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CASE NO.:

Appeal (civil) 3239 of 1995

PETITIONER:

INDUSTRIAL FINANCE CORPORATION OF INDIA LTD.

Vs.

RESPONDENT:

THLETDC.AN&NAONROSR.E SPINNING & WEAVING MILLS

DATE OF JUDGMENT: 12/04/2002

BENCH:

Umesh C. Banerjee & Y.K. Sabharwal

JUDGMENT:

Banerjee, J.

The general rule of equity expounded by Sir Samuel Romilly

as counsel and accepted by the Court of Chancery in Crythorne v.

Swinburne (1807) 14 Ves. 160, that the surety will be entitled to

every remedy which the creditor has against the principal debtor,

including the enforcement of every security stands statutorily

recognised and incorporated in Section 141 of the Indian Contract

Act as regards the discharge of a surety from liability, when the

creditor parts with or loses the security held by him with, however,

an insignificant variation to the effect that the surety is entitled to

the securities given to the creditor, both before and after the

contract of surety.

It is on this score thus Section 141 of the Act ought to be

noticed at some length more so by reason of the same being the

sheet-anchor in support of Respondents' presentation before this

Court in the instant appeal to the effect that the surety is entitled to

the securities given to the creditor, both before and after the

contract of surety and in the event the same stands dissipated then

and in that event there is cessation of liability to the extent of such

dissipation or extinction. An indeed bold proposition but the same

stands accepted by the High Court and hence the appeal before this

Court. Before, however, adverting to the issue as above, it would

be rather convenient to note certain decisions of this Court as well

as of the English Court for further appreciation of the matter.

In State of Madhya Pradesh v. Kaluram (1967 (1) SCR 266 =

AIR 1967 SC 1105) this Court pointedly stated that the expression

"security" in the Section is not used in any technical sense; it

includes all rights which the creditor has against the property on

the date of the contract. In Kaluram (supra) this Court also lent

its approval of Hannen, J. in Wulff and Billing v. Jay, (1872 (7)

QB 756), wherein the learned Judge stated the law as follows :-

" I take it to be established that the defendant became

surety upon the faith of there being some real and substantial

security pledged, as well as his own credit, to the plaintiff; and he

was entitled, therefore, to the benefit of that real and substantial

security in the event of his being called on to fulfil his duty as a

surety, and to pay the debt for which he had so become surety. He

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will, however, be discharged from his liability as surety if the

creditors have put it out of their power to hand over to the surety

the means of recouping himself by the security given by the

principal. That doctrine is very clearly expressed in the notes in

Rees v. Barrington, 2 White and T.L.C., (4th Ed.) at p. 1002 'As a

surety, on payment of the debt, is entitled to all the securities of the

creditor, whether he is aware of their existence or not, even though

they were given after the contract of suretyship, if the creditor,

who has had, or ought to have had, them in all full possession or

power, loses them or permits them to get into the possession of the

debtor, or does not make them effectual by giving proper notice,

the surety to the extent of such security will be discharged. A

surety, moreover, will be released if the creditor, by reason of what

he has done, cannot, on payment by the surety, give him the

securities in exactly the same condition as they formerly stood in

his hands'" - and it is on this score this Court, relying on the

aforesaid, in Kaluram (supra) observed that "The surety is entitled

on payment of the debt or performance of all that he is liable for to

the benefit of the rights of the creditor against the principal debtor

which arise out of the transaction which gives rise to the right or

liability. The surety is therefore on payment of the amount due by

the principal debtor entitled to be put in the same position in which

the creditor stood in relation to the principal debtor. If the creditor

has lost or parted with the security without the consent of the

surety, the latter is by the express provision contained in Section

141, discharged to the extent of the value of the security lost or

parted with."

(Emphasis Supplied)

At this juncture, it would also be convenient to note the true

effect of Sections 139 and 140 of the Indian Contract Act, 1872 as

well, which read as under :

"139. Discharge of surety by creditor's act or

omission impairing surety's eventual remedy. If

the creditor does any act which is inconsistent with

the rights of the surety, or omits to do any act which

his duty to the surety requires him to do, and the

eventual remedy of the surety himself against the

principal debtor is thereby impaired, the surety is

discharged.

140. Rights of surety on payment or

performance. - Where a guaranteed debt has

become due, or default of the principal debtor to

perform a guaranteed duty has taken place, the surety

upon payment or performance of all that he is liable

for, is invested with all the rights which the creditor

had against the principal debtor."

A reference to a Full Bench judgment of the Madras High

Court at this juncture would also be very apposite. In A.L.S.P.PL.

Subramania Chettiar (d) and Anr. v. Moniam P.Narayanaswami

(AIR 1951 Madras (FB) 48), the High Court stated in paragraph 12

as below :-

"Unhampered by judicial decisions also, on a fair

reading of the provisions of the Contract Act, I am

inclined to hold that as the liability of the surety is

co-extensive with that of the principal debtor, if

the latter's liability is scaled down in an amended

decree, or otherwise extinguished in whole or in

part by statute, the liability of the surety also is

pro tanto reduced or extinguished. Paragraph

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192 of Halsbury's Laws of England, Vol.16, 1935

Edn., contains the following passage :

"Whatever expressly or impliedly discharges the

principal debtor from liability usually discharges

the surety also by implication, as his position is

thereby altered without his consent,

notwithstanding that the alteration is

accomplished by operation of law. He is

therefore discharged where he can establish that

the alteration changes the nature of his liability,

but not otherwise."

This shows that extinction of a debt in whole or in

part by operation of law will do, and that the

creditor need not take any part in realising the

principal debtor from his liability. Mr.

Ramachandra Aiyar relied on a passage in para

195 which runs as follows :

"Though an alteration in the position of the

surety by the principal debtor's discharge, or

otherwise, accompanied by the operation of law,

may discharge him this is not always the case."

But this passage will not, in my opinion, help the

appellant in this case as the exceptions given there

relate to the release of the principal debtor's

liability under the law of limitation, bankruptcy

laws, etc. (which merely bar the remedy) and not

to the extinction of the principal debtor's liability,

as here under the Madras Agriculturists' Relief

Act."

