Jayakunvar Manilal Shah v. Syndicate Bank, Banavasi, Uttara Kannada District, Karnataka High Court, Judgment, Law, casemine.com

Precedent	Rule or Principle Cited For	Application by the Court
Union of India v. Bank of India, 1981 (51) Company Cases 494	Requirement of consideration for guarantee bonds; whether past consideration is valid	Distinguished and held not applicable as the guarantee bonds in instant case were executed pursuant to loan sanction conditions and past consideration is valid under Section 127
Ram Narain v. Lt. Col. Hari Singh, AIR 1964 Rajasthan 76	Interpretation of Section 127 of the Contract Act and whether consideration must be contemporaneous	Considered but court rejected its restrictive interpretation, holding past consideration is valid
Kali Charan v. Abdul Rahman, AIR 1918 PC 226	Past consideration is valid consideration for guarantee	Relied upon to support validity of guarantee bonds executed after principal agreement
State Bank of India v. Premco Saw Mill, AIR 1984 Gujarat 93	Surety bond supported by agreement to forbear from action	Not applicable here as no such forbearance agreement existed
Chakhanlal v. Kanhaiyalal, AIR 1929 All. 72	Fresh bond acknowledging liability is good consideration	Supported the principle that past consideration suffices for guarantee bonds
Ghulam Hussain v. Faiyaz Ali Khan, AIR 1940 Oudh 346	Past benefit to principal debtor is good consideration for guarantee	Supported the court’s interpretation of Section 127
Jagadindranath Roy v. Chandranath, (1904) 31 Cal. 242	Consideration for surety bond can be past benefit to principal debtor	Relied upon to confirm validity of guarantee bonds executed after principal agreement
A.E.G Carapiet v. A.Y Derderian, AIR 1961 Calcutta 359	Rule of evidence regarding acceptance of unchallenged testimony	Considered but court found other evidence undermining defendant’s claim of agreement
Ayyanna v. Veerabhadram, AIR 1926 Mad 62	Where contract mentions multiple sureties but only one signs, that surety is bound unless proved otherwise	Applied to reject defendant No. 3’s claim that guarantee bonds were invalid due to non-execution by others
Bhagwandas Goverdhandas Kedia v. Girdharlal Purshottamdas and Co., AIR 1966 SC 543	Indian contract law guided by English common law principles where no statutory provision exists	Applied to interpret Section 144 of the Contract Act and related equitable principles
Vishwanatha Reddy v. Konappa Rudrappa Nadgouda, (1969) 1 SCC 220	Regarding compounding of interest and enhancement of decretal liability	Referenced but relief for compounding interest on future interest denied due to absence of cross-objection
Chandradhara Goswami v. Gauhati Bank Ltd., AIR 1967 SC 1058	Proof of entries in bank account extracts	Distinguished as no specific entries were challenged in pleadings here; account extracts accepted
Bank of India v. Karnam Ranga Rao, 1986 (1) Kar. L.J 359	Interpretation of "rests" in interest calculation as compounding	Supported the court’s finding that interest was payable with quarterly rests (compounding)
State Bank of Mysore v. Official Liquidator, 1967 Mysore Law Reports Vol. 10, 767	Annual rests in accounts imply compounding of interest	Supported the court’s interpretation of compounding interest on loans
Yourell v. Hibernian Bank Ltd., 1918 AC 372	Legitimacy of compound interest through periodic rests	Referenced to explain the concept and legitimacy of compound interest
Evans v. Brembridge, 1843 to 1860 All. E.R 170	Equity relieves surety if creditor fails to obtain execution by all co-sureties where agreed	Distinguished as no such agreement was proved in instant case

JUDGMENT

1. These two appeals arise out of the Judgment and Decree dated 9-3-1990 passed by the learned Civil Judge, Sirsi in O.S No. 6/1986.

2. RFA No. 396/1990 is filed by the legal representatives of defendant No. 3 who are numbered as defendants 3(A) and 3(B) and defendants 4 and 5. RFA No. 219/1991 is preferred by defendant Nos. 1, 2 and 6 to 9. The first respondent in both the appeals is the plaintiff-Syndicate Bank. The other respondents in RFA No. 396/1990 are the appellants in RFA No. 219/1991 and similarly, the other respondents in RFA No. 219/1991 are the appellants in RFA No. 396/1990. In this Judgment, the parties will be referred to the position they held in the trial Court.

3. Both the appeals are heard together.

4. Though respondents 2 to 7 in RFA No. 396/1990 are not served but they are appellants in RFA No. 219 of 1991. Therefore, Sri S.P Kulkarni, learned counsel for the appellants in RFA No. 219/1991 submitted that he may be permitted to represent respondents 2 to 7 in RFA No. 396/1990. Accordingly, he is permitted to represent them.

5. The first defendant is a registered Private Limited Company having its registered Office at Banavasi and administrative office at Bombay. Defendant No. 2 is the Managing Director of the first defendant-Company as well as Glendale Fruit Processors Private Limited. Defendant No. 3, who died during the pendency of the suit was also one of the Directors of the 1st defendant-Company. Defendants 3 to 9 are also the members of the Board of Directors of the first defendant-Company. These facts are not in dispute.

6. The plaintiff-Bank filed the aforesaid suit for recovery of a sum of Rs. 26,66,407.24 p. with costs and also for interest at 15% p.a on the term loan, 19.50% p.a on the SODH loan and 18.50% p.a on the PCL Account.

7. The case of the plaintiff is that the first defendant-Company obtained the following three types of loan from the plaintiff-Bank on 13-11-1982.

1. Term loan of a sum of Rs. 10,00,000/- with interest at 15% p.a under OSL Account No. 17/82;

2. Rs. 6,00,000/- under the SODH Account No. 8/82 with minimum interest at the rate of 19.50% p.a compounded quarterly;

3. A sum of Rs. 8,00,000/- under the PCL Account No. 1/82 with minimum rate of interest at 18.50% p.a compounded quarterly.

8. The further case of the plaintiff is that as on the date of the suit, the defendants are due to pay under OSL Account No. 17/82 a sum of Rs. 16,23,285.25 p.; under SODH Account No. 8/82 a sum of Rs. 9,11,765.00 p. and under PCL Account No. 1/82 a sum of Rs. 1,31,356.99 p.

9. The further ease of the plaintiff is that as a security for these loans the first defendant hypothicated machineries and equipments belonging to the first defendant. We need not at this stage go into the details of the properties which have been succinctly stated in Schedules A and C to E annexed to the plaint. Schedule B relates to title deeds of the properties of the first defendant which have been deposited with the Bank under the equitable mortgage.

10. The plaintiff sought for the following reliefs in the plaint:

“A.i) For a decree against the defendants personally, jointly and severally directing payment of Rs. 16,23,285.25 p. as mentioned in para 13 above to the plaintiff-Bank under OSL Account No. 17/82 with proportionate costs of the suit thereon and future interest at the rate of 15% per annum from the date of the suit till the date of realisation;

ii) For a decree against the defendants for the sale of hypothicated machineries and equipments mentioned in plaint Schedule ‘A’ for the realisation of the amount claimed in para (i) above and surplus sale proceeds if any for the realisation of dues claimed in para B(i) below;

iii) For a decree against the defendants for the sale of immovable properties more fully described in Schedule ‘C’ of the plaint in terms of Order 34, Rules 4 and 6 of Civil Procedure Code for the realisation of the amount claimed in para (i) above and the surplus sale proceeds if any for the realisation of dues claimed in paras B(i) and C(i) below;

B.i) For a decree against the defendants personally, jointly and severally directing payment of Rs. 9,11,765.00 as mentioned in para 13 above due under SODH A/c No. 8/82 with proportionate costs of the suit thereon and future interest at the rate of 19.50% per annum from the date of the suit till the date of realisation;

ii) For a decree for the sale of the movable property described in Schedule ‘D’ of the plaint for the plaint for the realisation of the amount claimed in para B(i) above and the surplus sale proceeds if any for the realisation of the dues claimed in para A(i) above;

C. i) For a decree against the defendants personally, jointly and severally directing payment of Rs. 1,31,356.99 as mentioned in para 13 above due under PCL Account No. 1/82 with proportionate costs of the suit and future interest at the rate of 18.50% per annum from the date of the suit till the date of realisation;

ii) Fora decree for the sale of the movable properly described in Schedule ‘E’ of the plaint for the realisation of the amount claimed in para C(i) above and the surplus sale proceeds if any for the realisation of the dues claimed in paras A(i) and B(i) above;

D. For such other and future reliefs as the Court may deem fit under the circumstances of the case to meet the ends of justice be awarded;

E. Costs on account of insurance premia towards renewal of the insurance policies that may be incurred after the filing of the suit during the subsistence of the securities together with interest thereon as and when incurred by the plaintiff-Bank and premium receipts produced in the Court”.

11. Defendant Nos. 1, 2, 6, 8 and 9 filed their written statements jointly. Similarly, defendants 4 and 5 together filed a written statement and defendant Nos. 3 and 7 filed their written statement separately.

12. We may also point out here itself that the suit claim is made against Defendants 2 to 9 on the ground that they have stood as surety for the loans advanced to defendant No. 1, therefore, they are also personally liable for the suit claim.

13. Before we refer to the several contentions taken in the written statement, we may, at the outset, state that though the trial Court has decreed the suit against defendants 4 and 5, Sri Aswatharaman, learned counsel appearing for the plaintiff-Bank submitted that as they have not executed the guarantee-bonds, they are not personally liable. Therefore, the appeal filed by them along with Defendants 3(A) and 3(B) in RFA No. 396/1990 is entitled to succeed to the extent it relates to them.

14. We need not refer to the various defences taken by the defendants having regard to the contentions urged before us as the contentions urged before us are confined to only some of the defences taken in the written statement. Therefore, we only refer to the contentions urged before us.

15. Defendant No. 3 contended that he was not liable for the suit claim as the plaintiff failed to obtain a surety bond from defendants 4 and 5 as per the agreement between the plaintiff and the third-defendant. Therefore, the guarantee-bonds were not enforceable against Defendant No. 3; that the guarantee bonds were executed subsequent to the grant of loan, therefore, the same were not supported by consideration. These contentions were urged by Defendant No. 3. The common grounds of the defendants were that the accounts had not been properly maintained; that the interest charged was in excess of the Reserve Bank of India circulars issued, from time to time; that the first defendant is a Small Scale Industry, therefore, the interest ought to have been charged as a Small Scale Industry and as permissible under the various circulars issued by the Reserve Bank of India; that there was no agreement to pay penal interest on overdue amount and compound interest with quarterly rests in respect of the loans advanced to the 1st Defendant.

