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Bank Of Bihar Ltd. v. Dr. Damodar Prasad And Another
Factual and Procedural Background
The plaintiff, a banking company, advanced loans to Defendant 1, Damodar Prasad, secured by a guarantee executed on 15 June 1951 by Defendant 2, Dr. Paras Nath Sinha. As of the suit date, the outstanding liability amounted to Rs 11,723.56 (principal) and Rs 2,769.37 (interest). Despite repeated demands, neither the principal debtor nor the surety repaid the debt.
The Subordinate Judge, 1st Court, Patna, decreed the suit against both defendants but inserted a clause stating that the bank could enforce the decree against the surety only after exhausting remedies against the principal debtor. The bank appealed, but the Patna High Court upheld the restriction. The present appeal was filed before the Supreme Court on a certificate granted by the High Court.
Legal Issues Presented
- Whether, under Section 128 of the Indian Contract Act, 1872, and the terms of the guarantee bond, the surety’s liability is immediate and co-extensive with that of the principal debtor.
- Whether a court, invoking Order 20 Rule 11(1) or its inherent power under Section 151 of the Code of Civil Procedure, 1908, can direct that a decree against a surety be executed only after the creditor exhausts remedies against the principal debtor.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Wright v. Simpson | A surety cannot compel the creditor to proceed first against the principal debtor; it is the surety’s duty to ensure payment by the principal. | Invoked to affirm that, before payment, a surety has no right to dictate the creditor’s course of action. |
| Lachhman Joharimal v. Bapu Khandu and Surety Tukaram Khandoji | A creditor need not exhaust remedies against the principal debtor before enforcing a decree against the surety; a decree against a surety is enforceable like any other money decree. | Cited to reject the lower court’s practice of restraining execution against sureties until remedies against the principal are exhausted. |
Court's Reasoning and Analysis
1. Under Section 128 of the Indian Contract Act, the surety’s liability is co-extensive with that of the principal debtor unless the contract provides otherwise. The guarantee bond contained no term deferring the surety’s liability; indeed, it expressly allowed the bank to proceed “notwithstanding any other guarantee, security or remedy.”
2. The court reiterated that a surety, prior to payment, lacks any “special equity” to restrain the creditor from suing or executing against him, citing Wright v. Simpson.
3. The attempt to justify the restriction under Order 20 Rule 11(1) CPC failed because:
- The rule permits postponement of payment only for “sufficient reason,” which must be recorded. The trial court gave none.
- The direction was vague—there was no clarity on what constituted “exhausting remedies” against the principal debtor or how long the creditor must wait.
- The solvency of the principal debtor is irrelevant; the surety’s obligation is to pay first and then seek reimbursement through subrogation under Section 140 of the Contract Act.
4. Even assuming inherent power under Section 151 CPC, the court held that justice did not require postponing execution because such a condition would defeat the commercial utility of guarantees, particularly for banking institutions.
Holding and Implications
Appeal Allowed; Restrictive Condition Set Aside.
The Supreme Court annulled the clause that barred the bank from executing the decree against the surety until remedies against the principal debtor were exhausted. Costs in the Supreme Court and in the High Court were awarded to the appellant bank.
Implications: The judgment re-affirms that a surety’s liability is immediate and co-extensive with that of the principal debtor, limiting judicial discretion to postpone execution against sureties. It strengthens the enforceability of guarantees, particularly in banking transactions, without establishing new precedent beyond settled principles.
Bachawat, J.— The plaintiff Bank lent moneys to Defendant 1 Damodar Prasad on the guarantee of Defendant 2 Paras Nath Sinha. On the date of the suit Damodar Prasad was indebted to the plaintiff for Rs 11,723.56 nP on account of principal and Rs 2769.37 nP on account of interest. In spite of demands neither he nor the guarantor paid the dues. The plaintiff filed a suit against them in the Court of the Subordinate Judge, 1st Court, Patna, claiming a decree for the amount due. The trial court decreed the suit against both the defendants. While passing the decree, the trial court directed that the “plaintiff bank shall be at liberty to enforce its dues in question against Defendant 2 only after having exhausted its remedies against Defendant 1”. The plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.
2. The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agreed to pay and satisfy the liabilities of the principal debtor up to Rs 12,000 and interest thereon two days after demand. The bond provided that the plaintiff would be at liberty to enforce and to recover upon the guarantee notwithstanding any other guarantee, security or remedy which the Bank might hold or be entitled to in respect of the amount secured.
3. The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
4. Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simpson: “But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor”. In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings.
5. Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. In Lachhman Joharimal v. Bapu Khandu and Surety Tukaram Khandoji the Judge of the Court of Small Causes, Ahmednagar, solicited the opinion of the Bombay High Court on the subject of the liability of sureties. The creditors having obtained decrees in two suits in the Court of Small Causes against the principals and sureties presented applications for the imprisonment of the sureties before levying execution against the principals. The Judge stated that the practice of his court had been to restrain a judgment-creditor from recovering from a surety until he had exhausted his remedy against the principal but in his view the surety should be liable to imprisonment while the principal was at large. Couch, C.J, and Melvill, J. agreed with this opinion and observed—
“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.”
6. It is now suggested that under Order 20 Rule 11(1) and Section 151 of the Code of Civil Procedure the Court passing the decree had the power to impose the condition that the judgment-creditor would not be at liberty to enforce the decree against the surety until the creditor has exhausted his remedies against the principal. Order 20 Rule 11(1) provides that “where and insofar as a decree is for the payment of money, the Court may for any sufficient reason at the time of passing the decree order that payment of the amount decreed shall be postponed or shall be made by instalments, with or without interest, notwithstanding anything contained in the contract under which the money is payable”. For making an order under Order 20 Rule 11(1) the court must give sufficient reasons. The direction postponing payment of the amount decreed must be clear and specific. The injunction upon the creditor not to proceed against the surety until the creditor has exhausted his remedies against the principal is of the vaguest character. It is not stated how and when the creditor would exhaust his remedies against the principal. Is the creditor to ask for imprisonment of the principal? Is he bound to discover at his peril all the properties of the principal and sell them; and if he cannot, does he lose his remedy against the surety? Has he to file an insolvency petition against the principal? The trial court gave no reasons for this extraordinary direction. The Court rejected the prayer of the principal debtor for payment of the decretal amount in instalments as there was no evidence to show that he could not pay the decretal amount in one lump sum. It is, therefore, said that the principal was solvent. But the solvency of the principal is not a sufficient ground for restraining execution of the decree against the surety. It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated to the rights of the creditor under Section 140 of the Indian Contract Act, and he may then recover the amount from the principal. 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. The impugned direction cannot be justified under Order 20 Rule 11(1). Assuring that apart from Order 20 Rule 11(1) the Court had the inherent power under Section 151 to direct postponement of execution of the decree, the ends of justice did not require such postponement.
7. In the result, the appeal is allowed, the direction of the court below that the “plaintiff-bank shall be at liberty to enforce its dues in question against Defendant 2 only after having exhausted its remedies against Defendant 1” is set aside. The respondent Dr. Paras Nath Sinha shall pay to the appellant costs in this Court and in the High Court.
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