http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: MAHARASHTRA STATE ELECTRICITY BOARD, BOMBAY

       Vs.

RESPONDENT: OFFICIAL LIQUIDATOR, HIGH COURT, ERNAKULAM, ANR.

DATE OF JUDGMENT13/10/1982

BENCH: VENKATARAMIAH, E.S. (J) BENCH: VENKATARAMIAH, E.S. (J) ERADI, V. BALAKRISHNA (J)

CITATION:  1982 AIR 1497            1983 SCR  (1) 561  1982 SCC  (3) 358        1982 SCALE  (2)875

ACT:      Companies Act,  1956-Company gave  bank  guarantee  for supply of  goods on  tenders-Company ordered to be wound up- Appellant restrained from realising the amount of guarantee- Liability of bank-Nature of.      Contract Act-Bank  gave guarantee  for  a  company  for supply of  goods against tenders Company ordered to be wound up-Liability of surety-Nature of.

HEADNOTE:      The appellant  Board invites  tenders for the supply of goods.  One  of  the  terms  of  the  tenders  required  the intending supplier  of goods  to pay  earnest  money  and/or security  to   the  Board   along  with  the  tender  a  sum approximately equivalent  to 10%  of the  estimated price of goods tendered.  But where an intending tenderer deposited a sum of  Rs. 50,000 either in cash or in any form approved by the Board  such as a Bank guarantee he could offer to supply goods of  any value either under one or more tenders without complying with the above condition.      In accordance  with the  terms of tender the company in liquidation offered a bank guarantee for a sum of Rs. 50,000 for supply  of goods  to the  Board.  As  security  for  the guarantee, the  Bank took  from the company in liquidation a fixed deposit  receipt and  some quantity  of imported  zinc ingots and  the Bank  had certain rights in respect of these securities.      In August,  1973 the  Board called upon the Bank to pay to it  the guarantee  amount. In the meanwhile, however, the High  Court  ordered  the  winding  up  of  the  company  in liquidation. The  Bank then wrote to the Official Liquidator that the  company in  liquidation was  liable to  the Bank a large sum  of money  one of  which was the sum of Rs. 50,000 demanded by the Board.      On application  by the  Official Liquidator the company Judge issued  an order  restraining the Board from realising the amount  from the  Bank on the ground that since the Bank would have  recourse to  the securities given by the company in liquidation  for realising  the  amount  paid  by  it  in accordance with  the bank  guarantee  and  that  since  such action of the Bank would affect the assets of the company in liquidation, it  was not  open to  the Board  to  claim  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

amount of  guarantee from  the Bank  except as a creditor in the winding  up proceedings.  A Division  Bench of  the High Court dismissed the Board’s appeal. 562      On the  question whether  the Board  could recover from the Bank the sum of Rs. 50,000 according to the terms of the bank guarantee  and what  its effect would be on liquidation proceedings,      Allowing the Appeal, ^      HELD: It  was not open to the company Judge to make any order under  the Companies  Act 1956  prohibiting the  Board from realising the amount guaranteed by the Bank as this had nothing to do with the assets of the company in liquidation.      [568-D]      The terms  of the  document on  the basis  of which the Board has  claimed the  amount from  the Bank  constituted a contract of guarantee and not a contract of indemnity. [566- F]      The three  transactions, namely (1) the bank guarantee, (2) the contract of supply between the Board and the Company in liquidation  and (3) the document under which the Company in  liquidation  gave  a  fixed  deposit  receipt  and  some quantity of  zinc ingots as security are independent of each other in  so far  as their  legal incidents  are  concerned. [566-H; 567-A]      In order  to realise the guarantee amount of Rs. 50,000 all that the Board had to do was to make a demand, within 48 hours of which the Bank had to pay the sum to the Board. The Board was  not required  to prove any default on the part of the Company  in liquidation.  Nor could  the Bank  raise the plea that  it was  liable only  to the  extent of  any  loss sustained by  the Board. The Bank’s liability to pay the sum demanded by the Board was absolute and unconditional. [567-C-D]      The fact  that  the  principal  debtor  had  gone  into liquidation  would   not  have  any  effect  on  the  Bank’s liability as  guarantor. Under  section 128  of  the  Indian Contract Act  the liability  of the  surety is  co-extensive with that  of the  principal debtor  unless it  is otherwise provided by  the contract.  A surety  is no doubt discharged under section 134 of the Indian Contract Act by any contract between the  creditor and  the principal debtor by which the principal debtor  is released  or by  any act or omission of the  creditor,   the  legal  consequence  of  which  is  the discharge of the principal debtor. But a discharge which the principal  debtor   may  secure   by  operation  of  law  in bankruptcy (or  in liquidation  proceedings in the case of a company) does not absolve the surety of his liability.                                                    [567-D-F]      Jagannath Ganeshram  Aggarwala v. Shivnarayan Bhagirath JUDGMENT:      In re  Fitzegeorge Ex  parte Robson, [1905] 1 K.B. 462, referred to.      Punjab National  Bank Limited  v. Bikram Cotton Mills & Anr., [1970] 2 S.C.R. 462, held inapplicable.      On payment of the sum demanded by the Board it was open to the  Bank to have recourse to the securities given by the Company in liquidation. The 563 Board was  not concerned with what the Bank did to reimburse itself. It  was the  Bank’s responsibility  to deal with the securities held by it in accordance with law.      [568 C]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

