Holding

The notification under the Sugar Undertakings Act does not suspend secured liabilities to banks nor the liability of guarantors; therefore the suit may proceed.

Summary

The State Bank of India (SBI) extended a cash‑credit facility to Saksaria Sugar Mills Ltd., secured by an equitable mortgage of the mill’s goods and immovable property. When the mill defaulted, SBI sued the mill and its guarantors for Rs 54,89,822.99. During the suit, the Central Government took over the mill under the Sugar Undertakings (Taking over of Management) Act, 1978 and issued a notification suspending the operation of all contracts entered into before 28 March 1980, except those relating to secured liabilities to banks. The High Court stayed the suit against the mill and guarantors, but SBI appealed. The Supreme Court held that the notification expressly excluded secured liabilities to banks, so the suit could not be stayed; moreover, the liability of the guarantors under Section 128 of the Indian Contract Act, 1872 is co‑extensive with that of the principal debtor and is not suspended by the Act. Consequently, the High Court’s stay order was set aside and the trial court was directed to continue the suit.

Issues considered

Whether the suit against the borrower and guarantors is stayable under the Sugar Undertakings (Taking over of Management) Act, 1978.
Whether the notification issued under Section 7(1)(b) of the Act suspends secured liabilities to banks and financial institutions.
Whether the liability of guarantors is suspended by the same notification.
Interpretation of Section 7(1)(b) and Section 7(4) of the Sugar Undertakings Act.
Application of Section 128 of the Indian Contract Act, 1872 to the liability of sureties.

Legislation cited

Indian Contract Act, 1872s. 128
Sugar Undertakings (Taking over of Management) Act, 1978s. 3, s. 5, s. 7(1)(b), s. 7(4)

Subjects

secured loanmortgageguarantor liabilitySugar Undertakings Actnotificationstay of proceedingsIndian Contract Actsuretycentral government takeover

Judgment

290

A
STAl'E BANK OF INDIA
v.
SAXSARIA SUGAR KILLS LTD. AND ORS.

FEBRUARY 14, 1986.

B [E.S. VENKATARAMIAH AND M.P. THAKKAR, JJ.]

The Sugar Undertakings (Taking over of Management) Act ~
1978, s.7(l)(b) - Sugar Undertaking Notified - Only obliga-
tions, rights, liabilities etc. arising out of contracts,
assurances of properties or · agreements specified in the
C Notification issu.!d remain suspended and unenforceable -
Remedies against guarantor/surety - Not suspended.

Indian Contract Act, 1872, s. 128 - Liability of surety
- Whether co-extensive with that of principal debtor.

D The Sugar Undertakings (Taking over of Management) Act,
1978, by Clause (b) of section 7(1) mipowers the Central
Govenment to issue a notification declaring that the opera-
.tion of all or any of the contracts, usnrances of property,
agr._t•, aettlaenta, awards, standing orders or other
instramenta, in force (to which a notified sugar undertaking
E or the person Olllling snch undertaking is a party or which 118}'
be applicable to snch sugar undertaking or person) imediately
· before the date of isaae of the notification shall rmain
••pended or tha1; all or any of the rights, privileges,
•llligations and . liabilities accruing or arising thereunder \...
llefore the aaid date shall remain suspended or shall. be
F anforcesble with snch adaptations and in such unner u 118}' be
apecified in the notification. Sub-1iection (4) of section 7 of
tba Act provides that any ready for the enforcement of any
right, privilege, obligation or liability referred to in
cl-~ (b) of sub-1iection (1) of section 7 and suspended or
modified by a notification mada under that sub-1iection shall
G ill accordance with the terms of the notification, remain
auspended or llOdified and all proceedings relating thereto
pending before any Court, tribunal, officer or other authority
ahall accordingly rnain atayed or ~ continued subject to~
•nch adaptations, so, howet'er, that on the notification
ceuing to have effect (a) any right, privilege, obligation or
H
STATE BANK v. SAKSARIA SUGAR MILLS 291

A
liability so remaining suspended or modified shall become
-t revived and enforceable as if the notification had never been
made; and (b) any proceeding so remaining stayed shall be
proceeded with subject to the provisions of any law which may
then be in force .from the stage which had been reached when
the proceedings became stayed. B

The appellant, State Ban1t of India, had allowed cash
credit facility to respondent No. 1, M/s. Saksaria Sugar Mills
Ltd., on the security of goods produced at its Sugar Factory
and the title deeds of its i1111110vable properties deposited with
the appellant by way of equitable mortgage to secure the
amount advanced under the ~aid cash credit facility• c
Respondents Nos, 2 to 5 had agreed to be the guarantors for
the repayment of any amunt dae from respondent No. l under
the said cash credit aceount. Since there was default in the
repayment of the amount dae under the said caah credit
account, the appellant instituted a suit against respondent
Nos. l to 5 for recovery of a sum of Rs. 54,89,822,99, In the D
meanwhile, the Central Government took over the Sugar under-
.. taking belongliig to Respondent No. l under the provisions of
the Act and appointed a Custodian of the said undertaking.

