Holding

An unconditional bank guarantee remains enforceable despite the principal debtor’s liquidation; the bank’s liability is absolute and the Board may demand payment directly from the bank.

Summary

The Maharashtra State Electricity Board (MSEB) invited tenders for supply of goods, allowing exemption from earnest money upon furnishing a Rs 50,000 bank guarantee. Cochin Malleables (in liquidation) gave such a guarantee through Canara Bank. When the Board demanded payment of Rs 50,000, the company was ordered wound up and the Official Liquidator obtained a court order restraining the Board from realizing the guarantee, arguing that the Bank’s recourse to the securities would affect the liquidated company’s assets. The Board appealed, contending that the guarantee was an unconditional contract of guarantee, not affected by the liquidation of the principal debtor. The Supreme Court held that under an unconditional guarantee the Bank’s liability is absolute, co‑extensive with the principal debtor’s liability, and not discharged by the debtor’s liquidation. The Board could demand payment without proving default, and the company judge had no jurisdiction to restrain the Board under the Companies Act. The appellate order was set aside and the Board’s appeal was allowed.

Issues considered

Whether the liquidation of the principal debtor (the company) discharges the bank’s liability under an unconditional guarantee.
Whether the Electricity Board can claim the guaranteed amount directly from the bank, bypassing the winding‑up proceedings.
Whether the company judge could restrain the Board from realizing the guarantee amount under the Companies Act.

Legislation cited

Companies Act, 1956s. 456(2)
Indian Contract Act, 1872s. 128, s. 134

Subjects

bank guaranteesurety liabilityliquidationCompanies ActIndian Contract Actwinding upunconditional guaranteecreditor rights

Judgment

561 A

MAHARASHTRA STATE ELECTRICITY BOARD,
BOMBAY,

•• B
OFFICIAL LIQUIDATOR, HIGH COURT,
ERNAKULAM, ANR.
October 13, 1982

[E.S. VENKATARAMIAH AND V. BALAKRISHNA BRAD!, JJ.)

Companies Act, J956~Company gave bank guarante~ for supply of goods
c
on tenders-Company ordered to be wound up-Appellant restrained from realising
the amount of guarantee-Liability of bank-Nature of.
. . .
Contract Act-Bank gave guarantee for Q company for 1upply of goods
against tenders-Company ordered to be wound up-Liability of surety-Natur~ of.·
D
The appel1ant Board invites tenders for· the supply of goods. . One ·or the
terms of the tenders required the intending supplier of goods to pay earnest
money and/or security to the Board along with the tender a sum approximately
·equivalent to 10% of the estimated price of goods tendered. But where an
intending tenderer deposited· a sum of Rs; S0,000 either in cash or in any form
approved by the BOard such as a .Bank guarantee he could offer to supply goods
of any value either under one or more.tenders without compJying with the above E
condition. '

In accordance with the terms of tender the company in liquidation offered
a bank guaranree fo~ a sum of Rs. 50,000 for supply of goods to the Board.
As security for the guarantee, t~e Bank took from the company in liquidation a
fixed deposit receipt and some quantity of imported zinc ingots and the Bank had
certain rights in respect of these securities. '
F
In August, 1973 the Board cailed upon the· Bank to pay to it the gua:·rantee .
amount. In the meanwhile, however, the High Court ordered the winding up of
the company in liquidation. The Bank then wrote to the Official Liquidator that
the company in liquidation was liable to the Bank a large sum of money one of
which was the sum of Rs. 50,000 demanded by the Board.

On application by the Official Liquidator the· company Judge issued an
G
order restraining the Board from realising the amount from the Bank on the
ground that since the Bank would have r~course to the. securities given by the
ccmpany in liquidation for realising the amount paid by it in accord.ance with the
bank guarantee and that since such action of th4' Bank would affect the assets of
the company in·liquidatioo, it was not Open to the Board to claim the amount of H
guarantee from the Bank except as a creditor in.the windiog!up proceedings. A
Division Bench oft~~ Hi~h Court Qisq:i~ssc;d the ,P:oard's appeal~

-
562' SUPIUlME COURT IUlPOBTS (1983] I s.c.a,

On the question whe~her the Board could recover from the Bank the sum
of Rs. 50,000 according to the terms of the bank guarantee and what its effect
would be on liquidation proceedings,

