Karnataka HC Limits Guarantor’s Heirs’ ₹40.82-Crore KSFC Liability To Inherited Estate, Not Their Own Assets

Karnataka State Financial Corporation (KSFC) brought recovery proceedings under Sections 31(1)(aa) and 32 of the State Financial Corporations Act, 1951, against the borrower company, the deceased P.S. Raju as guarantor, and another company, seeking recovery of the loan with interest

P.S. Raju had executed deeds of guarantee in 1989; the appellant, his legal heir, challenged the Commercial Court’s decree holding the respondents, including the heirs, jointly and severally liable for approximately Rs. 40.82 crore with interest and costs

The appellant argued that the heirs’ liability was limited to the estate inherited from the guarantor. KSFC did not dispute that legal position, but submitted that the heirs had not disclosed the inherited properties

Section 128 of the Indian Contract Act, 1872, makes a surety’s liability coextensive with that of the principal debtor

The Court relied on State Bank of India v. Jayanthi, AIR 2011 Mad 179, for the proposition that a guarantor’s death does not extinguish liability existing at death, though a continuing guarantee is revoked for future transactions under Section 131 of the Contract Act

It also relied on Ram Kishun v. State of Uttar Pradesh, (2012) 11 SCC 511, for the principle that the deceased guarantor’s liability may be enforced against his estate inherited by his heirs, but does not ordinarily create personal liability against the heirs’ independent assets

The Court treated the guarantor’s existing liability as surviving his death and being enforceable against his estate. However, the heirs did not become personally liable for the debt merely by inheriting; recovery could extend only to the estate or assets they inherited from P.S. Raju, subject to the amount due and any applicable defences

Since the Commercial Court had imposed joint and several liability for the entire decree, that order required modification. The heirs were directed to disclose the inherited properties to the Executing Court

It modified the Commercial Court’s judgment and decree accordingly, directed the heirs to disclose inherited properties to the Executing Court, and disposed of the appeal