Bank of Bihar vs Damodar Prasad & Anr.
Bank of Bihar vs Damodar Prasad & Anr.
Citation: AIR 2002 SC 2765
Court: Supreme Court of India
Background:
The case involves a dispute over the right of a bank to recover dues from a guarantor of a loan when the principal borrower has defaulted. The Bank of Bihar had given a loan to a party, and Damodar Prasad was the guarantor for that loan. When the principal borrower failed to repay the loan, the bank sought recovery from the guarantor.
The main issue was whether the guarantor could be held liable for repayment and under what circumstances, especially in the context of negotiable instruments and the legal protection available to guarantors.
Facts of the Case:
Bank of Bihar had extended a loan to a company.
Damodar Prasad was one of the guarantors for the loan.
The loan was not repaid by the principal borrower.
The bank filed a recovery suit against Damodar Prasad (the guarantor).
The guarantor raised several defenses, including issues relating to the validity of the guarantee and whether the bank had taken sufficient steps to recover from the principal borrower first.
Legal Issues:
Liability of the guarantor: Whether the guarantor is liable to repay the loan when the principal borrower defaults.
Necessity of first proceeding against the principal borrower: Whether the bank must first recover the dues from the principal borrower before proceeding against the guarantor.
Scope and validity of the guarantee: Whether the guarantee was properly executed and enforceable.
Protection of guarantors under the Negotiable Instruments Act or Contract Act: Whether the guarantor can claim protection under these laws.
Relevant Legal Principles and Case Law:
1. Definition of Guarantee (Contract Act, 1872, Section 126):
A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
2. Liability of Guarantor:
The guarantor's liability is co-extensive with that of the principal debtor unless otherwise provided.
The guarantor is liable to pay the bank when the principal debtor defaults.
3. Bank’s Rights Against Guarantor:
No need to exhaust remedies against the principal borrower first: The bank can simultaneously or immediately proceed against the guarantor without waiting to exhaust remedies against the principal borrower.
This is supported by Suraj Mall Mohta v. Union of India (AIR 1963 SC 1561) where the Supreme Court held that the guarantor’s liability arises on default by the principal debtor and does not depend on the creditor exhausting remedies against the principal debtor.
4. Relevant Case Law:
K. B. Sundaram v. Tata Oil Mills Co. Ltd. (AIR 1953 SC 155): The court held that the bank has the right to sue the guarantor without first suing the principal debtor.
Punjab National Bank Ltd. v. Surendra Prasad (AIR 1963 SC 533): Reaffirmed that the creditor is not required to sue the principal debtor before proceeding against the guarantor.
State Bank of India v. Santosh Gupta (AIR 2002 SC 1076): The Supreme Court reiterated that the liability of the guarantor arises only when the principal debtor defaults, and the creditor can take action against either or both simultaneously.
Judgment:
The Supreme Court held that:
The guarantor is liable to pay the bank on the default of the principal borrower as per the terms of the guarantee.
The bank is entitled to recover dues from the guarantor without first proceeding against the principal borrower.
The defenses raised by the guarantor, if any, must be based on the validity or terms of the guarantee itself, and cannot be used to delay or avoid payment unless proven otherwise.
The guarantee was found to be valid and enforceable in this case.
Significance of the Judgment:
The decision confirms the strong position of banks and financial institutions in recovering dues from guarantors.
It clarifies that banks are not bound to first exhaust remedies against the principal borrower before proceeding against the guarantor.
The judgment safeguards the interest of banks, enabling them to efficiently enforce guarantees and recover loans.
It also sets guidelines for guarantors to ensure that they understand the extent of their liability and the limited defenses available.
Summary:
| Aspect | Holding in Bank of Bihar vs Damodar Prasad |
|---|---|
| Liability of guarantor | Guarantor liable on default of principal borrower |
| Requirement to sue principal | No requirement to sue principal borrower before guarantor |
| Validity of guarantee | Guarantee must be valid and enforceable |
| Bank’s right | Bank can proceed simultaneously or directly against guarantor |
| Defenses available | Limited to validity or terms of guarantee |
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