Full Judgment Text
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PETITIONER:
STATE BANK OF SAURASHTRA
Vs.
RESPONDENT:
CHITRANJAN RANGNATH RAJA AND ANR.
DATE OF JUDGMENT30/04/1980
BENCH:
DESAI, D.A.
BENCH:
DESAI, D.A.
GUPTA, A.C.
VENKATARAMIAH, E.S. (J)
CITATION:
1980 AIR 1528 1980 SCR (3) 915
1980 SCC (4) 516
CITATOR INFO :
D 1992 SC1740 (23)
ACT:
Indian Contract Act, Section 141, scope of-Discharge of
surety-Conditions under which surety can be discharged under
sections 139-141 of the Act, -Security of pledged goods was
lost on account of the negligence of the Creditor Whether
the Surety would not be discharged in the instant case on a
proper construction of clauses 5, 7 and 13 of the letter of
guarantee.
Civil Procedure Code, 1908-Section 144 as amended by
Amendment Act of 1976, scope of-Restitution-Directions by
the Supreme Court, in the instant case, whether could be
made- "Court of first instance", meaning of.
HEADNOTE:
The appellant bank allowed a cash credit facility
limited to Rs. 75,000/- to the principal debtor Harilal
Parmananddas Adatia on his pledging 5,000 tins of groundnut
oil under the lock and key of the Bank and on personal
guarantee of the surety, respondent No. 2. The principal
debtor executed a demand promissory note Ext. 81 in favour
of the Bank on September 16, 1957, and on the same day the
principal debtor also executed a demand promissory note,
Ext, 30, in favour of the surety which the surety endorsed
in favour of the Bank. Along with the two demand promissory
notes, simultaneously the surety executed a letter of
guarantee Ext. 31 in favour of the Bank and the principal
debtor executed a bond Ext. 83 in favour of the Bank. The
principal debtor also passed letter of continuity of the
bond and the promissory note Ext. 82. Thereafter the
principal debtor enjoyed the cash credit facility by
borrowing various amounts. By the end of February 1959 the
principal debtor owed Rs. 76,368.04 P in this account to the
Bank. Principal debtor died in November 1959. The Bank wrote
to the surety letter Ext. 32 dated December 24, 1959,
calling upon him to pay the outstanding balance of Rs.
70,879/- in cash credit account of principal debtor as in
the circumstances mentioned in the letter the balance was
required to be recovered from the surety. Some
correspondence ensued thereafter between the Bank and the
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surety and ultimately the Bank filed the suit for recovery
of Rs. 76,368.04 P. against defendant 1, the legal
representative of principal debtor and defendant 2, the
surety.
The trial court round that there was negligence on the
part of the Bank with regard to the safe custody of the
pledged oil tins but as the contract of guarantee entered
into by the surety with the Bank was independent of the
pledge of goods given by the principal debtor, the surety is
not discharged from his liability under the guarantee. So
observing the trial court decreed the suit. The surety paid
the entire amount demanded and appealed to the High Court.
The High Court held that the two promissory notes, one
executed by the principal debtor in favour of the Bank Ext.
81, and another by the principal debtor in favour of the
surety and endorsed by the surety to the Bank, Ext. 30, and
the letter of guarantee Ext. 31 executed by the surety in
favour of the Bank as also the bond executed by the
principal debtor in favour of the Bank Ext. 83
916
and the letter of continuity Ext. 82 executed by the
principal debtor in favour of the Bank, all on September 16,
1957, constituted one composite transaction and they
evidenced that the principal debtor had offered two
securities, one the pledge of oil tins and another personal
guarantee of the surety. The High Court further held that
the Bank was utterly negligent and had not exercised such
care as a prudent man would in the circumstances of the case
which resulted in the loss of security, namely, pledged oil
tins and, therefore, in view of combined operation of
sections 139 and 141 of the Indian Contract Act, the surety
is discharged. Accordingly, the appeal of the surety was
allowed and the suit against him was dismissed. Hence this
appeal by plaintiff Bank.
