IMPORTANT POINTS
Liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. It is the prerogative of the Creditor alone to move against the principal debtor first or the surety.
Clauses in letter of guarantee are binding on the guarantor.
Ignorance is not a valid ground.

Headnote:(a) Indian Contract Act, 1872 – Section 128 – Liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract – It is the prerogative of the Creditor alone to move against the principal debtor first or the surety – Guarantor cannot escape from her liability for the debt taken by the principal debtor. (Para 11, 12)
       (2012) 11 SCC 511 – Relied upon
       (b) Indian Contract Act, 1872 – Section 128 – Letter of guarantee – Clause (2) – Clauses in letter of guarantee are binding on the guarantor – Joint Memo regarding compromise with Bank binding on the guarantor. (Para 14)
       (1998) 8 SCC 653 – Relied upon
       (c) Administration of Justice – Ignorance – Not a valid ground – Respondent residing in the same house with her sons – Ignorance about the joint memo – cannot be accepted. (Para 15)
       (d) Administration of Justice – Auction sale – Sale confirmed – Respondents claimed their share of sale proceeds – Principal borrower neither repaying the Bank nor taking any interest in litigation – Auction purchaser in possession for 8 years – High Court erred in setting aside the sale. (Para 19, 20)
       Facts of the case:
       Respondent No.1 C.L. Vimla who is a senior citizen aged about 85 years, is the guarantor. The appellant Central Bank of India is the Bank to whom the property involved in the present case, was mortgaged.
       The property involved in the present case is a residential house which was purchased by the husband of C.L. Vimla. She is in possession of the property along with other family members. Her husband, during his life time, executed a Will dated 31.05.1995 bequeathing his undivided share in favor of his sons equally and while settling the property he granted life interest in favour of the guarantor. However, he has not authorized her to sell or mortgage the property.
       The property was mortgaged in favour of Central Bank of India for raising a loan of Rs.17,50,000/-for family business for which C.L. Vimla stood guarantee.
       The business suffered loss. Consequently, as the respondents were unable to repay the mortgage amount, the Bank filed O.A. before the Debt Recovery Tribunal, Bangalore. The Debt Recovery Tribunal referred the case for settlement before Lok Adalat. The High Court Legal Services Committee considered the reference and passed an award whereunder the borrower have agreed to pay Rs.33,50,000/-as final settlement of the claim of the Bank. This settlement was not within the knowledge of the guarantor C.L. Vimla as she had not signed the joint memo. One of her sons N. Surya Bhagavan has signed it. Her advocate has also signed the Joint Memo.
       It was only on 5.4.2006 when she learnt that the property has been ordered to be sold by auction. She also learnt about the signing of Joint Memo by N.Surya Bhagavan and the Bank. So she filed Writ Petition before the High Court for setting aside the award dated 20.03.2004 of the Lok Adalat, as far as she was concerned. The High Court by an order dated 1.06.2006, dismissed the writ petition on the ground of laches. Thereafter, she filed Writ Appeal which was permitted to be withdrawn with liberty to approach the Lok Adalat for appropriate relief.
       Thereafter, the guarantor approached the Lok Adalat by filing an application under Order 9 Rule 13 read with Sections 21 and 25 of Legal Services Authority Act, 1987 on 03.10.2006.
       During pendency of the writ petition, the Recovery Officer conducted auction on 5.10.2006.
       The guarantor filed an interim application being before the DRT for setting aside the same. The Guarantor requested the DRT not to confirm the sale since her case was pending before the Lok Adalat at High Court. The copy of the bid sheet did not contain the full particulars of the auction purchasers. Thus, she moved an application seeking stay of delivery of property. The DRT directed the Recovery Officer not to deliver the property to the auction purchaser until further orders.
       On 22.01.2007, the interim order was vacated by the DRT in the absence of the appellant. Thus, the guarantor continued in possession till 31.1.2007. The auction purchaser moved an application on 01.02.2007 for recalling the order dated 22.01.2007. On 5.02.2007, the High Court Lok Adalat permitted the appellant to request the DRT to defer the proceedings. An application made in this regard was dismissed on 22.2.2007. The High Court Lok Adalat held on 5.2.2007 that the guarantor not being a party to the joint memo to referring the matter to the Lok Adalat, the decree is not binding on her. While the guarantor was agitating her right in the property, the sale conducted is not valid in law, so she sought for setting aside the sale.
       The High Court held that as the guarantor was not a party to the Joint Memo, the decree would not be binding on her. Regarding the validity of the sale, the High Court held that the sale was not done as per the mandate of the sale proclamation which said that the sale was to be conducted part by part and stopped as soon as the decree amount was realized. Thus, the High Court held that the auction was violative of Order 21 Rule 64. It also rejected the plea for solatium of 20% of the Central Bank of India.
       Finding of the Court:
       High Court erred in setting aside the sale.
       Result: Appeals allowed.

