(1) Defendant 2 is the appellant. The first respondent-Bank obtained a decree on 31st January 1964 against two defendants for a sum of Rs. 29,720-06. The first defendant accepted the decree and has not filed an appeal. The second defendant, however, has preferred this appeal challenging the correctness of the said decree against him.
(2) The plaintiff-the Punjab National Bank Ltd. (which hereafter shall be referred to as the Bank) instituted O. S. No. 23 of 1959 in the Court of the Principal District Judge, Mysore, against two defendants to recover a sum of Rs. 38,203-01 due from them. It is the case of the plaintiff that it is a banking company, duly registered under the Indian Companies Act, having its head office at Delhi and two of its branches at Bangalore and Mysore. The defendants are merchants of Mysore and are also Directors of the Kapila Textile Mills, Ltd., Nanjangud, Mysore District (now in liquidation).The Kapila Textile mills, Ltd., hereafter shall be referred to as the Mills.
(3) The said Mills had two cash-credit accounts with the plaintiff-Bank, one on a pledge account secured on the pledge of raw cotton, yarn and other manufactured goods; and the other, a hypothecation account secured on the hypothecation of loose cotton, cloth in pieces and materials in process including cotton on the machines. In addition to the above securities, the plaintiff-Bank had also obtained the guarantee of two defendants, who by their separate letters of guarantee, dated 15th December 1956, personally guaranteed the payment of demand of all the monies or of any balance due by the said Mills. These two guarantees are individually liable to the plaintiff to pay the monies due by the said Mills and their liability so to pay is independent of the liability of the principal debtors.
(4) The Mills were ordered to be wound up by the High Court by its order dated 19th January 1959.
(5) The plaintiff states that after the realisation of the securities the said Mills are now liable to the plaintiff-Bank in the sum of Rs. 38,203-01, and as the assets of the Mills are fully encumbered, the plaintiff is not likely to recover the balance due from the Mills, and the plaintiff, therefore, after making a due demand, instituted the suit, out of which this appeal arises, claiming the said amount with future interest up to the date of payment.
(6) Since the first defendant has accepted the decree, it is not necessary to refer to the written statement filed by him.
(7) Defendant 2, by his written statement, contested the plaintiff's claim. He admits that he was one of the Directors of the Mills and that the Mills had two cash-credit accounts at the Mysore City Branch of the plaintiff-Bank and states that the loans were fully secured as could be verified from the Bank's periodical valuations of the pledged goods and securities and mortgages. He also admits that he had executed a letter of guarantee as stated by the plaintiff. He, however, denies the claim made by the plaintiff. He contends that it is not known how the plaintiff-Bank arrived at a consolidated figure when admittedly there are two separate and distinct accounts. This consolidation, according to him is neither legal nor bona fide and is fraudulent.
(8) He further states that the guarantee stands discharged as the plaintiff is not entitled to consolidate the two transactions, He also submits that since the plaintiff has parted with the securities without his consent, he is discharged. He also contested the correctness of the claim made by the plaintiff and state that at any rate, it is not entitled to interest from the date of the order of winding up.
(9) On these pleadings, the trial Court raised five issues, out of which issues 3, 4 and 5 are relevant. They are as follows:--
'(3) Does the plaintiff prove that Rs. 38,203-01 nP. was due as on the date of the plaint?
(4) Is the plaintiff not entitled to interest from the date of winding up the Mills?
(5) What is the amount realised from the goods pledged and whether proper and legal steps have been taken to realise the money value? What is the effect if proper and legal steps have not been taken?
And on the evidence, the Court held that the plaintiff-Bank has proved that the suit amount was due as on the date of the suit. It also held that the Bank is entitled to interest from the date of the winding-up of the Mills till the date of realisation of the dues. Its finding on issue No. 5 is that the amount realised from the goods pledged is correct, that the steps taken by the plaintiff to realise the money value of the goods pledged, were legal, and that there is no remedy open to the defendants to challenge the legality of the steps taken by the plaintiff.