Having noted the decisions as above it would be rather

convenient to have the factual details at this juncture since facts

are required tobe assessed in its proper prospective and while

assessing the same if it is so found that the assessment of the

factual matrix fully fits in with the statutory requirement noticed

hereinbefore no exception can be taken to the judgment under

appeal. Let us thus refer the facts as below:

(a) Presently we are not called upon to dilate in

detail the factual element, excepting where it is so

required by reason of the decree obtained by the

plaintiff/appellant for the balance of principal and

interest treating the principal and interest as on

31.3.1974 as Rs.48,50,000/- and Rs.22,36,707.95

with subsequent interest at the contract rate

without penal rate of interest from 1.4.1994, with

proportionate costs.

(b) The Trial Court resolved almost every issue

in favour of the plaintiff except however as

regards the issue of penal interest decreed the suit

as noticed above.

(c) The decree however stood challenged by the

respondent herein inter alia on two several counts:

the first being the factum of intervention of law

to wit the Nationalisation Act and on the second

the existing provisions of Sections 140 and 141 of

the Contract Act: The High Court however

answered the same in the affirmative and in

favour of the defendants in the suit and hence the

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petition for special leave before this Court and the

subsequent grant of leave by this Court.

Incidentally, the introduction of the Nationalisation Act has

obviously weighed with the High Court in particular the

mechanism provided in terms of Sections 20 and 21 of the Act.

Before however adverting thereto certain further factual

details ought to be noticed for correct appreciation of the matter in

its proper perspective. The facts disclose:

Having intended to set up another spinning unit at

Mahe (Pondicherry State), the first respondent

approached the appellant/plaintiff for financial

assistance and obtained sanction for Term Loan Facility

for Rs.35,00,000/-. Pending legal formalities, the

appellant/plaintiff granted Rs.15,00,000/- as interim

loan on 25.3.1963 on which date the first respondent

deposited the title deeds of certain immoveable

properties with the plaintiff's branch at Madras and

thus, agreed to create an equitable mortgage thereby.

The first respondent also executed a deed of

hypothecation in respect of moveable assets such as

plant, machineries, etc. and a promissory note for the

said amount of Rs.15,00,000/-. This, however, later

was merged in the Term Loan amount of

Rs.35,00,000/- secured by a deed of mortgage executed

by the first respondent on 2.5.1963. The first

respondent executed a legal mortgage under a

document registered with the then Notary of

Pondicherry as security for the repayment of the entire

term loan of Rs.35,00,000/- on 30.4.1963, which also

included the deferred payment guarantee facility of

Rs.5,62,230.40. This was followed by an equitable

mortgage by the deposit of title deeds in respect of the

moveables at Cannanore as security for the Deferred

Payment Guarantee facility for Rs.5,62,230.40 on

3.8.1963, in addition to a promissory note for the said

amount. The first defendant also executed bipartite

agreement embodying the terms and conditions

contained in the memorandum of final terms and

conditions for the Deferred Payment Guarantee amount.

That Defendants 2 to 4 in suit and one K. Damodaran (since

deceased) executed a deed of mortgage in their individual capacity

guaranteeing joint and several liability for the repayment of the

loan advanced to the first defendant under the deed of guarantee

dated 25.3.1963. On 8.12.1964 defendants 2 to 4 and Damodaran

and defendants 5 to 6 executed a similar deed of guarantee for the

total sum of Rs.52,00,000/-; Rs.17,00,000/- having been granted as

further Term Loan by the plaintiffs. Defendants 2 to 6 and K.

Damodaran also executed a deed of counter guarantee in their

individual capacity undertaking a joint and several liability for the

prompt repayment of the instalments by the first defendant on

3.8.1963. Defendants 5 to 6 also executed a separate deed of

counter guarantee on 29.4.1965. According to the plaintiff, the

conditions of counter guarantee contained inter alia a clause that

the guarantee would stand enforceable against defendants 2 to 6

and late K. Damodaran, notwithstanding that the security specified

in the security documents or any of them, be outstanding and

unrealised from the principal debtors.

According to the plaintiff, they granted additional loan of

Rs.17,00,000/- to meet the urgent financial need of the first

defendant on the same terms and conditions as contained in the

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memorandum dated 2.11.1964. The first defendant executed a

deed of further charge dated 4.5.1965 once again creating a

mortgage. This document created a mortgage over Mahe unit and

another deed of further charge dated 29.4.1965 over its Cannanore

Unit. Defendants 2 to 6 and late K. Damodaran also executed a

personal guarantee on 8.12.1964 undertaking a joint several

liability to repay the sum of Rs.62,00,000/-. Out of the second

loan of Rs.17,00,000/-; Rs.13,00,000/- were paid on 8.12.1964 and

Rs.6,00,000/- were paid on 2.6.1965 at Madras. At the request of

the first defendant, on their representations about the financial

difficulties, the plaintiff revised the schedule of repayment with

effect from 15.10.1966 under four separate deeds of modifications

dated 31.7.1968; 31.7.1968; 27.1.1970 and 27.1.1970 respectively.

Indian Rupee was devalued on 6.6.1966 which increased the

liability of the plaintiff under the Deferred Payment Guarantee by

Rs.2,37,580.33. According to the plaintiff, in terms of the bi-

partite agreement read with amendatory agreement, the above

increase also became the liability of defendants 1 to 6, for which

the plaintiff again obtained an equitable mortgage by deposit of

title deeds pertaining to the Cannanore and Mahe Units on

11.7.1970. The total contingent liability on account of the default

at that time was worked out at Rs.1,11,199.11 the total Deferred

Payment Guarantee thus increased to Rs.6,73,429.51.

The plaintiff-corporation has stated that the first defendant

repaid only Rs.3,50,000/- towards the first loan and the additional

loan advanced by the plaintiff and certain amounts towards interest

due on the two loans and under the Deferred Payment Guarantee,

the total interest paid was Rs.16,03,224.47. The Central

Government, however, took over the management of Mahe and

Cannanore Units under the Industrial Development and Regulation

Act. The foreign suppliers invoked the Deferred Payment

Guarantee against the Plaintiff, as the first defendant paid

instalments under the Deferred Payment Guarantee contract to the

foreign suppliers upto January, 1972 and thereafter defaulted to

pay any installment. As a result of this default of the first

defendant, the plaintiff was obliged to make the installment

payment to the foreign suppliers.

