1. This appeal arises out of a suit brought by the State Bank of Mysore, represented by its General Manager, against B. Shambhumull Gangaram, a firm of Bankers, represented by its sole proprietor B. S. G. Chagganmull (1st defendant) and B. S. G. Chagganmull personally (2nd defendant) to recover Rs. 1,61,272.45 with current and future interest and costs as money due to the Bank on accounts in respect of which the second defendant on behalf of himself and the firm had executed two memoranda of deposit of title deeds, each for Rs. l,00,000/- dated 14-8-1950 and 21-8-1950. thereby mortgaging the properties shown in plaint 'A' and 'B' schedules and by sale of the schedule properties other than those released from time to time by the Bank.
2. In or about August 1950 the defendants approached the erstwhile Bank of Mysore Ltd., which will hereinafter be referred to as the 'Bank' for purpose of convenience and brevity, for an advance upto a limit of Rs. 2,00,000/-offering the schedule properties as security for repayment of the advances to be made from time to time in addition to the hundies executed by third parties in favour of defendant No. 1. The defendants availed themselves of the facilities that were so granted and became due in a sum of Rs. 1.60,375.86 as per the certified statement of accounts produced along with the plaint. Interest at 6 1/2 per cent, per annum has been charged to this account. Under the Property Loan Account, the defendants became due in a sum of Rs 896.59. The defendants, therefore, became due in a sum of Rupees 1,61,272.45. This is how the claim of the Bank is put forward in the plaint.
3. It could be gathered from the material available in this case that the defendants had two kinds of accounts with the plaintiff, one being Local Usance Bills Discount Account (L. B. D. Account) and the other Overdraft (O. D.) Account. Under the Overdraft Account, the defendants became due in a sum of Rs. 58,879-5-0 in the year 1956. The Bank filed O. S. No. 19/56 on the file of the District Judge, Civil Station. Bangalore, and obtained a decree against the defendants. The defendants appear to have satisfied that debt by sale of certain items of mortgaged properties. In respect of the L. B. D. account, the defendants had offered the schedule properties as security by mortgaging them and in addition had given hundies executed by third parties in favour of defendant No. 1.
4. The defendants resisted the claim of the plaintiff on various grounds. They contended that the plaintiff was not entitled to collect and realise any securities executed in favour of the Bank without a registered conveyance or transfer or assignment as per provisions of the Stamp Act, the Registration Act and the Transfer of Property Act. The amalgamation of the Bank with the State Bank of Mysore is a transgression of the powers conferred on the local legislature and cannot override the provisions of the Central Legislation. Therefore, the plaintiff cannot seek to have a right to recover the claim in this case. The Bank advanced certain monies to the second defendant on the strength of deposit of title deeds and discounting hundies. Several hundies formed security furnished by the defendants and the plaintiff has suppressed that fact. The plaintiff ought to have filed a suit to recover the monies due under the hundies and should not have brought the present suit against the properties mortgaged. The defendants stated that the suit was barred by time inasmuch as there is no truth in the allegation of the plaintiff that they acknowledged the liability. In the course of the transaction of advances made by the plaintiff to the 2nd defendant, the defendant was taking securities and sometimes discounting hundies. The plaintiff filed a suit (O. Section 19/56) on the file of the First Additional Civil Judge, Bangalore for recovery of Rs. 58,879-5-0 as the amount found due under the overdraft facility. That suit ended in a decree. The discounting of hundies was a part of the said account and it was not distinct and separate account. Therefore, in that suit the plaintiff ought to have claimed the amount claimed in this suit as well and having omitted to do so, it was not open to the plaintiff now to enforce its right regarding the suit amount and the same ia barred under Order 2, Rule 2, Civil P. C. The plaintiff had retained hundies presented to it by the defendants for discounting and had allowed those hundies to become time-barred with the result the defendants were discharged to the extent of the amount due under the hundies. The plaintiffs ought to have realised the amounts on those hundies as the plaintiff stood in the position of an agent of the defendants in regard to the hundies and if the plaintiff had allowed those hundies to become time barred, the defendants were entitled to ask the plaintiff to adjust that amount. They stated in the written statement that each of the hundies gave rise to different cause of action and therefore the items of L. B. D. account on account of different hundies became time-barred and the drawers of the hundies not being made parties to the suit, the suit was not maintainable. Incidentally they pleaded that the interest claimed was excessive.
5. On these contentions, the trial Court raised 14 issues. The trial court negatived all the contentions of the defendant and decreed the suit. The said decree is challenged in this appeal.
6. Defendant 2 had transactions with the Bank from the year 1950 and before. He had two kinds of accounts, the first being L. B. D. account and the other current account. Under the L. B. D. account, the defendant was given the facility of getting advance to a limit of Rs. 2,00,000/- in the beginning and subsequently that limit was reduced to Rs. 1,50,000/- which was later reduced to Rs. 1,00,000/-. For the advance so made the Bank had taken the security by deposit of title deeds of immovable properties mentioned in the schedule and also hundies Under the other account, the Bank had given additional facility to the second defendant of overdraft to the extent of Rs. 50,000/- for which the second defendant had executed a promissory note. The evidence shows that later the limit of overdraft facility on this account was reduced to Rs. 25,000.
