Appeals Nos 1957 and 1958 of 1966
Appeal by special leave from the judgment and order dated September 6 1965 of the Allahabad High Court Lucknow Bench in First Civil Appeals Nos 62 and 71 of 1957
HR Gakhale MM Kshatriya and GS Chatterjee for the
appellant in both the appeals
MC Chagla AK Verma B Datta and 1
B Dadachanli for the respondents in both the appeals
The Judgment of the Court was delivered by Shah J
Ranjit Singh was a director of Ranjit Singh  Sons
Ltd which acted as a Managing Agent of Shri Vikram Cotton Mills Ltd Shri Vikram Cotton Mills Ltd hereinafter called the Company opened a cash credit account with the Punjab National Bank and to secure repayment of the balance due at the foot of the account on June 27 1953 four documents were executed three by the Managing Agents on behalf of the Company and one by Ranjit Singh
The three documents executed by the Managing Agents were i promissory note for Rs 1300000 payable with interest at the rate of 212 over the Reserve Bank of India rate with a minimum rate of 6 per annum until payment ii a deed of hypothecation of goods described in the Schedule annexed to the document iii a letter to the Bank agreeing that during the continuance of the agreement evidenced by the letter of hypothecation the Company will remain solely responsible for all loss damage or deterioration of the securities delivered to the Bank caused by theft fire rain robbery
464 dacoity or by any other cause whatsoever
Ranjit Singh executed a deed called an agreement of guarantee agreeing to pay on demand all monies which may be due as ultimate balance from the Company to the Bank
In December 1953 the Company closed its business
The stocks pledged were disposed of by the Bank and the amount realised was credited in the account of the Company
The Bank claimed that an amount of Rs 256877126 remained due at the foot of the account
Some creditors of the Company had in the meantime filed petition in the High Court of Allahabad for an order winding up the Company
On February 22 1956 a scheme of composition was settled among the creditors that the total liability of the Company was Rs 3445197 11 2 and the total assets of the Company were Rs 500000 that the Company was desirous of confirming a lease agreement and that in order to safeguard the rights and interests of the Company and its unsecured creditors the Company had entered into an agreement with the lessee
The scheme was sanctioned by order of the High Court of Allahabad dated May 21 1956 under section 391 of the Indian after rejecting the opposition of the Bank The Bank then filed a suit in the Court of the Civil Judge
Malihabad Lucknow against the Company and Ranjit Singh for a declaration that on the date of the suit a sum of Rs 256877 12 6 was due against the Company and for a decree for payment of that amount against Ranjit Singh with costs and interest pendente lite
In a joint written statement it was contended inter alia that Ranjit Singh was only a guarantor and not a co debtor and that he could be made liable only in case of default by the Company and since the Company had made no default the suit against Ranjit Singh was not maintainable
Certain preliminary issues were raised by the Trial Judge at the hearing of the suit out of which the following are relevant 1 Whether the plaintiff Bank is not entitled to file this suit as against the defendant No 1 the Company without obtaining the leave of the Company Judge as alleged  If so its effect  2 Whether the Court has no jurisdiction to decide on the merits of the plaintiff s claim in view of the facts as alleged in para 12A of the written statement  If so its effect  3 Whether the suit against defendant No 2 Ranjit Singh is not maintainable as pleaded under Paras 7 13 and 14 of the written statement  465 The Trial Court held that the suit was not maintainable against the Company without obtaining leave of the Company Judge and also that the Court had No jurisdiction to adjudicate upon the merits of the Bank s claim for under the scheme the Board of Trustees were to scrutinise the claim and their decision was final
In dealing with the claim against Ranjit Singh the Court head that he had not made any default in payment of the dues and under the terms of guarantee the suit was premature against him as well
The Court accordingly dismissed  the suit
Two appeals were preferred to the High Court of Allahabad against the judgments in the suit
The High Court held that a scheme of composition between the Company and its creditors confirmed by the Court had statutory operation and was binding on all creditors regardless of the fact whether any of them agreed or not that according to the scheme the Bank became an unsecured creditor for the amount remaining due after sale of the pledged goods that under cl 12 of the Scheme the amount payable to the unsecured creditors shall be the principal amount due to them determined by the Board of Trustees that it was for the Board of Trustees to determine the amount that remained payable to the Bank that though under cI 16 of the scheme a creditor may file suits and take appropriate steps for the limited purpose of establishing their claims the suit had to be filed with the leave of the Court and that the suit of the Company without obtaining leave of the Court was not maintainable