In the suit, respondent Nos. · l to 5 pleaded that the
suit was liable to be stayed in view of the provisions of the E
Act• The Trial Court held that it had jurisdiction to try the
suit. In revision, the High Court held that the trial of the
suit in so far aa prayer for d~cree for Rs. 54,89,822.99
against respondent Nos. l to 5 waa .concerned, waa liable to be
stayed by virtue of the provisions of the Act and that the
,.... trial of the suit with regard to all other matters may F
proceed. The High Court also dismissed an application filed by
the appellant seeking clarification of the· aforesaid order.
Hence these appeals by Special Leave.

Allowing the appeals,
G
lllW: l. The order paased by the High Court is set aaide
and the trial court is directed to proceed with the suit.
[299 F]

,. . 2, The Sugar Undertakings (Taking over of Manageaent)
Act 1978 does not provide that on a sugar undertaking being H
292 SUl'REME COURT REPORTS [1986] 1 s.c.a.

A
notified, automatically all the COBtrmcta, uaurances of
property or agree111nt• etc. entered into by auch augar
undertaking would beco• unenforceable. It atatea that only
those contracts, uaurancea of property or agree111nta etc.
which are specified in the notification issued under Hction
7(l){b) (not all contracts) would becOllO suspended ad the
rights, privileges, obligations and liabilities arising Glider
B
the• would not be enforceable. (297 I>-F]

In the instant cue, the Central Government haa ude a
declaration by Notification dated 21.3,84 to the effect that
the operation of all obligations and liabilitiea accruing or
arising out of all contracts, aaaurancea of properties,
c agree.uts, settlements, awards, standing orders or other
instrwoeui:s in force i-.liately before the 28th March 19ll0
(other tJum. those relating to aecanid.1:1.abilJ.ties to ..U ...
ffn•cf.al :hlstitut1-) to which the aaid augar uadertalting or
the person owoing-the aaid sagar,undertalting -£1 a party ahall
remain suspended up to March 12, 1985. It ia very clearly
D
stated in the said Notification th.at it does not apply to
secured liabilities due to banks and financial inatitutiona.
The liability involved in the auit waa a secured liability and
the creditor is the State Banlt of India. Since all secured
liabilities due to a bank or a financial institution are
excluded from the operation of the Notification, the aait
E
against respondent No. l as well aa respondent Noa. 2 to 5
remained unaffected by the Notification. (298 E-G; 299 E]

3, The Act does not say that when a notification ia
issued under section 7(l)(b) of the Act, rellll!dies against the
guarantors also stand suspended. Moreover, under section 128
F of the Indian Contract Act, 1872, aave as provided in the i,
. contract, the liability of the surety is co-extensive with "
that of the principal debtor. The sureties thus bee&llO liable
to pay the entire amount. Their liability wu immediate and it
was not- deferred until the creditor exhausted hia remedies
against the principal debtor. Th~refore, the order of the High
G
Court against respondent Nos. 2 to 5 1a untenable. (299 I-ii]

Bank of Bibar Led. "'• Dmoclu Praad 6 Aar. (1969] l
S,C,R. 620, referred to.

H
CIVIL APFELLATE JURISDICTION : Civil Appeal Nos. 569-70
of 1986.
""
STATE BANK v. SAKSARIA SUGAR MILt.S [VENKATARAMIAH, J.] 293

A
4 From the Judgment and Order dated 25.5.1984/22.2.1985 of
the Allahabad High Court in C.M.An. No.644(M) of 1984 in C.Jl.
No. 136 of 1982.

Y.S. Chitale and S.A. Shroff for the Appellant.
B
Yogeshwar Prasad and S.R. Srivastava for the Respondents.

The Judgment of the Court was delivered by

VEllKATABAMIAll, J. These appeals by special leave are
filed against the order dated May 25, 1984 passed by the High
Court of Allahabad in Civil Revision No. 136 of 1982 and the c
order dated February 22, 1985 in C.M.A. No.644(M) of 1984 on
the file of that Court.

