A Dissenting Plea: Restoring the Secondary Character of Guarantee and Reconsidering Section 128 of the Indian Contract Act, 1872

Scope note: this article argues for legislative change and judicial reconsideration. It does not state the law presently in force, which is settled to the contrary.

I. The Proposition

A guarantee is offered as support for a borrower’s access to credit. Yet on the prevailing reading of Section 128, once the borrower defaults the guarantor may be pursued at once, without the lender first taking meaningful steps against the borrower or its assets. A person who did not borrow the money can become the lender’s first recovery target.

That proposition is settled. It is also open to principled criticism, because the law has run together two distinct questions: how much a surety owes (the extent of liability) and in what order the creditor may recover (the sequence of enforcement). The first may be co-extensive with the debt. It does not follow that the second must expose the surety to full enforcement before the principal debtor’s assets and remedies have been genuinely pursued.

The case is practical as well as doctrinal. If a guarantee operates as an unconditional first recourse against a guarantor’s home and savings, responsible people will hesitate to give one, and a credit system that claims to promote enterprise loses a confidence-based form of support on which small borrowers depend.

II. The Law as It Stands

Section 126 defines a guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. Section 128 provides that the surety’s liability is co-extensive with that of the principal debtor, unless the contract provides otherwise. The Act thus recognises three roles (creditor, principal debtor, surety) and ties the surety’s promise to the borrower’s default.

What Bank of Bihar v. Damodar Prasad Actually Decided

The foundation of the modern rule is a short judgment, and it repays close reading. Bank of Bihar Ltd. v. Damodar Prasad, AIR 1969 SC 297 = (1969) 1 SCR 620, was decided on 8 August 1968 by a three-Judge Bench (Bachawat, Sikri and Hegde JJ.), Bachawat J. writing.

Facts

The bank lent a little over ₹11,700 (with interest) on a guarantee. It sued principal and surety. The trial court decreed against both but directed that the bank could enforce against the surety only after exhausting its remedies against the principal. The High Court affirmed.

The Contract

The guarantee bond allowed the bank to enforce notwithstanding any other security or remedy, with demand as the only condition. Section 128 itself yields to the contract.

The Question as Framed

Whether a court could impose that postponement under Order XX Rule 11(1) CPC (or its inherent power under Section 151). The question was the limit of judicial discretion, not whether Parliament may prescribe a rule of sequence.

The Reasoning

1. (i) The surety’s liability was immediate and not deferred until the creditor exhausted remedies against the principal.
2. (ii) Absent some “special equity”, a surety cannot dictate terms or restrain execution because the principal is solvent.
3. (iii) The direction was “of the vaguest character”: the Court asked whether the creditor must seek the principal’s arrest, discover all his properties at his own peril, or file an insolvency petition, and noted that no reasons were given.
4. (iv) The surety’s answer is to pay and be subrogated under Section 140.
5. (v) A banker’s collateral security would be rendered useless if postponement could be so easily ordered.

Sources of the Rule

Lord Eldon in Wright v. Simpson (1802) 6 Ves Jun 714, and Lachhman Joharimal v. Bapu Khandu (1869) 4 Bom HCR 241, a decision concerned with imprisoning sureties in execution.

The Line That Followed

State Bank of India v. Indexport Registered, (1992) 3 SCC 159, and Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, carried the rule into execution and recovery-tribunal proceedings. In the insolvency setting, State Bank of India v. V. Ramakrishnan, (2018) 17 SCC 394, held that the Section 14 moratorium does not protect guarantors; Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481, permitted insolvency proceedings against a corporate guarantor on the footing of co-extensive liability; and Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, held that approval of a resolution plan does not discharge a personal guarantor.

BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd., (2025) 1 SCC 456, read Section 60(2) of the IBC as contemplating separate or simultaneous proceedings against corporate debtor and guarantor. On 26 February 2026, ICICI Bank Ltd. v. Era Infrastructure (India) Ltd., 2026 INSC 201 (Datta J.), upheld simultaneous Section 7 proceedings, preserved safeguards against double recovery, declined to frame judicial guidelines on group insolvency, and left wider reform to the legislature.

