Without a Liability Cap, Chit Firm Can Recover Full Debt From One Guarantor Despite Co-Sureties’ Equal Shares: Karnataka HC

Respondent No. 1 was a subscriber to two chits conducted by the appellant and also stood as surety for two other chit subscribers who defaulted.

The appellant sought to apply funds standing to respondent No. 1’s credit towards the defaulters’ dues.

Respondent No. 1 disputed recovery beyond one-sixth of the dues, contending that there were five other co-sureties.

The Deputy Registrar directed the appellant to pay respondent No. 1 ₹8,18,763 with interest; the Joint Registrar dismissed the appellant’s appeal, and the learned Single Judge dismissed its writ petition.

The appellant appealed, asserting a right to recover the defaulters’ dues from the attached funds.

Section 128 of the Indian Contract Act, 1872 provides that a surety’s liability is co-extensive with that of the principal debtor, unless the contract provides otherwise.

Under Bank of Bihar Ltd. v. Damodar Prasad, a surety’s liability is immediate, and the creditor need not first exhaust remedies against the principal debtor.

The Court relied on State Bank of India v. Indexport Registered for the principle that the creditor may proceed against the principal debtor, a surety, or both, without first exhausting remedies against the principal debtor.

Section 146 provides for equal contribution among co-sureties “as between themselves”; it does not limit a surety’s liability to the creditor.

A surety who pays more than their share may seek contribution from co-sureties.

The guarantee agreements contained no term limiting respondent No. 1’s liability to one-sixth of the debt.

Applying Section 128, the Court held that each surety’s liability to the creditor was co-extensive with the principal debtors’ liability, and the appellant could proceed against any or all of the sureties without first pursuing the principal debtors or other sureties.

Section 146 did not support respondent No. 1’s defence because its equal-sharing rule governs contribution among co-sureties, not the creditor’s right of recovery.

Any surety who paid more than their proportionate share could pursue contribution from the others.

It allowed the appeal, set aside the learned Single Judge’s order, and disposed of the pending interlocutory application.