KERALA STATE FINANCIAL ENTERPRISES LTD. v. THAMPI — 1999 DIGILAW 50 (KER)

JUDGMENT K. Narayana Kurup, J. - The petitioner is a fully owned Government of Kerala undertaking engaged in the business of Chitties, Hire Purchase and Kerala undertaking engaged in the business of Chitties, Hire Purchase and Financing. One Smt. J. Anandavally was a subscribed to Chitty No. 6/97/43A of the Attingal Branch of the petitioner company. The 1st respondent herein and one Dharmaraj and B. Ravindran Nair stood as sureties for the subscriber as per Ext. P1 agreement. Clauses 5 and 6 of Ext. P1 agreement state in categorical terms that the liability of the surety is co-extensive and joint and several with that of the principal debtor. Clauses 5 and 6 of Ext. P1 agreement are as follows : "5. The bounden and the sureties do hereby agree that all sums found due to the company under or by virtue of this bond may be recovered jointly and severally from them and their properties movable and immovable as if such sums are arrears of land revenue due in any other manner as the company may deem fit. 6. The liability of the sureties under this bond is co-extensive with that of the bounden and shall not be affected by the company giving time or any other indulgence to the boundern or by the company varying all or any of the terms and conditions of the variola or those herein contained." 2. When the subscriber committed default in paying the amount, the Branch Manager of the petitioner-company, Attingal Branch requested the 2nd respondent, the District Collector, Trivandrum, to initiate revenue recovery proceedings for recovery of a sum of Rs. 7,824/- plus interest and other charges therefrom 18-9-1990, being chitty dues in respect of Chitty No. 6/87/43A. On receipt of the requisition from the petitioner, the 2nd respondent, the District Collector initiated revenue recovery proceedings and consequently prohibitory order was served on the 1st respondent, one of these sureties in the chitty, for the attachment of Rs. 500/- per month from his salary. On receipt of the said order, the 1st respondent filed a revision petition under Section 83(1) of the Kerala Revenue Recovery Act (for short the Act) which was allowed as per Ext. P2 directing the requisitioning authority viz., the petitioner herein to take action against the defaulter alone thereby restraining action against the sureties. Aggrieved by Ext. On receipt of the said order, the 1st respondent filed a revision petition under Section 83(1) of the Kerala Revenue Recovery Act (for short the Act) which was allowed as per Ext. P2 directing the requisitioning authority viz., the petitioner herein to take action against the defaulter alone thereby restraining action against the sureties. Aggrieved by Ext. P2 order, the petitioner preferred P3 revision petition before the Government invoking section Ext. P. 83(2) of the Act. The revision petition was posted for hearing and ultimately by Ext. P4 order dated 8-11-1993, the 4th respondent, the State of Kerala dismissed the same. The challenge in this Original Petition is directed against Exts. P2 and P4 and to quash the same by the issuance of a writ of certiorari. The endorsement on the file shows that services is complete and the 1st respondent is represented by learned counsel Mr. Mathews J. Nedumpara. 3. Having heard counsel on both sides, I am of the opinion that the orders impugned in this Original Petition cannot stand the scrutiny of law even for a moment. The reasonings given in Ext. P2 and P4 cannot be legally sustained. They cut at the very root of the well settled legal principal that the legality of a surety is co-extensive with that or the principal debtor as adumbrated under Section 128 of the Indian Contract Act and interpreted by a catena of decisions of the Supreme Court and by this Court. What is stated in Ext. P2 order of the Board of Revenue, as justification for not proceeding against the 1st respondent surety, is that the husband of the defaulter (subscriber in the chitty under reference) is an Engineer and now working as an Asstt. Executive Engineer, Kerala State Electricity Board, Trivandrum on deputation to Rural Development Board, Trivandrum and that the husband of the defaulter is financially well off. What is stated in Ext. P4 order of the State of Kerala is that under Section 67 of the Act, the Government had discretionary powers under which it can enforce the revenue recovery proceedings against the sureties subsequent to their enforcement against the principal debtor. The reasoning contained in. Exts. P2 and P4 are so fallacious that it cannot be given imprimatur of this Court. P4 order of the State of Kerala is that under Section 67 of the Act, the Government had discretionary powers under which it can enforce the revenue recovery proceedings against the sureties subsequent to their enforcement against the principal debtor. The reasoning contained in. Exts. P2 and P4 are so fallacious that it cannot be given imprimatur of this Court. First all, it has to be noted that Section 128 of the Indian Contract Act which defines surety's liability says in categorical terms that liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Ext. P1 is the contract which defines the relationship between parties. In the fact of the specific legal provision contained in Section 128 of the Indian Contract Act, there