Facts: The Appellant M/s. Housing Development and Finance Corporation (in short “HDFC”) instituted a suit under Order 37 of the Code of Civil Procedure, 1908, for realisation of its dues against Defendant No. 1 (the borrower)  and the two Respondents (Defendant Nos. 2 & 3) who were the guarantors to the loan. The Defendants defaulted in payment of the EMIs and as a result, a large sum was outstanding against them. The Defendants did not pay the instalments despite letters and reminders. Hence, the Plaintiff invoked the guarantees vide letter dated October 22, 1998, and intimated the two Respondents that in case of failure to make the payment, legal proceedings would be instituted against them. Despite the aforesaid letter and legal notices sent on behalf of the Appellant, the Defendants did not pay the outstanding amount of Rs. 4,37,350/-, and the Plaintiff was thus left with no option but to institute the suit for realisation of its dues. Defendant No. 1 borrower did not appear in the suit despite notice. The two Defendants-Respondents i.e. Guarantors, however, appeared before the trial court and filed separate applications under Order 37 Rule 3 sub-rule (5) of the Code of Civil Procedure for permission to defend the suit. According to the Guarantors, since the Plaintiff-Appellant Bank had got a promissory note executed in its favour by the borrower-Defendant No. 1 and had further made the borrower create an equitable mortgage in its favour by deposit of title deeds, they would be absolved of their liability in terms of Section 139 of the Contract Act.

The trial court dismissed the application of Guarantors and decreed the suit in favour of the bank.

The High Court reversed the order of Trial court and held that there was a triable issue and consequently permitted the Guarantors to file their written statements and directed the Trial Court to conduct the trial. Hence, the Bank approached the Supreme Court.

Issue: Whether in the facts of the case and law, there was a triable issue warranting the grant of leave to defend to the Guarantors?

Held: The Hon’ble Supreme Court observed that the High Court was completely wrong in holding that the Respondents were able to make out a triable issue on the basis of Section 139 of the Contract Act. It was well established that the liability of the guarantor is equal to and co-extensive with the borrower and it is highly doubtful that the guarantor can avoid his liability simply on the basis of the promissory note made out or an equitable mortgage created by the borrower in favour of the lender. A reference to the deed of guarantee executed by the two Respondents made the position completely clear but unfortunately the attention of the High Court was not drawn to the relevant clauses in the deed of guarantee. In light of the expressed stipulations, in the guarantee, reliance on Section 139 of the Contract Act was evidently futile and of no avail. Order and decree of trial court was restored.  (CA No. 137 of 2007 dt 20-1-2012 )

Editorial: The law on liability of surety has been clarified and settled.

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