7. Mr. Nanjundaswamy, the learned counsel for the defendants, urged that the State Bank of Mysore could not be the successor in interest of the Bank and therefore the plaintiff had no right to proceed against the mortgaged properties. Section 3 of the State Bank of India (Subsidiary Banks) Act, 1959, makes it clear that under the provisions of that Section the State Bank of Mysore was substituted in place of the then existing Bank. If that be so, there is no substance in the contention of Mr. Kanjundaswamy. It was also contended that the two mortgage deeds Exs. P-1 and P-2 have been duly stamped and registered under the Mysore Transfer of Property Act and as they pertain to properties situated in the Civil Area prior to the retrocession of that area to the erstwhile State of Mysore in 1947, the Indian Transfer of Property Act was applicable to this area and also the Indian Stamp Act and that even after the retrocession by virtue of Mysore Act XXV of 1947 (the Retrocession) (Miscellaneous Provisions) Act, the same old law continued to be in force and therefore the deeds in question were not in accordance with the Indian Stamp Act, which was in force in the Civil area and hence they were not valid deeds. But this argument overlooks the provisions of Act No. LVII of 1948. Section 3 of that Act provided that all laws in force then in the State of Mysore were made applicable to the retroceded area, from the appointed day except to the extent of the exceptions made in the Act itself. On an examination of the provisions of the said Act, it is abundantly clear that Exs. P-l and P-2 are in accordance with the law of Transfer of Property then in force in the State.
8. It was next contended that the defendants had admittedly furnished two securities one by way of deposit of title deeds and the other by way of hundies. The plaintiff could not have filed the suit only against one security, but it should have proceeded against the other security also namely the hundies. The argument was that the plaintiff having not taken action on the hundies and having retained them with them without returning them to the defendants in time thereby allowing them to become time-barred, had destroyed or impaired the defendants' remedy against the prior parties and therefore the defendants were discharged from the liability to the plaintiff to that extent, as if the hundies had been paid at maturity.
9. The second defendant has deposed that he was given facility to the extent of Rs. 2,00,000/- by the Bank in the L. B. D, account and Rs. 25,000/- in the current account, and that was in the year 1950. Ex. P-8 dated 9th December, 1950 is a letter written by the second defendant to the Bank. The contents of this letter disclose that he had offered the immoveable properties as security besides agreeing to tender the Bills drawn by different parties in favour of his firm as regards the monies borrowed from him from time to time. To operate the L. B. D. account, according to the admission of the second defendant, it became necessary for him to open the current account in the Bank and thereafter, current account was opened. He used to tender hundies to the Bank for discounting and the Bank after discount, and deducting advance interest for the period noted in the hundies, was crediting the amount to his current account facilitating him to draw the amount at his convenience. He has further stated that at the time of discounting the hundies, he was endorsing them in favour of the Bank or order. On maturity of the hundies they had to be honoured by payment to the Bank by the drawer of the hundies or by him. His evidence in examination-in-chief is that the drawers of the hundies would invariably pay him the money and that he in turn would pay to the Bank and get the hundies discharged. The drawers of the Hundies were not acquainted with the procedure of honouring the hundies deposited by him in the Bank. Therefore, they used to pay him all the amounts on all the hundies and then in turn he used to pay the Bank. After receipt of such payments, the Bank was returning the hundies with an endorsement 'payment received'. His evidence shows that he used to receive the monies from the drawers of the hundies and would pay to the Bank either in cash or by way of cheque on his current account Further, he has stated that, the drawers of the hundies used to be notified by the Bank about the due date even at the time of discounting. His evidence further shows that if the drawer of a hundi did not pay either to him or the Bank, he used to take back that hundi from the Bank and give a fresh one. He has admitted in unequivocal terms that the Bank had issued notices to the drawers of the hundies and also to him calling upon them to pay the amount. It is therefore clear that the defendants did not pay the amounts in respect of the hundies pledged with the Bank. No doubt, in his evidence the second defendant has stated that he asked for the return of the hundies to get a renewal from the drawers of the hundies or to get fresh hundies. But he has not stated that the Bank refused to return the hundies against payment. What all he has stated is that if the hundies had been returned to him he would have been in a position to collect the amounts from the drawers and pay to the Bank. Because the Bank did not return the hundies, he could not collect the amount from the drawers of the hundies and as those hundies have become now time barred, the plaintiff cannot file a suit for the recovery of the amounts due in respect of those hundies. But his evidence shows that whenever he made payment to the Bank, the Bank used to make an endorsement of discharge on the hundies and return the same to him and if no payment was made, even according to him, the Bank was not returning them to him. Some drawers, as admitted by him, used to credit to his current account monies due in respect of their hundies. With respect to the hundies that he had pledged with the Bank, he had maintained account showing the amount that he had lent to various persons who had executed hundies and the amount that he had received from them. His own admission is that the account books are with him. In order to show that he has not collected any amount from the drawers of the hundies that he had pledged with the Bank, the best evidence would have been to produce the account books or to examine the drawers. From the fact that he has withheld the account books, the only inference that could be drawn is that if he had produced the account books they would have gone against his interest. Two inferences are possible; one is that either he has collected the amounts due under the hundies from the drawers or the other is that the hundies pledged by him with the Bank were fictitious. The latter inference is possible from the fact that the second defendant himself used to discharge the hundies pledged with the Bank or used to give another hundi taking the one pledged. It is significant that defendant No. 2 produced from his custody Ex. D-3, which was one of the hundies pledged by him and later taken back by him after payment. Ordinarily it should have been with the drawer. At no point of time, the drawers, according to the second defendant himself had anything to do with the Bank. In view of what the second defendant himself has stated In respect of the hundies, it was understood between the parties that the plaintiff had to look to the security of immoveable properties for any amount due by the defendants and there was no agreement or contract that the plaintiff had to take action on the hundies.
