Bank of Bihar Ltd. v. Damodar Prasad

Supreme Court of India, 8 August 1968, 3 judges, 1969 AIR 297, 1969 SCR (1) 620

A surety's liability is immediate and coextensive with the principal debtor's, so a court cannot, without a special equity, direct a creditor to exhaust remedies against the principal before executing a decree against the surety.

Facts

The plaintiff bank lent money to defendant No. 1 (Damodar Prasad) on the guarantee of defendant No. 2. The guarantee bond of June 15, 1951 bound the surety to pay up to Rs. 12,000 with interest two days after demand, and allowed the bank to enforce the guarantee notwithstanding any other security or remedy. Neither defendant paid despite demands. The Subordinate Judge, Patna decreed the suit against both, but directed that the bank could enforce the decree against the surety only after exhausting its remedies against the principal debtor. The Patna High Court dismissed the bank's appeal against that direction, and the bank appealed to the Supreme Court on a certificate.

Questions before the Court

Can a court passing a money decree against both the principal debtor and the surety direct that the creditor shall proceed against the surety only after exhausting its remedies against the principal debtor?
Can such a direction be justified under Order XX Rule 11(1) or Section 151 of the Code of Civil Procedure?

What the Court held

Under Section 128 of the Indian Contract Act, save as provided in the contract, the surety's liability is coextensive with that of the principal debtor. Here the surety's liability was immediate and was not deferred until the creditor exhausted its remedies against the principal.
Before payment the surety cannot dictate terms to the creditor. In the absence of some special equity, a surety against whom a decree has been obtained along with the principal has no right to restrain execution until the creditor has exhausted its remedies against the principal.
An order under Order XX Rule 11(1) needs sufficient reasons and a clear and specific direction. The direction here was of the vaguest character, gave no reasons, and could not be justified under that rule. The solvency of the principal is not a sufficient ground.
Even assuming an inherent power under Section 151 to postpone execution, the ends of justice did not require it. The surety must pay and may then recover from the principal after subrogation under Section 140. The direction was set aside and the appeal allowed.

Why it matters

The judgment states that a creditor need not exhaust remedies against the principal debtor before proceeding against the surety, either before suit or in execution, because the surety's liability under Section 128 of the Contract Act is coextensive and immediate. It also limits the use of Order XX Rule 11(1) and Section 151 CPC to postpone execution against a surety, noting that otherwise a guarantee taken by a banker as collateral security would become useless.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Under sec. 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.”

Bachawat, J.Page 2 of the judgment

“Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal.”

Bachawat, J.Page 3 of the judgment

“But the solvency of the principal is not a sufficient ground for restraining execution of the decree against the surety. It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated to the rights of the creditor under sec. 140 of the Indian Contract Act. and he may then recover the amount from the principal. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety.”

Bachawat, J.Page 3 of the judgment

Provisions interpreted

Case and bench

Parties: Bank of Bihar Ltd. v. Damodar Prasad
Case: Civil Appeal No. 1109 of 1965
Decided: 8 August 1968
Bench: R.S. Bachawat, S.M. Sikri, K.S. Hegde
Opinions: Unanimous. Judgment of the Court delivered by Bachawat, J.

Questions on this case

4 questions in live Law Maker papers mention this case. Practise them with the landmark judgments questions.