1. This second appeal is by the defendants. They were defendants in O. S. No 201 of 1966 on the file of the principal Munsiff, Virajpet. They are the legal representatives of one Chekkara Machayya (Machayya). Machayya died on 12-12-1961. Respondent Thammayya was the plaintiff in the suit. He had claimed a money decree against the defendants. By this judgment dated 28-2-1973 the learned Munsiff had dismissed the suit in the appeal preferred by Thammayya in R. A. No. 14 of 1973 the learned Civil Judge, Coorg, Mercara, allowed the appeal, set aside the judgment and decree of the Munsiff, and granted a decree as prayed for with costs, with a direction that the decretal amount should be realised from the assets of Machayya in the hands of the defendants. It is this judgments and decree that is under challenge.
2. FACTS: Thammayya's case has been that in respect of four motor vehicles Machayya had entered into Hire Purchase Agreements with a concern called Finance Corporation, Bangalore, of which the sole proprietor was a certain Sirdar Labsingh Kohli (hereinafter called the Corporation); that under the terms and conditions of those Hire Purchase Agreements he, Machayya, had to pay a certain sum of money to the Corporation; that, he having failed to pay the money in accordance with the terms and conditions the Corporation had demanded him, the plaintiff, who was the guarantor, to pay the same on behalf of Machayya; that, having negotiated with the Corporation, he, the plaintiff who was the guarantor, to pay the same on behalf of Machayya; that, having negotiated with the Corporation, he, the plaintiff, had got the liability reduced to Rs. 4,000/- and that in full satisfaction of the debt to the Corporation he had paid Rs. 4,350/-; that, in the circumstances, the defendants were liable to reimburse to him to that extent; that they, the defendants, had failed to do so and therefore, he had brought the said suit claiming the principal amount with interest and court costs.
3. The contentions taken up by the defendants were that Machayya was not liable in any sum to the Corporation by virtue of the Hire Purchase Agreements said to have been entered into by him with the Corporation; that the Corporation, previous to the alleged settlement of accounts said to have been arrived at with the Corporation by Thammayya, had taken away their four vehicles; that it was not known what they had done with those four vehicles and how much money had, been realised; that if the value of those vehicles was adjusted to the loan outstanding, if any, no amount will be due; that the said four vehicles were worth more than Rupees 60,000/-; that the proprietor of the Corporation and the plaintiff Thammayya were good friends, had colluded together, and had exploited the helplessness of the legal representatives of Machayya; and that, in the circumstances, they being not liable to pay and money as claimed, the suit should be dismissed with their costs.
4. The Munsiff had formulated six issues. The plaintiff had examined himself besides examining the Accountant of the Corporation as P. W. 2 On behalf of the defendants the 3rd defendant got himself examined. Both sides have also produced some documents. The Munsiff held that the plaintiff had failed to prove that Machayya owed Rs. 6,000/- and odd to the Corporation and this was his answer on the first issue. This in fact, clinches the entire case of the plaintiff. Primarily based on this finding, the Munsiff dismissed the plaintiff suit.
5. In the appeal before him the learned Civil Judge formulated, in view of the rival contentions of the parties as many as ten points (see para-6 of his judgment). The first point was as to whether Machayya had left a balance of debt amounting to Rs. 6742/- to be paid to the Corporation? Answering this issue in favour of the plaintiff and finding on the other relevant issues also in its favour, the Civil Judge granted the plaintiff a decree as stated above.
6. The main contention of the learned counsel for the appellants was that the plaintiff had miserably failed to establish that Machayya was due in a sum of Rs. 6742/- to the Corporation as alleged and, therefore, he should be non-suited.
7. On the other hand it was contended by the learned counsel appearing for the respondent that the first appellate court's finding based as it is, on facts, that Machayya was indebted to the extent of Rs. 6,000/- and odd to the Corporation and that the plaintiff, being a guarantor, had paid Rs. 4,000/- in full satisfaction thereof, should not be interfered with in this second appeal.