Dismissing the appeal by certificate, the Court,
^
HELD: 1. In order to attract section 141 of the
Contract Act, it must be shown that the creditor had taken
more than one security from the principal debtor at the time
when the contract of guarantee was entered into and
irrespective of the fact whether the surety knew of such
other security offered by the principal debtor, if the
creditor loses or without the consent of the surety parts
with the other security the surety would be discharged to
the extent of the value of the security. In the instant case
as found by the High Court and not controverted, the
principal debtor had offered two securities, (i) the pledge
of goods, (ii) personal guarantee of the surety. Verily, the
General Manager of the Bank accepted the proposal for cash
credit facility on the specific condition that the principal
debtor shall offer two securities, one the pledge of goods
to be kept under the lock and key of the Bank to be
supervised by the Bank’s employee, and secondly, the
personal guarantee of the surety. The surety himself agreed
to give personal guarantee of the specific understanding and
with the full knowledge of the Bank that the principal
debtor was offering another security, namely, pledge of
goods. The surety contracted on the good faith of the
principal contract when entering into contract of guarantee
in which case he is deemed so to contract that both the
securities would be available to the creditor. If the two
promissory notes Exts. 81 and 30 coupled with the letter of
guarantee Ext. 31 executed by the surety and the bond Ext.
83 executed by the principal debtor at one sitting on
September 16, 1957, evidence one composite transaction, it
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is an inescapable conclusion that the principal debtor
offered two securities, one the pledge of goods and the
other the personal guarantee of the surety. The surety in
good faith contracted to offer personal guarantee on the
clear understanding that the principal debtor has offered
security by way of pledge of goods and the goods were to be
in the custody of the creditor Bank. On this conclusion s.
141 of the Act will be indubitably attracted. [922 A-F]
Sanderson v. Aston, [1873] L R. 8 Exch. 73 at 76,
quoted with approval.
2. Section 141 comprehends a situation where the debtor
has offered more than one security one of which is the
personal guarantee of the surety. Even if the surety of
personal guarantee is not aware of any other security
offered by the principal debtor yet once the right of the
surety against the principal debtor is impaired by any
action or inaction, which implies negligence appearing from
lack of supervision undertaken in the contract, the surety
would be discharged under the combined operation of sections
139 and 141 of the Act. In any event, if the creditor loses
or without the consent of the surety parts with the
security, the surety is discharged to the extent of the
security lost as provided by s. 141. [922 F-H]
State of Madhya Pradesh v. Kaluram, [1967] 1 SCR 266,
followed.
917
Wulff and Billing v. Jay, (1872) 7 QB 756, quoted with
approval.
3. In the instant case, clauses 5, 7 and 13 of the
letter of guarantee, Ext. 31 would be of no assistance to
the Bank. [926 B, G, H]
(a) Clause 5 confers right upon the creditor Bank to
grant any time or indulgence in payment of the debt or to
determine, enlarge or vary its credit and to vary, exchange
or take other securities or release any other securities
held by the Bank but such an act on the part of the Bank
would not have the effect of discharging the surety or in
any manner affecting his liability under the letter of
guarantee. It is not a case of granting time or indulgence
to the principal debtor or variation of the credit or taking
one set of security in substitution of some other security
or release of any security. Release of security implies a
volitional act on the part of the Bank. Loss on account of
negligence cannot be equated with release. [925 G-H. 926 A-
B]
(b) Clause 7 provides for non-discharge of surety even
if the creditor Bank enters into a composition with the
principal debtor and that the surety would nonetheless be
liable even if the Bank has other guarantee, security or
remedy guarantees, securities or remedies from the principal
debtor. Upon a true construction of clause 7, the expression
’any other guarantee, security or remedy’ therein mentioned
must be security other than the pledged goods. [926 B-C]
Amrit Lal Goverdhan Lal and ors. v. State Bank of
Travancore and ors.,[1968] 3 S.C.R. 724 @ 731, followed.
