LLOYD LAW COLLEGE

Name: UJJUVAL GARG

Submitted to:
Prof. Sangeet Saroha
 THE NELLORE CO-OPERATIVE URBAN BANK LTD., BY ITS SECRETARY, V.
VENKATAPPAYYA V. AKILI MALLIKARJUNAYYA: A CASE COMMENT

The Nellore Co-Operative Urban Bank Ltd., by its Secretary, V.

S.A. No. 2344 of 1945

High Court of Judicator at Madras

Mr Justice Patanjali Sastri & Mr Justice Tyagarajan, JJ.

I. Facts at hand:

Yarramreddi Balakrishna Reddi borrowed Rs. 500 from the Nellore Cooperative Urban Bank,
Ltd. on May 20, 1932. In this borrowing arrangement, the respondent (the person mentioned
in the document) guaranteed the repayment of the debt.

However, the borrower failed to repay the debt as per the agreed terms. In response to the non-
payment of the debt, the bank initiated a claim under Section 51 of the Madras Co-operative
Societies Act (VI of 1932). The claim was subsequently referred to an arbitrator, who issued
an award against both Balakrishna Reddi and the respondent on July 13, 1936.

II. Parties Involved:

For Appellant: Mr. G. Venkatarama Sastri

For Respondent: Messrs. M.S. Ramachandra Rao and D.R. Krishna Rao.

III. Principle Involved:

1. Indian Contract Act, 1882

Sec. 134: Discharge of surety by release or discharge of principal debtor.—

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. 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.

2. Madras Debt Reconciliation Act, 1936

Sec. 4: Application for settlement between a debtor and his creditors-

(1) A debtor may make an application for the settlement of his debts to the board established
for the local area within which he ordinarily resides, or if no board has been established for that
local area, to the board established for any local area in which he holds immovable property, if
any, but he shall not apply to more than one board.

(2) Unless the debtor has already made an application under subsection (1), any of his creditors
may make an application to a board to which the debtor might have applied under that
subsection.

(3) If applications for the settlement of the debts of the same (3) If applications for the
settlement of the debts of the same debtor are made to more than one board, such applications
shall, in accordance with rules made under this Act, be transferred to and dealt with by one
board as one single application.

Sec. 10: Notice calling upon Creditors to submit statements of debts -

Subsection (2): If no statement is submitted by a creditor in compliance with the provisions of

(a) in the case of any debt included in the particulars furnished by the debtor under sub-section
(1) of section 6 or sub-section (3) of section 8, the creditors shall not be entitled, in any
proceeding before a board or civil court or on any other occasion, to dispute the accuracy of
the, said particulars in regard to such debt; and

(b) every other debt shall be deemed for all purposes and on all occasions to have been duly
discharged.

IV. Issue Involved:

Is whether Section 10, Sub-section (2) of the Debt Conciliation Act, which the respondent
relied on in the lower court or Section 134 of the Indian Contract Act, which was argued by his
counsel Mr. Ramachandra Rao before us as an additional ground of exoneration, can be
considered as valid grounds for discharging the respondent's liability under the award?

V. Obiter Dictum (Observation of the Court):

In 1939, Balakrishna Reddi applied u/s 4 of the Madras Debt Conciliation Act 1936 to the Debt
Conciliation Board of Nellore to settle his debts, including the one owed to the bank based on
the award. Upon receiving the notice from the bank, they have to provide a statement of their
debt u/s 10(1) of the Act but they fail to do so within mentioned time. As a result, on April 21,
1939, in a board meeting, it was recorded that the bank "will be deemed to have been
discharged." The bank took no action to revive the debt as permitted under Section 10(3).

Subsequently, an execution petition was filed by the Bank to recover the award amount from
the respondent. In contrary to it, for objecting “claim petition” was filed. He argued that the
principal debtor’s liability had been extinguished in the board proceedings and he was merely
a surety, and no valid award could be executed against him. This “claim petition” was allowed
by the sales officer after hearing the respondent’s objection at length.

