IMPACT ON LIABILTY OF SURETY IN CASE OF CLAIMS BARRED

BY LIMITATION ACT

Submitted By-

Rachit Sharma

(4th Semester, 2nd year)

SM0118042

Faculty in Charge

Ms. Daisy Changmai

NATIONAL LAW UNIVERSITY, ASSAM

GUWAHATI

31st May, 2020

 TABLE OF CONTENTS
A. INTRODUCTION................................................................................................................V

A.1 OVERVIEW...................................................................................................................V

A.2 SCOPE AND OBJECTIVE..........................................................................................VI

A.3 REVIEW OF LITERATURE.......................................................................................VI

A.4 RESEARCH QUESTIONS.........................................................................................VII

A.5 HYPOTHESIS.............................................................................................................VII

A.6 RESEARCH METHODOLOGY................................................................................VII

1.CONCEPT OF SURETY IN CONTRACTS OF GUARANTEE..........................................1

1.1 RIGHTS OF A SURETY AS AGAINST THE CREDITOR:.........................................2

1.2 INDIAN CONTRACT ACT ON DEBT BARRED BY LIMITATION.........................4

2.LAW OF LIMITATION IN A CONTRACT OF GUARANTEE..........................................5

3.IMPACT ON SURETY’S LIABILITY FOR DEBT BARRED BY LIMITATION.............8

3.1 JUDICIAL OUTLOOK ON DEBTS BARRED BY LIMITATION...............................8

B. CONCLUSION...................................................................................................................13

BIBLIOGRAPHY....................................................................................................................14

II
 LIST OF CASE LAWS

 Aypunni Mani v, Kochoiweph

 Aziz Ahmed v. Sher Ali
 Bank of Bihar v. Damodar Prasad
 Bombay Dyeing Manufacturing Pvt. Ltd. V. The State of Bombay
 Carter v. White
 Chattan Singh v. Makhan Singh
 Conley Trustee v. Barclays Bank Limited
 Deepak Bhandari versus Himachal Pradesh State Industrial Development
Corporation Limited
 Krishto Kishori Chowdharain v. Radha Romun
 Mahant Singh vs U Ba Yi
 P, Anjaiah v. State Bank of India
 Radha v. Kinlock
 Sami Iyer v. Ramaswami Chettiar
 Shek Sulaiman v. Shivram Bhijai
 Suresh Narayan v. Akhauri
 Syndicate Bank vs Channaveerappa Beleri & Ors
 Wright v. Simpson

TABLE OF ABBREVIATIONS
A.I.R. All India Reporter
All ER  All England Law Reports
ALT Andhra Law Times 
BLJR Bihar Law Journal Report
Bom. Indian Law Reports, Bombay
C.J Chief Justice
Cal. Calcutta
DRJ Delhi Reported Judgments
ILR Indian Law Reports

III
Ind. Indian
Mad. Madras
SC Supreme Court
SCC Supreme Court Cases
SCR Supreme Court Reports

IV
 A. INTRODUCTION
A.1 OVERVIEW
Indemnity and Guarantee are both closely related and often confused concepts. Parties rarely
stop to consider whether they should be seeking a guarantee from the third party or both
guarantee and indemnity, or even realize that there is a distinction between the respective
obligations.

1
Section 126 of Indian Contract Act defines Contract of guarantee. It defines a contract of
guarantees a contract to perform the promise or discharge the liability of a third person in
case of his default. It is a tri-partite agreement among parties namely, the creditor, the
principal debtor and the surety. The person to whom the guarantee is given is called the
creditor. The person of whose default the guarantee is given is called the “Principal debtor”.
The person to whom the guarantee is given is called the creditor. The person who gives the
guarantee is called “surety”. The guarantee is a promise to answer for the payment of some
debt, or the performance of some duty, in case of the failure of another party, who is in the
first instance, liable to such payment or performance.2
So, the material question here in debt barred by limitation is whether or not the surety could
be discharged from liability under the law on substantive operation of law. As per law on
debt barred by limitation is settled when it comes to the debt payable by principal debtor to
creditor, i.e., in a time barred debt, collector or the creditors receives nothing on the debt.
Although the collector may not sue you to collect the debt but you still owe it. The collector
can continue to contact you to try to collecting such debts unless you send a letter to the
collector demanding that such communication stops. Not paying a debt may make it harder,
or more expensive, to get credit, insurance, or other services because it lowers individuals
credit rating. You can make a partial payment resetting the statue of limitations or pay off the
whole debt for a negotiated amount lesser than original.
However same is not the case when it comes to the impact on the liability of the surety when
the principal debtor’s liability in barred by limitation. This project aims to gain an
understanding over how the position of surety and his extent of liability in case of claims
affected or barred by statute of limitation and indulges into analysis of the view and opinion
of Indian Judiciary on this particular concept and extent of liability of the Surety in such
cases

