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PETITIONER: STATE BANK OF INDIA

       Vs.

RESPONDENT: SAKSARIA SUGAR MILLS LTD. AND ORS.

DATE OF JUDGMENT14/02/1986

BENCH: VENKATARAMIAH, E.S. (J) BENCH: VENKATARAMIAH, E.S. (J) THAKKAR, M.P. (J)

CITATION:  1986 AIR  868            1986 SCR  (1) 290  1986 SCC  (2) 145        1986 SCALE  (1)244  CITATOR INFO :  D          1992 SC1740  (23)

ACT:      The Sugar  Undertakings (Taking over of Management) Act 1978,  s.7(1)(b)   -  Sugar   Undertaking  Notified  -  Only obligations,  rights,   liabilities  etc.   arising  out  of contracts, assurances  of properties or agreements specified in   the    Notification   issued   remain   suspended   and unenforceable -  Remedies  against  guarantor/surety  -  Not suspended.      Indian Contract Act, 1872, s. 128 - Liability of surety - Whether co-extensive with that of principal debtor.

HEADNOTE:      The Sugar Undertakings (Taking over of Management) Act, 1978, by  Clause (b)  of section  7(1) empowers  the Central Government  to  issue  a  notification  declaring  that  the operation of  all or  any of  the contracts,  assurances  of property, agreements,  settlements, awards,  standing orders or other  instruments, in  force (to  which a notified sugar undertaking or the person owning such undertaking is a party or which  may be  applicable to  such sugar  undertaking  or person)  immediatley   before  the  date  of  issue  of  the notification shall  remain suspended or shall be enforceable with such adaptations and in such manner as may be specified in the notification. Sub-section (4) of section 7 of the Act provides that  any remedy  for the enforcement of any right, privilege, obligation or liability referred to in clause (b) of sub-section (1) of section 7 and suspended or modified by a  notification,   remain  suspended  or  modified  and  all proceedings  relating  thereto  pending  before  any  Court, tribunal,  officer  or  other  authority  shall  accordingly remain stayed  ro be  continued subject to such adaptations, so, however, that on the notification ceasing to have effect (a) any right, privilege, obligation or 291 liability so  remaining suspended  or modified  shall become revived and  enforceable as  if the  notification had  never been made;  and (b) any proceeding so remaining stayed shall be proceeded with subject to the provisions of any law which may then  be in  force from the stage which had been reached when the proceedings became stayed.

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    The appellant,  State Bank  of India,  had allowed cash credit facility  to respondent  No. 1,  M/s. Saksaria  Sugar Mills Ltd.,  on the  security of goods produced at its Sugar Factory and  the title  deeds of  its  immovable  properties deposited with the appellant by way of equitable mortgage to secure the  amount  advanced  under  the  said  cash  credit facility. Respondents  Nos. 2  to 5  had agreed  to  be  the guarantors  for   the  repayment  of  any  amount  due  from respondent No.  1 under  the said cash credit account. Since there was  default in  the repayment of the amount due under the said  cash credit  account, the  appellant instituted  a suit against respondent Nos. 1 to 5 for recovery of a sum of Rs. 54,89,822.99.  In the  meanwhile, the Central Government took over  the Sugar undertaking belonging to Respondent No. 1 under  the provisions of the Act and appointed a Custodian of the said undertaking.      In the  suit, respondent  Nos. 1  to 5 pleaded that the suit was  liable to  be stayed  in view of the provisions of the Act.  The Trial  Court held  that it had jurisdiction to try the  suit. In  revision, the  High Court  held that  the trial of  the suit  in so  far as  prayer for decree for Rs. 54,89,822.99 against  respondent Nos.  1 to 5 was concerned, was liable  to be  stayed by virtue of the provisions of the Act and  that the trial of the suit with regard to all other matters may  proceed.  The  High  Court  also  dismissed  an application flled  by the appellant seeking clarification of the aforesaid order. Hence these appeals by Special Leave.      Allowing the appeals, ^      HELD: 1.  The order  passed by  the High  Court is  set aside and  the trial  court is  directed to proceed with the suit. [299 F]      2. The  Sugar Undertakings  (Taking over of Management) Act 1978 does not provide that on a sugar undertaking being 292 notified, automatically  all the  contracts,  assurances  of property or  agreement  etc.  entered  into  by  such  sugar undertaking would  become unenforceable. It states that only those contracts,  assurances of  property or agreements etc. which are specified in the notification issued under section 7(1)(b) (not  all contracts)  would become suspended and the rights,  privileges,  obligations  and  liabilities  arising under them would not be enforceable. [297 D-F]      In the  instant case, the Central Government has made a declaration by   Notification  dated 21.3.84  to the  effect that  the  operation  of  all  obligations  and  liabilities accruing or  arising out  of all  contracts,  assurances  of properties, agreements, settlements, awards, standing orders or other  instruments in  force immeditely  before the  28th March 1980 (other then those relating to secured liabilities to banks and financial institutions) to which the said sugar undertaking or  the person owning the said sugar undertaking is a  party shall  remain suspended up to March 12, 1985. It is very clearly stated in the said Notification that it does not apply  to secured liabilities due to banks and financial institutions. The  liability involved  in  the  suit  was  a secured liability  and the  creditor is  the State  Bank  of India. Since  all secured  liabilities due  to a  bank or  a financial institution are excluded from the operation of the Notification, the  suit against  respondent No. 1 as well as respondent  Nos.   2  to   5  remained   unaffected  by  the Notification. [298 E-G; 299E]      3. The  Act does  not say  that when  a notification is issued under  section 7(1)(b)  of the  Act, remedies against the guarantors also stand suspended. Moreover, under section