may not be any justification in invoking the plea that the discretion vested with the Collector has to be exercised in favour of the surety. When dealing with the discretion of statutory authorities we are reminded of the classical constitutional doctrine that wide and unfettered discretion is incompatible with the rule of law. Courts have always frowned upon absolute and arbitrary exercise of discretionary powers which is capable of abuse as is in other power and will intervene to correct abuse or excess of discretion and to put the administrative authority in the correct trajectory. Therefore, notwithstanding conferment of discretionary powers its exercise has to be limited by rule of reason and law. For discretion is a science or understanding to discern between falsity and truth, between wrong and right, between shadows and substance, between equity and colourable glosses and pretenses, and not to do according to their will and private affections; for as one saith, tali discretion discretionem confundit. (Vide Rooke's case 1598(5) Co. Rep. 9(b). The aforesaid principle was applied in Keighley's case 1609(10) Co. Rep. 13(a) wherein it has been laid down that whenever an administrative authority has to do a thing at its discretion, it is to be understood of sound discretion, and according to law, and the Court has power to redress things otherwise done by them. Rep. 9(b). The aforesaid principle was applied in Keighley's case 1609(10) Co. Rep. 13(a) wherein it has been laid down that whenever an administrative authority has to do a thing at its discretion, it is to be understood of sound discretion, and according to law, and the Court has power to redress things otherwise done by them. An extensive discourse on the exercise of discretionary power is contained in the speeches of the Law Lords in Robert v. Hopwood (1925 AC 578), wherein the proposition of law is stated in the following terms : "A person in whom is vested a discretion must exercise his discretion upon reasonable grounds. A discretion does not empower a man to do what he likes merely because he is minded to do so - he must in the exercise of his discretion do not what he likes but what he ought. In other words, he must, by the use of his reason, ascertain and follow the course which reason directs. He must act reasonably." In other words discretion means "when it is said that something is to be done within the discretion of the authorities that something is to be done according to that rules of reasons and justice, not according to private opinion : Rooke's case; according to law and not humour. It is to be, not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man competent to the discharge of his ought to confine himself". (vide Sharp v. Wakefield (1891 AC 173)). These general principles are entrenched in our judicial system which is borne out by a catena of decisions of high authority deprecating exercise of unfettered discretionary power. Applying the aforesaid proposition of law to the facts of the present case, while passing the impugned order, it may be possible to say that respondents 3 and 4 have properly exercised their discretion under Section 67 of the Act. 4. The principle that the liability of a surety is joint and several and is co-extensive with that of the principal debtor is supported by the following decisions. 4. The principle that the liability of a surety is joint and several and is co-extensive with that of the principal debtor is supported by the following decisions. The Supreme Court in Bank of Bihar v. Damodar Prasad (AIR 1969 SC 297), has laid down that where a creditor has obtained a decree against a surety and the principal debtor, the surety has no right to restrain execution against him until the creditor has exhausted his remedy against the principal debtor. It was held that before payment of the amount, surety has right to ask the creditor to pursue his remedies against the principal debtor at the first instance. This dictum laid down by the Supreme Court in the aforesaid case was later followed with approval in State Bank of India v. M/s. Saksaria Sugar Mills Ltd. (AIR 1986 SC 868), wherein it has been held that 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. Since the sureties have agreed to pay the entire amount their liability is immediate and it cannot be deferred until the creditor exhausted his remedies against the principal debtor. A larger Bench of the Supreme Court in State Bank of India v. M/s. Indexport Registered (AIR 1992 SC 1740), upheld the dictum laid down in Bank of Bihar v. Damodar Prasad, (supra) as well as in State Bank of India v. M/s. Saksaria Sugar Mills Ltd. (supra). The Supreme Court in State of Bihar v. Damodar Prasad (supra), had occasion to hold that the very object of the guarantee would be defeated if the creditor is asked to postpone his remedies against the sureties. The Court in State Bank of India v. G. J. Herman (1998(1) KLT 389 = 1998 (Suppl.) Arb. LR 228), while dealing with the liability of a surety held that co-surety cannot insist that the creditor should proceed either against the principal debtor or against other sureties before proceeding against him since the liability of a surety is joint and several (vide Indian Contract Act, 1872). In the aforesaid discussion, it is held as follows : "The liability of the sureties is co-extensive with that