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Jagannath Ganeshram Agarwala Vs. Shivnarayan Bhagirath - Court Judgment

LegalCrystal Citation
Decided On
Case NumberFirst Appeal No. 384 of 1936
Reported inAIR1940Bom247; (1940)42BOMLR451
AppellantJagannath Ganeshram Agarwala
RespondentShivnarayan Bhagirath
.....right to recover balance from surety not affected-offer of surety by managing member of a joint family-whether, coparceners bound, as sureties-hindu law.;the plaintiff advanced money to a company of which the family firm of defendants nos. 1 to 3 (brothers) was the managing agent. when the company got into difficulty, the plaintiff pressed for payment, and defendant no. 1, as managing member of the firm, guaranteed payment to the plaintiff. ultimately the company was reconstructed by a scheme made under section 153) of the indian companies act, 1913, and sanctioned by the court, whereby each creditor was to be paid one half of the money in cash and the other half by issue of preference shares. the plaintiff intimated to defendants that his rights under the guarantee remained..........thereafter he filed the suit against the three members of the managing agency firm, which is a joint family firm, claiming that they were bound to pay the deficit. in the plaint he has offered to return the preference shares which came to him under the scheme. he has stated that he has not dealt with them and that he holds them intact. he has not yet received the share certificates from the company.2. defendant no. 1 who signed the letter of january 27, 1931, had raised numerous defences which have been dealt with in detail by the learned trial judge. the defence failed on all points except one. defendant no. 1 contended that as the plaintiff had received half the amount in) cash and the shares of the mill company, he was discharged from his debt and that no obligation of the surety.....

Kania, J.

1. This is a first appeal filed in civil suit No. 47 of 1934 against a judgment of the First Class Subordinate Judge at Jalgaon. The short facts leading to the litigation are that the Bhagirath Mill, Limited, had borrowed money from various depositors. Originally Bhagirath, the father of the defendants, was the managing agent, and we are told that the managing agency agreement was made out between him, and the mills. The agency agreement is not put in as exhibit, and the only materials before the Court which give some indication of some of the terms consist of stray statements in the evidence of defendant No. 1. He stated that there was a kararnama by which the agency should be perpetuated from generation to generation. At another place he stated that it was the managing agent's sole business to borrow sums and pay them for the company without consulting the directors. Bhagirath died and defendant No. 1 was substituted in his place as the managing agent.

The mill company came into financial difficulties. On January 17, 1931, defendant No. 1 in the name of the managing agency firm passed a writing in favour of the plaintiff by which in substance he stood guarantee for the debt due by the mill company to the plaintiff. The plaintiff was one of the directors. Defendant No. 1 stated in his evidence that he had passed similar letters in favour of some other creditors also. The company got a little extension of life. Ultimately a petition was presented to wind up the company, and acting under Section 153 of the Indian Companies Act meetings of the creditors and shareholders of the company were held to consider a scheme of reconstruction which was suggested. The scheme was approved at the meetings However, before it was presented to the Court for sanction on August 29, 1931, the plaintiff wrote to the agents informing them that he did not agree to the proposal of the mill to give preference shares. The scheme was sanctioned by the Court on January 11, 1932. Even thereafter by his letter dated June 28, 1932, the plaintiff gave notice, to the defendants putting on record that his rights against the defendants remained unaffected. Under the scheme every creditor (except preferential creditors) was to receive half the sum in cash and the other half in the shape of preference shares. In accordance with the scheme the plaintiff received Rs. 12,000 and odd and a temporary receipt in respect of the preference shares which came to his lot. Thereafter he filed the suit against the three members of the managing agency firm, which is a joint family firm, claiming that they were bound to pay the deficit. In the plaint he has offered to return the preference shares which came to him under the scheme. He has stated that he has not dealt with them and that he holds them intact. He has not yet received the share certificates from the company.