The appellant, the State Bank of India, had allowed cash
credit facility to M/s. Saksaria Sugar Mills Ltd., respondent
> No. I herein, on the security of the goods produced at the D
sugar factory belonging to respondent No.I. Respondent No.I
had also deposited in the Bombay office of the State Bank of
India on February 2, 1962 by way of equitable mortgage the
title deeds of its immovable properties to secure the amount
advanced under the said cash credit facility. Respondents Nos.·
2 to 5 M/s. Govind Ram and Brothers, Shri K.G. Saksaria, Shri E
G.L. Vaid and Shri R.K. Saksaria had agreed to be the guarant-
ors for the repayment or any amount due from respondent No.l
under the said cash credit account. Since there was default in
repayment of the amount due under the said cash credit account
the State Bank of India instituted a suit in Suit No. 18 of
_, 1980 on the file of the Additional District Judge, Gonda for F
recovery of a sum of Rs.54,89,822.99 as on March 6; 1980
against respondents Nos. 1 to 5 who were described as defen-
dants Nos.• I i:o 5 in the plaint praying for a decre.e in terms
of order 34, rule 4 C.P.C. and further consequential
directions. In the meanwhile by virtue of an order made by the
Central Government under the Sugar Undertakings (Taking over G
of Management) Act, 1978 (Act No.49 of 1978) (hereinafter
referred to as 'the Act' ) the sugar undertaking belonging to
respondent No. I had been taken over by the Central Government
and one Raghubir Singh had been appointed as the Custodian of
"&the said undertaking. The State Bank of India, therefore,
impleaded Raghubir Singh and the Union of India also as H
defendants Nos. 6 and 7 in the suit. In the suit respondents
294 SUPREME COURT REPORTS [1986] 1 S.C.R.

A
Nos. 1 to 5 pleaded inter alia that the trial court had no f-
territorial jurisdiction to try the suit and that the suit was
not maintainable and at any rate the suit was liable to be
stayed in view of the provisions of the Act. 'the trial court
had framed two issues arising out of the above pleas, The
defendants filed an application before the trial court on
B September 6, 1982 requesting it to decide first the above two
issues relating to its jurisdiction and its competence to
proceed with the suit. After hearing the parties the trial
court found that it had jurisdiction to try the suit as the
properties given as security were situated within its juris-
diction and that there was no impediment to proceed wi.th the
c trial notwithstanding the fact that the management of the mill
of respondent No.! had been taken over by the Central Govern-
ment under the Act. Aggrieved by the said decision of the
trial court, respondent No.! filed a revision petition in
Civil Revision No. 136 of 1982 before the High Court of
Allahabad. The High Court allowed the rev~sion petition hold-
D ing that the trial of suit in so far as relief No.l namely the
prayer for decree for Rs. 54,8.9,822.99 against respondent Nos.
1 to 5 was concerned was liable to be stayed by virtue of the
provisions of the Act. The High Court, however, directed that
the trial of the suit with regard to all other matters may
proceed. Since the only relief prayed .in the suit was in
E respect of the recovery of Rs.54,89,822.99 from respondents
Nos. 1 to 5 in accordance with the provisions of order 34,
rule 4 C.P,C. and that had been stayed, the State Bank of
India applied to the High Court by filing an application No.
C.M.A, 644(M) of 1984 for clarification as to what other
matter could be tried in the suit. That application was
F rejected by the High Court by its order dated February 22, i-
1985 holding that the provisions of order 34, rule 4 C.P,C,
were quite clear and it was for the court below to proceed in
accordance with law. The High Court was of opinion that the
order needed no further clarification. Aggrieved by the others
passed on revision in Civil Revision No, 136 of 1982 and the
G order pa.•sed in C.M.A. No. 644(M) of 1984 the State Bank of
India has filed this appeal by special leave.

