1. This is a claim by a company in liquidation for the balance of the kuri prize money drawn by the 1st respondent. The prize money was paid on 23-4-70 when the 1st respondent, along with the second, executed a promissory note for the amount in favour of the company, and also an agreement where-under the 2nd respondent, as surety, guaranteed repayment. The 1st respondent also executed a receipt for the amount. The claim is based on the promissory note, the original consideration and the contract of guarantee.
2. The first respondent has been examined; he admits the liability, his only case being that he is entitled to be discharged under S. 3 of the Kerala Debt Relief Act, 1977. Ext. A1 report filed by the local Inspector attached to the Liquidator's office supports this case. The annual income of the 1st respondent is estimated to be only Rs. 250/-. The claim is also for an amount below Rs. 3000/-. The first respondent is thus admittedly entitled to discharge. The 2nd respondent has raised the following plea in paragraph (3) of his counter affidavit:—
“The first respondent executed a Promissory note on 23-4-1970 in favour of the company to which I was a surety. The claim under the said promissory note was barred by limitation on 23-4-1973. However before 23-4-1973, one company in liquidation, approached the 1st respondent and got a fresh endorsement on the pronote to which I am not a party. The fresh endorsement on the said promissory note by the 1st respondent was without my knowledge and consent, as a result the entire character of the document was altered and thus, as a surety my liabilities with respect to the said document stands discharged.”
3. The argument on his behalf is that under S. 18 of the Limitation Act, 1963 the acknowledgment can save limitation only against the 1st respondent, and not against the 2nd. S. 20(2) of the Act is also pressed into service to urge that the principal debtor's acknowledgment could keep the liability alive only as against him, and not against other “joint contractors, partners, executors or mortgagees” chargeable only by reason of such acknowledgment.
4. In Popular Bank Ltd. v. The United Coir Factories (1961 KLT. 434), this Court had rejected a similar contention when Raman Nayar J. (as he then was) observed:—
“It seems clear that in respect of any debt incurred by the principal during the currency of the guarantee, the surety is liable so long as the debt is recoverable from principal. It does not matter that the principal has kept the debt alive by acknowledgments under S. 19 of the Limitation Act or by payments under S. 20, for by these acts, there is no renewal of the debt, and no new debt created which is not covered by the guarantee. The debt remains the same, namely, the debt guaranteed; only the bar of time against recovery is postponed. S. 21(2) of the Limitation Act has no bearing, for, a mere surety is not a joint contractor. His is a separate and collateral contract for the purpose of ensuring that the principal keeps his contract.”
5. But it is urged that many other High Courts have been taking a different view, and that the matter requires further consideration.
6. Under S. 126 of the Contract Act, a surety is one who guarantees to perform the promise or discharge the liability of a third person in case of his default. Under S. 128, the surety's liability is co-extensive with that of the principal debtor unless it is otherwise provided in the contract. S. 133 provides that a variance in the terms of the contract between the principal debtor and the creditor will discharge the surety. Under Sec. 134, the surety gets a discharge if the creditor enters into a contract with the principal debtor to discharge the latter. The same is the effect, under Sec. 135, when the creditor and the principal debtor enter into a contract by which the creditor makes a composition with the debtor, or promises to give him time or not to sue (unless, of course, the surety also assents to such a contract). But Sec. 137 makes a distinction between a contract not to sue and a mere forbearance by the creditor from suing; such forbearance does not discharge the surety. Sec. 139 provides for discharge of the surety when the creditor by his own act or omission, impairs the former's remedy against the principal debtor. Ordinarily the rights and obligations of a surety, when the execution of a contract of guarantee is admitted, have to be worked out within the confines of the above statutory provisions and the terms of the contract. Counsel for the 2nd respondent, however, mainly relied on the provisions of the Limitation Act to which reference will separately be made; but some of the decisions cited by him do advert to the law of suretyship contracts. It will therefore be useful, before proceeding further, to extract the following from paragraph (8) of the agreement dated 23-4-70 in this case:—
“It is further agreed and consented that the lenders shall not be bound to claim and recover payment from the sureties before resorting to the borrower or vice versa and that extension of time or any other indulgence granted by the lenders to the borrower or to the sureties shall not affect or release the other or either of them………”
7. In Federal Bank of India v. Som Dev AIR. 1956 Punjab 21 the question was whether payment by the principal debtor was sufficient to start a fresh period of limitation not only against himself, but also against the surety. Falshaw J. observed that the preponderance of authority was in favour of the view that such a payment could save limitation only against the person making it, and then proceeded to hold “on general grounds”, that there was “no reason for not placing the surety in the same position as a co-debtor”. The language indicates that the learned Judge was not prepared to hold that a surety is a co-debtor; only he has to be placed in the same position as a code for, on general grounds. With respect, it appears to me that such a formulation over-simplifies the distinction between the two, a distinction which is real and substantial, and one clearly noticed by Raman Nayar J. in the Popular Bank case. As is clear from Sec. 126 of the Contract Act, the surety's obligation depends on the default of the third person i.e principal debtor; the former's is not a primary and independent liability. There are three parties to any contract of guarantee: a creditor, a principal debtor and a surety. The surety only promises to discharge the debtor's liability in case the latter defaults; and this promise is made in consideration of some act or promise on the part of the creditor. The surety's contract is thus separate and collateral made for the purpose of ensuring that the debtor honors his and the transaction involves a third contract by which the debtor requests (expressly or impliedly) the surety to act as such. His liability cannot therefore be equated to that of a co-debtor, or joint contractor within the meaning of Sec. 20(2) of the Limitation Act.