(c) Clause 13 provides for continuing the guarantee
where the principal debtor is an association of persons and
for continuance of the guarantee in the event of death,
retirement etc. of one of such association of persons or the
guarantee remaining intact and effective and legally
enforceable irrespective of some defect arising from the
internal management of such association of persons. First
Security, namely, the pledged goods are lost to the Bank and
the concurrent finding again incontrovertible is that the
pledged goods were lost on account of the negligence of the
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creditor Bank. Whole of the security was lost and,
therefore, the surety would be discharge in entirety because
it is crystal clear that the principal debtor had agreed and
had in fact pledged 5,000 tins of oil which even if sold at
the then current market price would have satisfied the
Bank’s entire claim. Accordingly, the surety would be
discharged in entirety. [926 G-H, 927 A-B]
4. Accepting a contention that section 141 would not be
attracted and the surety would not be discharged even if it
is found that a creditor has taken more than one security on
the basis of which advance was made and the surety gave
personal guarantee on the good faith of other security being
offered by the principal debtor which itself may be a
consideration for the surety offering his personal guarantee
and the creditor by its own negligence lost one of the
securities, would tantamount to putting a premium on the
negligence of the creditor to the detriment of the surety
who is usually described as a ’preferred debtor’. A Court
should not by its construction of such letter of guarantee
enable the creditor to act negligently and yet be not in any
manner accountable. [927 B-E]
5. By section 144 of Civil Procedure Code 1908, as
amended by the Amendment Act, 1976, the jurisdiction to
grant restitution is conferred upon "the Court which passed
the decree or order". By an explanation added to section 144
by the Amendment Act of 1976, the expression "Court which
passed the decree or
918
order" shall be deemed to include where the decree or order
has been varied or reversed in exercise of appellate or
revisional jurisdiction, the Court of first instance. [927
G-H, 928 A]
In the instant case (i) the appellant was the plaintiff
and its suit was decreed by the trial Court, i.e. the Court
of Civil Judge, Senior Division, Gondal, on November 18,
1960. The present appellant by its letter dated February 14,
1961, demanded from the surety a sum of Rs. 84,828.07 P.
inclusive of costs and interests on the principal amount
decreed. The surety respondent 1 in this Court paid the
appellant Rs. 84,828.07 P. On April 3, 1961. In the appeal
by the surety the High Court reversed the decree and
dismissed the suit against the surety. Accordingly, the
surety is entitled to restitution; and (ii) the present one
is the simplest case where the suit in favour of the
appellant and against the surety was decreed by the trial
court, i.e. the Court of first instance, and this decree has
been reversed by the trial Court in exercise of its
appellate jurisdiction. In such a situation clause (a) of
the explanation would be attracted and an application for
restitution will have to be made to the Court of first
instance, i.e. the Court of Civil Judge, Senior Division,
Gondal. It is nowhere suggested that such a Court does not
exist. Therefore, it would not be proper for this Court to
direct restitution. However, there will be no justification
for the appellant Bank to withhold the amount which was
collected from the surety on a mere demand. Therefore, an
application for restitution made by the surety would not lie
to this Court [928 B-D, F-H].
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1058 of
1970.
From the Judgment and Decree dated 25-4-1969 of the
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Gujarat High Court in Appeal No. 22/61.
S. N. Kackar, K. J. John and Sri Narain for the
Appellant.
S. T. Desai, H. S. Parihar and I. N. Shroff for the
Respondents.
The Judgment of the Court was delivered by
DESAI, J. This appeal by certificate under Article
133(1) (a) of the Constitution is by the original plaintiff-
State Bank of Saurashtra (’the Bank’ for short)-whose suit
for recovery of Rs. 76,368 04 P. from the legal
representative of the deceased principal debtor Harilal
Parmanaddas Adatia and his surety original defendant 2
Chitranjan Rangnath Raja. (’Surety’ for short) was decreed
by the trial court both against the legal representative of
the principal debtor and the surety but on appeal by the
surety, was dismissed by the High Court only against the
surety.
Harilal Parmananddas Adatia, hereinafter referred to as
’principal debtor’, approached the Manager of the Bagasra
Branch of State Bank of Saurashtra seeking facility for cash
credit upto Rs. 75,000/-. He submitted proposal form Ext. 66
on September 10,1957, offering to give security for the cash
credit by pledge of groundnut oil tins as also a personal
guarantee of defendant 2 Chitranjan Rangnath Raja.
