A guarantor is entitled not only to recover amounts from the principal debtor but also has rights to the creditor's securities as per the Indian Contract Act, promoting equitable protection.

JUDGMENT

The petitioner is a guarantor in respect of the credit facilities availed by a company known as M/s. Scot Free Steels Limited from the Palakkad branch of the respondent Bank. As on 29.8.2022, the total amounts due from M/s. Scot Free Steels Limited is stated to be Rs.4,77,32,129/-. The petitioner is also a co- obligant in respect of credit facilities availed by an associate business enterprise (a registered partnership firm) known as M/s. Premier Alloys, which also owes money to the respondent bank. The total amount claimed by the respondent bank from M/s. Premier Alloys is Rs.8,47,32,369/- as on 29.8.2022. It is not in dispute that eight items of properties, out of which six are common (to both loans) are mortgaged with the respondent bank as collateral security by way of equitable mortgage. The total liability in respect of the facilities extended by the respondent Bank to M/s. Scot Free Steels Limited and to M/s. Premier Alloys is Rs.13,24,64,498/-.

2. The petitioner has approached this Court stating that the petitioner, as a guarantor in respect of the facilities extended to M/s. Scot Free Steels Limited and as a co-obligant in respect of facilities extended to M/s. Premier Alloys, is willing to settle the liabilities subject to the condition that the petitioner is permitted to proceed against the securities now held by the bank. Pursuant to interim orders issued by this Court, the petitioner has deposited, in total, a sum of Rs.2.50 crores, which is now maintained in a no-lien account by the respondent bank.

3. In respect of the facilities where the petitioner is a guarantor, the provisions of Sections 140 and 141 of the Indian Contract Act, 1872 make it clear that where the guarantor is called upon to discharge the liability of the principal borrower, the guarantor has the right to recover the amounts from the principal borrower and also that the guarantor is entitled to every security that is available against the principal borrower. and 141 of the read as under:

“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.

141. Surety’s right to benefit of creditor’s securities.—A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.”

4. I am of the view that in respect of facilities extended by the respondent Bank to M/s.Scot Free Steels Limited, where the petitioner is a guarantor, the provisions of Sections 140 and 141 of the Contract Act, 1872 suggest that the petitioner has the right to proceed against the principal borrower and also to proceed against all securities held by the respondent bank.

5. In respect of the liabilities of M/s.Premier Alloys, it must be noticed that the petitioner is a co-obligant. Whether on discharge of the liability of M/s. Premier Alloys, the petitioner will enjoy the same rights as a guarantor discharging the liabilities of the principal borrower, is the moot question.

6. The learned counsel for the petitioner and the learned counsel appearing for the respondent bank would submit that the issue appears to be squarely covered by the judgment of the Honourable Supreme Court in Krishna Pillai v. Padmanabha Pillai [2004 (2) KLT 61], where an identical situation was considered by the Supreme Court in paragraphs 11, 20 and 21 of the judgment, which read as follows:-

“11. Having examined the issue from all possible angles and having referred to Sir Rashbehary Ghose on Law of Mortgage in India