1
Indian Contracts Act, 1872, No. 9, Imperial Legislative Council, 1872 (India)
2
Re Conley Trustee v. Barclays Bank Limited (1939) 2 All ER 127.

V
A.2 SCOPE AND OBJECTIVE
 Scope
The scope of this project is to analyse the concept of party to the contract i.e.,
Principal-Debtor, Creditor and Surety in context of contract of guarantee and
analysing the position of surety and possible liability in case of time barred debts
 Objective
1. To study the concepts of contract of guarantee and various concepts in relation to
the same
2. To study and formulate an understanding over the law of limitation and its effects
on Contracts of guarantee
3. To analyse case laws highlighting the various aspects of extent of liability in
cases barred by limitation
4. To formulate an understanding and impact on Surety’s liability for debt barred by
Limitation Act

A.3 REVIEW OF LITERATURE

 R.K. Bangia, The Indian Contract Act, (14th edition, 2011)

This book is a thorough analysis over various forms of contracts like Contract of Guarantee,
Contracts of Indemnity or Certain Relations and includes chapters over rights in cases of
contracts of guarantee and liability of surety in cases of such contracts and also indulges into
discussion over the impact on surety’s claim when the Principal-debtor fails to fulfil the
contract

 Avatar Singh; Contract and Special Relief Act; EBC publishing (11th edition 2013)

The book includes chapters on quasi-contracts, contracts of indemnity, guarantee, bailment,

pledge, and agency. Copious reference is also made to English as well as to the Indian cases
and statutes containing a very careful collection of the latest case-law that explains the
provisions of the Statute. Through its pragmatic approach it highlights the contract of
guarantee and the approach of the author with a focus on case-law based pedagogy of
teaching with regard to guarantee and subsequent liability and is a collection of the latest
relevant case-laws for formulation of analysis of position of Indian Judiciary on this Aspect

VI
  C.K. Takwani; Civil Procedure with Limitation Act, 1963 And Chapter on
Commercial Courts; EBC publishing (8th edition, 2017)

The book explains the theoretical as well as practical aspects of civil procedure. The eighth
edition of the book has been made more informative and useful. The book also contains a
chapter on Limitation Act, 1963 and helps in comparing and formulating an analysis of
various provisions and case laws in particular context of Limitation act 1963

A.4 RESEARCH QUESTIONS

1. What is various manner of discharging a Contract

2. What are various concepts related to performance of contract?
3. What is the legal framework involved in the manner of discharging the contract due
to impossibility and its breach?

A.5 HYPOTHESIS
Surety is held liable even in cases of debt barred by limitation and whether in cases of debt
barred by limitation can the surety be discharged from liability under the law on substantive
operation of law

A.6 RESEARCH METHODOLOGY

 Approach to Research: In this project doctrinal research was involved.
Doctrinal Research is a research in which secondary sources are used and
materials are collected from libraries, archives, etc. Books, journals, articles
were used while making this project.
 Types of Research: Exploratory type of research was used in this project,
because the project topic was relatively new and also because various new
concepts were needed to be explained
 Sources of Data collection: Secondary source of data collection was used
which involves in collection of data from books, articles, websites, etc. No
surveys or case studies were conducted.
 Mode of Citation: - Bluebook 19th edition

