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2002(3) Supreme 427
SUPREME COURT OF INDIA
(From Chennai High Court)
Umesh C. Banerjee & Y.K. Sabharwal, JJ.
Industrial Finance Corporation of India Ltd. -Appellant
versus
The Cannanore Spinning & Weaving Mills Ltd. & Ors. -Respondents
Civil Appeal No. 3239 of 1995
Decided on 12-4-2002
Councel for Parties :
For the Appellants : C.A. Sundaram, Senior Advocate, Ms. Anuradha Dutt, Ms. Ekta Kapil, Ms. Vijayalakshmi Menon, Advocates.
For the Respondents : Mahendra Anand, Senior Advocate, Roy Abraham, Ms. Baby Krishnan, Rajiv Mehta, R. Rahim and Ms. Anita Pandey, Advocates.
Held : A definite volition is required to come within the ambit of Section 141. The heading of Section 141 also lends, though not normally a part of the statutory provision, assistance in interpreting the statutory intent since heading always serves as a guide to depict the intention. Adverting to the contract of guarantee be it noted that though it is not a contract regarding a primary transaction : but it is an independent transaction containing independent and reciprocal obligations. It is on principal to principal basis and by reason wherefor the Statute has provided both the creditor and the guarantor some relief as specified in this Chapter of Contract Act (between Sections 130 to 141). Section 141 thus involves an issue of a deliberate action on the part of the creditor and not a mere fortuitous situation beyond the control of the creditor. (Paras 32 & 33)
Held, therefore, that the liability of the guarantor cannot but be stated to the a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor s right of action against the surety is preserved. (Para 36)
Held further : Turning attention to the effect of the Sick Textile Undertakings (Nationalisation) Act, 1974, a bare perusal of some of the provisions will indicate that there is no discharge of the liability of principal debtor, leave alone that of the surety. Sections 3, 4, 5 and 20 of the Act of 1974, if read together, would depict that the liability of the owner of the undertaking/the debtor continues and it is only that the claim against the security which stands discharged by reason of the statutory shift of the charge on to the compensation. The liability of the principal debtor does not in any way come to an end neither that of the guarantor. (Para 37)
Held in addition : Needless to record that on a true perspective of Section 56 of the Contract Act, three essential conditions appear to be the realistic interpretation of the Statute. The conditions being (i) a valid and subsisting contract between the parties; (ii) there must be some part of the contract yet to be performed; and (iii) the contract after it is entered into becomes impossible of performance. Leaving aside the first condition, the second and the third one cannot, in our view, have any manner of application in the contextual facts. Recapitulating the facts briefly, the Nationalisation Act came into force in the year 1974 by reason of which the assets of a debtor company stand vested on the State. In terms of the provisions of the Nationalisation Act, there was appointed a Commissioner of Payments and by reason of the factum of the Appellant herein being a secured creditor, lodged its claim before the Commissioner of Payments in its entirety. The Commissioner of Payments, however, in terms of the provisions of the Nationalisation Act itself allowed a major portion of the claim but as regards the remainder, expressed its inability to pass any order and the remainder or the balance of the claim stands out to be the subject matter of the present proceedings. Incidentally, there exists some departure and shift from the case made out before the High Court and the case before this Court since the frustration was said to have occurred by reason of statutory termination of the Managing Agency System. (Damodaran & Company, being the Managing Agent of the principal-debtor). It has been the definite contention before the High Court that the contractual obligation by reason of severance of relationship between Damodaran and the principal - debtor the contract had become incapable of being performed in the same capacity in which the parties had entered into the contract with the appellant herein. The case made out before this Court, however, is a complete departure therefrom and as a matter of fact introduction of the Legislation of 1974 in terms which the entire assets stand vested has been taken recourse to as the supervening event and the contract of guarantee has thus become incapable of being performed for reasons beyond the control of the guarantors, having due regard to the statutory provisions, as appears from Section 141 of the Contract Act - undoubtedly the shift and variation cannot but be attributed to be well imagined but irrespective of the same and in either of the situations (i.e. the plea before the High Court or the plea before this Court), the doctrine of frustration as envisaged in terms of Section 56 of the Contract Act does not and cannot have any manner of application in the contextual facts. It is on the failure of the principal debtor to pay the entire sum due, the guarantee stands invoked - the Contract of Guarantee has no co-relation with that of the Nationalisation Act neither