~Hawing the Appeal,

HELD : It was not open to the company Judge to make any order under
8 the Compani!!s 'Act 1956 prohibiting the Board from realising the amount
gtiaranteed by the Bank as this had nothing to do with the assefs of the company
in liquidation. (568-D]

The terms of the document on the basis of which the Board has claimed
the amount from tht Bank constituted a 'contract Or guarantee and not a contract
of indemnity. [566-F]
c The three' transactions, namely (I) the bank guarantee, (2) the' contract of
supply between the Board and the Company in liquidation 8.nd .(3) the document
. under which the Company in liquidation 'gave a fixed deposit receipt and some
quantity of zinc ingots as security are independent of each other in so fat-as their
legal incidents are concerried .. [566-H; 567-A] :

D In order to realise the guarantee amount of .Rs. 50,000 all that the Board
had to do' was to make _a demand, within 48 hours of which the Bank had to pay
the sum to the Board. The BOard was not required to prove a·ny default on the
part of the Company in l~uidation. Nor could the Bank raise the plea that it
was liable only to the extent of any loss sustained by the Board. The Bank's
liability to pay the sum demanded by the Board was absolute and unconditional.
(567-C-D]
E
The fact that the principal debtor had gone into liquidation would not
have any effect.on the Bank's liability as guanintor. Under ·section 128 of the
Indian Contract Act the liability of the surety is co·extensive with 'that of the
principal debtor unless it is otherwise provided by the contract. A surety is no
doubt discharged under section 134 of the Indian Contract Act by any contract.
between the creditor and the principal debtor by which the" principal debtor is
F released or by ·any act or ommission of the creditor, the legal -consequence of
which~ is -the discharge of the principal debtor. But a discharge which the
principal debtor may secure by operation of Jaw in bankruptcy (or in liquidation
proceedings in the case of a company) does not absolve the surety of his Jiability.
[567-D-F]

JaC{lnnath Ganeshram Aggarwala v. Shivnarayan Bhagirath & Ors., A.I.R.
G 1940 Born. 247, approved.

In re Fitzegeorge Ex parte Robson, [1905] I K.B. 462, referred to.

· Punjab National Bank Limited v. Bikram Cotton Mills & Anr., [1970] 2
S.C.R. 462, held inapplicable.
H
On payment of the sum demanded by the Board it was open to the Bank
to have recourse to ~ho ~ecuri,ies ~iven1-b7 t~c Company in liquidatiOn. The
\

ELECTRICITY BOARD v. LIQUIDATOR (Venkataramlah, J.) - . 563

Board was not concerned with what the Bank did to reimburse.. itself. It was thO A
Bank's responsibility to deal with_thc securities held by it in accordance with law.
- , ' [568 CJ

CIVIL APPELLATE JURISDICTION: Civil App~al No. ~1~2 o,f
1~2 . ' ..
•
'Appeal by speCial leave from the Judgment and. Order dated B
the 13th November,_1978 of .the .Kerala High Court in M.F.A .. No.
• 145 of 1976.
B:s. Bhasme and H.S. Parihar for the Appellant.
/

K.N. Bhatt for Respondent No. 2.
c
A.S. Nambiar for- the intervener.

The Judgment of the-Court was delivered by

--VBNKATARAMIAH1 ·J, This is an appeal by special. leave under
-< ·.Article 136 of the Constitution. against the judgme~t and order dated , D
November 13, 1978 of the High Court of Kerala in M.F.A. No; 145
Of 1976. .. .
- I , ' ,
The facts leading to this appeal may be briefty statecFthus : ·
The appellant is the Maharashtra 'state Electricity ·Board (hereinafter ··
referred to as 'the Electricity Board'). ·cochin Mall,ables (P) Ltd. E
(in liquidation) (hereinafter referred to as 'the Company in liquida-\
tion') used to enter-into contracts with the ·Electricity Board before
it was ordered to .be wound up by the -High_ Court of K~rala to
supply goods to the cElectricity Board pursuant to tenders which
were being issued from time to time.. One of the terms usually F
found in such· tenders was that the intending supplier of goods
should pay as earnest money and/or security to the Electricity Board
alongwith every tender a sum approximately equivalent to l0% of·
the estimated price of the goods in question. There was, however, a
provision for exempting payment of such earnest money or security
deposit in the case of th'ose tenderers whchvould keep a permanent G
deposit of Rs. 50,000 either in cash or in any form approved by
th~- Electricity Boatd and 'one such approved form was a bank
guarantee to 'the tune of. Rs. 50,000. The effect . of such
deposit ·of Rs. 50,000 made by an . intending tenderer with' thO
Electricity Board under this condition was that he acquired 'the .H
privilege of,offering his tennder for the supply of goods of any valu~
to the Electricity Board and of ,s11qi! !~uder being Qonsidered along'
7--.
564 SUPREME COURT REPORTS - [1983) I s,c.a.

