TE JURISDICTION Civil Appeal NO 3182 of 1982
Appeal by special leave from the Judgment and Order dated the 13th November 1978 of the Kerala High Court in MFA No 145 of 1976
BS Bhasme and HS Parihar for the Appellant
KN Bhatt for Respondent No 2
AS Nambiar for the intervener
The Judgment of the Court was delivered by VENKATARAMIAH J
This is an appeal by special leave under Article 136 of the Constitution against the judgment and order dated November 13 1978 of the High Court of Kerala in MFA No 145 of 1976
The facts leading to this appeal may be briefly stated thus The appellant is the Maharashtra State Electricity Board hereinafter referred to as the Electricity Board 
Cochin Malleables P Ltd in liquidation hereinafter referred to as the Company in liquidation  used to enter into contracts with the Electricity Board before it was ordered to be wound up by the High Court of Kerala to supply goods to the Electricity Board pursuant to tenders which were being issued from time to time
One of the terms usually found in such tenders was that the intending supplier of goods should pay as earnest money andor security to the Electricity Board alongwith every tender a sum approximately equivalent to 10 of the estimated price of the goods in question
There was however a provision for exempting payment of such earnest money or security deposit in the case of those tenderers who would keep a permanent deposit of Rs 50000 either in cash or in any form approved by the Electricity Board and one such approved form was a bank guarantee to the tune of Rs 50000
The effect of such deposit of Rs 50000 made by an intending tenderer with the Electricity Board under this condition was that he acquired the privilege of offering his tender for the supply of goods of any value to the Electricity Board and of such tender being considered along 564 with other tenders made by others who had in the ordinary course paid 10 of the estimated cost of goods as security deposit as per the usual condition
Such privilege was available to him in the case of any tender that he might make as long as the deposit remained intact with the Electricity Board
In other words on depositing a sum of Rs 50000 an intending tenderer could offer to supply goods of any value either under one of more tenders without complying with the condition which required him to deposit alongwith with tender a sum equivalent to 10 of the estimated value of goods which he intended to supply
The security of Rs 50000 thus given did not relate to any specific tender but it was open to the Electricity Board to appropriate the whole or any part of it towards any amount due from the tenderer under any supply contract entered into during the relevant period
Any balance which remained unadjusted became refundable to the person who had made it on demand provided that there was no other subsisting liability towards which the said balance could be adjusted and on such refund being made the person ceased to enjoy the exemption from the requirement of making an earnest deposit in respect of any future tender
Any bank guarantee given by any such intending tenderer in lieu of the cash deposit of Rs 0000 was deemed to be equivalent to the cash deposit made on date of the guarantee and the Electricity Board could realise the bank guarantee amount or any part of it at its will on any day irrespective of whether any tender had been made by the person concerned during the period or not
On such realisation of the bank guarantee amount the Electricity Board could deal with it in accordance with the terms of the contract as if the said amount had been deposited with it in cash on the date of bank guarantee
The liability of the bank which gave the bank guarantee under these terms was unconditional and did not vary according to the number of tenders offered the value of the goods offered for sale under those tenders and the defaults if any committed by the tenderer in the supply of goods
Pursuant to the above term the Company in liquidation offered on September 1 1966 a bank guarantee for a sum not exceeding Rs 50000 given by the Canara Bank Ltd now known as Canara Bank and hereinafter referred to as the Bank 
The relevant part of the said guarantee was as follows THE CANARA BANK LTD hereby agrees unequivocally and unconditionally to pay within 48 Forty eight hours on demand in writing from the Maharashtra 565 State Electricity Board or any officer authorised by it in this behalf of any amount upto and not exceeding Rs50000 Rupees Fifty thousand only to the said Maharashtra State Electricity Board Bombay on behalf of Ms Cochin Malleables Private Ltd Trichur who have tendered and or contracted or may tender or contract hereafter for supply of materials equipment or service to the Maharashtra State Electricity Board and have been exempted from payment of earnest money andor security deposit against such tenders or contracts
 The original period of guarantee was one year
It was however extended from time to time and the guarantee was in force in the year 1973
On August 27 1973 the Electricity Board called upon the Bank to pay the guarantee amount of Rs 50000
Thereafter reminders were sent and a final demand was made on May 23 1974
In the meanwhile Company Petition No 14 of 1973 was filed on July 30 1973 on the file of the High Court of Kerala for the winding up of the Company in liquidation
By an order dated September 16 1974 the High Court ordered the winding up of the Company in liquidation and directed the Official Liquidator to take charge of its affairs
In view of these proceedings the Bank wrote to the Official Liquidator on November 4 1974 stating that the Company in Liquidation was liable to the Bank to the extent of Rs 16435312 on two heads one of which was the sum of Rs 50000 demanded by the Electricity Board as per the terms of the bank guarantee referred to above