(10) As a result of its findings, the Court made a decree against both the defendants. Though it found that the defendants were liable the plaintiff in a sum of Rs. 38,203.01, yet it gave deduction to a sum of Rs. 8,482.95 since the plaintiff had realised the said amounts from the sale of the remaining goods. In the result, as stated before, it made a decree for Rs. 29,720.06 against both the defendants, and the second defendant is challenging in this appeal the correctness of the said decree.
(11) Mr. E.S. Venkataramaiya, appearing for the appellant, challenges the correctness of the findings on all the three issues recorded by the trial Court. His principal argument, however, is that the appellant, as a surety, is entitled to the benefit of the security which the creditor has against the principal debtor, and that, since the creditor, without the consent of the surety, has parted with such security, the surety is discharged. He submits that it is a rule of equity that where any act has been done by the obligee that may injure the surety, the Court would always be ready to lay hold of it in favour of the surety. According to him, the creditor is not entitled, without the consent of the surety, to deal with the security which may cause injury to him, and since, in this case, the plaintiff-Bank has without his consent, parted with the securities to his prejudices, he stands discharged and, therefore, the decree made against him by the Court below is liable to be set aside.
(12) We, therefore, propose to examine first this contention of the learned counsel whether the appellant-second defendant is discharged. Chapter VIII of the Indian Contract Act, 1872, deals with indemnity and guarantee 126 defines a contract of guarantee thus:
'A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom, the guarantee is given is called 'the creditor'.
So a contract of guarantee is a tripartite agreement. Section 128 states that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Section 129 defines a 'continuing guarantee'. It means 'A guarantee which extends to a series of transactions'.
(13) In this case, the letter of guarantee executed by the appellant is a continuing guarantee. Exhibit P-3 is the letter of guarantee executed by the appellant in favour of the plaintiff-Bank, which is to the following effect:
'1. In consideration of your Bank at my request allowing an accommodation of cash credit against stocks of raw cotton, yarn and finished cloth in bales and in pieces and stocks of cotton, yarn and cloth in process and clean and D/D limit against cheques Docy. D.D. limit covering R. Rs. covering consignment of goods mentioned above, to Messrs. The Kapila Textile Mills, Ltd., Nanjangud, I in my personal capacity hereby guarantee to you the payment on demand of all monies which at any time be due to you from Messrs. The Kapila Textile Mills, Ltd., on the general balances of the above accounts with your Bank.
2. I declare that this guarantee shall be a continuing guarantee and shall not be considered as canceled or in any way affected by the fact that at any time the said Cash Credit Account, or Stock in Process Account may show no liability against the said debtors Messrs. The Kapila Textile Mills, ltd., or may even show a credit in favour of the said debtors Messrs. The Kapila Textile Mills, Ltd., but shall continue in operation in respect of subsequent transactions.
3. I further declare that you may grant time and/or other indulgence or enter into any composition with the said debtors Messrs. The Kapila Textile Mills, Ltd., or their representatives without affecting this guarantee and that my liability shall be co-extensive with that of the debtors Messrs. The Kapila Textile Mills, Ltd.
4. I further declare that all dividends, compositions, payments, received by you from the said Messrs. Kapila Textile Mills, Ltd., or any other person or persons liable or his or their representatives shall be taken and applied as payment in gross without any right on the part of myself or my representative to stand in your place in respect of or to claim the benefit of any such dividends, compositions or payment until full amount of all your claims against the said Messrs. The Kapila Textile Mills, Ltd., or their representatives which are covered by this guarantee shall apply to and secure ultimate balance which shall remain due to you on such cash credit facility up to the extent of Rs. 10,00,000. Stock in process facility up to Rs. 2,00,000 and Docy D. D. facility up to Rs.2,00,000 besides and in addition of all interests and charges up to the date of payment which you may in the course of your business as bankers charge in respect of the accounts together with all expenses of enforcing or obtaining or endeavoring to enforce or obtain payment of all such as aforesaid.
5. No advance that you may make or credit overdraft you may give to the said Messrs. The Kapila Textile Mills, Ltd. Beyond the extent of aforesaid or securing of any guarantee from any other person or of any other security shall determine prejudice or lessen my liability hereunder.
6. I further declare that this guarantee shall not be affected by my death but shall remain in force until the amount due to is paid in full.