&      CIVIL APPELLATE  JURISDICTION: Civil Appeal NO. 3182 of 1982.      Appeal by  special leave  from the  Judgment and  Order dated the  13th November,  1978 of  the Kerala High Court in M.F.A. No. 145 of 1976.      B.S. Bhasme and H.S. Parihar for the Appellant.      K.N. Bhatt for Respondent No. 2.      A.S. Nambiar for the intervener.      The Judgment of the Court was delivered by      VENKATARAMIAH, J.  This is  an appeal  by special leave under Article  136 of  the Constitution against the judgment and order  dated November  13, 1978  of the  High  Court  of Kerala in M.F.A. No. 145 of 1976.      The facts  leading to this appeal may be briefly stated thus: The  appellant is  the Maharashtra  State  Electricity Board (hereinafter  referred to as ’the Electricity Board’). Cochin Malleables  (P) Ltd.  (in  liquidation)  (hereinafter referred to  as ’the  Company in liquidation’) used to enter into contracts  with the  Electricity Board  before  it  was ordered to be wound up by the High Court of Kerala to supply goods to  the Electricity  Board pursuant  to tenders  which were being  issued from  time to  time.  One  of  the  terms usually  found  in  such  tenders  was  that  the  intending supplier  of  goods  should  pay  as  earnest  money  and/or security to  the Electricity  Board alongwith every tender a sum approximately  equivalent to  10% of the estimated price of the  goods in  question. There  was, however, a provision for exempting  payment of  such earnest  money  or  security deposit in  the case  of those  tenderers who  would keep  a permanent deposit  of Rs.  50,000 either  in cash  or in any form approved by the Electricity Board and one such approved form was  a bank  guarantee to  the tune  of Rs. 50,000. The effect of  such deposit  of Rs.  50,000 made by an intending tenderer with the Electricity Board under this condition was that he  acquired the  privilege of  offering his tender for the supply  of goods  of any  value to the Electricity Board and of such tender being considered along- 564 with other  tenders made  by others  who had in the ordinary course paid  10% of  the estimated cost of goods as security deposit as  per the  usual  condition.  Such  privilege  was available to  him in  the case  of any  tender that he might make as  long  as  the  deposit  remained  intact  with  the Electricity Board.  In other  words, on  depositing a sum of Rs. 50,000 an intending tenderer could offer to supply goods of any  value either  under  one  of  more  tenders  without complying with  the condition  which required him to deposit alongwith with  tender  a  sum  equivalent  to  10%  of  the estimated value  of goods  which he  intended to supply. The security of  Rs. 50,000  thus given  did not  relate to  any specific tender  but it was open to the Electricity Board to appropriate the  whole or  any part of it towards any amount due from the tenderer under any supply contract entered into during the  relevant  period.  Any  balance  which  remained unadjusted became  refundable to  the person who had made it on demand  provided  that  there  was  no  other  subsisting liability towards  which the  said balance could be adjusted and on such refund being made the person ceased to enjoy the exemption from  the requirement of making an earnest deposit in respect of any future tender. Any bank guarantee given by any such  intending tenderer  in lieu of the cash deposit of Rs. 0,000  was deemed  to be  equivalent to the cash deposit