VII
 CHAPTER-1

CONCEPT OF SURETY IN CONTRACTS OF GUARANTEE

As mentioned earlier Section 126 of Indian Contract Act 3defines Contract of guarantee. It
defines it as
“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."
It is a tri-partite agreement among parties namely, the creditor, the principal debtor and the
surety. The person to whom the guarantee is given is called the creditor. The person of whose
default the guarantee is given is called the “Principal debtor”. The person to whom the
guarantee is given is called the creditor. The person who gives the guarantee is called
“surety”.
The guarantee is a promise to answer for the payment of some debt, or the performance of
some duty, in case of the failure of another party, who is in the first instance, liable to such
payment or performance.4 There exists a direct right of action in favour of person who
committed the default or has cause loss. A guarantee is a promise to someone that a third
party will meet its obligations to them i.e. “If they do not pay you, I will pay you

For an Illustration: -

 B requests A to sell and deliver goods to him on credit. A agrees to do, provided that
C will guarantee the payment of the price of goods.
 A asks B to lend 1 Lac to C for some particular work and agrees that in case of
failure of payment for work, A will pay

Important concepts relevant in this particular context are to be highlighted while studying
guarantee are as follows: -

3
Contracts Act, 1872, supra note 1
4
Re Conley Trustee v. Barclays Bank Limited, (1939) 2 All ER 127.

1
1.1 RIGHTS OF A SURETY AS AGAINST THE CREDITOR:
According to the Indian Contract Act, 1872,

 Section 133 states that that the creditor shall not vary terms of the contract between the
creditor and the principal debtor without the surety's consent. Any such variance
discharges the surety as to transactions subsequent to the variance. However, if the
variance is for the benefit of the surety or does not prejudice him or is of an insignificant
character, it may not have the effect of discharging the surety.
 Section 134 states that the creditor should not release the principal debtor from his
liability under the contract. The effect of the discharge of the principal debtor is to
discharge the surety as well. Any act or omission on the part of the creditor which in law
has the effect of discharging the principal debtor puts an end to the liability of the surety.
 Section 135 states If an agreement is made between the Creditor and Principal debtor for
compounding the latter’s liability or promising him extension of time for carrying out the
obligations or promising not to sure, discharges the surety unless he assents to such a
contract.
 Section 139 states the surety is discharged if the creditor impairs the surety's eventual
remedy against the principal debtor.
Under section 128 of Indian Contract Act,1872 5, the liability of surety is co-extensive that of
the principal debtor that means the surety is liable to the same extent as the principal debtor.
Through common law it can rightly be attributed that the liability of a surety is secondary,
subsidiary, ancillary or collaterally conditioned upon the default by principal debtor.6
CASE ANALYSIS: -
JEKKANNU SAMI IYER V. MUTHUKUMARA RAMASWAMI CHETTIAR
MAJOR7,

In Sami Iyer v. Ramaswami Chettiar, a Bench consisting of Spencer and Venkatasubba Rao
JJ. In context of Section 128 held that the liability of a surety for a debt, ceased to exist when
his principal's debts are extinguished. In that case the debt was extinguished by an act which
caused the merger of the estates of the debtor and the creditor. The word ‘co-extensive’
indicates that the surety in liable to the same extent as the principal debtor; he is jointly and
severally liable with the principal debtor.8

5
Contracts Act, 1872, supra note 1, Section 128
6
R.K. Bangia, “THE INDIAN CONTRACT ACT” 237 (14th ed, 2011)
7
(1922) SCC Online 194 Mad.
8
Suresh N. Sinha v. Akhauri Balbhadra Prasad (1957) (5) BLJR 216

2
 BANK OF BIHAR V. DAMODAR PRASAD9
Main issue of Bank of Bihar v. Damodar prasad was whether the plaintiff can only enforce
his dues against the guarantor after exhausting all remedies against the principal debtor. The
appeal was allowed and the respondent Dr. Paras Nath Sinha was directed to pay to the
appellant costs.