The High Court further held that Ranjit Singh had executed an indemnity bond and that even assuming that Ranjit Singh was a surety it was expressly provided by the terms of the bond executed by him that the guarantee was only for ensuring payment of the ultimate balance remaining due to the Bank on such cashcredit account upto the specified limit and therefore Ranjit Singh was only to pay the ultimate balance which might be found due against the Company after taking into account all dividends compositions and payments etc as payments in gross towards the debt that the Bank s dues could be recovered from Ranjit Singh upon default in payment by the Company of the ultimate balance after scrutiny by the Board of Trustees and that the proper stage for commencing a suit against Ranjit Singh was after the ultimate liability of the Company was determined by the Board of Trustees and the Company committed default in payment
The High Court accordingly confirmed the decree of the Trial Court even in favour of Ranjit Singh With special leave granted by this Court these two appeals have been preferred by the Bank
The Bank claimed a mere declaration against the Company and not a decree for payment of the amount due Section 391 of the  insofar as it is material provides 1  Where a compromise or arrangement is proposed 466 a between a company and its creditors or an class of them or b between a company and its members or any class of them the Court may on the application of the Company or of any creditor or member of the Company or in the case of a company which is being wound up of the liquidator order a meeting of the creditors or class of creditors or of the members or class of members as the case may be to be called held and conducted in such manner as the Court directs
2 If a majority in number representing threefourths in value of the creditors or class of creditors or members or class of members as the case may be present and voting either in person or where proxies are allowed by proxy at the meeting agree to any compromise or arrangement the compromise or arrangement shall if sanctioned by the Court be binding on all the creditors all the creditors of the class as the case may be and also on the company or in the case of a company which is being wound up on the liquidator and contributories of the company Section 3921 provides Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company it a shall have power to supervise the carrying out of the compromise or arrangement and b  may at the time of making such order or at any time thereafter give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement
 In the present case a meeting of creditors of the Company was held in which a majority in number representing three fourths in value of the creditors agreed to the scheme of composition and the court rejected objection raised by the Bank and sanctioned the scheme The scheme was binding upon the Bank and the rights and obligations of the Bank had to be worked out under the scheme
467 In reaching its conclusion that the bond executed by Ranjit Singh in favour of the Bank was of the nature of a contract of  indemnity and not a contract of guarantee the High Court was impressed by the circumstance that the Company was not a party to the bond and that the bond was only a bilateral agreement between the Bank and Ranjit Singh Section 124 of the Indian Contract Act defines a contract of indemnity A contract by which one party promises to save the other from loss caused to him by the conduct of the promiser himself or by the conduct of any other person is called a contract of indemnity
Section 126 defines a contract of guarantee
It states A contract of guarantee  is a contract to perform the promise or discharge the liability of a third person in case of his default
The person who gives the guarantee is called the surety  the person in respect of whose default the guarantee is given is called the principal debtor  and the person to whom the guarantee is given is called the creditor 
A guarantee may be either oral or written
A promise to be primarily and independently liable for another person s conduct may amount to a contract of indemnity A contract of guarantee requires concurrence of three persons the principal debtor the surety and the creditor the surety undertaking an obligation at the request express or implied of the principal debtor
The obligation of the surety depends sub  stantially on the principal debtor s default under a contract of indemnity liability arises from loss caused to the promisee by the conduct of the promisor himself or by the conduct of another person In the present case the Company did not execute the bond But the bond executed by Ranjit Singh was one of four documents executed on June 27 1953 It was part of the scheme to ensure payment of the amount due at the foot of the cash credit account in favour of the Bank The Company executed by its managing agents i a promissory note ii a deed of hypothecation and iii a letter assuring the Bank that the Company shall remain solely responsible for all loss damage or deterioration to the stocks hypothecated with the Bank
The Bank also insisted upon a promise by some other person to pay the debt and as a part of the same arrangement Ranjit Singh executed the bond on which the suit is field
