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Is There A Conflict Between The Principle That A Creditor Is Not Required To Exhaust His Remedies Against The Principal Debtor And Section 141 Of The Indian Contract Act, 1872?

There lies no conflict between the principal that a creditor is required to exhaust all his remedies against the principal debtor before approaching the surety and Section 141 of the Indian Contract Act, 1872 (hereinafter, The Contract Act). Instead, the aforesaid principle and Section 141 complement each other.

Section 128 of the Contract envisages the co-extensiveness[1] of the surety's liability with that of the principal debtor implying that that the surety is liable for exactly the same amount (and not anything extra[2]) for which the principal debtor is liable to the creditor.[3]

It is crystal clear in the catena of judgements that:
"the liability of the guarantor and the principal debtor is co-extensive and not in alternative".[4]

In the case of Narayan Singh v. Chhattisgarh[5], the court held that if the principal debtor's liability is scaled down in an amended decree or otherwise extinguished in part or by whole then consequently, the surety's liability is also reduced or extinguished commensurately. This reflects that the liability of both the surety and the principal debtor are at par with each other.

Furthermore, a suit to enforce a contract of guarantee can succeed even if the plaintiff has not "exhausted all his remedies against the principal debtor"[6]. This implies that the liabilities of both the surety and the principal debtor are joint and it is under the creditor's discretion to proceed against the surety or the debtor in any particular order which he feels appropriate.[7]

Therefore, there lies no compulsion for the lender to first exhaust the remedies against the borrower before proceeding against the surety, provided that there are no such express terms in the contract.[8] It would defeat the very purpose of having a guarantee if a certain order of utilizing the legal remedies with respect to the surety and the borrower is created in law.[9] There is nothing in law which provides for the execution of such a debt first against the principal debtor and then moving on to the surety.[10]

Section 141 of the Contract Act incorporates the general rule of equity as laid down in the judgement of Craythorne v. Swinburne[11] which states that:
"The surety is entitled to every remedy which the creditor has against the principal debtor including the enforcement of every security"[12].

This implies that as soon as the surety pays off the debt to the creditor, he/she steps into the shoes of the creditor and thus qualifies to entitle himself with all the rights that the creditor has, even including the right to have the securities which the creditor has against the principal debtor.[13]

And it is pertinent to mention that this particular right exists irrespective of the fact whether the surety is aware of such security or not.[14] . However, Section 141 of the Contract Act doesn't restrict the creditor to exhaust all his remedies against the principal debtor when both are construed harmoniously.

It can be said that the main purpose of Section 128 of the Contract Act is to secure the interest of the creditor by binding the principal debtor/surety with the debt/obligation for which the latter is primarily liable (principal debtor liable for the original debt and surety liable only in cases where the principal debtor defaults)[15].

Section 141 of the Contract Act does not restrain the creditor from fulfilling his own interest because it merely acts as a shield for the surety by not allowing the creditor to unjustly enrich himself with the security and guarantee both i.e., parting with or selling the security which was provided to him by the principal debtor and simultaneously holding the surety responsible for paying the entire debt minus the security in cases where the principal debtor defaults thereby upholding the principles of equity and natural justice.

It protects the interests of the surety to a great extent- even when the surety is unaware of any such security which the debtor has kept with the creditor. Therefore Section 141 in no way meddles with the settled principal as enunciated in the Damodar Prasad judgement. Rather, it can be said that Section 141 compliments Section 128 and the principle as envisaged in the Damodar Case.

For instance, if A borrows Rs. 10,000 from B on the pretext of C being the surety then in case of default, C according to Section 128 will be liable to pay Rs. 10,000 (upholding co-extensiveness as A was originally liable to pay Rs. 10,000). And B is not force to exhaust all remedies against A. Now if A during the time of drawing a contract had kept Rs. 5000 as security with B then in case of default, C according to Section 141 would be liable to pay Rs. 5000 to B (10,000 minus the security amount of Rs. 5000 which A had kept with B).

This also upholds and reinforces the principle of co-extensiveness as logically, A would've been liable to pay Rs. 5000 only to repay the entire loan (Rs. 5000 security plus remaining Rs. 5000 to fulfill the entire loan of Rs. 10,000) and in this situation as well B is not being forced to exhaust all his remedies against A first.

Thus, even if Section 141 is an additional protective valve for the surety and doesn't impose any duty upon the creditor to first exhaust all his remedies against the debtor. Thus, Section 141 is not infringing the basic essence of the principal as laid down in Damodar Case.

**Note: All views are personal

End-Notes:
  1. SBI v. Indexport Registered AIR 1992 SC 1740.
  2. The Indian Contract Act, 1872, 141, No. 9, Acts of Parliament, 1872 (India).
  3. Indian Over Seas Bank v. G. Ramulu (1999) 2 ALD 104.
  4. Kiran Gupta v. State bank of India 2020 SCC OnLine Del 1390.
  5. AIR 1973 Raj 347.
  6. Bank of Bihar Limited v. Damodar Prasad, MANU/SC/0220/1968.
  7. The Indian Contract Act, 1872, 128, No. 9, Acts of Parliament, 1872 (India).
  8. Supra note 6.
  9. Supra note 6.
  10. Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala (2009) 9 SCC 478
  11. (1807) 33 ER 482.
  12. Industrial Finance Corporation of India Ltd. v. Cannanore Spinning & Weaving Mills Ltd. (2002) 5 SCC 54.
  13. State of MP v. Kaluram AIR 1967 SC 1105.
  14. State Bank of Saurashtra v. Chitranjan Rangnath Raja AIR 1980 SC 1528.
  15. Pradeep Chand Lall and Anr. v. Grindlays Bank Ltd. and Anr. AIR 1987 Cal 157.

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