919
After obtaining the approval of the General Manager of the
Bank cash credit facility to the extent of Rs. 75,000/- was
sanctioned against the pledge of approved goods under the
lock and key of the Bank and on personal guarantee of the
surety. The principal debtor executed a demand promissory
note, Ext. 81 in favour of the Bank on September 16, 1957,
and on the same day the principal debtor also executed a
demand promissory note, Ext. 30, in favour of the surety
which the surety endorsed in favour of the Bank. ’Along with
the two demand promissory notes, simultaneously the surety
executed a letter of guarantee Ext. 31 in favour of the
Bankand’ the principal debtor executed a bond Ext. 83 in
favour of the Bank. The principal debtor also passed letter
of continuity of the bond and the promissory note Ext. 82.
Thereafter the principal debtor enjoyed the cash credit
facility by borrowing various amounts. By the end of
February 1959 the principal debtor owed Rs. 76,368.04 P. in
this account to the Bank. Principal debtor died in November
1957. The Bank wrote to the surety letter Ext.32 dated
December 24,1957, calling upon him to pay the outstanding
balance of Rs. 70,879/- in cash credit account of principal
debtor as in the circumstances mentioned in the letter the
balance was required to be recovered from the surety. Some
correspondence ensued thereafter between the Bank and the
surety and ultimately the Bank filed the suit for recovery
of Rs. 76,368.04 P. against defendant 1, the legal
representative of principal debtor and defendant 2, the
surety.
Defendant 1 contested the suit, inter alia, contending
that the court had no jurisdiction to hear the suit and he
had no knowledge about the suit transaction. The allegation
of fraud made against him in the plaint was denied. He also
denied his liability for the claim of the Bank as heir and
legal representative of deceased principal debtor. Defendant
2, the surety, contested the suit as per written statement
Ext. 7, inter alia, contending that the Bank had agreed to
grant cash credit facility to deceased principal debtor on
the security of goods by way of pledge and that though the
goods were to be kept in the godown in the compound of Vijay
Oil Mills Pvt. Ltd., but the godown was to be kept under the
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lock and key of the Bank. It was also contended that the
principal debtor would provide such quantity of goods as
would provide full cover to the outstanding balance in the
cash credit account and the Bank was to be responsible for
the safe custody and keeping of the pledged goods. It was
also contended that the principal debtor had all throughout
pledged sufficient quantity of goods to provide full cover
for the Bank’s claim but the Bank either wrongfully lost the
goods or was negligent in retaining the goods within
920
its custody or the Bank wrongfully parted with the goods
without the consent of the surety and, therefore, the surety
was discharged.
The trial Court found that there was negligence on the
part of the Bank with regard to the safe custody of the
pledged oil tins but as the contract of guarantee entered
into by the surety with the Bank was independent of the
pledge of goods given by the principal debtor, the surety is
not discharged from his liability under the guarantee. So
observing the trial court decreed the suit.
On appeal by the surety, the High Court held that the
two promissory notes, one executed by the principal debtor
in favour of the Bank, Ext. 81, and another by the principal
debtor in favour of the surety and endorsed by the surety to
the Bank, Ext.30, and the letter of guarantee Ext. 31
executed by surety in favour of the Bank as also the bond
executed by the principal debtor in favour of the Bank Ext.
83 and the letter of continuity Ext. 82 executed by the
principal debtor in favour of the Bank, all on September 16,
1957, constituted one composite transaction and they
evidence that the principal debtor had offered two
securities, one the pledge of oil tins and another personal
guarantee of the surety. The High Court further held that
the Bank was utterly negligent and had not exercised such
care as a prudent man would in the circumstances of the case
which resulted in the loss of security, namely, pledged oil
tins and, therefore, in view of combined operation of
sections 139 and 141 of the Indian Contract Act, (’Act’ for
short), the surety is discharged. Accordingly, the appeal of
the surety was allowed and the suit against him was
dismissed. Hence this appeal by the plaintiff Bank.
Uncontroverted facts concurrently found and not sought
to be reviewed in this appeal are that the principal debtor
as per his application Ext. 65 sought cash credit facility
to the extent of Rs. 75,000/- pursuant to which the Bagasra
Branch of the Bank submitted a proposal Ext. 66 seeking
permission of the General manager of the Bank to extend the
facility. The General Manager of the Bank sanctioned
advance, inter alia, on the following terms:
"A cash credit limit of Rs.75,000/- (Rupees Seventy
five thousand only) is hereby sanctioned against
pledge of approved goods under Bank’s lock and key
and on the personal guarantee of Shri C. R. Raja,
Junagadh.
