REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4613 OF 2000

Industrial Investment Bank of India Ltd.   .. Appellant

Versus

Biswanath Jhunjhunwala  .. Respondent

J U D G M E N T

Dalveer Bhandari, J.

1. This appeal is directed against the judgment of the High  

Court  of  Calcutta  in  Civil  Revisional  Jurisdiction  dated  

10.9.1999 in C.O. No. 1581 of 1999.

2. Briefly stated the facts are as follows:

The appellant Industrial  Investment Bank of  India Ltd.  

(hereinafter  referred  to  as  “the  appellant”)  on  27.9.1994  

sanctioned the first  short term working capital  loan of Rs.3  

crores  in  favour  of  Modern  Malleables  Limited  (hereinafter  

referred to as “the borrower company”).   

3. The  loan  agreement  was  entered  into  between  the  

appellant and the borrower company on 03.10.1994 in respect  

of  the  first  short  term working  capital  loan  of  Rs.3  crores.  

The said loan agreement was signed on behalf of the borrower  

company  by  the  respondent  as  a  Director  of  the  borrower  

company.    On the same day,  demand promissory note  for  

Rs.3 crores was executed on behalf of the borrower company  

in favour of the appellant.   The same was executed on behalf  

of the borrower company by the respondent as the Director of  

the  borrower  company.    A  deed  of  undertaking  to  create  

mortgage in respect of its various immovable properties was  

also  executed  on  behalf  of  the  borrower  company  by  the  

respondent.   

4. A  deed  of  personal  guarantee  was  executed  by  the  

respondent on 03.10.1994 in respect of the said loan granted  

by  the  appellant  in  favour  of  the  borrower  company.   The  

relevant clauses of the said deed of guarantee are reproduced.

“7. This guarantee shall be enforceable against the  guarantor  notwithstanding  that  any  security  or  securities comprised in any instrument(s) executed  by  the  borrower  in  favour  of  the  Industrial  Reconstruction Bank of India Ltd. (for short, IRBI)  at the time when the proceedings are taken against  

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the guarantor on this guarantee, be outstanding or  un-realized or lost.”

5. Clause  11 of  the  deed of  personal  guarantee  reads  as  

under:

“11. To give effect to this guarantee, the IRBI may  act  as  though  the  guarantors  were  the  principal  debtor to the IRBI.”

6. The  appellant  sanctioned  the  second  term  working  

capital  loan  of  Rs.3  crores  on  15.03.1995  in  favour  of  the  

borrower  company.  The  Demand  Promissory  Note  for  Rs.3  

crores was executed on 21.03.1995 on behalf of the borrower  

company by the respondent as the Director of the borrower  

company in favour of the appellant.   A deed of undertaking to  

create  mortgage  in  respect  of  its  immovable  properties  was  

also executed on behalf of the borrower company in respect of  

the said second short term working capital loan.    

7. The  borrower  company  committed  defaults  in  the  

payment/repayment  of  the  principal  amount  of  the  loan as  

well as interest, liquidated damages and other moneys.   Some  

of the cheques issued on behalf of the borrower company by  

the  respondent  were  dishonored  for  want  of  funds.  

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Consequently, the proceedings started against the respondent  

under section 138 of the Negotiable Instruments Act, 1881 are  

pending before the court.   

8. In  view  of  the  defaults  committed  by  the  borrower  

company,  the  appellant  on  18.01.1997  issued  a  demand  

notice to the borrower company recalling the entire loans and  

calling upon the borrower company to pay the total sum of  

Rs.5.40 crores together with further interest at the rate of 17%  

per annum and liquidated damages at the rate of 2.1% from  

1.1.1997 till repayment.

9. The appellant on 18.03.1997 filed an application in the  

High  Court  of  Calcutta  under  section  40  of  the  Industrial  

Reconstruction Bank of India Act, 1984 (for short “IRBI Act”)  

for  attachment  and  sale  of  the  assets  of  the  borrower  

company.  The respondent was not made a party to the said  

application, inasmuch as there was no scope for seeking any  

relief  against  the  guarantor  under  an  application  under  

section 40 of the IRBI Act.   Hence, a prayer was made for  

attachment  of  the  assets  of  the  borrower  company.   The  

provisions of section 40 of the IRBI Act are  pari materia with  

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the provisions of  sections 31 and 32 of  the State  Financial  

Corporations Act, 1951.

10. A  notice  was  issued  on  20.3.1997  to  the  respondent  

invoking  the  personal  guarantee  given  by  him  and  calling  

upon  him  to  pay  the  sum of  Rs.5.40  crores  together  with  

further  interest  and  liquidated  damages  from  1.1.1997  till  

repayment.

