Case Note & Summary
The appellant, Bank of Bihar Ltd., lent money to the first respondent, Damodar Prasad, on the guarantee of the second respondent. The bank filed a suit for recovery of the amount due and obtained a decree. However, the trial court, while passing the decree, directed that the bank would not be at liberty to enforce the decree against the second respondent (surety) until it had exhausted its remedies against the first respondent (principal debtor). The bank challenged this direction, but the High Court dismissed the appeal. On further appeal to the Supreme Court, the issue was whether such a direction under Order XX Rule 11(1) of the Code of Civil Procedure, 1908, postponing payment by the surety, was justified. The Court observed that in the absence of some special equity, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. The very object of a guarantee is defeated if the creditor is asked to postpone his remedies against the surety. A guarantee is a collateral security usually taken by a banker, and the security would become useless if the creditor’s rights against the surety can be so easily curtailed. The Court further noted that the direction was of the vaguest character, as it did not state how and when the creditor would exhaust his remedies against the principal. The duty of the surety is to pay the decretal amount, and on such payment, he would be subrogated to the rights of the creditor under Section 140 of the Indian Contract Act, 1872, enabling him to recover from the principal. The Court held that the impugned direction cannot be justified under Order XX Rule 11(1), and set it aside. Consequently, the bank was at liberty to enforce the decree against the surety without first exhausting remedies against the principal debtor.
Headnote
A) Civil Procedure - Execution - Direction to Exhaust Remedies Against Principal - Code of Civil Procedure, 1908, Order XX Rule 11(1) - The trial court directed that the decree could not be enforced against the surety until the creditor exhausted remedies against the principal. The High Court affirmed. The Supreme Court held that in the absence of special equity, a surety has no right to restrain execution until the creditor exhausts remedies against the principal. The direction was vague, lacked specific reasons, and defeated the object of the guarantee. Held that the direction cannot be justified and must be set aside.
Issue of Consideration
Whether a court can direct a creditor to first exhaust remedies against the principal debtor before proceeding against the surety under Order XX Rule 11(1) of the Code of Civil Procedure, 1908
Final Decision
The Supreme Court allowed the appeal and set aside the trial court’s direction. It held that the decree can be enforced against the surety without first exhausting remedies against the principal debtor.
Law Points
- Surety has no right to restrain execution until creditor exhausts remedies against principal unless special equity exists
- guarantee is defeated if creditor’s remedies against surety are postponed
- guarantee is collateral security usually taken by banker
- surety on payment is subrogated to creditor’s rights under Section 140 of Indian Contract Act
- direction under Order XX Rule 11(1) CPC must be clear specific and supported by reasons
