M R CHAKRAPANI IYENGAR Vs. CANARA BANK

JUDGEMENT

(1.) A very important aspect of the law relating to the obligations of banks in relation to property that is pledged or hypothecated has indirectly fallen for decision in this dispute. The main controversy concerns the question as to whether the present petitioner who was the surety for the principal borrower can be said to have discharged the liability having regard to the provisions of Section 139 of the Contract Act. The only few facts which are material are that the principal borrower had taken a loan from the respondent-bank and was repaying it in instalments. He had defaulted with regard to the clearance of the loan. At this stage, the bank decided to take action against the principal borrower as also the surety who was none other than his own brother. The surety replied to the notice pointing out that there is a small amount of money due to the bank and that the principal debtor had hypothecated the electric oven of the bakery which was worth a substantial amount of money. He also pointed out that the oven had been sold to a particular party and gave the details. According to him, the bank did not take any steps to seize the property to sell it and recover its dues which could easily have been done and since the bank had failed and omitted to do so and was negligent in this regard, that his liability stood discharged. The trial Court negatived this contention and passed a decree against the principal borrower as also the surety who is the present petitioner holding both of them jointly and severally liable. The principal debtor has not challenged that decree but the surety has filed the present C.R.P. wherein he has contended that his liability stood discharged and that therefore the decree as against him must be set aside.

(2.) The principal contention raised by the petioner's learned advocate is that undoubtedly the liability of the surety is co-extensive with that of the principal debtor but he contends that having regard to the provisions of Section 139 of the Contract Act, that it was obligatory on the part of the bank to have ensured that the hypothecated property did not vanish and more so, when his client pointed out precisely where that property was, for the bank to have taken all necessary steps to have seized it, that by not having done so, the bank has virtually forfeited the remedy that was open to it to recover the sums in question and that this situation brings the case clearly within the four corners of Section 139 of the Contract Act whereunder his liability stands discharged. In this regard, the learned advocate has relied on a decision of the Supreme Court reported in AIR 1980 SC 1528 (State Bank of Saurashtra v. Chitranjan R. Raja) wherein the Court held that if such negligence was established on the part of the bank, the surety would stand discharged. The Court had occasion to refer to some of the earlier decisions reported in (1872)7 QB 756, (1873) 8 Ex 73, AIR 1967 SC 1105 and AIR 1968 SC 1432. The learned advocate also relied on another decision reported in AIR 1983 Punj and Har 244 wherein, on more or less similar facts the Court took the view that the liability of the surety stood completely discharged. The petioner's learned advocate submitted that the principle enunciated in Section 139 is well defined in so far as if the bank creates a situation whereunder the liability which could easily have been discharged gets unnecessarily foisted on the surety, that the law in such a situation immunises the surety. He therefore submits that as far as the present case is concerned, the decree passed against the petr. is liable to be set aside.

(3.) Mr. Aithal who repesents the bank has seriously contested this position. He submits that a surety for all intends and purposes is responsible in the same mannsr and to the same extent as the principal debtor and that by its very connotation the term surety presupposes that if for any reason the whole or part of the liability is not recoverable from the principal debtor that the institution may recover it from the surety. In this regard, the learned advocate has drawn my attention to a Divisiori Bench decision of this Court reported in AIR 1977 Kant 14. The Division Bench of this Court had occasion to view the question from a slightly different angle in so far as it took cognizance of the fact that merely because there is "passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security that it is not sufficient, in itself, to discharge the surety for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive." Learned advocate submitted that it is always open to the surety to recover the amount from the principal debtor and that this in fact is the correct view of the matter. He submitted that the Supreme Court had not dealt with this aspect of the law and that consequently, it is this decision which would still hold good on the facts of the present case.