The bond was expressly called an agreement of guarantee it was also recited therein that Ranjit Singh guaranteed to the Bank payment on demand of all monies which may at any time be due to the Bank from the Company on the general balance of that account with the Bank 468 that the guarantee was to be a continuing guarantee for the ultimate balance which shall remain due to the Bank on such cashcredit account
In the written statement it was admitted that Raniit Singh was a guarantor
The bond it is true did not expressly recite that the Company was the principal debtor it is also true and the Company did not execute the bond
But a contract of guarantee may be wholly written may be wholly oral or may be partly written and partly oral
The documents which secured repayment of the Bank s claim at the foot of the cashcredit account were executed simultaneously the bond executed by Ranjit Singh was one of them and the conduct of Ranjit Singh and the Company indicates that Ranjit Singh agreed to guarantee payment of the debt due by the Company
We hold therefore that the Bank the Company and Ranjit Singh were parties to the agreement under which for the dues of the Company Ranjit Singh became a surety
The extent of the liability of Ranjit Singh under the terms of the bond must therefore be determined
Section 128 of the Indian Contract Act provides that the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract
It is necessary therefore to consider whether in the terms of the bond there is anything which shows that the liability of the surety is not co extensive with that of the principal debtor
Certain clauses of the bond are relevant  1  In consideration of your Bank at my request allowing an accommodation by way of cash credit and DD limits to Ms SV Cotton Mills Ltd  at Lucknow Branch I in my personal capacity hereby guarantee to you the payment on demand of all monies which may at any time be due to you from Ms SV Cotton Mills Ltd on the general balance of that account with your Bank
2 I declare that this guarantee shall be continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time the said cash credit and DD account may show no liability against the borrower or may even show a credit in favour of the borrower but shall continue in operation in respect of subsequent transactions 4 I further declare that all dividends compositions payments received by you from the said borrower or any other person or persons liable or his or their representatives shall be taken and applied as payment in gross without any right 469 on the part of myself or my representative to stand in your place in respect of or to claim the benefit of any such dividends compositions or payments until full amount of all your claims against the said borrower or histheir representatives which are covered by this guarantee shall have been paid and that this guarantee shall apply to and secure ultimate balance which shall remain due to you on such cash credit account upto the extent of Rs 1300000 8 I also agree that the Bank shall be entitled to recover its entire dues under the said cash credit account from my person or property upon default in payment by the said borrower
By clause 4 it is expressly stipulated that the bond secured the ultimate balance remaining due to the Bank
Therefore unless and until the ultimate balance is determined no liability on Ranjit Singh to pay the amount arises and it is common ground that the ultimate balance due is not determined
The suit was for a decree for Rs 256877126 but the claim against Ranjit Singh could be decreed only for the amount remaining due as the ultimate balance under cls
4 and 5 of the bond
We are however unable to agree with the High Court that the suit filed was premature
The Bank was under the terms of the bond executed by Ranjit Singh entitled to claim at any time the money due from the Company as well as Ranjit Singh under the promissory note and the bond
The suit could not therefore be said to be premature
The High Court instead of dismissing the suit should have stayed it till the ultimate balance due to the Bank from the Company was determined
We deem it necessary to observe that a binding obligation created under a composition under section 391 of the Companies
Act 1956 between the Company and its creditors does not affect the liability of the surety unless the contract of suretyship otherwise provides
As observed in Halsbury section Laws of England Vol 6 3rd Edn article 1555 at p 771 A scheme need not expressly reserve the rights of any creditors against sureties for debts of the company as such rights are unaffected by a scheme
It was held in Re Garner s Motors Ltd1 that the scheme when sanctioned by the Court has a statutory operation and the scheme does not release other persons not parties
to the scheme from their obligations  1 up
CI70 18 470 The High Court in our judgment should have stayed the suit and after the ultimate balance due by the Company was determined the Court should have proceeded to decree the claim according to the provisions of cl 4 of the bond
We accordingly modify the decree passed by the Trial Court and declare that the rights of the Bank against the Company are governed by the scheme sanctioned by the High Court of Aliahabad in Company Case No 16 of 1956 by their judgment dated May 21 1956