10. Although the hundies were considered as securities for the amount advanced, in fact and in reality the plaintiff gave facility to the defendants upto a limit of Rs. 2,00,000/- on the specific understanding that the defendants should open an account called the L. B. D. account; they should draw the amount on discounting hundies; the Bank should hold those hundies and that finally whatever amount became due under the L. B. D. account would be recovered by the Bank from the defendants or by proceeding against the properties secured. The presentation of hundies and discounting them were considered to be one of the modes by which the defendants should draw advances from the Bank. The defendants have in fact taken advances only on presenting the hundies and discounting them. The effect of this mode was to compel the defendants to credit the amounts to the Bank and get the hundies discharged. The defendants were admittedly doing money-lending business. After taking advances from the Bank they were lending monies to their customers and taking hundies from them, which in turn were discounted in the Bank. What appears from the transaction is that the presentation of hundies and discounting them was a mode for drawing the advances from the Bank and it was not intended that the hundies should necessarily he securities for the advances made, because security of immoveable properties had been taken by the Bank under Exits. P-1 and P-2. Therefore, there is no substance in the contention that the plaintiff should have had recourse to the hundies to recover their debt. No question of splitting up the securities has arisen in this case. The only security that had been given by the defendants was the immoveable properties under Exs. P-1 and P-2 and the suit brought by the plaintiff is in order.
11. This is not a case governed by the law of guarantee as sought to be made out by Mr. Nanjundaswamy, with reference to the hundies. It is important to distinguish clearly between the rights of a surety under an ordinary contract of guarantee not containing any special provisions and the rights of a surety where the instrument creating the suretyship contains certain special clauses. It is elementary law that in a simple case of guarantee, the surety is discharged if the creditor gives time to the principal or does certain other acts) and, a fortiori, if the creditor releases the principal debtor, of course the surety Is released too. At one stage Mr. Nanjundaswamy urged that the drawers of hundies were really the principal debtors and that the defendants were only guarantors or sureties. This is hardly a case of that type. This is a simple case in which the defendants borrowed money against the hypothecated deeds and also by depositing hundies with the plaintiff. The admitted course of conduct of parties was that the defendants had to take back the hundies by making payment or by tendering fresh hundies by way of renewal. There is no instance in which any drawer of hundi directly made payment to the plaintiff and received the hundi back with an endorsement of discharge. This conduct in a way modified the ordinary law of guarantee. In this case, there is no covenant to realise debt bv enforcing the hundies, but Exits P-l and P-2 are documents in which second defendant's property was made available to the creditor for the debt. Defendant 2 has conveyed his properties under the two documents to the plaintiff for the purpose of securing advances on the basis of discounting the hundies. There is no substance in the contention of the defendants that they became sureties in respect of the hundies discounted by them in the plaintiff's bank and as the plaintiff failed to take action on the hundies and having allowed them to become time barred, to the extent of the amount covered under the hundies they were discharged. It seems to us plain that by this transaction the Bank discounted the hundies and kept them with them in order to facilitate the defendants to get advances of monies as agreed to between the parties to the extent of Rs. 2,00,000/- from time to time.
12. The second point which Is also plain from the transaction is that the Bank was the mortgagee in respect of the schedule properties mentioned in Exs. P-1 and P-2 to the extent of the amount that would be found due ultimately under the L. B. D. account, the upper limit being Rs. 2,00,000/-. The position is this: Rs 1,61,272-45 was the amount found due on the L. B. D. account after taking accounts, which has been accepted by the defendants long after the hundies became due from time to time as per their acknowledgments. It is perfectly possible for a surety to contract with a creditor in the suretyship instrument that notwithstanding any composition, release, or arrangement the surety shall remain liable although the principal does not. In the instant case, the defendants, after the Bank granted facility to the extent of Rs. 2,00,000/- under the L. B. D. account, wrote to the Bank on December 9, 1950 as per Ex. P-8 as follows:
'Telephone No. 31.
B. S. G. Chagan Mull
B. Samboo Mull Gangaram
No. 49, Brigade Road,
9th December, 1950.
The General Manager,
Bank of Mysore Ltd.,
We thank you for having granted us Local Bills Discounting limit of Rs. 2,00,000/-.
We may mention that the security for the said limit is our bungalow, property valued more than Rs. 6,00,000/-besides the tender of bills drawn by the different parties in our favour for the monies lent to them from time to time.
We find that the limit now sanctioned is not sufficient when compared to the volume of business. Moreover, we have given you very valuable house property as Security.
We, therefore, request you to grant us an enhanced L. B. D. limit of Rs. 4,00,000/- as requested in our previous application.
