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PETITIONER: PUNJAB NATIONAL BANK LIMITED

       Vs.

RESPONDENT: BIKRAM COTTON MILLS & ANR.

DATE OF JUDGMENT: 17/09/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GROVER, A.N.

CITATION:  1970 AIR 1973            1970 SCR  (2) 462  CITATOR INFO :  D          1982 SC1497  (7)

ACT:     Contract  Act 1872, s. 126--Company  director  executing bond to repay ’ultimate  balance’  found  due  from  company to   Bank  on  cash-credit   account--Simultaneously   other documents   executed  by company  undertaking  repayment--If bond  indemnity or contract, of guarantee--Whether  suit  by Bank   prior  to  determination  of  ultimate  balance   was premature.     Companies  Act,  1956,  s.  391--Scheme  of  composition between  company  and creditors--If  binding  on  dissenting creditors.

HEADNOTE:     The  first  respondent  company   opened  a  cash-credit account  with   the appellant bank and on June  7,  1953  to secure  repayment   of the balance due at the  foot  of  the account   the  first  respondent  company   executed   three documents  through  its managing agents  i.e.  a  promissory note,  a  deed of hypothecation and a  letter  assuring  the appellant   bank  that  the  company  would  remain   solely responsible  for  all loss, damage or deterioration  of  the stocks  hypothecated  with  the bank. On the same  day  R  a Director  of  the  managing agents executed  a  bond  called "agreement  of  guarantee’ agreeing to pay  on  demand   all monies  which may be due as the "ultimate balance" from  the company  to the bank.  In December, 1953 the company  closed its business.  The stocks pledged  were disposed of by   the bank  and the amount realised was credited in the  company’s account.  A balance of approximately Rs. 2.56 lakhs remained due at the foot of the account.     Some  creditors of the company in the meantime  filed  a petition  for winding up the company.  On February 22,  1956 a scheme of composition was settled among the creditors  and was later sanctioned by the High Court On May 21, 1956 under section 391 of the Companies  Act,  1956 after rejecting the opposition  of  the appellant bank.  The bank then  filed  a suit against the company and R for a declaration that on the date  of  the  suit a sum of over Rs.  2.56  lakhs  was  due against  the  company and for a decree for  payment  of  the amount  against R.  The trial  court dismissed the suit  and

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on  appeals  filed by both the parties the High  Court  held that  the  scheme having been confirmed by  the  court,  had statutory  operation  and  was  binding  on  all   creditors including  the  bank;  the  bank  had  become  an  unsecured creditor  for  the amount remaining due after  sale  of  the pledged goods and it was for the board of trustees under the Scheme to determine the amount for payment to the bank.  The court  also held that the suit against the  company  without obtaining  leave of the  court  was  not  maintainable.   It further  held that R had executed  an  indemnity   bond  and that  even assuming he was a surety under the terms  of  the bond  he  was only responsible for ensuring payment  of  the "ultimate  balance" which still had to be  determined.   The High  Court accordingly confirmed  the decree of  the  trial court and held that the suit against R was premature. On appeal to this Court,     HELD:  (i) The suit must be remanded to the trial  court to  determine  "the  ultimate  balance"  and  for   disposal according to law.    463     The appellant bank was entitled to claim at any time the money  due  from the company as well as from  R.  under  the promissory note and the bond.  The suit could not  therefore be  said  to  be  premature.   The  High  Court  instead  of dismissing the suit should have stayed it till "the ultimate balance"  due to the bank from the company  was  determined. [471 E-F]     (ii) The binding obligation created under a  composition under  s.  391  of the Companies  Act,  1956,  ’between  the company  and its creditors does not affect the liability  of the  surety  unless  the contract  of  suretyship  otherwise provides. [471 F-G]     Halsbury’s Laws of England, Vol. 63 rd. Edn., Art.  1555 at  p.   771;  Re. Garner’s Motors Lid,.  [1937]  Ch.  59’4; referred to.     (iii)  The  bond  executed  by R was  one  of  the  four documents  executed  on the same day and was  part   of  the scheme   to ensure  payment of the amount found due  to  the Bank.   Although  the  bond was not  also  executed  by  the company, the ’fact that it was executed simultaneously  with the  other  documents and the conduct of R as  well  as  the company indicated that R agreed to guarantee payment of  the debt  due by the company.  It must be held,  therefore  that the  Bank, the company and R were parties to  the  agreement under which for the dues of the company, R became a  surety. [470 A-C]

