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Punjab National Bank v. State Of U.P And Others
Factual and Procedural Background
The appellant advanced money to Respondent 4 after Respondent 4’s management was taken over by U.P. State Textile Corporation Limited (Respondent 3) under the Industries (Development and Regulation) Act. For this advance, Respondents 1, 2, and 3 executed deeds of guarantee undertaking to pay the amount due to the Bank in the event of default by the principal borrower (Respondent 4).
Subsequently, Respondent 3 became “sick,” and proceedings were initiated under the Sick Textile Undertakings (Nationalisation) Act, 1974 (“the Act”). The appellant instituted a recovery suit against both the principal debtor and the guarantors. A preliminary issue was framed to determine whether the plaintiff’s claim was maintainable in view of Act 57 of 1974. The trial court and the High Court held that the suit was not maintainable in light of Section 29 of the Act.
On appeal, the higher court reviewed the statutory scheme and the legal effect of nationalisation on guarantor liability and reversed the lower courts’ conclusion.
Legal Issues Presented
- Whether the appellant’s claim is not maintainable in view of Act 57 of 1974 (the Sick Textile Undertakings (Nationalisation) Act, 1974), particularly Section 29, as framed in the preliminary issue.
- Whether the nationalisation framework under the 1974 Act affects or extinguishes the liability of guarantors under deeds of guarantee when recovery from the principal borrower is restricted or altered.
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 |
|---|---|---|
| Maharashtra SEB v. Official Liquidator, High Court, Ernakulam, (1982) 3 SCC 358; AIR 1982 SC 1497 | A guarantor’s liability continues despite the principal debtor’s liability being discharged under insolvency or company law, given Section 128 of the Contract Act and absence of discharge under Section 134. | The Court applied the same principle by analogy: the 1974 Nationalisation Act does not extinguish or supersede guarantor liabilities arising from deeds of guarantee; creditors can proceed against guarantors notwithstanding limitations on recovery from the principal borrower. |
Court's Reasoning and Analysis
The Court examined the scheme of the Sick Textile Undertakings (Nationalisation) Act, 1974. It noted that Section 5 addresses the owner’s liability for certain prior liabilities, and Section 29 gives the Act an overriding effect over other enactments. However, the Court emphasized that the Act concerns the liabilities and recovery framework relating to the nationalised company itself and contains no provision that affects or nullifies the independent contractual obligations of guarantors under deeds of guarantee.
Relying on the precedent in Maharashtra SEB v. Official Liquidator, the Court reaffirmed that a guarantor’s liability is coextensive with that of the principal debtor under Section 128 of the Contract Act and is not discharged in the circumstances contemplated by Section 134. This doctrinal approach applies equally where the principal debtor is subject to a special statutory regime: nationalisation alters the mode of recovery but does not extinguish the underlying debt or the guarantor’s promise.
Applying these principles, the Court found the lower courts’ reliance on Section 29 of the 1974 Act to hold the suit non-maintainable to be incorrect. The rights arising from the deeds of guarantee remained enforceable against Respondents 1, 2, and 3, and even under the Nationalisation Act, the principal borrower’s liability does not end; only the method of recovery is affected.
Holding and Implications
APPEAL ALLOWED; PRELIMINARY ISSUE DECIDED IN FAVOUR OF THE APPELLANT; CASE REMANDED TO THE TRIAL COURT FOR DECISION ON MERITS; NO COSTS.
Additionally, IA No. 3 filed by Respondent 3 under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, was dismissed as withdrawn, with liberty to move an appropriate application before the trial court.
Implications: The appellant’s suit is maintainable and will proceed to trial on merits. The guarantors’ liability under the deeds of guarantee is not negated by the 1974 Nationalisation Act, and the creditor may pursue recovery from them notwithstanding any limitations on proceeding directly against the principal borrower under the Act. The order sets no new rule but applies established principles regarding guarantor liability.
Order
1. The appellant had, after Respondent 4's management was taken over by U.P State Textile Corporation Limited (Respondent 3) under the Industries (Development and Regulation) Act, advanced some money to the said Respondent 4. In respect of the advance so made, Respondents 1, 2 and 3 executed deeds of guarantee undertaking to pay the amount due to the Bank as guarantors in the event of the principal borrower being unable to pay the same.
2. Subsequently, Respondent 3 which had taken over the management of Respondent 4 became sick and proceedings were initiated under the Sick Textile Undertakings (Nationalisation) Act, 1974 (for short “the Act”). The appellant filed suit for recovery against the guarantors and the principal debtor of the amount claimed by it.
3. The following preliminary issue was, on the pleadings of the parties, framed:
“Whether the claim of the plaintiff is not maintainable in view of the provisions of Act 57 of 1974 as alleged in para 25 of the written statement of Defendant 2?”
4. The trial court as well as the High Court, both came to the conclusion that in view of the provisions of Section 29 of the Act, the suit of the appellant was not maintainable.
5. We have gone through the provisions of the said Act and in our opinion the decision of the courts below is not correct. Section 5 of the said Act provides for the owner to be liable for certain prior liabilities and Section 29 states that the said Act will have an overriding effect over all other enactments. This Act only deals with the liabilities of a company which is nationalised and there is no provision therein which in any way affects the liability of a guarantor who is bound by the deed of guarantee executed by it. The High Court has referred to a decision of this Court in Maharashtra SEB v. Official Liquidator, High Court, Ernakulam (1982) 3 SCC 358, AIR 1982 SC 1497 where the liability of the guarantor in a case where liability of the principal debtor was discharged under the insolvency law or the company law, was considered. It was held in this case that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of the language of Section 128 of the Contract Act as there is no discharge under Section 134 of that Act.
6. In our opinion, the principle of the aforesaid decision of this Court is equally applicable in the present case. The right of the appellant to recover money from Respondents 1, 2 and 3 who stood guarantors arises out of the terms of the deeds of guarantee which are not in any way superseded or brought to a naught merely because the appellant may not have been able to recover money from the principal borrower. It may here be added that even as a result of the Nationalisation Act the liability of the principal borrower does not come to an end. It is only the mode of recovery which is referred to in the said Act.
7. For the aforesaid reasons, this appeal is allowed, the preliminary issue framed by the trial court is decided in favour of the appellant and the case is remanded to the trial court for decision on merits. No costs.
8. IA No. 3 filed in this Court by Respondent 3 under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, is dismissed as withdrawn with liberty to the applicant to move the appropriate application before the trial court.
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