According to the plaintiff, the first defendant acknowledged

the liability but failed to repay. Defendants 2 to 6, however,

repudiated their liability on 21.12.1974 .

Incidentally, the Sick Textile Undertakings (Nationalisation)

Ordinance was promulgated under which the two Units of the first

defendant at Cannanore and Mahe were nationalised. The

Ordinance was replaced by Act 57 of 1974. All properties and the

management of the undertakings of the first defendant stood

transferred and vested in the Central Government free from all

encumbrances and charges with effect from 1.4.1974. But, in

terms of Section 6, according to the plaintiff-corporation of the

said Act, the liabilities of the first defendant incurred prior to

1.4.1974 continue and remain alive and enforceable against the

first defendant.

The first defendant had not filed any written statement.

Defendants 2 to 6 together, defendants 4 and 5 together and third

defendant alone, filed their respective written statement, the

common defence being that the documents allegedly executed by

them were all executed only in their capacity as the Directors of

the Company. Late Damodaran and defendants 2 to 6 were

partners of the firm Messrs Damodaran and Company, which

functioned as the Managing Agents of the first defendant

Company till 31.1.1966. The system of Managing agents,

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however, was discontinued with effect from 31.3.1966 in

accordance with the provisions and notifications under the

Companies Act, 1956. The only business task which the firm of

defendants 2 to 6 and Damodaran carried on was the business of

working of the first defendant Company. According to these

defendants, the bargaining task of the transactions between the first

defendant and the plaintiff-Corporation was the relationship of

managing agency existing between the firm Damodaran & Co. and

the first defendant-Company. The statutory termination of the

managing agency system and consequential severance of

relationship between the firm Damodaran & Co. and the first

defendant-company resulted in frustration of the contract between

the plaintiff on the one hand and the defendants 1 to 6 on the other.

Thus, according to these defendants, the contractual obligations

have become incapable of being performed in the same capacity in

which the parties entered into contract with the plaintiff. Their

further case is that the first defendant-Company has not defaulted

till they were in the capacity of Managing Agents of the Company.

Only after the termination of the managing agency system, the

business of the first defendant-Company suffered seriously and the

first defendant became a defaulter from 15.10.1968. Apart from

technical grounds, these defendants have alleged that the plaintiff

is guilty of gross prejudice of the various terms and conditions of

the deed of mortgage and the deeds of first charge which has

resulted in the impairment of the remedy of the surety or guarantee

against the principal debtor. They have alleged that the plaintiff

had allowed the first defendant to sell some valuable machineries

belonging to the company without getting the sale proceeds

properly appropriated towards the principal amount due to the

plaintiff under the mortgage deeds. This the plaintiff did although

the second defendant had notified the intended sale of the

machineries to it and requested it to invoke the power under the

deeds of mortgage. They have further alleged that had the

plaintiff taken over the management of the company under the

provisions of the Industrial Development and Regulations Act at

the earliest date of default, the nationalisation of the two units of

the first defendant under the Sick Textile Undertakings

(Nationalisation) Act, 1974 would not have occurred and the

plaintiff would have realised its entire claim from the units. The

further defence on which we shall have to pay a little more

attention has been raised in the written statement which is mainly

on the question of entertainability of any suit on behalf of the

plaintiff against the defendants, when all assets of the first

defendant Company have vested in the Government of India

under the Sick Textile Undertakings (Nationalisation) Act

(hereinafter referred to as 'the Act') and the compensation for the

vesting of the Mills in the Government has already been declared.

The plea raised in this behalf is that the plaintiff being a secured

creditor of the owner of the Mills is bound to put forward all the

claims and receive payment out of the compensation amount fixed

under the Act.

The principal issue with which the parties went into trial had

three several parts :

I. Whether the mortgage deeds executed by the defendants are

not capable of being enforceable in law ?

II. Whether defendant Nos.3 to 6 (presently respondent Nos.4,

6, 7 and 8 in the petition) are liable under the Contract of

Guarantee ?

III. Whether the liability of defendant Nos.2 to 6 (presently

respondent Nos.2, 3, 4 and 6 in the petition) stood discharged

on account of the latches on behalf of the plaintiff ?

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Apart from the issue of penal interest, the trial Court

answered all the issues noted above, in favour of the plaintiff.

There was, however, one additional issue which stood considered

by both the trial Court as well as the appellate Court to wit, the

effect of the Nationalisation Act (Sick Textile Undertakings

(Taking Over of Management) Act, 1972) and it is on this score

the trial Court stated as below :-

"So far as the assets that were taken over by the

Government are concerned, compensation had been

fixed in the Act and further considered by the

Commissioner for the Sick Textile Mills and in fact the

plaintiff has been paid major portion of the

compensation during the pendency of the suit. There is

absolutely no question of frustration of any contract

between the plaintiff and the defendants. The plaintiff,

being in the position of a creditor, has nothing to do

with the loss or profit in the business of the first

defendant or with the nationalisation of the

undertakings of the first defendant."

It is the definite finding of the trial Court that introduction of

the Act of 1972 in the Statute Book has had no effect whatsoever

as regards the liability to make the payment and the trial Court had

the following statutory provision (Section 5 of the Nationalisation

Act as above) to note in support of its finding :

"5. Owner to be liable for certain prior liabilities

(1) Every liability, other than the liability specified in

sub-section (2) of the owner of a sick textile

undertaking, in respect of any period prior to the

appointed day, shall be the liability of such owner and

shall be enforceable against him and not against the

Central Government or the National Textile

Corporation."

The Court recorded that the aforesaid provision has been

engrafted in the Statute to protect the rights of the plaintiff.