Kindly also reduce the rate of interest on L. B. D. account from 5 1/2%.
For B. Samboo Mull Gangaram,
Sd/- B. S. G. Chagan Mull
13. Although by this letter the defendants agreed to pledge the hundies, It is clear from the said letter that the main security on the basis of which the amounts were advanced by the Bank was the suit schedule properties. Exhibits P-68 to P-125 are hundies discounted by the defendants in the Bank and left with the Bank as additional security. Most of these hundies are of the year 1953 and only a few of them are of the year 1954. The due date of these hundies was 90 days from the date of the execution and some of them became due in the year 1953 and the remaining In the beginning of the year 1954. But even before they became time barred, the evidence of P. W. 1 Krishnamurthy, the then General Manager of the Bank, shows that notices of the maturity of hundies were issued both to the drawers and discounters. The Bank did not proceed against the drawers of the hundies for three reasons as stated by P. W. 1 namely, (1) the second defendant was requesting the bank not to proceed against him but to give time, (2) the Bank had the collateral security of property and (3) the Bank did not consider them to be good enough parties.
14. P. W. 1 has stated in his evidence that the defendants requested the Bank not to take action and to wait and therefore the Bank did not either proceed against the drawers or the defendants. The hundies Exs. P-68 to P-125 have been endorsed in favour of the Bank by the defendants and that endorsement reads: 'Pay Bank of Mysore, Ltd., or Order'. P. W. 1 has deposed that payments were made by the second defendant himself to the Bank in discharge of the liability of those hundies and that at no time the drawers of the hundies discharged the hundies by payment of monies to the bank. He went on to say that the second defendant at times was making cash payments and on some occasions he was giving fresh hundies in substitution of matured old hundies. The defendants sometimes were not retiring the hundies on due dates and used to pay later and for that overdue interest was debited to their account. This witness further stated that the second defendant had met him in connection with the suit claim as the Bank had made several demands and requested the Bank to give him time to pay the amounts. As the Bank had enough of security, time was given to him. In the course of his evidence, P. W. 1 has stated that the Bank, at all relevant time, considered the property as security. The drawers of the hundies were not the drawers approved by the Bank. His evidence shows that there are two classes of drawers of hundies. One such class consisted of parties whose property was taken as collateral security and on taking such security, the Bank used to discount the hundies tendered by them without further enquiry. As regards the other class, wherein no collateral security of property was taken, the Bank used to enquire into the assets of the drawer and after ascertaining his solvency the Bank used to discount the same. This witness has stated in unequivocal terms that the hundies discounted by the defendants with the Bank were of the former character. Finally, this witness has denied the suggestion made on behalf of the defendants that the second defendant had met him and had requested him to take action against the drawers of the hundies for realisation of the dues.
15. The Bank, in fact, issued notices not only to the defendants but also to the drawers of the hundies, as stated earlier, before the hundies became time barred, asking them to discharge the hundies. Apart from the oral evidence of the then General Manager to the effect that the second defendant approached him and requested him for time for discharge of the hundies, the letters written by the defendants clearly support the case of the plaintiff that the Bank was not to take action on the hundies at all.
16. Ex. P-13 is a letter written by the defendants to the Bank stating that the bills which fell due at the time of writing the letter during that month would be paid in cash and the balance in bill discounting account would be reduced to Rs. 1,00,000/-. In another letter Ex. P.14 dated 10-1-1956 written by the Agent of the defendants, the defendants mentioned that in spite of earnest trial, they were unable to collect their outstandings and as they had definite assurance of payment from their clients, they would bring their account to order early. In that letter it has been specifically mentioned that the loan given to them is based on adequate security, referring to the mortgage security, and requesting the Bank to give them some more time. By another letter dated 21-9-1956 the defendants stated that they were making sincere attempt to make payments towards L. B. D. account by selling some of the mortgaged properties and as the Bank had accommodated and assisted them all those years, they requested the Bank to put up with some more delay so that they might sell some property and pay the amount due to the Bank. By one more letter Ex. P-17 dated 19-9-1957 the defendants stated that towards the amount due under the L. B. D. account sufficient security had been furnished by depositing the title deeds and that they would sell some of the properties mortgaged and pay the amount due to the Bank and as the Bank was holding valuable security, they requested the Bank not to rush to Court and wanted some more time to pay the amount.
17. From the correspondence between the Bank and the defendants, it is clear that the parties never intended, more so the defendants, that the Bank should take action on the hundies, when they became matured, against the drawers. As a matter of fact, the defendants never wanted the Bank to take any action against the hundies at all, but on the other hand, they requested the Bank to give them time to pay the amount due to the Bank stating that they would themselves collect from the drawers the amounts stated in the respective hundies. From the conduct of the parties and the manner in which the L. B. D. account transaction has been dealt with, it is obvious that the defendants, at any rate, discounted the hundies in the Bank and had taken advances on that basis for which according to the Bank, the only security was the mortgaged properties. The hundies in the instant case were taken by the Bank as additional security with no further responsibility in respect of them.