Thereupon the Official Liquidator filed an application under section 4562 of the read with Rule 9 of the Companies Court Rules 1959 before the Company Judge praying for an order restraining the Electricity Board from realising the amount covered by the guarantee on the ground that since the Company in liquidation had been ordered to be wound up the Electricity Board could not claim the amount of guarantee from the Bank
The Electricity Board contended that the amount of Rs 50000 was not being claimed as a creditor of the Company in liquidation but on the basis of the bank guarantee the liability under which was not affected by the liquidation proceedings
The learned Company Judge upheld the plea of the Official Liquidator and issued an order restraining the Electricity Board from realising the amount from the Bank on the ground that since the Bank would have recourse to the securities given by the Company in liquidation to the Bank for realising the amount paid by it in accordance with the bank guarantee and such 566 action of the Bank would affect the assets of the Company in liquidation it was not open to the Electricity Board to claim the amount of guarantee from the Bank except as a creditor in the winding up proceedings
An appeal filed by the Electricity Board before the Division Bench of the High Court was dismissed
This appeal is filed by the Electricity Board against the order of the Division Bench
After the petition for special leave was filed in this Court in July 1979 notice was issued to the Official Liquidator
He has written a letter to this Court stating that the High Court of Kerala has since sanctioned a scheme for reconstruction of the Company in liquidation by an order dated November 6 1979 subject to certain conditions and that the winding up proceedings are directed to be kept in abeyance till December 31 1982
He has further stated that he has handed over all the assets of the Company in liquidation to the new management as per directions of the High Court and that he has no funds to participate in these proceedings
The Managing Director of the Company in liquidation has entered appearance as an intervener and is represented by a counsel
The learned counsel for the intervener has been heard in this appeal
He has also filed his submissions in writing
The principal question which arises for determination in this appeal relates to the effect of the liquidation proceedings on the right of the Electricity Board to recover from the Bank the sum of Rs 50000 as per the terms of the bank guarantee
It cannot be disputed that the terms of the document on the basis of which the Electricity Board has claimed the amount from the Bank constitute a contract of guarantee and not a contract of indemnity
Under that document the Bank has undertaken to pay any amount not exceeding Rs 50000 to the Electricity Board within forty eight hours of the demand
The payment of the amount guaranteed by the Bank is not made dependent upon the proof of any default on the part of the Company in liquidation
It may be that in order to give the said guarantee the Bank had in its turn taken as security from the Company in liquidation certain fixed deposit receipt and a certain quantity of imported zinc ingots and that the Bank had certain rights in respect of those securities
There may also be some claims or counter claims arising out of the contracts of supply entered into between the Electricity Board and the Company in liquidation
But the transactions viz 1 the bank guarantee executed by the Bank in favour of the Electricity Board 2 the 567 contracts of supply entered into between the Electricity Board and the Company in liquidation and 3 the document under which the Company in liquidation had given a fixed deposit receipt and certain quantity of zinc ingots as security to the Bank for executing the letter of guarantee in favour of the Electricity Board are independent of each other in so far as their legal incidents are concerned
Under the bank guarantee in question the Bank has undertaken to pay the Electricity Board any sum upto Rs 50000 and in order to realise it all that the Electricity Board has to do is to make a demand
Within forty eight hours of such demand the Bank has to pay the amount to the Electricity Board which is not under any obligation to prove any default on the part of the Company in liquidation before the amount demanded is paid
The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods ie the company in liquidation
The liability is absolute and unconditional
The fact that the Company in liquidation ie the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank ie the guarantor
Under section 128 of the Indian Contract Act the liability of the surety is co extensive with that of the principal debtor unless it is otherwise provided by the contract
A surety is no doubt discharged under section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor the legal consequence of which is the discharge of the principal debtor
But a discharge which the principal debtor may secure by operation of law in bankruptcy or in liquidation proceedings in the case of a company does not absolve the surety of his liability See Jagannath Ganeshram Aggarwala vs Shivnarayan Bhagirath  Ors1
See also In re Fitzgeorge Ex parte Robson2
In view of the unequivocal language of the letter of guarantee no reliance can be placed by the Company in liquidation on the decision of this Court in Punjab National Bank Limited vs Bikram Cotton Mills  Anr3 in which the surety s liability was limited to the ultimate balance  found due from the principal debtor and the said balance had not been ascertained before the institution of the suit
568 The facts of this case are distinguishable from the facts in the case before us
As mentioned earlier the liability of the Bank to pay the amount as per the letter of guarantee did not depend upon prior proof of any default on the part of the Company in liquidation
Whether the whole of Rs 50000 should be demanded or any lesser sum should be demanded from the Bank was entirely within the choice of the Electricity Board