16. The trial Court, on the basis of the pleadings of the parties raised as many as 19 issues which were as follows:

“1. Does plaintiff-Bank prove that defendants 2 to 9 as Directors of defendant No. 1-Company obtained loan credit facility of Rs. 10 lakhs O.D facility of Rs. 6 lakhs and P.C loan of Rs. 8 lakhs on 13-11-1982 have executed suit documents and hypothecated the deed agreeing to repay the same along with interest thereon at the minimum rate of 15%, 19.50% and between 12.50% p.a to 16.50% p.a as the respective amounts to be compounded quarterly along with other incidental charges as contended in plaint paras 5 to 9 and 17?

2. Whether the plaintiff-Bank further proves that it has maintained proper and correct accounts in respect of suit transactions as contended in plaint para 13?

3. Whether the plaintiff-Bank further proves that defendants failed to liquidate the suit loan account inspite of making demands and issue of notices as contended in the plaint para 12?

4. Has the suit of the plaintiff cause of action?

5. Do defendants 1, 2, 6, 8 and 9 prove that plaintiff-Bank adjusted Rs. 6 lakhs from the present management of defendant No. 1 to wipe out the arrears of interest accrued on the previous balance amount out of the ostensible loan amount of Rs. 10 lakhs, which is only a book entry as contended in para 7 of their W.S?

6. Whether defendants 1, 2, 6, 8 and 9 further prove that there is no three party agreement between the plaintiff, defendant No. 1 and other defendants as required by law and therefore, the guarantee alleged to have been given by these defendants are void ab-initio and therefore, they are not liable to pay any of the suit claim as contended in para 8 of their W.S?

7. Do defendants 1, 2, 6, 8 and 9 further prove that they are not liable to pay the suit claim in their personal capacity and therefore, entitled to be relieved of on the ground that the instrument of guarantee not been executed by all intended co-sureties and therefore, their liability stands discharged as contended in para 8 of their W.S?

8. Whether the defendants further prove that creation on equitable mortgage at Karwar was not as per the statutory requirement under the provisions of the T.P Act and therefore, the said mortgage is not binding on these defendants, as contended in para 9 of the W.S of defendants 1, 2, 6, 8 and 9?

9. Do defendants 1, 2, 6 and 9 further prove that since they have not agreed to pay compound interest they are not liable to pay the interest charged at exhorbitant rate and word ‘compounded quarterly’ were not made known to the defendants as contended in paras 10 to 12 of their W.S and paras 6, 7 and 11 of W.S of defendants 3 and 6?

10. Whether defendants 2, 6, 8 and 9 further prove that plaintiff-Bank knows that defendant No. 1 is a Small Scale Industry Unit, but charged higher rate of interest by flouting the directions of RBI and therefore, defendants are not liable to pay the claim as contended by them vide para 14 of their W.S?

11. Whether defendants 1, 2, 6, 8 and 9 further prove that this Court has no jurisdiction to try the present suit as the suit transaction not taken place within the jurisdiction of this Court as contended in para 18 of their W.S?

12. Whether defendant No. 3 proves that deeds of guarantee were prepared at plaintiff's branch office at Banavasi and it was forwarded through post along with letter dated 10-11-1982 for the signature of 4 Directors including defendants 3, 4 and 5 and the said letter was received after 13-11-1982 at Bombay and therefore, signatures of defendants 3, 4 and 5 were taken only after 18-11-1982 i.e, after the loan was advanced in favour of defendant No. 1 as contended in para 3 of his W.S?

13. Do defendant No. 3 further proves that plaintiff-Bank obtained 2 guarantee bonds from him without any consideration and that deed of guarantee not been executed by all the intended co-sureties undertaking defendants 3, 4 and 9 and therefore his liability stands discharged as contended in para 3 of his W.S?

14. Whether defendant No. 3 further proves that plaintiff-Bank has not properly maintained accounts in respect of suit transaction as contended in para 11 of his W.S?

15. Do defendants 4 and 5 prove they are not at all necessary parties to the suit and that they are not liable to pay any of the suit claim personally or in any capacity as they have not signed the guarantee agreement as contended in paras 1 and 3 of their W.S?

16. Whether defendant No. 6 proves that he has not stood guarantee to the suit transactions or signed the guarantee bonds in the capacity as guarantor and as such, he is not liable to pay the suit claim as contended in para 9 of his W.S?

17. Does defendant No. 7 prove that he is not a Director of defendant No. 1 and that defendant No. 2 has obtained the loan on behalf of defendant No. 1-Company and operated the accounts and therefore, plaintiff is liable to recover the suit claim from defendant No. 2 and by putting the hypothecated properties for sale as contended in paras 4, 5, 7, 8 and 16 of his W.S?

18. To what reliefs the parties are entitled to?

19. What decree or order?”

17. On the basis of the evidence on record, the trial Court answered issue Nos. 1 to 4 in the affirmative and 5 to 17 in the negative. Accordingly, it decreed the suit in the following terms:

“Defendants 1 to 9 are hereby directed to pay to the plaintiff-Bank a sum of Rs. 26,66,407.24-costs of the present suit, other admissible charges including payment Insurance premiums and the interest @ 15% p.a on the principal amount of OSL Account, @ 15.50% p.a on the principal amount of SODH Account and @ 18.50% p.a on the principal amount of PCL Loan Account from the date of suit till the realisation of the entire decretal amount.

Defendants are at liberty to pay the entire decretal amount within six months from the date of this Judgment.

In the event of defendants committing default to pay the entire suit claim within the stipulated time, then the plaintiff-Bank is at liberty to put the hypothecated plaint Schedule A machineries plaint Schedules C, D and E movables for sale and to adjust sale proceeds realised therefrom towards the decreetal amount.

When the net proceeds of such sale are found to be insufficient to pay the amount due to the plaintiff-Bank, then the plaintiff is at liberty to apply for an order as contemplated under Order 34, Rule 6, CPC to recover such balance amount found to be legally recoverable from defendants 2 to 9 who are also jointly, severally and personally liable to pay the suit claim.

A preliminary decree to be drawn accordingly”.

18. The plaintiff examined in support of its case the Manager of Banavasi Bank as P.W 1 and produced 36 documents which were marked as Exts. P. 1 to P. 36. The defendants examined two witnesses, one was the General Power of Attorney Holder of the legal representatives of defendant No. 3 and defendants 4 and 5, and also the Accountant of the 1st defendant-company at Banavasi who also held the Power of Attorney from defendants 1, 2, 6, 8 and 9. They produced 7 documents which were marked as Exts. D.1 to D.7

19. Having regard to the several contentions urged on both the sides, the following points arise for consideration in this appeal.

1. Whether the appellants in RFA No. 396/1990 have proved that the guarantee-bonds Exts. P. 7 and P. 8, dated 13-11-1982 were not supported by consideration. Therefore, the bonds were invalid, unenforceable, as such the appellants were not liable for the suit claim?

2. Whether defendant No. 3 has proved that there was an agreement between the creditor-plaintiff-Bank and himself that it would not execute or abstain from enforcing guarantee bonds Exts. P. 7 and P. 8 against defendant No. 3 unless the other sureties also executed the guarantee-bonds Exts. P. 7 and P. 8?

2-A. If Point No. 2 is answered in the affirmative, whether defendant No. 3 can be held to be liable for the suit claim?

2-B. If the Points 2 and 2-A are answered in the negative, what is the extent of the liability of defendants 3(A) and 3(B) who are the L.Rs of the deceased defendants No. 3?

3. Whether the plaintiff has proved that there was an agreement between the plaintiff and defendant No. 1 to levy penal interest on overdue amount and compound the interest with quarterly rests?

4. Whether the plaintiff has claimed interest on the loans in question according to circulars issued by the Reserve Bank of India from time to time as applicable to the loans in question advanced to a Small Scale Industry?

5. Whether the appellants in RFA No. 219/1991 have proved that the interest charged is opposed to law because it is higher than the interest permitted by the Reserve Bank of India from time to time?

Point No. 1:

20. The case of the third defendant, as pleaded in the written statement is that the guarantee-bonds were executed after 18-11-1982. As per the evidence adduced by the defendants, Exts. P. 7 and P. 8 were executed by defendant No. 3 at Bombay on 18-11-1982. In either case the guarantee-bonds were executed subsequent to sanctioning of the loans to defendant No. 1. Therefore, it is contended by Sri Holla, the learned counsel for the third-respondent, that the guarantee bonds were not supported by consideration, therefore, the guarantee-bonds are invalid and are not enforceable.

21. Sri Holla, learned counsel appearing for the third defendant placed reliance on a decision reported in 1981 (51) Company Cases 494, Union of India v. Bank of India. He also placed reliance on the illustration (C) to Section 127 of the Contract Act, and Ram Narain v. Lt. Col. Hari Singh, AIR 1964 Rajasthan 76.

22. It is no doubt true that the loans in question were sanctioned on 13-11-1982 as per Exts. D.6 and D.7 and pursuant thereto, the loans were disbursed on 13-11-1982. The specific case of the plaintiff-Bank is that the documents Exts. P. 7 and P. 8 were executed on 13-11-1982, the date on which the loans were disbursed, and therefore, they were supported by consideration. Even otherwise, it is contended by Sri Aswatharaman, learned counsel appearing for the plaintiff-Bank that as per the provisions contained in Section 127 of the Contract Act, even the past consideration is a good consideration. It is also contended that the loans were granted on condition that the Directors should stand as sureties and it was accepted by the Directors in the resolution passed by the Board of Directors, as per Ext. P. 36. Therefore, even if the third defendant has executed the surety Bonds, Exts. P. 7 and P. 8 on or subsequent to 18-11-1982, so long as, it is done pursuant to and in conformity with the terms of the sanction order and in compliance with the resolution of Board of Directors, it cannot be stated that the bonds are not supported by consideration.

23. Sri Aswatharaman, learned counsel appearing for the plaintiff-Bank placed reliance on the following decisions:

(i) AIR 1918 PC 226, Kali Charan v. Abdul Rahman;

(ii) AIR 1984 Gujarat 93, State Bank of India v. Premco Saw Mill;

(iii) AIR 1929 All. 72, Chakhanlal v. Kanhaiyalal;

(iv) AIR. 1940 Oudh. 346, Ghulam Hussain v. Faiyaz Ali Khan.

24. Section 127 of the Indian Contract Act, 1872 (‘the Act’ for short) reads thus:

“127. Consideration for guarantee.—Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee”.

25. We are clearly of the view that Section 127 of the Act is worded in unambiguous terms. The section takes into its fold the past consideration also. The words, “anything done…..for the benefit of the principal debtor”, are wide enough to cover the past consideration also. It is not necessary that conferment of benefit upon the principal debtor by the creditor must be contemporaneous with the execution of the surely bond in order to provide consideration for the agreement of guarantee.