The records depict that the High Court, however, was

approached in appeal basically on two counts as below :-

(1) There is error both in fact and in law in accepting the case of

the plaintiff inspite of such acts of the plaintiff that it

allowed appropriation of the securities without the consent of

the sureties and inspite of specific objection in this behalf by

the second defendant appellant; and

(2) Because of the intervention of the law, all the assets of the

first defendant Company stood vested in the Central

Government and what has been protected by Section 5(1) of

the Act is not such interest as that of the plaintiff but only

such liabilities which are specified in Sub-Section (2) thereof.

Upon specific reliance on to Sections 140 and 141 of the

Indian Contract Act (noticed above), the High Court stated "Section

140 and 141 of the Indian Contract Act together safeguard the

interests of the surety on the payment or performance by the

principal debtor and in respect of the security which the creditor has

against the principal debtor. Where a guaranteed debt has become

due, on default of the principal debtor to perform a guaranteed duty

and the surety is required thus to meet the guarantee, the surety

upon payment or performance of all that he is liable for, is invested

with all the rights which the creditor had against the principal

debtor at the time when the contract for suretyship is entered into,

whether the surety knows of the existence of such security or not

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and if the creditor loses or without the consent of the surety, parts

with such security, the surety is discharged to the extent of the

value of the security. On the facts of the instant case, when it is

conceded that a substantial part of the claim has been realised by

the creditor (plaintiff) from the assets of the Company by way of

compensation and the creditor has lost all such securities which the

principal debtor (Company) had created in its favour and on which

security alone it had advanced loans to the Company, it is possible

as the learned counsel for the appellants has suggested, to think that

the creditor has lost the security and thus, had fallen in a position

that unless it is held that the surety is discharged to the extent of the

value of the security, the sureties cannot be put in the same position

as the creditors upon the security of the principal debtor."

The High Court further went on to observe "We have no

information, however, as to the extent of the security that the

company had provided to the plaintiff or the extent of the discharge

of the debt covered by the sureties of each individual guarantor and

it is not possible thus to work out the equities which must always be

the first action of the court in the cases of the sureties who for the

reason either of the default of the principal debtor or for the default

of the creditor and/or matters beyond the control of all concerned,

are put to make good all legal claims of the creditor. Such equities

as are envisaged under Section 140 and 141 of the Indian Contract

Act , in our view, are not available to the plaintiff so that it may,

after realising the claims from the appellants (sureties), come to

have the benefit of the securities. In the view that we have taken,

we do not think, any further argument on either side is required to

be examined by us, as the view that we have taken above is enough

to hold that the plaintiff, that is to say, the creditor must be in a

position to deliver the securities which he had against the principal

debtor to the sureties before it (plaintiff) takes its claim against the

sureties. This, in our view, is enough to hold that the present suit

against the sureties must fail."

It is this finding which is under challenge before this Court

under Article 136 of the Constitution and this Court on 6th March,

1995 granted special leave to appeal upon condonation of a short

delay involved in the filing of the petition. Before dealing with the

respective contentions, this Court records its appreciation for the

assistance rendered by the two learned senior advocates, Mr. C.A.

Sundaram and Mr. Mahendra Anand, appearing for the appellants

and respondents respectively before this Court.

Felicitous as always, Mr. Sundaram drawing inspiration

from a decision of this Court in Maharashtra State Electricity

Board, Bombay v. Official Liquidator, High Court, Ernakulam &

Anr. (1982 (3) SCC 358) contended that by reason of the factum of

the liability of the surety being co-extensive with that of the

principal debtor and a discharge which the principal debtor may

secure by operation of law, the same does not absolve the surety of

his liability. In Maharashtra State Electricity Board (supra) this

Court categorically recorded a finding that the principal debtor

being in liquidation would not have any effect on the liability of the

guarantor. The observation of this Court obtained its sustenance

from Section 128 of the Indian Contract Act, which in no uncertain

terms prescribes, as noticed above, that the liability of the surety is

co-extensive with that of the principal debtor. The statutory

provision of the Indian Contract Act, however, records such unless,

of course, it is otherwise provided by the Contract. Let us,

therefore, at this juncture, consider the recording of the contract of

guarantee which reads as below :-

1. If at any time default shall be made in the payment of the

principal interest or any other moneys for the time being due

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to the Corporation upon the security of the Deeds of

Mortgage for Rs.35,00,000/- dated 30th April, 1963 and 2nd

May, 1963 and the Deeds of Further Charge and equitable

mortgage in connection with the loan of Rs.17,00,000/-

aggregating Rs.52,00,000/- (Rupees fifty two lacs only) the

Guarantors on demand shall pay to the Corporation the whole

of such principal interest and other moneys which shall then

be due to the Corporation as aforesaid and will indemnify

and keep indemnified the Corporation against all loss of

principal interest or other moneys secured by the Mortgage

dated 30th April, 1963 and 2nd May 1963 and Deeds of

Further Charge and equitable mortgage and all costs, charges

and expenses whatsoever which the Corporation may incur

by reason of any default on the part of the Company, its

successors or assigns.

2. The Corporation shall have the fullest liberty without

effecting this guarantee to postpone for any time or from time

to time the exercise of the power of sale or any other power

or powers conferred by the Deeds of Mortgage and Further

Charge and to exercise the same at anytime and in any

manner and either to enforce or forbear to enforce the

covenants for payment of principal or interest or any other

covenants contained or implied in the Deeds of Mortgage and

Further Charge or any other remedies or securities available

to the Corporation AND the Guarantors shall not be released

by any exercise by the Corporation of its liberty with

reference to the matters aforesaid or any of them or by reason

of time being given to the Company, its successors or assigns

or of any other forbearance act or omission on the part of the

Corporation or any other indulgence by the Corporation to

the Company or by any other matter or thing whatsoever

which under the law relating to sureties would but for this

provision have the effect of so releasing the Guarantors.

3. The Guarantors will observe and perform all the terms,

conditions and covenants contained in the Deeds of Mortgage

and Further Charge which bear on the payment by the

Company of the principal interest or any other money for the

time being due to the Corporation in such manner in which

the Company is liable for the due observance and

performance of the said terms, conditions and covenants.

4. The guarantee herein contained shall be enforceable against

the Guarantors notwithstanding that the securities specified in

the Deeds of Mortgage and Further Charge or any of them

shall at the time when proceedings are taken against the

Guarantors hereunder be outstanding or unrealised.

