Union Bank of India v Manku Narayana (1987)

The general rule, laid down in Bank of Bihar Ltd v Damodar Prasad (1969), is that a surety's liability is co-extensive with the principal debtor's and the creditor need not exhaust his remedies against the principal before proceeding against the surety. This short judgment shows the limit of that rule where the decree is a composite one — personal against the defendants and also against mortgaged property. There the Court required the bank to proceed against the mortgaged property first. Read the two cases together.

On 21 October 1970 the principal debtor borrowed Rs. 5,100 from the Bank on the strength of a guarantee executed by the respondent (the guarantor), who "undertook to repay the sum independently." The principal debtor and others had also executed a registered simple mortgage of joint family property to secure Rs. 2,300 of the loan.

The loan was unpaid. The Bank sued the principal debtor and the guarantors and obtained a decree making the defendants, including the respondent, personally liable, and also declaring the amount due on the mortgage to be Rs. 3,093.25. When the Bank sought execution against the guarantor, he resisted: the Bank must first proceed against the mortgaged property and the principal debtor. The execution court upheld that plea, and the Andhra Pradesh High Court, in revision, directed the Bank to exhaust its remedies against the mortgaged property and the principal debtor before proceeding against the guarantor. The Bank appealed by special leave.

1. Must a decree-holder bank exhaust its remedies against the principal debtor and the mortgaged property before executing the decree against the guarantor?
2. Does Bank of Bihar Ltd v Damodar Prasad decide the point where the decree is partly a mortgage decree?

The appeal was dismissed, but the matter was remanded to the High Court.

The Bank relied on Bank of Bihar, which the Court summarised: "It was held that in the absence of some special equity, the surety had no right to restrain execution against him until the creditor had exhausted his remedies against the principal." The Bank argued that it could proceed against the guarantor without exhausting its remedies since the guarantee was an independent one. The Court said: "We have difficulty in accepting this case."

The reason was the form of the decree: "The decree in execution is a composite decree, personally against the defendants including the respondent and also against the mortgaged property." Without deciding whether the two portions were severable, the Court held: "We are of the view that since a portion of the decreed amount is covered by the mortgage, the decree-holder Bank has to proceed against the mortgaged property first and then proceed against the guarantor." Since the High Court had not been told that such steps had been taken, it was not in error, and the appeal had to be dismissed.

However, the Bank's special leave petition stated that it had applied for sale of the mortgaged property (without any offer to purchase) and had also proceeded against the principal debtor. The Court said: "If this is correct, execution against the guarantor was maintainable." It remanded the matter to the High Court, giving the Bank the opportunity to plead this and seek execution against the respondent, with liberty to the respondent to dispute the statement. No order as to costs.

Where a decree is a composite decree — personal against the principal debtor and the guarantor and also against mortgaged property securing part of the debt — the decree-holder must proceed against the mortgaged property first before executing against the guarantor. Once the creditor has proceeded against the mortgaged property and the principal debtor, execution against the guarantor is maintainable.

• Is the liability of the surety co-extensive with that of the principal debtor? Must the creditor first proceed against the principal debtor? State s. 128 and Bank of Bihar for the general rule, then use Union Bank of India v Manku Narayana as the qualification for a composite money-and-mortgage decree.
• Problem question: a bank holds a guarantee and a mortgage over part of the debt and has a composite decree; the guarantor objects to execution. Apply this case — the bank goes to the mortgaged property first — and note that once that is done, execution against the guarantor lies.
• Point worth marks: the Court treated its conclusion as depending on the form of the decree and left the severability question open.