Noted that the Bank’s godown keeper already posted
at Amrali would look after the goods pledged by
the above party also.
921
All other terms as proposed." (underlining ours).
Accordingly, on the strength of two pronotes Exts. 30 and 81
and on the strength of letter of guarantee Ext.31 and the
bond Ext.83 cash credit facility was extended to the
principal debtor. The pledged goods were kept in the godown
in the compound of Vijay oil Mills under the lock and key of
the Bank and the Bank had appointed a Godown keeper to look
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after the goods pledged by the principal debtor. Two
promissory notes Exts. 30 and 81 and letter of guarantee
Ext. 31 and the bond executed by the principal debtor Ext.
83 all of September 16, 1957, constituted one transaction.
The High Court held that the surety had agreed to become
surety, on the principal debtor pledging oil tins as and by
way of security for the advance and, therefore, two
securities were offered, namely, pledge of goods and the
personal guarantee of the surety. The High Court also found
that 5,000 tins of oil had come to be transferred by Vijay
oil Mills in the name of the deceased principal debtor and
they were treated as pledged with the Bank as security for
cash credit facility. It is concurrently found that the Bank
was utterly negligent with regard to the safe keeping and
handling of pledged oil tins and the security of pledged oil
tins was lost on account of the negligence of the Bank.
Disagreeing with the trial court the High Court held that
the pledge and the personal guarantee were not two
independent transactions but they formed part and parcel of
one composite transaction. The High Court, therefore, held
that the creditor having lost one security, namely, the
pledged goods, the surety was discharged to the extent of
the value of security and that as in this case the entire
security was lost, the surety was wholly discharged.
Only contention canvassed in this appeal is that in
view of clauses 5,7 and 13 of letter of guarantee Ext.31
even if it is found as a fact that negligence of the
creditor Bank was responsible for the loss of security of
pledged oil tins, yet the surety would not be discharged.
Before we refer to clauses 5, 7 and 13, it is necessary to
notice section 141 of the Indian Contract Act under which
the surety claims the relief of discharge. Section 141 reads
as under:
"141.A surety is entitled to the benefit of every
security which the creditor has against the
principal debtor at the time when the contract of
suretyship is entered into, whether the surety
knows of the existence of such security or not;
and if the creditor loses, or, without the consent
of the surety, parts with such security, the
surety is discharged to the extent of the value of
the security."
922
In order to attract s. 141 it must be shown that the
creditor had taken more than one security from the principal
debtor at the time when the contract of guarantee was
entered into and irrespective of the fact whether the surety
knew of such other security offered by the principal debtor,
if the creditor loses or without the consent of the surety
parts with the other security the surety would be discharged
to the extent of the value of the security. In the instant
case as found by the High Court and not controverted, the
principal debtor had offered two securities, (i) the pledge
of goods, (ii) personal guarantee of the surety. Verily, the
General Manager of the Bank accepted the proposal for cash
credit facility on the specific condition that the principal
debtor shall offer two securities, one the pledge of goods
to be kept under the lock and key of the Bank to be
supervised by the Bank’s employee, and secondly, the
personal guarantee of the surety. The surety himself agreed
to give personal guarantee on the specific understanding and
with the full knowledge of the Bank that the principal
debtor was offering another security, namely, pledge of
goods. The surety contracted on the good faith of the
principal contract when entering into contract of guarantee
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in which case he is deemed so to contract that both the
securities would be available to the creditor (see Sanderson
v. Aston)
If the two promissory notes Exts. 81 and 30 coupled
with the letter of guarantee Ext. 31 executed by the surety
and the bond Ext. 83 executed by the principal debtor at one
sitting on September 16, 1957, evidence one composite
transaction, it is an inescapable conclusion that the
principal debtor offered two securities, one the pledge of
goods and the other the personal guarantee of the surety.