11. The  High  Court  on  the  said  application  filed  by  the  

appellant  on  31.03.1997  under  section  40  of  the  IRBI  Act  

appointed  a  Receiver  for  the  purpose  of  taking  symbolic  

possession of the assets mentioned in Schedules ‘A’,  ‘B’,  ‘C’  

and  ‘D’  to  the  said  application  and  also  for  making  an  

inventory of  the same.   The High Court  issued an order of  

injunction restraining the borrower company from parting with  

the  possession,  disposing  of  or  alienating  or  otherwise  

encumbering any of the said assets in any manner.   

12. The appellant on 17.7.1997 filed an application against  

the respondent under section 19 of the Recovery of Debts Due  

to  Bank  and  Financial  Institutions  Act,  1993  in  the  Debts  

Recovery  Tribunal,  Calcutta.    The  appellant  in  the  said  

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application  has  prayed  for  a  certificate  against  the  said  

respondent  for  a  sum of  Rs.5.40  crores  along  with  further  

interest and liquidated damages.  

13. The respondent on 20.3.1998 also filed an application in  

the  Debts  Recovery  Tribunal,  Calcutta  for  stay  of  further  

proceedings  in  the  case  filed  by  the  appellant  in  the  same  

Tribunal,  inter  alia,  on  the  ground  that  the  rights  of  the  

appellant  against  the  respondent  as  guarantor  did  not  

crystallize till the rights of the appellant against the borrower  

company are established.

14. The  Presiding  Officer  of  the  Debts  Recovery  Tribunal,  

Calcutta on 18.05.1999 relying on  State Bank of India v.  

Indexport  Registered  &  Others, AIR  1992  SC  1740  

dismissed the application filed by the respondent for stay of  

further proceedings in the case filed against him and held that  

the appellant cannot be forced to exhaust remedy elsewhere  

and then to proceed against the guarantor and further that  

the  liability  of  a  guarantor  is  co-extensive  with  that  of  the  

principal debtor.

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15. The respondent on 29.5.1999 filed an application under  

Article 227 of the Constitution of India in the High Court of  

Calcutta  against  the  order  dated  18.5.1999  passed  by  the  

Debts Recovery Tribunal, Calcutta.

16. The High Court of Calcutta by the impugned judgment  

allowed the application filed by the respondent under Article  

227  of  the  Constitution  of  India  and  stayed  further  

proceedings  in O.A.  No.  156 of  1997 filed  by  the  appellant  

against  the  respondent  in  the  Debts  Recovery  Tribunal,  

Calcutta. The appellant against the said judgment/order has  

filed this appeal.

17. Mr. J. L. Gupta, learned senior counsel appearing for the  

appellant submitted that the appellant bank is fully justified  

in initiating proceedings against the borrower company as well  

as its guarantor before the different courts.    

18. Mr.  Gupta  also  submitted  that  the  liability  of  the  

guarantor and the principal debtor are co-extensive and not in  

alternative.  He also submitted that sections 29, 31 and 32 of  

the  State  Financial  Corporations  Act  are  pari  materia with  

sections 39, 40 and 41 of the IRBI Act.     

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19. Mr. Gupta, in support of his submission, placed reliance  

on  a  judgment  of  this  Court  in  Bank  of  Bihar  Ltd.  v.  

Damodar Prasad & Another (1969) 1 SCR 620.   In that  

case,  the  court  referred  to  a  judgment  in  Lachhman  

Joharimal v. Bapu Khandu and Tukaram Khandoji (1869)  

6  Bombay  High  Court  Reports  241,  in  which  the  Division  

Bench of the Bombay High Court held as under:

"The court is of opinion that a creditor is not bound  to exhaust his remedy against the principal debtor  before suing the surety and that when a decree is  obtained against a surety, it may be enforced in the  same manner as a decree for any other debt."  

This Court, while approving the said judgment, observed  

that,  “the  very  object  of  the  guarantee  is  defeated  if  the  

creditor is asked to postpone his remedies against the surety.  

In  the  present  case  the  creditor  is  a  banking  company.  A  

guarantee is a collateral security usually taken by a banker.  

The  security  will  become  useless  if  his  rights  against  the  

surety can be so easily cut down.”      

20. In  State Bank of India v. M/s. Indexport Registered  

(supra), this  Court  held  that  the  decree  holder  bank  can  

execute the decree against the guarantor without proceeding  

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against  the  principal  borrower.  Guarantor’s  liability  is  co-

extensive with that of the principal debtor.   In that case, this  

court  further  observed  that,  “the  execution  of  the  money  

decree is not made dependent on first applying for execution of  

the mortgage decree. The choice is left entirely with the decree-

holder. The question arises, whether a decree which is framed  

as a composite decree as a matter of law, must be executed  

against  the mortgage  property  first  or  can a money decree,  

which covers whole or part of the decretal amount covering  

mortgage decree can be executed earlier. There is nothing in  

law  which  provides  such  a  composite  decree  to  be  first  

executed only against the principal debtor.  The court further  

observed that “the liability of the surety is co-extensive with  

the principal  debtor,  unless  it  is  otherwise  provided by the  

contract”.      

