Bank sued a company and its director on a cash-credit debt secured by documents including an 'agreement of guarantee'. The Supreme Court held the director was a surety whose liability was for the 'ultimate balance', that a s. 391 composition did not release the surety, and remanded the suit to the trial court.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
462
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PUN.JAB NATIONAL BANK LIMITED
v.
BIKRAM COTTON MILLS & ANR.
September 17, 1969
[J. C. SHAH AND A, N. GROVER, JJ.]
B
Contract Act 1872, s. 126-Coinpany director executing bond to repay 'u'timate balance' found due frofn co1npany to Bank on cash~credit account--Sinn1ltaneously other docun1ents executed by conzpany undertaking repayment-If bond inde11znity or co111rac/, of guarantee-Whether suit by Bank prior to deterniination of ultinulfc balance was ·pre)nature. Companies Act, 1956, s. 39!-Sclzeme of composition between con1pany and creditors-If binding on dissenting creditors.
| Theti:rstrespondent company openeQ acash~creditaccount with the appellant bank and on June7,1953to secure repayment of the balance due at the foot_df_the account the first respondent company executed three documents through its managingagents_i.e._apromissorynote, a deedof hypothecation and a letter assuring the appellant bank that theCO!Qpany would remain solely responsible forallloss, damageO(deter\crration of the stocks hypothecated with the bank. On the sameclayR a Director of the managing agents executed a bond called "agreement of guarantee" agree- ingtopayondemand all monies which may be dueasthe"ultimate balance" from the companytothe bank. Jn December, 1953 the com- pany closed its business. The stockspl-dgedwere disposed of by the bankancttheamount realised was credited in the company's account.A balance of approximately R•. 2.56 lakhs remained due at the 'foot of the account. |
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| Some creditors of the company in the meantimefileda petition for winding up the company. OnFebruary 22, 1956 a scheme of composi- |
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| tion was settled among the creditors andwaslater sanctionedbythe High | |
| CGurton May 21, 1956 under section391of the Companies Act, 1956 | |
| after rejecting the opposition of the appellant bank. The bank thenfiled |
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| a suit against the company and R for a declaration that on the date of the |
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| suit a sum_df_overRs.2.56 lakhswasdue against the company and for a |
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| decree for paymentofthe amount againstR. Thetrial court dismissed |
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| the suit and on appealsfiledby both the parties the High Court held that | |
| the scheme having been cqnfirmed·bythe court, had statutory operation |
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| and was binding on all creditors including the bank; the bank ha,t become | |
| an unsecured credito·r for the amount remaining due after sale of the pledg- |
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| ed~oodsandit\Vasfor the board of trustees under the scheme to deter- | |
| mine the amount for apyment to the bank. Theco11rtalso held that the |
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| suit against the company withour obtaining leaveClfthe court was not |
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| majntainable.Itfurther held that R had executed an inden1nitv bond |
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| and that evenassumin~he was a suretv under the terms of the bondhe |
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| wasonlyresponsible for ensuring payment of the "ultimate balance" which |
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| still had to be determined. TheHi_ghCourt accordingly confirmed thl' |
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| decreeofthe trial court and held that thesuiragainst R was premature. |
On appeal to this Court,
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HELD: (i) The suit must be remanded to the trial court to detern1ine 4'the ultimate balance" and for disposal according to la\·.
463
A The appellant b•nk was entitled to claim at any time the money due {rom the company as well as from R under the promissory note and the bond. The suit could not therefore be said w 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. [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 B not affect the liability of the surety unless the contract of suretyship otherwise provides. [471 F-G] Ha/sbury's Lall's of England, Vol. 63 rd. Edn., Art. 1555 at p. 771; Re. Garner's Motors Ltd. [1937] Ch. 594~ referred to.
(iii) The bond executed by R was one ot the four documents executed on the same day and was part of the schen1e to ensure payn1ent of the amount found due to the Bank. Although the bond was not also executc ed by the company, the 'fact that it was executed simultaneously with the other documents and the conduct of R as \Vell 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. [470 A-C]
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1957 D 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 a:nd 71 of 1957.
H. R. Goklwle, M, M. Kshatriya and G. S. Chatterjee, for the E appellant (in both the appeals).
M. C, Chagla, A. K. Verma, B. Datta and J, B. Dadachanji, for the resPondents (in both the appeals),
The Judgment of the Court was delivered by
(1970] 2 S.C.R.
-464
SUPREME COURT REPORTS
dacoity or by any other cause whatsoever, Ranjit Singh executed a deed called an "agreement of guarantee" agreeing to pay ol) demand all monies which may be due as "ultimate balance" fr:im the Company to the Bank.
In December 1953 the Company closed its business. The stocks pledged were disposed of by the Bank and the amol'nt 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 a 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 tl1e 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 Jude. Malihabad, Lucknow, again;t 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 osts and interest pendente lite. Jn a joint writtn statem~nt it was con .. tended, 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 maintainable.
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P. N. BANK V. BIKRAM COTTON MILLS (Shah, J.)
