Bhabani Sankar Patra v. State Bank Of India And Another

P.C Misra, J.:— This appeal arises out of a suit for recovery of money said to have been advanced by the State Bank of India (Respondent 1) under a cash credit agreement from the present appellant (Defendant 2) and the present respondent 2 (defendant 1).

2. The plaintiff's case in short is that the first defendant was carrying on the business in ready-made clothes, hosiery goods etc. in Berhampur town and had approached the plaintiff-Bank for a loan accommodation under a cash credit account for the purposes of his business. The second defendant (the present appellant) offered to stand as a guarantor for repayment loan by defendant 1. On 20-4-1970 the plaintiff-Bank granted a loan accommodation to defendant 1 for a sum of Rs. 5,000/- under a cash credit account. The amount of Rs. 5,000/- was secured by the first defendant by executing a promissory note on 20-4-1970 in favour of the second defendant as the guarantor for the loan and the latter duly endorsed the said promissory note to and in favour of the plaintiff-Bank on the same day. The first defendant also hypothecated his stock of mercantile in ready-made cloths, hosiery, etc. in favour of plaintiff-Bank by executing a hypothecation agreement on the very same day, i.e, on 20-4-1970, which was duly confirmed by the second defendant as the guarantor agreeing, inter alia, that the whole of the stock of the ready-made cloths, hosiery, etc. brought into and stored in the shop or godown of defendant 1 would stand hypothecated to the plaintiff-Bank by way of first charge as security for repayment of all moneys payable by the defendant 1 to the plaintiff-Bank in respect of the said cash credit account. A separate letter of guarantee was also executed by the second defendant in favour of the plaintiff-Bank on the same day. The plaintiff-Bank opened an account in favour of defendant 1 in accordance with the terms and conditions of the agreement with the defendants with a credit of Rs. 5,000/- whereafter the first defendant started withdrawing money from the said account. In due course, a sum of Rs. 4,995.61 paise which included interest at the stipulated rate became payable to the plaintiff by defendant 1, for repayment of which the plaintiff-Bank made a demand but without any result. The plaintiff-Bank filed the present suit for recovery of the aforesaid amount together with pendente lite and future interest a detailed account of which has been incorporated in the plaint.

3. Defendant 1 did not choose to appear and contest the suit in spite of summons duly served on him. Defendant 2 (the present appellant) alone contested the suit. His plea was that he was not aware of any loan granted by the plaintiff-Bank to defendant No. 1. It has been stated that the officials of the plaintiff-Bank along with defendant No. 1 once approached him (defendant No. 2) and persuaded him to follow them to the bank premises where he was required to sign some printed papers the contents of which were not known to him nor he was made aware of the same. It was represented to him at that time, that the said papers were necessary to be signed for the purposes of defendant No. 1 under which defendant No. 2 would not incur any liability. Similar representation was made by the bank authorities in respect of the promissory note which defendant No. 2 was made to endorse in favour of the Bank. Defendant No. 2 characterised the transaction as a collusive one. He further alleged that the promissory note was not backed by consideration and the endorsement made by him in the promissory note does not amount to transfer of negotiable instrument, under which, he cannot have any liability whatsoever. It was also pleaded by defendant No. 2 that the plaintiff-Bank was required to have a constant check over defendant No. 1 and his goods which were made the first charge against the loan. The indifference of the plaintiff-bank and its acts and omissions contrary to the terms of the agreement would amount to waiver of the rights of the Bank as against defendant No. 2, if any, the effect of which would be that defendant No. 2 shall stand released of any liability under the said agreement. Defendant No. 2 had intimated the plaintiff-bank in August, 1972 about the clandestine conduct of defendant No. 1 and further urged that the plaintiff-bank should take immediate steps to realise their dues, if any, from defendant No. 1. It was also indicated that unless immediate steps are taken in that behalf, he (defendant 2) would no longer stand as a surety. Similar intimation was again sent to the plaintiff-bank by defendant 2 in Oct. 1972, but the bank deliberately kept quiet being in collusion with defendant 1 giving him enough time to dispose of all his articles and ultimately to move away from the said locality. Under these circumstances, it has been urged by defendant 2 that his liability, if any, under the alleged agreement stood discharged and he is no more liable as a guarantor of defendant 1. A plea was also taken that the limit of cash credit transaction was originally fixed at Rs. 3,000/- and any advancement of loan beyond the said limit is unenforceable against defendant 2. On these grounds, it was claimed that the suit was liable to be dismissed as against defendant 2.