The Contract of Guarantee thus on a plain reading does not

provide any contra note pertaining to the liability of the surety so as

to create an exception within the meaning of Section 128 of the

Indian Contract Act. It is on this score that Mr. Anand relying on

the language of Section 141, with his persuasive eloquence

contended that the Statute, in fact, has conferred a right or

entitlement or a benefit on to a surety on every security which the

creditor has against the principal debtor at the time of entering into

the Contract of Guarantee between the parties undoubtedly, a

very attractive proposition at this juncture- thus it becomes rather

imperative to note Section 141 of the Contract Act in extenso for

the purposes of appreciation of the rival submissions made in

regard thereto. Section 141 of the Indian Contract Act, 1872 reads

as under :

"141. Surety's right to benefit of creditor's

securities A surety is entitled to the benefit of every

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security which the creditor has against the principal

debtor at the time when the contract of suretyship is

entered into, whether the surety knows of the existence

of such security or not; and if the creditor loses, or

without the consent of the surety, parts with such

security, the surety is discharged to the extent of the

value of the security."

Before we engulf ourselves into the wider issue as to the

effect of Section 141, be it noted that Mr. Anand in elucidation of

his submission strongly relied upon a decision of the Court of

Queens Bench in England in the case of Baily v. De Crespigny

(LR (1869) IV QB 180). The facts in Baily's case depict that the

defendant, in 1840, demised by deed certain premises to the

plaintiff for a long term of years, and the defendant covenanted

that "neither he nor his assigns would, during the term, permit any

messuage, &c., to be built on a paddock fronting the demised

premises;" alleging as breaches, (1), that the defendant during the

term permitted a railway station to be built on the paddock; (2) that

the defendant assigned the paddock to a railway company, who

erected the railway station on the paddock. Plea : that after the

making of the lease the railway company required to take the

paddock under powers given them by an Act of Parliament of

1862, for purposes for which they were by the Act empowered to

take the same; that the paddock was land which the company were

empowered to take compulsorily for the purposes of the

undertaking authorized by the Act; and that the company under the

powers so conferred did compulsorily purchase and take the

paddock, and that the assignment by the defendant to the company

was the assignment in completion of such compulsory purchase;

that the company afterwards built on the paddock the erections

complained of, which were erections reasonably required for the

purposes of the undertaking authorized by the Act.

It is on the basis of the fact situation of the matter in Queens

Bench decision that Hannen, J. speaking for the Bench stated as

below :

"The substantial question, therefore, raised on this record is

whether the defendant is discharged from his covenant by the

subsequent act of Parliament, which put it out of his power to

perform it.

We are of opinion that he is so discharged on the principle

expressed in the maxim "lex non cogit ad impossibilia."

We have first thus to consider as to the exact meanings of

the words or expressions used in the covenant between the parties.

There can be no doubt that a man may by an absolute contract bind

himself to perform which subsequently however becomes

impossible, or to pay damages for the non-performance and this

interpretation is to be placed upon an unqualified undertaking,

where the event which causes the impossibility was or might have

been anticipated and guarded against in the contract, or where the

impossibility arises from the act or default of the promissor.

But where the event is of such a character that it cannot

reasonably be supposed to have been in the contemplation of the

contracting parties when the contract was made, they will not be

held bound by general words which, though large enough to

include, were not used with reference to the possibility of the

particular contingency which afterwards happened. It is on this

principle that the act of God is in some cases said to excuse the

breach of a contract.

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The Latin Maxim referred to in the English judgment "lex

non cogit ad impossibilia" also expressed as "impotentia excusat

legem" in common English acceptation means, the law does not

compel a man to do that which he cannot possibly perform.

There ought always thus to be an invincible disability to perform

the obligation and the same is akin to the Roman Maxim "nemo

tenetur ad impossibilia" In Broom's Legal Maxims the state of

the situation has been described as below :-

"It is, then, a general rule which admits of ample practical

illustration, that impotentia excusat legem ; where the law creates a

duty or charge, and the party is disabled to perform it, without any

default in him, and has no remedy over, there the law will in

general excuse him (t) : and though impossibility of performance is

in general no excuse for not performing an obligation which a

party has expressly undertaken by contract, yet when the obligation

is one implied by law, impossibility of performance is a good

excuse. Thus in a case in which consignees of a cargo were

prevented from unloading a ship promptly by reason of a dock

strike, the Court, after holding that in the absence of an express

agreement to unload in a specified time there was implied

obligation to unload within a reasonable time, held that the maxim

lex non cogit ad impossibilia applied, and Lindley, L.J., said : "We

have to do with implied obligations, and I am not aware of any

case in which an obligation to pay damages is ever cast by

implication upon a person for not doing that which is rendered

impossible by causes beyond his control".

This effort to search out the meaning of the Latin Maxim has

been only to identify the situation which prompted the learned

Judge of the Queens Bench to come to the conclusion as above.

There, thus, has to be an impossibility of performance of the

obligation. The fact situation presently under consideration before

us thus has to be assessed whether in fact there was any such

impossibility or not. Let us be quite candid about laying down

the principles that rights created under Statute cannot stand

obliterated without cogent reasons and not on mere frivolity. In

any event, the right conferred in terms of a deed of guarantee

cannot but be stated to be an independent right which stands

recognised by the Statute and thus cannot in any manner be

whittled down without a just causa. Baily's decision (supra) in our

view does not lend any assistance in the fact situation of the matter

under consideration. There was in fact an impossibility of

performance which prompted the Court to excuse the guarantor

from its performance by reason of the impossibility of the situation

and for reasons that the same stood beyond the control of the

guarantor. The situation presently however, is not so.

In reference to the second limb of Section 141, in particular

the words "the creditor loses" Mr. Anand contended that the

legislature has been rather candid in not incorporating any

reservation or qualification for the word 'lose'. In continuation

thereof it was submitted that the same would thus include as a

matter of fact, both voluntary and involuntary act or acts of the

creditor, expression would mean and imply, both and the same is

an inescapable conclusion when read in contradistinction with

Sections 134 and 139 of the Act. Mr. Sundaram, on the other

hand, with equal felicity of expression contended that the words

noticed above cannot but mean involvement of some voluntary act

of the creditor, as otherwise it loses its efficacy and placed in

juxtaposition with the second limb of the Section would lead to an

utter absurdity. The intent of the law makers is quite candid and

apparent by reason of the particular user of expression to wit, (i.)

