Jayant T. Shah v. Andhra Bank Ltd

(1) This appeal is filed by the 3rd defendant against the decree in o. S. No. 516 of 1972 on the file of the 1st additional judge, city civil court, hyderabad.

(2) The andhra bank limited, the plaintiff, filed the suit to recover rs. 14,768 - 57ps. With subsequent interest. The 1st defendant is m/s. M. A. C. Industries of which the 2nd defendant, mrs. Maqbool fatima, is the proprietor. The 1st defendant had an account with the plaintiff - bank. The 2nd defendant approached the plaintiff in the beginning of april, 1969 to extend the credit facilities to the extent of rs. 20,000 and also wrote a letter to that effect on 5th april, 1969. The 3rd defendant jayant t. Shah, subsecribed his signature to that letter. After discussion, the 2nd defendant sent a letter dated 9th june, 1969 addressed to the chairman of the plaintiff - bank requesting for an overdraft facility to the extent of rs. 20,000. She offered security of two planners with motors, fiat car, jawa motor - cycle and vespa scooter, of a total value of rs. 33,500. The plaintiff - bank granted overdraft facility. The defendants 1 to 3 executed the necessary documents in favour of the plaintiff including a promissory note dated 18th august, 1969 for rs. 20,000 repayable with interest at 4l/2 % over and above the reserve bank of india rate of interest with a minimum of 9l/2 per annum with quarterly rests. The 3rd defendant also signed all the necessary documents as a co - obligant including the aforesaid promissory note undertaking joint and several liability along with the 2nd defendant and further signed a letter dated 18th august, 1969 in the printed form to the effect that the amount rs. 20,000 might be paid to the 1st defendant. The 2nd defendant operated the account and drew the money as sanctioned by the plaintiff. The plaintiff called upon the defendants several times both orally and in writing, to adjust the amount but they did not pay the amount. Towards the end of november, 1970 the plaintiff wrote to the first defendant that the facility fell due on 18th august, 1970. Repayment due thereon was rs. 19,995 - 06. The 2rd defendant sent a letter to the plaintiff - bank, dated 29th january, 1971 promising to repay the amount and requesting for further time. The plaintiff again wrote another letter, dated 12th april, 1971 intimating the balance then due. The plaintiff wrote another letter, dated 14th august, 1971 to the 2nd defendant intimating that a sum of rs. 21,237 - 37 ps. Was due and it was noticed that the 1st defendant - factory was not working and the defendants should adjust the amount within 7 days from the date of the receipt of the letter. A copy of that letter was also sent to the 3rd defendant. Still they did not pay. The 2nd defendant gave a reply stating that some more time might be given for payment. The 3rd defendant did not give any reply. Subsequently on 31st august, 1971, the plaintiff addressed another letter to the 1st defendant informing the 2nd defendant that no further extension of time would be granted. Still there was no payment. Again on 4th february, 1972, the plaintiff issued a notice through a lawyer calling upon them to adjust the amount completely within 3 days after the receipt of the registered notice failing which the hypothecated goods would be seized and sold under the hypothecation agreement. The 3rd defendant was also similarly called upon to adjust the amount failing which appropriate legal steps would be taken and a copy of the registered notice sent by the plaintiff's lawyer to the 1st defendant was enclosed for reference. That registered cover was returned unserved with the postal endorsement "refused". The plaintiff seized the fiat car no. 5522, which was hypothecated to the bank and ultimately sold it for rs. 9,500 and credited it on 16th february, 1972 to the account of the defendants. Thus as per the account, on the date of the plaint, the defendants had to pay a sum of rs. 14,768 - 67 ps. For which the present suit is filed. In the plaint it is stated that the 3rd defendant is liable to repay the entire debt due to the plaintiff along with defendants 1 and 2 since he is a co - obligant and undertook joint and several liability for this amount.

(3) In this case, i need not refer to the written statement filed by the defendants 1 and 2. They have not filed appeals. In the written statement filed by the 3rd defendant the appellant herein, he has stated that he merely attested all the documents as a witness but not as a co - obligant. He has further stated that the defendants 1 and 2 have hypothecated items 1 to 4 out of which only one item was seized and sold by the plaintiff and the value of the other items is more than sufficient to meet the claims of the plaintiff.

