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CIA – I
LAW OF CONTRACTS – II
CASE ANALYSIS
PUNJAB NATIONAL BANK LTD v BIKRAM COTTON MILLS AND ANR.
[1970 AIR 1973]
SUBMITTED TO:
Mr Venkat
Faculty, School of Law
SUBMITTED BY:
Nirih Kamplimath - 2250223
4 BA LLB B
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FACTS OF THE CASE
Bikram Cotton Mills established a cash-credit account with Punjab National Bank. On June
7, 1953, the company executed three documents (namely, a promissory note, a deed of
hypothecation, and a letter of assurance affirming sole responsibility for any loss, damage,
or deterioration of the stocks hypothecated with the bank). These documents served as
security for the repayment of the outstanding balance in the account. Simultaneously, Ranjit
Singh, the Managing Director, executed an "Agreement of Guarantee," undertaking to pay
the ultimate balance on behalf of the company. Six months later, the company ceased
operations, and the bank liquidated the pledged stocks, crediting the proceeds to the
company's account, leaving a balance of Rs. 2.56 lakhs.
Subsequently, other creditors petitioned for the company's dissolution, resulting in the
approval of a "Scheme of Composition" under Section 391 of the Companies Act, 1956, by
the Allahabad High Court.
Punjab National Bank initiated legal action against the company and Ranjit Singh, asserting
a claim of Rs. 2.56 lakhs against the company and seeking a decree for payment against
Ranjit Singh, inclusive of costs and interest during the suit's pendency. The trial court
dismissed the suit, determining that Ranjit Singh was solely a guarantor, not a co-debtor, and
could be held liable only in the event of default by the company. As there was no default,
the suit against Ranjit Singh was deemed non-maintainable.
Upon appeal, the Allahabad High Court held that:

The sanctioned scheme was binding on all creditors, including the bank, rendering it
an unsecured creditor for the outstanding amount after the stocks' sale. Clause 12
of the Scheme empowered the Board of Trustees to ascertain the payable amount
to unsecured creditors.

Ranjit Singh had executed a "bond of indemnity, not a bond of guarantee,"
characterized by its bilateral nature, with the company not party to the bond. His
responsibility extended to ensuring payment of the ultimate balance, to be
determined after factoring in dividends, compositions, etc. Liability for Ranjit Singh
would arise only in the event of the company defaulting in payment after the Board
of Trustees determined the company's liability.

Consequently, the suit against Ranjit Singh was deemed premature, pending the
determination of the amount.
The case proceeded to the Supreme Court for final adjudication.
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ISSUES BEFORE THE COURT
1. Whether the bond was "Contract of Indemnity" or "Contract of Guarantee"?
2. Whether the suit filed by the Bank prior to determining "Ultimate balance" was
premature?
3. Whether the "Scheme of Composition" is binding on dissenting creditors?
LAWS APPLIED
1. Section 126 of Indian Contract Act, 1872.
2. Section 391 of The Companies Act, 1956.
JUDGEMENT OF THE COURT
On the first issue, the Supreme Court held that Ranjit Singh executed the bond on the
same day as the other three documents, integrating it into the scheme to guarantee
payment of the amount determined as due to the Bank. Despite the absence of the
company's execution of the bond, its simultaneous execution with the other documents
was significant. Clause 2 of the agreement explicitly states that Ranjit Singh undertook
to "Guarantee" the payment of the debt owed by the company. Therefore, the Bank, the
Company, and Ranjit Singh were parties to the agreement, wherein Ranjit Singh
assumed the role of a surety for the company's dues.
With respect to the second issue, the Supreme Court asserted that the bank possesses
the entitlement to assert the amount owed from both the Company and Ranjit Singh in
accordance with the promissory note and the agreement of guarantee. Consequently,
the characterization of the suit as premature was deemed inaccurate. The Supreme
Court directed the High Court, advising that rather than dismissing the suit, it should
have stayed proceedings until the determination of the "ultimate balance" owed to the
bank.
On the third issue, the Supreme Court held that the binding obligation created by the
composition under section 391 of the Companies Act 1956, between the company and
its creditors, has no effect on the liability of the surety unless provided in the contract of
suretyship.
By concluding, SC remanded the suit to the trial court.
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ANALYSIS OF JUDGEMENT
This case is the case of Guarantee as there is no question of whether the bank has suffered
any losses by the conduct of the Company or by the conduct of any different man or woman
(as mentioned under section 124 of Indian Contract Act, 1872). The present case was solely
revolving around the question whether the company has failed to discharge its duties
towards the bank, if it has failed to discharge the duties, then Ranjit Singh will be held
responsible towards the bank for the repayment of the "ultimate balance" (as mentioned
under section 126 of Indian Contract Act, 1872).
The case is based on the contractual clause of assurance between Ranjit Singh and Punjab
National Bank. The clause 2 of the agreement said that this is a continuing guarantee and
Ranjit Singh will act as a guarantee. A contract of guarantee has three main components i.e.,
a principal-debtor, a creditor, and a surety. In the present agreement, Bikram Cotton Mills is
Principal debtor; Punjab National Bank is the Creditor and Ranjit Singh, director of the
company acts as a Surety. The apex court set aside the argument that the nature of
agreement between Ranjit Singh and the bank is of "Contract of Indemnity" and not of the
"Contract of Guarantee". The SC judgment discussed the concept of guarantee and defines
the difference between Indemnity and Guarantee.
Section 124 of Indian Contract Act says, A contract by which one party promises to save the
other from loss caused to him by the contract of the promisor himself, or by the conduct of
any other person, is called a “contract of indemnity”1. On the other hand, Section 126 of the
Act defines A “contract of guarantee” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default. The person who gives the guarantee is called
the “surety”; the person in respect of whose default the guarantee is given is called the
“principal debtor”, and the person to whom the guarantee is given is called the “creditor”.
A guarantee may be either oral or written.2 By these two definitions, one can interpret that
Indemnity provides compensation and guarantee acts as assurance.
CONCLUSION
1
2
Indian Contract Act, 1872, § 124, No. 9, Imperial Legislative Council, 1872 (India).
Indian Contract Act, 1872, § 126, No. 9, Imperial Legislative Council, 1872 (India).
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In this case, the Supreme Court addressed three key issues, applying relevant laws, and
delivered a judgment that clarified the nature of the contractual relationship and obligations
among the parties involved.
On the first issue, the Court determined that the executed bond by Ranjit Singh, despite the
absence of the company's signature, was integrated into the scheme as a guarantee for the
payment of the determined amount owed to the bank. Regarding the second issue, the
Supreme Court rejected the characterization of the suit as premature. It affirmed the bank's
entitlement to claim the amount owed from both the Company and Ranjit Singh based on
the promissory note and the agreement of guarantee. On the third issue, the Court held that
the binding obligation created by the composition under Section 391 of the Companies Act
1956, between the company and its creditors, does not affect the liability of the surety
unless expressly provided in the contract of suretyship.
The analysis of the judgment revealed that the case centered on a contract of guarantee,
involving the principal debtor (Bikram Cotton Mills), the creditor (Punjab National Bank), and
the surety (Ranjit Singh). The Court dismissed arguments suggesting the nature of the
agreement as a "Contract of Indemnity" and clarified the distinctions between indemnity
and guarantee. Section 124 of the Indian Contract Act defines indemnity as a promise to
save the other party from losses, while Section 126 defines a contract of guarantee as an
assurance to perform or discharge the liability of a third person in case of default.
In essence, the Supreme Court's decision affirmed the contractual obligations of the parties
and provided clarity on the nature of the agreement, leading to the remand of the suit to
the trial court for further proceedings.