8. The facts that cannot be disputed are: that Machayya had entered into Hire Purchase Agreements with the Corporation in respect of four motor vehicles; that under the terms and conditions of those agreements he had to pay to the Corporation, towards the amounts borrowed certain sums periodically as stipulated under those respective agreements; that on the allegation that he had failed to pay the allegation that he had failed to pay the installments and thereby had become liable to pay, in total, a certain sum of money as on a particular date, the four vehicles, which were with him (Machayya), were seized and taken away by the Corporation.
9. The plaintiff's case, as already stated, is that even after making an adjustment of the value of those vehicles, Machayya was found due in a sum of Rs. 6,000/- and odd; that he, as a guarantor, having negotiated with the Corporation, got that sum reduced to Rs. 4,000/- and that, since he had paid that money to the Corporation, as a guarantor, towards the debt of Machayya, these defendants, being his legal representatives and in possession of his assets, were liable to reimburse to him.
10. Now, the plaintiff, if as a guarantor, had discharged Machayya's outstanding dues with the creditor he, the plaintiff, stands subrogated to the place of the creditor and will be entitled to recover from the debtors what he had paid. In order to succeed in his suit the plaintiff has to satisfactorily show as to what was the amount that was due by Machayya to the creditors after adjusting all payments made by Machayya and the amounts realised by the sale of the 4 vehicles seized.
11. How has he, the plaintiff, proceeded to establish this fact, particularly in the light of the defence taken by the legal representatives of Machayya is the question. Plaintiff's first witness, Raichandra (P. W. 1) was the Accountant of that Corporation. He was examined to prove the alleged debt. I may extract what he, P. W. 1, has stated in his examination-in-Chief at para-2:
'On 12-12-1961 Machayya died. The balance of Rs. 27,000/- and odd was due. I recovered Rs. 25,000/- by selling his vehicles. The balance was transferred to the account of the plaintiff as there was no security to recover as he was a guarantor. The plaintiff paid the amount on installment basis'.
12. As to what had happened to those seized vehicles, who had sold them, and under what circumstances etc.. also has been stated by the witness and that makes a very interesting reading. In cross-examination this witness (P. W. 1 on 12-9-1967) says :
'The plaintiff seized the vehicles which were on hire purchase. The plaintiff himself sold the vehicles. I was not present at the time of seizure and sale. One vehicle was purchased by C. P. Channappa for Rs. 11,000/- and odd. The other two vehicles were purchased y the plaintiff himself one car was sold to (for?) one thousand to the plaintiff.'
So, the plaintiff the guarantor himself is said to have taken away the vehicles, sold them, and he himself is said to have purchased two vehicles. He claims that he had done all this in the interest of his friend Late Machayya. The allegation made on behalf of the defendants that the plaintiff, in collusion with the Corporation, having knocked away the vehicles had made a profit out of them and had falsely shown this balance as against Machayya cannot easily be brushed aside in the light of this conduct of the party. Assuming that Rs.20000/- and odd were due and that the vehicles had been seize, what had to be satisfactorily shown was not merely the balance said to be due at the time of the death of Machayya but also as to what had been realised out of the sale of the four vehicles. The defendants are certainly entitled to know, before accepting their liability, the correct state of affairs and accounts in relation to the amount due and about the adjustment by the sale or appropriation of the four vehicles of their's. The plaintiff, who has taken a prominent part in seizing the vehicles and in retaining two of them and, perhaps, arbitrarily fixing the price himself, cannot readily be believed when he says that so much was due to the Corporation and that as a guarantor he had paid the same and that he was entitled to be reimbursed by the Corporation.(sic) The burden very heavily lies on him to establish these facts.