It stated that the direction postponing payment of the amount decreed must be clear and
specific. The imposed injunction upon the creditor not to proceed against the guarantor until
the creditor has exhausted his remedies against the principal is of the vaguest character. It is
not stated how and when the creditor would exhaust his remedies against the debtor. It also
held that the solvency of the principal is not a sufficient ground for restraining execution of
the decree against the guarantor since, it is the duty of the guarantor to pay the amount

WRIGHT V. SIMPSON10

Similar where the observations in Wright v. Simpson were the court observed that the surety
could not restrain action against himself on to grounds that the principal debtor is solvent or
the creditor may have relief available through course of a proceeding against the principal
debtor.
This general principle does not apply on the matters were decretal debt in extinguished in
whole or in part by substantive statute or by operation of substantive laws. It results from the
definition of a surety's engagement as being accessory to a principal obligation that the
extinction of the principal obligation necessarily induces that of the surety, it being the nature
of an accessory obligation that it cannot exist without its principal.11

SHEK SULAIMAN V. SHIVRAM BHIJAI 12

In Shek Sulaiman v. Shivram Bhijai, where it was observed that if an amount recoverable by
a plaintiff, from a defendant debtor is diminished in appeal, the surety's engagement, being
one of indemnity, would diminish in like proportion. So, if the sum recoverable became zero,
owing to the decree being reversed, the surety's liability would also be reduced to nothing.

9
1969 SCR (1) 620
10
1282 32 ER 1272,
11
CUNNINGHAM & SHEPHARD “THE INDIAN CONTRACT Act” (1894)
12
(1888) ILR 12 71 Bom.

3
1.2 INDIAN CONTRACT ACT ON DEBT BARRED BY LIMITATION
The position is law on debt barred by limitation is settled when it comes to the debt payable
by principal debtor to creditor, i.e., in a time barred debt, collector or the creditors receives
nothing on the debt. Although the collector may not sue you to collect the debt, you still owe
it. The collector can continue to contact you to try to collect, unless you send a letter to the
collector demanding that communication stop.13 Not paying a debt may make it harder, or
more expensive, to get credit, insurance, or other services because not paying may lower a
persons’ credit rating.
Situations that can be undertaken is such case are as follows: -
 Making a Partial payment
In some states, if someone pays any amount on a time-barred debt or even promises to pay,
the debt is 'revived.' This means the clock resets and a new statute of limitations period
begins. It also often means the collector can sue you to collect the full amount of the debt,
which may include additional interest and fees.
 Condition of Paying off the full debt.
Even though the collector may not be able to sue you, you may decide to pay off the debt.
Some collectors may be willing to accept less than the amount you owe to settle the debt,
either in one large payment or a series of small ones. An individual has to get a signed form
or letter from the collector before you make any payment. This document should state that the
entire debt is being settled and that the amount to be paid will release you from any further
obligation. Without this document, the amount paid may be treated as a partial payment on
the debt, instead of a complete payment. It eventually helps in keeping a record of the
payments you make to pay off the debt.
As discusses earlier the same is not the case when it comes to the impact on the liability of
the surety when the principal debtor’s liability in barred by limitation. Mere forbearance on
the part of the creditor to sue the principal debtor or to enforce any other remedy against him,
does not, in the absence of any provision in the guarantee to the contrary, discharge the
surety14

13
AVATAR SINGH, CONTRACT AND SPECIAL RELIEF ACT (11th ed.2013)
14
Contracts Act, 1872, supra note 1, Section 137

4
 CHAPTER-2

LAW OF LIMITATION IN A CONTRACT OF GUARANTEE

The law of limitation means the time-limit for different suits within which an aggrieved
person can approach the court to obtain a decree against the principal debtor and surety. The
different time limit or period of limitation is prescribed for different types of suits, appeals or
applications in the ‘Schedule’ to the Limitation Act, 1963. 15
The basic concept of limitation is relating to fixing or prescribing of the time period for
barring legal actions. According to Section 2 (j) of the Limitation Act, 1963 16, ‘period of
limitation’ means the period of limitation prescribed for any suit, appeal or application by the
Schedule, and ‘prescribed period’ means the period of limitation computed in accordance
with the provisions of this Act. The suit filed, appeal preferred and application made after the
expiry of the time limit is struck by the law of limitation and same will not be admitted by the
court as evidence for breach of contract.
A guarantor is liable to pay if the principal debtor defaults. The creditor has to enforce the
guarantee within the limitation period stipulated under limitation act. As per Article 55 17of
limitation act 1963, the time-limit of 36 months would be reckoned from the date the
guarantee contract is breached. The breach of contract occurs if the payment is not made or
refused ‘on demand’. Further, Section 11318 (the residuary articles) of limitation act provides
that the time begins to run only when the right to sue accrues.