18. It may be relevant here to mention that from time to time even after the hundies became time-barred, the defendants accepted their liability due to the Bank by certifying the certificate of balance in the L.B.D. account. For example, Ex. P-19 is one such certificate, in which the balance on the L. B. D. account was accepted by them as Rs. 1,31,135-94 as on 31-12-1953. Therefore, it is futile for the defendants to contend that they are discharged from the liability to the extent of the amount covered under the hundies Exs. P-68 to P-125.
19. Mr. Nanjundaswamy cited number of decisions in support of his contention that the plaintiff having not taken action in respect of the hundies against the drawers, the defendants are discharged to the extent of the amount covered under the hundies. In Mulraj Khatau v. Vishwanath Prabhuram Vaidya, (1913) ILR 37 Bom 198 the appellant and the respondent were rival claimants to the proceeds of a policy of insurance on the life of their debtor which had been paid into court by the Insurance Company as a defendant in a suit brought for the money in which the appellant was also a defendant. The appellant relied on an assignment by the debtor of the policy by an instrument in writing; and the respondent based his claim on a deposit of the policy with him by the debtor unaccompanied by any written instrument. It was held by the Privy Council that the case was governed by Section 130(1) of the Transfer of Property Act (IV of 1882, as amended by Act II of 1900) which precluded the application in India of the principles of English law; and the title of the appellant, as being based on an instrument in writing, and so conforming in all respects with the provisions of that section, was absolute as against that of the respondent who acquired no right to the policy or its proceeds by reason of the deposit. The right to the proceeds was an 'actionable claim'; and Section 130 covered transfers by way of security, as well as absolute transfers as appeared from illustration 2 to the section. We are unable to see how this decision helps the defendants.
20. In Muthukrishna Aiyar v. Vera Raghava Aiyar, AIR 1915 Mad 1031 (FB) their Lordships were dealing with a case of hypothecation of promissory note with the creditor. The facts were that-- 'A by deed hypothecated a promissory note in his favour to B as security for money owing by the former to the latter. The promissory note was not endorsed to B. It became time-barred and the question was whether B should be debited with the amount due on the note.' Dealing with the question, their Lordships held:
'that the hypothecation was a transfer of an actionable claim within the meaning of Section 130, T. P. Act, and thus the remedies of the mortgagor having been transferred to the mortgagee, B was entitled to recover the sum due from the maker of the promissory note and in taking the account of what was due to him was liable to be debited with the amount of the note if he without justification allowed the debt to become irrecoverable.'
This is again a case under Section 130 of the Transfer of Property Act (4 of 1882) and the facts in that case were entirely different from the facts of this case and no assistance could be taken from that decision.
21. In Shyam Kumari v. Rameshwar Singh, (1905) ILR 32 Cal 27 (PC), the question related to assignment of a debt in favour of the mortgagee by the mortgagor due to him from a third person. Dealing with that question, their Lordships of the Privy Council observed that it lay upon the mortgagee to use reasonable diligence to recover the assigned debt from the debtor, and that it appearing that no serious attempt had been made to do so, it had been rightly deducted in the account of the mortgagee. In Jambu Chetty v. Palaniappa Chettiar, (1903) ILR 26 Mad 526. the facts were that the plaintiff brought an action against the defendant for the amount due on account of goods sold and delivered and money lent. The defence was that plaintiff had accepted hundies in discharge of the debt and was, in consequence, debarred from suing on the original consideration and that his remedy if he had one, was on the hundies. It was also contended that the hundies had been accepted as cash payment, in consideration of a discount, and that, in consequence, plaintiff had no cause of action either on the original debt or upon the hundies, as he had taken the risk of the latter being dishonoured by the drawee. On the evidence it was found that the hundies in question were accepted as absolute payment of the debt and that the plaintiff therefore could not sue on the original debt. Further it was pointed out that even in the view that the hundies were given and taken as conditional payment of the debt, the plaintiff could not maintain the action as he was guilty of laches in respect of the same and they must therefore be treated as absolute payments. The facts of this case are different from the facts in the instant case because there is no evidence that the hundies were accepted absolutely in discharge of the debt.
22. Great reliance was placed by Mr. Nanjundaswamy on the decision in Ganpatrao Balkrishna Bhide v. Maharaja Madhavarao Sinde, (1911) ILR 35 Bom 1; in that case, the plaintiff sued to recover from the defendant certain sum of money and for account and damages. The plaint alleged that the defendant was plaintiff's agent and was as such in management of the plaintiff's properties at various places and he had sent to the plaintiff from time to time abstracts of accounts and the suit was filed on the basis of the accounts so made. Out of the amount which the plaintiff sought to recover from the defendant, an item of Rs. 3,136-15-11 was strenuously contested. The defendant answered that when the plaintiff appointed him as his agent, he deposited Rs. 3,000/- with one person at the direction of the plaintiff himself and when he gave over charge to plaintiff's another agent, he gave him with his consent a 'cheque' (letter) to recover the balance due from the said deposit of Rs. 3,000/- and the plaintiff accepted the 'cheque' and passed receipt in his favour and therefore the suit brought would not lie. On those facts it was held that:
'where money deposited with a stakeholder was validly assigned by the depositor to his creditor in satisfaction of his debt and the creditor, being able to recover the amount so assigned, neglected to do so he was chargeable with the amount.'