13. As to how the vehicles seized had been dealt with is also noted by the Civil Judge. In para 9 of his judgment he states:' it is true the plaintiff has not placed any evidence to show the vehicles were actually sold to a particular person, nor has he produced any documents in proof thereof.' But, having stated so, the Civil Judge strangely says that 'that is of not much concern for the purpose of the present suit' and that 'even assuming that all the four vehicles are still with the plaintiff or the Finance Corporation, the question is about the legal implication arising out of the hire purchase contract between the Finance Corporation and Machayya,' The reason assigned by the Civil Judge for this view of his is that (according to him)the ownership in the vehicles covered by these hire purchase agreements vested only in the Corporation and not with Machayya or his legal representatives and, therefore, the Corporation for having seized these vehicles from the custody or possession of Machayya or his legal representatives, was not at all accountable and it was not bound to adjust or deduct the value of those vehicles as against the amounts due from Machayya. The Civil Judge says that, in spite of this, the Corporation, having valued the vehicles, had adjusted the said sum and given benefit of the same to Machayya and terms this as a gratuitous act on its part. In this connection the Civil Judge places reliance on three decisions of the Supreme Court, they being, (i) Damodar valley Corporation v. state of Bihar, : 1SCR118 ; (ii) Installment Supply (private) Limited v. Union of India, : 2SCR644 ; and (iii) K.L. Johar and Co., v. Deputy Commercial Tax Officer, : AIR1965SC1082 ,and he purports to examine the nature of the hire purchase agreements involved in the case on hand in the light of the principles enunciated in the said decisions.
Now, as observed in Damodar valley Corporation case, in order to determine ' as to which category a particular contract comes under, the court will look at the substance of the agreement and not at the mere words describing the category'. In the light of the facts of that case their Lordships were of the view that the agreement referred to therein was a sale on deferred payments with an option to repurchase and not a mere contract of hiring.
In Installment Supply (Private) Limited case, while examining as to what a hire purchase agreement amounts to, the Supreme Court observes that such a transaction 'partakes of the nature of a contract or bailment with an element of sale added to it .........................and that title to the goods vests not with the hire but with the owner.'
So also in the case of M/s. K. L. Johar and Company's case the Supreme Court observes that in a hire purchase agreement, properly so called, 'that the property in the goods does not pass at the time of the agreement but remains in the intending seller, and only passes later when the option is exercised by the intending purchaser.'
14. However, as stated, in the first case, referred to above, the real nature of the transaction will have to be found out in light of the facts of that particular case, the intention of the parties, and the surrounding circumstances. In a later decision of the Supreme Court, in Sundaram Finance Ltd. v. State of Kerala, : 2SCR828 , the Court had an occasion to again examine the nature of particular transaction. While trying to find out as to whether the transaction involved therein amounted, in fact, to a sale so that it attracted the sales tax livable under the Travancore-Cochin General Sales Tax Act (11 of 1925), at para 24 the Court observes as follows:
'The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire purchase agreement is not stopped from proving that the real bargain was a loan on the security of the goods......................................................................
If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction but subject to the terms of the hiring agreements, which become part of the buyer's title, and confer a licence to seize.'
Then, distinguishing a hire purchase agreement, properly so called, and a transaction not amounting to a hire-purchase agreement the Court observes in that very para (para 24) as follows.
'The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the installments of hire arises when the installments are paid and not before. In such a hire-purchase agreement there is no agreement to buy the goods; the hirer under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an agreement which is in the form of a hire-purchase agreement with the financier, but in substance evidence a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods.