The surety in good faith contracted to offer personal
guarantee on the clear understanding that the principal
debtor has offered security by way of pledge of goods and
the goods were to be in the custody of the creditor Bank. On
this conclusion s. 141 of the Act will be indubitably
attracted. Section 141 comprehends a situation where the
debtor has offered more than one security one of which is
the personal guarantee of the surety. Even if the surety of
personal guarantee is not aware of any other security
offered by the principal debtor yet once the right of the
surety against the principal debtor is impaired by any
action or inaction, which implies negligence appearing from
lack of supervision undertaken in the contract, the surety
would be discharged under the combined operation of sections
139 and 141 of the Act. In any event, if the creditor loses
or without the consent of the surety parts with the
security, the surety is discharged to the extent of the
security lost as provided by s. 141.
923
In Halsbury’s Laws of England, 4th Edn., Vol. 20, para
280, p. 52, the statement of law bearing on this point reads
as under:
"280.Effect of loss of securities.-On paying the
guaranteed debt the surety is entitled to have all
securities held by the creditor for the debt
handed over to him by the creditor in exactly the
same state and condition in which they were
originally provided whether they were in existence
at the date of the contract of suretyship or came
into existence subsequently. Consequently, any act
of the creditor interfering with or impairing that
right will, to the extent, at all events, of any
loss inflicted, relieve the surety from liability,
and, if it has the effect of altering or
purporting to alter the contract of suretyship,
discharge him altogether. Thus, where there is a
mortgage security given in respect of a debt which
is subsequently guaranteed, the creditor must hold
the security for the benefit of surety, so that,
on paying the debt, the surety may obtain a
transfer of mortgage in its original unimpaired
condition. If the creditor does not fulfil his
duty in this respect the surety is discharged."
This statement of law is reflected in ss.140 and 141 of the
Act.
In State of Madhya Pradesh v. Kaluram the facts were
that one Kaluram had executed a surety bond undertaking to
discharge the liability arising out of any act or omission
or negligence or default of a forest contractor whose bid
was accepted at an auction held for sale of felled trees and
who was required to pay the bid amount in four instalments.
The forest contract rules provided for preventing the
contractor from removing the forest goods in case he made
default in payment of the instalments due. The authorities
responsible for supervising the contract allowed the
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contractor to remove the felled trees without making the
subsequent payments. Subsequently the State of Madhya
Pradesh initiated proceedings to recover the balance of the
amount through surety Kaluram. The surety Kaluram contended
before this Court that because the State had lost or parted
with the security, namely, forest produce, he stood
discharged. Upholding this contention this Court quoted
Wulff and Billing v. Jay, wherein Hannen, J., stated the law
as under:
"....I take it to be established that the
defendant became surety upon the faith of there
being some real and substantial
924
security pledged, as well as his own credit, to
the plaintiff, and he was entitled, therefore, to
the benefit of that real and substantial security
in the event of his being called on to fulfil his
duty as a surety, and to pay the debt for which he
had so become surety. He will, however, be
discharged from his liability as surety if the
creditors have put it out of their power to hand
over to the surety the means of recouping himself
by the security given by the principal. That
doctrine is very clearly expressed in the note in
kees v. Barrington-2 White & Tudor’s L.C. 4th Edn.
at p. 1002-As a surety on payment of the debt, is
entitled to all the securities of the creditor,
whether he is aware of their existence or not,
even though they were given after the contract of
suretyship, if the creditor who has had, or ought
to have had, them in his full possession or power,
loses them or permits them to get into the
possession of the debtor, or does not make them
effectual by giving proper notice, the surety to
the extent of such security will be discharged. A
surety, moreover, will be released if the
creditor, by reason of what he has done, cannot,
on payment by the surety, give him the securities
in exactly the same condition as they formerly
stood in his hands."
This Court concluded that subject to certain variations s.
141 of the Indian Contract Act incorporates the English law
relating to discharge from liability of a surety where the
creditor parts with or losses to security held by it.
Mr. Kackar, however, contended that in view of clauses
5, 7 and 13 of the letter of guarantee, Ext. 31, even if it
is held proved that security of pledged goods was lost on
account of the negligence of the creditor Bank, yet the
surety would not be discharged from the obligation
undertaken under the letter of guarantee. Clauses 5, 7 and
13 may be extracted:
"5. You shall in any case, be at liberty and without
my/our further assent or knowledge, at any time,
to grant to the customer or any person liable with
or for his, whether as guarantor or otherwise, any
time or indulgence and to determine, enlarge or
vary its credit and to vary exchange or take other
securities or release any other securities held or
to be held by you for or on account of the moneys
intended to be hereby secured or any part thereof
or to renew any bills, notes or other negotiable
security and to compound or make any other
arrangements with the customer or any
925
person so liable with or for the customer as you
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may think fit without discharging or in any manner
affecting my/our liability under this guarantee."