4. The learned Subordinate Judge of Berhampur after recording the evidence offered by the parties decreed the suit ex parte against defendant 1 and on contest against defendant 2 (the present appellant) with costs together with pendente lite and future interest. The present appellant in this appeal challenges the legality of the said judgment and decree.

5. The finding of the learned trial court relating to advancement of loan under the cash credit account stands unchallenged. The only point urged in this appeal is as to whether the liability under the said transaction extends to defendant 2 who, according to the plaintiff, has made himself liable to pay the same being a guarantor. The present appellant in the written statement had taken a plea that he contributed his signature to some printed papers and the promissory note without knowing the contents thereof and being assured of the position that no liability would accrue against him by his being associated with the transaction. This plea, in our opinion, has been rightly rejected by the learned trial court. Besides the oral evidence which has been discussed by the learned court below on this issue with which we concur there are some documents to be presently referred to which clinch the issue. In Ext. B dt. 8-8-72 and Ext. 11 dt. 3-10-72 the present appellant had written to the Agent, State Bank of India, Berhampur, to take steps against defendant No. 1 to take charge of the stock in his business premises for recovery of the amount due from defendant 1 admitting therein that he stood as a surety in the loan transaction of the Bank with defendant 1. In Ext. B he cautioned the Bank that unless immediate steps are taken against the borrower, the debts may not at all be realised as the borrower was making speedy arrangements to sell away his entire stock and run away from Berhampur. He further requested the Bank to ask the debtor (defendant 1) to furnish a new surety as he (defendant No. 2) was no longer willing to continue as a guarantor. In the second letter (Ext. 11) similar requests were made by defendant 2 so that the Bank would take step to realise the debt from defendant 1 by attachment and sale of his movables in his house as also in the business premises. Those letters further indicate that defendant 2 acknowledged his responsibility as a guarantor for which he was anxious that the Bank should realise the debt lest he may be held responsible for the dues. In view of this position, we are unable to accept the plea of defendant 2 (the present appellant) that he was not aware of the contents of the documents signed by him on the date when the cash credit agreement and the promissory note were executed. The aforesaid conclusion is further strengthened by the fact that neither in Ext. B nor in Ext. 11 the defendant 2 had breathed a word about his ignorance of the contents of the documents nor did he dispute his liability as a guarantor.

6. The only contention raised by the appellant in this appeal is that he has been absolved from the liability, if any, as a guarantor with effect from 8-8-1972, the date of Ext. 11, when he had intimated the Bank that defendant 1, the borrower, is making brisk attempts to sell away the entire stock of goods in order to escape his liability and that the Bank should waste no time to take all possible steps for recovery of the dues from him. According to him, the Bank was guilty of taking no action against defendant 1 which, he alleges to be, in pursuance of a connivance between the Bank and defendant No. 1.

7. In support of the aforesaid contention the learned counsel appearing for the appellant relies upon various provisions of the Contract Act relating to the discharge of the surety. In this connection Ss. 133 to 141 of the Contract Act must be read together. Section 133 of the Contract Act provides that any variance made without surety's consent in the terms of the contract between the principal debtor and the creditor, discharges the surety, as to the transactions subsequent to the variance. A contract of guarantee as defined in S. 126 of the Contract Act is a contract to either promise or discharge the liability of a third person in case of his default. It is a tripartite agreement between the surety, the principal debtor, and the creditor. It is in essence a contract whereby the guarantor/surety agrees to be answerable for some liability of the principal debtor to the creditor. Thus S. 133 of the Contract Act provides that the surety being a party to the contract any variance in the terms of the contract made without his consent would have the effect of discharging him of all the transactions subsequent to the variance. It is not a case in which there has been any variance in terms of the contract between the principal debtor and the creditor so as to have the effect of discharging the surety. Therefore, this section, has no application whatsoever. This is also not a case falling under S. 134 of the Contract Act which lays down that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. The learned counsel appearing for the appellant does not also rely upon S. 135 of the Contract Act, as a discharge of the surety under the said section requires that the creditor must have either made a composition with the principal debtor or a promise to give time to the principal debtor or not to sue the principal debtor by virtue of a contract made between the creditor and principal debtor without the surety's consent. Section 136 contains provisions that the liability of the surety remains unaffected where the creditor or enters into a contract with a third person and not with the principal debtor to give time which evidently has no application in this case. Some reliance was placed on S. 137 of the Contract Act by the learned counsel for both the sides. The learned counsel for the appellant urged that the agreement for cash credit executed between the parties on 20-4-1970 (Ext. 2) contains a provision that forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him would discharge the surety. We have closely gone through the recital of Ext. 2 which in our opinion does not contain any such provision. The sixth paragraph of the said agreement which was brought to our notice in this connection merely enumerates the circumstances under which the bank could proceed against the borrower by sale of the hypothecated goods or otherwise. There is no stipulation whatsoever that the creditor's forbearance to sue would have the effect of discharging the surety. The learned counsel for the respondent also relied on the said section and contends that mere forbearance on the part of the creditor to sue the principal debtor or failure to enforce any other remedy against him does (not) per se discharge the surety in order to meet the arguments advanced on behalf of the appellant that the conduct of the creditor bank in not taking any action pursuant to the letters of the surety (the present appellant) would discharge him. In view of the unambiguous language of S. 137 of the Contract Act, there can be no doubt that the surety is not discharged by the mere passive conduct of the creditor in not suing the principal debtor in response to the letters (Exts. B and 11) from the surety. It is evidently not a case which comes under the provision of S. 138 or Section 140 of the Contract Act for which we refrain from discussing the provision of the said sections.

