Sardar Kahn Singh v. Tek Chand Nanda And Another

Bhat, J.:— This is an appeal against the order of the learned District Judge Jammu dated 1st of October, 1963, whereby he has rejected the contention of the appellant that he was not liable to pay the decretal amount in a joint decree passed against him and two others namely, Sardar Jagdish Singh and S. Dulla Singh. The facts of the case are that S. Jagdesh Singh who shall hereafter be referred to as the principal debtor had purchased a true No. J & K 4177, which was financed by the plaintiff decree holder. S. Jagdesh Singh gave two people, the present appellant S. Kahn Singh and Dulla Singh as the guarantors for the payment that would be due on the hire purchase agreement dated 19-9-1955 Some payments were made but ultimately a pronote for Rs. 6,000 was executed on 26-7-1958 by the principal debtor and two sureties in favour of the respondent No. 1. An agreement was simultaneously executed by these persons in favour of the plaintiff-respondent No. 1. When no payment was made, a suit was instituted by the respondent No. 1 against the three person for Rs. 6,480, Rs. 6,000 as principal and Rs. 480 as interest, describing Jagdesh Singh as the principal debtor, and the two other defendants, the appellants and the respondent No. 2 S. Dulla Singh, as the guarantors.

2. After a contest, the suit was decreed on 26-2-1962. The judgment of the trial Court in the original suit as well as the decree-sheet described Jagdesh Singh as the principal debtor and the other two defendants as the sureties. Later on it appears that the appellant and Jagdesh Singh put in an application for fixation of instalments, which application was rejected by the trial Court. An appeal was preferred by the principal debtor in this Court, which resulted in a compromise on 11-3-1963 before a Division Bench of this Court. In that appeal the principal debtor was represented by S. Avtar Singh, the decree-holder by Mr. V.S Malhotra and the present appellant by Mr. L.N Sharma. The learned counsel for the principal debtor made a statement in Court on that date to the effect that Jagdesh Singh had paid Rs. 500 to the decree-holder, the remaining amount would be paid by the principal debtor to the decree-holder in instalments of Rs. 325 per month beginning from 1-5-1963. Every instalment would be paid in the first week of each month. If there was a default of payment of any instalment, the decree-holder would be at liberty to recover the entire amount outstanding in lump by means of execution. This statement of the counsel for the principal debtor Jagdesh Singh was accepted as correct by Mr. Vidya Sagar counsel for the respondent-plaintiff who also made a statement accepting the statement of the counsel for the appellant, and prayed that the case be decided in accordance with the statement of the counsel for the principal debtor Further, he stated that the parties would bear their own costs. Mr. L.N Sharma the learned counsel for the present appellant, also was present, and the Court passed the following order:—

“Parties have compromised the case and then statements to that effect have been recorded in Court today. Let an order be made in terms of the statements made by the parties which shall form part of the order in this case”

3. We have quoted in extenso the proceedings that took place on that date, i.e, 11-3-1963 in this Court because the disposal of this appeal will mainly hinge upon the proceedings that took place in the case on that date before this Court.

4. When no payment was made by the principal debtor to the decree-holder in terms of this compromise, the decree-holder took out execution for the entire amount against the present appellant. He took no action against the principal debtor nor did he take out execution against Dulla Singh, the other surety. In this appeal also the learned counsel for the decree-holder refused to take any proceedings against S. Dulla Singh but insisted that the entire decretal amount should be realized from Kahn Singh, appellant. When execution was taken Page: 95out against the present appellant, he raised an objection in the trial Court to the effect that as the decree-holder had entered into a compromise with the principal debtor without the consent and concurrence of the appellant, he was discharged and was not liable to pay any amount to the decree-holder under the decree. This plea of the appellant was turned down by the trial Court; hence this appeal.

5. We heard arguments in this case more than once. The parties took adjournments more than once to compromise the case but no compromise was ultimately arrived at, which has made it necessary for us to decide the case ourselves.