In the case cited above it is seen that the defendant had given a cheque in respect of the amount that he had deposited with the person named by the plaintiff and the plaintiff having accepted the cheque and given discharge to that effect to the defendant, plaintiff could not have claimed if he had failed to recover the amount from the person with whom the defendant had deposited the amount. That is not the case here.
23. Mr. Nanjundaswamy relied upon the provisions of Section 139 of the Contract Act, This section could be invoked by a surety only if he is able to show that the creditor has done any act which is inconsistent with his rights or omits to do any duty and thereby impairs his remedy against the principal debtor. It is true that if the creditor either by express or implied contract agreed with the surety that he would recover the debt in respect of the hundies, as in this case, and it the creditor fails to do so and allows the hundies to become time-barred, the surety would have a cause of action under Section 139 of the Contract Act. A passage from 'Chitty on Contracts' may be extracted to illustrate:
'If there is a contract, express or implied, that the creditor shall acquire or preserve any right against the debtor, and the creditor deprives himself of the right which he has stipulated to acquire, or does anything to release any right which he has, that discharges the surety; but if there is no such contract, and he only has a right to perfect what he has in his hand, which he does not do, that does not release the surety unless he can show that he has received some injury in consequence of the creditor's conduct.'
Therefore, there is no substance In the contention of Mr. Nanjundaswamy that Section 139 of the Contract Act comes to the aid of the defendants. In view of the facts of this case in which the defendants are not sureties, we are unable to get any assistance from the decision in K. M. K. Subbaraya Chettiar v. Abirami Animal : AIR1965Mad157 , which was dealing with Sections 8 and 78 of the Negotiable Instruments Act.
24. It is true that the statute of limitation has run against the hundies. Mr. Nanjundaswamy contended that the Bank being the holder of the hundies, the Bank in fact, became the creditor of the maker or makers of the hundies and the defendants became sureties in respect of those hundies; the Bank having failed to take action against the maker or makers, the defendants were discharged from suretyship. The evidence in this case, as stated earlier, is that these hundies were given as additional securities to the loan advanced by the Bank to the defendants, which loan had been secured by mortgage. The defendant, while pledging the hundies never required the Bank to take action against the maker or makers of the hundies. If that is so the principle is this: If there is a contract, express or implied, that the creditor shall acquire or preserve any right against the principal debtor, and the creditor deprives himself of the right which he has stipulated to acquire, or does anything to release any right which he has, that discharges the surety; but where there is no such contract, and he only has a right against the debtor in the position of the defendants in this case without reference to the maker or makers of the hundies and if he does not take any action against the maker of the hundi, that does not release the debtor unless he can show some injury in consequence of the creditor's conduct. A debtor is not discharged merely by the omission of the creditor to sue. If the Bank had undertaken to enforce the claim under the hundies and the Bank had refused, the defendants might have been discharged, but are not discharged merely on the omission of the Bank for the reason that the defendants could have at any time paid off the debt and sued the drawers of the hundies themselves. It is said that it was the duty of the Bank to present the hundies for payment and to give notice to the defendants of the non-payment. That depends on the agreement or custom of merchants. The mere omission to sue the drawers does not discharge the defendant because they could have themselves set the law in operation against the drawers after taking back the hundies by making payment.
25. Section 139 of the Contract Act provides that if the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby unpaired the surety is discharged. By reason of this provision, Mr. Nanjundaswamy contended that the defendants are absolutely released inasmuch as the Bank impaired the remedy of the defendants against the debtors in respect of the hundies. In Mahanth Singh v. U Ba Yi it was pointed out that failure to sue the principal debtor until recovery is barred by the statutes of limitation does not operate as discharge of surety.
26. Reference may be made to Section 137 of the Contract Act, which provides that--
'Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.'
While Section 135 deals with a case of discharge of a surety as a result of a contract between the creditor and the principal debtor to give time to or not to sue the debtor, this section deals with the case of the mere forbearance to sue as distinguished from forbearance springing from a contract. The forbearance may be for a short period or it may continue until the expiration of the period of limitation. In the first case the surety is not discharged. There was some divergence of opinion amongst the High Courts, as to the effect in the second case. In Kali Charan v. Abdul Rahiman, AIR 1918 PC 226, the Privy Council held that mere forbearance on the part of a creditor to sue the principal debtor or to enforce any other remedy against him, does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. The law in England appears to be that omission of the creditor to sue within the period of limitation does not discharge a surety for another and more substantial reason that the surety can himself set the law in operation against the debtor. That seems to be the majority opinion of the High Courts and that must be accepted as correct. In Bireswar Chatterjee v. Saidpur Commercial Bank Ltd., (1937) 41 Cal WN 1361, similar view was taken that the omission on the part of a creditor to bring a suit against the principal debtor within the period of limitation has not the effect of discharging the surety from his liability.
