2009 (8) TMI 1186 - SC - Indian Laws

Whether the liability of the guarantor and principle debtors are co-extensive and not in alternative? Whether the High Court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay further proceedings in O.A. 156 of 1997?

Summary

Issues:
1. Interpretation of personal guarantee in case of default on a loan.
2. Applicability of Industrial Reconstruction Bank of India Act, 1984.
3. Rights and liabilities of guarantor and principal debtor.
4. Jurisdiction of Debts Recovery Tribunal.
5. Application of Recovery of Debts Due to Bank and Financial Institutions Act, 1993.
6. Legal position regarding the liability of guarantor and principal debtor.

Issue 1: Interpretation of personal guarantee in case of default on a loan:
The case involved a personal guarantee given by a respondent for a loan granted by the appellant to a borrower company. The guarantee was enforceable irrespective of the status of any other securities held by the borrower. The court examined the clauses of the guarantee and emphasized that the liability of the guarantor is co-extensive with that of the principal debtor.

Issue 2: Applicability of Industrial Reconstruction Bank of India Act, 1984:
The appellant invoked section 40 of the IRBI Act for attachment and sale of assets of the borrower company due to defaults. The court clarified that seeking relief under this section did not involve the guarantor. The provisions of the IRBI Act were compared to those of the State Financial Corporations Act, highlighting their similarity.

Issue 3: Rights and liabilities of guarantor and principal debtor:
The court analyzed various legal precedents and established that the liability of the guarantor and the principal debtor is co-extensive, not alternative. The guarantor can be proceeded against without exhausting remedies against the principal debtor first. The court emphasized that the security provided by a guarantor should not be easily undermined.

Issue 4: Jurisdiction of Debts Recovery Tribunal:
The appellant filed an application under section 19 of the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 against the respondent. The court upheld the appellant's right to initiate proceedings against both the borrower and the guarantor simultaneously.

Issue 5: Application of Recovery of Debts Due to Bank and Financial Institutions Act, 1993:
The court clarified that the remedy under this Act does not conflict with the provisions of the IRBI Act. The appellant's right to pursue recovery under different statutes concurrently was upheld.

Issue 6: Legal position regarding the liability of guarantor and principal debtor:
Through a series of legal cases, the court reaffirmed that the liability of the guarantor and the principal debtor is co-extensive. The court emphasized that the guarantor's liability is not contingent on the failure to recover from the principal debtor. The judgment concluded that the High Court was not justified in staying further proceedings against the respondent.

In conclusion, the Supreme Court allowed the appeal, setting aside the High Court's judgment and awarding costs to the appellant. The judgment reinforced the principle that the liability of a guarantor is co-extensive with that of the principal debtor, allowing creditors to pursue remedies against both simultaneously without exhausting options against the principal debtor first.