26. In Halsbury's Laws of England, 4th Edition at para 117, it has been stated in unequivocal terms ‘that consideration for the surety bond need not be contemporaneous with the agreement of guarantee as it may consist of a compliance with some stipulated condition which the creditor, without being bound to observe, must fulfill before the guarantee will attach. It may be entire or fragmentary and therefore divisible. The consideration for a promise of guarantee need not appear in writing’.

27. Under the Contract Act, past consideration is also good consideration.

28. In Kali Charon's case, it was contended that the surety bond was without consideration, because, the surety was not executed at the time when the agreement was executed by the principal. The Privy Council overruled this objection holding that it was a idle defence. It was also further held that there was ample consideration for the bond, because anything done or any promise made for the benefit of the principal may be sufficient consideration to a surety for giving a guarantee. It may also be pointed out that, in Kali Charan's case the guarantee-bond was executed subsequent to the agreement executed by the principal. The guarantee bond was not contemporaneous with the agreement executed by the principal.

29. In Chakhanlal case, the acknowledgment of an outstanding liability by the principal debtor by executing a fresh bond, was held to be good consideration even though the surety may not be benefitted from any of the advances made.

30. In Ghulam Husain's case, the decision in Kali Charan's case and Chaklianlal's case and also the decision in Jagadindranath Roy v. Chandranath, (1904) 31 Cal. 242, were followed.

31. It was held that the word, “done” in Section 127 of the Contract Act indicated that past benefit to the principal debtor will be good consideration for a bond of guarantee. In that case, the guarantee-bond was executed after the lease-deed was executed by the principal.

32. In Jagadindranath Roy's case a lease of grass and forest produce was obtained by one ‘S’ for four years at an yearly rental of Rs. 14,597/-. A few days later, one ‘M’ executed a surety bond in a sum of Rs. 5,000/-. The surety died and his heirs asked the lessor to discharge them. Thereupon, the lessor called upon ‘S’ to furnish a fresh surely and one ‘C’ executed in favour of the lessor a surety bond for Rs. 5,000/-. This was about two years after the date of the original deed in favour of ‘S’. The lessor sued ‘C’, as well as ‘S’ for the money due by the latter, and ‘C’ pleaded want of consideration for the surety bond.

33. It was held that the demand for fresh surety was made by the lessor, and ‘C’ became a fresh surety in order to save ‘S’ from the results of failure to comply with the demand of the lessor, which would have been either the forfeiture of his lease or the institution of legal proceedings, as such execution of the surety by ‘C’ resulted in advantage to the lessee, therefore, there was sufficient consideration for surety bond executed by ‘C’.

34. However, in Ramnarain's case, the aforesaid decisions of the Privy Council and the High Court of Allahabad, the Chief Court of Oudh., were distinguished, and it was held, as follows: (paras 13 and 14).

“13. From all the cases aforesaid as well as from the language of Section 127 it clearly emerges that the creditor must have done some thing for the benefit of the principal debtor to sustain the validity of a contract of guarantee. There is some divergence, however, on the view whether the benefit is given at the time of the execution of the guarantee or even a past benefit can constitute a valid consideration for the sustenance of such an engagement……”

“14. A reference to illustration (C) of Section 127 of the Indian Contract Act may be made. It reads:

“A, sells and delivers goods to B.C afterwards without consideration, agrees to pay for them in default of B. The agreement is void”.

From this illustration, I feel fortified in my conclusion that anything done or any promise made for the benefit of the principal-debtor must be contemporaneous to the surety's contract of guarantee in order to constitute consideration therefore. A contract of guarantee executed afterwards without any consideration is void. The case decided in AIR 1940 Oudh 346, however, lays down that the use of the word ‘done’ is Section 127 is indicative of the inference that past benefit to the principal debtor can be good consideration. With great respect, I regret, I am unable to agree with the interpretation put by their Lordships in this Judgment. It is giving the word ‘done’ an unnatural meaning. In Kali Charan's case, AIR 1918 PC 226 the circumstances were that though the agreement was executed subsequently but it was in pursuance to an earlier agreement. Illustration (C) to Section 127 completely negatives a consideration which the Oudh Court has chosen to give to Section 127 of the Indian Contract Act. Apart from this the case originally set out by the plaintiff was that Ex. 2 had for its consideration cash. The Lt. Col., had challenged this fact in his written statement and the plaintiff changed his case in the course of trial. No consideration qua Hari Singh passed from the plaintiff at the time of execution of Ex. 2 nor was anything done for his benefit on that day. The contract of guarantee, therefore, in my opinion, has been rightly held by the learned Judge to be one without consideration”.

35. It is possible to agree with the view expressed in Ram Narain's case. In Kali Charan's case, it was held in unequivocal terms, that anything done or any promise made for the benefit of the principal, may be sufficient consideration to a surety for giving a guarantee. The ground that the liability of the sureties was for the performance by the principal of the conditions of the lease was an additional ground. The rule that, ‘anything done’ or ‘any promise made for the benefit of the principal may be a sufficient consideration to a surety for giving a guarantee was laid down not on the ground that the liability of the sureties was for the performance by the principal of the conditions of the lease, but on the interpretation of the contents of Section 127 of the Contract Act. Illustration ‘C’ to Section 127 of the Contract Act cannot cut-down the amplitude of Section 127 of the Contract Act. No doubt, it cannot be readily assumed that an illustration to a section is repugnant to it. But, at the same time, as held by the Supreme Court in Shambu Nath Mehra v. State Of Ajmer., AIR 1956 SC 404, an illustration does not exhaust the full content of the section, which it illustrates, but equally it can neither curtail nor expand its ambit.

36. Therefore, we are of the view that the interpretation placed in Ram Narain's, case on Section 127 of the Contract Act on the basis of Illustration ‘C’, thereto, with great respect to the learned Single Judge, who decided the case, cannot be accepted as correct.

37. It is also not possible to agree with the view expressed in Bank of India v. H.J Matha Gowder, (1981) 51 Comp. Cases 494. In that decision it has been held by the Division Bench of the Madras High Court that in a transaction of guarantee the creditor should have done or agreed to do something in consideration of the surety's giving the guarantee. If the execution of the surely bond is simultaneous with the original borrowing then the original lending by the creditor will itself form sufficient consideration for the surety bond. But where the surety bond comes into existence after the original borrowing the creditor must prove, if he wants to proceed against the surety or guarantor, that in consideration of the contract of surety or guarantee he did something or refrained from doing something. It has also been further held that forbearance to sue is not sufficient to constitute consideration for a person becoming a surety for a debt but there must be promise or undertaking to forbear or an actual forbearance at the surety's express or implied request and the promise by the creditor to forbear should be such as is capable of being enforced.

38. In that case, the surety bond, which was marked as Ext. A. 26 was held to contain a vague provision without any specified time limit to forbear from taking action. Therefore, it was held that it was incapable of being enforced. It was also further held that it could not be taken to be a sufficient consideration to support the contract of guarantee. No doubt, in that case, the Division Bench decision of the High Court Allahabad in Nanak Ram…(Plaintiff); v. Mehin Lal…(Defendant)., ILR (1875-1877) (1) All. 487, was relied upon in support of the proposition that where the surety bond comes into existence after the original borrowing, the creditor must prove if he wants to proceed against the surety or guarantor, with any consideration of the contract of surety or guarantee, he did something or refrained from doing something. In other words, past consideration was not a good consideration for a surety bond. But, in Chakhanlal's, case, a Division Bench of the very same High Court held, that the past consideration was a good consideration for a surety bond.

39. We, therefore, find it not possible to persuade ourselves to agree with the view expressed in the case of Bank of India v. H.J Matha Gowder.

40. The decision in State Bank of India v. Premco Saw Mill, Ahmedabad, AIR 1984 Gujarat 93 has not considered the point in question. That was a case in which there was an agreement to forbear from taking action against the principal debtor. Therefore, it was held that the surety bond was supported by consideration. Such is not the situation obtaining in the instant case. Therefore, we cannot consider that this decision is of any assistance to the plaintiff. In addition to the fact that the surety bonds in question were executed for the various loans advanced to the first-defendant. They were also executed in compliance with the terms of the order under which the various loans were sanctioned to the first defendant. The loans were sanctioned by the plaintiff-Bank on condition that the directors of the first-defendant should also stand as sureties. This is clear from the letter of sanction dated 11-11-1982 produced as Ext. D.6, in which it has been stated that all the Directors should give their personal guarantee for the facility; same is the condition prescribed in Ext. D.7 The Directors of the first-defendant accepted this condition and passed a resolution, as per Ext. P. 36 in the meeting of the Board of Directors. Pursuant thereto, executed the surety bonds, as per Ext. P. 7 and P. 8. Thus, it is clear that the surety bonds were executed though on a date subsequent to the principal agreement was executed, but the surety bonds were executed in pursuance of one of the terms of the agreement. This itself was a sufficient consideration.

41. The execution of a surety bond subsequent to the principal agreement, if it is in compliance with the terms of the principal agreement, that itself is a sufficient consideration for the surety bond. In fact, in Kali Charan's case, the Privy Council observed thus:

“There was ample consideration for the bond; anything done, or any promise made for the benefit of the principal, may be a sufficient consideration to a surety for giving a guarantee; the liability of the sureties was for the performance by the defendant No. 1 of the conditions of the lease which were set out in the deed of agreement of the 14th January, 1909, and the plaintiff was not bound on the failure of the defendant No. 1 to pay an instalment when it became due to insist on the payment by the defendant No. 1 of all the other instalments”.

42. Therefore, we are of the view that Exts. P. 7 and P. 8 were supported by sufficient consideration. In the view we take, we do not consider it necessary to go into the questions as to whether the surety bonds were executed on 13-11-1982 or subsequent to 18-11-1982 and as to whether they were executed at Banavasi or at Bombay, as these aspects, in the light of the finding recorded above, become inconsequential.

43. Accordingly, Point No. 1 is answered in the negative.

44. Point No. 2:

This defence of the third-defendant falls under Section 144 of the Contract Act. In addition to this, it is also the contention of the third-defendant that even if it is held that no express or implied agreement is proved by the third defendant between himself and the plaintiff-Bank, as falling under Section 144 of the Contract Act, the equitable rule embodied in Section 144 of the Contract Act can be extended by drawing an inference from the proved facts that unless the surety bonds were executed by all the Directors, none was responsible to the liability incurred by the principal-debtor. Ext. P. 7 is executed by defendants 2, 3, 8 and 9, whereas, Ext. P. 8 is executed by defendants 2, 3, 6 and 7. Both the surety bonds (Exts. P. 7 and P. 8), are similarly worded and they relate to the liability of the first-defendant. Admittedly, Exts. P. 7 and P. 8 are not executed by defendants 4 and 5, who are also the Directors of the first defendant-Company. The contention of the third-defendant is that there was a specific understanding between the plaintiff and himself, that unless the other Directors-Guarantors execute the guarantee bonds, the guarantee bonds will not be enforced against him by the first-defendant.