7. I further agree that any account settled by and between you and the said Messrs. The Kapila Textile Mills, Ltd., or admitted by them may be adduced by you and received as conclusive evidence against me and my representative of the balance of account hereby appearing due from the said Messrs. The Kapila Textile Mills Ltd., or their representative to you and shall not be disputed or questioned by me or my representative.
8. I also agree that the Bank shall be entitled to recover its entire dues under the said agreement from my person or property upon default in payment by the said Messrs. The Kapila Textile Mills, Ltd.
9. This guarantee shall apply to and secure ultimate balance due or remaining unpaid to you and you may enforce this security against me not withstanding that any bills or other instruments covered by it may be in circulation or outstanding and it shall not be determinable by me except on terms of my making full provision up to the limits of my guarantee for any then outstanding liabilities or obligations on my part and on the customer's account. This guarantee shall not be affected by my death or insanity until you shall have received formal and authentic in writing thereof.
10. I also agree that any balance or debit confirmed by the principal debtor or any acknowledgment of liability concerning the same made and signed by him shall be binding on me in the same manner and to the same extent as if the principal debtor was my authorised agent to make such acknowledgment or liability or confirming the balance and the said acknowledgment and confirmation shall be binding on me as if made by myself'
(14) Thus it is seen from this letter of guarantee that it secures the ultimate balance which shall remain due to the plaintiff on such cash-credit facility up to the extent of Rs. 10,00000, stock in process facility up to Rs. 2,00,000 and Docy. D.D. facility up to Rs. 2,00,000, besides all interest and charges up to the date of payment. The amount which the plaintiff-Bank would advance to the Mills was on the security of goods which the Mills could give to the plaintiff-Bank. The advances made by the plaintiff-Bank to the Mills did not cover the full value of the securities.
(15) P.W.2, the Manager of the Bank, has stated in his evidence that under the trust loan, the Bank would advance up to 65 per cent of the value as declared by the Mills, and under the key-loan, the Bank would advance 75 per cent of the value of the goods as key-loan and 65 per cent of the value of the goods on trust loan. Thus we see that the plaintiff-Bank has always held securities in excess of the advances made by it to the Mills. The excess varied from 25 per cent to 35 per cent.
(16) Now it is in evidence that the Mills stopped borrowing from the plaintiff-Bank from November 1957. P. W. 1, the Accountant, says that the plaintiff-Bank refused to lend amount from that date. We also have it that the Mills went into liquidation in the month of June 1958. P. W. 2 the Manager states that the value of the goods as on 26th June 1958, the value of the stocks in the key-loan account of the Mills as declared by the Mills, was Rs. 5,22,214, 3,98,238/13 p. In the trust loan account the value of the goods, such as stocks in process, as declared by the Mills was Rs. 84,040 against which were was an advance of Rs. 84,814/-. Thus it is to be seen that as on 21st June 1958, the total value of the goods given as security to the plaintiff was Rs. 6,06,254/-. We gather from the order of the Liquidator, that the total value of the stocks in the possession of the Bank against both the loan accounts amounted to Rs. 6,15,024.17.
Thus there is a slight variation in the value of the stocks in the possession of the plaintiff-Bank as given by the Manager, P. W. 2, and as stated in the order of the official Liquidator. We further gather from the order of the Liquidator that the total net sale proceeds realised was Rs.4,73,996.99. Thus it results in a shortfall of Rs. 1,41,027.18. And, according to the evidence of the Manager and the Accountant, the shortfall was due to the fact that the prices declined and the goods could not be sold. According to the plaintiff after giving deduction to the realisation made by sale of the securities, the Mills, and the defendants, as guarantors, are liable to pay to the plaintiff the sum claimed by it in the suit.
(17) It is the case of the plaintiff that it filed an application before the High Court praying for permission to remove and sell the stock which was pledged to it, and exhibit XVIII is the order passed by the High Court on that application. P. W. 1, the Accountant says that the plaintiff-Bank was taking the consent of the 1st defendant for disposing of the pledged articles. He states that he does not know whether the Bank have any notice to the 2nd defendant regarding the sale of the pledged articles since, according to him, he was not dealing with it in those days.