of the principal debtor. Consequently creditor can proceed against the principal debtor or against the sureties, unless it is otherwise provided in the contract. In the aforesaid discussion, it is held as follows : "The liability of the sureties is co-extensive with that of the principal debtor. Consequently creditor can proceed against the principal debtor or against the sureties, unless it is otherwise provided in the contract. The same should also be the principle with regard to the rights and liabilities between so-sureties as well. A co-surety cannot insist that the creditor should proceed either against the principal debtor or against other sureties before proceeding against him, since the liabilities of a surety is joint and several. To the extent to which they stood guarantee, they are liable to be proceeded against by the creditor. The option is entirely that of the creditor to decide against whom he could proceed with either against principal debtor, or against any of the sureties. Court for that matter or a co-surety cannot insist that creditor should proceed against other sureties before proceeding against him." In the light of the aforesaid judicial pronouncement, I have no hesitation in holding that the reasoning adopted by respondents 3 and 4 in the impugned order is erroneous and unsustainable. As the discretion of the Collector under Section 67 of the Act was exercised in a legal and proper manner, the 3rd respondent should not have interfered with the same on an erroneous ground. To recapitulate, under Section 128 of the Indian Contract Act as also under Ext. P1 agreement, the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. It is settled law that a surety may be proceeded against without first proceeding against the principal debtor. The creditor is not bound to exhaust his remedy against the principal debtor before proceeding against the surety. Respondents 3 and 4 have not properly adverted to the correct legal position as laid down in the various judicial pronouncements and the Indian Contract Act. 5. The reasoning adopted by respondents 3 and 4 is erroneous and unsustainable. Ext. P2 order which is passed by the 3rd respondent does not state any reason for interfering with the order of the Collector. The only reason mentioned in Ext. P2 is that the husband of the principal debtor is an Engineer and that the defaulter has other movable and immovable properties. The aforesaid reasoning are erroneous and without any basis. Ext. P2 order which is passed by the 3rd respondent does not state any reason for interfering with the order of the Collector. The only reason mentioned in Ext. P2 is that the husband of the principal debtor is an Engineer and that the defaulter has other movable and immovable properties. The aforesaid reasoning are erroneous and without any basis. The mere fact that the principal debtor or her husband has got other properties does not imply that the sureties cannot be proceeded against. Further, this is against the provisions of Ext. P1 agreement and the Indian Contract Act which provide that payment can be enforced simultaneously with the sureties previously or subsequently to the enforcement against the principal. Therefore, I am of the view that if the impugned orders are given effect to, it will render the provisions contained in the aforesaid agreement nugatory. That apart, the 4th respondent has also gone wrong in mechanically confirming the order passed by the Board of Revenue without considering the question as to whether the Collector was right in passing as order against the surety. Neither the Board of Revenue nor the State of Kerala has come to the conclusion that the Collector's power has been exercised wrongly. In that view of the matter also respondents 3 and 4 went wrong in interfering with the action taken by the 2nd respondent, the District Collector, Trivendrum. Again, it has to be noted that the 3rd respondent has exceeded its jurisdiction under Section 83 of the Act. The limited revisional power conferred under Section 83 of the Act cannot be invoked unless there substantial grounds warranting interference. Further, if the impugned orders are given effect to, the creditor will not be in a position to proceed against the surety simultaneously or previously before enforcing the recovery against the principal debtor. As noted earlier, the petitioner is engaged in the business of Chitties, Hire Purchase and Financing. If the petitioner is deprived of its right to enforce payment against the sureties, then the petitioner will stand to lose by a larger extent. Ext. P2 order has been passed in gross violation of the principles of natural justice. Ext. P2 itself is passed in the absence of the petitioner herein on the party array. If the petitioner is deprived of its right to enforce payment against the sureties, then the petitioner will stand to lose by a larger extent. Ext. P2 order has been passed in gross violation of the principles of natural justice. Ext. P2 itself is passed in the absence of the petitioner herein on the party array. It is settled law that any order involving civil consequence to party shall be passed strictly in conformity with the principles of natural justice. In that view, Ext. P2 cannot stand. Therefore, I allow the P.O. and quash Ext. P2 and P4 as prayed. There will be no order as costs. Petition allowed.