1. This appeal by the second defendant, an Insurance Company under the name and style Hukumchand Insurance Company is directed against the judgment and decree dated 3-2-1973 in 0. S. No. 9 of 1970 on the file of the Court of the II Additional Civil Judge, Belgaum, by which the Court below held the second defendant liable to the suit claim to the extent of Rs. 1,66,231-15 on the basis of a Credit Indemnity Policy dated 28-12-1967 issued by it in favour of the plaintiff.
2. The facts in so far as they are material for the disposal of this appeal, are the following:
Plaintiff, Bank of Baroda, is a Nationalised Bank. Defendant No. 1 is a firm of partners, of which defendants I (a) to I (f) are stated to be the partners. On 28-1-1967, first defendant executed what is styled as a 'Cash Credit Agreement' with the plaintiff and secured cash credit facility to the extent of Rs. 2,00,000 for the purpose of its business,. By way of security the moveable assets of the firm were hypothecated in favour of the creditor-Bank. in addition, under a in mortgage by deposit of title-deeds certain immovable properties situate at Wadgaon, Belgaum, Mahadevpur and Angol were offered as security for the said loan.
On 28-12-1967, second defendant issued what is styled 'Bank Loan/Cash Credit Indemnity Policy', as per Exhibit P-6, by which in consideration of the payment of Rs. 3,000 by the first defendant, the second defendant undertook to indemnify the plaintiff against losses that may be suffered by the plaintiff in consequence of any default on the part of the first defendant in due repayment of all moneys at any time payable by the first defendant to the plaintiff, provided that the liability under that Policy did no exceed the principal sum of Rs. 2,00,000. The first defendant having committed default in the matter of repayment of the moneys borrowed from the plaintiff, plaintiff instituted the present suit against both the defendants and sought recovery of 11.9. 2,24,334-33 from them.
3. First defendant while admitting the liability, disputed, in some measure, its extent and sought for the grant of instalments in repayment.
4. Second defendant, however, raised a number of defences. It even denied having issued any Cash Credit Indemnity Policy in favour of the plaintiff. It also contended that the person who executed the alleged Cash Credit Indemnity Policy on behalf of the second defendant had no right or authority or power to execute or issue such documents and that therefore no liability on its part arose. It also contended that the Policy was vitiated by non-disclosure of material facts, and, that at all events, the loan sought to be recovered had been advanced even prior to the date of the Policy and that therefore the second defendant could not be held liable.
5. On these pleadings, the Court below framed the necessary issues, of which the following are material for the purpose of this appeal:
3. Whether defendant No. 2 had undertaken to indemnify the plaintiff by the Insurance Policy?
4. Whether the Insurance Policy issue is unauthorised and invalid?
5. Whether the Policy is invalid on
any grounds of suppression of material facts by plaintiff and defendant No. I?
6. Whether the plaintiff has violated the conditions of the cash credit policy ,and is not entitled to enforce it?
6. On an appreciation of the evidence on record, the :Court below recorded findings in favour of the plaintiff on all these issues and entered a decree in favour of the plaintiff. However, as during the pendency of the proceedings the first defendant had paid the sum of Rs. 33,760-85 towards the suit claim, the liability of the second defendant was limited to Rs. 1,66,231-15 and the suit against the first defendant was decreed as prayed for.
7. We have heard Sri D. Cheluvaraju, learned counsel for the second defendant-appellant; Sri S. G. Sundaraswamy, learned counsel for the plaintiff-respondent No. 1, and Sri N. A, Mandagi, learned counsel. for defendant No. IA. We have been taken through the evidence on record and the judgment of the Court below.
8. Sri D. Cheluvaraju, learned counsel for the appellant, has urged the following grounds in support of this appeal:
(a) that K. G. Merchant who has executed Exhibit P-6 had no authority to bind the second defendant;
(b) that at all events, Ext P-6 by its express terms, could be invoked in respect of the advances made and liability incurred only after 26-12-1967 and that the present suit-claim which represents advances which had been made earlier would not attract the Indemnity under Ext. P-6;
(c) that the liability of the Insurers would, at all events, arise only after the plaintiff had exhausted its remedy against the principal debtor, and, that therefore, the quit claim is premature;
(d) that the suit in so far as it seeks the enforcement of mortgage security is in substance a suit for sale on a mortgage and the personal decree against the partners of the firm could only be made after the proceeds of sale of hypothecate are found insufficient and only to the extent of such insufficiency; and that consistently with this position the liability of the Insurance Company could not be larger than that of the principal debtors and accordingly, the. liability of the second defendant must be limited to such part of the decretal sum, if any, as may remain unsatisfied by the proceeds of sale of the security; and
(e) that the Court below, in granting the decree as prayed for, has failed to give deduction to the sum of Rs. 33,760.85 admittedly paid during the pendency of the suit.
