PETITIONER:
PUNJAB NATIONAL BANK LIMITED
Vs.
RESPONDENT:
BIKRAM COTTON MILLS & ANR.
DATE OF JUDGMENT:
17/09/1969
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1973 1970 SCR (2) 462
CITATOR INFO :
D 1982 SC1497 (7)
ACT:
Contract Act 1872, s. 126--Company director executing
bond to repay 'ultimate balance' found due from company
to Bank on cash-credit account--Simultaneously other
documents executed by company undertaking repayment--If
bond indemnity or contract, of guarantee--Whether suit by
Bank prior to determination of ultimate balance was
premature.
Companies Act, 1956, s. 391--Scheme of composition
between company and creditors--If binding on dissenting
creditors.
HEADNOTE:
The first respondent company opened a cash-credit
account with the appellant bank and on June 7, 1953 to
secure repayment of the balance due at the foot of the
account the first respondent company executed three
documents through its managing agents i.e. a promissory
note, a deed of hypothecation and a letter assuring the
appellant bank that the company would remain solely
responsible for all loss, damage or deterioration of the
stocks hypothecated with the bank. On the same day R a
Director of the managing agents executed a bond called
"agreement of guarantee' agreeing to pay on demand all
monies which may be due as the "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 company's
account. A balance of approximately Rs. 2.56 lakhs remained
due at the foot of the account.
Some creditors of the company in the meantime filed a
petition for winding up the company. On February 22, 1956
a scheme of composition was settled among the creditors and
was later sanctioned by the High Court On May 21, 1956 under
section 391 of the Companies Act, 1956 after rejecting the
opposition of the appellant bank. The bank then filed a
suit against the company and R for a declaration that on the
date of the suit a sum of over Rs. 2.56 lakhs was due
against the company and for a decree for payment of the
amount against R. The trial court dismissed the suit and
on appeals filed by both the parties the High Court held
that the scheme having been confirmed by the court, had
statutory operation and was binding on all creditors
including the bank; the bank had become an unsecured
creditor for the amount remaining due after sale of the
pledged goods and it was for the board of trustees under the
Scheme to determine the amount for payment to the bank. The
court also held that the suit against the company without
obtaining leave of the court was not maintainable. It
further held that R had executed an indemnity bond and
that even assuming he was a surety under the terms of the
bond he was only responsible for ensuring payment of the
"ultimate balance" which still had to be determined. The
High Court accordingly confirmed the decree of the trial
court and held that the suit against R was premature.
On appeal to this Court,
HELD: (i) The suit must be remanded to the trial court
to determine "the ultimate balance" and for disposal
according to law.
463
The appellant bank was entitled to claim at any time the
money due from the company as well as from R. under the
promissory note and the bond. The suit could not therefore
be 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.
[471 E-F]
(ii) The binding obligation created under a composition
under s. 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. [471 F-G]
Halsbury's Laws of England, Vol. 63 rd. Edn., Art. 1555
at p. 771; Re. Garner's Motors Lid,. [1937] Ch. 59'4;
referred to.
(iii) The bond executed by R was one of the four
documents executed on the same day and was part of the
scheme to ensure payment of the amount found due to the
Bank. Although the bond was not also executed by the
company, the 'fact that it was executed simultaneously with
the other documents and the conduct of R as well as the
company indicated that R agreed to guarantee payment of the
debt due by the company. It must be held, therefore that
the Bank, the company and R were parties to the agreement
under which for the dues of the company, R became a surety.
[470 A-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1957 and
1958 of 1966.
Appeal by special leave ,from the judgment and order
dated September 6, 1965 of the Allahabad High Court, Lucknow
Bench in First Civil Appeals Nos. 62 and 71 of 1957.
H.R. Gakhale, M.M. Kshatriya and G.S. Chatterjee, for
the. appellant (in both the appeals).
M.C. Chagla, A.K. Verma, B. Datta and 1. B. Dadachanli,
for the respondents (in both the appeals).
The Judgment of the Court was delivered by
Shah, J. Ranjit Singh was a director of Ranjit Singh &
Sons. Ltd.–which acted as a Managing Agent of Shri Vikram
Cotton Mills Ltd. Shri Vikram Cotton Mills Ltd.–hereinafter
called the Company, opened a cash-credit account with the
Punjab National Bank, and to secure repayment of the balance
due at the foot of the account on June 27, 1953 four
documents were executed-three by the Managing Agents on
behalf of the Company and one by Ranjit Singh. The three:
documents executed by the Managing Agents were (i)
promissory note for Rs. 13,00,000/- payable with interest
at the rate of 21/2% over the Reserve Bank of India rate
with a minimum rate of 6% per annum until payment; (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.