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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. The sureties thus became liable  to  pay  the  entire  amount.  Their  liability  was immediate  and  it  was  not  deferred  until  the  creditor exhausted  his   remedies  against   the  principal  debtor. Therefore, the  order of  the High  Court against respondent Nos. 2 to 5 is untenable. [299 B-D]      Bank of  Bihar Ltd.  v. Damodar  Prasad & Anr. [1969] 1 S.C.R. 620, referred to.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 569-70 of 1986. 293      From the  Judgment and  Order dated 25.5.1984/22.2.1985 of the  Allahabad High Court in C.M.An. No.644(M) of 1984 in C.R. No. 136 of 1982.      Y.S. Chitale and S.A. Shroff for the Appellant.      Yogeshwar  Prasad   and   S.R.   Srivastava   for   the Respondents.      The Judgment of the Court was delivered by      VENKATARAMIAH, J.  These appeals  by special  leave are filed against  the order  dated May  25, 1984  passed by the High Court  of Allahabad  in Civil  Revision No. 136 of 1982 and the order dated February 22, 1985 in C.M.A. No.644(M) of 1984 on the file of that Court.      The appellant,  the State  Bank of  India, had  allowed cash credit  facility to  M/s. Saksaria  Sugar  Mills  Ltd., respondent  No.1  herein,  on  the  security  of  the  goods produced at  the sugar factory belonging to respondent No.1. Respondent No.1  had also  deposited in the Bombay office of the State  Bank of  India on  February 2,  1962  by  way  of equitable  mortgage   the  title   deeds  of  its  immovable properties to secure the amount advanced under the said cash credit facility. Respondents Nos. 2 to 5 M/s. Govind Ram and Brothers, Shri  K.G. Saksaria,  Shri G.L. Vaid and Shri R.K. Saksaria had  agreed to  be the guarantors for the repayment of any  amount due  from respondent No.1 under the said cash credit account.  Since there was default in repayment of the amount due under the said cash credit account the State Bank of India  instituted a  suit in  Suit No.  18 of 1980 on the file of the Additional District Judge, Gonda for recovery of a sum  of  Rs.54,89,822.99  as  on  March  6,  1980  against respondents Nos.  1 to  5 who  were described  as defendants Nos.1 to  5 in  the plaint  praying for a decree in terms of order  34,   rule  4   C.P.C.  and   further   consequential directions. In  the meanwhile  by virtue of an order made by the Central  Government under the Sugar Undertakings (Taking over  of   Management)  Act,   1978  (Act   No.49  of  1978) (hereinafter referred to as ’the Act’) the sugar undertaking belonging to  respondent No.1  had been  taken over  by  the Central Government and one Raghubir Singh had been appointed as the  Custodian of the said undertaking. The State Bank of India, therefore,  impleaded Raghubir Singh and the Union of India also  as defendants  Nos. 6  and 7 in the suit. In the suit respondents 294 Nos. 1  to 5  pleaded inter alia that the trial court had no territorial jurisdiction  to try  the suit and that the suit was not  maintainable and at any rate the suit was liable to be stayed  in view  of the  provisions of the Act. The trial court had  framed two issues arising out of the above pleas.

