The guarantor of a loan is liable to pay it if the
debtor fails to clear it, the Supreme Court
has ruled, while maintaining that financial institutions too cannot act like
property dealers in recovering the debts.
A bench of justices BS Chauhan
and Dipak Misra also said the guarantor cannot insist that the creditor must
first exhaust all remedies against the principal debtor before recovering the
debts from the surety holders.
"There can be no dispute to the settled
legal proposition that in view of the provisions of Section 128 of the Indian
Contract Act, 1872, the liability of the guarantor / surety is co-extensive with
that of the debtor.
"Therefore, the creditor has a right to obtain
a decree against the surety and the principal debtor.
"The surety has no
right to restrain execution of the decree against him until the creditor has
exhausted his remedy against the principal debtor for the reason that it is the
business of the surety/ guarantor to see whether the principal debtor has paid
or not," said Justice Chauhan, writing the judgement for the bench.
The
apex court gave the ruling on an appeal by one Ganga Kishun, who had stood as a
guarantor to a bank loan, raised by one Ganga Prasad, who had died without
clearing it. Ganga Kishun had come to the apex court against the Uttar Pradesh
government's decision to recover the loan arrears from him after the death of
principal debtor Ganga Prasad.
While dismissing Ganga Kishun's appeal,
the apex court, however, faulted the government's decision to auction Ganga
Kishun's entire stretch of land for Rs 25,000 to recover an arrear worth Rs
8,500 only and not confining the auction to only 1/3rd of the land which could
have fetched the arrears