'or without the consent of the surety'; and (ii) 'parts with such

security'. It has been contended that the true intent of the statute

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cannot be derived from reading in part only and it is one of the

golden rule of statutory interpretation that the statutory provision

be read in its entirety rather than a word or words in isolation of

others 'if creditor loses' has to be attributed a meaning as being

stated by Mr. Anand, that is to say without there being any

voluntary act on the part of the creditor, it cannot possibly be said

to be in unison with the other part of the Statute obviously it shall

have to be read as a voluntary act by reason whereof he loses the

security and which thus tantamounts to be without the consent of

the surety. The expression 'or' in between the words 'creditor

loses' and 'without the consent of the surety' and the coma read in

its proper sphere after the word 'loses' and 'surety' stands out to be

significant since the same qualifies only the latter part of the

second limb, namely, parting with such security. The expression

'creditor loses' cannot mean and imply an involuntary act but by

reason of an act which is attributable to the creditor. The second

alternative, parting with security without the knowledge of the

surety is a contra situation, but affords a meaning to the words

used in the first para, to wit, 'the creditor loses'. Section 141 of

the Contract Act would lose its efficacy and the Act would render

itself totally nugatory if the meaning is to be attributed in the

manner as suggested by Mr. Anand. A definite volition is

required to come within the ambit of Section 141. The heading of

Section 141 also lends, though not normally a part of the statutory

provision, assistance in interpreting the statutory intent since

heading always serves as a guide to depict the intention.

Adverting to the contract of guarantee be it noted that though

it is not a contract regarding a primary transaction : but it is an

independent transaction containing independent and reciprocal

obligations. It is on principal to principal basis and by reason

wherefor the Statute has provided both the creditor and the

guarantor some relief as specified in this Chapter of Contract Act

(between Sections 130 to 141). Section 141 thus involves an issue

of a deliberate action on the part of the creditor and not a mere

fortuitous situation beyond the control of the creditor. It is in this

context strong reliance was placed on a decision of the Privy

Council in China and South Sea Bank Ltd. v. Tan ( 1989 (3) All

ER 839), wherein Lord Templeman speaking for the Council stated

the law as below :-

"In the present case the security was neither surrendered nor lost

nor imperfect nor altered in condition by reason of what was done

by creditor. The creditor had three sources of repayment. The

creditor could sue the debtor, sell the mortgage securities or sue the

surety. All these remedies could be exercised at any time or times

simultaneously or contemporaneously or successively or not at all.

If the creditor chose to sue the surety and not pursue any other

remedy, the creditor on being paid in full was bound to assign the

mortgage securities to the surety. If the creditor chose to exercise

his power of sale over the mortgage security he must sell for the

current market value but the creditor must decide in his own

interest if and when he should sell. The creditor does not become

a trustee of the mortgaged securities and the power of sale for the

surety unless and until the creditor is paid in full and the surety,

having paid the whole of the debt is entitled to a transfer of the

mortgaged securities to procure recovery of the whole or part of

the sum he has paid to the creditor.

The creditor is not obliged to do anything. If the creditor

does nothing and the debtor declines into bankruptcy the

mortgaged securities become valueless and if the surety decamps

abroad the creditor loses his money. If disaster strikes the debtor

and the mortgaged securities but the surety remains capable of

repaying the debt then the creditor loses nothing. The surety

contracts to pay if the debtor does not pay and the surety is bound

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by his contract. If the surety, perhaps less indolent or less well

protected than the creditor, is worried that the mortgaged securities

may decline in value then the surety may request the creditor to

sell and if the creditor remains idle then the surety may bustle

about, pay off the debt, take over the benefit of the securities and

sell them. No creditor could carry on the business of lending if he

could become liable to a mortgagee and to a surety or to either of

them for a decline in value of mortgaged property, unless the

creditor was personally responsible for the decline. Applying the

rule as specified by Pollock CB in Watts v. Shuttleworth (1860) 5

H&N 235 at 247-248, 157 ER 1171 at 1176, it appears to their

Lordships that in the present case the creditor did not act injurious

to the surety, did not act inconsistent with the rights of the surety

and the creditor did not omit any act which his duty enjoined him

to do. The creditor was not under a duty to exercise his power of

sale over the mortgaged securities at any particular time or at all."

In Halsbury's Laws of England Fourth Edition (para 335),

it has been, relying upon four rather old decisions of the Court of

Appeal , Wheatley v. Bastow (1855) 7 De G M & G 261 at 279-

280 per Turner LJ; Hardwick v. Wright (1865) 35 Beav 133; Polak

v. Everett (1876) 1 QBD 669 at 675, C.A. per Blackburn J, Carter

v. White (1883) 25 ChD 666 at 670, CA., categorically stated "A

transaction which causes no loss of securities, or a loss not

attributable to the fault of the creditor, will not discharge the

guarantor."

The interpretation offered by Mr. Anand as regards Section

141 of the Act also stands decried and negated by the Punjab High

Court in Krishan Talwar v. Hindustan Commercial Bank Ltd. &

Anr. (AIR 1957 Punjab 310). The basic situation stands very well

elucidated in Rees v. Barrington 2 White & Tudor's L.C., 4th

Edn.at p. 1002, wherein the effect of Section 141 stands expressed

as below :-

"As a surety, on payment of the debt, is entitled to all the securities

of the creditor, whether he is aware of their existence or not, even

though they were given after the contract of suretyship, if the

creditor who has had, or ought to have had, them in his full

possession or power, loses them or permits them to get into the

possession of the debtor, or does not make them effectual by

giving proper notice, the surety to the extent of such security will

be discharged. A surety, moreover, will be released if the creditor,

by reason of what he has done, cannot, on payment by the surety,

give him the securities in exactly the same condition as they

formerly stood in his hands."

