Contract Law

Bank of Bihar Ltd. v. Damodar Prasad

AIR 1969 SC 297; (1969) 1 SCR 620

Facts

The Bank of Bihar advanced money to Damodar Prasad.
Paras Nath Sinha guaranteed repayment up to the amount stated in the guarantee.
The principal debtor defaulted despite demand.
The Bank sued both the principal debtor and the surety.
The trial court passed a decree against both.
However, it directed the Bank to proceed against the surety only after exhausting remedies against the principal debtor.
The High Court affirmed that restriction.
The Bank challenged it before the Supreme Court.

Whether a creditor must first exhaust remedies against the principal debtor before enforcing liability against the surety.

Under Section 128, the surety’s liability is co-extensive with that of the principal debtor unless the guarantee provides otherwise.
Once the principal debtor defaults and any required demand is made, the surety’s liability is immediate.
The creditor may proceed directly against:
the principal debtor;
the surety; or
both.
The surety cannot compel the creditor first to sue or execute against the principal debtor.
After paying, the surety may use rights of subrogation under Section 140 against the debtor.

The guarantee stated that the surety would pay after demand and allowed the Bank to enforce the guarantee notwithstanding other remedies or securities.
The Bank made the required demand.
Both debtor and surety failed to pay.
Therefore, the contractual condition for the surety’s liability was fulfilled.
The lower courts’ direction effectively postponed the guarantee.
That would defeat its commercial purpose because a guarantee is taken precisely to give the creditor an additional and immediately enforceable source of recovery.
The debtor’s solvency did not change the surety’s liability.
It was the surety’s responsibility to pay and thereafter recover from the principal debtor through subrogation.
The Supreme Court therefore rejected the requirement that the Bank first pursue all possible remedies against the debtor.

The Supreme Court removed the restriction imposed by the lower courts.
The Bank could immediately enforce the decree against the surety.
Use this case for: the creditor need not exhaust remedies against the principal debtor before proceeding against the surety.