(4) On a consideration of the evidence on record, the learned additional judge held that the plaintiff sanctioned overdraft facility to the 1st defendant to the extent of rs. 20,000 and the 2nd defendant as the proprietor of the 1st defendant and the 3rd defendant as a co - obligant had signed the several documents in favour of the plaintiff undertaking the liability. He has found that the 3rd defendant has executed several documents as a surety undertaking liability along with the defendants 1 and 2. When it was contended on behalf of the 3rd defendant that the plaintiff cannot proceed against him without first exhausting the remedy available to him to proceed against the hypothecated movables, which according to him, were more than sufficient to discharge the debt, the learned judge held that he was satisfied from the evidence of p. Ws. Nos. 2 and 3, that the other movables were not available to be seized by the plaintiff. He further held that even if the plaintiff had not seized the movables, the liability of the 3rd defendant who is a co - obligant is co - extensive with that of the defendants 1 and 2 and does not cease. Finally, he held that the 3rd defendant was liable along with defendants 1 and 2 as a co - obligant. In the result, he decreed the suit against all the defendants for rs. 14,768 - 57 ps. With subsequent interest thereon at 9 l/2% per annum from the date of the suit till the date of the judgment and at 6% per annum thereafter and with costs. Questioning that decree to the extent it is adverse to him, the 3rd defendant has filed this appeal.

(5) In this appeal, it is submitted by sri sitaramayya, the learned counsel for the appellant, that the 3rd defendant was a surety for the debt and when the other articles could not be traced, in view of section 141 of the contract act, the 3rd defendant is relieved of the burden of discharging the debt to the extent of the value of the property that had been lost by the plaintiff. Sri narasimha rao, the learned counsel for the respondent - bank, has submitted that this question was not raised in the lower court and therefore, the plaintiff had no occasion to adduce evidence in that regard. He further submitted that the goods were not pledged with the plaintiff - bank by the defendants 1 and 2 much less their possession was given to the bank. Only they were hypothecated to the bank and the bank did not have their possession. He also contended that the 3rd defendant is not a surety but a co - obligant and: therefore the 3rd defendant could not invoke the benefit of section 141 of the contract act.

(6) On the evidence on record, i find that the goods were not pledged with the plaintiff - bank but they were only hypothecated. In this suit, they have produced only hypothecated letter with reference to the fiat car. Clause 10 of that letter clearly shows that the possession of the car was retained by the defendants 1 and 2. However, liberty is given to the bank to take possession of the car and to sell it without prejudice to the bank's rights or remedies against the borrower personally and apply the net proceeds of such sale towards liquidation of the balance due to the bank. It is true that the letter ex. A - 2 dated 9th june, 1969 written by the 1st defendant shows that the defendants were prepared to offer machinery and the motor vehicle as security but the bank has stated that all these goods were only hypothecated to it. It is not disputed that the bank did not have possession of these goods. In fact when the bank has stated in the plaint that these goods were hypothecated to it, it is not denied by the defendants in the written statement. On the other hand, the defendants have proceeded on the assumption that these goods were only hypothecated to bank. It means the bank did not have possession of these goods.

(7) There is a distinction between "hypothecation" and "pledge". In the indian contract act (9th edition) by pollock and mulla at page 688, the difference between 'hypothecation' and 'pledge' is neatly stated:

"in hypothecation the possession of the property is restrained by the owner and certain rights in that movable property are transferred to the person in whose favour the property is hypothecated. But in a pledge the possession of goods also passes to the pledgee by way of security though the possession may be constructive. The true distinction from hypothecation is that the constructive possession of the goods in the case of pledge is specifically secured by the terms of the contract and is continued unabated throughout"

In this case, the goods were hypothecated to the bank. The possession of those goods was still retained by the owner i. E. , the defendants 1 and 2.

(8) Section 141 of the contract act reads as follows:

"a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the - value of the security."

(9) In order to attract the section, there must be a surety and there must also be a security. In the case on hand, the question is, whether the 3rd defendant is a surety and whether the goods were given by way of security to the creditor. The case of the plaintiff - bank from the beginning is that the 3rd defendant is a co - obligant. His case in the written statement is that he has merely attested all the documents only as a witness. He denied that he was a co - obligant. He did not say he was a surety. Even, the lower court has found that the 3rd defendant was a co - obligant. It is true that at one stage the learned judge has observed that the defendant has signed on several documents as a surety. But after reading his judgment in entirety and his specific findings on the relevant issues, i have no doubt in my mind that the learned judge has held that the 3rd defendant is a co - obligant. He rejected the contention of the 3rd defendant that he had signed the documents merely as a witnes. Apart from that, it is not disputed that the 3rd defendant had joined in the execution of the promissory note, exhibit a - 19, in favour of the bank. He does not say that that he had executed the promissory note as a surety nor does it show that he had merely signed it as a witness. Exhibit a - 2s, the letter of authorisation given by the 3rd defendant to the plaintiff bank also shows that he is a co - obligant.

(10) Even assuming for the sake of argument that he is a surety, still no security was given in this case for him to invoke the benefit of section 141. As stated by me already, the goods were only hypothecated. Under section 141, if the creditor loses or without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security. That question cannot arise in the case of hypothecation of goods. When the goods are not in his possession, there is no question of his losing or parting with the goods. Therefore i am of the opinion that the 3rd defendant cannot claim the benefit of section 141 of the contract act in this case.

