Hukumchand Insurance Company Limited

v.
Bank of Baroda and Others
Facts:
First defendant executed what is styled as a "Cash Credit Agreement" with the plaintiff bank and
secured cash credit for business. By way of security the moveable assets of the firm were
hypothecated in favour of the creditor-Bank. In addition, under a mortgage by deposit of title-
deeds certain immovable properties were offered as security for the said loan.
Later, the second defendant, Hukumchand Insurance Co. undertook (under “Cash Credit
Indemnity Policy”) to indemnify the plaintiff against losses that may be suffered by the Plaintiff
in consequence of any default on the part of the first defendant in due repayment of all moneys at
any time payable by the first defendant to the plaintiff.
The first defendant having committed default in the matter of repayment of the moneys borrowed
from the plaintiff, plaintiff instituted the present suit against both the defendants.
Issues:
1. Whether the Insurance Policy issued is unauthorised and invalid?
2. Whether the Cash credit indemnity clause could be invoked in respect of advances made
earlier than the signing of the clause by the HICL? (Basically past consideration)
3. Liability of the Insurers would, at all events, arise only after the plaintiff had exhausted
its remedy against the principal debtor, and, that therefore, the suit claim is premature;
4. Whether the liability of the second defendant must be limited to such part as may remain
unsatisfied by the proceeds of sale of the security?
Arguments:
1. HICL also contended that the person who executed the alleged Cash Credit Indemnity
Policy on behalf of the second defendant had no right or authority or power to execute or
issue such documents and that therefore no liability on its part arose.
2. HICL says that "After 28-12-1967, bank has not made any new advances to the 1 st
defendant", strenuously contended that in the light of this admission and upon proper
construction of Ext. P-6 no liability could be fastened on HICL.
3. The contention urged in this behalf, in effect and in its essence, is that the remedy against
the appellant would arise only when it is shown that the debt was irrecoverable from the
first defendant.
4. According to HICL, a personal decree against the principal debtors being limited to such
part of the mortgage debt, if any, as may remain unsatisfied consequent upon an
insufficiency in the proceeds of sale of the security, the decree against the appellant
should also be so limited.
Held:
1. The conduct of the appellant in having obtained and retained the benefit of this premium,
in our opinion, clearly amounts to a ratification of the acts of its manager within the
meaning of Ss. 196 and 197 of the Contract Act. According to general principles of law
when an agent acting for and on behalf of another, stipulates a benefit for the principal
under a contract, and the principal without demur avails himself of that benefit, the law
implies a ratification of that contract on the part of the principal. THEREFORE,
BINDING.
2. Even after 28-12-1967, the first defendant was permitted to make withdrawals from the
account which, but for the guarantee under Ext.P-6, would not have been permitted. But,
in our opinion, the continuance of the cash credit account even after 28-121967 is in
pursuance of the guarantee policy.
3. Exhibit P-6 is styled 'an Indemnity Policy'= Primary liability. Now, whether the contract
in the instant case is viewed as a contract of indemnity or as one of guarantee and
whether, correspondingly, the liability is to pay a new debt arising under the
contract to indemnify or to pay the original debt, the claim, in our opinion, cannot be said
to be premature. The liability on the part of the appellant under Ext. P-6 arises in
consequence of default of the borrowers in due repayment on demand. Both the demand
against and the default by the 1st defendant must be held to have been established.
4. The liability of a principal debtor and the liability of a surety which is co-extensive with
that of the former are really separate liabilities, although arising out of the same
transaction. Notwithstanding the fact that they may stem from the same transaction, the
two liabilities are distinct. Referring to Bank of Bihar v Damodar Prasad,
“Before payment the surety has no right to dictate terms to the creditor and ask him to
pursue his remedies against the principal in the first instance. As Lord Eldon observed in
Wright v. Simson: 'But the surety is a guarantee; and it is his business to see whether the
principal pays, and not trial of creditor.' In the absence of some special equity the surety
has no right to restrain an action against him by the creditor on the ground that the
principal is solvent or that the creditor may have relief against the principal in some
other proceedings.
Likewise where the creditor has obtained a decree against the surety and the principal,
the surety has no right to restrain execution against him until the creditor has exhausted
his remedies against the principal......"