The only question canvassed before us by the parties
relates to the question whether the trial of the suit should
be stayed by reason of the provisions of the Act. There is no·ai
H dispute about the territorial jurisdiction of the trial court.
It is contended by respondents Nos. 1 to 5 that since the
STATE BANK v. 'SAJ<SARIA SUGAR MILLS [VENKATARAMIAH, J.] 295

A
management of the sugar undertaking belonging to the respon-
dent No. 1 had been taken over by the Central Government under
the Act, the trial of the suit filed against respondent No. 1
for recovery of any amount due from the sugar undertaking was
liable to be stayed. It is no doubt true that the Central
Government has taken over the management of the sugar under- B
taking belonging to the respondent No. 1 by issuing a notifi-
cation under section 3 of the Act and has appointed a
Custodian under section 5 thereof. The material part of
section 7 of the Act which is relevant for the purposes of
this case reads thus :

"7. Power of Central Government to make certain c
declarations.- (1) The Central Government may, if
it is . satisfied, in relation to a notified sugar
undertaking that it is necessary so to do in the
interests of the general public with a view to
preventing the fall in the volume of production of
the . sugar industry, it may, by notification, D
declare that-

(a).••••••.•••••••• •• •••••••• •• ••~•••••••••-• •••••• •

(b) the operation of all or any of the contracts,
assurances of property, agreements, settlements, E
awards, standing orders or other instruments in
force (to .which such sugar undertaking or the
person owning such undertaking is a party or which
may be applicable to such sugar undertaking or
person) immediately before the date of issue of the
notification shall remain suspended or that all or F
any of the rights, privileges, obligations and
liabilities accruing or arising thereunder before
the said date, shall remain suspended or shall be
enforceable with such adaptations and in such
manner as may be specified in the notification.
G
....................................................
( 4) Any remedy for the enforcement of any right,
privilege, obligation or liability referred to in
clause (b) of sub-section (1) and suspended or
modified by a notification made under that sub- H
section shall, in accordance with the terms of the
296 SUPREME COURT REPORTS [1986] 1 s.c.R.

A
notification, remain suspended or modified and all
proceedings relating thereto pending before any
Court, tribunal, officer or other authority shall
accordingly remain stayed or be continued subject
to such adaptations, so, however, that on the noti-
fication c:easing to have effect -
B
(a) any right, privilege, obligation or liability
so remaining suspended or modified shall become
revived and enforceable as if the notification had
never been made;

c (b) any proceeding so remaining stayed shall be
proceeded with subject to the provisions of any law
which may then be in force, from the stage which
had been reached when the proceedings became stay-
ed."

D Clause (b) of section 7(1) of the Act which is extracted
above empowers the Central GoveI'Il.IIent to issue a notification
declaring that the operation of all or any of the contracts,
assurances of property, agreeroonts, settlements, awards,
standing orders or other instruments in force (to which a
notified sugar undertaking or the person owning such under-
E taking is a party or which may be applicable to such sugar
undertaking or person) immediately before the date of issue of
the notification shall remain suspended or that all or any of
the rights, privileges, obligations and liabilities accruing
or arising thereunder before the · said date shall remain
suspended or shall bE! enforceable with such adaptations and in
F such manner as may be specified in the notification. Sub-
section (4) of section 7 of the Act provides that any remedy
for the enforcement of any right, privilege, obligation or
liability referred to in clause (b) of sub-section (1) of
section 7 and suspended or modified by a notification made
under that sub-section shall in accordance with the terms of
G the notification, remain suspended or modified and all pro-
ceedings relating thereto pending before any Court, tribunal,
officer or other authority shall accordingly remain stayed or
be continued subject to such adaptations, so, however, that on
the notification ceasing to have effect (a) any right,
privilege, obligation or liability so remaining suspended or l,,t
H modified shall become revived and enforceable as if the noti-
STATE BANK v. SAKSARIA SUGAR MILLS [VENKATARAMIAH, J.] 297

A
.4 fication had never been made; and (b) any proceeding so
remaining stayed shall be proceeded with subject to the
provisions of any law which may then be in force from the
stage which had been reached when the proceedings became
stayed.
B
A reading of clause (b) of sub-section (1) and sub-
section (4) of section 7 of the Act makes it clear that it is
only on the issuance of a notification by the Central Govt.
under section 7(l)(b) containing the necessary declaration
that the operation of all or any of the contracts etc. entered
into by the notified sugar undertaking which are referred to
in the said notification shall remain suspended or that all or c
any of the rights, privileges, obligations and liabilities
accruing or arising thereunder before the said date shall
remain suspended. The Act does not provide that on a sugar
undertaking being notified, automatically all the contracts,
9Ssurances of property or agreements etc. entered into·by such
sugar undertaking would become unenforceable. It states that D
only those contracts, assurances of p:C-operty or agreements
etc. which are specified in the notification issued under
section 7(l)(b) (not all contracts) w0uld become suspended and
the rights, privileges, obligation and liabilitiAS arising
under them would not be enforceable. In the instant case the
Central Government has issued notifications from time to time E
specifying the contracts, assurances of property, agreements
etc •.the operation of which would stand suspended or stayed
during the period of its managE!ment of the sugar undertaking
in question. The latest notification issued in that connection
is dated March 21, 1984. It reads thus
F
"s.o, 181 (E) Whereas the Central Government is
satisfied that in relation to the Saksaria Sugar
Mills Limited manufacturing sugar at Badhanan in
the district of Gonda in the State of Uttar Pr1desh
being the notified sugar undertaking, it is neces-
sary so to do in the interests of the general G
public with a view to preventing the fall in the
volume of production of the sugar industry.

