated parallel actions against borrower and guarantor.
Whether the bank must exhaust remedies against the principal debtor before proceeding against the guarantor under the applicable statutes.

Legislation cited

Subjects

guarantor liabilityco‑extensive liabilityArticle 227High Court supervisory jurisdictionDebt recoverysuretyshipstay of proceedingsIndustrial Reconstruction Bank of India ActRecovery of Debts Due to Banks and Financial Institutions Act

Judgment

[2009] 13 (ADDL.) S.C.R. 391

INDUSTRIAL INVESTMENT BANK OF INDIA LTD. A
v.
BISHWANATH JHUNJHUNWALA
(Civil Appeal No. 4613 of 2000)

AUGUST 18, 2009
B
[DALVEER BHANDARI AND H.L. DATTU, JJ.]

Debt - Recovery of - Liability of guarantor vis-a-vis
principal debtor - Default in loan payment - Lending Bank
initiating proceedings against principal debtor as well as C
guarantor in different forums - High Court in exercise of
jurisdiction under Article 227 of Constitution of India staying
proceedings before Tribunal till the right of the lending Bank
was established against the principal debtor - On appeal,
held: Order of High Court not justified - Liability of guarantor D
and principal debtor are co-extensive and not alternative -
Industrial Reconstruction Bank of India Act, 1984 - s. 40 -
Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 - s. 19 Constitution of India, 1950 - Article 227.

Appellant-Bank sanction~d loan to a company. E
Respondent, the Director of the borrower company stood
. guarantor. On default, appellant-Bank initiated
.f proceedings u/s. 40 of Industrial Reconstruction Bank of
India Act, 1984 against the borrower company. During
pendency thereof, it also initiated proceedings against F
the respondent-Guarantor before Debts Recovery
Tribunal. Respondent filed application before the Tribunal
to stay the proceedings before the Tribunal on the
ground that the right of the Bank against the guarantor
did not crystallize till the rights of the Bank against the G
borrower company was not established. Tribunal
dismissed the application. High Court in exercise of its
jurisdiction under Article 227 of Constitution of India
stayed the proceedings before the Tribunal. Hence the
391 H
392 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A present appeal.

Allowing the appeal, the Court

HELD: The liability of the guarantor and principle
debtors are co-extensive and not in alternative. Th~ High
B Court under its power of superintendence under Article
227 of the Constitution of India was not justified to stay
further proceedings in the application before the Tribunal.
[Para 30] [400-E-G]

c State Bank of India v. Mis. lndexport Registered and Ors.
AIR 1992 SC 1740, relied on.

Bank of Bihar Ltd. v. Damodar Prasad and Anr.(1969) 1
SCR 620; Lachhman Joharimal v. Bapu Khandu and
Tukaram Khandoji (1869) 6 Bombay High Court Reports
D 241; Jagannath Ganeshram Agarwala v. Shivnarayan ~
Bhagirath and Ors. AIR 1940 Bombay 247; Hukumchand
Insurance Co. Ltd. v. The Bank of Baroda and Ors. AIR 1977
Kant 204; Transcore v. Union of India and Anr. (2008) 1 SCC
125; A.P. State Financial Corporation v. Mis Gar Re-Rolling
E Mills and Anr. (1994) 2 SCC 647, referred to.

Polock and Mui/a on Indian Contract and Specific Relief
Act, TenthEdition, p. 728; Chitty on Contracts, 24th Edition, •
Volume 2p.1031; Halsbury's Laws of
England, Fourth ,.__
F · Edition,Vol. 20,paragraph 159 p. 87, referred to.
- i -

Case Law Reference:
(1969) 1 SCR 620 Referred to. Para 19
(1869)6 Bombay High Court Reports 241 Referred
G to. Para 19
-~·
AIR 1992 SC 1740 Relied on. Para 20
AIR 1940 Bombay 247 Referred to. Para 24

H
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 393
BISHWANATH JHUNJHUNWALA

AIR 1977 Kant 204 Referred to. Para 25 A
(2008) 1 sec 125 Referred to. Para 28
(1994) 2 sec 647 Referred to. Para 29

CIVIL APPELLATE JURISDICTION : Civil Appeal No. B
4613 of 2000.