8. We shall now proceed to examine as to whether the liability of the surety stands discharged by application of the provisions of Ss. 139 and 141 of the Contract Act. Section 139 of the Contract Act provides that the surety is discharged (a) if the creditor does any act which is inconsistent with the rights of the surety, or (b) if the creditor omits to do any act which his duty to the surety, requires him to do, and the eventual remedy of the surely himself against the principal debtor is thereby impaired. The basic principle of S. 139 of the Act is that it is the duty of the person who has secured a guarantee to do every act necessary for protection of the rights of the surety, as a surety is a person who receives no benefit and no consideration out of the transaction but has voluntarily accepted the liability of the principal debtor to the creditor. By application of this section, surety is discharged, when a creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do and the eventual remedy of the surety is impaired as a consequence thereof. The impairment of the eventual remedy of the surety is essential for application of the Section in addition to the acts of commission and omission on the part of the creditor.

9. Mr. Jagdev Ray, the learned counsel for the appellant, has relied upon the stipulation in paragraph 6 of the cash credit agreement (Ext. 2) which, according to him, the Bank is guilty of non-performance. The said clause authorises the Bank to take possession of the goods hypothecated and dispose of the same to satisfy the outstanding dues against the principal debtor under any circumstance which in the opinion of the Bank would endanger the security in the goods. According to Mr. Jagdev Ray, the learned counsel for the appellant, the Bank in the due discharge of his duty should have proceeded to take possession of the goods and dispose of the same after receipt of the letters of the surety (Ext. B and Ext. 11) in which he had requested the Bank to take steps to realise the dues from the defendant No. 1 by taking possession of the goods and other moveables belonging to defendant No. 1, the principal debtor, as by that time the latter was preparing to sell away the entire stock of goods with a view to escape his liability. Assuming that the Bank did not take any action in spite of the letters (Exts. B and 11), we are unable to reach a conclusion that in the facts and circumstances of this case, the plaintiff-Bank has done any act which is inconsistent with the rights of the surety or has omitted to do any act which his duty to the surety requires him to do. Besides, as already stated, in order to attract S. 139 there must not only be an act inconsistent with the rights of the surety or any omission to do any act which his duty to the surety requires him to do, but also the impairment of the eventual remedy of the surety against the principal debtor. We are unable to find the last requirement of the Section, which according to us is the crucial factor, has been satisfied, even if the other ingredients of the Section are assumed to exist.

9A. The learned counsel for the appellant relied upon a decision of their Lordships of the Supreme Court reported in AIR 1980 SC 1528 (State Bank of Saurashtra v. Chitranjan Rangnath Raja) in support of his contention that by the combined operation of S. 139 and S. 141 of the Contract Act a surety shall be taken to have been discharged. In the said case the State Bank of Saurashtra had given cash credit facility to a businessman to the tune of Rs. 75,000/- as aginst two sureties offered by him, namely, (1) the pledge of goods to be kept under its lock and key under the supervision of the Bank, and (2) personal guarantee of the surety. It was clearly stipulated that the Bank Godown Keeper would look after the goods pledged.