The Bank has therefore to pay the amount due under the letter of guarantee given by it to the Electricity Board
On such payment it is open to the Bank to have recourse to the securities given by the Company in liquidation for the purpose of the issue of the letter of guarantee
The Electricity Board is not concerned with what the Bank does in order to reimburse itself after making payment of the amount guaranteed by it
It is the responsibility of the Bank to deal with the securities held by it in accordance with law
It was not however open to the Company Judge to make any order under the prohibiting the Electricity Board from realising the amount guaranteed by the Bank as this had nothing to do with the assets of the Company in liquidation
The order of the Company Judge and the Judgment of the Division Bench in appeal are therefore liable to be set aside be and they are accordingly set aside
Before concluding this judgment we place on record the submission made on behalf of the Electricity Board that it is open to the Company in liquidation to prefer any claim arising out of the supply contracts as against the Electricity Board
It is also open to the Electricity Board to claim any sum that may be due to it under such contracts
In considering the above mutual rights and liabilities of the Electricity Board and the Company in liquidation the sum to be received by the Electricity Board from the Bank under the letter of guarantee will have to be taken into consideration and dealt with in accordance with the terms of the supply contracts
The appeal is accordingly allowed
No costs
PBR Appeal allowed


Summary:
The appellant Board invites tenders for the supply of goods
One of the terms of the tenders required the intending supplier of goods to pay earnest money andor security to the Board along with the tender a sum approximately equivalent to 10 of the estimated price of goods tendered
But where an intending tenderer deposited a sum of Rs 50000 either in cash or in any form approved by the Board such as a Bank guarantee he could offer to supply goods of any value either under one or more tenders without complying with the above condition
In accordance with the terms of tender the company in liquidation offered a bank guarantee for a sum of Rs 50000 for supply of goods to the Board
As security for the guarantee the Bank took from the company in liquidation a fixed deposit receipt and some quantity of imported zinc ingots and the Bank had certain rights in respect of these securities
In August 1973 the Board called upon the Bank to pay to it the guarantee amount
In the meanwhile however the High Court ordered the winding up of the company in liquidation
The Bank then wrote to the Official Liquidator that the company in liquidation was liable to the Bank a large sum of money one of which was the sum of Rs 50000 demanded by the Board
On application by the Official Liquidator the company Judge issued an order restraining the Board from realising the amount from the Bank on the ground that since the Bank would have recourse to the securities given by the company in liquidation for realising the amount paid by it in accordance with the bank guarantee and that since such action of the Bank would affect the assets of the company in liquidation it was not open to the Board to claim the amount of guarantee from the Bank except as a creditor in the winding up proceedings
A Division Bench of the High Court dismissed the Board s appeal
562 On the question whether the Board could recover from the Bank the sum of Rs 50000 according to the terms of the bank guarantee and what its effect would be on liquidation proceedings Allowing the Appeal  HELD It was not open to the company Judge to make any order under the prohibiting the Board from realising the amount guaranteed by the Bank as this had nothing to do with the assets of the company in liquidation
568 D The terms of the document on the basis of which the Board has claimed the amount from the Bank constituted a contract of guarantee and not a contract of indemnity
566 F The three transactions namely 1 the bank guarantee 2 the contract of supply between the Board and the Company in liquidation and 3 the document under which the Company in liquidation gave a fixed deposit receipt and some quantity of zinc ingots as security are independent of each other in so far as their legal incidents are concerned
566 H 567 A In order to realise the guarantee amount of Rs 50000 all that the Board had to do was to make a demand within 48 hours of which the Bank had to pay the sum to the Board
The Board was not required to prove any default on the part of the Company in liquidation
Nor could the Bank raise the plea that it was liable only to the extent of any loss sustained by the Board
The Bank s liability to pay the sum demanded by the Board was absolute and unconditional
567 C D The fact that the principal debtor had gone into liquidation would not have any effect on the Bank s liability as guarantor
Under section 128 of the Indian Contract Act the liability of the surety is co extensive with that of the principal debtor unless it is otherwise provided by the contract
A surety is no doubt discharged under section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor the legal consequence of which is the discharge of the principal debtor
But a discharge which the principal debtor may secure by operation of law in bankruptcy or in liquidation proceedings in the case of a company does not absolve the surety of his liability
567 D F Jagannath Ganeshram Aggarwala vs Shivnarayan Bhagirath In re Fitzegeorge Ex parte Robson  referred to
Punjab National Bank Limited vs Bikram Cotton Mills  Anr   held inapplicable
On payment of the sum demanded by the Board it was open to the Bank to have recourse to the securities given by the Company in liquidation
The 563 Board was not concerned with what the Bank did to reimburse itself
It was the Bank s responsibility to deal with the securities held by it in accordance with law