None of these decisions adopts a borrower-first rule, and Era Infrastructure expressly leaves the policy field to Parliament. The plea below is therefore a plea for reform and reconsideration, not a description of existing law.

III. Eight Grounds for Reform

1. The Text Speaks to Extent, Not Order

“Co-extensive” measures the reach of the obligation. The illustration to Section 128, a guarantor of a dishonoured bill who owes the bill together with interest and charges, is about quantum. Where Parliament wished a promisee to have a free choice of debtor, it said so: Section 43 allows the promisee, absent contrary agreement, to compel any one of several joint promisors to perform the whole. Section 128 contains no comparable words.

Section 137 (mere forbearance to sue the principal does not discharge the surety) is a rule about discharge, not priority. It tells the creditor that delay will not cost it the surety; it does not say the creditor may reach the surety first. Sections 128 and 137 each yield to contrary agreement, which shows the Act treats them as default rules, and defaults are precisely what a legislature may reset.

2. Damodar Prasad Is Narrower Than Its Legacy

The decision answered a specific question: whether a trial court could, by an open-ended direction under Order XX Rule 11(1), postpone execution against a surety who had contracted for immediate enforcement. The Court expressly reserved “special equity”, and its real objection was vagueness: the direction did not say how, when or at what cost the creditor must pursue the principal. A statutory rule that defines the steps, the timeline, the disclosure and the exceptions is the opposite of that direction. Nothing in the judgment considered, let alone rejected, a structured legislative sequence.

3. The 1968 Objection Has Been Answered by the Statute Book

The Court asked how the creditor would be expected to “exhaust” remedies against the principal. In 1968 there was no uniform answer. Today the creditor has defined borrower-side tracks: an application under Section 7 of the IBC, enforcement of security under Section 13(4) of the SARFAESI Act, and recovery proceedings under Section 19 of the RDB Act. What defeated the 1968 direction was indefiniteness; the vagueness can now be removed by drafting.

4. The Act’s Own Scheme Is Not Indifferent to Creditor Conduct

Sections 133 to 139 discharge the surety for unauthorised variation, release of the principal, giving time, and acts or omissions impairing the surety’s eventual remedy against the principal. Section 141 gives the surety the benefit of every security the creditor holds against the principal and discharges the surety pro tanto where such security is lost or parted with without consent. A rule that lets the creditor leave borrower-side securities to languish while the guarantor is pursued sits uneasily with Section 141’s premise that the surety has a real interest in those securities. These provisions do not themselves create a borrower-first rule; they supply the structure on which one can be built.

5. Subrogation Is a Right on Paper and a Weak Remedy in Practice

Damodar Prasad treated Section 140 as the surety’s answer: pay first, then recover from the principal. But subrogation presupposes the capacity to pay and then to pursue a borrower who may be insolvent, absent or judgment-proof. An individual guarantor who has paid may have lost the very assets needed to litigate. The remedy repairs poorly the injury of having been chosen as first source of recovery.

6. The Legal Landscape Has Changed Beyond What the 1968 Court Contemplated

The rule rests on foundations laid in 1802 (equity), 1869 (a Bombay case about imprisonment in execution) and 1968 (a decree for a few thousand rupees). Since then came the SARFAESI Act (2002), the IBC (2016), personal-guarantor insolvency provisions notified from 15 November 2019 and upheld in Lalit Kumar Jain, and RBI’s treatment of non-paying guarantors with means as wilful defaulters, accompanied by a direction that banks make clear to prospective guarantors that liability is immediate.

The result is an asymmetry. A corporate borrower in CIRP is shielded by the Section 14 moratorium; Ramakrishnan holds that the guarantor is not; Lalit Kumar Jain holds that a plan does not release the personal guarantor. The person who never borrowed is exposed first and longest, while the borrower’s assets are held in a process the lender itself negotiates. A rule never designed for that environment merits fresh examination.

