1. The petitioner/Decree Holder in the execution petition is the petitioner in the present revision petition. The Decree Holder, which is a Nationalised Bank, filed the execution petitioner against the second Judgment Debtor, who is a surety for the recovery of the amount due by the principal Debtor.
2. The respondent herein, who was the Judgment Debtor filed a counter stating that he was only a surety and not the original borrower and he is not liable to paythe debt and the Decree Holder must proceed against the secured properties of the first Judgment Debtor. It is also stated that as the suit was abated against the original borrower, the decree passed against the second Judgment Debtor is void, illegal and is not executable. It is also contended that the Government of India cancelled the agricultural debts, to the extent of Rs.10,000/-and as the first Judgment Debtor is an agriculturist and the first Judgment Debtor borrowed the amount for agricultural purpose, the debt is also deemed to have been discharged.
Thereafter, the executing Court framed the point 'whether the decree obtained against the respondent/second Judgment Debtor is executable or not?' The executing Court relying upon a Judgment of this Court in the case of Royal Finance Corporation, Gudur v. Venkata Seshayya, 1983 (2) ALT 344, held that as the debt had abated against the principal Debtor, the debt against the surety also stands discharged. Therefore, the executing Court dismissed the execution petition.
Aggrieved by the said order, the petitioner/Decree Holder has come up in the present revision.
3. The learned Counsel for the petitioner contended that the executing Court is in error in dismissing the execution petition as not executable against the respondent/ 2nd Judgment Debtor. It is contended that as the suit was decreed against the second Judgment Debtor, the executing Court cannot go behind the decree and hold that the decree is not executable against the second Judgment Debtor. It is contended by the learned Counsel that the surety's liability is co-extensive with that of the principal Debtor and the suit has been instituted against both of them. The trial Court after considering the merits of the matter passed a decree against the surety. When once a decree has been passedagainst the surety, the surety is bound by the said decree and the executing Court cannot go into the merits of the said decree.
4. The learned Counsel for the petitioner/Decree Holder relied upon the following decisions, in support of his contentions:
Nur Din v. Allah Ditta, 138 (1932) Indian Cases, 305; Bank of Bihar v. Damodar Prasad, : 1SCR620 , V. Seetharamaiah v. Srirama Motor Finance Corporation, : AIR1977AP164 , MSEB Bombay v. Official Liquidator, : 1SCR561 , and State Bank of India v. Indesport Registered, : AIR1992SC1740 .
5. The learned Counsel for the respondent/2nd Judgment Debtor, on the other hand, supported the order of the executing Court, It is contended by the learned Counsel that the debt against the principal Debtor has abated by the acts/ omissions of the creditor/Decree Holder. When once the debt stands discharged against the principal Debtor, there is no liability for the surety and the debt equally stands discharged against the surety also. The learned Counsel contended that the surety's liability is as long as the principal Debtor's liability continues. When once either by operation of law or by an act or omission of the creditor, the liability of the principal Debtor stands discharged, the liability of the surety also automatically gets discharged. In the present case, the principal Debtor died and because of the omission on the part of the plaintiff-creditor, the suit had abated against the principal Debtor for its failure to bring the legal representatives of the principal Debtor on record. The result was that the suit had abated against the principal Debtor and the debt stands discharged. When once the debt stands discharged against the principal Debtor, there is no liability of the surety, as the debt itself against the principal Debtor standsdischarged. The learned Counsel also contended that the surety's liability is as long as the debt against the principal Debtor continues. When once the principal Debtor's liability stands discharged, there is nothing for the surety to discharge the liability. Therefore, the trial Court has rightly held that though a decree was passed against the surety, even though the suit has abated and the debt also stands discharged against the principal Debtor, still such a decree is not executable, as according to the executing Court, the liability of the surety stands discharged.
6. From the above rival contentions the issue to be considered is 'whether the plaintiff/Decree Holder can proceed against the surety when the principal Debtor's liability stands discharged?'