464
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
petition in the High Court of Allahabad for an order winding
up the Company. On February 22, 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 desirous of confirming “a lease agreement” and
that in order to safeguard the rights and interests of the
Company and its unsecured creditors the Company had entered
into an agreement with the lessee. The scheme was
sanctioned by order of the High Court of Allahabad dated May
21, 1956 under s. 391 of the Indian Companies Act, 1956
after rejecting the opposition of the Bank,
The Bank then filed a suit in the Court of the Civil
Judge. Malihabad, Lucknow, against the Company and Ranjit
Singh for a declaration that on the date of the suit
a sum of Rs. 2,56,877-12-6 was due against the Company and
for a decree for payment of that amount against Ranjit Singh
with costs and interest pendente lite. In a joint written
statement it was contended, inter alia, that Ranjit Singh
was “only a guarantor and not a co-debtor” and that he could
be made liable only in case of default by the Company, and
since the Company had made no default–the suit against
Ranjit Singh was not maintainable.
Certain preliminary issues were raised by the Trial Judge
at the hearing of the suit out of which the following are
relevant:
“(1) Whether the plaintiff (Bank) is not entitled to file
this suit as against the defendant No. 1 (the Company)
without obtaining the leave of the Company Judge as alleged
? If so, its effect’?
(2) Whether the Court has no jurisdiction to decide on the
merits of the plaintiff’s claim in view of the facts as
alleged in para 12(A) of the written statement ? If so, its
effect ?
(3) Whether the suit against defendant No. 2
(Ranjit Singh is not maintainable as pleaded under Paras 7,
13 and 14 of the written statement ?”
465
The Trial Court held that the suit was not maintainable
against the Company without obtaining leave of the Company
Judge, and also that the Court had no. jurisdiction to
adjudicate upon the merits of the Bank’s claim, for under
the scheme the Board of Trustees were to scrutinise the
claim and their decision was final. In dealing with the
claim against Ranjit Singh the Court head that he had not
made any default in payment of the dues and under the terms
of guarantee the suit was premature against him as well.
The Court accordingly dismissed’ the suit.
Two appeals were preferred to the High Court of
Allahabad against the judgments in the suit. The High Court
held that a scheme of composition between the Company and
its creditors confirmed by 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
cl. 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 cI. 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 of 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 cashcredit account upto
the specified limit, and therefore Ranjit Singh was only to
pay “the ultimate balance” which might be found due against
the Company after “taking into account all dividends,
compositions and payments etc as payments in gross towards
the debt”, that the Bank’s dues could be recovered from
Ranjit Singh upon default in payment by the Company of the
ultimate balance after scrutiny by the Board of Trustees,
and that the “proper stage for commencing a suit against
Ranjit Singh was after the ultimate liability of the Company
was determined by the Board of Trustees and the Company
committed default in payment”. The High Court accordingly
confirmed the decree of the Trial Court even in favour of
Ranjit Singh With special leave granted by this Court,
these two appeals have been preferred by the Bank.
The Bank claimed a mere declaration against the Company
and not a decree for payment of the amount due Section 391
of the Companies Act, 1956, insofar as it is material
provides:
“(1 ) Where a compromise or arrangement is
proposed–
466
(a) between a company and its creditors or an
class of them; or
(b) between a company and its members or
any class of them;
the Court may, on the application of the
Company or of any creditor or member of the
Company, or, in the case of a company which is
being wound up, of the liquidator, order a
meeting of the creditors or class of
creditors, or of the members or class of
members, as the case may be, to be called,
held and conducted in such manner as the Court
directs.
(2) If a majority in number representing
threefourths in value of the creditors, or
class of creditors, or members, or class of
members, as the case may be, present and
voting either in person or, where proxies are
allowed by proxy, at the meeting, agree to any
compromise or arrangement, the compromise or
‘arrangement shall, if sanctioned by the
Court, be binding on all the creditors, all
the creditors of the class, as the case may
be, and also on the, company, or, in the case
of a company which is being wound up, on the
liquidator and contributories of the company:
Section 392(1) provides:
“Where a High Court makes an order under
section 391 sanctioning a compromise or an
arrangement in respect of a company, it-
(a) shall have power to supervise the
carrying out of the compromise or arrangement;
and
(b ) may, at the time of 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 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.
467
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 promiser himself, or by the conduct of any
other person, is called a “contract of indemnity”. Section
126 defines a “contract of guarantee”. It states:
“A ‘contract of guarantee’ is a contract
to perform the promise, or discharge the
liability, of a third person in case of his
default. The person who gives the guarantee
is called the ‘surety’: the person in respect
of whose default the guarantee is given is
called the ‘principal debtor’, and the person
to whom the guarantee is given is called the
‘creditor’. A guarantee may be either oral
or written”.