7. The Soft-Target Incentive and Access to Credit

Where a relative, director or promoter holds readily identifiable personal assets and the borrower’s assets are hard to realise, immediate recourse gives the lender little practical reason to pursue the borrower first. The law need not assume that lenders act improperly or that every guarantor is innocent; it should recognise the structural incentive. The cost of default is concentrated on an individual before the borrower has been meaningfully held to account.

The credit-access argument is a policy argument, not a proven empirical claim. It is a reason for Parliament, the RBI and the IBBI to collect and publish data (guarantee invocation rates, timelines, recoveries from borrower-side security versus guarantors) and to design a proportionate framework on that evidence.

8. The Legislature Already Sequences, and Other Systems Do Too

Domestic Analogues

Section 81 of the Transfer of Property Act (marshalling) requires a mortgagee, so far as possible, to satisfy the debt from property not sold to a purchaser. Order XXXIV Rules 6 and 14 CPC reflect a security-first, personal-decree-for-the-balance structure in mortgage suits. Section 60(2) and (3) of the IBC channel debtor and guarantor proceedings to one forum. The legislature has repeatedly shown that ordering and coordination are workable.

Comparative Practice (Persuasive Only)

Civil-law systems give the guarantor a benefit of discussion (BGB § 771; Codice civile art. 1944; the French Code civil), typically waivable and typically unavailable to commercial guarantors (see HGB § 349), which is exactly the tiering proposed below. In common-law practice parties routinely distinguish guaranties of payment from guaranties of collection, and English analysis begins from the secondary character of guarantee (Moschi v. Lep Air Services Ltd. [1973] AC 331). The UK Lending Standards Board strengthened its personal-guarantee standards for business lending in September 2024, adding annual reminders to guarantors and stronger advice-related requirements, which shows regulators elsewhere treat the unsuspecting personal guarantor as a policy problem. These sources do not bind a court in India; their value is to show that sequencing is neither eccentric nor unworkable.

IV. The Objections, Answered

1. “The Very Object of a Guarantee Is Defeated.”

Not under a deficiency model. The surety remains liable for any shortfall; what changes is order and timing, with exceptions for urgency, futility, fraud and dissipation.

2. “Delay Will Erode Recovery.”

Hence a time-bound sequence, interim protective orders (attachment or freezing of guarantor assets on a showing of dissipation) and a saving of limitation against the guarantor while the sequence runs.

3. “Parallel Statutory Routes Will Undercut the Rule.”

Hence coordinated amendments to the SARFAESI Act, the RDB Act and the IBC. In CIRP, filing and prosecuting the claim before the resolution professional and committee of creditors would count as the borrower-side step; any balance unsatisfied by the plan would remain recoverable from the guarantor, consistent with Lalit Kumar Jain.

4. “Era Infrastructure and Surana Point the Other Way.”

They decide what the present statutes permit. Era Infrastructure found no statutory bar on parallel proceedings and left policy to the legislature. That is an invitation to amend, not an answer to the policy case.

5. “Commercial Certainty Requires First-Resort Enforcement.”

The rule can be tiered so that sophisticated parties and autonomous undertakings stay outside it (Part V).

V. A Workable Borrower-First Framework

The Sequence

The creditor should ordinarily (1) make a formal demand on the principal borrower and initiate appropriate proceedings; (2) take reasonable, time-bound steps to realise the borrower’s available assets and securities, including assets charged for the loan; (3) disclose to the court or tribunal the steps taken, amounts recovered, assets remaining and reasons why further borrower-side recovery would be futile or disproportionate; and (4) proceed against the guarantor for the deficiency only after accounting for all recoveries and realisable borrower-side security.

Tiers

Outside the Rule

Autonomous undertakings of this kind already follow their own law (U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568).

Exceptions and Safeguards

The tribunal may dispense with the sequence on proof of urgency, fraud, collusion, concealment or dissipation of assets, imminent limitation, or another concrete risk that waiting would materially prejudice recovery. The test is reasonable and time-bound diligence, not exhaustive litigation.