A with other tenders made by_ others who had in the ordinary course
paid 10% of the estimated cost of goods as security deposit as per
the usual condition. Such privilege was available to him in the case
of any tender that he might make as long as the deposit remained·
intact with the Electricity Board. In other words, on depositing a
sum of Rs. 50,000 an intending tenderer 'could offer to supply goo<!s
8 . of any value either und'er one or more tenders without complying with
the condition which re'quired him to deposit alongwith with tender a .
sum equivalent to 10% of the estimated value of goods which he
inte'nded to supply. The security of Rs. 50,000 thus given did not
relate. to any specific tender b11t it was open to the Electricity Board.
to appropriate the whole or any part of it towards any amount due ·•
c from the tenderer under any supply contract entered into during the
relevant period .. Any balance which remained unadjusted became
refundable to the person who had made ,it on demand provided ·that
there was no other subsisting liability !<>Wards which the said balance
could be adjusted an!!. on such refund being made the person ceased
to enjoy the exemption from the requiremen_t of" making an earnest
D
depo.sit in respect of.any future tender. Any bank guarantee given .,
by any such intending tenderer in lieu of the cash deposit of
Rs. 50,000 was deemed to be equjvalent to the cash. deposit made on
date of the guarantee and ·the Electricity Board could realise the·
bank guarantee amount or any part of it at its will on any day
E irrespective of whether' any tender had been made by the person
concerned during the period or not. On such realisa\ion of the bank
guaranfee amount, the Eiectricity Board could deal with it in
accord~nce with the terms of the contract as if the said amount had
been deposited with it in casli on the date of bank guarantee. The
liability of the bank which gave the' bank guarantee under these
F terms was unconditional and. did not vary according to the number
of tend.ers offered, the value bf the goods offered for sale under those •
tenders, and the defaults, if any, committed by the tenderer in the
supply of goods: ·

Pursuant to the above term, tl!e Company in liquidation
G offered· on September I, 1966 a .bank guarantee for a sum not
exceeding Rs. 50,000 given by the Canara Bank Ltd. (now known
l
as Canara Bank and hereinafter referred to as 'the Bank'). The
relevant part of the said guarantee was as follows

H "THE C,ANARA BANK LTD.", hereby agrees un-
equivocally and unconditionally to pay, within 48 (Forty
•
eight) hours, on dem;\l!d jn writing .from the Maharashtra
ELECTRICITY BOARD'v. LIQUIDATOR (Jlenkataramiah, J.). 565