For an Illustration: -

When a demand is made to the guarantor requiring payment within a stipulated

period, (say within 15 days from the date of the notice), the breach occurs or right to
sue accrues, if the payment is not made or is refused within 15 days of the notice date.
19

Then again, the different implications for the words ‘on demand’ which would depend purely
on the terms of the contract, as there are some decided cases reveal a divergence of opinion
for the words ‘on demand’ in relation to certain time guarantees. Therefore, in the cases of
15
The Limitation Act, 1963 No. 36 Acts of Parliament, 1963 (India)
16
Id, at Section 2 (j)
17
Limitation Act 1963, supra note 15, Article 55
18
Limitation Act 1963, supra note 15, Article 133
19
C.K. Takwani “Civil Procedure with Limitation Act, 1963 And Chapter on Commercial Courts” 1459 (8th
edition, 2017)

5
guarantees, a claim may be time-barred against the principal debtor, but still enforceable
against the guarantor on breach of contract.
CASE ANALYSIS: -
SUBRAMANIA AIYAR V. GOPALA AIYAR20
The main provision to be looked into is that the debt of the principal debtor is not
extinguished due to limitation, as also observed in Subramania Aiyar v. Gopala Aiyar was
that a debt the recovery of which is barred by limitation is not extinguished and the debtor is
not, by reason of the bar of limitation discharged therefrom and that the omission of the
creditor to sue the debtor within the period of limitation is not an act the legal consequence of
which is the discharge of the debtor and such omission has not the effect of discharging the
surety under Sections 13421 and 13722 of the Contract Act.

DEEPAK BHANDARI V. HPSIDCL23

In the case of Deepak Bhandari v. Himachal Pradesh State Industrial Development
Corporation Limited in Supreme Court, the court seized that, the right to sue under a contract
of indemnity or guarantee would principally arise when the indemnifier or the guarantor fails
to pay the money claimed from it and not from the time when the ‘Recall Notice’ is served.
The Supreme Court held that when the Respondent takes steps for recovery of the amount,
the limitation period for recovery of the balance amount would start only after adjusting the
proceeds from the sale of assets of the Borrower as only then would the Respondent be in a
position to determine the Appellant’s final liability as the guarantor. Accordingly, the suit
filed by the Respondents for recovery of money from the Appellant being the guarantor was
held to be within the period of limitation.
But on the other hand, in the following cases, the period of limitation will start afresh:

1. Acknowledgement of Debt in writing:

24
Section 18 of the Limitation Act provides that the period of limitation is extended in the
event of an acknowledgement of liability made by the debtor before the expiration of the
period of limitation to initiate the recovery process. An acknowledgement of debt by the
principal borrower also abandons the earlier demand made against the guarantor. Thus, the

20
(1910) 20 MLJ 633 (India)
21
Contracts Act, 1872, supra note 1, Section 134
22
Supra note 1
23
2014 (2) SCR 138 (India)
24
Limitation Act 1963, supra note 17, Section 18

6
limitation period for the related guarantee contract also extended from the date of the
acknowledgement.

2. Promise after expiry period:

Under Section 25(3) of the Contract Act25, a promise is made by the debtor to pay in whole or
in part, a time-barred debt offers fresh period of limitation for the debt contract. Under
section 128, the liability of the surety is co-extensive with that of the principal debtor unless
it is otherwise provided by the contract.

