Defendants 2 to 4 (Third defendant has been substituted by his legal representatives) have appealed. It is not in dispute that the plaintiff Bank entered into a contract of cash credit loan as well as medium term loan on the hypothecation of the schedule of properties with the principal debtor Messrs Discon Foods (P) Ltd. (first defendant), a company incorporated under the Indian Companies Act and carrying on business in processing and exporting sea foods. The cash credit limit was Rs. 3,00,000/- and medium termloan limit was Rs. 75,000/-. Defendants 2 and 3 who were at the relevant time, Directors of the first Defendant company stood surety for the cash credit loan to the first defendant company and defendants 3 and 4 stood surety for the medium term loan. This was, however, in April 1974, and continued until, it is said, the second defendant resigned from the directorship of the first defendant company on 19.7.1974 and the third defendant resigned from the directorship with effect from 27.10.1975 It appears that one M.C Agarwal and Mrs. Pushpa Agarwal entered as new directors and passed a letter dated 22.11.1975 to defendants 2 and 3 with regard to the discharge of the loan due to the plaintiff.
2. According to the defendants, when the Agarwals took over, they entered into some sort of arrangement with the creditor Bank and thus they stood discharged as sureties. The creditor bank found that the principal debtor had not cleared the cash credit loan amounting to Rs. 2,14,379.22 and medium term loan amounting to Rs. 48,701.61. Hence, it filed the suit claiming moneys, both principal and interest from defendants 1, 2 and 3 jointly and severally for the cash credit loan and defendants 1, 3 and 4 for the medium term loan.
3. On the main questions that were raised in the suit, whether the novation put forward by defendants 2 and 3 is true, valid and binding on the plaintiff and whether there has been any variation in the terms of the contract between the plaintiff and the first defendant and the sureties are discharged thereby, learned trial Judge has found that the plea of novation set up by defendants 2 to 4 is illusory and that they are not absolved of their liability and there is no material to establish that there has been any variation in the terms of the contract so as to attract the operation of S. 133 of the Contract Act and discharge the liability of the second defendant.
4. Learned counsel for the appellants has assailed the said finding and taken us through the evidence on record. He has however, not been able to dispute the proposition that in case the defendants/appellants pleaded a novation so as to give rise to a new contract leading to the discharge of the surety or such variation in the terms of the original contract attracting S. 133 or S. 135 of the Contract Act, the burden of proof for the same was upon them.
5. Learned trial Judge has looked into all such materials and found the evidence inadequate to hold in agreement with the case of the defendants. We find nothing particular drawn to our notice to take a different view. We shall be only rewriting the judgment of the trial court in this behalf if we record what is stated in Exhibits P2, P3, P4, P5, P6, P7, P9 and P10 or refer to the evidence of P.W 1 who alone has been examined on this aspect of the matter on behalf of the plaintiff Bank and that of D.Ws 1 and 2, who have been examined on behalf of the defendants along with the documents that have been produced on their behalf particularly Exhibit D-5, a letter allegedly written by one Mr. Agarwal (not examined) date 22.11.1975 as the Managing Director of the first defendant company to defendants 2 and 3, wherein he has referred to his discussions with the Bank and the proposal given by the company for the repayment of the amounts in instalments. We concur with the findings of the learned trial Judge in this behalf.
6. It is a case however, in our opinion, in which serious notice has to be taken of, a plea of discharge of surety to the extent of the security lost to the creditors Bank. It is conceded in the evidence of P.W 1 that the credit loan to the extent of Rs. 3,00,000/- had been sanctioned by the plaintiff Bank on the security of the goods, produce and merchandise of the first defendant company for which Exhibit P2 the security bond, had been executed by the first defendant company. Exhibit P3 is the shipping lien agreement in respect of stock of canned shrimps and other sea foods to be stored on such place and in such mariner as the Bank may from time to time approve. Exhibit P4 is the trust letter under which the first defendant company has undertaken to hold in trust solely for the plaintiff Bank to keep all the goods pledged to the Bank and the documents of title thereto in their absolute control, possession and disposition, free of any charge, lien or other encumbrance in favour of any other bank or any other person, firm or company and to keep the goods fully insured against loss or damage by fire, riot, civil commotion, theft, pilferage, etc. In respect of the medium term loan — Exhibit P6 is the Articles of agreement pledging the machineries of the first defendant company set out in the schedule thereto. It was contended before the learned trial Judge, as has been contended before us by the learned counsel for the appellants that provided under S. 141 of the Indian Contract Act, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract for suretyship was entered into and if the creditor lost or without the consent of the surety parted with the security, the surety is discharged to the extent of value of the security.