A promise to be primarily and independently liable for
another person’s conduct may amount to a contract of
indemnity A contract of guarantee requires concurrence of
three persons-the principal debtor, the surety and the
creditor–the surety undertaking an obligation at the
request express or implied of the principal debtor. The
obligation of the surety depends sub-‘ stantially on the
principal debtor’s default; under a contract of indemnity
liability arises from loss caused to the promisee by the
conduct of the promisor himself or by the conduct of
another person
In the present case the Company did not execute the
bond But the bond executed by Ranjit Singh was one of
four documents executed on June 27, 1953 It was part of
the scheme to ensure payment of the amount due at the foot
of the cash-credit account in favour of the Bank The
Company executed by its managing agents–(i) a promissory
note; (ii) a deed of hypothecation; and (iii) a letter
assuring the Bank that the Company shall remain solely
responsible for all loss, damage or deterioration to the
stocks hypothecated with the Bank. The Bank also insisted
upon a promise by some other person to pay the debt, and as
a part of the same arrangement Ranjit Singh executed the
bond on which the suit is field. The bond was expressly
called an “agreement of guarantee”: it was also recited
therein that Ranjit Singh guaranteed to the Bank, payment on
demand of all monies which may at any time be due to the
Bank from the Company on the general balance of that account
with the Bank,
468
that the guarantee was to be a continuing guarantee for the
ultimate balance which shall remain due to the Bank on such
cashcredit account. In the written statement it was
admitted that Raniit Singh was a guarantor. The bond, it is
true, did not expressly recite that the Company was the
principal debtor; it is also true and the 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 cashcredit 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 coextensive 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 allowing an accommodation by way of
cash credit and D/D limits to M/s. S.V.
Cotton Mills Ltd , at Lucknow Branch, I, in my
personal capacity hereby guarantee to you the
payment on demand of all monies which may at
any time be due to you from M/s. S.V. Cotton
Mills Ltd., on the general balance of that
account with your Bank.
(2) I declare that this guarantee shall be
continuing guarantee and shall not be
considered as cancelled or in any way affected
by the fact that at any time the said cash-
credit and D/D account may show no liability
against the borrower, or may even show a
credit in favour of the borrower, but shall
continue in operation in respect of subsequent
transactions”.
“(4) I further declare that all dividends,
compositions, payments received by you
from the said borrower or any other
person or persons liable or his or
their representatives shall be taken and
applied as payment in gross without any
right
469
on the part of myself or my representative
to stand in your place in respect of or to
claim the benefit of any such dividends,
compositions or payments, until full amount
of all your claims against the said borrower
or his/their representatives which are covered
by this, guarantee shall have been paid and
that this guarantee shall apply to and secure
ultimate balance which shall remain due to you
on such cash-credit account upto the extent of
Rs. 13,00,000.
“(8) I also agree that the Bank shall be
entitled to recover its entire dues
under the said cash-credit account
from my person or property upon default in
payment by the said borrower”.
By clause 4 it is expressly stipulated that the bond
secured “the ultimate balance” remaining due to the Bank.
Therefore, unless and until the ultimate balance is
determined no liability on Ranjit Singh to pay the amount
arises, and it is common ground that the ultimate balance
due is not determined. The suit was for a decree for Rs.
2,56,877/12/6, but the claim against Ranjit Singh could be
decreed only for the amount remaining due as the ultimate
balance under cls. 4 and 5 of the bond.
We are, however, unable to agree with the High Court that
the suit filed was premature. The Bank was under the terms
of the bond executed by Ranjit Singh entitled to, claim at
any time the money due from the Company as well as Ranjit
Singh under the promissory note and the bond. The suit
could not, therefore, be 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
s. 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, Vol. 6, 3rd Edn.,
Art. 1555 at p. 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 Re. Garner’s Motors Ltd.(1) 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.’
(1) [1937] Ch. 594.
up. CI/70–18
470
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 cl. 4 of the bond.
We accordingly modify the decree passed by the Trial
Court and declare that the rights of the Bank against the
Company are governed by the scheme: sanctioned by the High
Court of Aliahabad in Company Case No. 16 of 1956 by their
judgment dated May 21, 1956. Liability of Ranjit Singh
being only for payment the ultimate balance’ which remains
due on the cash-credit account with the Bank in favour of
the Company. The Court will, when such ultimate balance is
determined, proceed to pass a decree in favour of the Bank.
Ranjit Singh has filed an affidavit in this Court that
in accordance with the scheme the total amount due to the
Bank was determined at Rs. 41,536/7/3 as the ultimate
balance and a cheque for Rs. 35,721 was sent to the Bank
on October 6, 1956 being 25% plus the other pro rate
payments allowed ‘by the Trustees to creditors, but the
Bank did not cash the cheque. Thereafter by letter dated
‘October 28, 1966, the Bank requested that a fresh cheque
be issued to them. Accordingly a fresh cheque for Rs.
38,047-46 was issued to the Bank on November 5, 1966,
comprising Rs. 35,721 on the basis of the old cheque plus
Rs. 2,326-46 sanctioned for pro rate payment to the Bank by
the Trustees on November 3, 1966 at the rate of 50%
of the then balance due. Thereafter another cheque for Rs.
1,744.50 being 50% of the amount then due to the Bank
was also forwarded to the Bank on January 29, 1968, in
pursuance of another pro rate payment resolution passed by
the Trustees and the balance now due to the Bank out of the
original amount is Rs. 1,744.09 only. We are unable to
investigate the correctness of these averments.
The decree passed by the High Court is set aside and the
suit be remanded to the Trial Court to be disposed of in the
light of the observations made in this judgment. There will
be no order as to costs in the High Court and in this
Court. Costs in the Trial Court will be costs in the suit.
R.K.P.S.
Suit remanded.
471