(18) P. W. 2, the Manager, states in his evidence as follows:--
'We took the consent of both the defendants for the disposal of their goods. Exs.P-13 to P-16 contain the consent of the 1st defendant for disposal of these goods at the rates mentioned in Exs. P-13 to P-16. The 1st defendant has signed Exts. P-13 to P-16 on approval. The 2nd defendant was mostly not available during this period'.
Thus exhibits P-13 to P-16 indicate that it is only the 1st defendant, if at all, that has given his consent to the sale of the goods and though P. W. 2 says that he took the consent of both the defendants for the disposal of their goods, he has had to admit that the 2nd defendant was mostly not available during that period; further, there is no document to show that the 2nd defendant at any time gave his consent to the disposal of the goods by the plaintiff-Bank or that he was aware of the sale made by the plaintiff. D. W. 2 (Defendant 2) in his evidence, states that he was not notified by the plaintiff Bank when it approached the High Court and obtained the order Et. P-18 nor he was made a party to that application. He was not notified when the inventory was taken out pursuant to that order, and that he was never notified by the Bank when it proceeded to sell the goods in its custody. Since he was not notified, he did not take any interest in those sales. He further says that had he been notified, he would have taken interest and he would have realised better value for the goods sold by the Bank. This part of the evidence given by the second defendant has not been challenged in his cross-examination. Thus it is clear from the evidence that the plaintiff sold the goods given to it by way of security without the consent of the 2nd defendant.
(19) The trial Court, however, finds that defendants 1 and 2, who are guarantors, are not entitled to any notice of the sale, In support of that conclusion, it relied upon the provision of Section 176 of the Indian Contract Act which deals with the rights of the pawnee where the pawner makes default in payment of the debt. though the trial Court notices that under Section 176, the pawnee may sell the goods pledged to him on giving the pawner reasonable notice of the sale, yet it finds that the Mills as pawner are not entitled to any notice, since, according to it, in para 15 of Exhibit P-21, which is the form under which goods were pledged, it is provided that the borrows shall regularity of the sale or as to the rate or the time at which the goods are sold, and it states that this condition binds the Mills which was the pledges of the goods, and if so, it equally binds defendants 1 and 2 who are only the guarantors. In our view, this conclusion of the trial Court is not correct. Firstly, the condition referred to in Para 15 of Exhibit P-21, does not say that the Mills are not entitled to any notice. All that it says is that the Mills are not entitled to raise any objection as to the regularity of the sale or as to the rate or the time at which the goods are to be sold. That does not mean that the Mills, as pawner, are not entitled to any notice under Section 176 of the Indian Contract Act.
Secondly, the trial Court seems to have ignored that, in a pledge, there are only two parties, viz., pledgor and pledgee, but in a contract of guarantee, there are three parties to it, and the rights and liabilities of the surety have been stated n various sections appearing in Chapter VIII of the Indian Contract Act. Therefore, in our view, the relevant provisions which are applicable to the facts of the case are those contained in Chapter VIII. The trial Court does not seem to have considered, when a surety is deemed to be discharged. Though a contention was raised by defendant 2 in his written statement that he has been discharged from his liability to the plaintiff, yet no specific issue has been raised as to whether defendant 2 is discharged. However, it may be taken that such an issue is impliedly covered by the latter part of issue No.5. We will, therefore, proceed to consider whether the appellant is discharged.
(20) Ss. 133 to 135 and 139 and 141, appearing in Chapter VIII of the Indian Contract Act, state when a surety can be said to be discharged, Section 133 states that the surety is discharged when any variance is made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, as to transactions subsequent to the variance. Under Section 134, a surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequences of which is the discharge of the principal debtor. Section 135 states that a contract between the creditor and the principal debtor, by which the creditor makes a composition with or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.
(21) Sections 136 and 137 state when a surety is not discharged, and it is not necessary for us to consider them since they do not cover the facts of this case. Thus we see that Sections 133 to 135 state the circumstances under which a surety is discharged by any act of the principal debtor and the creditor which may cause injury to the surety.
(22) Section 140 provides that:--
'Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor'. that is, the surety, is invested with all the rights of the creditor when he discharges his liability to the creditor when the same becomes due and the principal debtor commits default, i.e. on payment of the guaranteed debt, the surety stands in the same position as that of the creditor.