7. The facts are not in dispute that the petitioner herein, who was the creditor, filed the suit - O.S.No. 185 of 1985 against both the principal Debtor and the surety impleading them as Defendants 1 and 2. During the pendency of the suit, the principal Debtor died and no legal representatives were brought on record. The result was that the suit against the principal Debtor had abated. But, however, the trial Court passed a decree against the 2nd Defendant, who was only a surety. When the Decree Holder filed the execution petition, the surety against whom the decree was passed took the objection that the decree is not executable against him and the executing Court accepted the said contention and dismissed the suit.
8. Before consideration of the rival contentions, it would be relevant to mention the relevant provisions of the Contract Act, 1872.
Section 126. ' Contract of guarantee', 'surety', 'principal Debtor' and 'creditor' - A 'contract of guarantee' is a contract to perform the promise, ordischarge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety', the person in respect of whose default the guarantee is given is called the 'principal Debtor', and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written.
Section 128. Surety's liability - The liability of the surety is company-extensive with that of the principal Debtor, unless it is otherwise provided by the contract.
Section 134, Discharge of surety by release or discharge of principal Debtor - The surely is discharged by any contract between the creditor and the principal Debtor, by which the principal Debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal Debtor.
Section 139. Discharge of surety by creditor's act or omission impairing surety's eventual remedy - 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.
Section 140. Rights of surety on payment or performance - Where a guaranteed debt has become due, or default of the principal Debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal Debtor.
9. A perusal of the above provisions clearly shows that the person, who gives guarantee to discharge the liability of athird person in case of his default, is called 'surety' and the person in respect of whose default the guarantee is given is called the 'principal Debtor'. The liability of the surety is co-extensive with that of the principal Debtor. Section 134 shows that the surety's liability stands discharged by any contract between the creditor and the principal Debtor by which the principal Debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal Debtor. Section 139 also contemplates the discharge of surety by the creditor's act or omission impairing surety's eventual remedy. As per Section 140, where a guaranteed debt has become due, or on default of the principal Debtor, the surety, upon payment, is invested with all the rights, which the creditor had against the principal Debtor. In the above provisions, it is clear that the rights and obligations on both the creditor and the surety are provided. In the present case it is a fact that though the creditor filed the suit both against the principal Debtor and the surety, the principal Debtor died during the pendency of the suit and because of the omission on the part of the creditor the suit stands abated against the principal Debtor. The effect of it is the creditor cannot proceed against the principal Debtor or his legal heirs and the debt stands discharged because of the omission to act on the part of the creditor. Now it is to be examined 'whether by the said omission on the part of the creditor, which had resulted in the abatement of the suit against the principal Debtor and consequential discharge against the principal Debtor would result in discharge of the surety or not'. As already noticed, the surety is only a guarantor for the due to be discharged by the principal Debtor and in case of default committed by the principal Debtor, the surety has to make good the loss to the creditor. It is also not in dispute that the creditor has the right to proceed against the surety also, even though he can proceed against the principal Debtor.If the creditor has recovered the amount due by the principal Debtor from the surety, the surety stands subrogated into the shoe of the creditor and he can proceed and recover the amount paid as a surety from the principal Debtor. By virtue of the act of omission by the creditor, the surety had lost such a right. The surety is only a guarantor and in case he pays the amount guaranteed by him on behalf of the principal Debtor, he must have the right to proceed against the principal Debtor. In the present case, as a result of an act of omission on the part of the creditor, the liability of the principal Debtor stands discharged, as the creditor's suit against him had abated. Therefore, in terms of Section 134, it should be inferred that the liability against the surety also stands discharged, as a result of the abatement of the suit against the principal Debtor.
10. The learned Counsel for the petitioner relied upon the following Judgments in support of his contention that the liability of the surety does not stand discharged, even when the suit against the principal Debtor had abated.