45. In para 3 of the Written Statement, the third-defendant has specifically pleaded as follows:

“Accordingly after 18th November, 1982 this defendant went to see Branch Manager of the plaintiff-Bank at Bombay………”

“This defendant says that the signature of this defendant was taken on two guarantee letters after 18th November, 1982 i.e, after the said loans were advanced by the plaintiff to the 1st defendants………”

“This defendant says that when his signature was to be taken on the said two deeds of guarantee by the Branch Manager of the plaintiff-Bank at Bombay this defendant inquired why the guarantee deeds were not signed by the defendant Nos. 4, 5 and 8 when the said Branch Manager assured and agreed with this defendant that the guarantee deed will be also definitely duly signed by defendants Nos. 4, 5 and 8 and all Directors of the first defendant and also by the said holding company. Relying upon the faith of the assurance, understanding and agreement with the said Branch Manager this defendant put his signature on the said two deeds of guarantee and entered into the said obligation, if any, upon the faith of the said assurance, understanding and agreement with the said branch manager that the defendants No. 4, 5 and 8 and all Directors of the first defendant and the said holding company would also enter into the obligation under the said guarantee. This defendant is entitled to a right in equity to be relieved on the ground that the instrument i.e, the deed of guarantee has not been executed by other intended co-sureties. This defendant says that on the facts and circumstances of the said transaction such a contract can be inferred. This defendant says that the said guarantee is not valid as defendants Nos. 4 and 5 have not signed any guarantee. This defendant says that the said rule of equity is recognised by Section 144 of the Indian Contract Act. This defendant further says that the said holding company even though it appears that it has given a guarantee is not made a party defendant to the suit and on that ground also this defendant is discharged from his liability, if any, under the alleged guarantees”.

46. Whereas, in the evidence, D.W 1, who held the power of attorney for defendant-3 and also holds a power of attorney for the legal-representatives of the deceased Defendant No. 3, has stated thus:

“Defendant No. 3 signed Ex. P. 7, P. 8, on 18-11-1982 on page 3 that day there was a phone call from the Manager, Syndicate Bank Branch, Bombay Port. It was 3 p.m then, the said phone call was to defendant 3. He was absent. Therefore, said phone call was given to me. I talked on behalf of defendant 3. The Manager Syndicate Bank, Bombay Fort Branch wanted D.3 to go his office to see the documents. I informed the Manager that D.3 should be available around after 5.30 p.m On that day Therefore, Manager asked me to inform defendant 3 to go the branch office at about 5.30 p.m On that day itself about 5.45 p.m I along with D.3 went to Syndicate Bank, Bombay Fort Branch. D.3 perused the documents shown by the Manager. He wanted that all the Directors to be present and signed. The Manager asked defendant 3 to sign the document and he will get the signatures of other directors later on. Accordingly defendant 3 signed the said document. Later on defendant 3 and myself confirmed that the above said document was not signed by all the Directors, because D.4 was out of India and another directors did not sign. Since defendants 4 and 5 are not signed the suit page 4 documents, they are not liable to pay any of the suit claim. Defendant 3 is also not liable to pay the suit claim because he signed the suit documents only after the disbursement of the loan amount”.

47. In the cross-examination nothing has been elicited with regard to the existence or otherwise of the agreement between the plaintiff and the third defendant, as pleaded in the written statement of the third-defendant, and also as deposed to by D.W 1. In the evidence adduced by the plaintiff, there is nothing which can be considered to have any bearing on this point. Therefore, it is contended by Sri Holla, learned counsel for the third-defendant, that when the plaintiff did not confront D.W 1 with its case that there was no such agreement, as pleaded by the third defendant, the evidence of D.W 1 should be taken as unchallenged and should be accepted. As such, it is contended that there is no reason, whatsoever to reject the case of the third defendant that there was a specific agreement between the plaintiff-Bank and the third defendant that the surety bonds will be got executed by all the Directors and that the same will become enforceable against the third defendant only on execution of the same by all the Directors.

48. The learned counsel placed reliance on a decision in A.E.G Carapiet… v. A.Y Derderian…., AIR 1961 Calcutta 359 and also on the statement of law made by Cross in his Treatise on Evidence, VI Edition at page 277.

49. In para 10 of the Judgment in A.E.G Carapiet's case, it has been held as follows:

“The law is clear on the subject. Wherever the opponent has declined to avail himself of the opportunity to put his essential and material case in cross-examination, it must follow that he believed that the testimony given could not be disputed at all. It is wrong to think that this is merely a technical rule of evidence. It is a rule of essential justice. It serves to prevent surprise at trial and miscarriage of justice, because it gives notice to the other side of the actual case that is going to be made when the turn of the party on whose behalf, the cross-examination is being made comes to give and lead evidence by producing witnesses. It has been stated on high authority of the House of Lords that this mush a counsel is bound to do when cross-examining that he must put to each of his opponent's witnesses in turn, so much of his own case as concerns that particular witness or in which that witness had any share. If he asks no question with regard to this, then he must be taken to accept the plaintiff's account in its entirety. Such failure leads to miscarriage of justice, first by springing surprise upon the party when he has finished the evidence of his witnesses and when he has no further chance to meet the new case made which was never put and secondly, because such subsequent testimony has no chance of being tested and corroborated”. Learned counsel also placed reliance on the following statement of law made in Cross on Evidence, Sixth Edition, at page 277. It reads:

“Any matter upon which it is proposed to contradict the evidence-in-chief given by the witness must normally be put to him so that he may have an opportunity of explaining the contradiction, and failure to do this may be held to imply acceptance of the evidence-in-chief, but is not an inflexible rule and it has been held to be unsuitable to proceedings before lay justices”.

50. We are of the view that the statement of law made by Cross and also the proposition laid down in para 10 in A.E.G Carapiet's case (supra) can be accepted in a case where there is no other evidence to judge the probabilities of the case pleaded by the defendant. In the passage extracted from Cross, it is also stated that the said rule is not an inflexible rule. In the instant case, there is other evidence which improbabilises the agreement pleaded by the third defendant. We are of the view that the evidence on record does not establish the agreement as set up by the third defendant. There is variance between the pleadings and the evidence. In the written statement, it is pleaded that the agreement was entered into after 18-11-1982 whereas in the evidence of D.W 1 it is stated that the agreement was entered into between the plaintiff and the third defendant on 18-11-1982. D.W 1 stands in the position of a party. Therefore, his evidence is self serving. As such it has to be taken with a pinch of salt. The agreement or understanding pleaded was with the Manager, Syndicate Bank Branch, Bombay Fort, who was only asked to get the signatures of the persons named in Exs. P. 7 and P. 8. This is clear from Ex. D.1, dated 10-11-1982 — a letter from the Branch Manager Banavasi to the Divisional Manager, Syndicate Bank, Fort, Bombay, requesting him to obtain separate O.G 48 from the persons mentioned therein in their individual capacity and as Directors. As such it is highly improbable that he could have entered into an agreement or given an understanding to the third defendant that the plaintiff-Bank would not enforce security bonds unless they are executed by all the Directors. The contents of Exs. P. 7 and P. 8 also are not consistent with the agreement pleaded by the third defendant. Exs. P. 7 and P. 8 are similar. Therefore, we reproduce para 5 hereunder from Ex. P. 7.

“The Syndicate without exonerating the Guarantor may grant time or other indulgence of the Borrower or any other person or persons liable to the Syndicate on all or any of the obligations or liabilities guaranteed hereunder or in respect of cheques, Hundis, Bills, Drafts, Guarantees and undertakings and give up or modify or abstain from perfecting or taking advantage of any securities or contracts and discharge any party or parties and accept or make any composition or arrangement and realise any securities when and in such manner as the Syndicate may think expedient”.

51. From the aforesaid para 5 of Ex. P. 7, it is clear that even if the plaintiff failed to perfect the guarantee bond by getting it executed from other Directors, or even if the plaintiff were to discharge any of the sureties, such failure or action on the part of the plaintiff did not affect its right to enforce the guarantee bond against the executants. The recitals or terms contained in the aforesaid para 7 of Ex. P. 7 are not consistent with the agreement pleaded by the 3rd defendant which, according to him, preceded the execution of Exs. P. 7 and P. 8. It is also relevant to notice that the agreement pleaded by the 3rd defendant is also highly improbable. The plaintiff-Bank, while sanctioning the loans, made it a condition that all the Directors of the 1st-defendant should also give personal guarantee for repayment of the loans. If the plaintiff-Bank were to agree that if any one of the Directors failed to execute the guarantee bond, none of the Directors would be liable, the very object or taking guarantee bond would have been defeated by one of the Directors failing to execute it. In that event, the plaintiff-Bank would have placed itself in an uncertain and precarious position where, even the Directors who had executed surety bonds would not have been made liable and no surety would have been available to the Bank. If there were to be such an agreement, we fail to understand why it could be only with the 3rd defendant and why not with the other Directors who also stood in the same position as that of the 3rd defendant. The other defendants who are the Directors of the 1st defendant have not pleaded any such agreement. Therefore, taking into consideration all the evidence on record, having a bearing on this point, we are of the view that it is not possible to accept the defence of the third defendant that there was an agreement between the plaintiff and the 3rd defendant preceding or at the time of execution of Exs. P. 7 and P. 8 by the third defendant that the same would be invalid and will not be enforced against him unless they were executed by all the Directors. Accordingly, it is held that the alleged agreement is not proved by the third defendant.

52. Section 144 of the Contract Act, on the basis of which the aforesaid defence is set up by the third defendant reads thus:

“Guarantee on contract that creditor shall not act on it until co-surety joins.—Where a person gives a guarantee upon a contract that creditor shall not ad upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join”.

53. The section is attracted in the case of co-sureties when one of them does not join the surety bond and the creditor has entered into an agreement or understanding with the surety who executes the surety bond that he shall not act upon the surety bond until another surety joins in it or in other words until surety named therein also executes it. Therefore, there must be a contract between the creditor and a person who gives guarantee to the effect that the creditor shall not act upon the guarantee until the other person/s named in the surety bond joins or join as a co-surety or co-sureties. In such a case, the section further declares that until such persons join or execute the surety bond, the guarantee will not be valid and it will not be enforceable against the executant who has executed on such understanding or agreement. The agreement may be oral, written, contemporaneous or anterior to the surety bond in point of time or it may even be incorporated in the surety bond itself. If it is incorporated in the surety bond, on further proof is required. In other cases, it is necessary for the surety to specifically plead and prove such an agreement. Of course, such an agreement can also be proved by drawing necessary inference from the proved facts or by the conduct of the parties. It all depends upon the facts and circumstances of each case.