From the Judgment & Order dated 10.9.1999 of the High
y Court of Calcutta in C.O. No. 1581 of 1999.

J.L. Gupta, Sanjay Bhatt, Abhishek Kumar, Manjula Gupta c
for the Appellant.

S.K. Bhattacharya, B.P. Yadav for the Respondent.

The Judgment of the Court was delivered by
~
D
~
DALVEER BHANDARI, J. 1. This appeal is directed
against the judgment of the High Court of Calcutta in Civil
Revisional Jurisdictior. dated 10.9.1999 in C.O. No. 1581 of
1999.
E
2. Briefly stated the facts are as follows:

The appellant industrial Investment Bank of India Ltd.
~
(hereinafter referred to as "the appellant") on 27.9.1994
~· sanctioned the first short term working capital loan of Rs.3
crores in favour of Modern Maileables Limited (hereinafter F
referred to as ·"the borrower company").

3. The loan agreement was entered into between the
appellant and the borrower company on 03.10.1994 in respect
of the first short term working capital loan of Rs.3 crores. The G
said loan agreement was signed on behalf of the borrower
~~
company by the respondent as a Director of the borrower
company. On the same day, demand promissory note for Rs.3
crores was executed on behalf of the borrower company in
favour of the appellant. The same was executed on behalf of
H
-·
394 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.

A the borrower company by the respondent as the Director of the
borrower company. A deed of undertaking to create mortgage >--
in respect of its various immovable properties was also
executed on behalf of the borrower company by the respondent.

4. A deed of personal guarantee was executed by the
B
respondent on 03.10.1994 in respect of the said loan granted
by the appellant in favour of the borrower company. The relevant
clauses of the said deed of guarantee are reproduced.
...,
"7. This guarantee shall be enforceable against the
c guarantor notwithstanding that any security or securities
comprised in any instrument(s) executed by the borrower ....
in favour of the· Industrial Reconstruction.Bai1k of India Ltd.
(for short, IRBI) at the time when the proceedings are taken
against the guarantor on this guarantee, be outstanding or
D un-realized or lost"

5. Clause 11 of the deed of personal guarantee reads as ~

under:
...___
"11. To give effect to this guarantee, the IRBI may act as
E though the guarantors were the principal debtor to the
IRBI."

6. The appellant sanctioned the second term working
capital loan of Rs.3 crores on 15.03.1995 in favour of the
,.
borrower company. The Demand Promissory Note for Rs.3 ~
F
crores was executed on 21.03.1995 on behalN>f the borrower
company by the respondent as the Director of the borrower
company in favour of the appellant. A deed of undertaking to
create mortgage in respect of its immovable properties was I

G
also executed on behalf of the borrower company in respect .'
)-

of the said second short term working capital loan. .>--
r
7. The borrower company committed defaults in the ---'r'-
payment/repayment of the principal amount of the loan as well
as interest, liquidated damages and other moneys. Some of
H the cheques issued on behalf of the borrower company by the
...
-
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 395
BISHWANATH JHUNJHUNWALA [D,A.LVEER BHANDARI, J.]

respondent were dishonored for want of funds. Consequently, A
the proceedings started against the respondent under section
138 of the Negotiable Instruments Act, 1881 are pending before
the court.

8. In view of the defaults committed by the borrower B
company, the appellant on 18.01.1997 issued a demand notice
to the borrower company recalling the entire loans and calling
l-' upon the borrower company to pay the total sum of Rs.5.40
crores together with further interest at the rate of 17% per
annum and liquidated damages at the rate of 2.1 % from c
1.1.1997 till repayment.

9. The appellant on 18.03.1997 filed an application in the
High Court of Calcutta under section 40 of the Industrial
Reconstruction Bank of India Act, 1984 (for short "IRBI Act") for
attachment and sale of the assets of the borrower company. D
The respondent was not made a party to the sa.id application,
--- inasmuch as there was no scope for seeking any relief against
the guarantor under an application under section 40 of the IRBI
Act. Hence, a prayer was made for attachment of the assets
of the borrower company. The provisions of section 40 of the E
IRBI Act are parrmateria with the provisions of sections 31 and
32 of the State Financial Corporations Act, 1951 .
. -'. 10. A notice was jssued on 20.3.1997 to the respondent
invoking the personal guarantee given by him and calling upon F
him to pay the sum of Rs.5.40 crores together with further
interest and liquidated damages from 1.1.1997 till repayment.

