Kantilal R. Shah v. Central BANK OF INDIA — 1994 DIGILAW 400 (GUJ)

S. M. SONI, J. ( 1 ) RULE. Learned Advocate Mr. J. T. Trivedi waives service of Rule for the respondent. With the consent of learned advocates for the parties, this application is heard for final hearing today. ( 2 ) APPLICATION Ex. 136 in Special Suit no. 63 of 1982 filed by the defendant- present petitioner came to be rejected by the learned 2nd Joint Civil Judge (S. D.) by his order dated 11-1-94. Defendant by that application prayed for the stay of the further proceedings of the suit and in the alternative for return of plaint to the plaintiff-respondent for presentation to the proper authority. ( 3 ) PLAINTIFF had advanced loan to one m/s Kanti Cotton Mills of whom the defendant had stood surety. This plaintiff is a creditor, defendant is a surety and said M/s. Kanti Cotton Mills is a principal debtor. They are so referred hereinafter in this judgment. Creditor bias filed Special civil Suit No. 42/86 against principal debtor and the said suit came to be returned to creditor for presentation to competent authority under the Gujarat closed Textile Undertakings (Nationalisation) Act, 1986 (the Act for short ). Creditor had filed Special Civil suit No. 63/82 against surety to recovery the guarantee amount, which he had stood for principal debtor. In the said suit, surety gave an application Ex. 136 contending, inter alia, that the suit be stayed till the disposal of proceedings pending before the competent authority against the principal debtor. Until the liability of the principal debtor and the extent thereof cannot be determined by the competent authority, liability of the surety cannot be fixed and in the alternative, this suit also be returned to the competent authority. ( 4 ) THE plaintiff opposed the application on the ground that the liability of the surety is co-extensive under Section 128 of the Contract Act and the creditor is entitled to proceed against principal debtor and surety simultaneously. There is no bar to proceed simultaneously against both or either. Secondly, the provisions of the Act do not cover the liability of the surety and the question of return of plaint does not arise. ( 5 ) LEARNED Civil Judge after hearing the Advocates rejected the application Ex. 136, against which the present application is filed. Mr. There is no bar to proceed simultaneously against both or either. Secondly, the provisions of the Act do not cover the liability of the surety and the question of return of plaint does not arise. ( 5 ) LEARNED Civil Judge after hearing the Advocates rejected the application Ex. 136, against which the present application is filed. Mr. p. M. Thakkar, learned counsel, has challenged the said order on the ground that the liability of the principal debtor is either scaled down, reduced or extinguished under the Act. It is further contended that till the liability of the surety (sic. principal debtor) is determined, the claim against the surety cannot be adjudicated muchless extent of liability can be determined. Mr. J. T. Trivedi, learned Counsel appearing for the creditor, contended that the liability of the surety is co-extensive with that of principal debtor and unless the liability of the principal debtor is extinguished or reduced by any agreement between creditor and principal debtor the liability of surety under the agreement of surety is not affected. ( 6 ) MR. Thakkar, relying on the following judgments, contended that the liability of the surety shall stand either reduced or extinguished to the extent the debt of the principal debtor is scaled down. ( 7 ) IN the case of Subramania v. Narayanswami (A. I. R. 1951 Madras 48), a suit was filed against debtors for the amount due on promissory note. There, the principal debtors claimed that they were entitled to a scaling down of the debt under the Madras Agriculturists relief Act. It was the case of the surety that he was entitled to scaling down of the whole debt under the Madras agriculturists Relief Act as his guarantee even if there was one would amount only to a guarantee of the amount actually payable by the principal debtor on the dates of his renewal of it after 22-3-1938. There, in that case, after considering the provisions of Section 128of the Act, the full Bench held, in answering the question referred to it, as follows :"that a non-agriculturist surety will not be liable for the entire debt when the principal debt has been scaled down under the Madras Agriculturists Relief act and that his liability will be co-extensive with that of the agriculturist principal debtor. "it will be pertinent to note that in that case, Subamania had sought scaling down under the provisions of Madras agriculturists Relief Act. ( 8 ) NEXT judgment on which Mr. Thakkar relied is the case of Babu Rao v. Manaklal (A. I. R. 1983 Nagpur 413 ). In that case, the defendant had guaranteed to pay Rs. 400/- out of a loan of Rs. 1100/- borrowed by one Rajmal from the plaintiff. The defendant paid Rs. 220/- and left the balance of Rs. 180/- outstanding. Rajmal applied to the Debt conciliation Board for settlement of his debts. Before the Board, the plaintiff excluded from his statement of debts this debt of Rs. 400/- declaring that he would recover it from the surety (defendant ). The plaintiff filed the suit out of which the revision in question arose, to recover rs. 219. 13. 