Now, therefore, in exercise of the poWers cqnferred
by clause (b) of sub-section (1) read with sub-
section (2) · of section 7 of the Sugar Undertakings H
(Taking Over of Management) Act, 1978 (49 of 1978),
298 SUPREME COURT REPORTS [19861 1 s.c.R.

A
and in continuation of the notification of the
Government of India in the Ministry of Food and
Civil Supplies (Department of Food) No. S.O. l.96(E)
dated the 22nd March 1983, the Central Government
hereby declares that the operation of all obli-
gations and liabilities accruing or arising out of
II all contracts, assurances of property, agreements,
settlements, awards, standing orders or other
instruments in force immediately before the 28th
March, 1980 (other than those relating to secured
liabilities to banks and financial institutions) to
which the said sugar undertaking or the person
c owning the said sugar undertaking is a party, or
which may be applicable to the said sugar under-
taking or that person, shall remain suspended for
a further period from 28th March, 1984 to
12.3.1985."

D The above notification clearly sets out the contracts,
assura0ces of property etc. the operation whereof is suspended
or stayed. The Central Government has made a declaration by
that notification to the effect that the operation of all
obligations and liabilities accruing or arising out of all
contracts, assurances of properties, agreements, settlements,
E awards, standing orders or other instruments in force imme-
diately before the 28th March 1980 (other than those relat:hig
to secured liabilities to banks and financial institutions) to
which the said sugaI' undertaking or the person owning the said
sugar undertaking is a party shall remain suspended up to
March 12, 1985; It is very clearly stated in the said noti-
F fication that it does not apply to secured liabilities due to
banks and financial institutions. The liability involved in
the suit was a secured liablity and the creditor is the State
Bank of India. Yet the High Court surprisingly has proceeded
to hold that the operation of the contract, assurance of
property and agreement in respect of the undertaking and its
G property entered into with the State Bank of India is to be
suspended and the suit in respect of them should be stayed in
vie~ of the Act and the notification issued thereunder.

It is unfortunate that the High Court err.ed in overlook-
ing words "other than those relat:hig to secured 'iiabilities to 11
H banks and finaricial institutiana" referred to in the noti-
fication which had the effect of excluding the mortgage in
STATE BANK v. SAKSARIA SUGAR MILLS [VENKATARAMIAH, J,) 299

A
ci favour of the State Bank of India from the scope of the noti-
fication issued under section 7 of the Act. The High Court
further erred in not noticing that even when a notification is
issued under section 7(l)(b) of the Act suspending the opera-
tion of any agreement or assurances of property to which a
notified sugar undertaking or the person owning is a party, B
any proceeding against the guarantor would remain unaffected
by the issuance of such a notification. Under section 128 of
the Indian Contract Act, 1872, save as provided in the
""· contract, the liability of the surety is co-extensive with
that of the principal debtor. The sureties thus became liable
to pay the entire amount. Their liability was immediate and it
was not deferred· until the creditor exhausted his remedies C
against the principal debtor •. The Act does not say that when a
notification is issued under section 7(l)(b) of the Act the
remedies against the guarantors also stand suspended. In any
event the order of the High Cour.t against respondents Nos. 2
to 5 is untenable. (See Bani< of Bihar Ltd. v. Da.odar Prasad &
"' Anr., [1969) 1 s.c.R. 620). n

Since in t.he instant case all secured liabilities due to
a bank or a financial institution are excluded from the
operation of the notification, the suit against respondent
No.l as well as respondents Nos. 2 to 5 remained unsffected by
·the notification issued by the Central Government. The order E
of the High cOurt in the Civil Revision is, therefore, liable
to be set aside. We accordinly set aside the orders passed by
the High Court against Which these appeals are filed and
direct the trial court to proceed with the suit. The appeals
are accordingly allowed. Respondents Nos. 1 to 5 shall pay the
-~ costs of the appellant. F

M.L.A. <\?peals allowed.