These, then, are the points that arise for, determination in this appeal.
9. Point (a): The contention of the ,appellant seems to be that the acts of K. G. Merchant, its Manager at Belgaum during the relevant period, in executing Ext. P-6 were without the knowledge or authority of the appellant. But it is admitted that the premium of Rs. 3 , 000 paid by the first defendant as consideration for Ext. P-6 went into the account of the appellant; and that appellant had had the benefit of the same. indeed by Ext. P-7 dated 26-11-1969, appellant while acknowledging the previous communications, only required the copies of previous communications in that behalf to enable the appellant 'to proceed further in the matter'. Even at that stage, appellant, apparently, did not consider itself immune from the legal incidents of Ext. P-6 on the ground that its Manager had no authority to execute Ext. P-6. That apart, a ratification -by the appellant of the acts of the said K. G. Merchant, who in executing Ext. P-6 purported to act for and on behalf of the appellant, is implicit in the conduct of the -appellant. Appellant, admittedly, availed of and appropriated to itself the benefit of the premium of Re. 3,000. The conduct of the appellant in having obtained and retained the benefit of this premium, in our opinion, clearly amounts to a ratification of the acts of its manager within the meaning of Ss. 196 and 197 of the Contract Act. It was not the case of the appellant that its memorandum and articles of association rendered a contract of the kind contained in Ext. P-6 ultra vires of the provisions of the charter of its constitution. According to general principles of law when an agent acting for and on behalf of another, stipulates a benefit for the principal under a contract, and the principal without demur avails himself of that benefit, the law implies a ratification of that contract on the part of the principal Accordingly, on these principles and having regard to the conduct of the appellant, it requires to be held that appellant had rendered itself disabled from disowning and repudiating the contract and that contract under Ext. P-6 should be held binding on the appellant.
We, accordingly, hold point (a) against the appellant.
10. Point (b): The contention of Sri Cheluvaraju is that Ext. P-6 came into being in the context of and envisaged a prospective transaction between the plaintiff on the one hand and the first defendant on the other, and having regard to the intendment of Ext. P-6 and its actual terms, the liability against the appellant could arise only in respect of any lending in fact made after the date of the policy viz., 28-12-1967. Sri D. Cheluvaraju inviting our attention to what he considers a crucial admission stated to have been made by P.W. I to the effect that 'after 28-12-1967, bank has not made any new advances to the 1st defendant', strenuously contended that in the light of this admission and upon proper construction of Ext. P-6 no liability could be fastened on appellant. It is no doubt true that even on the date when the Policy, Ext. P-6, was issued there was a subsisting liability of the first defend-ant in favour of the plaintiff in the sum of Rs. 2,09,510-42. Even assuming that the construction Sri 0. Cheluvaraju seeks to put on Exhibit P-6 is correct, it is seen from the statement of account, Ext. P-5, that even after 28-12-= the first defend-ant was permitted to make withdrawals from the account which, but for the guarantee under Ext. P-6, would not have been permitted. The total sum actually withdrawn by the first defendant in the account after 28-12- is admittedly over 2 lacks of rupees. The contention of Sri D. Cheluvaraju is that these withdrawals were in turn made out of the in-puts of money made by the first defendant into account subsequent to 28-12-1967 and that total indebtedness as it stood prior to the execution of Ext. P-6 remained unaltered. But, in our opinion, the continuance of the cash credit account even after 28-12is in pursuance of the guarantee policy and the continued operation of the account and the further withdrawals there from by appellant after 28-12-'67 is relatable to and in pursuance of the Policy Ext. P-6. It cannot, therefore, be said that no, advances were made after 28-12-1967, even assuming that the guarantee did not pertain to or cover the indebtedness even as it obtained as on 28-12-1967.
Accordingly, we answer point (b), against the appellant.