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  1957  and 1958 of 1966.     Appeal  by  special leave ,from the judgment  and  order dated September 6, 1965 of the Allahabad High Court, Lucknow Bench in First Civil Appeals Nos. 62 and 71 of 1957.     H.R.  Gakhale, M.M. Kshatriya and G.S.  Chatterjee,  for the. appellant (in both the appeals).     M.C. Chagla, A.K. Verma, B. Datta and 1. B.  Dadachanli, for the respondents (in both the appeals). The Judgment of the Court was delivered by     Shah,  J. Ranjit Singh was a director of Ranjit Singh  & Sons.  Ltd.--which acted as a Managing Agent of Shri  Vikram Cotton Mills Ltd. Shri Vikram Cotton Mills Ltd.--hereinafter called  the Company, opened a cash-credit account  with  the Punjab National Bank, and to secure repayment of the balance

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due  at  the  foot  of the account on  June  27,  1953  four documents  were  executed-three by the  Managing  Agents  on behalf  of the Company and one by Ranjit Singh.  The  three: documents   executed  by  the  Managing  Agents   were   (i) promissory  note for Rs. 13,00,000/-  payable with  interest at  the  rate of 21/2% over the Reserve Bank of  India  rate with a minimum rate of 6% per annum  until  payment; (ii)  a deed of hypothecation of  goods  described in  the  Schedule annexed  to  the  document; (iii) a  letter   to   the  Bank agreeing  that  during the  continuance  of  the   agreement evidenced  by the letter of hypothecation, the Company  will remain   solely  responsible  for  all  loss,    damage   or deterioration  of   the  securities delivered  to  the  Bank caused by theft, fire, rain, robbery. 464 dacoity  or  by any other cause  whatsoever.   Ranjit  Singh executed a deed called an "agreement of guarantee"  agreeing to  pay on demand all monies which may be due  as  "ultimate balance" from the Company to the Bank.     In December 1953 the Company closed its  business.   The stocks  pledged  were  disposed of by  the  Bank   and   the amount realised was credited in the account of the  Company. The  Bank  claimed  that  an  amount  of  Rs.  2,56,877/12/6 remained due at the foot of the account.     Some creditors of the Company had in the meantime  filed petition in the High Court of Allahabad for an order winding up  the  Company.   On  February  22,  1956,  a  scheme   of composition was settled among the creditors that  the  total liability  of  the Company was Rs. 34,45,197-11-2  and   the total  assets  of the Company were Rs.  5,00,000,  that  the Company  was desirous of confirming "a lease agreement"  and that  in order to safeguard the rights and interests of  the Company and its  unsecured creditors the Company had entered into  an   agreement   with  the  lessee.   The  scheme  was sanctioned by order of the High Court of Allahabad dated May 21,  1956 under s. 391 of  the  Indian Companies  Act,  1956 after rejecting the opposition of the Bank,     The  Bank  then filed a suit in the Court of  the  Civil Judge.  Malihabad, Lucknow, against the Company  and  Ranjit Singh for a  declaration  that  on  the  date  of  the  suit a  sum  of Rs. 2,56,877-12-6 was due against the Company and for a decree for payment of that amount against Ranjit Singh with  costs and interest pendente lite.  In a joint  written statement  it was contended, inter alia, that  Ranjit  Singh was "only a guarantor and not a co-debtor" and that he could be  made liable only in case of default by the Company,  and since  the  Company had made no  default--the  suit  against Ranjit Singh was not maintainable. Certain  preliminary issues were raised by the  Trial  Judge at  the hearing of the suit out of which the  following  are relevant: "(1)  Whether the plaintiff (Bank) is not entitled  to  file this  suit  as  against the  defendant No. 1  (the  Company) without obtaining the leave of the Company Judge as  alleged ? If so, its effect’? (2)  Whether the Court has no jurisdiction to decide on  the merits  of  the plaintiff’s claim in view of  the  facts  as alleged in para 12(A) of the written statement ? If so,  its effect ? (3)   Whether   the  suit   against    defendant    No.    2 (Ranjit Singh is not maintainable as pleaded under Paras  7, 13 and 14 of the written statement ?" 465 The  Trial  Court held that the suit  was  not  maintainable against  the Company without obtaining leave of the  Company