"7. To the extent that you may obtain satisfaction of
the whole of your claim against the customer, I/we
agree that you may enforce and recover upon this
guarantee the full amount hereby guaranteed and
interest thereon notwithstanding any such proof or
composition as aforesaid, and notwithstanding any
other guarantee, security or remedy, guarantees,
securities or remedies which you may hold or be
entitled to in respect of the sum intended to be
hereby secured or any part thereof, and
notwithstanding any charges or interest which may
be debited in your account current with the
customer, or in any other account upon which the
customer may be liable."
"13. Should the customer be a limited company,
corporate or an incorporate body, committee, firm,
partnership, trustees or debtors on a joint
account, the provisions hereinbefore contained
shall be construed and take effect where necessary
as if the words importing the singular number
included also the plural number. This my/our
guarantee shall then remain effective
notwithstanding any death, retirement, change,
accession or addition as fully as if the person or
persons constituting or trading or acting as, such
body, committee, firm, partnership, trustees, or
debtors on joint account, at the date of the
customer’s default or at and time previously, was
or were the same as the date hereof. And further
you may recover against me/us to the extent here
in before mentioned notwithstanding that any
security given or to be given to you may be void,
defective, or informal, or notwithstanding that
the customer being a limited company, corporate or
unincorporated body or committee, may exceed its
borrowing powers or that the borrowing from you
may have been ultra vires."
Clause 5 confers right upon the creditor Bank to grant
any time or indulgence in payment of the debt or to
determine, enlarge or vary its credit and to vary, exchange
or take other securities or release any other securities
held by the Bank but such an act on the part of the Bank
would not have the effect of discharging the surety or in
any manner affecting his liability under the letter of
guarantee. We fail to see how
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clause 5 can help the creditor Bank in any manner. It is not
a case of granting time or indulgence to the principal
debtor or variation of the credit or taking one set of
security in substitution of some other security or release
of any security. Release of security implies a volitional
act on the part of the Bank. Loss on account of negligence
cannot be equated with release. Therefore, clause 5 would
not assist the Bank in this case.
Clause 7 provides for non-discharge of surety even if
the creditor Bank enters into a composition with the
principal debtor and that the surety would nonetheless be
liable even if the Bank has guarantee, security or remedy,
guarantees, securities or remedies from the principal
debtor. Upon a true construction of clause 7, the expression
’any other guarantee, security or remedy’ therein mentioned
must be security other than the pledged goods. In an almost
identical situation with regard to an identical clauses in
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Amrit Lal Goverdhan Lalan v. State Bank of Travancore and
Ors, this Court after referring to clause 5 in the letter of
guarantee which is in pari materia with clause 7 of the
letter of guarantee under discussion, held as under:
"On behalf of the respondent Bank reference was
made to cl. 5 of Ex. P-4 which has already been
quoted. It was contended that on account of this
clause in Ex. P-4 the appellant has opted out of
the benefit of s. 141 of the Indian Contract Act.
We are unable to accept the argument put forward
by the Attorney General on behalf of the
respondent Bank. In our opinion, the expression
"any security" in cl. 5 of Ex. P-4 should be
properly construed as "any security other than the
pledge of goods mentioned in the primary
agreement, Ex. P-1 between the Bank and the firm."
We consider that there is nothing in cl. 5 of
Ex.P-4 to indicate that the appellant is not
entitled to invoke the provisions of s. 141 of the
Indian Contract Act."
Therefore, cl. 7 is of no assistance to the Bank.
A bare perusal of clause 13 would show that it provides
for continuing the guarantee where the principal debtor is
an association of persons and for continuance of the
guarantee in the event of death, retirement, etc. of one of
such association of persons or the guarantee remaining
intact and effective and legally enforceable irrespective of
some defect arising from the internal management of such
association of person. We fail to see how it can render any
assistance to the Bank.