6. The learned counsel for the decree-holder argues that the present appellant may have been a guarantor only but once a decree was passed against him, he became a co-judgment-debtor and, therefore, was liable to the same extent as the principal debtor. The distinction between him and the principal debtor came to an end as soon as the decree was passed. This argument is not correct either factually or legally. The agreement dated 26-7-1958 and the plaint clearly describes Kahn Singh as Dulla Singh as the guarantors and S. Jagdesh Singh as the principal debtor. The decree also clearly makes a distinction in the description of the different judgment-debtors. It mentions Jagdesh Singh as the principal debtor and Kahn Singh and Dulla Singh as the sureties. Therefore, the first contention of Mr. Vidyasagar is without any substance.

7. It was argued by the learned counsel for the appellant that the principle of Sections 134, 135 and 139 of the Contract Act would apply to the facts of this case. The surety would be discharged as soon as the decree-holder entered into a compromise with the principal debtor without the consent of the surety. Mr. Vidyasagar has controverted this proposition of law and has stated that these sections deal with contracts and not with decrees. These sections can have no bearing when the question of liability of the sureties is to be considered in the execution petitions. This argument of the learned counsel for the decree-holder Mr. Vidyasagar is again without any substance. The legal position seems to us to be very clear; because simply by bringing a suit against a surety as well as the principal debtor or getting a decree against them the nature of the original transaction is not changed and cannot be changed. Their relationship is to be determined from the original contract and all consequences following must be interpreted and acted upon in the fight of and on the basis of the original contract.

8. To construe the terms of a decree properly, one can go behind the decree and read the judgment and even the pleadings of the parties. In this case all that is unnecessary because the position of Jagdesh Singh as principal debtor and Kahn Singh and Dulla Singh being guarantors is admitted throughout, in the suit agreement, in the plaint, in the judgment of the trial Court and even in the decree itself. The rights and liabilities of the parties will be and must be determined on the terms of the original contract and, therefore, in our opinion the provisions of Sections 134, 135 and 139 or, as a matter of fact, the entire Chapter VIII of the Contract Act, so far as it pertains to contracts of guarantee, shall apply to this case. Whatever can be held under that chapte in favour of either party must be given to it.

9. Section 126 of the Contract Act defines what is understood by the words “contract of guarantee”, “surety”, “principal debtor” and creditor”. Under Section 128 of the Act the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Under Section 133, any variance made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. Under Section 134 the surety is discharged if the creditor and the principal debtor enter into a contract by which the principal debtor is released or by any act or omission on the part of the creditor which results in the legal discharge of the principal debtor. Section 135, which is particularly applicable to this case lays down:

“A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor discharges the surety, unless the surety assents to such contract.”

10. Section 137, however, lays down that—

“Mere forbearance on the part of the creditors to sue the principal debtor or to enforce any other remedy against him does not in the absence of any provision in the guarantee to the contrary, discharge the surety.”

11. The only proviso is that by “such forbearance” the suit or remedy should not get time-barred. Section 139 states:

“If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”

12. We have quoted more or less in extenso the relevant sections. Under Sec. 135, if the creditor compromises the matter without the assent of the surety or even promises to give him time or promises not to sue the principal debtor that ipso facto discharges the surety. In our opinion, in this case the compromise arrived at between the principal debtor and the creditor in this Court on 11-3-1963 completely discharges the surety. Before we discuss that aspect of the case, let us consider the argument of Mr. Vidyasagar which was based on Section 137 of the Contract Act. Under Section 137 if the creditor does not bring a suit against the principal debtor or does something else or takes recourse to another remedy against the principal debtor that will not absolve the surety unless of course by such forbearance the suit or remedy gets time-barred. Here the decree-holder has not forborne to sue the principal debtor. He has sued him as well as the sureties, got Page: 96a decree against them and taken out execution also. Therefore, this section cannot help the decree-holder; but on the other hand, after doing all that against the principal debtor and least one surety, the decree-holder, entered into a compromise with only the principal debtor leaving out the surety. Here, as we indicated earlier, the exact terms of the compromise are very material.

13. As we have stated earlier, Mr. L.N Sharma, the learned counsel for the present appellant, also was present when the compromise of 11-3-1963 was entered into between the principal debtor and the creditor. S. Avtar Singh the counsel for the principal debtor has categorically stated that his client has entered into a compromise and the decree-holder has fixed instalments with him. The exact words in his statement are:

14. (The original in Urdu, omitted in this re port—Ed.)