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The defendants  filed an  application before the trial court on September 6, 1982 requesting it to decide first the above two issues  relating to  its jurisdiction and its competence to proceed  with the  suit. After  hearing the  parties  the trial court  found that  it had jurisdiction to try the suit as the properties given as security were situated within its jurisdiction and  that there  was no  impediment to  proceed with the  trial notwithstanding the fact that the management of the  mill of  respondent No.1  had been taken over by the Central Government  under the  Act. Aggrieved  by  the  said decision  of  the  trial  court,  respondent  No.1  filed  a revision petition  in Civil  Revision No. 136 of 1982 before the High  Court of  Allahabad. The  High Court  allowed  the revision petition  holding that  the trial of suit in so far as  relief  No.1  namely  the  prayer  for  decree  for  Rs. 54,89,822.99 against  respondent Nos.  1 to  5 was concerned was liable  to be  stayed by virtue of the provisions of the Act. The High Court, however, directed that the trial of the suit with regard to all other matters may proceed. Since the only relief  prayed in  the  suit  was  in  respect  of  the recovery of  Rs.54,89,822.99 from respondents Nos. 1 to 5 in accordance with  the provisions  of order  34, rule 4 C.P.C. and that had been stayed, the State Bank of India applied to the High Court by filing an application No. C.M.A. 644(M) of 1984 for  clarification as  to what  other matter  could  be tried in the suit. That application was rejected by the High Court by  its order dated February 22, 1985 holding that the provisions of  order 34,  rule 4 C.P.C. were quite clear and it was  for the  court below  to proceed  in accordance with law. The  High Court was of opinion that the order needed no further clarification.  Aggrieved by  the others  passed  on revision in  Civil Revision  No. 136  of 1982  and the order passed in  C.M.A. No. 644(M) of 1984 the State Bank of India has filed this appeal by special leave.      The only  question canvassed  before us  by the parties relates to the question whether the trial of the suit should be stayed  by reason  of the provisions of the Act. There is no dispute  about the  territorial jurisdiction of the trial court. It is contended by respondents Nos. 1 to 5 that since the 295 management  of   the  sugar  undertaking  belonging  to  the respondent  No.  1  had  been  taken  over  by  the  Central Government under  the Act,  the  trial  of  the  suit  filed against respondent No. 1 for recovery of any amount due from the sugar  undertaking was  liable to  be stayed.  It is  no doubt true  that the  Central Government  has taken over the management  of   the  sugar  undertaking  belonging  to  the respondent No.  1 by  issuing a notification under section 3 of the  Act and  has appointed  a Custodian  under section 5 thereof. The  material part of section 7 of the Act which is relevant for the purposes of this case reads thus:           "7. Power  of Central  Government to  make certain           declarations.- (1)  The Central Government may, if           it is  satisfied, in  relation to a notified sugar           undertaking that  it is  necessary so to do in the           interests of  the general  public with  a view  to           preventing the fall in the volume of production of           the  sugar  industry,  it  may,  by  notification,           declare that-           (a)........................................           (b)  the   operation  of   all  or   any  of   the           contracts,assurances  of   property,   agreements,           settlements,  awards,  standing  orders  or  other           instruments  in   force  (to   which  such   sugar