54. In the instant case, no doubt the 3rd defendant has set up such an agreement but he has failed to prove the same as per the finding recorded by us in the preceding paragraph. We are of the view that merely because the deed (surety bond) mentions plural sureties, in other words, drawn up in the plural form but one of them does not join or is signed by only one, it does not absolve the one who has or the others who have, executed it, unless specific agreement in terms of Section 144 is proved.

55. In Ayyanna v. Veerabhadram, AIR 1926 Mad. 62 it has been held that where a contract of guarantee mentions two sureties but only one signs the bond, it binds the surety who signs it unless it is shown that he was to be liable only if the other surety signed it. We have, on consideration of the evidence on record, held that no such agreement is proved by defendant No. 3.

56. We are also of the view that the recitals in the surety bonds Exs. P. 7 and P. 8 also indicate that the surety bond executed by the various directors is an individual guarantee and where there is more than one guarantor, their liability has to be construed as joint and several.

57. In para 1 of Exs. P. 7 and P. 8, after mentioning four names of sureties, it has been specifically stated thus: “hereinafter referred to as the “Guarantor” and not as “Guarantors”. Thereafter, in para 1 itself it has been further recited thus: “hereby agrees to pay and satisfy”. It is a “continuing guarantee for payment of the ultimate balance to become due to the Syndicate by the Borrower not exceeding Rs. 25 lakhs as aforesaid” (vide para 3 of the surety bond). Para 4 of the surety bond also indicates that each Director has given individual guarantee and it is only in the case of more than one guarantor, their liability, has to be construed as joint and several. Para 4 of the surety Bond reads thus:

“4. Notwithstanding the discontinuance of this guarantee as to one or more of the guarantors or the death of any one of them, the guarantee is to remain a continuing guarantee as to the other or others or the representatives and estates of the deceased and where there is more than one guarantor, their liability under these presents being construed as joint and several”.

58. Again at the end of the deed, it recites thus:

“In witness whereof the Guarantor hath hereunto set his hand this…..”

59. Therefore, we are of the view that even though in the guarantee bond, names of four sureties are mentioned but the very tenor of the deed is to the effect that each surety has executed it individually and it is only when it is executed by more than one, it has to be construed as joint and several. Therefore, the question of the creditor entering into an agreement with the 3rd defendant that it would not enforce the surety bond against him unless the other Directors executed it was not at all within the contemplation of the parties.

60. However, Sri Holla, learned counsel appearing for the 3rd defendant placing reliance on a decision of the Supreme Court in Bhagwandas Goverdhandas Kedia v. Girdharlal Purshottamdas and Co., AIR 1966 SC 543 contended that the Courts in India have generally been guided by the rules of the English Common Law applicable to contracts where no statutory provision to the contrary is in force; that in the instant case, from the proved facts, it is possible to infer that there was an understanding between the plaintiff and the Directors of the 1st defendant-Company that all the Directors, as sureties, would be liable only if all the directors execute the surety bond and that the surety bond will not be enforced against those who execute it if any one of the Directors failed to execute it. It is submitted that such an understanding can be inferred from the conduct of the parties as evidenced by the condition imposed by the plaintiff in the order sanctioning the loans that all the Directors should stand as sureties and the resolution passed by the Board of Directors of the 1st defendant-company that all the Directors should execute the surety bond and the surety bonds also were prepared in the names of all the Directors that such an inference would not be inconsistent or incompatible with the rules of equity embodied in Section 144 of the Contract Act even if it is held that the agreement pleaded by the 3rd defendant as falling under Section 144 of the Contract Act is not proved. The learned counsel also placed reliance on a decision of the Court of Appeal in Chancery in Evans v. Brembridge, 1843 to 1860 All. E.R 170, the statement of Law made in Halsbury's Laws of England, IV Edition, Vol. 20 at para 160 and also the statement of law made in Sheldon and Fidler's Practice and Law of Banking, 11th Edition at page 328.

61. There is no doubt that the Rules of English Common Law applicable to contracts can be applied by the Courts in India where no statutory provision to the contrary is found in the Contract Act. The Supreme Court in Bhagwandas Goverdhandas Kedia's case, AIR 1966 SC 543 has specifically observed that in the administration of Law of Contract, the Courts in India have generally been guided by the Rules of English Common Law applicable to contracts where no statutory provision to the contrary is in force. There is a specific provision contained in Section 144 of the Contract Act. We have also held in the preceding paragraph that the contract contemplated under Section 144 of the Con tract Act can be oral, written, contemporaneous or anterior to the surety bond in point of time or it may even be incorporated in the surety bond itself. Therefore, it is even possible and permissible in law to infer such an agreement or understanding either from the proved facts or from the conduct of the parties. There does not appear to be any difference and in fact, in view of the provisions contained in Section 144 of the Contract Act, there is no difference, between the Indian Law and English Common Law in this regard. Section 144 of the Contract Act incorporates very English Common Law principles of equity. Under both the laws an understanding between the creditor and the surety is necessary, that another person would also execute the bond as co-surety or else he would be relieved of the liability as surety. This is also clear from the very passages relied upon by learned counsel Sri Holla from Halsbury's Law of England, Sheldon and Fidler's “Practice and Law of Banking” and the decision in Evans v. Brembridge. We have also pointed out that having regard to the facts and circumstances proved in the case and the recitals contained in Ex. P. 7 and P. 8, no such agreement or understanding attracting Section 144 of the Contract Act was within the contemplation of the parties.

62. In Evans v. Brembridge, and Court, as a matter of fact, came to the conclusion that the intention of the parties to the deed was that there should be a joint and several liability on the part of the two co-sureties. Turner, L.J who agreed with Knight Bruce, L.J observed thus:

“On the second point, I agree with Knight Bruce, L.J Several cases were cited in the argument. I do not think it necessary to discuss them, for I concur in thinking that as the plaintiff entered into the obligation upon the understanding and faith that another person would also enter it, he has a right in equity to be relieved, on the ground that the instrument has not been executed by the intended co-surety”.

63. Therefore, it is clear that the aforesaid decision is of no help to the 3rd defendant because as a matter of fact we have come to the conclusion that no such understanding between the plaintiff and the 3rd defendant is proved in the instant case. The decision in Evan's, case did not merely depend upon the fact that out of the two cosureties one of them had not executed. On the contrary it was found, as a mailer of fact, that there was an understanding and faith between the creditor and the surety that another person would also join the surety bond.

64. The following statement contained in para 160 of Vol. 20 of Halsbury's Laws of England, Fourth Edition, was also relied upon by Sri Holla, learned counsel for the 3rd defendant:

“Where it is a condition precedent that a guarantee is to be executed by certain named persons as co-sureties, it is the creditor's duty to see that it is executed by the proper parties, and the known insolvency of one of those parties does not dispense with the duty of obtaining his execution of it, for all the proposed sureties must execute it or none is liable”.

65. Similarly, at page 328 in Sheldon and Fidler's “Practice and Law of Banking”, 11th Edition, the statement of law is stated as follows:

“Thus if a guarantor executes the guarantee on the basis that the creditor will take certain securities from the principal debtor, or that there will be other guarantors, the guarantor will be completely released if the securities are not duly taken and retained, or if the other guarantors do not execute the guarantee or they limit their liability under it”.

66. We may point out that the aforesaid statements of law in Halsbury's Laws of England and Sheldon and Fidler's Practice of Law of Banking, are based on the decision in Evans v. Brembridge, and the other cases referred to therein. The aforesaid statement of law also does not go to the extent that in the absence of any understanding or agreement between the creditor and the guarantor that the creditor would obtain guarantee from the other co-surety named therein, a mere preparation of the surety bond in the names of two or more sureties and one of them does not executing it, and the recitals in the surety bond are not leading to any joint and several liability, would not by itself be sufficient to hold that the creditor is not entitled to enforce the surety against the executant or that the surety bond in the absence of execution by the other surety named therein is invalid and unenforceable. It all depends upon the facts and circumstances of each case as already pointed out above. Therefore, we are of the view that the aforesaid statement of law made in Halsbury's Laws of England and Sheldon and Fidler's “Practice and Law of Banking” will not be of any help to the 3rd defendant.

67. We may also point out that in the instant case, it is not possible to draw an inference from Exs. D.6 and D. 7 and Exs. P. 7, P. 8 and P. 36 that there was an understanding between the plaintiff and the Directors of the 1st defendant-company including the 3rd defendant that all the Directors would join the surety bond and if any one of them failed to join, none was liable. Exhibits D. 6 and D. 7 are the letters of sanction dated 11-12-1982 and 27-9-1982 respectively, sanctioning the loans to the 1st defendant-Company. No doubt one of the conditions of sanction of the loans, was that all the Directors should give their personal guarantee to the banking facility extended by the plaintiff-Bank to the 1st defendant-company. Pursuant to such a condition, the Board of Directors of the 1st defendant-bank passed a resolution on 11-11-1982 to the effect that all the Directors should execute the surety bonds. Accordingly, the surety bonds were executed as per Exs. P. 7 and P. 8. Defendant 4 and 5 did not execute the surety bonds. The learned counsel for the 3rd defendant submitted that from these facts and circumstances, it was apparent that there was an understanding between the plaintiff and the directors that all the Directors must stand as sureties, otherwise none would be liable as a surety. The plaintiff-Bank imposed a condition that all the directors should stand as sureties to the banking facilities extended by it to the 1st defendant. The intention of the plaintiff-Bank was to have all the directors of the 1st defendant-Company as sureties and not that in the event one of them did not join the surety bond, none of the directors would be liable as sureties or the surety bond will not be enforced against others and would be treated as invalid. There was no such understanding between the plaintiff-Bank and the directors, much less with the 3rd defendant. Such an understanding would be inconsistent with the intention of the bank insisting for all the directors to stand as sureties. We have already pointed out this aspect in the preceding paragraph. It is not possible to read Exs. D.6 and D.7 imposing a condition for sanctioning the loan that all the directors should stand as sureties amounting to an agreement by the creditor (plaintiff) with the directors of the 1st defendant that the plaintiff would not enforce the surety bond unless all the directors executed it. Such a condition would have gone against the very interest of the plaintiff and would have made the condition imposed for sanction of the loan that all the directors shall stand as sureties, of no value as it would have been defeated by one of the Directors not executing the surety bond.

68. As far as the resolution passed by the Board of Directors of the 1st defendant that all the Directors shall stand as sureties, it can only be stated that they were obliged to do so as they wanted banking facility to be extended by the plaintiff to the 1st defendant, otherwise, the plaintiff-Bank would not have extended the banking facility. It was to serve their own interest and also the interest of the 1st defendant-Company, of which they were the Directors, they executed the surety bond. Exs. P. 7 and P. 8 are surety bonds. They do not contain any recital to support the contention of the 3rd defendant. On the contrary, as already pointed out, the recitals belie any such understanding between the plaintiff and the 3rd defendant or other sureties. Therefore, it is not possible to hold that the circumstances relied upon by Sri Holla, learned counsel for the 3rd defendant would lead to an inference that there was an understanding between the creditor and the sureties in terms of Section 144 of the Contract Act to the effect that the surety bond would be enforced only if all the sureties executed them and in default of any one of the sureties named therein in executing the surety bonds, all the other executants would not be liable as sureties. Therefore, the contention of Sri Holla, learned counsel for defendant No. 3 is liable to be rejected. It is accordingly rejected. Point No. 2 is accordingly answered in the negative.

