M CHETTYAPPAN Vs. STATE BANK OF INDIA

JUDGEMENT

(1.) FOR the Defendants 2 to 4 (third defendant has been substituted by this legal representatives) have appealed. It is not in dispute that the plaintiff-Bank entered into a contract of cash credit loan as well as medium term loan on the hypothecation of the schedule of properties with the principal debtor Messrs. Discon Foods (P) Ltd., (first defendant), a company incorporated under the Indian Companies Act and carrying on business in processing and exporting sea foods. The cash credit limit was Rs. 3, 00, 000/- and medium term loan limit was Rs. 75, 000/- Defendants 2 and 3, who were at the relevant time, Directors of the first defendant-company, stood surety for the cash credit loan to the first defendant-company and defendants 3 and 4 stood surety for the medium term loan. This was, however, in April, 1974, and continued until, it is said, the second defendant resigned from the directorship of the first defendant Company on 19.7.1974 and the third defendant resigned from the directorship with effect from 27.10.1975. It appears that one M. C. Agarwal and Mrs. Pushpa Agarwal as entered new directors and passed a letter dated 22.11.1975 to defendants 2 and 3 with regard to the discharge of the loan due to the plaintiff.

(2.) ACCORDING to the defendants, when the Agarwals took over, they entered into some sort of arrangement with the creditor Bank and thus they stood discharged as sureties. The creditor Bank found that the principal debtor had not cleared the cash credit loan amounting to Rs. 2, 14, 379.22 and medium term loan amounting to Rs. 2, 14, 379.22 and medium term loan amounting to Rs. 48, 701.61. Hence, it filed the suit claiming moneys, both principal and interest from defendants 1, 2 and 3 jointly and severally for the cash credit loan and defendants 1, 3 and 4 for the medium term loan.

(3.) IN the case of Madhya Pradesh v. Kaluram 1987 AIR(SC) 1005), the Supreme Court considered a case of forest contract under which the Government demanded security and it was terms as extracted : "Whereas the Governor in order to secure the due performance of conditions of the above contract demanded security from the forest contractor ... undertake to discharge the liability of the forest contractor in case of any act, omission, negligence or default on the part of the forest contractor for any sum which may become payable by the forest contractor to the Governor by or under the conditions of the above contract." The principal debtor, however, removed almost the entire quantity of trees sold to him, but since he did not pay the remaining three instalments of the price, the State of Madhya Pradesh took proceedings to recover from the agent the amount due by the principal debtor. The sureties started action on the plea that forest authorities gave time to the principal debtor and omitted to take steps which their duty to the surety required them to take and thus the loss so caused, must lead to discharge of the surety. The Supreme Court stated as follows : "... the facts in the present case make it abundantly clear that it was on account of the conduct of the forest authorities that the security was lost. The goods sold were under the control of the Forest Officers when they were in the coupe and even when they were in the depot of the contractor. The goods could be removed on the production of a pass from the coupe, and even after the goods were removed, unless they were examined and checked they were not at the disposal of the contractor. It is not pleaded by the State that the trees sold were not checked and examined at the depot of the contractor. Knowing that the goods were removed without payment of the instalments, if the Forest authorities checked and examined the goods and took no action for recovery of the amount payable, and did not enforce the charge, it would be difficult to say that there was mere inaction on the part of the forest authorities. The Supreme Court, however, opined about the legal proposition in these words : "The expression" security" in Section 141 is not used in any technical sense; it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefits of the rights of the creditors against the principal debtor which arise out of the transaction which gives rise to the right of liability, he is, therefore, on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of the surety, the latter is, by the express provision contained in Section 141, discharged to the extent of the value of the security lost or parted with. "IN his judgment the Supreme Court has quoted with approval the observations by Hannen, J. in Wulff and Biling v. Jay (1872 7 Q.B. 756) which run as follows :" I take it to be established that the defendant became surety upon the faith of there being some real and substantial security pledged, as well as his own credit, to the plaintiff; and he was entitled, therefore to the benefit of that real and substantial security "in the event of his being called on to fulfil his duty as a surety, and to pay the debt for which he had so become surety. He will, however, be discharged from his liability as surety if the creditors have put it out of their power to hand over to the surety the means of recouping himself by the security given by the principal. That doctrine is very clearly expressed in the notes in Ress v. Barrington-2 Whites & Tudor's L.C. 4th Edn. at p. 1002. As a surety on payment of the debt is entitled to all the securities of the creditor, whether he is aware of their existence or not even though they were given after the contractor of suretyship, if the creditor who has had, or ought to have had, them in his full possession or power, loses them or permits them, to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands." The Supreme Court has then added," subject to certain variations, which are not material for the matter under discussion, Section 141 of the Contract Act incorporates the rule of English Law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him." IN Amrit Lal v. State Bank of Travancore, the Supreme Court has referred to the above judgment and pointed out : "As pointed out by this court in State of Madhya Pradesh v. Kaluram (supra), the expression "security" in this "security" in this section is not used in any technical sense; it includes all rights which the creditor has against the property at the date of the contract. The surety is, entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability. The surety is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or parted with the security without the consent of the surety the letter is by the express provision contained in Section 141 discharged to the extent of the value of the security lost or parted with. IN Wulff and Billing v. Jay (supra), Nannen, J. stated the laws as follows ... After saying as above, the Supreme Court in this judgment has added," It is true that Section 141 of the INdian Contract Act has limited the surety's right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety. But subject to this variation, Section 141 of the INdian Contract Act incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or losses the security held by him. "8. The two judgments of the Supreme Court thus clearly state the law on the subject that a surety shall be entitled to securities held by the creditor at the date of his becoming surety and all such securities thus will accrue to him if he discharged the debt or performed all that he under the terms and conditions of the contract was required to perform.IN State Bank of Saurashtra v. Chitranjan Ranganath 1980 AIR(SC) 1328), the Supreme Court considered a case of a Bank giving cash credit facility to a businessman against securities, namely, (1) the pledge of goods to be kept under lock and key under the supervision of the Bank, and (2) personal guarantee of the surety. The Supreme Court noticed that the surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor had offered security by way of pledge of goods and the goods were to be in the custody of the creditor-Bank. It was found that the Bank was utterly negligent with regard to the safe keeping and handling of pledged goods and the security of pledged goods was lost on account of the negligence of the Bank. The Supreme Court relied upon its earlier judgments (supra) and made some further examination of the principles of law in this behalf to notice in Halsbury's Laws of England, 4th Edn., Vol. 20, para 280, p. 152 the statement of law bearing on this point as under :" On paying the guaranteed debt the surety is entitled to have all securities held by the creditor for the debt handed over to him by the creditor in exactly the same state and conditions in which they were originally provided, whether they were in existence at the date of the contract of suretyship or came into existence subsequently. Consequently any act of the creditor interfering with or impairing that right will, to the extent at all evens of any loss inflicted, relieve the surety from liability, and, if it has the effect of altering or purporting to alter the contract of suretyship, discharge him altogether. Thus, where there is a mortgage security given in respect of a debt which is subsequently guaranteed, the creditor must hold the security for the benefit of surety, so that, on paying the debt, the surety may obtain a transfer of the mortgage in its original unimpaired condition. If the creditor does not fulfil his duty in this respect the surety is discharged."and added," This statement of law is reflected in Sections 140 and 141 of the Act.