10. It was canvassed in the appeal before the Hon'ble Court that the Bank wrongfully lost the goods or was negligent in retaining the goods within its custody or the bank wrongfully parted with the goods without the consent of the surety and, therefore, the surety was discharged. It was concurrently found by the courts below that the Bank was utterly negligent with regard to the safe keeping and handling of the pledged goods and the pledged goods were lost on account of such negligence. The High Court in appeal held that the Bank was utterly negligent and had not exercised such care as a prudent man would in the circumstances of the case which resulted in the loss of the security and, therefore, in view of combined operation of S. 139 and S. 141 of the Contract Act, the surety was discharged. In the appeal by certificate under Art. 133(1)(a) of the Constitution, it was contended that even if it is found as a fact that the negligence of the creditor Bank was responsible for the loss of security (Pledged goods), yet the surety would not be discharged, in the face of certain clause in the letter of guarantee, which were construed by the Supreme Court to be of no assistance to the creditor Bank. Their Lordships refused to entertain a contention that S. 141 of the Contract Act would not be attracted and the surety would not be discharged even if it is found that a creditor has taken more than one security on the basis of which advance was made and the surety gave personal guarantee on the good-faith of the other security being offered by the principal debtor which itself may be a consideration for the surety offering his personal guarantee and the creditor by its own negligence lost one of the securities. Their Lordships observed that acceptance of such a contention would tantamount to putting a premium on the negligence of the creditor to the detriment of the surety who is usually described as a preferred debtor. It is thus, apparent that the Supreme Court in the aforesaid case declared the surety to have been discharged on the basis of a finding that the bank lost the pledged goods on account of its own negligence, which is not the case here.

11. Mr. Sinha appearing for the respondent urged that the decision of the Supreme Court reported in AIR 1980 SC 1528 (supra) is distinguishable from the present case inasmuch as in that case their Lordships were dealing with the rights of the pawnee with regard to the pledged goods whereas in this case the goods were hypothecated and not pledged. The distinction between hypothecation of goods and pledge of goods is well known. In case of pledged goods, the goods are stored in the godown under the lock and key of the Bank under the Bank's supervision. Thus, the pledged goods remain under the physical possession of the Bank and no withdrawals or additions of the stocks in the godown are permissible without the Bank's permission. The position with regard to the hypothecated goods is, however, different because these goods are, strictly speaking, not under the lock and key of the Bank but allowed to be kept at the premises of the borrower without any lock and key of the Bank as such but are supposed to be under the constructive possession of the Bank by virtue of deed of hypothecation under which the borrower is obliged to submit regular returns to the Bank indicating the increase and decrease of the value of the said goods to enable the Bank from time to time to determine the drawing of the borrower with regard to it. In law, however, there is no difference with regard to the legal possession of the Bank. In both the cases, the goods are under the constructive possession of the Bank, while in the case of pledge they are also in the actual physical possession of the Bank, but in the case of hypothecated goods they are in actual possession of the borrower subject to the restrictions mentioned above. It is, therefore, said that hypothecation is only an extended idea of a pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself. We are, therefore of the view that the decision reported in AIR 1980 SC 1528 (supra) is not distinguishable because of the distinction between the hypothecation and pledge but because in the said case as already stated it was found as a fact that the goods which formed one of the securities was lost as a consequence of the negligence by the Bank.

12. It was strenuously contended by the learned counsel appearing for the appellant that the plaintiff-bank having failed to take any action whatsoever against the principal debtor despite the letters of the present appellant referred to earlier, it was a case of forbearance on the part of the Bank for which the surety should be taken to have been discharged. A reading of the provisions in S. 137 and S. 141 of the Act together it clearly emerges that while a mere forbearance to enforce the security against the principal debtor will not discharge the surety, and act or omission by which the creditor loses or without the consent of the surety, parts with the security, it has the effect of discharging the surety to the extent of the value of the security. Whether any particular act on the part of the creditor constitutes mere forbearance without move or constitutes an act by which the creditor puts it, out of his power to handover of security to the surety, will depend upon the facts and circumstances of a particular case — vide AIR 1977 Kant 14 Karnataka Bank Ltd. v. Gajanan Sankararao Kulkarni. In the guarantee agreement (Ext. 3) executed by the present appellant, the surety, it has been agreed that the default on the part of the Bank in requiring or enforcing the observance or performance of any of the stipulated terms shall not have the effect of releasing the surety. The relevant passage from the said agreement (Ext. 3) is quoted below for reference.

“We/I agree that no failure in requiring or obtaining the said security or in the observance or performance of any of the stipulations or terms of the said agreement and no default of the said Bank in requiring or enforcing the observance or performance of any of the said stipulations or terms shall have the effect of releasing us/me from our/my liability or of prejudicing the said Bank's rights or remedies against us/me under the said promissory note.”

13. On an analysis of the circumstances placed before us and the relevant provisions of law which we have discussed, we do not find any legal justification to hold that the appellant was released from the liability as a surety. Accordingly we do not find any merit in this appeal and the same is dismissed. In the facts and circumstances of this case we make no order as to costs of this Court.

B.K Behera, J.:— I agree.

Appeal dismissed.