Following this, the bank initiated a lawsuit in the District Court in Nellore, against the
Respondent to pay the due amount and to declare the sales officer’s order dated Dec. 19, 1942,
illegal. The District Judge ruled in favour of the bank, upon the findings that Board proceedings
cannot shred off the respondent’s liability under the award. It also held, that the statutory
discharge of the principal debtor's debt, also operated as a discharge of the respondent's liability
as a surety. Consequently, the District Judge dismissed the suit, leading to this second appeal.

It is evidentiary, that the unconditional liability of the respondent is dependent on the principal
debtor’s default, and fault had occurred before the bank initiated its claim. Due to this, the
respondent became directly liable for the debt, and the award was passed against the principal
debtor and respondent both to pay the due amount. The directions to the authorized officer to
recover any due debt along with interests were given u/s 57A, Rule 15(7)(a) r/w rule 22 of the
Co-operative Societies Act against the “defaulter.” Therefore, the respondent is prima facie
considered a defaulter, and the bank is entitled to recover the amount due under the award from
him by attaching and selling his property.

The arguments relating to the abovementioned key question by the respondent heavily relied
upon the case of Babu Rao v. Babu Manaklal,1 which was accepted by the District Judge.
Here, they mentioned that the basis of liability for surety will be formed on the debt owed by
the principal debtor to the creditor and seeking the debt against the surety means seeking the
debt against the principal debtor. Additionally, the debt has been already statutorily discharged
“for all purposes and all occasions,” thereby, no liability of the surety will arise as of now.

2. Observation from Single Judge Bench of Justice Rajamannar: -

Here, the court has set aside the observation made in Babu Rao v. Babu Manaklal and
reiterated that the liability of the surety co-exists with the liability of the principal debtor until

1
ILR 1939 Nag. 175.
 the creditor has destroyed that debt. And, if it does so, the surety’s liability is discharged.
However, in S. Rm. Subramanian Chettiar vs. Chinnamuthu Batcha Rowther and Another,2
it was observed if the debt of the principal debtor is discharged by operation of law, it has been
held that the surety is not discharged.

The court stated that in the context of Section 10(2) of the Debt Conciliation Act, merely, the
creditor’s omission to submit a statement of debts as per sub-section (1) cannot take away his
remedy to recover his amount from the principal debtor or surety, their rights will arise from
the S. 134 of the Indian Contract Act 1882. However, in the court’s opinion this argument
would not be sustained as once the decree has been obtained against the principal debtor and
surety then ICA 1882 will cease to be in effect for all purposes for creditors to recover any
amount.

The effect of a decree under a special statute cannot be altered except through legal procedures
like appeals, reviews, etc.., or by special statutory provisions specifically affecting decrees. As
it was held In re A Debtor,3 the rule of law which states that granting time to the principal
debtor discharges the surety (see Section 135 of the Indian Contract Act) does not apply when
the time was granted after judgment for the debt had been recovered by the creditor against
both the principal debtor and the surety. However, in casu, the judgment-debtors are all equally
liable, and the original debt has merged into the judgment, making the debt determined by the
judgment fixed and equally enforceable against all judgment-debtors. Therefore, Section 134
of the Indian Contract Act is not applicable in the context of a decree obtained against both the
principal debtor and the surety.

The principle that "the subsequent dealing with the principal debtor does not operate to
discharge the surety from a liability under which he is no longer a surety but under the decree"
was succinctly expressed by Kindersley, V.C., in Jenkins v. Robertson4 and tersely agreed by
Horwill, J in Meenakshi Sundaram Chetti v. Velambal Ammal.5 The lower court is of the same
view in this case while determining the rights and liabilities of creditor u/s 134 of the Indian
Contract Act.

However, in the absence of any apt authority in this aspect, Rajamannar J. expressed some
doubt about this view and needs clarification on such implications. The statements by the
learned Judge do not mean that none of the rights and obligations laid down from Section 134
onwards apply once a decree is passed against the principal debtor and the surety. It means that
after such a decree, the nature of the relationship between the parties changes, and they are no
longer in the position of a principal and a surety under a contract of suretyship.

