Punjab National Bank Limited Vs.
Bikram Cotton Mills & ANR  INSC 249 (17 September 1969)
17/09/1969 SHAH, J.C.
CITATION: 1970 AIR 1973 1970 SCR (2) 462
D 1982 SC1497 (7)
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.
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
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
[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,.
 Ch. 59'4;
(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.
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,
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 like. 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
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
(2) If a majority in number representing
three fourths 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
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
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
"( 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 they 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
"(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
surety ship 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)  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
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.