11. The High Court on the said application filed by the
appellant on 31.03.1997 under section 40 of the IRBI Act
appointed a Receiver for the purpose of taking symbolic G
-""(- possession of the assets mentioned in Schedules 'A', 'B', 'C'
and 'D' to the said application and also for making an inventory
of the same. The High Court issued an order of injunction
restraining the borrower company from parting with the
possession, disposing of or alienating or otherwise H
396 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A encumbering any of the said assets in any manner.

12. The appellant on 17. 7.1997 filed an application against
the respondent under section 19 of the Recovery of Debts Due
to Bank and Financial Institution~ Act, 1993 in the Debts
Recovery Tribunal, Calcutta. The appellant in the said
B
application has prayed for a certificate against the said
respondent for a sum of Rs.5.40 crores along with further
interest and liquidated damages.
'-of
13. The responder.ton 20.3.1998 also filed an application
c in the Debts Recovery Tribunal, Calcutta for stay of further
proceedings in the case filed by the appellant in the same
Tribunal, inter alia, on the ground that the rights of the appellant
against the respondent as guarantor did not crystallize till the
rights of the appellant against the borrower company are
D established.

14. The Presiding Officer of the Debts Recovery Tribunal,
Calcutta on 18.05.1999 relying on State\ Bank of India v.
--
lndexport Registered & Others, AIR 1992 SC_1JAO dismissed
the application filed by the respondent for stay of further
E
proceedings in the case filed against him and held that the
appellant cannot be farced to exhaust remedy elsewhere and
then to proceed against the guarantor and further that the
liability of a guarantor is co-extensive with that of the principal ~

debtor. ~
F
15. The respondent on 29.5.1999 filed an application
under Article 227 of the Constitution of India fo the High Court
of Calcutta against the order dated 18.5.1999 passed by the
Debts Recovery Tribunal, Calcutta.
G
16. The High Court of Calcutta by the impugned judgment
allowed the application filed by the respondent under Article ~r--
227 of the Constitution of India and stayed further proceedings
/
in O.A. No. 156 of 1997 filed by the appellant against the
respondent in the Debts Recovery Tribunal, Calcutta. The
H
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 397
BISHWANATH JHUNJHUNWALA [DALVEER BHANDARI, J.)

appellant against the said judgment/order has filed this appeal. A

17. Mr. tst·Gupta, learned senior counsel appearing for
the appellant s bmitted that the appellant bank is fully justified
in initiating proceedings against the borrower company as well
as its guarantor before the different courts. B
18. Mr. Gupta also submitted that the liability of the
~
guarantor and the principal debtor are co-extensive and not in
alternative. He also submitted that sections 29, 31 and 32 of
the State Financial Corporations Act are pari materia with
sections 39, 40 and 41 of the IRBI Act. c
19. Mr. Gupta, in support of his submission, placed
,eliance on a judgment of this Court in Bank of Bihar Ltd. v.
Damodar Prasad & Another (1969) 1 SCR 620. In that.case,
the court referred to a judgment in Lachhman Joharimal v. D
-I Bapu Khandu and Tukaram Khandoji (1869) 6 Bombay High
Court Reports 241, in which the Division Bench of the Bombay
High Court held as under:
"The court is of opinion that a creditor is not bound to
exhaust his remedy against the principal debtor before E
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."
This Court, while approving the said judgment, observed F
that, "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 G
easily cut down."
.-..(-
20. In State Bank of India v. Mis. lndexport Registered
{supra), this Court held that the decree holder bank can execute
the decree against the guarantor without proceeding against
the principal borrower. Guarantor's liability is co-extensive with H
398 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A that of the principal debtor. In that case, this court further )..
observed that, "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
B 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 the decretal amount covering mortgage
decree cah be executed earlier. There is nothing in law which ·'4'
provides such a composite decree to be first executed only
c against the principal debtor. The court further observed that "the
liability of the surety is co-extensive with the principal debtor,
unless it is otherwise provided by the contract".

