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TMI Blog1969 (9) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) a deed of hypothecation of goods described in the schedule annexed to the document; (iii) a letter to the bank agreeing that during the continuance of the agreement evidenced by the letter of hypothecation, the company will remain solely responsible for all loss, damage or deterioration of the securities delivered to the bank caused by theft, fire, rain, robbery, dacoity or by any other cause whatsoever. Ranjit Singh executed a deed called an "agreement of guarantee" agreeing to pay on demand all monies which may be due as "ultimate balance" from the company to the bank. In December, 1953, the company closed its business. The stocks pledged were disposed of by the bank and the amount realised was credited in the account of the company. The bank claimed that an amount of Rs. 2,56,877-12-6 remained due at the foot of the account. Some creditors of the company had in the meantime filed a petition in the High Court of Allahabad for an order winding up the company. On 22nd February, 1956, a scheme of composition was settled among the creditors that the total liability of the company was Rs. 34,45,197-11-2 and the total assets of the company were Rs. 5,00,000, that the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court had statutory operation and was binding on all creditors regardless of the fact whether any of them agreed or not; that according to the scheme the bank became an unsecured creditor for the amount remaining due after sale of the pledged goods, that under clause 12 of the scheme the amount payable to the unsecured creditors shall be the principal amount due to them determined by the board of trustees, that it was for the board of trustees to determine the amount that remained payable to the bank, that though under clause 16 of the scheme a creditor may file suits and take appropriate steps, for the limited purpose of establishing their claims the suit had to be filed with the leave of the court, and that the suit against the company without obtaining leave of the court was not maintainable. The High Court further held that Ranjit Singh had executed an indemnity bond and that even assuming that Ranjit Singh was a surety it was expressly provided by the terms of the bond executed by him that the guarantee was only for ensuring payment of the "ultimate balance" remaining due to the bank on such cash credit account up to the specified limit, and therefore Ranjit Singh was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement." In the present case a meeting of creditors of the company was held in which a majority in number representing three-fourths in value of the creditors agreed to the scheme of composition and the court rejected the objection raised by the bank and sanctioned the scheme. The scheme was binding upon the bank and the rights and obligations of the bank had to be worked out under the scheme. In reaching its conclusion that the bond executed by Ranjit Singh in favour of the bank was of the nature of a contract of indemnity and not a contract of guarantee, the High Court was impressed by the circumstance that the company was not a party to the bond, and that the bond was only a bilateral agreement between the bank and Ranjit Singh. Section 124 of the Indian Contract Act defines a "contract of indemnity". A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company did not execute the bond. But a contract of guarantee may be wholly written, may be wholly oral, or may be partly written and partly oral. The documents which secured repayment of the bank's claim at the foot of the cash credit account were executed simultaneously; the bond executed by Ranjit Singh was one of them and the conduct of Ranjit Singh and the company indicates that Ranjit Singh agreed to guarantee payment of the debt due by the company. We hold, therefore, that the bank, the company and Ranjit Singh were parties to the agreement under which, for the dues of the company, Ranjit Singh became a surety. The extent of the liability of Ranjit Singh under the terms of the bond must, therefore, be determined. Section 128 of the Indian Contract Act provides that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. It is necessary, therefore, to consider whether in the terms of the bond there is anything which shows that the liability of the surety is not co-extensive with that of the principal debtor. Certain clauses of the bond are relevant: "(1) In consideration of your bank at my request allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be premature. The High Court, instead of dismissing the suit, should have stayed it till "the ultimate balance" due to the bank from the company was determined. We deem it necessary to observe that a binding obligation created under a composition under section 391 of the Companies Act, 1956, between the company and its creditors, does not affect the liability of the surety unless the contract of suretyship otherwise provides. As observed in Halsbury's Laws of England, Volume 6, 3rd Edition, article 1555, at page 771 : "A scheme need not expressly reserve the rights of any creditors against sureties for debts of the company, as such rights are unaffected by a scheme." It was held in In re Garner's Motors Ltd. [1937] Ch. 594 ; [1937] 1 All. ER 671 that the scheme when sanctioned by the court has a statutory operation and the scheme does not release other persons not parties to the scheme from their obligations. The High Court, in our judgment, should have stayed the suit and after "the ultimate balance" due by the company was determined, the court should have proceeded to decree the claim according to the provisions of clause 4 of the bond. We accordingly modify the decre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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