State Electricity Board or any officer authorised by it in this A·, )
behalf, of any amount upto and not exceeding Rs. 50,000/-
(Rupees Fifty thousand only) to the said Maharashtra State
Electricity Board, Bombay on behalf of M/s Cochin
Malleables (Private) Ltd., Trichur, who have tendered and/
or contracted or may tender or contract hereafter for
supply of materials equipment or service to · the n
Maharashtra State Electricity Board and have been
exempted.from payment of earnest money and/or security
deposit against such tenders ~r coniracts."
•
The original period of guarantee was one year. It was,
however, extended from time to time and the guarantee :was in.force c
in the year 197~. Pn August 27, 1973,_ the ElectriCity Board called
upon the B.ank to pay the guarantee amount of Rs ..50,000. There-,
after reminders were sent and a.final demand was made ·on May 23,
· 1974;.
In the meanwhile Company
- -·Petition . No. 14 of 1973 was
filed on July 30, 1973 on the file of the High Court of Kerala for the
winding up of the Company' in liquidation. · By an order dated
D
September 16, 1974 the High Court ordered the winding up of-the
Company in liquidation and directed the 'Official Liquidator to take
charge of its affairs., In view of these proceedings the Bank wrote to
the Official Liquidator , on November 4, i974 stating that the
Company iii Liquidation was liable to the Bank to the extent .of
Rs. 1,64,353.12 on two heads one ·of which was the sum of
E
Rs. 50,000 de!'landed by- the 'Ele~tricity Board as per the terms of
the bank guarantee referred to above. Tliereupon, ,the· Official
Liquidator filed an· application under section 456(2) of the
Companies Act, 1956. read with Rule 9 or' the Companies (Co~rt)
Rules, 1959 before the Company Judge praying for an order
restraining the Elect. ricity Board from realising. the amount covered.
.by the guarantee on the ground that since the Company in liqui-
dation had been ordered to be,wound up the Electricity Board could
not claim the amount of guarantee 'from the Bank. The Electricity
IBoard contended that the amount of Rs. 50,000 was not being
·claimed as a creditor of the Company ip liquidation but on the basis G
,of the bank guarantee, the liability under which was not affected by .
the liquidation proceedings. The learned ~ompany Judge upheld
the plea of the Official Liquidator and issued an order restraining the
Electricity Board from realising the amount from the Bank on 'the
ground that since the Bank would have recourse, to the securities H,
·given by the Company in liquidation· to the .Bank for realising the
amount paid by it in accordance with the bank guarantee and such.
566 SUPREME COURT REPORTS [1983] 1 s.C.ll,

action of. the Bank would affect the assets of the . Company in liqui-
dation, it was not open to the Electricity Board to claim the amount
of guarantee from the Bank ex 0ept as a creditor in the winding up
· proceedings. An appeal filed by the Electricity Board before {be\
Division Bench of the High C,ourt was dismissed. This appeal. is
filed by the ·Electricity Board against the order of the Division
8 Bench.

After the petition for special leave was filed in this Court in
July 1979, notice was issued· to the Official Liquidatcir. He has
written· a letter to this Court stating .that·the High Court of Kerala
bas since sanctioned a scheme for reconstruction.of the Company in
G liquidation by an order dated .November 6, 1979: ·subject to certain
condition~ and that the winding up proceedings are directed to be
kept in abeyance till December 31, 1982. _ H~ has further stated that
be has handed over all the assets of the Company in liquidation to
the new management as per directions of the High Court and that
be ha:s no funds to participate in tbese proceedings. The Managing ·
D Director of the Company in ·liquidation has entered appearance·as
an intervener and is represented by a counsel. The learned counsel
for the intervener has been heard in tliis appeal. He has also fil~d
his submissions in writing. · ·

The principal question which arises for determination in this
E appeal relates to the effect of the liquidation proceedings on the
right. of the Electricity Boar<l to recover from the Bank the sum of
Rs. 50,000 as per the \errr s ·of the bank . guarantee. It cannot be
disputed that the terms ·of the document on the basis of which the
Electricity Board has .claimed the amount from the Bank constitute
a contract of guarantee and not a contract of indemnity. Under
F thai document the Bank -has· undertaken to pay any· amount not
exceeding R~. so;ooo to the Electricity Board within forty eight
hours of the demand. The payment of the amount guaranteeo by
the Bank is not made dependent upon the proof of any default on
the part of the Company in liquidation. It may pe that in order to
give th.- said guarantee, the Bank-had in its· turn taken .as security
G from the ·Company in liquidation certain fixed deposit receipt and a
. certain quantity of imported zinc ingots and that the Bank had
certain righis in respect of those securities. There· may also be some
'claims or counter-claims arising out of the contracts of supply
H entered into between the Electricity Board and. the Company in
. liquidation. But the transactions viz. (!) the bank guarantee
executed by the Bank in· f~vo11r of the Electricity Board, (2) the
llLECTRICITY BOARD v. LIQUIDATOR- (Venkataramiah, J;) 567

contracts of,supply entered into between th~ Electricity Boa~d and A
the Company in liquidation and (3) the document under which the
Company in liquidation-had given a fixed deposit receipt and certain _
quantity of zinc ingots as security tO the ·Bank for executing the
letter of guarante·e in favour of the Electricity Board are independent
of each other in so far as their legal incidents are concerned.