8. Hazara Singh Gujjar Singh v. Bhakshish Singh Mula Singh (AIR 1962 Punjab 495), also cited by counsel for the 2nd respondent, rests on the same reasoning as in the Federal Bank case (AIR. 1956 Punjab 21), with the differences that in the former, the surety had made an acknowledgment without the knowledge and consent of the principal debtor. D.K Mahajan J. held that such an acknowledgment could not lift the bar of limitation against the principal debtor. It was observed that there was a catena of cases under Sec. 20 of the Limitation Act (1908) where part payment or payment of interest by the surety were held to be insufficient to save limitation against the principal debtor, and that there was no reason why the same rule should not apply to acknowledgment also. Said the learned Judge:
“The rule seems to be well settled that acknowledgement by one of the co-debtors is not acknowledgement on behalf of the other co-debtors. So also would be the case where a surety and a principal debtor are concerned”.
9. No doubt, the rule that acknowledgement by one of several joint contractors would not affect the others is well settled, and is even statutorily recognised; but it is difficult, again with respect, to recognise that the principal debtor and the surety are joint contractors.
10. The third case cited, Baikunth Narain Misra v. Kisar Kali (AIR. 1969 Patna 160), creates no difficulty, since the only point decided was that one of the co-obligants under a promissory note who had made some payment and endorsed it on the note could not plead limitation on the footing that the claim was barred against the other. No question of a suretyship contract had arisen at all.
11. Turning to the provisions of the Limitation Act, it is true that S. 18 (of the 1963 Act) provides for a fresh period of limitation from the date of acknowledgement only in relation to the party who makes it and against whom the right is claimed. But the question is whether such an acknowledgement by the debtor is not sufficient, in the context of a contract of guarantee, to keep alive his liability, and thereby that of the surety also. It seems to me that so long as the principal debtor's liability is alive, any default on his part would attract the collateral liability of the: surety also, unless the latter is able to plead discharge by relying on one or other of the provisions of the Contract Act referred to above, or on some provision of the Limitation Act other than S. 18. S. 18 does not in terms operate on a collateral contract; it operates only on the contract between the claimant and the person against whom the claim is made, when such person makes an acknowledgement. And S. 20(2), it has already been seen, cannot be taken advantage of by a surety, as he is not a joint contractor.
12. It is somewhat feebly argued on behalf of the 2nd respondent that the effect of the acknowledgment made by the first is to vary the terms of the latter's contract with the creditor in a manner in which the surety could claim discharge under S. 133 of the Contract Act. I am unable to accept this argument. S. 3 of the Limitation Act makes certain claims unenforceable after the prescribed period. But this is subject to the provisions of S. 4 to 24, so that when S. 18 provides for an extension of the prescribed period under certain conditions, what the statute really does is to provide for the debt or claim to remain alive for a longer period, when those conditions are satisfied. The debt is not extinguished. It is not modified. The contract is not varied. The original contract continues without any change. The debtor's acknowledment does not create a contract different from the one the performance of which the surety had guaranteed.