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         undertaking or  the person owning such undertaking           is a  party or  which may  be applicable  to  such           sugar undertaking  or person)  immediately  before           the date of issue of the notification shall remain           suspended or  that  all  or  any  of  the  rights,           privileges, obligations  and liabilities  accruing           or arising  thereunder before the said date, shall           remain suspended or shall be enforceable with such           adaptations and in such manner as may be specified           in the notification.           ..................................................           .           (4) Any  remedy for  the enforcement of any right,           privilege, obligation  or liability referred to in           clause (b)  of sub-section  (1) and  suspended  or           modified  by   a  notification   made  under  that           subsection shall,  in accordance with the terms of           the 296           notification, remain suspended or modified and all           proceedings relating  thereto pending  before  any           Court, tribunal,  officer or other authority shall           accordingly remain  stayed or be continued subject           to such  adaptations, so,  however,  that  on  the           notification ceasing to have effect -           (a) any  right, privilege, obligation or liability           so remaining  suspended or  modified shall  become           revived and enforceable as if the notification had           never been made;           (b) any  proceeding so  remaining stayed  shall be           proceeded with  subject to  the provisions  of any           law which  may then  be in  force, from  the stage           which had been reached when the proceedings became           stayed."      Clause  (b)  of  section  7(1)  of  the  Act  which  is extracted above  empowers the  Central Government to issue a notification declaring  that the  operation of all or any of the   contracts,   assurances   of   property,   agreements, settlements, awards, standing orders or other instruments in force (to  which a  notified sugar undertaking or the person owning  such   undertaking  is  a  party  or  which  may  be applicable to  such sugar undertaking or person) immediately before the  date of  issue of  the notification shall remain suspended or  that all  or any  of the  rights,  privileges, obligations and  liabilities accruing  or arising thereunder before the  said date  shall remain  suspended or  shall  be enforceable with  such adaptations and in such manner as may be specified  in the notification. Subsection (4) of section 7 of the Act provides that any remedy for the enforcement of any right, privilege, obligation or liability referred to in clause (b)  of sub-section (1) of section 7 and suspended or modified by a notification made under that sub-section shall in accordance  with the  terms of  the notification,  remain suspended or  modified and  all proceedings relating thereto pending  before   any  Court,  tribunal,  officer  or  other authority shall  accordingly remain  stayed or  be continued subject to  such  adaptations,  so,  however,  that  on  the notification  ceasing   to  have   effect  (a)   any  right, privilege, obligation or liability so remaining suspended or modified shall  become revived  and enforceable  as  if  the noti- 297 fication had  never been  made; and  (b) any  proceeding  so remaining stayed  shall be  proceeded with  subject  to  the provisions of  any law  which may  then be in force from the

