BANK OF INDIA BOMBAY Vs. YOGESHWAR KANT WADHERA

JUDGEMENT

(1.) The plaintiff-appellant Bank filed the suit for recovery of Rs. 71,500.51 against the principal debtors as well as against the guarantors, i.e., the sureties Yogeshwar Kant Wadhera and Jai Gopal Mehra. The trial Court decreed the plaintiffs suit against both the principal debtors as well as against the sureties. Aggrieved against the judgement and decree of the trial Court, the sureties filed the appeal and the learned District Judge relying upon the Single Bench judgement of this court in State Bank of India v. M/s. Quality Bread Factory, Batala, AIR 1983 Punj and Har 244, came to the conclusion that if it was proved that the goods hypothecated by defendants 1 to 3 with the plaintiff were lost due to the negligence of the plaintiff, a finding will have to be recorded that the liability of the guarantors was discharged. Finally, their appeal was accepted and qua them the suit was dismissed. It would be pertinent to note here, in brief, that in the said Single Bench decision of this Court, it was held that if the loan has been advanced on the basis of security, the surety stands discharged to the extent of the value of the security, if the creditor loses or parts with the security without the consent of surety. Against the said judgement, the parties went to the Supreme Court, wherein their Lordships passed the following orders on Nov. 21, 1983 :

(2.) The plaintiff Bank sanctioned a cash credit limit of Rs. 30,000/- against the hypothecation of stocks, re-payable on demand in favour of M/s. Baij Nath Bhim Sain Wadhera and others, defendants 1 to 3. In pursuance of the sanction of the aforesaid cash credit limit of Rs. 30,000/- by the plaintiff Bank, defendants Nos. 2 and 3 on their own behalf and on behalf of their firm, defendant 1, executed various security documents in favour of the plaintiff-Bank including a particular Joint and several promissory note for Rs. 30,000/- and the deed of hypothecation of stocks. Defendants Nos. 4 and 5 executed a joint and several guarantee deed on May 1, 1976, guaranteeing the due payment of the money advanced by the plaintiff-Bank in consideration of the cash credit limit of Rs. 30,000/-, two days after demand together with interest at the agreed rates. Thereafter, in Oct./Nov. 1977, defendants 2 and 3 again approached the plaintiff-Bank and represented that they were converting their wholesale trade into retail trade and that they required the additional limit of Rs. 18,000/- to enable them to meet their working capital requirements. The plaintiff Bank sanctioned the aggregate cash credit limit of Rs. 40,000/- against hypothecation of stocks and also to assure the repayment of the balance due and outstanding in the cash credit account of defendants 1 to 3. They also executed a joint and several demand promisory note for Rs. 40,000/- bearing interest and also a deed of hypothecation in favour of the plaintiff-Bank of all stocks of crockery and cutlery etc. Likewise, defendants 4 and 5 executed a joint and several guarantee in favour of the plaintiff-Bank wherein they guaranteed the due re-payment of the loan lent by the plaintiff-Bank to the defendants up to the extent of Rs. 40,000/- together with interest at the agreed rates. Since the principal debtors failed to make the payment; hence the suit against both the borrowers and the guarantors. The suit was decreed by the trial Court against all the defendants. Appeal filed against the same by the sureties was allowed by the lower appellate Court and the suit against them was dismissed. Dissatisfied with the same, the plaintiff has come up in second appeal to this Court.

(3.) It is the common case of the parties that the loans are advanced by the Bank to its customers either on key loan system or on open credit system. In the key loan system, the goods pledged are under the lock of the pledged and the pledgor has no access to them whereas in the open credit system the goods pledgedlhy pothecated remain in actual possession of the pledgor. In the former system, the pledgor cannot deal with the goods unless the pledgee gives their possession to him, whereas in the latter system, he has freedom to deal with them. In the open credit system, however, the legal character of pledge as such is not maintained. The loan advanced on the basis of key loan system is also called loan by pledge of goods and the loan advanced on open credit system is also called factory type loan or loan on the basis of hypothecation. Thus, the main dispute between the parties to be decided in this appeal is : when the delivery of goods is not made over to the creditor, then, how far the sureties can escape liability by invoking S.141 of the Contract Act, 1872, which reads, "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." There is no dispute that the Single Bench decision of this Court in M/s. Quality Bread Factory's case (AIR 1983 Punj and Har 244) (supra) fully supports the surety-respondents because therein it has been held that there is no difference with regard to the legal possession of the bank over the security since in both the types of cases, viz., of pledge or of hypothecation, 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, in the case of hypothecated goods, they are in the actual physical possession of the borrower but subject to restrictions. It is the correctness of these observations of the learned single Judge that the possession over the security remains of the bank in the case of hypothecation also, that are being challenged before us vehemently by the learned counsel for the appellant. We feel the challenge has some force.