7. P.W 1 has admitted besides admitting the security, that during the last inspection, the Bank found that there was no machinery and found no name board of the company and that there was nothing of security found in the terms as Exhibits P2, P3, P4 and P6 provided for. The learned trial Judge upon that posed the question whether the plaintiffs has been so negligent as to lead to the total loss of the security and absolve the liability of the sureties and answered:
“In the case on hand, neither the goods and merchandise nor the machinery were in the natural custody of the plaintiff bank. They were at Cochin and the persons in the management of the company have played fraud and deprived the plaintiff Bank of the securities. It cannot be said that there was any lack of supervision implying negligence on the part of the plaintiff bank so as to attract the provisions of Ss. 139 and 141 of the Contract Act.”
8. In the case of State Of Madhya Pradesh v. Kaluram AIR 1967 SC 1105 to Supreme Court considered a case of forest contract under which the Government demanded security and it was in terms as extracted:
“Whereas the Governor in order to secure the due performance of conditions of the above contract demanded security from the forest contractor…….undertake to discharge the liability of the forest contractor in case of any act, omission, negligence or default on the part of the forest contractor for any sum which may become payable by the forest contractor to the Governor by or under the conditions of the above contract”.
The principal debtor, however, removed almost the entire quantity of trees sold to him, but since he did not pay the remaining three instalments of the price, the State of Madhya Pradesh took proceedings to recover from the agent the amount due by the principal debtor. The sureties started action on the plea that that forest authorities gave time to the principal debtor and omitted to take steps which their duty to the surety required them to take and thus the loss so caused, must lead to discharge of the surety. The Supreme Court stated as follows:
“…..the facts in the present case make it abundantly clear that it was on account of the conduct of the forest authorities that the security was lost. The goods sold were under the control of the forest officers when they were in the coupe and even when they were in the depot of the contractor. The goods could be removed on the production of a pass from the coupe, and even after the goods were removed, unless they were examined and checked they were not at the disposal of the contractor. It is not pleaded by the State that the trees sold were not checked and examined at the depot of the contractor. Knowing that the goods were removed without payments of the instalments, if the forest authorities checked and examined the goods and took no action for recovery of the amount payable, and did not enforce the charge, it would be difficult to say that there was mere inaction on the part of the forest authorities.”
9. The Supreme Court, however, opined about the legal proposition in these words:
“The expression “security” in S. 141 is not used in any technical sense; it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefits of the rights of the creditors against the principal debtor which arise out of the transaction which gives rise to the right or liability; he is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of the surety, the latter is, by the express provision contained in S. 151, discharged to the extent of the value of to security lost or parted with.”
10. In this judgment the Supreme Court has quoted with approval the observations by Hannen, J in Wulff and Billing v. Jay
“I take it to be established that the defendant became surety upon the faith of there being some real and substantial 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 an 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 notes in Ross v. Barrington-2 whites & 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 creditors 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.”
11. The Supreme Court has then added:
“subject to certain variations, which are not material for the matter under discussion, S. 141 of the Contract Act incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him.”
12. In Amrit Lal v. State Bank of Travancore AIR 1968 SC 1432, the Supreme Court has referred to the above judgment and pointed out:
“As pointed out by this court in State Of Madhya Pradesh v. Kaluram (AIR 1967 SC 1105) the expression “security” in this section is not used in any technical sense; it includes all rights which the creditor has against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditors against the principal debtor which arise out of the transaction which gives rise to the right or liability. The surety is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or parted with the security without the consent of the surety the latter is by the express provision contained in S. 141 discharged to the extent of the value of the security lost or parted with. In Wulff and Billing v. Jay (1872 7 QB & 756) Hannen, J. stated the law as follows:…….”
11. After saying as above, the Supreme Court in this Judgment, has added:
“It is true that S. 141 of the Indian Contract Act has limited the suretys right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety. But subject to this variation, S. 141 of the Indian Contract Act incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him.”
12. The two Judgments of the Supreme Court thus clearly state the law on the subject that a surety shall be entitled to securities held by the creditor at the date of his becoming surety and all such securities thus will accrue to him if he discharged the debt or performed all that he under the terms and conditions of the contract was required to perform.
13. In State Bank of Saurashtra v. Chitranjan Ranganath AIR 1980 SC 1528 = 93 L.W 74 SC SN, the Supreme Court considered a case of a Bank giving cash credit facility to a businessman against securities, namely, (1) the pledge of goods to be kept under lock and key under the supervision of the Bank and (2) personal guarantee of this surety. The Supreme Court noticed that the surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor had offered security by way of pledge of goods and the goods were to be in the custody of the creditor Bank. It was found that the Bank was utterly negligent with regard to the safe keeping and handling of pledged goods and the security of pledged goods was lost on account of the negligence of the Bank. The Supreme Court relied upon its earlier judgments (supra) and made some further examination of the principles of law in this behalf to notice in Halsbury's Laws of England, 4th Edn. Vol. 20 para 280, p. 152 the statement of law bearing on this point as under:
“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 conditions 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 vact 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, in paying the debt, the surety may obtain a transfer of the mortgage in its original unimpaired condition. If the creditor does not fulfil his duty in this respect the surety is discharged”.
and added:
“This statement of law is reflected in Ss. 140 and 141 of the Act.”
