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The Allahabad High Court has ruled that a bank can recover outstanding loan dues from a guarantor without first exhausting its remedies against the principal borrower. The Lucknow bench held that a guarantor’s liability is co-extensive with that of the borrower under Section 128 of the Indian Contract Act, 1872, unless the guarantee agreement states otherwise. The ruling came while dismissing petitions filed by two employees who had guaranteed loans taken by their colleague from UP Postal Primary Cooperative Bank Ltd. The court also upheld monthly salary deductions of INR 10,000 from the guarantors.
The Allahabad High Court has held that a bank is not required to first recover loan dues from the principal borrower before proceeding against a guarantor. The court said a creditor can take recovery action against the borrower, the guarantor, or both at the same time when the borrower defaults.
A Lucknow bench comprising Justices Shekhar B Saraf and Abdhesh Kumar Chaudhary made the observation while dismissing two writ petitions filed separately by Vineet Pandey and Anoop Kumar Mishra. Both had stood as guarantors for loans taken by their colleague Vikrant Dubey from UP Postal Primary Cooperative Bank Ltd.
Dubey had taken three loans during 2022-23, including a festival loan of INR 50,000, a short-term loan of INR 3 lakh and a personal loan of INR 18 lakh. Following his default, the bank began recovery proceedings and also asked the Postal Department to deduct INR 10,000 every month from the salaries of the two guarantors.
The two petitioners challenged the recovery action, arguing that the bank should first attempt to recover the outstanding amount from the principal borrower. According to them, the guarantors could be approached only for any amount that remained unpaid after recovery from the borrower. They also contended that simultaneous recovery proceedings against the borrower and guarantors were not legally permissible.
The High Court rejected the argument and relied on Section 128 of the Indian Contract Act, 1872. The provision states that the liability of a surety is co-extensive with that of the principal debtor unless the contract of guarantee provides otherwise.
The bench observed that this makes the guarantor liable for the entire amount for which the principal borrower is liable. Since the liability is joint and several, a creditor is entitled to proceed against either the borrower or the guarantor, or against both simultaneously.
The court further held that the law does not create a hierarchy of remedies under which a creditor must first exhaust recovery measures against the principal borrower. In this case, the guarantee agreement did not contain any condition postponing the liability of the guarantors. The bank was therefore entitled to recover the dues through monthly salary deductions.
The court also clarified that a guarantor who discharges the borrower’s liability can subsequently pursue remedies of subrogation or contribution against the principal borrower. However, such rights do not allow the guarantor to stop the creditor from enforcing the guarantee.
The bench consequently found the recovery of INR 10,000 per month from the salaries of the two guarantors legally sustainable and dismissed both writ petitions.
Source PTI
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