2. Defendant No. 1 who signed the letter of January 27, 1931, had raised numerous defences which have been dealt with in detail by the learned trial Judge. The defence failed on all points except one. Defendant No. 1 contended that as the plaintiff had received half the amount in) cash and the shares of the mill company, he was discharged from his debt and that no obligation of the surety survived. This contention found favour with the trial Court. All the other contentions of defendant No. 1 were rejected and they were evidently considered to be bad. Although the plaintiff lost his suit, defendant No. 1 was ordered to bear half the costs. As regards defendants Nos. 2 and 3, the claim in the plaint is to proceed against the joint family estate in their hands. In paragraph 3 of the plaint it is alleged

the defendant No. 1 is and was the karta and manager and agent and managing partner. He has given the writing in suit for self and for the said firm... The agency of the mill is a great source (of profits) to the undivided family and business of the defendants. And their responsibility to pay the debts borrowed by them for the mill is falling on them in pursuance of that also. The defendant and his undivided family arid the two firms have derived benefit from the writing ... Therefore the defendants and their property are responsible for the plaintiff's suit.' In the written statement of defendants Nos. 2 and 3 it was denied that the transaction was binding on the joint family, and that there was any legal necessity. Issue No. 6 which was raised in the trial Court was ' whether the managing agency was the ancestral business of the defendants, and, if so, whether the writing was passed for the legal necessities of that business

3. The defence of defendant No. 1, in our opinion, fails. The fact that the plaintiff received from the mill company half the amount in cash and received also preference shares for the other half does not discharge the surety. The statement of law is found in all recognized books on company law and also in Halsbury's Laws of England, (II Ed.), Vol. v. In Ex parte Jacobs : In re Jacobs (1875) L.R. 10 Ch. App. 211 where the acceptor of a bill of exchange presented a petition for liquidation or composition under the Bankruptcy Act, 1869, and the creditors passed a resolution for liquidation or composition, the acceptor was held as discharged by operation of law, but the drawer was not thereby discharged from his liability. It was also held that it made no difference whether the bill-holder was present at the meeting or not, or whether he voted in favour of the resolution or against it. The drawer in the particular case stood in the position of a surety under the Negotiable Instruments Act. This decision shows that as a result of bankruptcy the debt due by the principal debtor may become unenforceable against the debtor, but the liability of the surety is not thereby discharged. In the case of a limited company in In re London Chartered Bank of Australia (1893) 3 Ch. 540 it was held to the same effect. It was there pointed out that it was unnecessary to insert in the scheme of reconstruction a reservation of the rights of sureties for the company's debts, when an order for winding-up had been made, because the scheme did not affect the liability of the sureties. Lord Justice Vaughan Williams in the course of his judgment .observed as follows (pp. 546-547) :-

Now, with regard to the first point, no one intends that the scheme shall deprive the creditors of the bank of their rights against those who have guaranteed payment of the deposits and current accounts due from the bank. The principle upon which it is anticipated that the scheme of arrangement might have that effect is, either that the effect of the scheme is satisfaction of the guaranteed debt, so that there no longer exists any 'debt which the sureties can be called on to pay, or because the remedy over which the sureties would have against the bank is inconsistent with the scheme of arrangement, which is intended to) liquidate, once and for ever, all liabilities of the bank. The scheme contains no release of the bank or the contri-butories; it contains no covenant not to sue, and it is by operation of law that the scheme becomes effective to relieve the company and contributories from further liability than that contemplated or imposed by the scheme. The scheme of alternative mode of liquidation which the law allows the statutory majority of creditors to) substitute for the pending winding-up... It seems to me, then, that, the discharge being clearly by operation of law consequent upon pending statutory; liquidation, the principles laid down by Lord Justice Mellish in Ex parte Jacobs : In re Jacobs apply, and that, therefore, there is no need, and it would not be right, to introduce a reservation; of rights against sureties into the scheme of arrangement.

4. The facts in the present case are very similar to those found in Garner's Motors Ld., In re (1937) 1 Ch. 594. There T. Ltd. claiming to be creditors of G.M. Ltd., a company in voluntary liquidation, claimed379-5-0. The creditors claimed that under an order of the Court G.M. Ltd. and another company called Section W. Ltd. became jointly and jointly and severally liable to pay to the creditors the said sum. The liquidator of G.M. Ltd. contended that the company was discharged from its liability as a scheme of arrangement between Section W. Ltd. and its creditors was sanctioned by the Court. It was held that it was not so. In the judgment it is stated as follows (pp. 598-599) my judgment a discharge of one of several joint debtors by operation of law does not discharge the other debtors. In my judgment the effect of Section 153 of the Companies Act, 1929, is to give to a scheme when sanctioned by the Court under the Section a statutory operation. The scheme when sanctioned by the Court becomes something quite different from a mere agreement signed by the parties. It becomes a statutory scheme. In my judgment, therefore, the discharge of Sentinel Waggon Works, Ltd., from the debt to Temple Press, Ltd. which was effected under clause 15 of the scheme...did not have the effect of discharging Garner's Motors, Ltd., from its liability in respect of the debt.