3. Acknowledgment or payment by another person:

Section 19 of the limitation act 26 provides that where payment on account of a debt or of
interest on a legacy is made before the expiration of the prescribed period by the person liable
to pay the debt or legacy or by his agent duly authorised in this behalf, a fresh period of
limitation shall be computed from the time when the payment was made. Provided that, an
acknowledgement of the payment appears in the handwriting of, or in a writing signed by, the
person making the payment.

25
Contracts Act, 1872, supra note 1, Section 25(3)
26
Limitation Act 1963, supra note 17, Section 19

7
 CHAPTER 3

IMPACT ON SURETY’S LIABILITY FOR DEBT BARRED BY

LIMITATION
Generally, the liability of a surety is made depend upon the liability of the principal debtor. A
positive action of the creditor which discharges the principal debtor releases the surety.
However, the laxity of the creditor in pressing his claim against the principal debtor may not
be pleaded as a defence by the surety, although he thereby suffers a determent.
Another concept to note here is concept of ‘forbearance’. Discussed in section 137 of the
Indian Contract act it states that
“Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety.”

For an Illustration: -
A owes C a debt which is guaranteed by B. The debt of A becomes payable and C
lapses on his action of suing A for a year after the debt has become payable. This
doesn’t discharge B from suretyship27

The question whether the surety is discharged when the creditor allows his remedy against
the principal debtor to become barred by limitation may be considered at this stage. Mere
forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him, does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety 28
3.1 JUDICIAL OUTLOOK ON DEBTS BARRED BY LIMITATION
On this point there are two opposite views taken by the Indian High Courts. On the one hand
it has been held that the surety is not under such circumstances discharge from liability to
credit while on the other hand has held that surety is discharged. The Apex Court held if the
debt had already become time- barred against the principal debtor, the question of creditor
demanding payment thereafter, for the first time, against the guarantor would not arise. When
the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is
not barred) against the principal debtor, limitation in respect of the guarantor will run from

27
Contracts Act, 1872, supra note 1, Section 137
28
C.K. Takwani, supra note 19, at 1459

8
the date of such demand and refusal/non-compliance. Where guarantor becomes liable in
pursuance of demand validly made in time, the creditor can sue the guarantor within 3 years,
even if the claim against the principal debtor gets subsequently time barred
The simple reason for this latter interpretation is that a person can only forbear to do a thing
as long as he has got a right to do it. Directly the suit of the creditor becomes time-barred, he
loses his power to enforce his claim. Forbearance after the expiry of the period of limitation
29
would therefore be meaningless . On the other hand, the majority view is based on the
ground that a debt does not cease to be a debt, because its recovery is barred by the law of
limitation. The right subsists, though the remedy comes to an end. Shadi Lai, C.J. observed,
that the balance of judicial authority is decidedly in favour of the view, that the omission of
the creditor to sue the principal debtor does not discharge the surety.30
CASE ANALYSIS: -
KRISHTO KISHORI CHOWDHARAIN V. RADHA ROMUN MUNSHI 31
In Krishto Kishori Chowdharain v. Radha Romun Munshi the plaintiff sued the principal
debtor and the surety for arrears of rent. The plaintiff also made the legal representatives of
the principal debtor a party after knowing about the death of the principal debtor to avoid the
debt being barred by limitation.
It was held that even if debt is barred by limitation on account of death of principal debtor,
the surety is still liable. The first Court gave a decree in favour of the plaintiffs. The second
Court has set aside that decree on the ground that the defendant is a surety, that the claim
against the principal debtor has been allowed to become barred by limitation, and that,
therefore, the claim against the present defendant cannot be sustained. The Calcutta High
Court here, overturned the decision of Appellant Court and determined the amount of the
liability of the defendant.

