Aziz Ahmad vs. Sher Ali and Others

Aziz Ahmad vs. Sher Ali and Others

Citation: AIR 1956 All 8

Full Text here

Issue: Whether a surety is discharged when the creditor allows the execution of his decree against the ‘principal debtor to be barred by limitation.

Position in England: 

In England, a failure to sue the principal debtor until recovery is barred by the Statute of Limitation does not operate as a discharge of the surety. Lindlay, L. J. in Carter v. White [(1885) 25 Ch D 666] observed- “mere omission to sue does not discharge the surety, because the surety can himself set the law in operation against the debtor.”

Position in India:

Section 137 of the Indian Contract Act, provides 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.”

As per Section 134 of the Indian Contract Act, “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.”

Contentions:

Respondent: The surety will be prejudiced if he is liable to be sued after the creditor’s remedy against the principal debtor has become barred, as he will not then himself have any remedy against the latter; Ss. 145 and 145 of the Act.

Held:

The effect of the expiry of the period of limitation (except in the case of suits to establish a right to immovable property) is to bar the remedy without extinguishing the right and the consequence is that the omission to sue a debtor within the period of limitation will not result in the debtor’s discharge.

Section 25(3) of the Act makes it clear that a barred debt is a good foundation for a written promise to pay signed by the persons to be charged therewith, or by his agent; and S. 60 speaks of a barred debt as a lawful debt actually due and payable to the creditor.

The Court in this case observed that Section 137 should not be interpreted restrictively and noted that the phrase “mere forbearance” in Section 137 does not mean forbearance for a limited time (namely that within which legal proceedings may be taken), but a forbearance not resting upon or in consequence of such a promise to give time to, or not to sue the principal debtor, as is the subject of S. 135.

As regards the Respondent’s contention, it was admitted that in such event the surety will be deprived of certain rights, however, the Court pointed out that the surety can guard himself against such a contingency as Section 140 of the Act provides that as soon as the guaranteed debt becomes due the surety will, upon payment or performance of all that he is liable for, be invested with all the rights which the creditor had against the principal debtor.

The Court further noted that Section 145 of the Act deals with quite a different matter (namely the implied promise by the principal debtor to indemnify the surety) and provides that the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. As per the Court, here again the surety can undoubtedly exercise his rights against the principal debtor as soon as the guaranteed debt becomes due by paying the debt himself. The payment by the surety of a debt which has become barred by time is a sum rightfully paid in this regard.

A creditor has no duty to the surety (in the absence of an express provision in the guarantee) to pursue a legal remedy against the principal debtor. Creditor’s failure to take action will not in such circumstances discharge the surety.

Author: Vishrut Kansal