VI. Ration Decideni with Judgement:

2
1941 2 MLJ 751.
3
1913 3 K.B. 11.
4
1854 2 Drew. 351: 61 E.R. 755.
5
1944 1 M.L.J. 301.
Patanjali Sastri, J.

The decision in Zibal v. Ramchandra,6 provides a precedent that precisely covers the present
case. In that case, Niyogi J. refused to apply Section 134 of the Indian Contract Act to a surety
who resisted execution of a decree passed against both the surety and the principal debtor. The
decree debt against the principal debtor was discharged because the decree-holder had failed
to submit a statement of the debt under the Central Provinces Debt Conciliation Act, which
contained provisions similar to Section 10(2) of the Madras Act.

Niyogi J. distinguished his earlier decision in Babu Rao v. Babu Manaklal7 in this context and
observed that the surety's rights and liabilities as a surety had been replaced by those created
by the decree. Consequently, he was not entitled to invoke Section 134 of the Indian Contract
Act.

The decision in In re E.W.A., a debtor,8 on the other hand, concerned the English law and the
rule of law that the release of one of two joint debtors under a joint and several obligations
operates as a release of the other. This rule is a general principle applicable to all joint debts,
regardless of whether the joint obligation arises from a judgment or other security. The decision
in

It is important to recognize the distinction between the two cases, with In re E.W.A. being
specific to English law and its rule regarding joint debtors, while In re A Debtor involves a
different legal context and principle. The decision in In re A Debtor reaffirms that the rights
and liabilities arising from an original contractual liability are subject to modification or
replacement when merged in a decree, contrary to the broader applicability of the rule in In re
E.W.A.

In the matter of the respondent's right to reimbursement, it was argued that since the principal
debtor's liability had been discharged under Section 10(2) of the Debt Conciliation Act, the
respondent would have no right of reimbursement, as the existence of the debt is a condition
of such right. It was contended that it would be anomalous and unjust to enforce the
respondent's liability under the award in such circumstances. However, the right of
reimbursement held by the respondent against the principal debtor is distinct from the bank's
right as a decree-holder to enforce the unconditional liability of the respondent under the award.
Under Section 145 of the Indian Contract Act, the respondent, upon payment to the bank, would
be entitled to recover the amount from the principal debtor. The discharge of the principal
debtor's liability to the creditor does not affect the respondent's obligation under the implied
covenant to indemnify.

6
1939 N.L.J. 402.
7
ILR 1939 Nag. 175.
8
1901 2 K.B. 642.
Furthermore, the argument that indirect recovery of the discharged debt would defeat the
purpose of the statute was rejected. The liability of the principal debtor to reimburse the
respondent arises only after the bank has recovered the amount due under the award from the
respondent. This contingent and future liability was not within the purview of the proceedings
under the Debt Conciliation Act and is not affected by the discharge of the principal debtor's
liability to the bank under Section 10(2).

Regarding the competency of the Civil Court to entertain the suit, the argument that the claim
should be considered a "dispute" under Section 51 of the Madras Co-operative Societies Act
was dismissed. The award in question was originally passed on a reference to an arbitrator
under Section 51. The claim was sought to be executed under the special procedure provided
by the rules framed under the Act. The argument presented later was that the respondent
wrongly raised his objection to the execution of the award before the sale officer under Rule
XXII, Sub-rule 17(a), which pertains to claims and objections to the attachment of property
and does not cover objections to the execution of the decree. The implication of this argument
was that the sales officer's order against the bank was ultra vires and could be challenged in a
civil court. This argument was rejected, and the court held that the objections could be dealt
with by the sales officer, who had the jurisdiction to address the matter, and the objections to
the execution of the decree did fall within the purview of the rule.

Therefore, the objection regarding the competency of the Civil Court to entertain the suit was
overruled.