RADHA V. KINLOCK32
In Radha v. Kinlock, case it was held by Edge, C. J., and Tyrell, J., that under Section 134,
Contract Act 33 the omission by the creditor to sue the principal debtor within the period

29
C.K. Takwani, supra note 19, at 1461
30
Aypunni Mani v, Kochoiweph, 1966 AIR 203
31
(1885) ILR 12 Cal 330
32
1889 ILR ALL 11 310
33
Contracts Act, 1872, supra note 1, Section 134

9
allowed by the law of limitation produced the legal consequence of the discharge of the
principal debtor, and that Section 13734 applied only to a forbearance during the time a
creditor can be said to be forbearing to exercise a right which still is in existence

The reasons in support of this view were that it is obvious that any act or Commission of the
creditor, the legal consequences of which is the discharge of the principal debtor, discharges
the surety, and mere forbearance on the part of the creditor to sue the principal debtor does
not absolve the surety from the liability. Interpreting on the same we can conclude that the act
of the creditor in allowing his suit to be barred against the principal debtor would amount to
an act the legal consequences of which is to discharge the principal debtor and, therefore,
such act would automatically exonerate the surety from his responsibility

35
But in contrary to the decisions by various High Courts mentioned above, some High
Courts decided differently.

 The Judicial Commissioner’s Court at Peshawar in the matters of Chattar Singh v.

Makhan Singh36 the Court allowed the contentions of the defendant and discharged
the surety of the liability to pay on amount of debt being barred by limitation. The
Madras High Court relied on the well-known distinction between the barring of
remedy by action and the complete extinction of a debt.

 It is also settled provision in England that omission of the creditor to sue within the
period of limitation does not discharge the surety for another and more substantial
reason, that the surety can himself set the law on operation against the debtor. The
discharge of the principal debtor will not discharge the surety where it is not brought
about by the voluntary act of the creditor, but by the operation of law, such as the bar
under the statute of limitations or by reason of bankruptcy or liquidation of the
principal debtor.

 The court held, a majority of the courts adhere to the view that a statute of limitations,
as distinguished from a statute which prescribes conditions precedent to a right of

34
Supra note 17
35
Aziz Ahmed v. Sher Ali AIR 1956 All 8 (FB)
36
AIR 1936 20 (Pesh.)

10
 action, does not go to the substance of a right, but only to the remedy. It does not
extinguish the debt or preclude its enforcement, unless the debtor chooses to avail
himself of the defence and specially pleads it.

MAHANT SINGH VS U BA YI 37
In a Privy Council case, the reasoning of the majority of High Court has been preferred by
their Lordships and the point, therefore may be regarded as settled. While answering Whether
a surety is discharged when the creditor allows the execution of his decree against the
principal debtor to be barred by limitation.
The court held that omission of the creditor to sue within the period of limitation does not
discharge the surety. the surety is discharged 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. Mere
forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him, does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.

BOMBAY DYEING MANUFACTURING PVT. LTD. V. THE STATE OF BOMBAY 38

In Bombay Dyeing Manufacturing Pvt. Ltd. V. The State of Bombay, the Supreme Court
has also held that the creditor is entitled to recover the debt from the surety to the suit against
the principal debtor is barred. Although by defining 'unpaid accumulation' in the way it did
the Legislature obviously intended that only such wages of the employees as were time-
barred should be taken by the State, it being well settled that the law of limitation only bars
the remedy but does not extinguish the debt, Act must be held to have the effect of
transferring to the Board the debts due by the appellant to its employees free from the bar of
limitation.

SYNDICATE BANK VS CHANNAVEERAPPA BELERI & ORS 39

An indebtedness does not lose its character as such merely because it is barred; it still affords
sufficient consideration to support a promise to pay, and gives a creditor an insurable interest
Recently in Syndicate Bank vs Channaveerappa Beleri & Ors observed that the creditor
cannot pursue against the surety that has been time but against the principal debtor. The Court
37
A.I.R 1939 P.C 110
38
1958 AIR 328, 1958 SCR 1122
39
(2006) 11 SCC 506,518 (India)

11
ruled against the order of High Court and Trail Court. In the Court’s view finding that the suit
is not barred by time, we allow this appeal and, consequently set aside the judgment and
decree of the High Court and that of the trial court.

