Case: Sobran Singh &amp; Others Vs. State of U.P. &amp; Others

Proceedings for the recovery of outstanding loan amount having been initiated against the Appellant Sobran Singh who stood guarantor for the repayment of the loan amount, Writ Petition No. 37172 of 2006 filed by him before the High Court of Judicature at Allahabad challenged the same primarily on the ground that so long as the properties of the principal borrower remained to be sold, the guarantor could not be proceeded against. That contention did not find favour with the High Court who summarily dismissed the writ petition holding that the liability of the guarantor was coextensive with that of the borrower and that recovery proceeding could be initiated against both of them simultaneously. The present appeal by special leave assails the correctness of the view taken by the High Court.When the matter came up for hearing on 12 November, 2007 before a bench comprising S.B. Sinha and H.S. Bedi, J.J.,the Appellant placed reliance upon the decision of this Court in Pawan Kumar Jains case (supra) to argue that the guarantor was as much protected against proceedings for recovery of the outstanding amount as the borrower in view of the provisions of Section 3(1)(d) read with Section 4(2)(b) of the Act aforementioned. The Court, however, entertained doubts about the correctness of the view taken in Pawan Kumar Jains case (supra) and accordingly referred the matter to a larger bench. That is precisely how this appeal and the accompanying two matters have come up before us for hearing.

Court's reasoning:
5. Section 4(2)(b) does not, in our opinion, lend itself to the interpretation urged on behalf of the Appellants.It is not in dispute that the guarantors have not in the present appeals created any mortgage, charge or encumbrance in regard to their immovable property in favour of the RespondentCorporation. The bar against initiation of recovery proceedings till such time such mortgaged, charged or encumbered properties are sold can, therefore, have no application to them. The contention that Section 4(2)(b) protects even the guarantors must, therefore, fail. The protection is, in our opinion, confined only to the principal debtor who has charged his properties in the manner indicatedargument though attractive does not stand closer scrutiny. The legislature has, it is evident from the language employed in the provision, made a conscious departure in the case of guarantors while providing protection to the borrowers whose properties stand mortgaged in connection with the loan transactions. If the intention of the legislature was to extend the benefit of such protection to the guarantors also, nothing prevented it from specifically indicating so. Section 4(2) would then have been differently worded. That, however, is not the position. The general principle of law that the liability of the guarantor is coextensive with that of the principal borrower continues to hold good even when recovery proceedings are taken under a special enactment. There is nothing in Section 4(2) to suggest that the legal edifice on which the liability of the borrower and the guarantor are made coextensive stands altered. All that the statute provides is that while the liability of the guarantor remains enforceable coextensively with the principal borrower, the latter shall not be proceeded against so long as properties mortgaged, charged or encumbered by him have not been sold. The difference in the treatment which the special enactment authorises as between the borrower and the guarantor in our opinion springs from the fact that one has mortgaged, charged or encumbered his immovable property while the other has not. The one who has charged, mortgaged or encumbered the property is placed at a different footing than the one who has not done so. To that extent alone there is a difference in the matter of enforcement of the recovery proceedings against the borrower and the guarantor for in all other respects the liability of the two continues to be unlimited and coextensive.7. In the light of what we have said above, we are of the view that Pawan Kumar Jains case (supra) was not correctly decided when it said that the guarantors cannot be proceeded against unless the property mortgaged or charged by the principal debtors is first sold. The later decision of the Court in Ashok Mahajans case (supra) has simply followed Pawan Kumar Jains case (supra) without making any qualitative contribution to the rationale underlyingt though attractive does not stand closer scrutiny. The legislature has, it is evident from the language employed in the provision, made a conscious departure in the case of guarantors while providing protection to the borrowers whose properties stand mortgaged in connection with the loan transactions. If the intention of the legislature was to extend the benefit of such protection to the guarantors also, nothing prevented it from specifically indicating so. Section 4(2) would then have been differently worded. That, however, is not the position. The general principle of law that the liability of the guarantor is coextensive with that of the principal borrower continues to hold good even when recovery proceedings are taken under a special enactment. There is nothing in Section 4(2) to suggest that the legal edifice on which the liability of the borrower and the guarantor are made coextensive stands altered. All that the statute provides is that while the liability of the guarantor remains enforceable coextensively with the principal borrower, the latter shall not be proceeded against so long as properties mortgaged, charged or encumbered by him have not been sold. The difference in the treatment which the special enactment authorises as between the borrower and the guarantor in our opinion springs from the fact that one has mortgaged, charged or encumbered his immovable property while the other has not. The one who has charged, mortgaged or encumbered the property is placed at a different footing than the one who has not done so. To that extent alone there is a difference in the matter of enforcement of the recovery proceedings against the borrower and the guarantor for in all other respects the liability of the two continues to be unlimited and coextensive.