5. The present case is not of co-debtors but of a debtor and a surety. The reasoning however clearly applies to their case also. This point does not appear to have been argued before the trial Court, but having regard to these decisions defendant No. 1 has no answer. It was argued on behalf of respondent No. 1 that if the debt is considered alternative, satisfaction having been received from one party, the debt did not survive. But the basis of this contention is unsound. The liability of a surety is co-extensive, but is not in the alternative. Both the principal debtor and the surety are liable at the same time to the creditors. The discussion on this line is therefore not profitable. As the sole defence of defendant No. 1 fails, the appeal must be allowed as against him. As I have pointed out, on all other facts the trial Court had found against defendant No. 1 and we see no reason to differ from the conclusion arrived at on those points.

6. As regards defendants Nos. 2 and 3, it was found in the lower Court that the business was ancestral, but there was no legal necessity. The facts as found from the record show that the managing agents were under no legal obligation to procure money for the mill company. They had the authority and the sole authority to receive deposits and pay the same to the company. If, however, sufficient deposits were not forthcoming, they were under no legal liability to find funds and to make themselves personally liable. The contract found in the writing of January 17, 1931, is clearly one of guarantee. The agency firm did not receive for their own use a pie out of the amount for which they stood guarantee. The whole amount was received by the mill company and used for the benefit of the mill company. On the facts as proved I am unable to consider that any case of legal necessity has been made out. It requires much stronger evidence to justify the conclusion that the manager of a joint Hindu family, which has a business, has on the ground of legal necessity a right by standing surety to make the joint family estate liable. Stated in its bare form, the proposition is negatived by judicial authority. There are no particular aspects here which would justify a distinction. The case of legal necessity, in my opinion, fails, and the conclusion of the trial Court is correct in that respect.

7. It was urged on behalf of the appellant that apart from legal necessity in the present case the passing of a document of this nature was an ordinary incident of the joint family business. Relying on Raghunathji Torachand v. The Bank of Bombay 11 Bom. L.R. 255 it was therefore urged that the joint family estate wasliable. In my opinion, it is not open to the appellant to urge this contention at all. His statements in the plaint were not understood by him to mean that, no issue was raised to suggest this contention, and throughout the judgment of the trial Court this point has not been dealt with. The question whether, the passing of a letter of guarantee is an ordinary incident of the trade or business of the joint family is a question of fact on which evidence is necessary. Mr. Thakor referred us to certain statements in the evidence of defendant No. 1 in support of this contention. Those statements were evidently admitted as relevant evidence on the issue of legal necessity. From that it is not right for the Court to consider that a case of an ordinary incident of trade had been suggested or made out. The fact that in respect of some other creditors similar letters were passed is not helpful because an incident of trade could not be established by reason of some documents passed at about the same time in favour of other parties, especially when the circumstances relating to the passing of those documents are not. on record. On the evidence on record I do not think such an incident is established in any event. The contention against defendants Nos. 2 and 3 therefore fails. The suit is dismissed against defendants Nos. 2 and 3. That order is confirmed. Therefore there shall be a decree for the plaintiff-appellant against defendant No. 1, respondent No. 1, for Rs. 11,900 with interest at six per cent, on Rs. 23,930 from September 15, 1931, till July 1, 1932, and on Rs. 11,900 thereafter till judgment. Costs of the suit and costs of the appeal. Interest on judgment at six per cent. The plaintiff is ordered to hand over to defendant No. 1 the temporary receipt which he received in respect of the preference shares duly endorsed and to sign such other documents as may be necessary to enable the preference shares to be transferred to the name of defendant No. 1 or his nominee. The appeal as against respondents Nos. 2 and 3 is dismissed with costs.

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