15. which means clearly that the decree-holder confined his remedy to the person of the principal debtor alone because this statement of S. Avtar Singh is fully accepted and endorsed by Mr. Vidyasagar, the learned counsel for the decree-holder. Neither of these statements makes any mention that the decree would stand intact so far as the sureties were concerned. On the other hand, the only interpretation that can be put upon the statements made and the order passed by the Court is that the decree-holder gave up the idea of seeking any remedy against the sureties and remained content to realize the decretal amount from the principal debtor and that too in instalments fixed with him. By this compromise a composition was entered into between the creditor and the principal debtor, time was given to the principal debtor to make payment and all this was done without the assent and consent of the surety-appellant. Therefore, from that moment onwards the liability of the surety became extinct and the only available remedy to the decree-holder remained against the principal debtor.

16. Not only this, Section 139 of the Con tract Act also renders the surety not liable for this amount; because under this section if the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which he was bound to do vis-a-vis the surety and the surety's remedy vis-a-vis the principal debtor is in any way impaired, the surety is discharged. In this case it can very safely be argued that the principal debtor at the time of this composition was possessed of property. If the original decree had remained intact, and the surety was made to make the entire payment, he could proceed against the principal debtor under Section 140 of the Act and get himself reimbursed. By giving time to the principal debtor to make the payment by instalments of Rs. 325 per month which would make the entire sum paid after quite a long time, the principal debtor did dispose of his property and paid nothing to the creditor.

17. The decree-holders learned counsel stated in Court that the principal debtor now had no property which could be attached; his whereabouts even are not known. The result is that the creditor tries to pounce upon the surety and realise the decretal amount from him. The surety has nothing left in the hands of the judgment-debtor to fall back upon from which he can reimburse himself. Therefore, this action of the principal debtor and creditor which impaired the right of the surety to reimburse himself against the principal debtor has, in terms of Section 139, fully exonerated the surety of his liability to pay the decretal amount. In our opinion therefore, the appellant was perfectly justified in claiming discharge from his responsibility in the executing Court, which has been wrongly refused to him.

18. This was a clear case of a principal debtor and a surety qua the creditor; hence in our opinion the provisions of Chapter VIII of the Contract Act would apply to this case. Apart from this aspect of the case authorities have gone so far as to hold that in a case where the principal debtor is required by the Court to furnish security in an attachment before judgment or otherwise and the security is given to the Court, even then the principle underlying Sections 134, 135 and 139 of the Contract Act have been made applicable.

19. In AIR 1944 Lah 428, it was held that—

“A contract between the creditor and the debtor by which the former had promised to give time to the debtor and instalments were fixed without the surety's assent on even knowledge which prevented him to require the creditor from calling upon the principal debtor to pay off the entire debt or to pay the entire debt himself and then to recover it from the principal debtor comes within the terms of Ss. 135, 39 and 141 and the surety is discharged from his liability.”

20. Similarly, in AIR 1939 Bom 23, it was held that principles underlying Sections 126, 133, 135 and 139 of the Contract Act, would be applicable to a surety bond given to the Court. In another authority reported as AIR 1961 Punj 281, it was held that any variation in the original contract between the creditor and the principal debtor without the consent of the surety discharges the surety. Similarly, in AIR 1959 Bom 516, where a surety bond was executed in favour of the Court by a surety agreeing to pay the decretal amount in case the judgment-debtor failed to appeal or obtain stay, there was a compromise in the execution whereby the decretal amount was agreed to be paid in instalments surety was considered to be discharged.

21. In AIR 1935 PC 21, it was held:

“The surety, like any other contracting party, cannot be held bound to something for which he has not contracted. If the original parties have expressly agreed to vary the terms of the original contract, no further question arises. The original contract has gone, and unless the surety has assented to the new terms, there is nothing to which he can be bound, as the final obligation of the principal debtor will be something different from the obligation which the surety guaranteed. Presumably, he is discharged forthwith on the contract being Page: 97altered without his consent for the parties have made it impossible for the guaranteed performance to take place.”

