08.09.

2022 Adhiraj Sood

Bhavya Jasti
Arahant Vaishali Raj
Arjun jain

BANK OF BIHAR LTD. V. DR. DAMODAR PRASAD

(Hon’ble Supreme Court)
S.M. Sikri, R. S. Bachawat, and K. S. Hegde
-8th of August 1968

Identification of relevant facts-

Bank of Bihar Ltd. vs Damodar Prasad is a landmark case pertaining to the contract of
guarantee. Bank of Bihar, the plaintiff bank, lent money to defendant one Damodar Prasad on
the guarantee of defendant 2, Paras Nath Sinha. On the date of the suit Damodar Prasad owed
Rs.11,723.56 to the plaintiff as principal and additionally owed Rs.2769.37 on the account of
interest. Despite the continual reminders and demands of the bank, neither the principal
debtor nor the guarantor paid the dues.
Consequently, the plaintiff filed a suit against them in the Court of Subordinate Judge in
Patna claiming a decree for the debt due. The trial court decreed the suit against the
defendants and directed that the plaintiff bank shall be at liberty to enforce its dues in
question against defendant 2 only after having exhausted its remedies against defendant 1.
Naturally, the plaintiff bank was not satisfied by the decision of the court and thus appealed
to the High Court challenging the legality and propriety of this direction. The High court
dismissed the appeal, but after completing certain procedural obligations the plaintiff filed for
an appeal which was accepted by the Supreme court.

Legal issue(s) pertaining to contract law-

The bond provided that the plaintiff, that is, the creditor Bank of Bihar would be at the liberty
to enforce and recover the guarantee from the surety in case of a default from the principal
debtor. There were 2 important legal issues that were raised in this case- Could the plaintiff
only enforce the guarantee after exhausting all his remedies against the principal debtor, that
is, defendant 1? Is the liability of the surety co-extensive with that of the principal debtor?
These issues would comprehensively be addressed in the judgement.

Contentions made by the parties-

The appellant contended that under section 128 of the Indian Contract Act, the liability of the
surety is coextensive with that of the principal debtor. The surety thus became liable to pay
the entire amount. Before payment the surety has no right to dictate the terms to creditor and
ask him to pursue his remedies against the principal in the first stance. The bond provided
that the plaintiff would be at liberty to enforce and to recover upon the guarantee
notwithstanding any other guaranteed security or remedy which the Bank might hold or be
entitled to in respect of the amount secured. The demand for payment of the liability of the
principal debtor was the only condition for the enforcement of the bond. That condition was
fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the
principal debtor despite demands. So, his liability was immediate. It was not deferred until
the creditor exhausted his remedies against the principal debtor.
The defendants contended that under Order XX r. 11 (1 ) and sec. 151 of the Code of Civil
Procedure, the Court passing the decree had the power to impose the condition that the
judgment-creditor would not be at liberty to enforce the decree against 'the surety. until the
creditor has exhausted his remedies against the principal. Order XX r. 11 ( 1 ) provides that
"where and in so far as a decree is for the payment of money, the Court may for any
08.09.2022 Adhiraj Sood
Bhavya Jasti
Arahant Vaishali Raj
Arjun jain

sufficient reason at the time of passing the decree order that payment of the amount decreed
shall be postponed or shall be made by instalments, with or without 'interest, notwithstanding
anything contained in the contract under which the money is payable."

Decision made by the court-

The highest court held that, for making an order under O. XX r. 11 (1) the Court must give
sufficient reasons and the direction postponing payment of the amount decreed must be clear
and specific. The injunction upon the creditor not to proceed against the surety until the
creditor has exhausted his remedies against the principal is of the vaguest character as it is not
stated how and when the creditor would exhaust his remedies against the principal. Is the
creditor to ask for imprisonment of the principal? Is he bound to discover at his peril all the
properties of the principal and sell them; and if he cannot, does he lose his remedy against the
surety? Has he to file an insolvency petition against the principal? The Court observed that,
“the very object of the guarantee is defeated if the creditor is asked to postpone his remedies
against the surety. In the present case the creditor is a Banking Company. A guarantee is a
collateral security usually taken by a banker. The security will become useless if his right
against the surety can be so easily cut down.”

The appeal was thus allowed, and the court directed that, “plaintiff-bank shall be at liberty to
enforce its dues in question against defendant no.2 only after having exhausted its remedies
against defendant no.1”is set aside. The respondent Dr. Paras Nath Sinha was liable to pay
the appellant costs in this Court and in the High Court.

Reasoning relied upon for coming to that decision-

This case law set forth a principle that an action against the surety cannot be prevented solely
on the ground that the creditor has an alternative relief against the principal borrower. It was
held that asking the creditor to exhaust his remedies against the principal debtor first and only
then move against the surety would defeat the purpose of the guarantee. Based on this, ther
are many judgements namely the State Bank of India v Indexport Registered, the Hon’ble
Supreme Court held that surety cannot insist that the creditor should first exhaust his
remedies against the principal debtor. Same in Ram Bahadur Singh v Tehsildar Bisli.
Moreover, in the case of N. Narasimhaiah v Karnataka State Financial Corpn it was held that
a suit against the surety is maintainable even if the creditor has not sued the principal debtor.
The term ‘co-extensive’ under section 128, implies that the liability of the surety is at par
with the principal debtor. Liability of surety is the same as principal debtor and not more than
that. In Maharaja of Benares v Har Narain Singh, it was held that if the principal debtor is
liable to pay interest, the surety can also be held liable to pay the interest. So, it is a principle
in the law that if the PD is liable for the principal amount plus the interest, then the creditor
has the option to move against either the surety or the principal debtor to recover that amount.
The said case law, and the relevant precedent set out by it, has also influenced proceedings
relating to insolvency. In Ferro Alloys Corporation Limited v Rural Electrification
Corporation Limited the NCLAT held that insolvency proceedings against the corporate
guarantor may be undertaken without initiating prior proceedings against the principal debtor
under the Insolvency and Bankruptcy Code 2016.