This Court in Kaluram's case (supra) in its Three-Judge

Bench judgment upon approval has been pleased to take note of

the situation that subject to certain variations Section 141 of the

Contract Act incorporates the Rule of English Law relating to the

discharge from liability of a surety when the creditor parts with or

loses the security held by him. Incidentally, the decision in

Kaluram (supra) as also a later decision of this Court in State Bank

of Saurashtra v. Chitranjan Rangnath Raja & Anr. (1980 (4) SCC

516) was dealing with a contra situation and came to a conclusion

that by reason of the deliberate act of the principal debtor or the

creditor and without the knowledge, consent and approval of the

surety, question of further liability would not arise and in the

contextual facts discharged the guarantor the situation presently,

however, is converse thereto by reason of the fact that it is not by

any definite act of the creditor or the debtor but by an operation of

law for which none of the parties had any control. Significantly,

it may be stated that the liability of the guarantor cannot but be

stated to the a strict liability and even if the principal debtor is

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discharged from his liability unless such discharge is through the

act of the creditor without consent of the surety/guarantor, the

creditor'r right of action against the surety is preserved.

Turning attention to the effect of the Sick Textile

Undertakings (Nationalisation) Act, 1974, a bare perusal of some

of the provisions will indicate that there is no discharge of the

liability of principal debtor, leave alone that of the surety.

Sections 3, 4, 5 and 20 of the Act of 1974, if read together, would

depict that the liability of the owner of the undertaking/the debtor

continues and it is only that the claim against the security which

stands discharged by reason of the statutory shift of the charge on

to the compensation. The liability of the principal debtor does not

in any way come to an end neither that of the guarantor. It is in

this context, a recent Three-Judge Bench decision of this Court in

Civil Appeal No.15521 of 1996 (Punjab National Bank v. State of

U.P. & Ors.) is of utmost relevance since the same pertains to the

involvement of the same Act of 1974 and together with the issues

as regards the liability of the guarantor and principal debtor.

Since the order as passed by this Court is rather short, we feel it

inclined to quote the order in its entirety. The order reads as

below :-

"The appellant had, after respondent No.4's

management was taken over by the U.P. State

Textile Corporation Ltd. (respondent No.3) under

the Industries (Development and Regulation) Act,

advanced some money to the said respondent

No.4. In respect of the advance so made,

respondents 1, 2 and 3 executed deeds of

guarantee undertaking to pay the amount due to

the Bank as guarantors in the event of the

principal borrower being unable to pay the same.

Subsequently, respondent No.3 which had

taken over the management of respondent No.4

became sick and proceedings were initiated under

the Sick Textile Undertakings (Nationalisation)

Act, 1974 (for short "the Act"). The appellant

filed suit for recovery against the guarantors and

the principal-debtor of the amount claimed by it.

The following preliminary issue was, on the

pleadings of the parties, framed :

"Whether the claim of the plaintiff is not

maintainable in view of the provisions of Act 57

of 1974 as alleged in para 25 of the W.S. of

defendant No.2?"

The trial court as well as the High Court

both came to the conclusion that in view of the

provisions of Section 29 of the Act, the suit of the

appellant was not maintainable.

We have gone through the provisions of the

said Act and in our opinion the decision of the

Courts below is not correct. Section 5 of the said

Act provides for the owner to be liable for certain

prior liabilities and Section 29 states that said Act

have a overriding effect over all other enactments.

This Act only deals with the liabilities of a

company which is nationalized and there is no

provision therein which in any way affects the

liability of a guarantor who is bound by the deed

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of guarantee executed by it. The High Court has

referred to a decision of this Court in Maharashtra

State Electricity Board, Bombay v. The Official

Liquidator, High Court, Ernakulam & Anr., AIR

1982 SC 1497 where the liability of the guarantor

in a case where liability of the principal debtor

was discharged under the insolvency law or the

company law, was considered. It was held in this

case that in view of the unequivocal guarantee

such liability of the guarantor continues and the

creditor can realize the same from guarantor in

view of the language of Section 128 of the

Contract Act as there is no discharge under

Section 134 of that Act.

In our opinion, the principle of the aforesaid

decision of this Court is equally applicable in the

present case. The right of the appellant to

recover money from respondents 1, 2 and 3 who

stood guarantors arises out of the terms of the

deeds of guarantee which are not in any way

superseded or brought to a naught merely because

the appellant may not be able to recover money

from the principal-borrower. It may here be

added that even as a result of the Nationalisation

Act the liability of the principal-borrower does not

come to an end. It is only the mode of recovery

which is referred to in the said Act.

For the aforesaid reasons, this appeal is

allowed, the preliminary issue framed by the trial

Court is decided in favour of the appellant and the

case is remanded to the trial Court for decision on

merits. No costs.

IA No.3 fild in this Court by respondent

No.3 under Section 22 of the Sick Industrial

Companies (Industrial Provisions) Act, 1995, is

dismissed as withdrawn with liberty to the

appellant to move the appropriate application

before the trial Court."

A faint attempt has been made during the course of hearing

that the decision of the Punjab National Bank (supra) may not have

a binding effect by reason of this being an order only and not a

detailed judgment. We are, however, unable to record our

concurrence therewith.

The Three-Judge Bench decision in Punjab National Bank

(supra) categorically dealt with the issue as to the effect of the Act

of 1974 and this Bench records its respectful concurrence

therewith, apart from the same being a binding precedent in the

normal circumstances, in terms of a Constitution Bench decision of

this Court in Pradip Chandra Parija & Ors. v. Pramod Chandra

Patnaik & Ors. (2002 (1) SCC 1). In any event, this Court in no

uncertain terms in Patheja Bros. Forging & Stamping & Anr. v.

ICICI Ltd. & Ors. (2000 (6) SCC 545) made it abundantly clear

that when the words of the Legislation are clear, the Court must

give effect to them as they stand and cannot demur on the ground

that the Legislature must have intended otherwise. The provisions

of the Nationalisation Act as noticed above, are otherwise clear

and categorical as to the extent of its applicability and the state of

affairs upon introduction of the Legislation on the Statute Book

and we need not dilate thereon.

