Sec.128 of Indian Contract Act - Guarantee co existence with that of Principal unless specifically exempted in the letter of Guarantee - mother aged 85 years, having 1/6 share with limited rights to enjoy the property through will , stood as Guarantor for Mortgage loan executed by her sons for business purpose infavour of Bank - failed to pay debt - Bank filed a petition to DRT - DRT referred the case before Lok Adalat for settlement - joint memo filed but mother not signed - time given to deposit the settled amount towards one time settlement - but the sons principal debtors failed to pay the Lok Adalat awarded amount - while pending sale notices , she filed for setting aside the Lok Adalat Award as it is not binding on her - High court set aside the Award as she is not signed on the Joint Memo and thereby set aside sale etc. conducted pending enquiry - Apex court held that the guarantor cannot escape from her liability as a guarantor for the debt taken by the principal debtor. In the loan agreement, which is the contract before us,there is no clause which shows that the liability of the guarantor is not co-extensive with the principal debtor. Therefore Section 128 of the Indian Contract Act will apply here without any exception.- mere fact of ignorance of joint memo not beliveable as sons and mother are living together - 2015 S.C.MSKLAWREPORTS
The Respondent No.1 C.L. Vimla
who is a senior citizen aged about 85 years, is the guarantor.
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.
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 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.
The High Court of Karnataka, in the impugned judgment, has dealt with the
issues individually. The Court had framed issues on the inherent power of
the Lok Adalat, the action of the Debt Recovery Tribunal (DRT) in deciding
the interim applications filed by the guarantor and the possession by the
auction purchaser and payment of solatium to the Central Bank of India. On
the issue of the inherent power of the Lok Adalat, the High Court after
relying on a number of decisions 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.
Apex court held that
the liability of the guarantor under Section 128 of the Indian
Contract Act, 1872. The legislature has succinctly stated that the
liability of the guarantor is co-extensive with that of the principal
debtor unless it is otherwise provided by the contract. This Court has
decided on this question, time and again, in line with the intent of the
In Ram Kishun this Court has held that “in view of the provisions of Section 128
of the Contract Act, the liability of the guarantor/surety is co-extensive
with that of the debtor.” The only exception to the nature of the
liability of the guarantor is provided in the Section itself, which is only
if it stated explicitly to be otherwise in the Contract.
In the case of Ram Kishun (supra), this Court has also stated that it is
the prerogative of the Creditor alone whether he would move against the
principal debtor first or the surety, to realize the loan amount. This
“Therefore, the creditor has a right to obtain a decree against the surety
and the principal debtor. The surety has no right to restrain execution of
the decree against him until the creditor has exhausted his remedy against
the principal debtor for the reason that it is the business of the
surety/guarantor to see whether the principal debtor has paid or not. The
surety does not have a right to dictate terms to the creditor as to how he
should make the recovery and pursue his remedies against the principal
debtor at his instance”.
Thus, we are of the view that in the present case the guarantor cannot
escape from her liability as a guarantor for the debt taken by the
principal debtor. In the loan agreement, which is the contract before us,
there is no clause which shows that the liability of the guarantor is not
co-extensive with the principal debtor. Therefore Section 128 of the Indian
Contract Act will apply here without any exception.
After a thorough reading of the Form of Guarantee for Advances & Credit
Generally, our attention has been drawn to Clause 2 where Respondent No.1,
C.L. Vimala and one of her sons N. Ramesh Babu, have stated under the
relevant part of the clause as under:
“2)……in relation to the subject matter of this guarantee or any judgement
or award obtained by you against the principal debtor shall be binding on
This Court has held in United Bank of India that the Clauses in the letter
of guarantee are binding on the guarantors as follows:
“In view of the above, the question regarding confirmation of the decree
against the guarantors now needs to be settled. ……………… we see no reason why
the guarantors should not be made liable under the letters of guarantee,
the terms whereof clearly stipulate that on the failure of the principal
debtor to abide by the contract, they will be liable to pay the amount due
from the principal debtor by the appellants. Clause 15 of the letter of
guarantee, in terms states that any action settled or stated between the
bank and the principal debtor or admitted by the principal debtor shall be
accepted by the guarantors as conclusive evidence. In view of this
stipulation in the letter of guarantee, once the decree on admission is
passed against the principal debtor, the guarantors would become liable to
satisfy the decree jointly and severally.”
Thus, we see no reason why the Joint Memo, which states compromise arrived
at between the Central Bank of India and the principal debtors, would not
bind C.L. Vimla when under Clause (2) she has admitted that any judgment or
award obtained by the Central Bank of India against the principal debtor
would bind the parties.
The mere fact of ignorance cannot be a valid ground. The respondent, C.L.
Vimala and her son, N.Surya Bhagavan who signed the joint memo, were
residing in the same house. We see no reason why the Respondent would not
know of the joint memo, when she could have by reasonable means made
herself aware of the proceedings.
Accordingly, we set aside the order passed by the High Court and hold that
since the auction purchaser has already paid the full amount of sale
consideration and is in possession of the property in question for more
than about 8 years, for equity and good conscience, we do not intend to
interfere with his possession and we, therefore, set aside the order passed
by the High Court, and allow these appeals. - 2015 S.C. MSKLAWREPORTS