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Judge,  and  also  that the Court had  no.  jurisdiction  to adjudicate  upon the merits of the Bank’s claim,  for  under the  scheme  the Board of Trustees were  to  scrutinise  the claim  and  their decision was final. In  dealing  with  the claim against Ranjit Singh the  Court  head that he had  not made any default in  payment of the dues and under the terms of  guarantee  the suit was premature against him  as  well. The Court accordingly dismissed’ the suit.     Two  appeals  were  preferred  to  the  High  Court   of Allahabad against the judgments in the suit.  The High Court held  that a scheme of composition between the  Company  and its creditors confirmed by the Court had statutory operation and  was  binding on all creditors regardless  of  the  fact whether  any  of them agreed or not; that according  to  the scheme the Bank became an unsecured creditor for the  amount remaining  due after sale of the pledged goods,  that  under cl.  12  of the Scheme the amount payable to  the  unsecured creditors  shall  be  the  principal  amount  due  to   them determined  by the Board of Trustees, that it was  for  the, Board  of  Trustees to determine the  amount  that  remained payable to the Bank, that though under cI. 16 of the  scheme a  creditor may file suits and take appropriate  steps,  for the  limited purpose of establishing their claims  the  suit had  to be filed with the leave of the; Court, and that  the suit of the Company without obtaining leave of the Court was not  maintainable.  The High Court further held that  Ranjit Singh had executed an indemnity bond, and that even assuming that Ranjit Singh was  a surety it was expressly provided by the terms of the:  bond  executed by him that the  guarantee was  only for ensuring  payment  of  the "ultimate  balance" remaining due to the  Bank on  such  cashcredit account upto the specified limit, and therefore Ranjit Singh was only  to pay "the ultimate balance" which might be found due  against the  Company  after  "taking  into  account  all  dividends, compositions and payments etc  as payments in gross  towards the  debt",  that the Bank’s dues could  be  recovered  from Ranjit  Singh upon default in payment by the Company of  the ultimate  balance after scrutiny by the Board  of  Trustees, and  that  the "proper stage for commencing a  suit  against Ranjit Singh was after the ultimate liability of the Company was  determined  by the Board of Trustees  and  the  Company committed default in  payment".   The High Court accordingly confirmed  the decree of the Trial Court even in  favour  of Ranjit  Singh   With special leave  granted by  this  Court, these two appeals have been preferred by the Bank.     The Bank claimed a mere declaration against the  Company and not a decree for payment of the amount due   Section 391 of  the  Companies  Act, 1956, insofar  as  it  is  material provides:               "(1  )  Where a compromise or  arrangement  is               proposed--               466                (a) between a company and its creditors or an               class of them; or                  (b)  between a company and its  members  or               any class  of them;               the  Court  may,  on the  application  of  the               Company  or of any creditor or member  of  the               Company, or, in the case of a company which is               being  wound  up, of the liquidator,  order  a               meeting   of   the  creditors  or   class   of               creditors,  or  of  the members  or  class  of               members,  as the case may be, to   be  called,               held and conducted in such manner as the Court               directs.

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                 (2)  If a majority in number  representing               threefourths  in  value of the  creditors,  or               class  of creditors, or members, or  class  of               members,  as  the  case may  be,  present  and               voting either in person or,  where proxies are               allowed by proxy, at the meeting, agree to any               compromise or arrangement, the  compromise  or               ’arrangement  shall,  if  sanctioned  by   the               Court,  be binding on all the  creditors,  all               the  creditors of the class, as the  case  may               be, and also  on the, company, or, in the case               of  a company which is being wound up, on  the               liquidator and contributories of the company:               Section 392(1) provides:                     "Where a High Court makes an order under               section  391  sanctioning a compromise  or  an               arrangement in respect of a  company, it-                   (a)  shall  have power  to  supervise  the               carrying out of the compromise or arrangement;               and                   (b  )  may, at the time  of  making   such               order  or  at any time thereafter,  give  such               directions  in  regard to any matter  or  make               such   modifications  in  the  compromise   or               arrangement  as it may consider necessary  for               the  proper   working  of  the  compromise  or               arrangement." In  the  present case a meeting of creditors of the  Company was  held in which a majority in number representing  three- fourths  in value of the creditors agreed to the  scheme  of composition and the court rejected  objection raised by  the Bank and sanctioned the scheme   The scheme was binding upon the Bank and  the rights and obligations of the Bank had  to be worked out under the scheme.   467     In  reaching  its conclusion that the bond  executed  by Ranjit  Singh in favour of the Bank was of the nature  of  a contract of’ indemnity and not a contract of guarantee,  the High  Court  was  impressed by  the  circumstance  that  the Company  was not a party to the bond, and that the bond  was only  a  bilateral  agreement between the Bank   and  Ranjit Singh     Section  124  of  the  Indian  Contract  Act  defines  a "contract  of  indemnity"   A contract by  which  one  party promises  to save the other from loss caused to him  by  the conduct  of the promiser himself, or by the conduct  of  any other person, is called a "contract of indemnity".   Section 126 defines a "contract  of guarantee".  It states:                   "A  ’contract of guarantee’ is a  contract               to  perform  the  promise,  or  discharge  the               liability,  of  a  third person in case of his               default.  The  person who  gives the guarantee               is called the ’surety’: the person in  respect               of  whose  default the guarantee is  given  is               called the ’principal debtor’, and the  person               to  whom the guarantee is given is called  the               ’creditor’.   A  guarantee may be either  oral               or written".     A promise to be primarily and  independently liable  for another  person’s   conduct  may amount  to  a  contract  of indemnity   A contract of guarantee requires concurrence  of three  persons-the  principal debtor, the  surety   and  the creditor--the   surety  undertaking  an  obligation  at  the request  express  or implied of the principal  debtor.   The obligation  of the surety  depends  sub-’ stantially on  the