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Mr. Anand lastly contended that as a matter of fact by reason

of the non-availability of the security in terms of Section 141, the

Contract of Guarantee cannot but be termed to stand frustrated and

it is in this context, Section 56 of the Contract Act has been taken

recourse to. It may be noticed here that the Statute itself has

recognised the doctrine of frustration and encompassed within its

ambit an exhaustive arena of force majeure under which non-

performance stands excused by reason of an impediment beyond

its control which could neither be foreseen at the time of entering

into the contract nor can the effect of the supervening event could

be avoided or overcome. The decision of the Court of Appeal in

F.A. Tamplin Steamship Co. Ltd. v. Anglo-Maxican Petroleum

Products Co. Ltd. (1916-2 AC 397) (which stands quoted (with

approval by this Court) in Naihati Jute Mills v. Khyaliram (AIR

1968 SC 522), seems to have settled the law on the same. Lord

Loreburn in Tamplin Steamship stated :

"A court can and ought to examine the contract and the

circumstances in which it was made, not of course to vary, but only

to explain it, in order to see whether or not from the nature of it the

parties must have made their bargain on the footing that a

particular thing or a state of things would continue to exist. And if

they must have done so, then a term to that effect would be

implied; though it be not expressed in the contract."

Lord Loreburn went on to observe :-

"It is in my opinion the true principle, for no court has an

absolving power, but it can infer rom the nature of the contract and

the surrounding circumstances that a condition which was not

expressed was a foundation on which the parties contracted

Were the altered conditions such that, had they thought of them,

they would have taken their chance of them, or such that as

sensible men they would have said, "if that happens, of course, it is

all over between us."

In Davis Contractors' decision (Davis Contractors v.

Fareham U.D.C.: 1956 AC 696), an oft-cited decision as regards

the doctrine of frustration, Lord Radcliffe formulated the doctrine

of frustration in the manner following :-

"Frustration occurs whenever the law recognises that without

default of either party a contractual obligation has become

incapable of being performed because the circumstances in which

performance is called for would render it a thing radically different

from that which was undertaken by the contract."

Needless to record that on a true perspective of Section 56 of

the Contract Act, three essential conditions appear to be the

realistic interpretation of the Statute. The conditions being (i.) a

valid and subsisting contract between the parties; (ii) there must be

some part of the contract yet to be performed; and (iii) the contract

after it is entered into becomes impossible of performance.

Leaving aside the first condition, the second and the third one

cannot, in our view, have any manner of application in the

contextual facts. Recapitulating the facts briefly, the

Nationalisation Act came into force in the year 1974 by reason of

which the assets of a debtor company stand vested on the State. In

terms of the provisions of the Nationalisation Act, there was

appointed a Commissioner of Payments and by reason of the

factum of the Appellant herein being a secured creditor, lodged its

claim before the Commissioner of Payments in its entirety. The

Commissioner of Payments, however, in terms of the provisions of

the Nationalisation Act itself allowed a major portion of the claim

but as regards the remainder, expressed its inability to pass any

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order and the remainder or the balance of the claim stands out to be

the subject matter of the present proceedings. Incidentally, there

exists some departure and shift from the case made out before the

High Court and the case before this Court since the frustration was

said to have occurred by reason of statutory termination of the

Managing Agency System. (Damodaran & Company, being the

Managing Agent of the principal-debtor) It has been the definite

contention before the High Court that the contractual obligation by

reason of severance of relationship between Damodaran and the

principal-debtor the contract had become incapable of being

performed in the same capacity in which the parties had entered

into the contract with the appellant herein. The case made out

before this Court, however, is a complete departure therefrom and

as a mater of fact introduction of the Legislation of 1974 in terms

of which the entire assets stand vested has been taken recourse to

as the supervening event and the contract of guarantee has thus

become incapable of being performed for reasons beyond the

control of the guarantors, having due regard to the statutory

provisions, as appears from Section 141 of the Contract Act

undoubtedly the shift and variation cannot but be attributed to be

well imagined but irrespective of the same and in either of the

situations (i.e. the plea before the High Court or the plea before

this Court), the doctrine of frustration as envisaged in terms of

Section 56 of the Contract Act does not and cannot have any

manner of application in the contextual facts. It is on the failure

of the principal debtor to pay the entire sum due, the guarantee

stands invoked the Contract of Guarantee has no co-relation with

that of the Nationalisation Act neither is dependent thereon : it is

an independent contract and in all fairness has to be honoured to

fulfil the contractual obligation between the surety and the creditor.

Taking recourse to Section 141 by the surety, in our view, is utterly

misplaced and we need not dilate once again, since we have

already dealt with the issue hereinbefore in this judgment, except

recording that doctrine of frustration as contended cannot be

invoked having regard to the provisions of Section 141 of the

Contract Act.

On the factual score, a Civil Suit stands filed and thereafter

the claim was preferred before the Commissioner of Payments in

terms of the Nationalisation Act. The right of a claimant to

proceed before the Commissioner and to file a suit to recover the

amount due to him cannot, in our view, on a perusal of the Statute,

be taken away, though the Claimant would not be entitled to

recover any amount at both the ends. The amount paid by the

Commissioner would stand reduced to the extent of payment by

the Commissioner. The filing of the Civil Suit thus is not barred

as has been contended by Mr. Anand that once the claim stands

paid, though partially, question of proceeding with the suit would

not arise. It is in this context, we concur with the findings of the

Bombay High Court in Oriental Coal Co. Ltd.,Calcutta v. M/s

Mohanlal Kisanlal & Anr. (AIR 1984 Bom. 174) and record our

approval and similar concurrence also goes to the decision of the

Calcutta High Court in Barakar Coal Co. Ltd. v. N.C. Mehta [81

Cal WN 380 : AIR 1977 NOC 198 (Cal)].

In the premises aforesaid, we are unable to record our

concurrence with the judgment under appeal and the same is thus

set aside and the decree as passed by the learned Single Judge

stands restored. Each party, however, will pay and bear its own

costs.

J.

(Umesh C. Banerjee)

J.

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(Y.K. Sabharwal)

April 12, 2002.