Guarantor liability – Co-extensive with that of debtor – Financial institution – Not to act as property dealers: Contract Act 1872, sec. 128:

One Ganga Prasad had taken an agricultural loan to the tune of Rs.8,425/- from the Union Bank of India on 20.3.1982 and Chuni Lal, father of the Appellant stood guarantor. Ganga Prasad, debtor died in 1985 and Chuni Lal died in 1986. Ganga Prasad could not pay the loan during his life time. Therefore, the bank initiated the proceedings for recovery and ultimately sent the matter to the District Collector, Banda, for realisation of the loan amount as an arrear of land revenue.

In order to make the recovery, land belonging to said Ganga Prasad was put to auction and it could fetch only a sum of Rs. 6,000/-. In order to recover the balance amount, the proceedings were initiated against the Appellants as their father had stood guarantor. The Appellants raised objections that instead of putting their property to auction, the loan amount be recovered from legal heirs of Ganga Prasad as he had left movable/immovable properties and livestocks and other assets to meet the recovery of the bank loan. Their objections were not accepted and the land of the Appellants was put to auction. Respondent No. 4 purchased the said land for Rs.25,000/-. The sale was confirmed and sale certificate was issued by the Collector in favour of Respondent No. 4 and he was put in possession. Aggrieved, the Appellants approached the Board of Revenue, U.P. by filing Revision. However, the same was dismissed. The High Court upheld the said revisional order of the Commissioner.

The Court, on further appeal, observed that there can be no dispute to the settled legal proposition of law that in view of the provisions of section 128 of the Indian Contract Act, 1872, the liability of the guarantor/surety is co-extensive with that of the debtor. Therefore, the creditor has a Dr. K. Shivaram Ajay R. Singh Advocates Allied laws 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. Section 146 of the Contract Act provides that co-sureties are liable to contribute equally. Thus, in case there are more than one surety/guarantor, they have to share the liability equally unless the agreement of contract provides otherwise.

A person cannot be deprived of his property except in accordance with the provisions of statute. (Vide: Lachhman Dass vs. Jagat Ram and Ors.: (2007) 10 SCC 448; and Narmada Bachao Andolan v. State of Madhya Pradesh and Anr. AIR 2011 SC 1589). Thus, the condition precedent for taking away someone’s property or disposing of the secured assets, is that the authority must ensure compliance of the statutory provisions.

 Therefore, it becomes a legal obligation on the part of the authority that the property be sold in such a manner that it may fetch the best price. Thus essential ingredients of such sale remain a correct valuation report and fixing the reserve price.