27. 'Where bills or notes are deposited as security, and not absolutely transferred in consideration of the advance, the banker's position is that of pledgee, analogous to that which he holds by virtue of his lien. If the banker holds the customer's endorsement on the bill or note, he can sue the customer thereon to the extent of the advance; but the property in the bills or notes remains in the borrower.' (Halsbury's Laws of England, 3rd Edn. Vol. 2, page 231). 'Where a negotiable instrument is given by a debtor to the creditor, the question upon what terms it is given is one of fact, depending on the intention of the parties. In the absence of special agreement, a creditor is not bound to accept payment of a debt otherwise than in current coin, or in notes of the Bank of England; and if he takes a bill, note, or cheque in payment he may either accept it in absolute satisfaction of the debt, in which case he takes the risk of its being dishonoured and can sue only on it, or may accept it as a conditional payment only, the effect of which is to suspend his remedies during the currency of the instrument. The question whether a negotiable instrument has been accepted in absolute satisfaction or only as a conditional payment is one of fact and depends on the intention of the parties.' (Halsbury's Laws of England, 3rd Edn. Vol. 8, pages 212 and 213).
28. In Aziz Ahmad v. Sher Ali : AIR1956All8 the question that arose for consideration was, whether a surety is discharged when the creditor allows the execution of his decree against the principal debtor to be barred by limitation. Mootham, C. J., speaking on behalf of the Full Bench, answered the question in the negative and observed that a surety is not discharged when the creditor allows the execution of his decree against the principal debtor to be barred by limitation. Similar view has been expressed in Dass Bank Ltd. v. Smt. Kali Kumari Debi : AIR1958Cal530 .
29. The cases in which a surety is discharged by the dealings of the creditor are dealt with in Sections 134, 135 and 139 of the Indian Contract Act; these provisions must in the case of parties to bills of exchange, promissory notes and cheques, be read along with Sections 39 and 40 of the Negotiable Instruments Act. Section 134 of the Contract Act applies where there is either release or discharge of the principal debtor. Under Section 135, when a creditor compounds or promises to give time to, or not to sue the principal debtor, the surety will be discharged unless the surety assents to such contract. Section 139 deals with the subject of discharge of surety by the creditor impairing the surety's remedy against the principal debtor. That section provides for two cases, that of an act on creditor's part inconsistent with the right of the surety and that of an omission inconsistent with the duty towards the surety, the act or omission having the effect of impairing the surety's remedy. Whether it be an act of creditor inconsistent with the rights of the surety or an omission of the duty he owes to the surety, it is necessary in order to attract the application of the section that the eventual remedy of the surety against the principal must be impaired,
30. Under Section 39 of the Negotiable Instruments Act, generally a surety is discharged by a contract between the creditor and the principal debtor by which the debtor is discharged or relieved or by which the creditor gives time to, compounds with, or undertakes not to sue the principal debtor. Section 39 enables the holder of a bill of exchange to enter into any such contract with the acceptor without losing his rights against the other parties, provided he expressly reserves his rights against those parties. But the scope of the section being limited to the case of the acceptor of bill, it would not enable the holder of a bill or note to effectually reserve his rights against the indorsers when he enters into any such contract with the drawer or maker. The Section does not apply where the acceptor is discharged not by reason of a contract between himself and the holder but by some act or omission, the legal consequence of which is the discharge of the acceptor. This section has no application to the facts of the present case.
31. Section 40 is more appropriate to the facts of this case than Section 39. Section 40 deals with discharge of indorsers' liability. That Section reads:
'When the holder of a negotiable instrument, without the consent of the indorsers, destroys or impairs the indorsers's remedy against the prior party, the indorsers is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.' The implication of this section is made clear by the illustration, namely:
'A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsement in blank:--
First indorsement, 'B'.
Second indorsement. 'Peter Williams' .
Third indorsement, 'Weight and Co.,'
Fourth indorsement, 'John Rozario'.
'This bill A puts in suit against John Rozario and strikes out, without John Rozario's consent, the endorsements by Peter Williams and Wright and Co., A is not entitled to recover anything from John Rozario.'
From the illustration it appears that a person whose prior party's name is struck out can plead discharge whether prior party is immediate or remote. As said: 'the contracts of the several indorsers are like so many links of a pendant chain, if the holder dissolves the first, every link falls with it. If he dissolves an intermediate link, all after it are likewise dissolved. But the last link supports nothing, and its dissolution injures no one'. The question whether the striking out of an indorsement by mistake releases the surety is not clear from the section. But it is not necessary to decide that point here.
32. The scope of the section, however, is not confined to the striking out of the names of the parties. When the holder destroys or impairs the securities to which the indorsers becomes entitled after payment, this act of the holder impairs indorsers's remedy against the prior parties and thereby leads to its discharge. Again a release of one of the persons who are jointly liable as principal debtors will operate to discharge the surety.
33. Another instance may be stated: Where, as a result of an act or omission of the creditor, there is a variation of the liability undertaken or a departure in the terms of the instrument the surety will be discharged from his obligation thereunder and it is immaterial whether the variation is substantial or material, because the contract ceases to be one which he has undertaken to fulfil. On the facts of this case, the Bank did not destroy or impair the remedy of the defendants in respect of the hundies, because as the evidence on behalf of the defendants themselves shows that the parties never intended that the Bank should take action against the makers of the hundies at all.
