Punjab National Bank Ltd. v. Bikram Cotton Mills & Anr.
1970 AIR 1973
(Difference between indemnity and guarantee)
The first respondent company (R1) opened a cash-credit account with the appellant bank (A) and to secure repayment of the balance due at the foot of the account R1 executed three documents through its managing agents i.e. a promissory note, a deed of hypothecation and a letter assuring A that R1 would remain solely responsible for all loss, damage or deterioration of the stocks hypothecated with the bank. On the same day R, a Director of the managing agents, executed a bond called “agreement of guarantee’ agreeing to pay on demand all monies which may be due as the “ultimate balance” from R1. When R1 was closed the stocks pledged were disposed of by the bank and the amount realized was credited in the R1’s account. A balance of amount remained due at the foot of the account. Creditors of R1 filed a petition for winding up the company. A scheme of composition was settled by these creditors, which was sanctioned by the HC. The bank then filed a suit against R1 and R for the amount due. The bank, being a secured creditor, wanted preference above the unsecured creditors and proceeded under Contract Law as opposed to Company Law.
CONTENTION (Defendant, R): R was a guarantor and not a co-debtor, therefore, he could be called upon to pay only if R1 fails to pay, which was not the case.
Trial Court: dismissed the suit
High Court (upheld the Trial Court):
- The scheme having been sanctioned, had statutory operation and was binding on all creditors including the bank; the bank had become an unsecured creditor for the amount remaining due after sale of the pledged goods and it was for the board of trustees under the Scheme to determine the amount for payment to the bank.
- The suit against R1 without obtaining leave of the court was not maintainable.
- R had executed an indemnity bond because R1 was not a party to the bond and that even assuming he was a surety under the terms of the bond he was only responsible for ensuring payment of the “ultimate balance” which still had to be determined. The suit against R was premature.
- The suit must be remanded to the trial court to determine “the ultimate balance” and veracity of the relevant facts, for disposal according to law.
- (w.r.t 3rd observ’n of HC) The bond executed by R was one of the four documents executed on the same day and was part of the scheme to ensure payment of the amount found due to the Bank. Although the bond was not also executed by the company, the ‘fact that it was executed simultaneously with the other documents and the conduct of R as well as the company indicated that R agreed to guarantee payment of the debt due by the company showed that the Bank, R1 and R were parties to the agreement under which for the dues of the company, R became a surety.
The bank was entitled to claim at any time the money due from R1 as well as from R under the promissory note and the bond. The suit could not therefore be said to be premature.
- The binding obligation created under the composition ‘between the company and its creditors does not affect the liability of the surety unless the contract of surety-ship otherwise provides.
R would be liable for payment of ‘the ultimate balance’ and decree should be in favour of the Bank.
 under s. 391 of the Companies Act, 1956,