21. The  term  “co-extensive”  has  been  defined  in  the  

celebrated  book  of  Polock  & Mulla  on  Indian  Contract  and  

Specific Relief Act, Tenth Edition, at page 728 as under:

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“Co-extensive. -  Surety's liability is co-extensive with that  of the principal debtor.  

A  surety's  liability  to  pay  the  debt  is  not  removed by reason of the creditor's omission to sure  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  surely  though  the  principal  has  not  been sued.”

22. In  Chitty  on Contracts,  24th Edition, Volume 2 at page  

1031 paragraph 4831 it is stated as under,

“Conditions  precedent  to  liability  of  surety.-  Prima facie  the  surety  may  be  proceeded  against  without  demand  against  him,  and  without  first  proceeding  against  the  principal debtor.”

23. In  Halsbury's Laws of England,  Fourth Edition,Vol. 20,  

paragraph 159 at 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”.

24. A  Division  Bench  of  the  Bombay  High  Court  in  

Jagannath  Ganeshram  Agarwala v.  Shivnarayan  

Bhagirath  and Ors. AIR  1940  Bombay  247  held  that  the  

liability  of  the  surety  is  co-extensive,  but  is  not  in  the  

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alternative. Both the principal debtor and the surety are liable  

at the same time to the creditors.

25. A Division Bench of the High Court of Karnataka, in The  

Hukumchand Insurance Co. Ltd. v. The Bank of Baroda &  

Others AIR 1977 Kant 204  had an occasion to consider the  

question of liability of the surety vis-a-vis the principal debtor.  

The court held as under:-

“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.”

26. The  case  of  the  respondent  has  never  been  that  the  

liability  of  the  guarantor  is  only contingent  and if  remedies  

against the principal debtor failed to satisfy the dues of the  

decree  holder,  then  only  the  bank can proceed against  the  

guarantor.

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27. Mr. Gupta also asserted that the remedy under section  

19  of  the  Recovery  of  Debts  Due  to  Bank  and  Financial  

Institutions Act, 1993 is not in derogation of section 40 of the  

IRBI Act.     

28. In  Transcore v.  Union of  India & Another (2008)  1  

SCC  125,  this  Court  in  great  detail  examined  whether  

withdrawal of suit pending before the Debts Recovery Tribunal  

under DRT Act is not a pre-condition for taking recourse to the  

Securitisation  and  Reconstruction  of  Financial  Assets  and  

Enforcement of Security Interest Act, 2002.   This court held  

that it is for the bank or the financial institution to exercise its  

discretion.

29. In  A.P.  State  Financial  Corporation v.  M/s Gar Re-

Rolling  Mills  &  Another (1994)  2  SCC  647  this  Court  

observed that the right vested in the corporation under section  

29 of the Act is besides the right already possessed at common  

law to institute a suit or the right available to it under section  

31 of the Act. In that case, it was further observed that on a  

conjoint  reading  of  sections  29  and  31  of  the  said  Act,  it  

appears that in case of default in repayment of loan or any  

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installment  or  any advance or  breach of  an agreement,  the  

Corporation  has  two  remedies  available  to  it  against  the  

defaulting  industrial  concern,  one  under  section  29  and  

another  under  section  31.   Since,  the  corporation  must  be  

held entitled and given full protection by the court to recover  

its dues it cannot be bound down to adopt only one of the two  

remedies provided under the Act.  The Court further held that  

the doctrine of election is not applicable to this case.

30. The legal position as crystallized by a series of cases of  

this  court  is  clear  that  the  liability  of  the  guarantor  and  

principle  debtors  are  co-extensive  and  not  in  alternative.  

When we examine the impugned judgment in the light of the  

consistent position of law, then the obvious conclusion has to  

be that the High Court  under  its  power of  superintendence  

under Article 227 of the Constitution of India was not justified  

to stay further proceedings in O.A. 156 of 1997.

31. Consequently,  the appeal is allowed and the impugned  

judgment  of  the  High  Court  of  Calcutta  is  set  aside.   The  

appellant shall be entitled to costs of Rs.50,000/-.     

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…….……………………..J.  (Dalveer Bhandari)

...….……………………..J.   (H.L. Dattu)

New Delhi; August 18, 2009.

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