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stage which  had been  reached when  the proceedings  became stayed.      A  reading   of  clause  (b)  of  sub-section  (1)  and subsection (4)  of section  7 of the Act makes it clear that it is  only on the issuance of a notification by the Central Govt.  under   section  7(1)(b)   containing  the  necessary declaration  that  the  operation  of  all  or  any  of  the contracts  etc.   entered  into   by  the   notified   sugar undertaking which  are referred  to in the said notification shall remain  suspended or  that all  or any  of the rights, privileges, obligations  and liabilities accruing or arising thereunder before  the said date shall remain suspended. The Act does  not provide  that on  a  sugar  undertaking  being notified, automatically  all the  contracts,  assurances  of property or  agreements etc.  entered  into  by  such  sugar undertaking would  become unenforceable. It states that only those contracts,  assurances of  property or agreements etc. which are specified in the notification issued under section 7(1)(b) (not  all contracts)  would become suspended and the rights, privileges, obligation and liabilities arising under them would  not be  enforceable. In  the  instant  case  the Central Government  has issued  notifications from  time  to time  specifying  the  contracts,  assurances  of  property, agreements etc. the operation of which would stand suspended or stayed  during the  period of its management of the sugar undertaking in  question. The  latest notification issued in that connection is dated March 21, 1984. It reads thus :           "S.O. 181(E)  Whereas the  Central  Government  is           satisfied that  in relation  to the Saksaria Sugar           Mills Limited  manufacturing sugar  at Badhanan in           the district  of  Gonda  in  the  State  of  Uttar           Pradesh being  the notified  sugar undertaking, it           is necessary  so to  do in  the interests  of  the           general public  with a view to preventing the fall           in the volume of production of the sugar industry.           Now,  therefore,   in  exercise   of  the   powers           conferred by  clause (b)  of sub-section  (1) read           with subsection  (2) of  section 7  of  the  Sugar           Undertakings (Taking Over of Management) Act, 1978           (49 of 1978), 298           and in  continuation of  the notification  of  the           Government of  India in  the Ministry  of Food and           Civil  Supplies  (Department  of  Food)  No.  S.O.           196(E) dated  the 22nd  March  1983,  the  Central           Government hereby  declares that  the operation of           all  obligations   and  liabilities   accruing  or           arising  out   of  all  contracts,  assurances  of           property,   agreements,    settlements,    awards,           standing orders  or  other  instruments  in  force           immediately before  the 28th  March,  1980  (other           than those  relating  to  secured  liabilities  to           banks and  financial institutions)  to  which  the           said sugar  undertaking or  the person  owning the           said sugar undertaking is a party, or which may be           applicable to  the said  sugar undertaking or that           person,  shall  remain  suspended  for  a  further           period from 28th March, 1984 to 12.3.1985."      The above  notification clearly sets out the contracts, assurances  of   property  etc.  the  operation  whereof  is suspended or  stayed. The  Central  Government  has  made  a declaration by  that notification  to the  effect  that  the operation of  all obligations  and liabilities  accruing  or arising out  of all  contracts,  assurances  of  properties, agreements, settlements,  awards, standing  orders or  other

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instruments in  force immediately before the 28th March 1980 (other than  those relating  to secured liabilities to banks and  financial   institutions)  to   which  the  said  sugar undertaking or  the person owning the said sugar undertaking is a  party shall  remain suspended up to March 12, 1985. It is very clearly stated in the said notification that it does not apply  to secured liabilities due to banks and financial institutions. The  liability involved  in  the  suit  was  a secured liablity  and the  creditor is  the  State  Bank  of India. Yet the High Court surprisingly has proceeded to hold that the  operation of  the contract,  assurance of property and agreement in respect of the undertaking and its property entered into with the State Bank of India is to be suspended and the  suit in respect of them should be stayed in view of the Act and the notification issued thereunder.      It  is   unfortunate  that  the  High  Court  erred  in overlooking words  "other than  those  relating  to  secured liabilities to banks and financial institutions" referred to in the  notification which  had the  effect of excluding the mortgage in 299 favour of  the State  Bank of  India from  the scope  of the notification issued  under section  7 of  the Act.  The High Court further  erred  in  not  noticing  that  even  when  a notification is  issued under  section 7(1)(b)  of  the  Act suspeding the  operation of  any agreement  or assurances of property to which a notified sugar undertaking or the person owning is  a party,  any proceeding  againse  the  guarantor would  remain   unaffected  by   the  issuance   of  such  a notification. 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. The sureties  thus became  liable to  pay the entire emount. Their liability  was immediate and it was not deferred until the creditor  exhausted his  remedies against  the principal debtor. The  Act does  not say  that when  a notification is issued under section 7(1)(b) of the Act the remedies against the guarantors  also stand suspended. In any event the order of the  High Court  against  respondents  Nos.  2  to  5  is untenable. (See Bank of Bihar Ltd. V. Damodar Prasad & Anr., [1969] 1 S.C.R. 620).      Since in  the instant  case all secured liabilities due to a  bank or  a financial institution are excluded from the operation of  the notification,  the suit against respondent No.1 as  well as respondents Nos. 2 to 5 remained unaffected by the  notification issued  by the  Central Government. The order of the High Court in the Civil Revision is, therefore, liable to  be set  aside. We accordinly set aside the orders passed by  the High  Court against  which these  appeals are filed and  direct the  trial court to proceed with the suit. The appeals are accordingly allowed. Respondents Nos. 1 to 5 shall pay the costs of the appellant. M.L.A.                                 Appeals allowed. 300