In the case of Bank of Bihar v. Damodar Prasad (supra) the Apex Court has considered the liability of the surety, whether the creditor can be proceeded directly against the surety without exhausting the remedies against the principal Debtor. In that case the plaintiff bank lent money to 1st Defendant, Damodar Prasad on the guarantee of the 2nd Defendant, Paras Nath Sinha. As the debt amount was not discharged either by the principal Debtor or by (he surety, the plaintiff bank filed the suit in the Court on the Subordinate Judge, Patna claiming a decree for the amount due. The said suit was decreed 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 the Defendant No.2 only after having exhausted its remedies againstDefendant No.1. The plaintiff therefore filed an appeal challenging the legality and propriety of the said direction. The High Court dismissed the appeal. Hence, the matter was carried in further appeal before the Supreme Court. The Apex Court after referring to Order XXI, Rule 11 CPC as well as to the provisions of Section 140 of the Indian Contract Act and observing that the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the sureties, held - '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). Assuming 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.' Holding so, the Apex Court set aside that portion of the decree, which postponed the execution of the decree against the surety.
In the case of State Bank of India v. Indesport Registered (supra), the bank obtained a decree against the respondent-firm and its two partners, who are defendants 2 and 3, and also against the 4th defendant, the guarantor. The Court while passing a decree against the mortgaged property as well as against the defendants personally, ordered that the plaintiff bank shall be entitled to the amount by way of sale of the shop in the case the decretal amount is not paid within a period of three months from the date of the Decree. On an application filed by the Decree Holder for execution of the Decree, a notice was issued to the 4th respondent-guarantor, who filed objections stating that the Decree Holder has to proceed against the mortgaged property and until then no action by way of execution be taken against the guarantor. The said objection was upheld by the executing Court. The Decree Holder unsuccessfully assailed thesaid order in a revision before the High Court, and therefore, carried the matter to the Apex Court. The Apex Court held - 'In the present case before us, the decree does not postpone the execution. The decree is simultaneous and it is jointly and severally against all the defendants including the guarantor. It is the right of the decree holder to proceed with it in a way he likes. Section 128 of the Indian Contract Act itself provides that 'the liability of the surety is co-extensive with that of the principal Debtor, unless it is otherwise provided by the contract.'. It was also further observed that the creditor is not bound to exhaust his remedy against the principal Debtor before suing the surety, and a suit may be maintained against the surety though the principal has not been sued.' The Apex Court also noticed that the guarantor alone could have been sued, without even suing the principal Debtor, so long as the creditor satisfies the Court that the principal Debtor is in default. The Apex Court also held that the decree for money is a simple decree against the Judgment Debtor including the guarantor and in no way subject to the execution of the mortgage decree against the Judgment Debtor No.2. If on principle a guarantor could be sued without even suing the principal Debtor there is no reason, even if the decretal amount is covered by the mortgaged decree, to force the Decree Holder to proceed against the mortgaged property first and then to proceed against the guarantor. The Apex Court also held-
'The guarantor in the present suit never took any pleas to the effect that his liability is only contingent if remedies against the principal Debtors fail to satisfy the dues of the Decree-Holder. If such a pica had been taken and the Court trying the suit had considered the plea and gave any finding in favour of the guarantor, then it would have been a different position. But in the present case, on the fact of the decree, which hasbecome final, the Court cannot construe it otherwise than its tenor. No executing Court can go beyond the decree. All such pleas as to the rights which the guarantor had, had to be taken during the trial and not after the decree while execution is being levied.
The result is that the appeal is allowed and the impugned orders of the High Court dated 23rd May, 1990 and of the learned Additional District Judge dated 5th May, 1989 arc set aside and it is held that the Decree Holder is entitled to proceed against the guarantor (Judgment Debtor No.4) for the execution of the aforesaid decree.'
Holding so, the order of the High Court was reversed.