is dependent thereon : it is an independent contract and in all fairness has to be honoured to fulfil the contractual obligation between the surety and the creditor. Taking recourse to Section 141 by the surety, in our view, is utterly misplaced and we need not dilate once again, since we have already dealt with the issue hereinbefore in this judgment, except recording that doctrine of frustration as contended cannot be invoked having regard to the provisions of Section 141 of the Contract Act. On the factual score, a Civil Suit stands filed and thereafter the claim was preferred before the Commissioner of Payments in terms of the Nationalisation Act. The right of a claimant to proceed before the Commissioner and to file a suit to recover the amount due to him cannot, in our view, on a perusal of the Statute, be taken away, though the Claimant would not be entitled to recover any amount at both the ends. The amount paid by the Commissioner would stand reduced to the extent of payment by the Commissioner. The filing of the Civil Suit thus is not barred as has been contended by Mr. Anand that once the claim stands paid, though partially, question of proceeding with the suit would not arise. It is in this context, we concur with the findings of the Bombay High Court in Oriental Coal Co. Ltd., Calcutta v. M/s. Mohanlal Kisanlal & Anr. (AIR 1984 Bom. 174) and record our approval and similar concurrence also goes to the decision of the Calcutta High Court in Barakar Coal Co. Ltd. v. N.C. Mehta [81 Cal. WN 380 : AIR 1977 NOC 198 (Cal.)]. In the premises aforesaid, we are unable to record our concurrence with the judgment under appeal and the same is thus set aside and the decree as passed by the learned Single Judge stands restored. Each party, however, will pay and bear its own costs. (Paras 42, 43, 44 & 45)
Key Points: - (!) (!) - (!) (!) - (!) (!) - (!) (!) - (!) (!)
JUDGMENT
Banerjee, J.-The general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery in Crythorne v. Swinburne (1807) 14 Ves. 160, that the surety will be entitled to every remedy which the creditor has against the principal debtor, including the enforcement of every security stands statutorily recognised and incorporated in Section 141 of the Indian Contract Act as regards the discharge of a surety from liability, when the creditor parts with or loses the security held by him with, however, an insignificant variation to the effect that the surety is entitled to the securities given to the creditor, both before and after the contract of surety.
2. It is on this score thus Section 141 of the Act ought to be noticed at some length more so by reason of the same being the sheet-anchor in support of Respondents presentation before this Court in the instant appeal to the effect that the surety is entitled to the securities given to the creditor, both before and after the contract of surety and in the event the same stands dissipated then and in that event there is cessation of liability to the extent of such dissipation or extinction. An indeed bold proposition but the same stands accepted by the High Court and hence the appeal before this Court. Before, however, adverting to the issue as above, it would be rather convenient to note certain decisions of this Court as well as of the English Court for further appreciation of the matter.
3. In State of Madhya Pradesh v. Kaluram (1967(1) SCR 266 = AIR 1967 SC 1105) this Court pointedly stated that the expression "security" in the Section is not used in any technical sense; it includes all rights which the creditor has against the property on the date of the contract. In Kaluram (supra) this Court also lent its approval of Hannen, J. in Wulff and Billing v. Jay, (1872(7) QB 756), wherein the learned Judge stated the law as follows :-
"......... I take it to be established that the defendant became surety upon the faith of there being some real and substantial security pledged, as well as his own credit, to the plaintiff; and he was entitled, therefore, to the benefit of that real and substantial security in the event of his being called on to fulfil his duty as a surety, and to pay the debt for which he had so become surety. He will, however, be discharged from his liability as surety if the creditors have put it out of their power to hand over to the surety the means of recouping himself by the security given by the principal. That doctrine is very clearly expressed in the notes in Rees v. Barrington, 2 White and T.L.C., (4th Ed.) at p. 1002 - As a surety, on payment of the debt, is entitled to all the securities of the creditor, whether he is aware of their existence or not, even though they were given after the contract of suretyship, if the creditor, who has had, or ought to have had, them in all full possession or power, loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor, by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands - and it is on this score this Court, relying on the aforesaid, in Kaluram (supra) observed that "The surety is entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability. The surety is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or parted with the security without the consent of the surety, the latter is by the expre
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