9 including interest and cost of notice. Therefore, the lower court held that the defendants right as a surety to have recourse to his remedy against the principal debtor was impaired by the plaintiffs act of withholding the debt in suit from the statement of his debts submitted to the Debt Concilation Board and that the legal consequence under section 15 (3), Debt Conciliation Act, was that the defendant was discharged from liability in view of Section 134 of the contract Act. That judgment of the lower Court was under challenged before the Nagpur Bench of the Bombay high Court and that Court held that the original debt cannot be regarded as subsisting. Granting for the once that it subsists, it cannot be overlooked that under Section 15 (3), Debt Concilation act the suretys remedy is very substantially impaired. The plaintiff by lifting the burden of the debt of the shoulders of the principal debtor and laying it on those of the surety, seeks virtually to shift his own disability entailed by the Debt Conciliation Act on to the surety, in an aggravated form. The nagpur Bench, therefore, in substance held that the plaintiff was not entitled to recover debt from the principal debtor under the provisions of Section 15 (3) of the Debt Conciliation Act. The nagpur Bench, therefore, in substance held that the plaintiff was not entitled to recover debt from the principal debtor under the provisions of Section 15 (3) of the Debt Conciliation Act. The remedy of the plaintiff was impaired against the principal debtor and when the plaintiff was not able to recover the amount from the principal debtor, his right to recover from the guarantor was also impaired under Section 134 of the Contract Act. ( 9 ) MR. Thakkar also relied on the judgment in the case of Narayan Singh v. Chhatarsingh (A. I. R. 1973 Raj. 347 ). There also, decree was passed against the debtor who at the time of execution of the decree by the judgment creditor, made an application under Section 6 of the rajasthan Relief of Agricultural indebtedness Act, 1957 and the question that arose was whether liability of the surety even after the decree is passed by a competent court is co-extensive with that of the principal debtor and if any relief is granted to the principal debtor by the debt Relief Court, can the surety also take advantage of that relief? The rajasthan High Court in that case, after relying upon the judgment in Babu Raos case (supra) has held that the decree even if passed would not change the position of a surety except that if the decretal amount is realised from the surety- judgment debtor, then it would confer a right on him to realise that amount from the principal debtor against whom the decree also stands. The test applied by the rajasthan High Court is that the debt must exist. ( 10 ) MR. Thakkar also relied on the judgment in the case of Aypunni Mani v. D. Kochouseph (A. IR. 1966 Kerala 203 ). There, the appellant had obtained a decree against the second respondent and the second respondent had filed the appeal before Kerala High Court. There, the respondent was the surety. When the execution was filed against the judgment- debtor, i. e. the principal debtor and the surety, the judgment-debtor claimed himself to be an agriculturist entitled to the benefit of the Kerala Act 31 of 1958 and had filed M. P. No. 1461 of 1960 depositing the four instalments as required by the Act and claiming benefits thereunder. When the execution was filed against the judgment- debtor, i. e. the principal debtor and the surety, the judgment-debtor claimed himself to be an agriculturist entitled to the benefit of the Kerala Act 31 of 1958 and had filed M. P. No. 1461 of 1960 depositing the four instalments as required by the Act and claiming benefits thereunder. There, the Kerala High Court held as under:"it appears to us that Section 128 of the Indian Contract Act, sketches the ambit of liability of the surety when it enacts that the liability is co-extensive with that of the principal debtor. It has nothing to do with the consequences of recovery of the debt. Such being the scope and intendment section, we feel that a statutory reduction or extinguishment of the principal debtors liability will operate as a pro tanto reduction extinguishment of the princial suretys debt. A reduction or extinguishment of the debt, is quite different from its unenforceability against the principal debtor by operation of the law of Bankruptcy or the statement of limitation. "it is further held as under:"it appears to us, that to hold otherwise, would be to altogether deny the benefit of the ameliorative provisions of the Act, to the agriculturist-debtor. On any other view, it would be open to the creditor to recover the debt as scaled down from the agriculturist debtor, and the balance from the surety, and the latter in his turn could seek reimbursement from the principal debtor. " ( 11 ) IT is thus, clear from the above decisions that the liability of the principal-debtor is either scaled down, reduced or extinguished under some Act. Principal debtor is a beneficiary under the said Act. Said Act is legislated with an only view to ameliorate such persons covered under the Act. Thus, liability of the principal-debtor is either scaled down or reduced or extinguished. If the liability of the surety is not accordingly effected, it would only create an anomalous situation by there being different decrees in respect of the same subject-matter. ( 12 ) KEEPING in mind the ratio of the judgments referred to by Mr. Thakkar, learned Counsel appearing for the creditor, it is to be considered whether there is any scaling down, reduction or extinguishment of the liability of principal debtor under the Act. ( 12 ) KEEPING in mind the ratio of the judgments referred to by Mr. Thakkar, learned