In the Delhi High Court
AIR 1988 Delhi 130; 34 (1988) DLT 18; 1988 RLR 74
M/s. Security Finance Private Limited
21st October, 1987
P. K. Bahri, J.
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. According to section 128 of the Indian Contract Act (1872), a surety’s liability is co-extensive with that of the principal debtor, unless otherwise provided by the contract. Any variation to the terms of the contract without the knowledge of the surety has the effect of discharging the surety’s liability according to section 133 of the Act. In this case, the question was whether the same provisions would be applicable even after the creditor had obtained a decree against the principal debtor and the surety for the recovery of the amount advanced.
The respondent had obtained a decree for recovery of Rs. 30,155/- against Bhiku Ram, Attar Singh and the respondent. Bhiku Ram and Attar Singh were principal debtors whereas the appellant was the surety. Attar Singh died during the pendency of the execution proceedings and the respondent did not proceed against his legal heirs as they couldn’t be found. During the execution proceedings, the respondent entered into a compromise with the other judgment-debtor, Bhiku Ram, wherein he would pay the respondent a sum of Rs. 10,00/- in instalments and the respondent would not proceed against Bhiku Ram for the recovery of the money. Bhiku Ram paid the amount to the respondent. However, the respondent proceeded to seek for execution of the decree against the appellant. The appellant objected to the same contending that the appellant stood discharged from his liability as the respondent had entered into a compromise with the principal debtor without the consent of the surety. The respondent contended that the appellant’s liability had not ceased as he was a co-judgment debtor. The executing court dismissed the appellant’s objections and the appellant appealed to the Delhi High Court.
Whether the appellant’s liability exists even after the respondent has entered into a compromise with one of the judgement debtors?
Contentions of the appellant:
According to section 133 of the Indian Contract Act (1872), as soon as any composition has been made by the decree holder with the principal debtor the liability of the surety stands discharged.
The provisions of Sections 133 to 139 of the Contract Act apply only where no decree has been passed by the court. After a decree has been passed, the character of the principal debtor and the character of the surety change into those of co-judgment debtors. The Hon’ble Court relied on Nellore Co-operative Urban Bank Limited v. Akili Mallikarjunayya (AIR 1948 Madras 252) wherein a co-operative society obtained an award against the principal debtor and the surety. The decree holder discharged the principal debtor and sought to execute the decree against the surety to which the surety objected on the grounds that the liability of the surety ceases with that of the principal debtor. The Madras High Court made reference to In re a Debtor [(1913) 3 K.B. 11] wherein it was held that upon the passing of the judgment in the recovery proceedings, the principal debtor and the surety became equally liable. The Madras High Court also relied on Jenkins v. Robertson [(1854) 2 Drew 351] wherein it was held that the once the surety was under a decree, the compromise between the creditor and the principal debtor would not affect his liability. The Hon’ble Court also took notice of the observation in Meenakshi Sundarum Chettiar v. Velambal Ammal (AIR 1944 Mad 423) to the effect that upon the passing of a joint decree against them, the principal debtor and the surety would become joint judgment debtors. The Madras High Court held that section 134 of the Contract Act was not applicable in cases where the creditor had obtained a decree against the principal debtor and the surety.
The same decision was followed by the Kerala High Court in Velappa Kumar v. Kosamattom Chit Fund & Another (1978 KLT 10). In this case, the Kerala High Court held that sections 128, 133, 134 and 139 of the Contract Act can have application only as long as no decree is passed against the principal debtor and the surety on the basis of the contract. The above provisions of the Contract Act which govern the rights and liabilities of the creditor, the principal debtor and surety, cease to operate after the rights and liabilities are determined and declared by a decree. The counsel for the appellant had cited the case, Sardar Kahn Singh v. Tek Chand Nanda and Another (AIR 1968 J&K. 93) where a Division Bench of the High Court had taken a different view. This was not taken into consideration by the Hon’ble court on the grounds that the court had applied the relevant provisions of the Contract Act even after the passing of a decree which would render such provisions inapplicable. The court also refused to take into consideration another case cited by the counsel for the appellant, Raja Pertabgeerjeev. Rasheed Shawpoorji Chenai and Another (AIR 1958 AP 512), on the grounds that the facts of the case were different from the present case. The appeal was dismissed.
A contract of guarantee ensures that the creditor’s interests are protected even when the principal debtor is unable to discharge the liability. In a contract of guarantee, the surety is considered a favoured debtor and provisions of the Contract Act ensure that the terms of the contract are not varied to his detriment without his consent. The position of a surety, after the creditor had obtained a decree against the surety and the principal debtor, is reduced to that of a mere joint judgment debtor. In this case, the extent of the protection accorded to a surety was clarified.
Edited by Parul Soni
Approved & Published – Sakshi Raje