21. The term "co-extensive" has been defined in the
celebrated book of Polack & Mulla on Indian Contract and
D Specific Relief Act, Tenth Edition, at page 728 as under:
~

"Co-extensive. - Surety's liability is co-extensive with that
of the principal debtor.

A surety's liability to pay the debt is not removed by
E reason of the credit~r's omission to sure 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 surely though the principal ·~
has not been sued."
F
22. In Chitty on Contracts, 24th Edition, Volume 2 at page
1031 paragraph 4831 it is stated as under,

"Conditions precedent to liability of surety.- Prima facie
the surety may be proceeded against without demand
G against him, and without first proceeding against the
principal debtor." -'r
23. In Ha/sbury's Laws of Englana; Fourth Edition.Vol. 20,
paragraph 159 at page 87 it has been observed that "it is not
H necessary for the creditor, before proceeding against the
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. v. 399
BISHWANATH JHUNJHUNWALA [DALVEER BHANDARI, J.]

surety, to request the principal debtor to pay, or to sue him, A
although solvent, unless this is expressly stipulated for''.

24. A Division Bench of the 'Bombay High Court in
Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath
and Ors. AIR 1940 Bombay 247 held that the liability of the
surety is co-extensive, but is not in the alternative. Both the B
principal debtor and the surety are liable at the same time to
v the creditors.

25. A Division Bench of the High Court of Karnataka, in
The Hukumchand Insurance Co. Ltd. v. The Bank of Baroda c
& Others AIR 1977 Kant 204 had an occasion to consider the
question of liability of the surety vis-a-vis the principal debtor.
The court held as under:-
j
"The question as to the liability of the surety, its extent and
--11 the manner of its enforcement have to be decided on first D
principles as to the nature ·and incidents of suretyship. The
liability of a principal debtor and the liability of a surety
which is co-extensive with that of the former are really
separate liabilities, although arising out of the same
transaction. Notwithstanding the fact that they may stem E
from the same transaction, the two liabilities are distinct.
The liability of the surety does not also, in all cases, arise
•. simultaneously."
4
26. The case of the respondent has never been that the
liability of the guarantor is only contingent and if remedies F
against the principal debtor failed to satisfy the dues of the
decree holder, then only the bank can proceed against the
guarantor.

27. Mr. Gupta also asserted that the remedy under section G
~- 19 of the Recovery of Debts Due to Bank and Financial
Institutions Act, 1993 is not in derogation of section 40 of the
IRBI Act.

- 28. In Transcore v. Union of India & Another (2008) 1
SCC 125, this Court in great detail examined whether H
400 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A withdrawal of suit pending before the Debts Recovery Tribunal ~
under ORT Act is not a pre-condition for taking recourse to the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. This court held that
it is for the bank or the financial institution to exercise its
B discretion.
29. In A.P. State Financial Corporation v. Mis Gar Re-
Rolling Mills & Another (1994) 2 SCC 647 this Court observed
4-
, that the right vested in the corporation under section 29 of the
Act is besides the right already possessed at common law to
c institute a suit or the right available to it under section 31 of the
Act. In that case, it was further observed that on a conjoint
reading of sections 29 and 31 of the said Act, it appears that
in case of default in repayment of loan or any installment or any
advance or breach of an agreement, the Corporation has two
D remedies available to it against the defaulting industrial concern, ~
one under section 29 and another under section 31. Since, the
corporation must be held entitled and given full protection by
the court to recover its dues it cannot be bound down to adopt
only one of the two remedies provided under the Act. The Court
E further held that the doctrine of election is not applicable to this
case.

30. The legal position as crystallized by a series of cases )>
of this court is clear that the liability of the guarantor and ~
principle debtors are co-extensive and not in alternative. When
F 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 O.A. 156 of 1997.
G
31. Consequently, the appeal is allowed and the impugned
judgment of the High Court of Calcutta is set aside. The
-r
appellant shall be entitled to costs of Rs.50,000/-.

K.K.T. Appeal allowed.
H