Counsel appearing for the creditor, it is to be considered whether there is any scaling down, reduction or extinguishment of the liability of principal debtor under the Act. Preamble of the Act reads as under:"an Act to provide for the acquisition and transfer of the closed textile undertakings, and the right, title and interest of the owners in respect of the closed textile undertakings specified in the first schedule with a view to reorganising and reconstructing the said textile undertakings and thereby forming viable units to subserve the interest of the general public by the augmentation of the production and distribution, at fair prices of different varieties of cloth and yarn, and for matters connected therewith or incidental thereto. " ( 13 ) THIS Act is enacted by the legislature for the purpose to take care to reorganise and reconstruct the textile undertakings and to form viable units to subserve the interest of the general public by the augmentation of the production and distribution at fair prices of different varieties of cloth and yarn and for matters connected therewith or incidental thereof. Therefore, the Act is not to ameliorate the unit owners. ( 14 ) IT will be relevant to look at the scheme of the Act. Section (3)1 provides for absolute vesting in the State government of every specified textile undertaking from appointed day and night, title and interest of the owner in relation to every such textile undertaking. Such undertaking also stands immediately transferred in the corporation under Section 3 (2 ). Section 4 provides for general effect of vesting. Section 5 provides that any liability of the owner of the textile undertaking, despite absolute vesting of such textile undertaking for the period prior to the appointed day, shall be the liability of the owner and shall be enforceable against him and not against the State Government or Corporation. Section 6 provides for deemed contribution of an amount equal to the value of the assets of the specified textile undertaking by the State government to the Corporation. Section 7 provides for payment of amount to owners in the manner specified in chapter V (Sections 12 to 21 ). Section 11 provides for employment of certain employees. Section 12 provides for appointment of commissioner of payment. Section 7 provides for payment of amount to owners in the manner specified in chapter V (Sections 12 to 21 ). Section 11 provides for employment of certain employees. Section 12 provides for appointment of commissioner of payment. Section 13 provides for making a claim other than the claim relating to gratuity or Compensation for retrenchment or closure to the commissioner. Section 16 provides for priorities of claims stated in the Second schedule. Section 1-7 provides, for examination of claims and Section 18 provides for adjudication of claims. Section 19 provides for disbursement of money to the claimant and Section 20 provides for disbursement to owners of specified textile undertaking. Section 21 provides for deposit of undisbursed or unclaimed amount. Chapter VI (Sections 22 to 33) pertains to miscellaneous. ( 15 ) FROM the scheme of the Act, it is clear that by the Act the liability of the principal debtor is neither scaled down nor reduced nor extinguished. It is ma. de clear by Section 5 that liability of the owner of the specified textile undertaking for the period prior to the appointed day remains and continues to be the liability of such owner. The State Government or the Corporation has to do nothing with the same. Under the Act, the State government contributes an amount equal to the value of assets of the specified textile undertaking and no other property of the principal debtor. It is also clear that the balance of amount after disbursement as per priority will be paid to owner under Section 20. From all these provisions, it is clear that liability of the owner principal debtor is neither reduced nor scaled down nor extinguished. There is also no provisions which directly or indirectly impairs the creditor of his claim against the principal debtor. The liability of the principal debtor is not affected by the Act and so also the liability of the surety, more particularly when it is co-extensive under Section 128 of the Contract Act. ( 16 ) LEARNED Advocate Mr. Trivedi for the respondent has relied on number of judgments. I would like to refer to one of the judgment of the Supreme Court in the case of State Bank of India v. Indexport registered (1992) 3 SCC 159 ). In the case before the Supreme Court, a loan was taken by the Board, viz. respondent no. Trivedi for the respondent has relied on number of judgments. I would like to refer to one of the judgment of the Supreme Court in the case of State Bank of India v. Indexport registered (1992) 3 SCC 159 ). In the case before the Supreme Court, a loan was taken by the Board, viz. respondent no. 1 which consisted of Bhaneshwar kumar Jain and Ajay Kishan Mehta (since deceased ). Respondent No. 2 had created an equitable mortgage of his shop as security and respondent No. 4, father of late Ajay Kishan Mehta stood as guarantor for the loan to respondent No. 1. The Supreme Court, while considering the liability of the surety, has observed as under:"in the present case before us, the decree does not postpone the execution. The decree is simultaneous and it is jointly and severally against all the defendants including the guarantor. It is the right of the decree holder to proceed with it in a way he likes. Section 128 of the Indian Contract Act itself provides that "the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract". In Pullock and Mulla on Indian contract and Specific Relief Act, Tenth edition at page 728, it is observed thus:"co-EXTENSIVE - Surveys liability is co-extensive with that of the principal debtor. "a suretys liability to pay the debt is not removed by reason of the creditors omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued. In Chitty On Contracts, 24th Edition, vol. 2 at page 1031, paragraph 159 page 87, it has been observed that:"conditions precedent to surety - prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor. "in Halsburys Laws of England. Fourth edition, Vol. 20, paragraph 159 page 87, it has been observed that:"it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for. "in Hukumchand Insurance Co. "in Halsburys Laws of England. Fourth edition, Vol. 20, paragraph 159 page 87, it has been observed that:"it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for. "in Hukumchand Insurance Co. Ltd. v. Bank of Baroda, a Division Bench of the high Court of Karnataka had an occasion to consider the question of liability of the surety vis-a-vis the principal debtor. Venkatchaliah J. (as His Lordship then was) observed:"the question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety, which is 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 from the same transaction, the two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously. It will be noticed that the guarantor alone could have been sued, without even suing the principal debtor, so long as the creditor satisfies the court that the principal debtor is in default". ( 17 ) IN my opinion, the extinction ro reduction of the liability of the surety would hinge upon the extinction/ reduction of the liability of the principal debtor under provisions of law, if any, of enactments like Agricultural Debtors relief Act. If the liability of the principal debtor is either extinguished or reduced, that of the surety may also stand pro tanto extinguished or reduced. However, in the instant case before me, the liability of the principal debtor is neither extinguished nor reduced under any of the provisions of the Act. It is only that the textile unit is taken over by the Government in public interest and compensation is provided to the owner by taking into consideration his indebtedness. But there is rider in the act in that it provides that in case such liability is taken over, Government is not liable for the balance or liability of the owner. Thus, it is clear that the debt of the principal debtor is neither extinguished nor reduced and, therefore, the liability of the guarantor does not get extinguished or reduced. But there is rider in the act in that it provides that in case such liability is taken over, Government is not liable for the balance or liability of the owner. Thus, it is clear that the debt of the principal debtor is neither extinguished nor reduced and, therefore, the liability of the guarantor does not get extinguished or reduced. ( 18 ) IT is amply clear that Sections 133 and 134 of the Contract Act do not exonerate a surety from his liability. where the same is sought as a result of some enactment like the Act in the present case. If the provisions of such a law result in reducing/extinguishing the liability or rather the debt itself, the surety can certainly claim reduction/ extinction of his liability to the same extent. But for adjudging such reduction/ extension, the provisions of the particular enactement itself would have to be considered. There cannot be a general statement that the surety generally gets discharged of his liability by operation of law, though he certainly may get so discharged by the provisions of any particular legislation. Thus, if the principal debtor gets any benefit under some legislation of an ameliorative nature like Agriculture Debtors Relief Act, it cannot be said that there is any act, omission or agreement by the creditor, the provisions of the contract Act would be of no avail to the surety in such a case. Therefore, unless the particular Statute itself specifically provides for discharge for extinction/reduction of the debt itself, the surety would continue to remain liable, as he is answerable under his own contract with the creditor. A statute would generally leave the parties to the terms of the contract itself, except in cases of enactments of ameliorative nature and specially providing for surety, no reduction/extinction of the liability itself would be effective. The Debt Relief Acts fall in the category of being of an ameliorative nature, enacted to prevent usury and the stranglehold of moneylenders. ( 19 ) AS a principal debtor gets benefit independent of the act or omission or forbearance of the creditor, the surety does not get himself relieved of his liability, though his liability is conextensive with that of the principal debtor. ( 19 ) AS a principal debtor gets benefit independent of the act or omission or forbearance of the creditor, the surety does not get himself relieved of his liability, though his liability is conextensive with that of the principal debtor. Therefore, the learned Judge, in not staying the suit and not returning the plaint for presentation to the conpetent authority, has not committed any error which requires to be interfered with by this court under the provisions of Section 115 of the Code of Civil Procedure. Hence, this application is liable to be dismissed and it is hereby dismissed with no order as to costs. The Trial Court is directed to expedite the suit, keeping in mind its diary. Revision dismissed. .