The case established that the provisions of the Contract Act with regard to contracts of guarantee did not apply, and the entitlement to security was decided based on the general principles underlying the provisions, emphasizing the relief of a surety from liability if the creditor compounds or gives time to the principal debtor without his consent.

Leach, C.J.

1. The question in this appeal is whether the liquidators of the Travancore National and Quilon Bank Ltd., now in liquidation under a compulsory winding up order made by this Court on 7th September 1933, are entitled to certain security deposited in the Court of Small Causes, Madras, or whether the Official Assignee as representing the estate of an insolvent named M. Elayaperumal Naicker is entitled to it. In Small Cause Suit No. 5185 of 1936 the bank sued one Dr. A. R. Krishnaswami Ayyar and another to recover a sum of Rs. 1728. On 22nd July 1936 the suit was decreed ex parte. Defendant 1 then moved the Court to set aside the decree and on 4th August 1936 it was set aside on terms. Defendant 1 was to deposit in Court in cash a sum of Rs. 750 or furnish security for this sum to the satisfaction of the Registrar of the Court. Security was furnished by M. Elayaperumal Naicker, who deposited in Court five shares of the Reserve Bank of India and together with defendant 1 executed a bond in favour of the Court. The condition of the bond is stated in these words: "Now the condition of this bond is such that if the suit is decreed as against defendant 1 and if he pays the decreed amount or satisfies the decree debt otherwise as per the terms of the decree to be passed and complies with all orders of Court that might be passed from time to time, then this bond shall become null and void, otherwise it shall remain in full force and virtue." In March 1937 defendant 1 applied to this Court for an order under Section 39, Presidency Small Cause Courts Act, 1882, and Section 3, City Civil Court and Presidency Small Cause Courts (Amendment) Act, 1916, for the transfer of the case to the City Civil Court. The application was granted. After the suit had been transferred to the City Civil Court it was renumbered as No. 353 of 1937. On 22nd March 1938, a decree was passed against both the defendants for the payment of the sum of Rs. 1296 with costs. In O.S. No. 325 of 1936 of the City Civil Court the bank obtained another decree against defendant 1. Here the decretal amount was Rs. 2486. In Small Cause Suit No. 5186 of 1936 of the Court of Small Causes, Madras, the bank obtained a decree against him for the sum of Rs. 292-12-11. On 12th August 1941, Dr. Krishnaswami Ayyar applied to this Court under Section 234, Companies Act, for an order granting leave to the Official Liquidators to compound with him. He suggested that the Court should accept in respect of these decrees a composition of two annas in the rupee. The Official Liquidators were agreeable to an order being passed, but they suggested that the composition should be on the basis of eight annas in the rupee. On 24th October 1941, Venkataramana Rao J. granted leave to the Official Liquidators to compound with Dr. Krishnaswami Ayyar who was to pay to them Rs. 2500 in five monthly instalments of Rs. 500 beginning from 15th November 1941. The Official Liquidators compounded with the debtor on these terms but he has made no payment to them.

2. On 14th July 1942, the surety was adjudicated an insolvent and thereupon the Official Assignee applied to the Judge sitting in Insolvency (Chandrasekhara Ayyar J.) for an order directing the Court of Small Causes to deliver to him the five shares in the Reserve Bank. This application was made on the ground that the order of 24th October 1941 amounted to a compounding of the debt and the giving of time to the principal debtor, which relieved the surety of his obligation under the bond. The learned Judge accepted this contention. He was of the opinion that if Section 135, Contract: Act, did not apply, Section 133 would operate to discharge the surety. We are unable to agree with the learned Judge that the provisions of the Contract Act with regard to contracts of guarantee apply here. Section 126 of that Act defines a "contract of guarantee" as, "a contract to perform the promise, or discharge the liability, of a third person in case of