CANARA BANK Vs. GOKULDAS SHENOY

JUDGEMENT

(1.) The plaintiff in O. S. No. 10 of 1978 on the file of the Court of the Subordinate Judge of Kasaragod is the appellant.

(2.) The suit was filed for recovery of money. It is necessary to briefly state the facts which are relevant for determination of the question raised in the appeal.

(3.) The 1st defendant who is the Proprietor of a firm by name 'M/s. Paxwell Printers' was given various financial facilities by the plaintiff Bank under various transactions and as on the date of the plaint, a total of Rs. 5,39,220.93 was due from the 1st defendant. One such facility was open cash credit facility for a sum of Rs. 50,000/- on the strength of a deed of hypothecation and a promissory note. The stock in trade and the raw materials which belonged to the 1st defendant were hypothecated to the plaintiff bank. The 1st defendant was also given a key shut cash credit facility for a sum of three lakhs of rupees on the pledge of raw materials belonging to him as security. Subsequently, the 1st defendant also executed a promissory note for the said sum. The 1st defendant sought a further loan of Rs. 1,80,000/- by way of Term Loan Facility on 14-8-1972 and the same was also granted by the plaintiff Bank on the security of equitable mortgage by deposit of title deeds in respect of the properties belonging to the 1st defendant and by hypothecation of machineries and also by assigning life insurance policies. Thereafter the open credit facility of Rs. 50,000/- granted to the 1st defendant was enhanced to Rs. 75,000/- with effect from 19-1-1973. However, the 1st defendant was not diligent in repaying the loans and in the circumstances the plaintiff was contemplating legal steps to realise the amounts. At that stage, the 2nd defendant who is also an industrialist became desirous of starting a printing press at Bangalore and it appears that he contacted the 1st defendant with the idea of taking over the press of the 1st defendant. As a result of the understanding reached by them they approached the plaintiff and it was agreed that at the first instance the 2nd defendant would be given a facility for a sum of Rs. 1,05,000/- which would be adjusted towards the amounts due from the 1st defendant under the key shut cash credit accommodation and that 32 drums of Chinawood Oil which was hypothecated by the 1st defendant in connection with the key shut cash credit accommodation would be released to the 1st defendant on the understanding that the sale proceeds of the said Chinawood Oil amounting to Rs. 1,05,000/- would be credited towards the liability of the 1st defendant. The 2nd defendant agreed to be a guarantor for repayment of the above sum and to execute a hypothecation deed in respect of his lands and building valued at Rs. 2,00,000/- and a deed of guarantee guaranteeing the value of the Chinawood oil. Ext. A16 dated 17-6-1974 is the application sent by the 2nd defendant to the Bank regarding the arrangement. In the said application, the Bank was requested to grant a loan of Rs. 1,05,000/- against the security of the machineries and landed properties belonging to him, the book values of which as on 31-3-1973 was mentioned as Rs. 74,000/-. It also stated that the loan amount could, be credited towards the key shut cash credit account of the 1st defendant and against this credit, Chinawood oil held by the Bank as part of the security would be released and that a sum of Rs. 1.05 lakhs would be paid within a period of 30 days from the date of release of the goods by the 1st defendant. Thereafter the Bank would grant a loan of Rs. 2.50 lakhs to the 2nd defendant against the existing machineries of Sri. Murughendra Deo, the 1st defendant which was hypothecated to the Bank and also the machineries of the 2nd defendant mentioned in Ext. A16 and the 2nd defendant would repay the entire loan amount of Rs. 2.50 lakhs in five annual instalments of Rs. 50,000/- and would stand as a guarantor to the amount that was payable by the 1st defendant on account of the Chinawood oil that would be released to the 1st defendant. Ext. A17 dated 17-6-1974 is a covering letter sent by the 1st defendant to the Bank alongwith Ext. A16 letter. In Ext. A17, the 1st defendant stated that the proposal made in Ext. A16 was acceptable to the 1st defendant and that he undertook to deposit a sum of at least Rs. 1.05 lakhs within 45 days from the date of release of Chinawood Oil and Rs. 10,000/- within 10 days after release of G. P. Paper approximately 3 tons in weight, held by the Bank. Ext. A18 dated 6-9-1974 is a letter sent by the plaintiff-Bank to the 2nd defendant wherein it was stated that the Head Office of the plaintiff Bank had agreed in principle to grant a term loan of Rs. 2.50 lakhs to the 2nd defendant subject to the conditions mentioned therein. The conditions stated therein are: (1) The 2nd defendant should hypothecate the machinery items belonging to the 2nd defendant's existing foundry at Kasaragod having market value of not less than Rs. 2.00 lakhs and create equitable mortgage in favour of the Bank in respect of land and building offered by the 2nd defendant as security, (2) a sum of Rs. 28,783.63 which was due to Kerala State Finance Corporation against the aforesaid property should be cleared by the 2nd defendant and evidence should be furnished for having done so, or deposit the actual amount due to be paid to Kerala State Finance Corporation and the said amount would be remitted to the Corporation directly by the Bank; (3) after creation of security by the 2nd defendant in favour of the Bank, the G. P. Paper valued about Rs. 25,000/- should be released to the 1st defendant against the 2nd defendant's personal guarantee, and the 1st defendant would in turn arrange to sell the same and deposit a sum of Rs. 10,000/- with the Bank within a period of 10 days from the date of such release and (4) that at the time of making such release of Chinawood Oil, the 1st defendant would give a letter of undertaking to the Bank to the effect that he would credit a sum of Rs. 1.05 lakhs to the Bank within 30 days from the date of release and the balance amount of Rs. 15,000/- available from out of the sale of G. P. Paper should be utilised by the 1st defendant for carrying the Chinawood Oil to Bombay for sale. Some other additional conditions are also mentioned in the said letter. Consequently, Ext. A19 agreement and guarantee letter dated 23-10-1974 were executed by the 2nd defendant in favour of the plaintiff Bank. Ext. A19 stated that the guarantor, namely, the 2nd defendant, agreed to indemnify the Bank against all loss and to pay and satisfy to the Bank on demand "the general balance" due from the borrower and the expression "general balance" shall be deemed to include all and every sum and sums of money which were then due from the borrower to the Bank or under any account whatsoever whether from the borrower solely or from the borrower jointly with any other or others in partnership or otherwise whether as principal or surety or otherwise. The total liability was limited to Rs. 2 lakhs and it was also agreed that the liability which shall be enforceable against the guarantor under the guarantee shall not exceed the sum of Rs. 2 lakhs together with interest thereon at 10% per annum above Reserve Bank of India rate with a minimum of 19% per annum from the date of demand by the Bank upon the guarantor for payment. Special mention has to be made to the following clause contained in Ext. A19:-