Banking law, Suretyship, Guarantee bond, Continuing guarantee, Winding up of principal debtor, Maintainability of action against guarantor, Novation of contract, Demand guarantee, Beneficium Ordinis, Civil Procedure Code, Companies Act, Costs.

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MOHAMED UVAIS MOHAMED RUSHDI v. SEYLAN BANK LIMITED AND ANOTHER

 

Supreme Court of Sri Lanka

SC/CHC/15/2012

Before: Murdu N. B. Fernando, PC CJ, A. H. M. D. Nawaz J, K. K. Wickremasinghe J

Decided on: 23 July 2025

 

Headnote

Banking law, Suretyship, Guarantee bond, Continuing guarantee, Winding up of principal debtor, Maintainability of action against guarantor, Novation of contract, Demand guarantee, Beneficium Ordinis, Civil Procedure Code, Companies Act, Costs.

 

Background

Seylan Bank lent USD 806,842 to the first defendant company, Samdo Macky Sportswear (Pvt) Ltd. The company defaulted. The second defendant, Mohamed Uvais Mohamed Rushdi, Managing Director of the company, executed a guarantee bond (P9) in 1999, undertaking joint and several liability and expressly renouncing rights of sureties.

The Bank sued both the company and the guarantor. As the company was subject to a winding up order, the trial proceeded only against the guarantor. The High Court, Colombo, held the guarantor personally liable under the continuing guarantee.

On appeal, the guarantor contended that the Bank, having lodged a claim in the winding up, could not maintain this action, and that the guarantee bond was disconnected from the loan transaction of 2003.

 

Arguments

For the Appellant (Guarantor):

The Bank, having proceeded in the winding up court, had waived further claims and could not maintain a separate action.

The guarantee bond had no nexus with the 2003 loan agreement.

By analogy to Hatton National Bank v. Rumeco Industries Ltd., a guarantee executed prior to a loan could not secure a subsequent facility.

 

For the Respondent Bank:

Under section 262(2) of the Companies Act No. 17 of 1982, winding up reverts to the date of petition. The Bank filed suit before learning of the winding up petition.

A continuing guarantee covers past, present, and future liabilities unless terminated. The guarantor expressly renounced Beneficium Ordinis, allowing the Bank to proceed directly against him.

The Rumeco case was distinguishable, as there was no novation of contract here.

 

Issues

Whether the Bank could maintain its action against the guarantor despite lodging a claim in the winding-up proceedings of the principal debtor.

Whether the Bank was entitled to rely on the guarantee bond P9 to claim the debt arising from the 2003 loan agreement.

 

Legal Principles

Maintainability of action: 

A creditor may maintain an action against a guarantor notwithstanding participation in winding-up proceedings against the debtor company, unless expressly precluded by law.

Continuing guarantees: A guarantee expressed as continuing security extends to future facilities unless terminated.

Demand guarantees: Each demand is autonomous; failure to respond to a valid demand creates a cause of action against the guarantor.

Renunciation of Beneficium Ordinis: A guarantor who has renounced the privilege cannot compel the creditor to first exhaust remedies against the principal debtor.

 

Precedents

Hatton National Bank v. Rumeco Industries Ltd. SC/APP/99A/2009, S.C.M. 08.06.2011

Principle: A guarantee must be connected to the transaction sued upon; novation discharges earlier guarantees.

Applied: Distinguished on facts; no novation occurred here.

 

Union Bank v. Emm Chem Pvt Ltd. SC/APP/CHC 22/2011, S.C.M. 07.03.2019

Principle: Continuing guarantees must be interpreted in light of the parties’ intent and factual context.

Applied: Supported enforceability of the guarantee bond P9 as continuing security.

 

Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] 1 QB 159

Principle: Demand guarantees are autonomous obligations, independent of underlying contracts.

 

Standard Bank London Ltd v. Canara Bank [2002] EWHC 1032 (Comm)

Principle: A demand guarantee must be honoured upon proper demand regardless of disputes under the principal contract.

 

Sri Lankan authorities:

Sivasubramaniamv. Alagamuttu 53 NLR 150

Seylan Bank Ltd v. Intertrade Garments Pvt Ltd (2005) 1 SLR 80

L. B. Finance Ltd v. Manchanayake (2000) 2 SLR 142

Seneviratnev. Lanka Orix Leasing Co. Ltd. (2006) 1 SLR 230

ABOVE JUDGMENTS ARE ACCESSIBLE ONLINE- CLICK


Principle: Non-response to a demand letter amounts to admission; guarantors remain liable on continuing security.

 

Held

The Bank was entitled to maintain its action against the guarantor despite having lodged a claim in the winding up proceedings.

 

The guarantee bond P9 was a valid continuing guarantee covering the 2003 loan.

 

The guarantor, having renounced Beneficium Ordinis, was liable to be sued directly.

 

The appeal was dismissed; High Court judgment affirmed.

 

Decision

 

Appeal dismissed.

 

High Court judgment affirmed.

 

Appellant ordered to pay costs of Rs. 250,000 to the Bank.

 

 

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