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First security, namely, the pledged goods are lost to
the Bank and the concurrent finding again incontrovertible
is that the pledged goods were lost on account of the
negligence of the creditor Bank. Whole of the security was
lost and, therefore the surety would be discharged in
entirety because it is crystal clear that the principal
debtor had agreed and had in fact pledged 5,000 tins of oil
which even if sold at the then current market price would
have satisfied the Bank’s entire claim. Accordingly, the
surety would be discharged in entirety.
It is difficult to entertain a contention that s. 141
would not be attracted and the surety would not be
discharged even if it is found that a creditor has taken
more than one security on the basis of which advance was
made and the surety gave personal guarantee on the good
faith of other security being offered by the principal
debtor which itself may be a consideration for the surety
offering his personal guarantee and the creditor by its own
negligence lost one of the securities. Acceptance of such a
contention would tantamount to putting a premium on the
negligence of the creditor to the detriment of the surety
who is usually described as a preferred debtor. Should a
Court by its construction of such letter of guarantee enable
the creditor to act negligently and yet be not in any manner
accountable ? Was the guarantee a guarantee against proper
performance of the contract evidencing advance of loan and
methods of its repayment, or a guarantee covering Bank’s
utter disregard of its responsibility or to use the words of
the High Court, the Bank’s utter negligence in failing to
exercise the care of a prudent man which one would expect in
management of one’s own affairs ?
The appeal accordingly fails and is dismissed with
costs.
The respondent surety has made an application that in
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compliance with the decree made by the trial court he had
paid the entire amount and he should not be exposed to
second round of litigation for restitution of the amount and
that this Court should give a direction to the Bank as part
of this judgment that the amount be returned with interest
at current rate to the respondent surety.
By s. 144 of the Code of Civil Procedure, 1908 as it
stood prior to amendment by the Code of Civil Procedure
(Amendment) Act, 1976, the jurisdiction to grant restitution
was conferred upon the ’Court of first instance’. Since the
amendment the expression the Court of first instance’ has
been substituted by ’the Court which passed the decree or
order’. An explanation has been added to s. 144 by the
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Amendment Act of 1976, the relevant portion of which reads
as under:
"Explanation-For the purposes of sub-section (1) the
expression "Court which passed the decree or
order" shall be deemed to include-
(a) where the decree or order has been varied or
reversed in exercise of appellate or
revisional jurisdiction, the Court of first
instance."
In the instant case the appellant was the plaintiff and its
suit was decreed by the trial court, i.e. the Court of Civil
Judge, Senior Division, Gondal, on November 18, 1960. The
present appellant by its letter dated February 14, 1961,
demanded from the surety a sum of Rs. 84,828.07P. inclusive
of costs and interest on the principal amount decreed. The
surety respondent I in this Court paid the appellant Rs.
84,828.07P. on April 3, 1961. In the appeal by the surety
the High Court reversed the decree and dismissed the suit
against the surety. Accordingly, the surety is entitled to
restitution.
The limited question is whether this Court can grant
restitution. Prior to Amendment Act, 1976, an application
for restitution under s. 144 in all cases had to be made to
the Court of first instance. Ever since the amendment the
substituted expression ’the Court which passed the decree or
order’ would as per clause(a) of the explanation, mean the
Court of first instance because the expression ’the Court
which passed the decree or order’ has been deemed to include
where the decree or order has been varied or reversed in
exercise of appellate or revisional jurisdiction, the Court
of first instance. The present one is the simplest case
where the suit in favour of the appellant and against the
surety was decreed by the trial court, i.e. the Court of
first instance, and this decree has been reversed by the
High Court in exercise of its appellate jurisdiction. In
such a situation clause (a) of the explanation would be
attracted and an application for restitution will have to be
made to the Court of first instance, i.e. the Court of Civil
Judge, Senior Division, Gondal. It is nowhere suggested that
such a Court does not exist. Therefore, it would not be
proper for this Court to direct restitution. However, there
will be no justification for the appellant Bank to withhold
the amount which was collected from the surety on a mere
demand. Therefore, an application for restitution made by
the surety would not lie to this Court and it would stand
disposed of accordingly.
S.R. Appeal dismissed.
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