Liability of Ranjit Singh being only for payment the ultimate balance  which remains due on the cash credit account with the Bank in favour of the Company
The Court will when such ultimate balance is determined proceed to pass a decree in favour of the Bank
Ranjit Singh has filed an affidavit in this Court that in accordance with the scheme the total amount due to the Bank was determined at Rs 4153673 as the ultimate balance and a cheque for Rs 35721 was sent to the Bank on October 6 1956 being 25 plus the other pro rate payments allowed by the Trustees to creditors but the Bank did not cash the cheque
Thereafter by letter dated October 28 1966 the Bank requested that a fresh cheque be issued to them
Accordingly a fresh cheque for Rs 38047 46 was issued to the Bank on November 5 1966 comprising Rs 35721 on the basis of the old cheque plus Rs 2326 46 sanctioned for pro rate payment to the Bank by the Trustees on November 3 1966 at the rate of 50 of the then balance due
Thereafter another cheque for Rs 174450 being 50 of the amount then due to the Bank was also forwarded to the Bank on January 29 1968 in pursuance of another pro rate payment resolution passed by the Trustees and the balance now due to the Bank out of the original amount is Rs 174409 only
We are unable to investigate the correctness of these averments
The decree passed by the High Court is set aside and the suit be remanded to the Trial Court to be disposed of in the light of the observations made in this judgment
There will be no order as to costs in the High Court and in this Court
Costs in the Trial Court will be costs in the suit
RKPS Suit remanded


Summary:
The first respondent company opened a cash credit account with the appellant bank and on June 7 1953 to secure repayment of the balance due at the foot of the account the first respondent company executed three documents through its managing agents ie a promissory note a deed of hypothecation and a letter assuring the appellant bank that the company would remain solely responsible for all loss damage or deterioration of the stocks hypothecated with the bank
On the same day R a Director of the managing agents executed a bond called agreement of guarantee  agreeing to pay on demand all monies which may be due as the ultimate balance from the company to the bank
In December 1953 the company closed its business
The stocks pledged were disposed of by the bank and the amount realised was credited in the company s account
A balance of approximately Rs 256 lakhs remained due at the foot of the account
Some creditors of the company in the meantime filed a petition for winding up the company
On February 22 1956 a scheme of composition was settled among the creditors and was later sanctioned by the High Court On May 21 1956 under section 391 of the after rejecting the opposition of the appellant bank
The bank then filed a suit against the company and R for a declaration that on the date of the suit a sum of over Rs 256 lakhs was due against the company and for a decree for payment of the amount against R
The trial court dismissed the suit and on appeals filed by both the parties the High Court held that the scheme having been confirmed by the court had statutory operation and was binding on all creditors including the bank the bank had become an unsecured creditor for the amount remaining due after sale of the pledged goods and it was for the board of trustees under the Scheme to determine the amount for payment to the bank
The court also held that the suit against the company without obtaining leave of the court was not maintainable
It further held that R had executed an indemnity bond and that even assuming he was a surety under the terms of the bond he was only responsible for ensuring payment of the ultimate balance which still had to be determined
The High Court accordingly confirmed the decree of the trial court and held that the suit against R was premature
On appeal to this Court HELD i The suit must be remanded to the trial court to determine the ultimate balance and for disposal according to law
463 The appellant bank was entitled to claim at any time the money due from the company as well as from R under the promissory note and the bond
The suit could not therefore be said to be premature
The High Court instead of dismissing the suit should have stayed it till the ultimate balance due to the bank from the company was determined
471 E F ii The binding obligation created under a composition under section 391 of the  between the company and its creditors does not affect the liability of the surety unless the contract of suretyship otherwise provides
471 F G Halsbury s Laws of England Vol
63 rd
Edn article 1555 at p 771 Re
Garner s Motors Lid  referred to
iii The bond executed by R was one of the four documents executed on the same day and was part of the scheme to ensure payment of the amount found due to the Bank
Although the bond was not also executed by the company the fact that it was executed simultaneously with the other documents and the conduct of R as well as the company indicated that R agreed to guarantee payment of the debt due by the company
It must be held therefore that the Bank the company and R were parties to the agreement under which for the dues of the company R became a surety
470 A C