1997 Supreme(MP) 88

High Court Of Madhya Pradesh
S. C. PANDEY
STATE BANK OF INDIA - Appellant
Versus
MADHYA PRADESH IRON AND STEEL WORKS PVT.LIMITED, RAIPUR - Respondents
C. R. 1061 Of 1996
Decided On : 02/20/1997

A creditor has an independent right to proceed against a surety, even before exhausting its remedies against the principal debtor. The right of set-off or adjustment claimed by a bank is not a banker's lien in the strict sense, but a right recognized in banking practice and law. The right of set-off can be exercised only when there is mutuality of demands between the same parties in the same capacity.

Headnote:

BANKER'S LIEN - CONTRACT ACT, SECTION 171 - INTERPRETATION - RIGHT OF SET-OFF - MUTUALITY - SURETY'S LIABILITY - RES JUDICATA - PRINCIPLES OF CONSTRUCTIVE RES JUDICATA - APPLICABILITY - INTEREST OF JUSTICE - ADJUSTMENT OF DEPOSITS - PERMISSION GRANTED.

Fact of the Case:

The applicant-bank filed a civil suit against the non-applicant company and its directors for recovery of a loan amount of Rs. 2,81,75,422.21 advanced to the company. The non-applicant No. 8, one of the directors and a guarantor to the loan, deposited Rs. 10 lakhs in his current account with the applicant-bank's Malviya Nagar branch. The applicant-bank filed an application under Section 151 of the Code of Civil Procedure (CPC) seeking permission to adjust/set-off the Rs. 10 lakhs deposited by the non-applicant No. 8 towards its dues, claiming a banker's lien under Section 171 of the Indian Contract Act, 1872. The trial court rejected the application, which was upheld by the District Judge. The applicant-bank filed a revision petition in the High Court.

Finding of the Court:

The High Court held that: * The non-applicant No. 8, as a surety, was jointly and severally liable with the principal debtor (the non-applicant company) to repay the loan. * The applicant-bank had an independent right to proceed against the surety, even before exhausting its remedies against the principal debtor. * The right of set-off or adjustment claimed by the applicant-bank was not a banker's lien in the strict sense, but a right recognized in banking practice and law. * The right of set-off could be exercised only when there was mutuality of demands between the same parties in the same capacity. * In this case, the Rs. 10 lakhs deposited by the non-applicant No. 8 in his individual capacity could be set off against the loan liability of the non-applicant company, as the non-applicant No. 8 was a surety for the loan and, therefore, had the same capacity as the principal debtor. * The dismissal of the applicant-bank's earlier application for attachment before judgment under Order 38, Rule 5 of the CPC did not amount to res judicata and did not bar the subsequent application under Section 151 of the CPC. * In the interest of justice, the applicant-bank should be granted permission to set off the Rs. 10 lakhs deposited by the non-applicant No. 8 towards the loan claim.

Issues: 1. Whether the non-applicant No. 8, as a surety, was jointly and severally liable with the principal debtor to repay the loan? 2. Whether the applicant-bank had an independent right to proceed against the surety, even before exhausting its remedies against the principal debtor? 3. Whether the right of set-off or adjustment claimed by the applicant-bank was a banker's lien in the strict sense? 4. Whether the right of set-off could be exercised only when there was mutuality of demands between the same parties in the same capacity? 5. Whether the dismissal of the applicant-bank's earlier application for attachment before judgment under Order 38, Rule 5 of the CPC amounted to res judicata and barred the subsequent application under Section 151 of the CPC? 6. Whether, in the interest of justice, the applicant-bank should be granted permission to set off the Rs. 10 lakhs deposited by the non-applicant No. 8 towards the loan claim?

Ratio Decidendi: 1. The liability of a surety is co-extensive with that of the principal debtor, unless otherwise provided in the contract. Therefore, the creditor has an option to proceed against the surety independently of the principal debtor, if he chooses to do so. (Paragraph 12) 2. The right of set-off or adjustment claimed by the applicant-bank was not a banker's lien in the strict sense, but a right recognized in banking practice and law. It is a right to combine the two accounts of a depositor and set-off one against the other, whenever the banker pleases, unless there is an agreement, express or implied, to keep them separate. (Paragraph 17) 3. The right of set-off could be exercised only when there was mutuality of demands between the same parties in the same capacity. In this case, the Rs. 10 lakhs deposited by the non-applicant No. 8 in his individual capacity could be set off against the loan liability of the non-applicant company, as the non-applicant No. 8 was a surety for the loan and, therefore, had the same capacity as the principal debtor. (Paragraph 22) 4. The dismissal of the applicant-bank's earlier application for attachment before judgment under Order 38, Rule 5 of the CPC did not amount to res judicata and did not bar the subsequent application under Section 151 of the CPC. The principles of constructive res judicata did not apply to such proceedings, as the earlier application was dismissed on technical grounds, without considering the merits of the case. (Paragraph 25)

Final Decision: The revision petition was allowed. The impugned order of the District Judge was set aside, and the applicant-bank was permitted to set off the Rs. 10 lakhs deposited by the non-applicant No. 8 towards the loan claim. The amount so set off was to be repayable to the non-applicant No. 8 in the event the entire claim of the applicant-bank was satisfied by the principal debtor or the suit of the applicant-bank failed and was dismissed.