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principal  debtor’s default; under a contract  of  indemnity liability  arises  from loss caused to the promisee  by  the conduct  of  the  promisor himself or  by  the   conduct  of another person     In  the  present case the Company did  not  execute  the bond   But  the bond executed by Ranjit Singh was    one  of four   documents executed on June 27, 1953  It was  part  of the  scheme to ensure payment of the amount due at the  foot of  the  cash-credit  account in favour of  the  Bank    The Company  executed by  its managing agents--(i) a  promissory note;  (ii)  a  deed of hypothecation; and  (iii)  a  letter assuring  the  Bank  that the  Company shall  remain  solely responsible  for  all loss, damage or deterioration  to  the stocks  hypothecated with the Bank.  The Bank also  insisted upon a promise by some other person to pay the  debt, and as a  part of the same arrangement Ranjit  Singh  executed  the bond  on  which the suit is field.  The bond  was  expressly called  an  "agreement of guarantee":  it was  also  recited therein that Ranjit Singh guaranteed to the Bank, payment on demand  of  all monies which may at any time be due  to  the Bank from the Company on the general balance of that account with the Bank, 468 that the guarantee was to be a continuing guarantee for  the ultimate balance which shall remain due to the Bank on  such cashcredit  account.   In  the  written  statement  it   was admitted  that Raniit Singh was a guarantor. The bond, it is true,  did  not expressly recite that the Company  was   the principal   debtor; it is also true and the Company did  not execute  the   bond.  But  a contract of  guarantee  may  be wholly written, may be wholly oral, or may be partly written and  partly oral.  The documents which secured repayment  of the Bank’s claim at the  foot of the cashcredit account were executed simultaneously:  the bond executed by Ranjit  Singh was  one  of them and the conduct of Ranjit  Singh  and  the Company  indicates  that Ranjit Singh  agreed  to  guarantee payment of the debt due by the Company.  We hold, therefore, that the Bank, the Company and Ranjit Singh were parties  to the  agreement  under  which for the dues  of  the  Company, Ranjit Singh became a surety.     The  extent of the liability of Ranjit Singh  under  the terms  of the bond must, therefore, be determined.   Section 128 of  the Indian Contract Act provides that the  liability of  the  surety is coextensive with that  of  the  principal debtor, unless it is otherwise provided by the contract.  It is necessary, therefore, to consider whether in the terms of the bond there is anything which shows that the liability of the  surety is not co-extensive with that of  the  principal debtor.  Certain clauses of the bond are relevant:                  "( 1 ) In consideration of your Bank at  my               request  allowing an accommodation  by way  of               cash  credit  and  D/D limits  to   M/s.  S.V.               Cotton Mills Ltd , at Lucknow Branch, I, in my               personal capacity hereby guarantee to  you the               payment  on demand of all monies which may  at               any time be due to you from M/s. S.V.   Cotton               Mills  Ltd.,  on the general balance  of  that               account with your Bank.               (2)  I  declare that this guarantee  shall  be               continuing   guarantee   and  shall   not   be               considered as cancelled or in any way affected               by  the fact that at any time the  said  cash-               credit  and D/D account may show no  liability               against  the  borrower, or  may  even  show  a               credit  in favour of the  borrower, but  shall