Point No. 2-A:

69. In the light of the finding recorded on Point No. 2, Point No. 2-A does not arise.

Point No. 2-B:

70. The learned Judge has passed a decree against defendants 3-A and 3-B without any qualification. The liability incurred by defendant No. 3 personally was as a surety to the loans advanced to defendant No. 1-Company under the surety bonds. Defendant No. 3 was one of the Directors of defendant No. 1. It cannot be held that the liability incurred by defendant No. 3 as a surety was either illegal, unlawful or immoral. Therefore, the heirs of defendant-3 will be liable. However their liability as legal representatives will be limited to the extent of the estate of the 3rd defendant that has devolved upon them. Therefore, the learned trial Judge instead of making a decree in absolute terms against defendants 3-A and 3-B, ought to have qualified it, by directing that they would be liable only to the extent of the estate of the third defendant, devolved upon them. Point No. 2-B is answered accordingly.

Point No. 3:

71. As pointed out earlier, three types of loans were granted to the first defendant by the plaintiff-Bank with varied rates of interest. The types of loans granted were (1) OSL Loan, (2) SODH Loan and (3) PCL Loan.

72. We take up for consideration the question as to the interest payable on each of these loans in the same order. The plea of the defendants is that there was no agreement to pay compound interest. Exs. P. 1 to P. 3 relate to the OSL Loan. Ex. P. 1 is the receipt executed by second defendant as the Managing Director of the first defendant for having received a sum of Rs. 10,00,000/- under the agreement dated 13-11-1982 from the Banavasi Branch of the plaintiff-Bank. Ex. P. 2 is an agreement dated 13-11 -1982 executed by the second defendant as the Managing Director of the first defendant in favour of the plaintiff-Bank. In paras 3 and 4 of the agreement, it is specifically stated thus:

Para 3:

“In consideration of the sum of Rs. 10,00,000/- to be lent by the Bank as mentioned in the first schedule hereto, the borrower/s hereby confirm/s having agreed to repay to the Bank the principal sum of Rs. 10,00,000/- in instalments on the dates mentioned in the second schedule here to;

The borrower/s agrees/agree that interest on the said principal sum of Rs. 10,00,000/- or on so much thereof as shall from time to time remain unpaid shall be repayable at the rate of 5% per annum above the Reserve Bank of India rate subject to the minimum of 15% per annum on the 31st March, 30th June, 30th September and 31st December each year and also so long as the principal or part thereof remain unpaid”.

Para 4:

“The borrower/s agrees/agree that if quarterly interest and/or any other instalment on due date is not paid, the arrears in the loan shall bear overdue interest at the rate fixed by the Bank for such loans from time to time until the interest and/or the instalment of the principal in arrears as the case may be are paid”.

73. Ex. P. 3 is a letter dated 13-11-1982 written by the second defendant as the Managing Director of the first defendant to the Manager, Syndicate Bank, Banavasi Branch thanking the Bank for granting the loan of Rs. 10,00,000/- and further agreeing to pay overdue interest at 17.5% or such rates as may be charged by the Bank from time to time on the amount over due. He has also further stated that the first defendant-Company would waive the notice of variation of rate of interest from time to time as per the directions of the Reserve Bank of India or the Head Office of the Bank, and such variation in the rate of interest notified in the Notice Board n the Bank premises would be sufficient notice to the first defendant. He has further undertaking to debit the monthly instalments at the rate of Rs. 21,000/- and periodical interest thereon, Ex. P. 4 is the list of machineries and equipments hypothecated to the Bank.

74. Except contending in the written statement that there was no agreement to pay compound interest, no evidence was adduced by the defendants in this regard. A reading of Clauses 3 and 4 of Ex. P. 2 leaves no doubt that the first defendant had agreed to pay interest on the sum of Rs. 10,00,000/- at the rate of 5% above the Reserve Bank of India rate subject to a minimum of 15% per annum on the 31st March, 30th June, 30th September and 31st December each year. It had also further agreed that if the instalments and interest were not paid, the loan shall bear overdue interest at the rates fixed by the Bank on such loan from time to time until the interest and or the instalment of the principal in arrears as the case may be are paid.

75. In respect of the second loan i.e, SODH Account No. 8/82, the following are the documents concerning the said loan.

76. Ex. P. 11 is a letter dated 13-11-1982 written by the second defendant as the Managing Director of the first defendant addressed to the Manager, Syndicate Bank, Banavasi Branch requesting overdraft facilities upto a limit of Rs. 6,00,000/-. In that letter, he has stated that he would abide by the conditions that may be imposed as to security for repayment. Ex. P. 12 is an on demand pronote in favour of the plaintiff for a sum of Rs. 6,00,000/- with interest at 9.50% per annum above the Reserve Bank of India rate with a minimum of 19.5% per annum compounded monthly/quarterly. Ex. P. 13 is a letter dated 13-11-1982 addressed by the second defendant as the Managing Director of the first defendant to the plaintiff-Bank giving an undertaking that the first defendant would close the SODH Account 8/82 for Rs. 6,00,000/- within a year. Ex. P. 14 is another letter dated 13-11-1982 addressed to the plaintiff thanking the plaintiff-Bank for having granted a loan of Rs. 6,00,000/- and further agreeing to pay overdue interest at 21.5% or such rate as may be charged by the Bank from time to time on the amounts overdue in case of default. In that letter, the first defendant has given up right to notice of variation of rates of interest as per the directions of the Reserve Bank of India and he has further stated that the notifying of the enhanced rates of interest on the Notice Board of the Bank would be sufficient notice to the first defendant. Ex. P. 15 is a covering letter to Ex. P. 12 — on demand pronote. Ex. P. 16 is the deed of hypothecation hypothecating the goods to the plaintiff as security to the loan of Rs. 6,00,000/- granted under SODH Account 8/82, dated 13-11-1982. Paras 11 and 12 of the deed are relevant which are as follows:

“11. That interest at the rate of 9.50% above the Reserve Bank of India rate subject to a minimum of 19.50% per annum or such other rate as may be fixed by the bank from time to time and notified by the bank in its notice board shall be calculated/and charged on the daily balance in the Bank's favour until the same is fully liquidated and shall be paid by the Borrowers as and when demanded by the Bank.

12. We hereby agree to pay overdue interest at 21.5% or such rate as may be charged by the Bank from time to time on the amounts overdue in case of default”.

77. A reading of Exs. P. 11, P. 12, P. 13, P. 14, P. 15 and P. 16 together makes it clear that the first defendant has agreed to pay compound interest as stated in Ex. P. 12.

78. The documents that have a bearing on the PCL Account No. 1/82 for Rs. 8,00,000/- are as follows:

Ex. P. 18 is a promissory note dated 13-11-1982 executed by the second defendant in favour of the plaintiff-Bank for a sum of Rs. 8,00,000/- with interest at 2.50% per annum above the Reserve Bank of India rate with a minimum of 12.50% per annum compounded monthly/quarterly for value received. The words compounded monthly/quarterly for value received are sufficient to come to the conclusion that the first defendant has agreed for compounding of interest. Ex. P. 19, dated 13-11-1982 is nothing but a covering letter to pronote Ex. P. 18. Ex. P. 20 is Export Credit Agreement pertaining to the loan in question. It is dated 13-11-1982. Para 6 of this agreement reads thus:

“6. The borrowers agree that interest on the amounts advanced shall be paid to the Bank at the rates stated in the Third Schedule hereto, on the 31st March, 30th June, 30th September and 31st December in each year and also so long as the amounts advanced remain outstanding, the Bank shall be entitled to alter, modify or vary the said rates as the Bank may in its absolute discretion require or deem proper without giving any prior notice to the borrowers in that behalf and the Borrowers shall bound to and shall thereafter pay interest at such altered, modified and varied rates. The Borrowers agree that if quarterly interest or amounts advanced are not paid on due dates within the period stated in the second schedule hereto, the arrears shall bear overdue interest at the rates fixed by the Bank for such advance from time to time until the interest/amounts advanced as the case may be, are repaid by Borrowers and such interest shall be compounded at the end of each calendar quarter of the year. In respect of packing credit advances, advances against export incentives, duty draw back advances and export loans/advances, if the advances are not cleared out of export proceeds of the respective commodity export incentives, duty drawbacks undrawn balances or surplus earned out of replenished licenses respectively, the Borrowers agree to pay interest on amounts advanced at penal interest rates in force in the Bank from time to time and such interest shall be compounded at the end of each calendar quarter of the year i.e, 31st March, 30th June, 30th September and 31st December each year, so long as the amounts remain outstanding. The Borrowers also agree to pay to the Bank the processing charges/service charges ECGC premium and out of pocket expenses, if any”.

(emphasis supplied)

79. From the aforesaid clause, it is clear that the defendant No. 1 has agreed that the plaintiff will be entitled to charge compound interest quarterly. Therefore, it is clear that in respect of the two loans granted under SODH Account No. 8/82 and PCL Account No. 1/82, there is a clear recital contained in the relevant documents referred to above for compounding of interest. Hence, in respect of these two loans, it is not possible to agree with the contention of the defendants that the first defendant has not agreed for compounding of interest.

80. No doubt there are no specific words contained in Exs. P. 1 to P. 4 pertaining to the OSL Account No. 17/82 to the effect that the first defendant has agreed for compounding of interest, however it is contended by Sri Aswathram, learned counsel for the plaintiff that the recitals contained in Clause 3 of Ex. P. 2 leave no doubt that the first defendant has agreed for quarterly rests which is nothing but compounding.

81. We have already pointed out that in Clause 3 of Ext. P. 2, the first defendant has undertaken to repay the loan in instalments with interest at the rate of 5 per cent per annum above the Reserve Bank of India rate subject to the minimum of 15% per annum on the 31st March, 30th June, 30th September and 31st December each year. The first defendant has also further agreed under Clause 4 thereof that in the event any instalment on the due date remaining unpaid the arrears in the loan shall bear overdue interest at the rate fixed by the Bank until the interest and or the instalments of the principal in arrears, as the case may be, are paid.

82. The contention of the defendants is that the words quarterly rests' are not used in Clause 3 or Clause 4 of Ext. P. 2, therefore, they were not aware of the fact that the loan would carry compounding of interest; that even otherwise they were also not told to that effect.