14. We have chosen to refer to these salutary principles and statements of law on the subject only to assure ourselves that it is not in the language of S. 140 or S. 141 of the Indian Contract Act that the Court will always endeavour to find out whether the creditor was in actual custody of the security or not and that it was only on account of the negligence of the creditor that the security was lost. The provision in S. 140 invests the surety with the same rights which the creditor had against the principal debtor and thus puts him in the same position as the creditor to realise his debt from the principal debtor including in it all such rights which the creditor had in the properties that were offered as securities. Unless such transfer of security is also read in S. 140 of the Contract Act, there shall be always a chance of a creditor suing the surety and in the meanwhile, the principal debtor approaching or removing every security, so that in the event of the surety paying or performing all that he is liable for he is denied the benefits or the right of the creditor that is conferred upon him by virtue of a statute. S. 141 read in the same context as the Supreme Court has read thus entitles the surety to the benefit of every security which the creditor has against the principal debtor at the time when the contract for suretyship is entered into. The qualifying words “whether the surety knows of the existence of such security or not” keep the surety in unenviable position in relation to the creditor, as all rights of the creditor as per S/140 would vest in him upon payment or performance of all that he is liable for. The other co-ordinating part of S. 141 reads:
“and, if the creditor loses or, without the consent of the surety, parts with security, the surety is discharged to the extent of the value of the security.”
The loss that can be discharged by the surety to the extent of value of the security has been illustrated as follows:
“C advances to B, his tenant, 2,000 rupees on the guarantee of A.C, has also further security for the 2,000 rupees by a mortgage of B's furniture. C cancels the mortgage. B become insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.”
This Illustration has some similarity with the case in hand. It is found in Exhibits P2, P3, P4 and P5 that the cash credit loan was sanctioned on the security of the goods, produce and merchandise and the stock of canned shrimps was required to be stored in such place and in such manner as the Bank may from time to time approve. The first defendant company held in trust solely for the plaintiff Bank the goods pledged and the documents of title thereto in their absolute control, possession and disposition, free of any charge, lien or other encumbrance and to keep the goods fully insured against loss or damage by fire, riot, civil commotion, theft, pilferage, etc. This shows that the security against loss even on account of theft, pilferage, etc., must be found in the hands of the creditors. The creditor cannot escape liability by saying that he has not ensured that the first defendant company had kept all the goods insured against loss or damage by fire, riot, civil commotion, theft, pilferage, etc. It will be for the creditor thus to say how the security was lost and in case of loss, the amount of insurance that must be found to accrue to the surety and the surety must accordingly be found to have been discharged to the extent of the insurance. If there is no insurance, it is obvious, it is on account of the negligence of the creditor Bank. If there is insurance, there is security and the surety must be deemed to have been discharged to that extent.
15. It is thus a case, in our opinion, in which the learned trial Judge was not addressed by either party properly on the question of discharge of surety to the extent of security. It is not to be found anywhere in the records as to what was the extent of the security. It is not available anywhere on the record how the goods were kept and how all goods were insured as required under Exhibits P2, P3, P4 and P6. The sudden conclusion that goods were at godown and the persons in management of the company played fraud and deprived the plaintiff Bank of the security, will not absolve the creditor Bank to make good the surety the loss of security. It is also not possible on such facts as above, in the absence of further evidence that may be available to the creditor-Bank that they had taken all care to ensure that conditions of the contract in Exhibits P2, P3, P4 and P6 have been complied, with and maintained therein with respect to the goods that were under security. Negligence need not always be inferred from a positive act. It can be inferred also from omission. If the creditor has omitted to do something which he had to do, to keep the security for the surety in the event of creditor claiming the debt from the surety, the creditor has to account for the loss. The finding in this behalf is hopelessly insufficient. No party, it appears, cared to take notice of the specific provisions of law in S. 140 and 141 of the Contract Act. The burden is obviously upon the creditor to satisfy the court that it has no liability under S. 141 of the Act or under S. 140 thereof to the extent of the security and that notwithstanding the loss of the security, it can still claim that debt from the surety.
16. We have no other way but to interfere with the impugned judgment and set it aside, but setting aside of the impugned judgment is not going to meet the ends of justice. It is a fit case, in our opinion, in which the matter should be remitted to the trial court for a rehearing and if necessary, by affording opportunity to the plaintiff bank to lead proper evidence and so to afford opportunity to the defendants to enter into further evidence, if any, on the question as above.
17. In the result, the appeal is allowed. The impugned judgment and decree are set aside. The case is remitted to the trial court for a re-hearing and disposal in accordance with law. There shall be no order as to costs.
RR/VCS