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

made on  date of  the guarantee  and the  Electricity  Board could realise the bank guarantee amount or any part of it at its will  on any  day irrespective of whether any tender had been made  by the person concerned during the period or not. On such  realisation  of  the  bank  guarantee  amount,  the Electricity Board  could deal with it in accordance with the terms of  the contract  as  if  the  said  amount  had  been deposited with it in cash on the date of bank guarantee. The liability of  the bank  which gave  the bank guarantee under these terms  was unconditional and did not vary according to the number  of tenders  offered,  the  value  of  the  goods offered for  sale under  those tenders, and the defaults, if any, committed by the tenderer in the supply of goods.      Pursuant to  the above term, the Company in liquidation offered on  September 1, 1966 a bank guarantee for a sum not exceeding Rs.  50,000 given  by the  Canara Bank  Ltd.  (now known as  Canara Bank  and hereinafter  referred to  as ’the Bank’). The  relevant part  of the  said  guarantee  was  as follows           "THE   CANARA    BANK   LTD.",    hereby    agrees      unequivocally and  unconditionally to  pay,  within  48      (Forty eight)  hours, on  demand in  writing  from  the      Maharashtra 565      State Electricity Board or any officer authorised by it      in this  behalf, of  any amount  upto and not exceeding      Rs.50,000/-(Rupees Fifty  thousand only)  to  the  said      Maharashtra State  Electricity Board,  Bombay on behalf      of M/s  Cochin Malleables  (Private) Ltd., Trichur, who      have tendered  and/ or  contracted  or  may  tender  or      contract hereafter for supply of materials equipment or      service to  the Maharashtra State Electricity Board and      have been exempted from payment of earnest money and/or      security deposit against such tenders or contracts."      The original  period of guarantee was one year. It was, however, extended from time to time and the guarantee was in force in  the year 1973. On August 27, 1973, the Electricity Board called  upon the  Bank to  pay the guarantee amount of Rs. 50,000.  Thereafter reminders  were  sent  and  a  final demand was  made on  May 23,  1974. In the meanwhile Company Petition No.  14 of  1973 was  filed on July 30, 1973 on the file of  the High  Court of Kerala for the winding up of the Company in liquidation. By an order dated September 16, 1974 the High  Court ordered  the winding  up of  the Company  in liquidation and  directed the  Official Liquidator  to  take charge of its affairs. In view of these proceedings the Bank wrote to the Official Liquidator on November 4, 1974 stating that the  Company in  Liquidation was  liable to the Bank to the extent  of Rs. 1,64,353.12 on two heads one of which was the sum  of Rs.  50,000 demanded by the Electricity Board as per the  terms of  the bank  guarantee  referred  to  above. Thereupon, the  Official  Liquidator  filed  an  application under section  456(2) of  the Companies  Act, 1956 read with Rule 9  of the  Companies (Court)  Rules,  1959  before  the Company  Judge   praying  for   an  order   restraining  the Electricity Board  from realising  the amount covered by the guarantee  on   the  ground   that  since   the  Company  in liquidation had  been ordered to be wound up the Electricity Board could not claim the amount of guarantee from the Bank. The Electricity  Board contended  that  the  amount  of  Rs. 50,000 was not being claimed as a creditor of the Company in liquidation but  on the  basis of  the bank  guarantee,  the liability under  which was  not affected  by the liquidation proceedings. The  learned Company  Judge upheld  the plea of the Official  Liquidator and issued an order restraining the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

Electricity Board from realising the amount from the Bank on the ground  that since  the Bank  would have recourse to the securities given  by the  Company in liquidation to the Bank for realising  the amount  paid by it in accordance with the bank guarantee and such 566 action of the Bank would affect the assets of the Company in liquidation, it  was not  open to  the Electricity  Board to claim the  amount of  guarantee from  the Bank  except as  a creditor in  the winding  up proceedings. An appeal filed by the Electricity  Board before the Division Bench of the High Court was dismissed. This appeal is filed by the Electricity Board against the order of the Division Bench.      After the  petition for special leave was filed in this Court in  July 1979,  notice  was  issued  to  the  Official Liquidator. He  has written  a letter  to this Court stating that the  High Court of Kerala has since sanctioned a scheme for reconstruction of the Company in liquidation by an order dated November  6, 1979,  subject to  certain conditions and that the  winding up  proceedings are directed to be kept in abeyance till  December 31, 1982. He has further stated that he has  handed  over  all  the  assets  of  the  Company  in liquidation to  the new  management as per directions of the High Court  and that he has no funds to participate in these proceedings.  The   Managing  Director  of  the  Company  in liquidation has  entered appearance  as an intervener and is represented by  a  counsel.  The  learned  counsel  for  the intervener has  been heard in this appeal. He has also filed his submissions in writing.      The principal  question which  arises for determination in this  appeal relates  to the  effect of  the  liquidation proceedings on the right of the Electricity Board to recover from the  Bank the sum of Rs. 50,000 as per the terms of the bank guarantee.  It cannot be disputed that the terms of the document on  the basis  of which  the Electricity  Board has claimed the  amount from  the Bank  constitute a contract of guarantee and  not  a  contract  of  indemnity.  Under  that document the  Bank has  undertaken to  pay  any  amount  not exceeding Rs.  50,000 to  the Electricity Board within forty eight hours  of  the  demand.  The  payment  of  the  amount guaranteed by  the Bank is not made dependent upon the proof of any default on the part of the Company in liquidation. It may be  that in  order to  give the said guarantee, the Bank had in  its turn  taken as  security  from  the  Company  in liquidation certain  fixed deposit  receipt  and  a  certain quantity of  imported zinc  ingots and  that  the  Bank  had certain rights  in respect  of those  securities. There  may also be  some claims  or counter-claims  arising out  of the contracts of  supply entered  into between  the  Electricity Board and  the Company  in liquidation. But the transactions viz. (1)  the bank  guarantee executed by the Bank in favour of the Electricity Board, (2) the 567 contracts of  supply entered  into between  the  Electricity Board and  the Company  in liquidation  and (3) the document under which  the Company  in liquidation  had given  a fixed deposit receipt  and certain  quantity  of  zinc  ingots  as security to  the Bank  for executing the letter of guarantee in favour  of the  Electricity Board are independent of each other in so far as their legal incidents are concerned.      Under the  bank guarantee  in  question  the  Bank  has undertaken to  pay the  Electricity Board  any sum  upto Rs. 50,000 and  in order  to realise it all that the Electricity Board has  to do  is to  make a  demand. Within  forty eight hours of  such demand  the Bank has to pay the amount to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