Under the~ank guarantee in question ihe Bank has undertaken
to pay the Electricity Board any sum upto Rs. 50~000 and in order
to realise ii all that the Electricity Board has to do is to ·make a
deman.d. Within forty eight hours of such demand the Bank has to
pay the amount to the Electricity Boatd which is not under .any
'obligation to prove any default on the part of the Company in. liqui-.
c
dation before the amount demanded is paid. The Bank cannot raise
the plea t.hat it is liable only to the extent of any loss that may have
been..sustained by the Electricity Board owing to any default on the
part of the. supplfer of goods i.e. the company in liquidation. The
liability is absolute·and unconditional. The fact that the Company_ D
in liquidation i.e. thqirincipal debtor has gone into liquidation also
would not have any effect on the 1liability of the Bank Le. the
guarantor. Un\ier section 128 of ,the Indian Cqntract Act, the
liability of the surety is co-extensive with 'that of the principal
debtor unless it is otherwise provided by the contract. A sure.ty is
no doubt discharged under section 134 of· the Indian ·Contract Act
by 1µ1y contract between the cre,ditor 'and the principal debtor by
which. the principal debtor is released or by any act or .omission of
the creditor, the legal consequence of which is·the discharge of the
prlncipal debtor. But a discharge which the 'principal debtor may
secure by operation of law in bankruptcy (of in liquidation pro-
ceedings in the case of a company) does not absolve the su~ety of F.
his liability (See Jagannath GanesJiram Aggarwala \/. Shivnarayan
Bhagirath & Ors.(1)) · See also In re Fitzgeorge Ex parte Robson(') .
. In- view of the unequivoc~l language of .the letter of guarantee, no
·reliance can he placed by the Company in liquidation on the decision
of ibis Court iII Punjab National Bank limite4 v. Bikram Cotton G
. Miils & Anr.(') in .which the sur~ty's liabllify was llmited to the
'ultimate balance' found due from the principal debtor and tlie said
balance had not been ascertained before _the J institution of the suit.

(I) A.I.R. 1940 Born. 247. H
(2) fl 905] I K.Jf. 462.
-" (3) [1970] 2 S.C.R.. 462. ..

'
568 SUPREME COURT REPoRTS . !1983] 1 s.c.ll.

A The facts of this case are distinguishable from the facts in the case
before us. As mentioned .earlier the liability of the Bank to pay the
amount as per the letter of guarantee did not depend upon prior
proof of any default on the part of the Company in liquidation.
Whether the whole of Rs. 50,000 should be demanded or any
lesser sum should be demanded from the Bank was entirely within
8 the choice of the Elect~icity Board. · The Bank has, therefore, to pay
·the amount due under the letter of guarantee given by it to' the
Elec.tricity Board. On such payment it is open to the Bank to have
recourse to the securities given by the Company in liquidation· for '
the purpose of the issue· of the letter of guarantee.. ·The Electricity
Board . is not concerned with what· the Bank does in· order to
c reimburse itself after makin'g payment of the amount .guaranteed. by·.
it. It is the responsibility of the Bank to deal with the securities
held by it in accordance with law. It was not, however, open to the
Company Judge to make any order under the Companies Act
prohibiting the Electricity. Board from realising the· amount
guaranteed by th~ Bank as this. had nothing to do with the assets of
D the' Company in liquidation. The order of the Company Judge and
the Judgment of the Divisi~n Bench in appeal are, therefore, liable to
be set aside 'be and they are accordingly set aside.

· Before concluding. this judgment, we place on record the .
submission made on behalf of the Electricity Board that it .is open
E to the Company iii liquidation to prefer any claim arising out of the'
supply contracts as against tbe Electricity Board. It is also open to
the Electricity Board to claim any sum ·that may be due to it under
such contracts. In considering the above mutual rights and liabilities
of the Electricity Board and the Company in liquidation the sum to
be received by the Electricity Board from the Bank under the letter'
F of guarantee will have to be taken into consideration and dealt with
in accordance with the terms of the supply contract.s.

The appeal is accordingly allowed. No costs.

P.B:R. Appeal allowed.