Punjab National Bank vs. Ram Dutt Sharma & Ors AIR 2013 Allahabad 198
Plaintiffs Sri Ram Dutt Sharma and his wife Smt. Saroj, instituted a Suit, impleading New Bank of India, Sri Chhote Lal Sharma, son of Sri Khacheru Singh and Smt. Saroj, wife of Sri Shiv Charan as defendants. The relief sought in the aforesaid suit was a mandatory injunction directing defendant No. 1 to auction Truck No. UHN 1077, belong to defendant Nos. 2 and 3, and in possession of defendant-Bank towards security/ guarantee against the amount of loan, advanced to defendant Nos. 2 and 3, and realise outstanding dues, before encashing Fixed Deposit Receipts of plaintiffs, lying with defendant-Bank.
The plaintiff’s case was that defendant Nos. 2 and 3 were running a transport business. They purchased a new Truck in 1985. The financial assistance in the aforesaid transaction was tendered by the Bank, advancing a loan of Rs. 1,50,000/-, against which Truck itself was hypothecated. Besides, the plaintiffs’ FDRs of Rs. 10,000/- and Rs. 70,000/- were pledged in security for a period of three years or till repayment of loan amount, whichever is earlier. There appears to be some default towards repayment of loan amount, on the part of defendant Nos. 2 and 3, but defendant No: 1, instead of realising defaulted amount from defendant Nos. 2 and 3, by sale/auction of mortgaged vehicle, proceeded to encash FDRs of plaintiffs lying in security with the bank, hence the suit.
The Hon’ble Court observed that it would be necessary to determine the nature of contract between the plaintiffs and the Bank. The contract between the Bank and respondents 3 and 4 was admittedly that of loaner and loanee. A “contract of guarantee” is defined in Section 126 of I.C. Act, 1872. It says that a “contract of guarantee” is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called “surety”, 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”. In case this Court found that the plaintiffs entered into a contract of guarantee with the Bank in terms of Section 126 of I.C. Act, 1872 the plaintiffs would be “surety”, respondents 3 and 4 would be the “principal debtor”, and the Bank would be “the creditor”. A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail.
The distinction between the “contract of guarantee” and “contract of indemnity” comes out from the definitions of two. The phrase “contract of indemnity” is defined in Section 124 of I.C. Act, 1872 which states that a contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person is called “contract of indemnity”. One of the apparent distinctions between two is that a “contract of guarantee” requires concurrence of 3 persons, namely, the principal debtor, surety and the creditor, while “contract of indemnity” is a contract between two parties and promisor enters into such contract with other party. In other words, a person who is party to a contract, if he executes a promise to other party to save him from loss on account of promiser’s conduct or by the conduct of any other person, it, is a “contract of indemnity”, while for the purpose of “contract of guarantee”, it requires presence of three parties at least.
“Surety” is always liable to the extent of precise terms of his commitment and not beyond that. In the case of “contract of guarantee”, section 128 of I.C. Act, 1872 says that the liability of surety is co-extensive with that of principal debtor, unless it is provided otherwise by the contract.
The initial term of guarantee/surety was alleged to be three years or earlier thereto till the entire loan money is paid. The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs surety as a collateral guarantee against the loan amount. Lower Appellate Court, had rightly read the averments contained in the plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if matured before payment, were referable to a period prior to 3 years from the date of such contract and not to the extent of period of contract beyond 3 years. To that extent, there was a clear averment that contract was only for three years or earlier thereto when the entire loan amount was paid. The word “earlier” rules out any possibility of a continuing contract of guarantee beyond 3 years.
Collateral security of FDRs was, therefore, available to the bank for a period of 3 years only and not beyond that, unless consented by surety, i.e. plaintiffs. Admittedly, no such consent was obtained by plaintiffs-surety and, on the contrary, the Bank on its own gave extension to the principal debtor in the matter of re-payment of loan amount. The appeal was allowed.