In the case of V. Seetharamaiah v. Srirama Motor Finance Corporation (supra), a Division Bench of this Court examined the circumstances under which the surety's liability is discharged by the conduct of the creditor. The respondent in that case filed the suit against two defendants, E. John Cyriac and Vasireddi Seetharamaiah for recovery of a sum due under a promissory note executed by the defendants and also for a charge on the lorry bearing Registration No. APV 5313. Under a hire purchase agreement, the 1st defendant purchased a lorry for which the plaintiff had financed in a sum of Rs.40,000/- and the 2nd defendant joined in the hire purchase agreement as a guarantor and executed the suit pronote along with the 1st defendant. Though the 1st defendant paid 9 instalments, thereafter he defaulted in payments. Therefore, the suit was filed for recovery of the balance amount. In the suit, the 1st defendant remained ex parts and the 2nd defendant alone contested the same. The trial Court after considering the material on record decreed the suit against both the defendants. The 2nd defendant-guarantor preferred appeal to this Court. This Court afterconsidering the rival contentions, while negativing the contention of the appellant, guarantor, held as under: -
'In the instant case, the failure of the plaintiff to exercise the right of the seizure and sale of the vehicle cannot be said to amount to such negligence act or omission which could be said to be an act inconsistent with the right of the surety or that it resulted, in mpairing the eventual remedy of the surety against the principal Debtor. The evidence disclose that the lorry was with M/s. Prakash Automobiles, both on the date of filing of the suit and on 27-2-1969 when the 2nd defendant put a call on to the plaintiff as evidence by the entry in the Diary Ex.B37 and also at the time when the written statement was filed on 1-4-1969. There is no reason why the 2nd defendant could not have taken immediate steps to pay off the amount and exercise the right which the creditor had against the principal Debtor which right it available to the surety under Section 140 of the Act. The surety the 2nd defendant did not move in the matter inspite of his knowledge of the default as early as on 4-11-1967 and also subsequently. He could have discharged the debt at any time and proceeded against the security. Having remained inactive, and there being no evidence of any positive act of negligence on the part of the plaintiff which resulted in the loss of the security, the 2nd defendant cannot claim to be discharged as a surety. For the foregoing reasons, we hold that the 2nd defendant did not stand discharged from liability as surety.'
In the case of MSEB Bombay v. Official Liquidator (supra) the dispute relates to the right of the Maharashtra State Electricity Board to encash the bank guarantee given by a bank on behalf of the Company, which was in liquidation. In pursuance of the tenders called for by the Board for supplycertain materials, one of the terms was either to deposit a sum of Rs. 50,000/- or furnish bank guarantee. Accordingly, Cochin Malleables (Private) Limited (in liquidation) furnished bank guarantee to the Board for a sum of Rs. 50,000/-. When the said amount was proposed to be encashed by the Electricity Board by calling upon the bank to pay the said amount, the bank informed the same to the Official Liquidator, who in turn made an application before the Company Court under Section 456(2) of the Companies Act, 1956 read with Rule 9 of the Companies (Court) Rules, 1959, praying for an order restraining the Electricity Board from realizing the amount covered by the guarantee on the ground that since the Company in liquidation had been ordered to be wound up, the Electricity Board could not claim the amount of guarantee from the bank. The bank contended that the amount of Rs. 50,000/- was not being claimed as a creditor of the Company in liquidation, but on the basis of the bank guarantee. But, however, the application filed by the official liquidator was allowed by the Company Court, which was appealed before a Division Bench unsuccessfully by the State Electricity Board, which carried the matter in appeal to the Supreme Court. The Apex Court after considering the contentions held - 'The fact that the Company in liquidation i.e., the principal Debtor has gone into in liquidation also would not have any effect on the liability of the bank i.e., the guarantor. Under Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal Debtor unless it is otherwise provided by the contract. A surely is no doubt discharged under Section 134 of the Indian Contract Act by any contract between the creditor and the principal Debtor by which the principal Debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal Debtor, but a discharge which the principal Debtor may secure by operationof law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability.' So holding, the appeal of the Electricity Board was allowed.
In the case of Nagpur Nagarik Sahakari Bank Limited v. Union of India, : AIR1981AP153 , a Division Bench of this Court considered the right of the creditor-Decree Holder vis-a-vis the liability of the principal Debtor as well as the guarantor. It was held that it is not necessary that the creditor must first seek remedy against the principal Debtor before proceeding against the surety.