83. However it is contended by the learned counsel for the plaintiff that in Ext. P. 7, the surety bond executed by the defendants 2, 3, 8 and 9 it has been specifically stated that the guarantors have undertaken to abide by the quarterly rests, Commission and Banking charges and in respect of all costs, charges and expenses which the Syndicate may incur in paying any rent rates, taxes, duties calls, instalments, legal and other professional charges etc. Therefore, it is contended that they were not only fully aware of the fact that the loan carried compounding of interest, but gave a specific undertaking under the guarantee bond Ext. P. 7. Therefore, it is not now open to them to contend to the contrary.

84. It may be pointed out that the liability of the guarantor is co-extensive with that of the principal debtor. When the guarantor undertakes more than the liability of the borrower, the borrower cannot be held liable for the guarantee given by the guarantor. Therefore, we cannot determine the question as to whether the first defendant has agreed for compounding of interest by referring to Ext. P. 7.

85. Now we shall see whether the words found in para 3 of Ex. 22 that:

“The borrower/s agrees/agree that interest on the said principal sum of Rs. 10,00,000/- or on so much thereof as shall from time to time remain unpaid shall be repayable at the rate of 5% per annum above the Reserve Bank of India rate subject to the minimum of 15% per annum on the 31st March, 30th June, 30th September and 31st December each year and also so long as the principal or part thereof remain unpaid”.

would mean or would amount to, agreeing for compounding the interest with quarterly rest.

86. The contention of the defendants is that the meaning of the aforesaid words is to agree for payment of interest at the end of each quarter and does not amount to compounding of interest if it is not paid quarterly. They also take aid of contents of Clause (4) which provides that if the arrears of instalment and the interest are not paid, the bank will be entitled to recover overdue interest at the rate fixed by the bank for such loans from time to time. However Sri Aswatharaman, learned counsel for the bank has placed reliance on the Reserve Bank of India Circular bearing DBCD No. Dir. BC. 70.C. 96-76, dated 13th March, 1976. It is also referred to in Gowda, D.S v. Corporation Bank, reported in 1982 (2) Kar. L.J 490. The said circular merely uses the expression “rest”. The relevant portion of the circular reads thus:

“No scheduled commercial Bank incorporated in India and having aggregate demand time liabilities of Rs. 50 Cr. or above as on the 12th March, 1976 or at any time thereafter and no scheduled commercial Bank incorporated outside India shall charge interest on loans-advances/cash credits/overdrafts or any other financial accommodation made or provided by it, or renewed by it or discount usance bills at a rate, in either case, higher than 15.50% per annum: Interest shall be charged with quarterly rests”.

87. The meaning of the word ‘rest’ as stated in Stroud's Judicial Dictionary, is as follows:—

“A rest, in taking an Account, is a pause at which the net balance between receipts and expenses is ascertained, so that interest may be abated or charged according to the finding; e.g, as between mortgagee in possession and his mortgagor”.

88. Again in Paget's Law of Banking, 8th Edn. (1972), Chap. V, the word ‘rest’ has been considered with reference to a decision in Yourell v. Hibernian Bank Ltd., 1918 Appeal Cases 372 and it has been held thus:

“The Bank, by taking the account with these half-yearly rests, secured for itself the benefit of compound interest. This is an usual and perfectly legitimate mode of dealing between banker and customer”.

89. This Court in State Bank of Mysore v. Official Liquidator, 1967 Mysore Law Reports Vol. 10, 767 has held thus:

“When the accounts were to be taken with annual rests, it would necessarily mean that the balance of previous year would constitute as principal for the next year and interest would be charged on that amount”.

90. This has been followed by a Division Bench of this Court in Bank of India v. Karnam Ranga Rao, 1986 (1) Kar. L.J 359 : ILR 1985 KAR 4282.

91. The word ‘compound interest’ has also been explained in the Law Lexicon i.e, compound interest is interest upon interest where accrued interest is added to the principal sum and the whole amount treated as a new principal for the calculation of the interest for the next period.

92. In the case on hand, Ex. P. 2 does not use the term ‘rest’. It only states that the interest is payable at the end of each quarter by giving the last date of each quarter of the year.

93. Therefore, we are now to see whether, in the absence of the term ‘rest’, Clause (3) of Ex. P. 2 would amount to agreeing for quarterly rest. As per the Reserve Bank of India Circular referred to above, there is no doubt that a commercial Bank like that of the plaintiff, is entitled to levy and recover interest at quarterly rest. The term ‘rest’ as explained above, means adding of interest at the end of the rest period to the principal and from that date onwards it would become part of the principal and the bank can claim interest on it just as principal or as part of the principal sum. Clause (3) of Ex. P. 2 clearly states that the interest is payable at the end of each quarter and in the event it is not paid at the end of each quarter, the amount shall bear overdue interest at the rate fixed by the bank. The overdue interest being more than the interest agreed upon, the interest payable at the end of the quarter, if not paid, will bear not only the usual rate of interest but also the overdue interest. Thus, it is clear that the amount of interest becomes part of principal and it becomes an overdue amount unpaid on the date it became due. Therefore, the plaintiff-Bank has maintained the accounts by indicating the quarterly rest and it has calculated interest at the end of the quarter and has added it to the principal. Defendant 1 has never raised any objection in this regard. Therefore, it follows that defendant 1 has also understood the words used in Clause (3) of Ex. P. 2 referred to above that the interest payable at the end of each quarter as meaning that the interest is payable at the quarterly rest. Hence, we are of the view that in Clause (3) of Ex. P. 2 though the words ‘quarterly rest’ have not been used but it is clear from the contents of Clause (3) that the interest is payable at the end of each quarter; in other words, it is payable with quarterly rest. Hence we are of the view that even in respect of OSL Account No. 17/1982, the interest is payable with quarterly rest and as such it is compoundable. The effect of Clauses (3) and (4) as indicated above would be to permit the bank to claim interest with quarterly rest.

94. As far as the interest on overdue amount is concerned, the documents relatable to each of the loans namely, Ext. P. 2 pertaining to OSL loan, Ex. P. 12 pertaining to over draft facility and Exts. P. 18 and 20 pertaining to PCL loan, clearly mention the interest payable on the overdue loan amount, as well as interest and also provide for compounding. Hence we hold that the plaintiff has proved the agreement between the plaintiff and the defendants 1 and 2 to levy penal interest on overdue amount and compound the interest with quarterly rest in respect of all the three loans.

95. Point No. 3 is answered accordingly.

96. Points 4 and 5: These points go together. In fact RFA No. 219/1991 is confined to the interest claimed by the plaintiff and decreed by the trial Court. Of course, the other defendants have also contended that the interest has not been charged in accordance with law and in accordance with the agreement. We have already pointed out the rate of interest agreed to by the parties is respect of the three loans. Now we are only required to find out whether as contended by the defendants the interest has been levied by the plaintiff-Bank in accordance with the Reserve Bank of India's circulars pertaining to the loans advanced to Small Scale Industries because admittedly the first defendant is a Small Scale Industry. As per the circulars of the Reserve Bank of India, the bank is required to levy interest in accordance with the rates mentioned in the various circulars relatable to Small Scale Industries. Therefore we now straightaway advert to the relevant circulars.

97. Learned counsel for the appellant in RFA 219 of 1991, has produced a letter dated 10-2-1986 issued by the Reserve Bank of India accompanied by various circulars, annexed to the said letter. The said letter reads thus:

“All Scheduled Commercial Banks,

Dear Sirs,

Interest rates on advances-chart indicating rates of interest prescribed by the Reserve Bank.

Of late, we are receiving a number of requests from private parties, Courts and banks for furnishing them with the schedule of rates of interest on advances operative during different periods of time. As it involves copying of old directives as and when such requests are received, we have prepared an exhaustive chart indicating rates of interest operative from 1st October, 1960 till the date of this circular. While Annexure-1 of the chart indicates the effective dates of minimum lending rates from 1st October, 1960 to 22nd July, 1974 and maximum lending rate from 2nd March, 1968 till it was rescinded with effect from 21st January, 1970 and reintroduced in 1976. Annexures-II and III give the position of rates of interest on advances prescribed from time to time thereafter. We hope that this chart will be useful to the banks in their day-to-day work. We may, however, clarify that this chart is being supplied to the banks only as an additional aid and it is not intended to replace the directives issued from time to time. In the event of any doubts a reference to the relevant directives should be made by the Banks”.

98. It may be noticed that the letter extracted above is addressed to All Scheduled Commercial Banks with Annexures-I to III; it covers the circulars issued from 1-10-1960 to 10-2-1986.

99. The relevant entries in Annexure-III of the aforesaid letter referable to OSL loan which is otherwise called as term loan and also SODH loan advanced to Small Scale Industries are follows:

“Category of advances. Rate of interest per cent per annum. Effective from 2nd March '81. Effective Effective from Ist April '83. Effective from 1st April from 1st April '85. xx xx xx xx V. Small Scale Industry. 1. Composite loans upto Rs. 25,000/-: (a) Backward areas 10.25 10.00 10.00 (b) Other areas 12.50 12.00 12.00 2. Short term advances; limits of: (a) Upto and inclusive of Rs. 2 lakhs Not exceeding 15.00 Not exceeding 14.00 Not exceeding 14.00 (b) Over Rs. 2 and upto lakhs Rs. 25 lakhs Not exceeding 17.50 Not exceeding 16.50 Not exceeding 16.50 (c) Over Rs. 25 lakhs Not exceeding 19.50 Not exceeding 18.00 Not exceeding 17.50 VIII. Term Loans. 1. Small Scale Industry Units in— i) Backward Area 12.50 12.50 12.50 ii) Other Areas 13.50 13.50 13.50”

100. According to the defendants, plaintiff-bank could not have charged interest on the term loan amount at the rate more than 13.50% per annum as the term loan falls under category No. VIII(I)(ii) and not under category No. V(2)(b) or (c). However, Sri Aswatharaman, learned counsel for the plaintiff submits that the rate of interest at 13.50% referred to above in category No. VIII as per the Reserve Bank of India Circular is applicable only when there is refinancing facility from the IDBI; that as there is no such plea raised by the defendants and no evidence is adduced by them to show that refinancing facility for the term loan in question was available from the IDBI, it is not open to the defendants to claim that the interest leviable on the term loan amount could not exceed 13.50%. It is not possible to accept this contention. Rate of interest chargeable by the Commercial Banks in respect of the term loan advanced to Small Scale Industry is governed by the circular referred to by us above. The circular does not state that the rate of interest at 13.50% in respect of the loan advanced to Small Scale Industry is applicable when there is refinancing facility by the IDBI. No doubt learned counsel for the plaintiff relied upon the IDBI scheme, but we do not find it necessary to refer the same since there is no reference to IDBI scheme in the category No. VIII of advances by way of term loan made to a Small Scale Industry.