22. There are other authorities on this point for instance AIR 1958 Punj 337. Mr. Vidyasagar however relied strongly on three authorities, viz., AIR 1933 Lah 505, AIR 1967 Madh Pra 250 and AIR 1952 All 587; but in our opinion these authorities do not help him at all. The ratio decidendi of AIR 1933 Lah 505 is that when there are joint judgment-debtors, the principle of Section 44 of the Contract Act applies and a release granted to one of them without the consent of the others does not absolve the other joint judgment-debtors from responsibility. That was a case of an award. Jairamdass and Bansiram had raised a big loan from the Punjab National Bank. They had mortgaged property with the Bank. Defendant No. 3 (Daulat Ram) and the defendant No. 4 guaranteed payment of this loan, according to the terms of the mortgage deed and in the event of default, made themselves liable for the whole amount. The matter was referred to arbitration and the arbitrator passed a decree against the principal debtors as well as the sureties. The award stated in clear terms that the decree was executable against the defendant immediately. It was held by the Arbitrator that the liability of the defendants 3 and 4 was absolute and not in any way dependent on defendants 1 and 2. The contention raised for the so-called sureties was that as the Bank had proceeded by way of sale of the mortgage property, the sureties would be discharged. But that argument was not upheld. Although no reference was made to Section 137, the authority can be clearly deemed to be given under Section 137 of the Contract Act, because the liability of the surety does not cease if the creditor takes recourse to any other remedy against the principal debtor. Here the principal debtor had mortgaged the property with the Bank. The Bank took out execution and sought to sell the mortgaged property; that by itself would not absolve the sureties of their responsibility.

23. The second authority AIR 1967 Madh Pra 250 is again under Section 137 read with Section 139 of the Contract Act. In that authority it is clearly laid down that the essential requirements under S. 135 is whatever the creditor offers to do should be a contract, that is, one with a quid pro quo or consideration from the principal debtor. If it is a mere forbearance to take action, then of course there is no effect on the surety; for Section 137 expressly provides that a mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not discharge the surety unless there is an express provision to that effect in the surety bond. It was held on the facts of that case that there was no other new contract substituted for the original contract which would absolve the surety.

24. The last authority AIR 1952 All 587 also does not help him. It lays down:

“Where the creditor (transferee of the decretal debt) agrees not to continue execution proceedings against the principal debtor for the time being, to allow him opportunity to raise money to discharge the debt, it is only an act of forbearance within the meaning of Section 137 and not an instance of giving time under a ‘contract’ within the meaning of S. 135 and does not discharge the surety.”

25. This was a case when security was given in the Court. Here, as in the present case, the original contract as well as the decree made the decretal amount payable in lump. By the arrangement arrived at between the principal debtor and the creditor on 11-3-1963 an entirely new contract was substituted for the old one. This can be illustrated like this: Under Section 128 the liability of the surety is co-extensive with that of the principal debtor. Suppose in this case the decree-holder wanted to take out execution of the entire decretal amount against the surety. The surety could at least have raised a plea that as the creditor had agreed to realise the amount by instalments instead in one lump, he also would be entitled to that benefit. Therefore, the remedy of the decree-holder to recover the entire sum in lump would be barred under this compromise. Even if the provisions of Section 135 would not come into play, this would be a complete answer to the execution of the decree-holder. The crux of the matter is if the original contract is in any way materially altered in the eye of law, a new contract is substituted for the old one, which makes the old contract impossible of performance. To apply this principle again to the facts of the case, suppose the decree-holder would take out an execution of the entire amount contrary to the terms of the compromise entered into by him with the judgment-debtor on 11-3-63, would his execution lie against the judgment-debtor? The simple reply is no; because the judgment-debtor could confront the decree-holder with the terms of the compromise and say that the original contract had become extinct and a new one substituted therefor. The contract of guarantee implies a co-extensive responsibility of the principal debtor with that of the surety. If the contract cannot be proceeded against one, it cannot be similarly proceeded against another. This is the legal position even if Sections 135 and 139 were not there. But the present case is fully covered by the provisions contained in Sections 135 and 139 of the Contract Act; or at least by the principles contained therein and therefore in our opinion the surety has been entirely absolved and discharged of the responsibility to pay the decretal amount.

26. The appeal is, therefore, allowed with costs and the order of the lower Court is set aside.

27. S. Murtaza Fazl Ali, C.J:— I agree.

GGM/DVC

28. Appeal allowed.