465
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Two appeals were preferred to the High Court of Allahabad against the judgments in the suit. The High COQrt held that a scheme of composition between the Company and its creditors c 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 unseclired creditor for the amount remaining due after sale of the pledged goods, that under cl. 12 of the Scheme the amount pay· able to the unsecured creditors shall be ihe principal amount due to them determined by the Board of Trustees, that it was for the D Board of Trustees to determine the amount that remained payable to the Bank, that though under cl. 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 E 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 cash· credit account upto the specified limit, and therefore Ranjit Singh F was only to pay "the ultimate balance" which might be found due against the Company after "taking into account all dividends, comp<)sitions and payments etc. as payments in gross towards the debt", that the Bank's dues could be recovered from Ranjii Singh upon default in payment by the Company of the ultimate balance after,scrutiny by the Board of Trustees, and that the "proper ~tage for commencing a suit against Ranjit Singh was after the ultimate G 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 Bunk claimed a mere declaration against the Company and not a decree for payment of the amount due. Section 391 of the tompanies Act, 1956, insofar as it is material provides : " ( 1) Where a compromise or arrangement is proposed--
[1970) 2 S.C.R.
466
SUPREME COURT REPORTS
(a) between a company and its· creditors or any 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 ca&~ 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 dLrects.
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. (2) If a majority in number representing threetourths 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 arrangemen! 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 :
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Section 392( 1) provides :
"Where a High Court makes an order under section 391 sanctioning a compromirn or an arrangement in respect of a company, it-
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 aµreed to the scheme of composition and the court rejected objection raised by the Bank tind sanctioned the scheme. The scheme was binding upon the Bank afid the rights and obligations of the Bank had to be worked out under the scheme.
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P. N. BANK V. BIKRAM COTTON MILLS (Shah, J.)
467
A 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 coniract 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 bjlateral agreement between the Bank and Ranjit Singh.
B S-..ction 124 of the Indian Contract Act define~ 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 promisor himself, or by the conduct of any other person, is called a "contract of indemnity". Section 126 defines a "contract of gu2rantee". It states :
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"A 'confract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his defualt. 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 guaD rantee is given is calli'.d 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 indeinniiy. A contract of guarantee requires concurrence of three persons-the principal debtor, the surety and the creditor-the surety E undertaking an obligation at the request express or implied of the principal ,debtor. The obligation of the surety depends subsiantially 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.
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In the present case the Company did not execute the bond. But the bond executed by Ranjit Singh was one of four documents exected 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 hypoth G cation; an~ (iii) a letter ~suring the Bank that the Company shall remam 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 8uit is field. The bond was expressly H 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,
[1970] 2 S.C.ll.
468
SUPREME COURT REP~RTS
that the guarantee was to be a continuing guarantee for the ulti' mate balance which shall remain due to the Bank on such cashcredit account. In the written statement· it was admitted that Ranjit 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 ai 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. th.e dues of the Company, Ranjit Singh became a surety.
The extent of the liability of Ranjit Singh under the temis 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 tem1s of the bond there is anything which shows thllt the liability of the surety is not co-extensive with that of the principal debtor. Certain clauses of the "bend are relevant :
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P. N. BANK v. BIKRAM COTTON MILLS (Shah, J.)
469
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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.
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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 D 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 ulti· mate balance under els. 4 a;nd 5 of the bond.
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"A scheme need not expressly reserve the rights of any creditors against sureties for debts of the company; as such rights are •maffected by a- scheme".
It w'as held in Re. Garner's Motors Ltd.(') that the scheme when sanctioned by the Court has a statutory operation and the scheme H does not release other persons not parties to the scheme from their obligations.
ll) [1937] Ch. 594. L2Sup.Cl/70-18
(1970] 2 S.C.R.
SUPREME COURT REPORTS
470
The High Court, in our judgmeni, 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 afe governed by the scheme sanctioned by the High. Court of Allahabad in Company Case No. 16 of 1956 by their .judgment dated May 21, 1956. Liabiliiy of 1.anjit Singh being only for payment of. 'the ultimate balance' which remains due on the cash-credit account .with the Bank in favour of tile Company. The Court will, when such ultimate balance is determined, proceed to pass a decree in favour of the Bank.
Ranjit Singh has filed an affidavii 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 th eultimate 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. 38,047-461 was issued to the Bank on November 5, 1966, comprising Rs. 35, 721 qn 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 ~he rate of 50% of the then balance due. Thereafter another cheq:ie for Rs. 1,744.50 being 50% of the amount· then due to the Bank was also forwarded to tbe 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 Coun; 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 iii the .. Trial Court will be costs in the suit.
R.K.P.S.
Suit remanded.
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3 issues framed by the court
Whether the bond executed by the director was a contract of guarantee or indemnity.
Whether a composition scheme under s. 391 Companies Act binds or releases the surety's liability.
Whether the Bank's suit before determination of the 'ultimate balance' was premature.
Colour shows how this judgement treated each authority
Re Garner's Motors Ltd.Relied on¶121
[1937] Ch. 594
6 provisions across 2 enactments
Punjab National Bank Limited
Bikram Cotton Mills
Ranjit Singh
J. C. Shah
A. N. Grover
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