11. Point (c): The contention urged in this behalf, in effect and in its essence, is that the remedy against the appellant would arise only when it is shown that the debt was irrecoverable from the first defendant. Exhibit P-6 is styled 'an Indemnity Policy'. A contract under which an insurer undertakes to make good losses -caused by the default of a debtor bears close resemblance to a contract of guarantee. There is, however, a broad distinction between an insurance and a guarantee, which, though difficult to formulate, undoubtedly exists. This distinct depends upon the intention of the parties. In a contract of insurance pure and simple, insurer is not a surety. Insurer does not undertake to pay the original debt; but undertakes to pay new debt which arises out of the contract of indemnity, and this debt may differ from the original debt both in amount and as regards other incidents, The fart that the contract is framed in the form of a policy is some and only a prima facie evidence of this intention; but the form of the contract however, is not conclusive. A contract expressed in the form of policy may nevertheless be a guarantee Many contracts, in facts, may with equal propriety be called either contracts of insurance or Ruaranteew; and more often than not it is immaterial to which of the two classes the particular contract belongs. In -a contract of guarantee, there must always be three parties in contemplation; a principal debtor (whose liability may be actual or prospective), a creditor, and a third party who, in consider of some act or promise on the part of the creditor, promises, to discharge the debtor's liability, if the debtor failed to do so. In a contract of indemnity, however, the promisor makes himself primarily liable and undertaken to discharge the liability in any event. The liability may arise out of tort or as well as out of contract. It may also boa prospective at the time the promise is made or may be past provided some new consideration is, given. The risk of default 'by a debtor can be insured against as effectively as the debt can be guaranteed.
In any view of the matter, whether the contract in the instant case is viewed as a contract of indemnity or as one of guarantee and whether, correspondingly, the liability is to pay a new debt arising under the contract to indemnify or to pay the original debt, the claim, in our Opinion, cannot be said to be premature. The liability on the part of the appellant under Ext. P-6 arises in consequence of default of the borrowers in due repayment on demand. Roth the demand against and the default by the 1st defendant must be held to have been established.
We, therefore, answer point, (c) also against the appellant.
12. Point (d): It is no doubt true, as contended for by Sri D. Chelluvara that the plaint seeking as, it does, the realisation of the security is in substance akin to a suit for sale on a mortgage. The plaint, however, is not in the form in which such suit ought to be having re- to the Provisions of O.34, C.P.C.. The plaint leaves much to be desired bath in the matter of a proper presentation of plaintiff's case as well as in its form. The point that Sri D. Cheluvaraju seeks to make is that even if the .liability of his client is held to be coextensive with that of the principal debtor, the decree that can be made against his client should necessarily be limited to the extent of personal decree that admits of being made against the principal debtors. According to him, a personal decree against the principal debtors being limited to such part of the mortgage debt, if any, as may remain unsatisfied consequent upon an insufficiency in the proceeds of sale of the security, the decree against the appellant should also be &o; limited. He relied upon the decision in Subhankhan Rarnjankhan v. Lalkhan Haji Umarkhan (AIR 1948 Nag 123) in support of this contention. In that case, it was held that in a suit on mortgage though a surety for the mortgagor, who had contracted to make good the deficit which may be found due on the sale of the security, was a necessary party to the action by virtue of S. 91 of the T. P. Act read with 0. 34, R. 1, C.P.C., no conditional decree for even the balance could be passed against him, the reason being that as the liability of the surety would arise only if the mortgaged property was found insufficient. This decision while clearly not supporting the case of the appellant, on the contrary, supports the view that in a converse cage where the liability of the surety is not so limited, a decree against the surety is permissible.
The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of surety ship. The liability of a principal debtor and the liability of a surety which is co-extensive with that of the former are really separate liabilities, al- though arising out of the same transaction. Notwithstanding the fact that they may stem from the same transaction, the I two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously. This proposition finds support in a passage from Halsbury's Laws of England (Third Edition, Volume 22 para 819):
'819. Proceedings by assured against debtor: Except where the policy so provides, the creditor is not bound to sue the debtor or to enforce his security first: he is entitled. as soon as there is a default within the meaning of the policy, to claim payment from the insurers. The Policy may, however, be limited to cover only the deficiency which remains after the creditor has exhausted his remedies ,against the debtor or his sureties.'