Electricity Board which is not under any obligation to prove any default on the part of the Company in liquidation before the amount  demanded is paid. The Bank cannot raise the plea that it  is liable  only to  the extent of any loss that may have been  sustained by  the Electricity  Board owing to any default on  the part  of the  supplier  of  goods  i.e.  the company  in  liquidation.  The  liability  is  absolute  and unconditional. The fact that the Company in liquidation i.e. the principal  debtor has  gone into  liquidation also would not have  any effect  on the  liability of the Bank i.e. the guarantor. Under section 128 of the Indian Contract Act, the liability of  the surety  is co-extensive  with that  of the principal debtor  unless it  is otherwise  provided  by  the contract. A  surety is no doubt discharged under section 134 of the  Indian Contract  Act by  any  contract  between  the creditor and  the principal  debtor by  which the  principal debtor is  released  or  by  any  act  or  omission  of  the creditor, the legal consequence of which is the discharge of the principal  debtor. But  a discharge  which the principal debtor may  secure by  operation of law in bankruptcy (or in liquidation proceedings  in the  case of a company) does not absolve the surety of his liability (See Jagannath Ganeshram Aggarwala v. Shivnarayan Bhagirath & Ors.(1). See also In re Fitzgeorge Ex  parte Robson(2).  In view  of the unequivocal language of  the letter  of guarantee,  no reliance  can  be placed by the Company in liquidation on the decision of this Court in Punjab National Bank Limited v. Bikram Cotton Mills & Anr.(3) in which the surety’s liability was limited to the ’ultimate balance’  found due  from the principal debtor and the  said  balance  had  not  been  ascertained  before  the institution of the suit. 568 The facts of this case are distinguishable from the facts in the case  before us.  As mentioned  earlier the liability of the Bank  to pay  the amount  as per the letter of guarantee did not  depend upon  prior proof of any default on the part of the  Company in  liquidation. Whether  the whole  of  Rs. 50,000 should  be demanded  or  any  lesser  sum  should  be demanded from the Bank was entirely within the choice of the Electricity Board.  The Bank  has,  therefore,  to  pay  the amount due  under the letter of guarantee given by it to the Electricity Board. On such payment it is open to the Bank to have recourse  to the  securities given  by the  Company  in liquidation for  the purpose  of the  issue of the letter of guarantee. The  Electricity Board is not concerned with what the Bank  does in  order to  reimburse itself  after  making payment  of   the  amount   guaranteed  by  it.  It  is  the responsibility of  the Bank to deal with the securities held by it  in accordance  with law. It was not, however, open to the Company  Judge to make any order under the Companies Act prohibiting the  Electricity Board from realising the amount guaranteed by  the Bank  as this  had nothing to do with the assets of  the Company  in liquidation.  The  order  of  the Company Judge  and the  Judgment of  the Division  Bench  in appeal are,  therefore, liable  to be  set aside be and they are accordingly set aside.      Before concluding this judgment, we place on record the submission made  on behalf  of the Electricity Board that it is open  to the  Company in  liquidation to prefer any claim arising  out   of  the   supply  contracts  as  against  the Electricity Board.  It is also open to the Electricity Board to claim any sum that may be due to it under such contracts. In considering  the above  mutual rights  and liabilities of the Electricity Board and the Company in liquidation the sum to be  received by the Electricity Board from the Bank under

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

the  letter   of  guarantee  will  have  to  be  taken  into consideration and dealt with in accordance with the terms of the supply contracts. The appeal is accordingly allowed. No costs. P.B.R.                                       Appeal allowed. 569