The Liability of the Guarantors is absolute and co-extensive with that of the borrower.

Facts – The appellant, HDFC granted loan to the borrower (not a defendant in this case) for constructing  a house on a plot owned by him. To secure the loan amount, the borrower :

a)      Executed a promissory note in favor of the appellant, and

b)      Created an equitable mortgage in favor of appellant by depositing the title deeds of the plot in question.

In addition, he also arranged the guarantee of the two persons (defendant in this case) for repayment of loan.

The amount of loan was released thereafter in two installments. Thereafter, the borrower defaulted in payment of EMIs, hence the appellant invoked the guarantee and intimidated the two defendants that being guarantors, if they fail to make payment of the amount outstanding, legal proceedings would be instituted against them. Despite the aforesaid action, the defendants did not pay the outstanding amount.

The Delhi High court noted that relying upon Section 139 of the Contract Act,  for recovery of its loan from the borrower, the plaintiff should have taken recourse first by either seeking to give effect to the promissory note or by enforcing the equitable mortgage. Neither of these remedies which were open to the plaintiff were taken recourse to and the recovery was sought to be made straight from the defendants.

On an appeal made to Supreme Court, the other of the Delhi High Court was set aside and it was held that it is well established that the liability of the guarantor is equal to and co-extensive with the borrower and it is highly doubtful that the guarantor can avoid his liability simply on the basis of the promissory note made out or an equitable mortgage created by the borrower in favour of the lender.

Decision – The order of the Delhi High Court shall be set aside and the defendants are required to make payments to the appellant.