13. In the Bank of Bihar Ltd. v. Dr. Damodar Prasad : 1SCR620 , dealing with the liability of a surety envisaged in S. 128 of the Contract Act, the Supreme Court observed:
'4. Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simson, (1802) 6 Ves 714 at p. 734 : 31 ER 1272 at p. 12,82: 'But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of creditor.' In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings.
5. Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal ........
14. In the present case, the suit comprised of two actions, one against the appellant under which the appellant is sued upon the basis of the distinct cause of action against him under which he is liable to the plaintiff in respect of what he has contracted to make good and the other against the first defendant in terms of its contract with the plaintiff. If the plaintiff could have sued appellant and appellant alone - and obtained a decree to the extent of the whole of the liability of the appellant in terms of Ext. P-6, the mere fact that the plaintiff has chosen to bring an action against the first defendant also should not, and indeed consistently with first principles,. does not detract from the extent of the relief the plaintiff would otherwise have been entitled to against appellant. A contention similar to the one urged by Sri Cheluvaraju was considered in Muthuvelappa Goundan v. Palaniappa Chettiar (1937 Mad WN 373) where a Bench of consisting of Varadachariar and Pandrang Row J.J.repelling the contention, observed.
'Before us, it has been contended on behalf of the appellants that the lower court should have directed the plaintiff to proceed in the first instance against the security properties and only after they had been sold should the plaintiff have been permitted to proceed against the appellants personally. This contention was sought to be supported by the analogy of a decree to be passed in mortgage suits. And Mr. Ramaswami Iyer argued that as under the Transfer of Property Act the remedy in respect of a charge is governed by the provisions relating to mortgages, the principle of S. 68 of the Transfer of Property Act must be applied here. He further urged that on the true construction of S. 68, the course contended for by him would be the proper course. We are unable to agree with this contention. It is true that when a person is personally liable under a mortgage document, it is the policy of the law that the mortgagee should not enforce the personal liability before exhausting his remedy against the property except in cases where the mortgagee is prepared to abandon the security,. But by the very reason of the thing this can apply only as between the mortgagor and the mortgagee. In the present case the appellants had nothing whatever to do with the security bond. Their liability did not arise under the security bond; nor was the liability under the promissory note merged in that under the mortgage bond. Their relation to the plaintiff was therefore not of a mortgagor al all. We do not therefore see any ground on which they can invoke the aid of the provisions of S. 68 of the Transfer of Property Act.'
The contention, therefore, that the decree against the appellant should be limited to and be co-extensive with what should be the subject-matter of a personal decree under R. 6 of 0. 34, C.P.C. against the mortgagors does not appear to be supportable.
We, accordingly, answer point (d) against the appellant.
15. Point (e): While the sum of Rs. 33,760-85 admittedly paid during the pendency of the suit has been given deduction to in the liability of the appellant, the direction in the matter of a decree against the first defendant in so far as it directs that the suit be 'decreed as prayed for' appears to have ignored this payment. This point urged by Sri D. Ch6luvaraju is a matter that should concern the first defendant and not the appellant However, in drawing up the decree against the first defendant, this sum of Rs. 33,760-85 paid during the pendency of the suit shall be taken into account.
In the present case, however, we should observe that consistently with the true nature and scope of the suit as comprising of two separate causes of action - one against the appellant and the other against the first defendant and its partners - there shall be drawn up two decrees one against the appellant in the sum of Rs. 1,66,231-15 with pendency lite and future interest at 6% per annum. from the date of the suit till the date of realisation and costs, and the other against the first defendant in the form of a preliminary decree for sale under R. 4, 0. 34, C.P.C. for the sum of Rupees 1,90,565-48 with costs and interest at 9J% per annum granting six months' time to deposit. It shall be a condition in both the decrees that if any realisations are made under 'the decree against the appellant-second defendant, the sum of the extent to which the decree is so satisfied shall also be given deduction to and pro tanto satisfaction entered in the decree against the first defendant and, likewise, if any realisations are made under the latter decree in so far as such realisations exceed Rs. 24,334 and proportionate interest thereon, such realisation shall correspondingly be given credit to in the decree against the appellant.
In the result, this appeal except to the extent the decree of the court below stands modified as indicated above, is dismissed. in the circumstances, we direct the parties to bear their own costs in this appeal.
16. Order accordingly.