It is submitted that the majority view appears to be in conformity with Justice, the 13 th law
Commission Report40 suggests that an explanation shall be inserted in section 134 of the
principal Act to adopt the majority view. The Supreme Court 41 has also held that a creditor is
entitled to recover the debt from the surety even though the suit against the principal debtor is
barred, A time barred debt does not become extinguished but only becomes unenforceable in
a court of law. If a debt subsists even after it is barred by limitation, in law, there is no
discharge therefrom.
The modes in which an obligation under a contract becomes discharge are well defined and
the bar of limitation is not one of them. If the law requires that a debtor can be discharged
before he can be compelled to pay that if requirement is not satisfied. If he is merely told that
in the normal course, he is not likely to be imposed to action by the creditor. 42
43
A barred debt is a valid consideration under Section 25(3) of the Contract Act for a written
promise to pay signed by the party liable to be charged therewith. Equally when section 60 of
the Contract Act 44 speaks of barred debt as lawful debt actually due and payable it cannot be
considered to be discharged Surety, as a prudent guarantor, to avoid the risk and the cloth
himself with all the creditor's rights under Section 140 of the Contract Act45 himself is to pay
or perform the obligation within limitation lest he is himself to blame. Hence by mere failure
or forbearance to sue the principal debtor, the surety is not discharged from the liability
unless there is an express covenant in that regard or a release by the principal debtor by
novation or otherwise. Therefore, the omission to sue the principal debtor by the creditor
within the period of limitation does not discharge the surety.46

40
Law Commission of India, The Specific Relief Act, 1963, Report No. 147, 8 (1993).
41
Supra note 36
42
C.K. Takwani, supra note 19, at 1463
43
Contracts Act, 1872, supra note 1, Section 25 (3)
44
Id, at Section 60
45
Id, at Section 140
46
P, Anjaiah v. State Bank of India, 1987 ALT 1 85 (India)

12
 B. CONCLUSION

The law of limitation is founded on the principle ‘one who sleeps over his rights has no
rights’
this is relevant in an agreement of guarantee if the debt that the principal debtor is liable to
pay is a time barred debt, the credit has no remedy against the principal debtor in a court of
law. Although, it is worth to note here the limitation bars the remedy and not the right.
Certain situations like, on the event of an acknowledgement of liability made by the principal
debtor, the time period of limitation shall start de nova. It can be concluded here that since
the liability of surety is co-extensive to that of the principal debtor, he’d be liable for the
payment of default
amount if the period of limitation starts de nova.

But the question whether a surety is discharged when a creditor allows his remedy against the
principal debtor to be barred by limitation may be considered at this point. In the above
manner, the English courts have a settled opinion, the true principle is that mere omission to
sue does not discharge the surety, because the surety can himself set the law in operation
against the debtor.

The courts in India have two opposing views. On one hand the Courts ruled that the surety is
not under such circumstances discharged from the liability of the creditor while on the other
hand, some Courts in India were of the opinion that a surety is discharged of the liability in
time barred debt.

While the Court allowed the contentions of the surety and discharged the surety of the
liability to pay on amount of debt being barred by limitation. Similarly, in 2006 Supreme
Court judgment, the court observed that the creditor cannot pursue against the surety that has
been time but against the principal debtor. The Court ruled against the order of High Court
and Trail Court. In the Court’s view finding that the suit is not barred by time, we allow this
appeal and,
consequently, set aside the judgment and decree of the High Court and that of the trial court.
But, in another Supreme Court judgment of a higher bench, the court adhere to the view that
a statute of limitations, as distinguished from a statute which prescribes conditions precedent
to a right of action, does not go to the substance of a right, but only to the remedy. Hence it

13
can be concluded that a surety in not absolved of liability of account of debt barred by
limitation.

14
 BIBLIOGRAPHY

LIST OF BOOKS
Bangia, R. (14th edition, 2011) The Indian Contract Act
Cunningham, H. S. (Henry Stewart) (1894) The Indian contract act, no. IX of 1872, together
with an introduction and explanatory notes, table of contents, appendix and index (Madras,
Lawrence Asylum Press)
Singh, A. (11th edition, 2013) Contract and Special Relief act, EBC publishing
Takwani, C.K publishing (8th edition, 2017) Civil Procedure with Limitation Act, 1963 And
Chapter on Commercial Courts; EBC Publishing

LIST OF WEBSITES

Google scholar
Manupatra
SCC Online

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