34. It is to be seen that the contentions of the defendants dealt with above are on the basis that the defendants were only the sureties and the drawers of the hundies were principal debtors. We have already stated that that was not the position at all. The defendants were the debtors and they never acquired the character of sureties. Therefore, in our view, the plaintiff had no duty to the defendants in the absence of an express provision in the contract to pursue a legal remedy against the drawers of the hundies and its failure to take action did not discharge the defendants. On the facts of this case and in law, the defence set up by the defendants that they are absolved from the liability to the extent of the amount covered under the hundies Exs. P-68 to P-125, because the plaintiff allowed them to become time-barred, fails.
35. Mr. Nanjundaswarny urged that the suit is barred by virtue of the provisions of Order 2, Rule 2. Civil P. C, According to him, the Bank agreed to advance loan to the extent of Rupees 2,00,000/- and also another sum of Rs. 50,000/- and for that purpose, the arrangement arrived at between the parties was that the defendants should open two accounts in the Bank one called the L. B, D. account and the other current account; that the Bank should advance monies on hundies presented by discounting them, such amounts discounted to be credited to the current account of the defendants from which the defendants were drawing the amounts. This arrangement was part of one agreement and it constituted one transaction though the entries of credit and debit were made in different accounts. In continuation of his argument, he urged that a sum of Rs. 2,50,300/- became due on one transaction. The plaintiff filed O. S. No. 19/56 on the promissory note executed by the defendants to secure the overdraft amount under the current account and thereby having sued the defendants for a part of the whole claim of Rs. 2,50,300/-, which gave rise to one cause of action, and the plaintiff having omitted to claim the balance the plaintiff has lost his remedy to bring the present suit for the balance. As stated earlier, the defendants had two different and independent transactions with the Bank, one under the L. B. D. account and another under current account in which Rs. 50,000/- overdraft was given to the defendants. For the L. B. D. account, the defendants mortgaged the schedule properties under Exs. P-1 and P-2 and in addition gave hundies as securities. For the overdraft amount, the defendants executed a pronote. The evidence in this case shows that on 14-8-1950 and 21-8-1950 the parties entered into agreement regarding the advance to be made to the defendants to the extent of Rs. 2.00.000/- under the L. B. D. account. In respect of the overdraft facility, the Bank gave such facility on the application of the second defendant dated 13-2-1953. The two transactions. therefore, were independent of each other. They gave rise to two different causes of action.
36. The defendants, who have raised the plea of bar under Order 2, Rule 2, C. P. C. in order to succeed must make out-- (1) that the present suit was n respect of the same cause of action as that on which O. S. No. 19/56 was based; (2) that in respect of the cause of action in that suit the plaintiff was entitled to more than one relief; (3) that the plaintiff without leave obtained from ;he court, omitted to sue the relief for which the present suit had been filed. Thus, the defendants, in order to succeed, should establish the precise cause of action upon which O. S. No. 19/56 was filed and that on which the claim in the present suit is based and they have to show that there is identity between the cause of action on which O. Section 19/56 was filed and that on which the claim in the present suit is based. Otherwise, there would be no scope for the application of Order 2, Rule 2, Civil P. C. On a perusal of the pleadings of the previous suit and the present suit and on the facts, we are satisfied that there is no identity of causes of action in the two suits. Therefore, the present suit is not barred under Order 2. Rule 2, Civil P. C.
37. It was contended by Mr. Nanjundaswamy that the suit claim being on the basis of accounts, the same is barred by limitation. If the suit had been brought on accounts, then the question whether on the date of the suit, the claim was barred by time would have been relevant because the limitation for such a suit would be three years from the time the account was started and in such a case, the plaintiff would have been required to show that each time before the expiry of three years' period, the defendants acknowledged the debt. In the present case, the suit is brought for the sale of the mortgaged property for realisation of the mortgage debt. The defendants have admitted the debt by acknowledging in writing as could be made out from the acknowledgements Exs. P-3 to P-7. The question as to what is an acknowledgement has been answered by Fry L. J. as early as 1884 A. D. in Green v. Humphreys, 1884-26 Ch D 474 at p. 481. 'What is an acknowledgment' asked Fry L. J. and he stated: 'In my view an acknowledgment is an admission by the writer that there is a debt owing by him, either to the receiver of the letter or to some other person on whose behalf the letter is received but it is not enough that he refers to a debt as being due from somebody. In order to take the case out of the statute there must, upon the fair construction of the letter, read by the light of the surrounding circumstances, be an admission that the writer owes the debt.' From the circumstances of this case, the acknowledgements referred to above, undoubtedly are admissions by the defendants that they owed that debt which debt is referable only to the mortgage debt. This is not a suit on accounts, but a suit solely on the mortgage and that being so, the suit is well within time.
38. Lastly it was urged by Mr. Nanjundaswamy that the rate of interest claimed is excessive. There appears to be no substance in this contention also. The contract between the parties as could be made out from the deeds was that the rate of interest was at 6 1/2% per annum with quarterly rests. Even if on this basis interest is calculated, after each quarter, the interest would not exceed 9% per annum when calculated at 6 1/2% per annum. The Money Penders' Act provides for 9 % interest per annum on secured debts. If the Interest, therefore, has been calculated and claimed as agreed to by the parties at 6 1/2% per annum with quarterly rests it cannot be said that the same is excessive.
39. For the foregoing, we are of the view that the decree passed by the learned Civil Judge cannot be disturbed.
40. In the result, this appeal fails and is dismissed with costs.