(23) However, the pertinent sections which are relevant to the case under consideration are Section 139 and 141.
(24) At this stage, we, may refer to the authorities referred to by the learned counsel for the appellant. He invited our attention to Paragraph 1049 in 'Chitty on Contracts' (22nd Edition), wherein it is stated that it is a rule of equity that where any act has been done by the obligee that may injure the surety, the Court is ready to lay hold of it in favour of the surety'. He also referred to a statement appearing at p. 54 in the decision in Bolton v. Salmon, 1891-2 Ch 48, which is :
'It is the clearest and most evident equity not to carry on any transaction without the knowledge of him (the surety), who must necessarily have a concern in every transaction with the principal debtor'.
These are the rules of equity known to common law. But these rules of equity, referred to above, find a place in Sections 139 and 141 of the Indian Contract Act.
(25) It is provided in Section 139 that
'If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which is duty to surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is hereby impaired, the surety is discharged' Section 141 says:--
'..... 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:.
Therefore it is clear from these two sections that if the creditor does any act which is prejudicial to the interest of the surety in the security, then the surety must be deemed to the discharged. We have found that the plaintiff-Bank, the creditor, has sold the security, the value of which was far in excess of the liability, without the consent of the appellant, which has caused prejudice to him, since the sale has resulted in considerable loss. That the conduct of the creditor plaintiff Bank in parting with the security without the consent of the appellant discharges him, is apparent from the provisions of Section 141.
(26) However, it is contended on behalf of the plaintiff Bank by its learned counsel Mr. Subramanyam that Section 141 has reference only to the simple case of a surety for a single debt for which the creditor held a security of securities, and he argues that this section has no application to a case where the guarantee extends to a series of transactions; in other words, he states that if there is a continuing guarantee, then the principle underlying Section 141 cannot be invoked, and, in support that contention, he relies on the decision in P. Bhushayya v. P. Suryanarayanan : AIR1944Mad195 , and the relevant observations relied upon are at page 201, where their Lordships have stated that 'Sections 140 and 141, Contract Act, prima facie have reference to the simple case of a surety for a single debt for which the creditor holds a security or securities'. We do not understand the observations relied upon by the learned counsel to suggest that the surety is not discharged if the creditor, without the consent of the surety, parts with the security to the prejudice of the surety in a case of continuing guarantee. In our view, the provisions of Section 141 equally apply to a case of a continuing guarantee.
(27) It was next contended by him that even if the principle underlying Section 141 is applied to the present case, the surety must be held to have been discharged to the extent of the value of the security; and he contends that there is no finding as to the extent of the value of the security, and, therefore, the case may be sent back to the trial Court to consider the extent of the value of the security. According to him, the value of the security must be the value realised by its sale. We are unable to accept that contention. Defendant 2, in his evidence, has stated how the value of the securities was arrived at. He state that :--
'The bank used to arrive at the value of the goods in their custody on the basis of the market reports or the contracts entered by the Kapila Textiles with their customers'.
And there is no suggestion in his cross-examination that what he has stated is not true. Therefore, in our view, the value of the security must mean the value of the security at the time when it was given to the creditor. Therefore, when it was given to the creditor. Therefore, the words 'the surety is discharged to the extent of the value of the security is less than the liability undertaken by the surety, then the surety must be held to be discharged to the extent of the value of the security and that he will still be required to discharge the liability which exceeds the value of the security. But if the value of the security given is far in excess of the liability, then it is clear that the surety must be held to be discharged wholly. Since, in the instant case, the value of the security was far in excess of the liability of the principal debtor, and consequently that of the surety, and since the security has been parted with or sold by the creditor without the consent of the surety, we hold that the surety i.e., the second defendant, is wholly discharged.
(28) In view of our above finding, we do not think it is necessary to consider the correctness of the findings on issues 3 and 4 which relate to the plaintiff's claim as made out in the plaint and his claim for interest from the date of winding up of the Mills.
(29) In the result, for the reasons stated above, we allow the appeal, set aside the decree of the trial Court against 2nd defendant and dismiss the plaintiff's suit against him. Plaintiff will pay the costs of the second defendant of this Court as well as of the trial Court.
(30) Appeal allowed.