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             continue in operation in respect of subsequent               transactions".               "(4)  I  further declare that  all  dividends,               compositions,     payments  received  by   you               from   the   said     borrower  or  any  other               person or persons  liable            or his or               their  representatives  shall  be  taken   and               applied  as  payment in  gross   without   any               right               469                on  the part of myself or my   representative               to  stand  in your place in respect of  or  to               claim  the  benefit  of  any  such  dividends,               compositions   or payments, until full  amount               of all your  claims against the said  borrower               or his/their representatives which are covered               by  this, guarantee shall have been  paid  and               that this guarantee shall apply to and  secure               ultimate balance which shall remain due to you               on such cash-credit account upto the extent of               Rs. 13,00,000.                 "(8)  I also agree that the Bank   shall  be               entitled  to        recover  its  entire  dues               under  the said  cash-credit           account               from  my  person or property upon  default  in               payment by the said borrower". By  clause  4  it is expressly  stipulated   that  the  bond secured  "the ultimate balance" remaining due to  the  Bank. Therefore,   unless  and  until  the  ultimate  balance   is determined  no liability on Ranjit Singh to pay  the  amount arises,  and it is common ground that the  ultimate  balance due  is not determined.  The suit was for a decree  for  Rs. 2,56,877/12/6,  but the claim against Ranjit Singh could  be decreed  only for the amount remaining due as  the  ultimate balance under cls. 4 and 5 of the bond. We  are, however, unable to agree with the High  Court  that the suit filed was premature.  The Bank was under the  terms of  the bond executed by Ranjit Singh entitled to, claim  at any  time the money due from the Company as well  as  Ranjit Singh  under  the promissory note and the  bond.   The  suit could  not,  therefore, be said to be premature.   The  High Court  instead of dismissing the suit should have stayed  it till  "the  ultimate  balance" due to   the  Bank  from  the Company  was  determined.  We deem it necessary  to  observe that a binding obligation created under a composition  under s. 391 of the Companies. Act, 1956, between the; Company and its  creditors does not affect the liability of  the  surety unless  the contract of suretyship otherwise  provides.   As observed  in Halsbury’s. Laws of England, Vol. 6, 3rd  Edn., Art.  1555   at p. 771:       "A scheme need not expressly reserve the rights of any creditors  against  sureties for debts; of the  company,  as such rights are unaffected by a scheme". It  was held in Re. Garner’s Motors Ltd.(1) that the  scheme when  sanctioned by the Court has a statutory operation  and the  scheme does not release other persons not  parties.  to the scheme from their obligations.’ (1)  [1937] Ch. 594. up. CI/70--18 470     The High Court, in our judgment, should have stayed  the suit and after "the ultimate balance" due by the Company was determined  the  Court should have proceeded to  decree  the claim according to the provisions of cl. 4 of the bond.     We  accordingly  modify the decree passed by  the  Trial

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Court  and declare that the rights of the Bank  against  the Company  are governed by the scheme: sanctioned by the  High Court  of Aliahabad in Company Case No. 16 of 1956 by  their judgment  dated  May 21, 1956.  Liability  of  Ranjit  Singh being  only for payment the ultimate balance’ which  remains due  on the  cash-credit account with the Bank in favour  of the Company.  The Court will, when such ultimate balance  is determined, proceed to pass a decree in favour of the Bank.     Ranjit  Singh has filed an affidavit in this Court  that in  accordance with the scheme the total  amount due to  the Bank   was  determined  at Rs. 41,536/7/3  as  the  ultimate balance   and  a cheque for Rs. 35,721 was sent to the  Bank on  October  6,  1956  being 25% plus  the  other  pro  rate payments  allowed  ’by  the Trustees to creditors,  but  the Bank  did not cash  the  cheque. Thereafter by letter  dated ’October  28, 1966, the Bank requested that a  fresh  cheque be  issued  to them.  Accordingly  a  fresh cheque  for  Rs. 38,047-46  was  issued  to the Bank  on  November  5,  1966, comprising  Rs. 35,721 on the basis of the old  cheque  plus Rs. 2,326-46 sanctioned for pro rate payment to the Bank  by the Trustees  on  November  3,  1966  at  the  rate  of  50% of the then balance due.  Thereafter another cheque for  Rs. 1,744.50  being 50% of the  amount  then  due to   the  Bank was  also  forwarded to the Bank on  January  29,  1968,  in pursuance  of another pro rate payment resolution passed  by the Trustees and the balance now due to the Bank out of  the original  amount  is Rs. 1,744.09 only.  We  are  unable  to investigate the correctness of these averments.     The decree passed by the High Court is set aside and the suit be remanded to the Trial Court to be disposed of in the light of the observations made in this judgment.  There will be  no  order  as to costs in the High  Court  and  in  this Court.  Costs in the Trial Court will be costs in the suit. R.K.P.S. Suit remanded. 471