Judgement Key Points

Key Points: - The liability of the guarantor is co-extensive with that of the principal debtor unless the contract provides otherwise (!) (!) . - It is the prerogative of the creditor to decide whether to proceed against the principal debtor or the surety first (!) (!) . - Clauses in a letter of guarantee are binding on the guarantor, and ignorance is not a valid ground to escape liability (!) (!) (!) . - The guarantor cannot avoid liability merely because they were not aware of the joint memo or the settlement (!) . - The auction sale was validly conducted, and the guarantor’s late challenge did not invalidate the sale (!) (!) .

What is the liability of a guarantor under Section 128 of the Indian Contract Act, 1872?

Can a guarantor escape liability if they were unaware of the principal debtor’s default?

What is the effect of clauses in a letter of guarantee on the guarantor’s liability?

JUDGMENT

Pinaki Chandra Ghose, J.

1. Leave granted.

2. These appeals, by special leave, arise from the Judgment and Order dated 23.12.2010 passed by the Division Bench of the High Court of Karnataka at Bangalore in Writ Petition No.3531 of 2007, Writ Petition No.17320 of 2007 and Writ Petition No.17544 of 2007, whereby Writ Petition No.3531 of 2007 filed by C.L. Vimla was allowed while Writ Petition Nos.17320 and 17544 of 2007 filed by the auction purchaser and Central bank of India respectively, were dismissed.

3. The facts material to the present case are that Respondent No.1 C.L. Vimla who is a senior citizen aged about 85 years, is the guarantor. The appellant Central Bank of India is the Bank to whom the property involved in the present case, was mortgaged. The property involved in the present case is a residential house which was purchased by the husband of C.L. Vimla, namely, C.L.Narsimhaiah Shetty, under a sale deed dated 10.06.1997. She is in possession of the property along with other family members. Her husband, during his life time, executed a Will dated 31.05.1995 bequeathing his undivided share in favor of his sons equally and while settling the property he granted life interest in favour of the guarantor. However, he has not authorized her to sell or mortgage the property. The property was mortgaged in favour of Central Bank of India (hereinafter referred to as “the Bank”) for raising a loan of Rs.17,50,000/-for family business. The business suffered loss. Consequently, as the respondents were unable to repay the mortgage amount, the Bank filed O.A. No.309/2002 before the Debt Recovery Tribunal, Bangalore. The Debt Recovery Tribunal referred the case for settlement before Lok Adalat. The High Court Legal Services Committee considered the reference and passed an award whereunder the borrower have agreed to pay Rs.33,50,000/-as final settlement of the claim of the Bank. This settlement was not within the knowledge of the guarantor C.L. Vimla as she had not signed the joint memo. One of her sons N. Surya Bhagavan has signed it. Her advocate has also signed the Joint Memo. It was only on 5.4.2006 when she learnt that the property has been ordered to be sold by auction. She also learnt about the signing of Joint Memo by N.Surya Bhagavan and the Bank. So she filed Writ Petition No.6625 of 2006 before the High Court of Karnataka for setting aside the award dated 20.03.2004 of the Lok Adalat, as far as she was concerned. The High Court by an order dated 1.06.2006, dismissed the writ petition on the ground of laches. Thereafter, she filed Writ Appeal No.899 of 2006, which was permitted to be withdrawn with liberty to approach the Lok Adalat for appropriate relief. Thereafter, the guarantor approached the Lok Adalat by filing an application under Order 9 Rule 13 read with Sections 21 and 25 of Legal Services Authority Act, 1987 on 03.10.2006.

4. During pendency of the writ petition, the Recovery Officer conducted auction on 5.10.2006. The guarantor filed an interim application being I.A. 1464/2006 on 17.10.2006 before the DRT for setting aside the same. The office of the DRT raised an objection stating that the application amounted to an appeal. The Guarantor requested the DRT on 2.11.2006 not to confirm the sale since her case was pending before the Lok Adalat at High Court. The copy of the bid sheet did not contain the full particulars of the auction purchasers. Thus, she moved an application seeking stay of delivery of property. On 28.11.2006, the DRT directed the Recovery Officer not to deliver the property to the auction purchaser until further orders. In the meanwhile, the auction purchaser filed the applications seeking vacation of the Interim orders. On 22.01.2007, the interim order was vacated by the DRT in the absence of the appellant. Thus, the guarantor continued in possession till 31.1.2007. The auction purchaser moved an application on 01.02.2007 for recalling the order dated 22.01.2007. On 5.02.2007, the High C

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2015 Supreme(SC) 372

What is the liability of a guarantor under Section 128 of the Indian Contract Act, 1872?

Can a guarantor escape liability if they were unaware of the principal debtor’s default?

What is the effect of clauses in a letter of guarantee on the guarantor’s liability?

Cases Referred (1)