Case Note & Summary
The petitioner, M/s. SICOM Limited, a State Financial Corporation, filed two petitions under Section 31(1)(aa) of the State Financial Corporation Act, 1951 against the guarantors (respondents 1 to 3) of a loan advanced to M/s. Mehta Rubber Chemical Ltd. (respondent 4). The loan of Rs. 149 lacs was sanctioned and disbursed on 6.1.1995, secured by a mortgage of the company's plant, machinery, land, and building. The guarantors executed personal guarantees on the same date, undertaking to repay the dues in case of default by the company. The company defaulted, and the petitioner sought to enforce the guarantees. The guarantors contended that the petitioner must first exhaust remedies against the principal debtor company before proceeding against them. The court rejected this contention, holding that the liability of a guarantor is co-extensive with that of the principal debtor, and there is no requirement under the SFC Act or general law to exhaust remedies against the principal debtor first. The court allowed the petitions, directing the guarantors to pay the outstanding dues along with interest.
Headnote
A) State Financial Corporation Act, 1951 - Section 31(1)(aa) - Guarantor's Liability - Co-extensive Liability - The court held that the liability of a guarantor is co-extensive with that of the principal debtor, and the Financial Corporation is not required to first exhaust its remedies against the principal debtor before proceeding against the guarantors under Section 31(1)(aa) of the SFC Act. The court relied on the principle that a guarantee is an independent contract, and the creditor can proceed against the guarantor directly. (Paras 1-5) B) State Financial Corporation Act, 1951 - Section 31(1)(aa) - Enforcement of Guarantee - No Need to Exhaust Remedies - The court held that there is no requirement under the SFC Act or general law that the Financial Corporation must first take action against the principal debtor or its assets before enforcing the guarantee against the guarantors. The guarantors are liable to pay the dues as per the terms of the guarantee deed. (Paras 4-5)
Issue of Consideration
Whether the State Financial Corporation can proceed against the guarantors under Section 31(1)(aa) of the State Financial Corporation Act, 1951 without first exhausting remedies against the principal debtor company.
Final Decision
The court allowed the petitions and directed the guarantors (respondents 1 to 3) to pay the outstanding dues along with interest as per the terms of the guarantee.
Law Points
- Guarantor's liability is co-extensive with principal debtor
- Section 31(1)(aa) of State Financial Corporation Act
- 1951
- No requirement to exhaust remedies against principal debtor before proceeding against guarantor
- Guarantee is an independent contract