Lenders must keep a transparent account of recoveries across proceedings and credit them promptly to prevent double recovery. RBI’s wilful-defaulter framework should be conformed so that a guarantor is not so classified while a required borrower-side sequence is pending.

VI. Reconsideration and the Larger Bench

Precedent and Reconsideration

Precedent binds, but it is not immutable. Keshav Mills Co. Ltd. v. CIT, AIR 1965 SC 1636, recognises that the Court may revisit its earlier decisions where substantial and compelling reasons exist, and Bengal Immunity Co. Ltd. v. State of Bihar, AIR 1955 SC 661, shows the Court doing so on grounds of public interest and changed circumstances.

Damodar Prasad is a three-Judge decision and later Benches have followed it; Pradip Chandra Parija v. Pramod Chandra Patnaik, (2002) 1 SCC 1, and Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673, show the discipline by which doubt about a decision of equal or greater strength goes to a larger Bench.

Proposed Question for a Larger Bench

The Court should be respectfully invited, in an appropriate case, to refer to a Bench of larger strength than the one that decided Damodar Prasad the following question:

Whether the expression “co-extensive” in Section 128 governs only the extent of the surety’s liability, or also confers an unconditional right to enforce that liability before reasonable remedies against the principal debtor have been pursued; and, if the latter, whether the law should be reconsidered in light of the statutory scheme of guarantee, the surety’s rights under Sections 139 to 141, the statutory machinery now available against borrowers, and the effects of first-resort enforcement on access to credit and enterprise.

VII. Routes Open Today (A Practitioner’s Note)

Building the Record

Until Parliament or a larger Bench acts, a guarantor’s counsel should build the record. Candidly, success will be modest in the face of a line of authority running from 1968 to 2026.

Practical Legal Strategies

• Plead special equity on facts. Damodar Prasad itself reserves it. Relevant facts include a solvent borrower, borrower-side security in the lender’s possession, prolonged lender inaction, a guarantor who received no benefit, and borrower misconduct unknown to the guarantor.
• Seek specific, reasoned directions. The Court demanded clarity and reasons under Order XX Rule 11(1). Frame the prayer to meet that standard: which steps, by when, with what consequence.
• Invoke Sections 139 and 141 where borrower-side securities have been lost, impaired or left to deteriorate.
• Challenge blanket waiver clauses in standard-form guarantees given by individuals. Challenge blanket waiver clauses in standard-form guarantees given by individuals, under Section 23 and the unequal-bargaining-power line of Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156. This extension is untested.
• Preserve the question for reference by pleading the larger-Bench submission in terms.

Constitutional Overlay (Limited)

A direct attack on Section 128 under Articles 14 or 19(1)(g) is unlikely to succeed: the section is a default rule and the surety consents by contract.

Constitutional values do better as interpretive and policy considerations, namely proportionality (Modern Dental College v. State of M.P., (2016) 7 SCC 353) and manifest arbitrariness (Shayara Bano v. Union of India, (2017) 9 SCC 1), in the argument that unstructured first-resort enforcement against non-beneficiary individuals is disproportionate.

VIII. Conclusion

The Proposed Rule

The proposed rule is not that a guarantor should never be liable, nor that banks must litigate every remedy against a borrower to its end. It is that the borrower, whose debt is primary and who received the credit, should ordinarily face meaningful recovery proceedings first, and that the guarantor should answer for the deficiency when those efforts fail, prove futile, or are displaced by a recognised exception.

Legislative Reform and Reconsideration

A guarantee should remain a serious undertaking. But it should not, by default, make the guarantor the first and preferred source of recovery while the principal debtor’s assets and conduct remain unexamined.

Parliament should amend Section 128, or enact a complementary provision, with coordinated changes to the SARFAESI Act, the RDB Act and the IBC, after consultation with the Ministry of Finance, the Ministry of Corporate Affairs, the RBI, the IBBI, lenders, guarantors and small-business representatives. And the Supreme Court should be invited to reconsider.

Rebalancing the order of recovery would preserve the lender’s ultimate security while making guarantee more compatible with fairness, responsible lending and enterprise.

Citation Table

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]

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