(11) In this connection, i will refer to the decisions relied upon by the learned counsel for the appellant. In state of madhya pradesh v. Kaluram, at an auction held by the divisional forest officer for sale of "felled trees", one jagatram was declared the highest bidder and the trees were sold to him for rs. 12,100. The amount of the bid was payable in 4 instalments. Jagatram executed a contract in favour of the governor of madhya pradesh in which were incorporated the terms and conditions of the sale. He paid the 1st instalment due under the contract. Nathuram and kaluram stood sureties for him and executed a bond undertaking to discharge the liability of the forest contractor in case of any act, omission, negligence or default on the part of the contractor for any sum which may become payable by the contractor to the governor by or under the conditions of the contract. Jagatram removed almost the entire quantity of trees sold to him. Since he did not pay the remaining 3 instalments of the price, the state of madhya pradesh took proceedings to recover from kaluram the amount due by jagatram as arrears of land revenue. Then kaluram commenced an action against the state of madhya pradesh for a declaration that he was not liable to pay the arrears of forest dues recoverable from jagatram and for an injunction restraining the state from realising or from continuing the recovery proceedings with regard to those forest dues from him. The trial court held that the forest officers were negligent in allowing the contractor jagatram to remove the trees sold, and on that account the security of the surety was impaired and the surety stood discharged for the whole amount recoverable from the contractor. The high court of madhya pradesh confirmed the decree of the trial court. In appeal filed by the state of madhya pradesh, the supreme court held that the forest officers had allowed jagatram to remove the goods sold before the instalments due on 1st december, 1954. The state had a charge over the goods sold as well as the right to remain in possession till payment of the instalments. When the goods were removed by jagatram, that security was lost and to the extent of the value of the security lost the surety stood discharged.

(12) That is a case where the state had had a right to remain in possession of the felled trees and parted with the goods before receiving the payment of the amount due by the contractor jagatram. Therefore, the supreme court had no difficulty in coming to the conclusion that the surety could claim the benefit of section 141 of the contract act. But in the present case, the bank did not have possession of the goods. So this decision has no application to the facts of the present case.

(13) Similarly amrit lal govardhanlal v. State bank of travancore and others, is a case where certain loans were given by a bank to the respondents secured by goods pledged with the bank and the respondents agreed that if they failed or neglected to repay the bank on demand the amount due, it shall be lawful for the bank, without any notice to them, to sell or otherwise dispose of all securities, either by public auction or by private contract and to apply the net proceeds of such sale towards the liquidation of the debt. Since it was a pledge and the bank had possession of the goods, it was held that under section 141 of the contract act, when the creditor loses a part of the security due to his negligence, the surety is to that extent discharged.

(14) But as stated by me already, in this case the goods were not pledged with the bank but they were only hypothecated and the plaintiff did not have possession of those goods. Therefore this case is distinguishable on facts. In bank of maharashtra limited v. Official liquidator, high court building, sri justice a. Narayana pai, observed as follows:

"in the case of hypothecation or pledges of movable goods, there is no doubt about the creditor's right to take possession, to retain possession and to sell the goods directly without the intervention of court for the purpose of recovering his dues. The position in the case of regular pledge completed bv possession is undoubted and set out in the relevant sections of the contract act. Hypothecation is only extended idea of pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself (the creditor)"

(15) I do not see how this decision can help the appellant. It is not disputed that in the case of hypothecation, the creditor has the right to take possession of the goods and to sell it without the the intervention of the court. But the question is whether it is a security within the meaning of section 141 of the contract act so that if the creditor were to lose or part with the goods given in security, to that extent the surety is discharged.

(16) Lastly, it is argued by the learned counsel for the appellant that the amount fell due on 18th august, 1970 but the fiat car was seized only on 1st february, 1972 and sold thareafter and if the bank had seized all the goods immediately after 18th august, 1970 they would have realised the entire amount and therefore the 3rd defendant should not be penalised for the inaction of the plaintiff - bank. But in this case though the amount fell due on 18th august, 1970 the plaintiff - bank wrote a number of letters requesting the 1st defendant to pay the amount. But the 2nd defendant went on giving replies that she would pay the amount and some time might be granted to her. In fact, to the letter written by the plaintiff on 31st august, 1970 the 2nd defendant gave a reply stating that she would clear the amount due to the plaintiff with interest in instalments of rs. 400 per month commencing from december january, 1972. Therefore if the bank has waited from 1970 to 1972, it is because of the request made by the 2nd defendant who was promising to repay the debt. So the defendant cannot take advantage to his own action and say that it constitutes inaction on the part of the plaintiff - bank.

(17) In the result, i see no grounds to interfere with the judgment of the lower court and i dismiss this appeal with costs. Appeal dismissed.