In the above case the facts were: Sundaram Finance Company with their registered office in Madras, carried on business of financing purchase of motor vehicles on the security of those vehicles. The scheme for financing the purchase of the vehicles was that the customer purchased the vehicle from the dealer directly and got it registered in his name. At his request Sundaram Finance agreed to advance the balance of the price remaining to be paid, and pay it to the dealer on the customer's executing a promissory note for repayment of the amount, a hire-purchase agreement and other related documents. On repayment of the amount stipulated to be paid, the vehicle became the sole and absolute property of the customer. The eligibility to tax on the alleged sale resulting from payment of all installments under the hire-purchase agreement was at issue. In the agreement involved in that case (Sundaram Finance Ltd.) the prominent features were: The Financiers - Sundaram Finance Ltd - had been described as the owners, the customer as the hirer, and the surety as a guarantor. The first clause recited, that the owner (the appellants) will let and the hirer (customer) will take on hire the motor vehicles. As per the second clause the customer has agreed to pay the rent to the owner monthly; take proper care of the vehicles; keep it insured; to pay all rents, rates, taxes etc., including licence fees, insurance premium, and other duties; to keep the vehicle in his sole custody and possession, and not to sell or assign. Under Clause (4) the agreement would stand determined without any notice to the customer if he were to fail to pay hiring installments within the stipulated time, on becoming insolvent or compounding with his creditors, on alienating the vehicle or on his breaking or failing to perform any conditions. That Clause also conferred on 'the owners' the power to seize the vehicle and to sue for all the installments due. Under Clause 6 on the customer paying the entire amounts due, the vehicle becomes the sole and absolute property of the customer. Under Clause (8) the registration of the vehicle shall stand in the name of the customer, but he was bound to transfer the registration in the name of the owners whenever required and especially when the customer commits a breach of any of the conditions of the agreement. As to the real nature of that transaction the Court observes at para 28 as follows:
'In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on the business of financiers, they are not dealing in motor vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remain at all material times so registered in his name......
'Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. The customer remains qua the world at large the owner and remains in possession, and on condition of performing the convenants has a right to continue to remain in possession. The right of the appellants (financiers) may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment. The agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants' recovery of the amount advanced. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions.'
15. That agreement and the agreement(s), with which we are concerned, contain many similarities. The Corporation is termed as the owner, Machayya, the hirer; and Thammayya, the respondent, as guarantor. On paying the installments stipulated therein the vehicles become the absolute property of the hirer. It appears that the vehicles had been registered in the name of Machayya. After their seizure by the Corporation the legal representatives of Machayya had not agreed to get the registration changed or transferred to the name of the Corporation. Therefore they had to file suits to get a declaration to that effect, and a certified copy of the judgment in one such suit in O. S. No. 287/64 on the file of the Munsiff, Birajpet, is in the records and marked as Ex. A-13. The Munsiff granted a decree as sought for by the Corporation stating that the plaintiff is entitled to the transfer of registration to its name. This is an important aspect of the matter and has to be borne in mind while examining the real nature of this transaction. In fact, prior to the filing of the present suit claiming reimbursement, the guarantor himself got issued notices through his Counsel to these appellants-defendants stating therein that Machayya had obtained loans from the Corporation and towards those debts he had stood as a surety, and that in that connection Rs. 6,742/- had been found due from Machayya, and that, in full satisfaction of the said sum, he had paid Rs. 4,000/- and they (L.Rs.) were liable to reimburse the said sum to him. If the facts and circumstances of this case are examined in the light of what is stated above (in the case of Sundaram Finance Ltd.) the only conclusion we have to reach is that the transactions in question between the Corporation and Machayya were financial transactions and the relationship between the parties was that of a creditor and debtor. In view of this if the creditor, exercising the option under the agreement, had seized the vehicles and appropriated the value thereof towards the debts due by the debtor, it was its duty to satisfy as to how it had dealt with those vehicles and what actually it had realised. Now that responsibility lies on the guarantor who is virtually subrogated to the place of the creditor. The burden throughout lies on him because it is his case that so much amount was due to the Corporation and that he had paid the same, as a guarantor, and as such he is entitled to be reimbursed. It is for him to show, in a case like this satisfactorily as to what was due by Machayya to the Corporation. He has miserably failed to show that fact, and on the other hand, there is, in this entire transaction, more than meets the eye. In placing the debtors in this predicament the plaintiff has his own share.
16. The Civil Judge, having not correctly approached the issues involved, has erred in setting aside the judgment and decree of the Munsiff. The plaintiff, in the instant case, in my view is not entitled to succeed.
17. Therefore, and for the reasons stated above this appeal is allowed. The judgment and decree of the First Appellate Court is hereby set aside and that of the Munsiff is restored, but with this modification, and that is, the suit is dismissed with costs of these appellants. Also the plaintiff to bear the costs of these appellants not merely in the first appellate court but also in this Court.
18. Appeal allowed.