13. The law of limitation is based on public policy and expediency, and generally stated, it only disables the litigant who has not been vigilant, from getting the aid of the State in enforcing his claim. It does not destroy the litigant's right, but only puts an end to the accessory right of action. It is procedural, notwithstanding that in some rare cases like those under S. 25 and 27 (of the Act of 1963), rights are sometimes created and sometimes extinguished. Mahant Singh v. U Ba Yi (43 CWN. 641), the Privy Council held that failure to sue the principal debtor till recovery is barred by the statute of limitation would not operate to discharge the surety, and that when S. 2(j) of the Contract Act lays down that
“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”.
14. the unenforceability should arise from substantive law, and not from procedural regulations. The debt remains a debt even when the creditor by reason of a rule of procedure cannot himself bring an action upon it. In Bombay Dyeing Mfg. Co. v. State of Bombay (AIR 1958 SC. 328), the Supreme Court held:—
“Now, it is the settled law of this country that the statute of limitation only bars the remedy but does not extinguish the debt. S. 28 of the Limitation Act (of 1908, which corresponds to S. 27 of the present Act) provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. And the authorities have held—and rightly, that when the property is incapable of possession, as for example a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto.”
15. If a debt barred by limitation is not extinguished, an acknowledgement designed to place it beyond the pale of unenforceability cannot certainly alter its nature or character, or that of the contract on which it is founded, so as to enable the surety to disown his obligation.
16. It is pointed out that the surety will be adversely affected if he is sued after his remedies against the debtor get time-barred. Such is certainly not the case here because the principal debtor's liability was kept alive by the acknowledgement. That apart, the question has been posed and answered by a Division Bench of the Madras High Court in the following terms, in Subramania Aiyar v. Gopala Aiyar (ILR 33 Madras 308):—
“…………Whenever procedural actions are barred, the rights themselves are not extinguished………Unless a law of limitation operates as well as a law of extinctive prescription, omission to sue cannot discharge the debtor. Limitation which merely bars the remedy is never spoken of in modern jurisprudence as a mode of discharging an obligation……It would therefore seem to follow that, as a mere omission to sue does not discharge the principal debtor, the surety is not discharged under S. 134 of the Indian Contract Apt. It has been argued that the surety will be prejudiced if he is liable to be sued when he cannot have any remedies against the debtor after a suit against him has become barred. The answer is he is himself to blame. He can easily avoid the risk and clothe himself with all the creditor's rights by payment or performance as soon as the debtor becomes liable.”
17. This decision has been noticed with approval by the Privy Council in Mahant Singh's Case (43 CWN 641) and by the Supreme Court in the Bombay Dyeing Case. (AIR. 1958 SC. 328).
18. To sum up, the making of an acknowledgement by the principal debtor does not involve any variance of the contract within the meaning of S. 133 of the Contract Act. It also does not involve the making of another contract under Ss. 134 and 135 whereby the creditor discharges the debtor or makes a composition with him. In fact, the effect of an acknowledgement is just the contrary. Nor is S. 137 attracted because it has been held that mere forbearance to sue even for a time beyond the period of limitation does not operate to discharge the surety. An acknowledgement does not also impair the remedy of the surety against the debtor, under S. 139. It follows that there is nothing in Ss. 18 and 20(2) of the Limitation Act, or in the relevant provisions of the Contract Act, as contended for, to render the surety's collateral obligation unenforceable by reason of a written acknowledgement by the principal debtor. Lastly, reliance has been placed on a decision of this Court in CRP. No. 1620 of 1977 for the proposition that any alteration of the date of an endorsement indicating part payment by the endorsor on a promissory note is a material alteration of the negotiable instrument itself, sufficient to render the instrument void under S. 87 of the Negotiable Instruments Act. That was a case where the suit was on a promissory note and it was found that only one of the co-obligants had really endorsed the part payment made before limitation had set in. The other signature in the endorsement was found to be a forgery. There is no case of part-payment or forgery here, and as already noticed, the claim itself is based not on the promissory note alone, but also on the contract of guarantee. The principle of the decision therefore, is inapplicable to the facts of the present case
19. The result is that there are no grounds for re-examining the rule laid down in the Popular Bank case (1961 KLT. 434). I am in respectful agreement with the view taken therein. I therefore discharge the 1st respondent under Act 17 of 1977 and decree the claim as prayed for, as against the 2nd respondent. No costs.