Liability of a surety or a guarantor to repay loan of principal debtor arises only when a default is made by the latter : State Financial Corporation Act 1951 : S. 29(1) and S. 31.

2. Liability of a surety or a guarantor to repay loan of
   principal debtor arises only when a default is made by the latter : State
   Financial Corporation Act 1951 : S. 29(1) and S. 31.

[ West Bengal Industrial Development Corpn. Ltd. & Anr
v. Niccon Electronics Devices P. Ltd. & Ors., AIR 2009 Calcutta 193.]

The appellant had given financial assistance of Rs. 55 lacs
to the respondent No. 1 a Pvt. Ltd. Company @ interest 14% p.a. for setting up
of a plant. The respondent 2 to 7 executed a deed of their personal guarantee.

On the failure on part of respondent No. 1 to pay dues a
notice u/s.29(1) read with S. 30 of the State Financial Corporations Act, 1951
was issued, asking the respondent No. 1 to liquidate the dues within a
stipulated period, but as the respondent No. 1 failed to liquidate its dues in
accordance with the said notice, the appellant took over all secured assets of
the respondent No. 1.

The assets were auctioned and after adjusting the sale
proceeds of the fixed assets of respondent No. 1 amounting to Rs.12,00,000 in
the loan account of respondent No. 1, the appellant sent demand notices dated
7th June, 2005, invoking guarantee of respondent Nos. 2 to 7. By the said
notices, the appellant called upon the said respondents to pay the sum.

The Single Judge by an order appointed Jt. Receivers to
sell the properties and assets of respondents 2 to 7. The respondent submitted
that the auction by financial corporation in terms of S. 29 of the Act must be
exercised only on a defaulting party. Only when there was a default on the
part of the principal debtor that the separate provision could be invoked
against a surety or a guarantor for repayment of loan.

The Court observed that S. 29 of the Act nowhere states
that the corporation can proceed against the surety even if some properties
are mortgaged or hypothecated by it. The right of the financial corporation in
terms of S. 29 of the Act must be exercised only on a defaulting party. There
cannot be any default as is envisaged in S. 29 by a surety or a guarantor. The
liabilities of a surety or the guarantor to repay the loan of the principal
debtor arise only when a default is made by the latter.

The demand was, therefore, specifically made and default
had admittedly not occurred on the part of the ‘industrial concern’, as on
date of the said notice, so as to enable the appellant to invoke the provision
of S. 31 of the Act for enforcing the liability of any surety.