11. Though in all the above decisions, it was held that the liability of the surely is co-extensive with that of the principal Debtor and the creditor-Decree Holder need not proceed against the principal Debtor before proceeding against the surety, either by way of suit or for the recovery of the decretal amount, but in none of the above decisions, the present position exist, where a suit against the principal Debtor had abated by an act of omission on the part of the creditor. As a result of the omission on the part of the creditor in bringing the legal representatives on record, the surety's right that was provided under Section 140 of the Contract Act to proceed against the principal Debtor had been lost. Apart from that in terms of Section 134, the surety is discharged by the omission of the creditor in allowing the suit to abate against the principal Debtor and consequently in the discharge of the debt against the principal Debtor.
12. However, in the case of Nur Din v. Allah Ditta (supra) the Lahore High Court considered whether bar of limitation of remedy against the principal Debtor would result in discharge of the surety. It was held by the Lahore High Court, the omission of the creditor to sue the principal Debtor within the period of limitation does notdischarge the surety, inasmuch as though the remedy of the creditor against the principal Debtor is gone, the debt due to him is not extinguished. On the same principle it was held that though the debt against the principal Debtor abates, the liability of the surety does not discharge.
But in the above decision the effect of Section 140 of the Contract Act as well as the effect of other relevant provisions were not considered. Therefore, I do not find that there is any justification to accept the said view, especially in the light of the subsequent Judgments.
13. A similar issue, though not identical, was considered by a single Judge of this Court in the case of Royal Finance Corporation, Gudur v. Venkata Seshayya (supra). In this case the 1st defendant, who was the principal Debtor, claimed relief under the provisions of A.P. Agricultural Indebtedness (Relief Act), 1977 and the Court found that the 1st defendant was an agriculturist and is entitled to the relief and consequently the suit was dismissed even against the surety, though he was not entitled to the benefit of the provisions of Act 7 of 1977. The plaintiff carried the matter in appeal against the surety, unsuccessfully and further in revision before this Court. This Court while negativing the contention of the petitioner held on the issue as under :
'The next question that arises for consideration is whether the respondent is liable to discharge the debt through the principal Debtor, namely Somisetti Venkateswarlu (first defendant) was declared to be a small farmer and the debt stood discharged as against him by operation of law. It is contended for the petitioner that the respondent is a non-agriculturist and non-small farmer. Therefore, he would be liable for the debt in terms of Ex.A2. As held earlier, the respondent is only a surety and thecontract he entered into is a guarantee. It is therefore accessory to the principal contract under Ex. A1 being always ancillary and subsidiary as a collateral contract. In view of Section 128 of the Contract Act, the liability of the respondent is co-extensive with that of the principal Debtor, unless it is otherwise provided by the contract. By extinction of the debt as regards the principal Debtor by operation of Section 4 of the Act, the benefit also would extentd to the surety and extinguish his liability as well. In Babu Rao Ramachandra Rao v. Babu Manaklal (AIR 1938 Nagpur, 413) Niyogi, J., held that:
'When the creditor seeks to enforce the debt against the surety, the latter is legitimately entitled to ask is the principal Debtor himself liable If not, he has committed no default, and you cannot compel me to discharge an obligation which has no existence.....'In Halsbury's Laws of England, IV Edition, Volume 20, Paragraph 284 at page 154, the effect of discharge of principal Debtor by operation of law has been stated thus:
'Whatever expressly or impliedly discharges the principal Debtor from liability usually discharges the surety also, as his position is thereby altered without his consent, notwithstanding that the alteration is accomplished by operation of law. He is therefore discharged where he can establish that the alteration changes the nature of the liability.'By operation of law the burden of debt is lifted off from the shoulders of the principal Debtor and stands extinguished. The surety on his discharging the liability seeks subrogation under Section 140 of the Contract Act and thereby fastens back the liability onthe 'Debtor', The question is could this consequence be countenanced? My answer is 'No' because if allowed to prevail, it would not only breed evasion of the Act but also feed defeat of the object of the Act, the negation thereof is the endeavour of the Court. This is also what Venkata Subba Rao, J., has succinctly stated in Sami Aiyer v. Ramaswamy Chettiar (AIR 1923 Madras 340) thus:
'The rule may also be put upon the less technical ground that if the release of the surety did not follow from that of the Debtor, the latter's release would be purely illusory because the consequence would be that the surety on being compelled to pay would immediately turn round on the Debtor. I find it impossible to hold that a creditor can proceed against the surety although the debt has been recovered.'A Full Bench of the Madras High Court in Subramania v, Narayana Swami : AIR1951Mad48 had to consider the question whether a non-agriculturist surety could also get the benefit of the provisions of the Madras Agriculturists' Relief Act (4 of 1938) when the principal agriculturist Debtor became entitled to the scaling down of the debt. The Full Bench held that:
'A non-agriculturist surety will not be liable for the entire debt when the principal debt has been scaled down under the provisions of the Agriculturists Relief Act, but will be liable only to the extent of the scaled down debt due by the principal Debtor.'Thus, in view the extinguihments of the liability of the principal Debtor viz., the first Defendant, by operation of law the liability of the respondent also stands extinguished and as a result the proceedings in the suit under proviso to sub-section (2)(a) of Section 4 of theAct, though the respondent is jointly impleaded with the principal Debtor, stands abated.'
Holding so, this Court negatived the contention of the plaintiff-creditor.
14. A similar issue was considered by the Karnataka High Court in the case of T. Raju Setty v. Bank of Baroda, : AIR1992Kant108 . The respondent bank filed a suit against the principal Debtor, the first defendant and two sureties, who are defendants 2 and 3. During the pendency of the suit, the 1st defendant, principal Debtor died and the trial Court passed decree against the defendants 2 and 3. The 3rd defendant preferred an appeal aggrieved by the said Judgment contending that as the legal representatives of the 1st defendant were not brought no record, the suit has abated against the 1st defendant. Therefore, a decree could not be passed against the other defendants, who are the sureties. The appellate Court, however, did not agree with the said contention. Hence, the 3rd defendant carried the matter in second appeal before the Karnataka High Court. A Division Bench of the Karnataka High Court held that when once the suit against the principal Debtor abates, it abates altogether and the suit cannot be decreed against the sureties, as according to it, there will be two conflicting decrees.
In the light of the above judgment, the suit abates and no decree could be passed and even if a decree is passed it is only a nullity.
15. In the present case also though the principal Debtor did not claim the relief under the Act 7 of 1977, but due to his death the suit had abated and the debt against him stands discharged. When once the debt stands discharged against the principal Debtor, more so, as a result of an omission on the part of the creditor, I do not find that there is any case for the creditor toproceed against the surety. The liability of the surety is always to make good the loss that was caused as a result of the default of the principal Debtor and if the surety discharges the liability of the creditor he can have a right to proceed against the principal Debtor. In the present case as a result of the omission of the creditor, the surety is denied of such a right. In such a case, it would not be proper to hold that the surety is still liable for the creditor even after the discharge of the principal Debtor, as a result of the omission on the part of the creditor.
16. One of the contentions advanced by the learned Counsel for the petitioner is that the executing Court cannot go beyond the decree. Therefore, the execution petition ought to have been allowed against the surety. I am unable to accept the said contention of the learned Counsel. When once the suit is abated against the principal-debtor, it is equally abated/ dismissed against the surety also. Therefore, the decree even if it is passed against the surety when the principal-debtor has been discharged as a result of the abatement of the suit, such a decree is illegal and unenforceable against the surety also. In that view of the matter, the petitioner is not entitled to proceed against the surety. Even though the trial Court has passed a decree against the surety, such a decree is not executable at all.
17. Under the above circumstances, the revision petition is without merit and the same is accordingly dismissed, but without costs.