101. It is next contended that even charging the interest at 13.50% on the loan advanced on the OSL account, the defendants are liable to pay interest at 15% because they have not paid the principal sum and the interest as and when the same became due. As the principal sum and the interest became overdue as per Clause (4) of Ex. P. 2, the bank was entitled to claim interest on the overdue principal sum as well as on the interest. In this regard apart form the terms contained in Ex. P. 2, learned counsel placed reliance on the circular of the Reserve Bank of India dated 26th June, 1976, in which it is stated thus:

“2. Reserve Bank enjoins on commercial Banks that they should follow the guidelines suggested by the Committee, which are broadly as follows:

(1) Circumstances under which penal rates of interest could be levied by banks and the justification for such levy”.

102. In sub-para (ii), the levels at which penal rates should be charged is mentioned. Clauses (a) and (d) are relevant for our purpose which are as follows:

“(ii) Levels at which penal rates should be charged:

(a) Generally penal rates may be charged at rates varying from 1 per cent to 2.5 per cent p.a, over and above the normal rates applicable to the advances, subject to the condition that under no circumstances should the penal rate exceed 2 per cent over the ceiling rates on advances prescribed by the Reserve Bank for various classes of banks (i.e, 16.5 per cent or 17.5 per cent p.a, as the case may be, plus 2 per cent. However, separate treatment may be given for certain categories of advances as indicated below.

(d) In the case or small-scale industrial units with credit limits of over Rs. 5,000/- but less than Rs. 2 lakhs, the penal rate should not exceed 1.5 per cent p.a, provided the overall rate of interest, inclusive of penal rate, does not in any case exceed one ceiling rates of interest prescribed by the Reserve Bank for various classes of banks, i.e, 16.5 per cent or 17.5 per cent p.a as the case may be. In the case of small-scale industrial advances to units having limits of Rs. 2 lakhs and over, the penal rate may be on the scales indicated in sub-paragraph (a) above”.

103. Therefore, it is contended by Sri Aswatharaman, learned counsel for the plaintiff that even if the bank has to calculate the interest at 13.50%, in the light of the circular, it would be entitled to levy and recover interest at 16%, (13.50% + 2.50%). Therefore, the learned counsel has filed the recalculated account extract from 13-11-1982 to 7-11-1985 pertaining to OSL 17/1982 calculating the interest at 13.5 + 2.5% on over due amount. Though this account extract was not produced before the trial Court, we have allowed it to be produced and marked it as Ex. P. 37 because this extract goes in favour of the defendants and the calculations made therein are not disputed. Thus, as on the date of filing of the suit, under the OSL loan account 17/82, the plaintiff was entitled to only Rs. 15,63,690/- and not Rs. 16,23,285.25 ps. The excess sum has to be disallowed in the light of the finding recorded by us and also in the light of Ex. P. 37 fresh recalculated account extract filed by the Bank.

Re. SODH Account No. 8/82:

104. It is contended by learned counsel for the plaintiff that the first defendant availed the various loans from various branches of the plaintiff-Bank amounting to over Rs. 25 lakhs. Therefore, as per V Category of advances, the plaintiff-Bank is entitled to claim interest at the rate not exceeding 19.50% 18% and 17.50% as mentioned in the circular. In this regard, the learned counsel for the plaintiff placed reliance on Ex. D.7 the sanctioned letter. It may be noticed in this regard that there is no plea raised by the plaintiff that the first defendant has availed the loans over and above Rs. 25 lakhs. There is no evidence on record. Therefore, it is contended by the defendants that such a contention should not be allowed. As there is no foundation laid in the pleadings and no issue also was raised in this regard, we are of the view that the contention of the plaintiff which is not a pure question of law cannot be considered in the appeal for the first time. It is accordingly rejected. Therefore, we consider the case only on the basis that the loan availed by defendant-1 is over Rs. 2 lakhs and less than Rs. 25 lakhs. In that event the interest that can be levied by the plaintiff on the SODH Account 8/82 would be 17.50% p.a upto 31st March, 1983 and at 16.50% p.a from first April, 1983 upto 31st March, 1985 and from 1st April, 1985, 16.50% p.a as per Item No. 2(b) in V Category of advances as extracted earlier. The Bank is not entitled to claim interest at the rate more than what is stated above because the circular specifically states that the interest shall not exceed the rates mentioned therein. However, it is contended that as the defendants failed to pay the amount as and when it became due, the plaintiff-Bank was entitled to claim interest as per the circular dated 26-6-1976 referred to above, on the overdue amount at 2.50% per annum over and above the normal rate of interest. From Ex. P. 24 the account extract pertaining to this loan, it is noticed that the interest charged from time to time did not exceed 20% upto 31st March, 1983, and 19% from 1st April, 1983 to 31st March, 1985. However, the interest levied from 1st April, 1985 exceeded by half per cent; but Ex. P. 24 indicates that before filing the suit, the excess interest levied at 5% has been credited to the account of defendant-1 pertaining to SODH loan account 8/82 and after deduction the excess interest, the amount of Rs. 9,11,765/- has been claimed as due on the date of the suit. Therefore, we are of the view that the Bank has neither overlooked the circulars of the Reserve Bank of India nor claimed interest in excess of the rates prescribed by the various circulars referred to above. Hence, we do not see any substance in the contention of the defendants that the bank has arbitrarily imposed the interest at higher rate contrary to the Reserve Bank of India Circulars.

Re. PCL Account No. 1/82:

105. According to the plaintiff, the rates prescribed by the Reserve Bank in respect of the PCL loan in question are as follows:

From 2-3-1981 From 1-4-1983 From 1-4-1985 “5. Export credit not otherwise specified. Not exceeding 17.50% Not exceeding 17.50% Not exceeding 17.50%

106. It is not in dispute that PCL loan in question falls under the category of advances described as “Export Credit not otherwise specified”. As per Ex. P. 25, account extract pertaining to PCL 1/82, the interest in charged in accordance with the aforesaid rates plus the interest on the overdue amount at 2.5% because the first defendant did not pay the amount of instalments and the interest as and when the same became due. On the contrary, it is contended by Sri Aswatharaman, learned counsel for the plaintiff that even as per the aforesaid rates of interest, the Bank ought to have claimed Rs. 1,60,838.69 ps. whereas it has claimed Rs. 1,31,356.99 ps. Therefore, the decree is required to be modified in this regard. It is not possible to accept this contention because the original claim of the plaintiff itself is for Rs. 1,31,356.99 ps. As such it cannot be enhanced in appeal. Therefore, we are of the view that the plaintiff cannot be allowed to claim excess amount by way of interest on the amount due under the PCL loan account as it has not made any such claim in the plaint.

107. Accordingly, Point No. 4 is answered in the affirmative. Subject to the modification by way of reduction of the amount claimed under OSL Account No. 17/82 as indicated earlier, Point No. 5 is answered in the negative.

Miscellaneous Contentions:

108. It is contended by learned counsel for the plaintiff that the learned trial Judge has ordered simple interest from the date of the suit at the rate of 15% on the principal sum pertaining to term loan and at 15.5% on the principal sum due under the SODH account 8/82 and at 18.5% on the PCL loan from the date of the suit till the date of the decree. It is submitted by the learned counsel for the plaintiff that even in respect of the current and future interest upto the date of repayment, compounding of interest ought to have been allowed. Learned counsel has placed reliance on a decision of the Supreme Court in Vishwanatha Reddy v. Konappa Rudrappa Nadgouda, (1969) 1 SCC 220 : AIR 1969 SC 600. We do not consider it necessary to go into the correctness of this contention because even if the contention of Sri Aswatharaman, learned counsel for the plaintiff, is accepted as correct, the relief cannot be granted because it results in enhancing the decretal liability and increasing the decretal amount for which there is no cross-objection or appeal preferred by the plaintiff-Bank. However, reliance is placed on the provisions contained in Order 7, Rule 7 and Order 41, Rule 22 of the Code of Civil Procedure and it is contended that in the light of these provisions even in the absence of an appeal or cross-objection by the respondent-plaintiff relief can be granted enhancing the decretal liability. No doubt, under Order 41, Rule 22 of the Code of Civil Procedure, it is open to the respondent in the appeal to support the decree without filing in appeal or cross-objection challenging the findings recorded against him, but it does not enable the respondent to have the decree modified and the liability enhanced without preferring cross-objection or an appeal. Similarly, Order 7, Rule 7 of the CPC, cannot be availed for granting such a relief which would be beyond the scope of the appeal and which would result in substantial variation in the decree to the disadvantage of the appellant. Hence, we decline to accept the contention.

109. It is contended by Sri Udaya Holla for the 3rd defendant that the entries in the accounts extract are not proved because P.W 1 does not speak to any of the entries; that a mere production of the account extracts is no proof of it, hence the plaintiff-bank cannot rely upon Exs. P. 23 to P. 25. In support of this contention, learned counsel has placed reliance on a decision of the Supreme Court in Chandradhara Goswami v. Gauhati Bank Ltd., AIR 1967 SC p. 1058.

110. It is relevant to notice that nowhere in the written statements filed by the defendants particular entry in any one of the accounts extracts which were produced along with the plaint was challenged. In the case decided by the Supreme Court, referred to above, the defendant challenged the particular entry pertaining to Rs. 10,000/- but the plaintiff therein did not produce any evidence to prove that entry. Hence, the Supreme Court specifically held that the said entry was not proved. Therefore, in the absence of any challenge to any of the specific entries in the accounts extracts produced by the plaintiff and in the light of provisions contained in Section 21-A of the Banking Regulation Act, it is not possible to accept this contention. Hence, it is rejected.

111. For the reasons stated above, both the appeals are allowed in part. The Judgment and decree of the trial Court are modified in the following terms:

The suit of the plaintiff as against defendant 4 and defendant 5 is dismissed with costs. There shall be a decree in favour of the plaintiff for a sum of Rs. 26,06,811.99 ps. against defendants 1 to 3-A and 3-B and 6 to 9, jointly and severally, and defendants 2 and 6 to 9 are also personally liable, with proportionate costs throughout, with interest at 15% on the principal amount of Rs. 15,63,690/- on OSL Account 17/82, and at 15.5% on the principal sum of Rs. 9,11,765/- under SODH Account 8/82, and at 18.5% on the principal amount of Rs. 1,31,356.99 ps. under PCL loan Account 1/82 from the date of the suit till the date of realisation.

112. The liability of the defendants 3-A and 3-B is confined to the extent of the estate of the third-defendant devolved upon them. The parties shall give and receive costs proportionate to their success throughout.

113. In all other respects, the decree of the trial Court is affirmed.

RFA No. 396 of 1990 c/w RFA No. 219 of 1991

Jayakunvar Manilal Shah v. Syndicate Bank, Banavasi, Uttara Kannada District

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Defendant No. 3's Arguments

Plaintiff-Bank's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Jayakunvar Manilal Shah v. Syndicate Bank, Banavasi, Uttara Kannada District

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