1. This substantive appeal is filed by the appellant/Original applicant State Bank of India, being aggrieved by the judgment and Order dated 29.10.2004, passed by the learned Presiding Officer of DRT, Bangalore, in OA-866/1999. By the impugned Judgment and Order, the learned Presiding Officer allowed the OA with cost in favour of the Bank directing defendant Nos. 1 to 5 to personally pay to the applicant Bank jointly and severally, sum of Rs. 11,19,479.19 p with subsequent interest at the rate of 15.80% p.a. compounded quarterly from the date of application till the date of realisation. He further gave direction with respect to the enforcement of securities by giving direction that the applicant Bank should cause the sale of Schedule 'A' hypothecated properties, Schedule 'B' mortgaged property belonging to defendant No.4 and Schedule 'C' mortgaged property belonging to defendant No. 6 for the purpose of realisation of the above debt. A further directions, thereafter, given that the applicant Bank should proceed against the Schedule 'C' property of defendant No. 6 only as a last resort, and it is this last direction which is hurting the applicant Bank and hence appeal to this Appellate forum on this limited issue and ground.
3. Defendant No. 1 Aparna Creations is a Partnership firm of which defendant Nos. 2 to 5, are the partners. Defendant No. 6 is arraigned in his status as a guarantor. Defendant No. 1 firm represented by its partners approached the applicant Bank for certain credit facilities.
Accordingly, the applicant Bank on consideration of their request sanctioned Medium Term Loan of Rs. 28.20 lakhs on 21.8.1996. The defendants accepted the terms and conditions of sanction. Defendant Nos. 1 to 5 fully availed and utilized the said facility. Defendant Nos. 2 to 5, apart from being partners of defendant No. 1 firm had also personally guaranteed due repayment of the debt along with guarantor defendant No. 6. Usual security documents were executed by the defendants.
Defendant Nos. 2 to 5, again approached along with defendant No. 6, applicant Bank seeking grant of credit facilities. In consideration thereof, the applicant Bank sanctioned Cash Credit (Mundy Type) of Rs. 7 lakhs and Cash Credit (Receivables) of Rs. 19 lakhs. Again, security documents were executed and defendant Nos. 2 to 5 and defendant No. 6 stood as guarantors. In addition to the primary security of hypothecated machineries, the defendant Nos. 4 to 6 also created equitable mortgage of their property set out in Schedules 'B' and 'C' respectively, in favour of the applicant Bank towards due security of both the credit facilities. Revival letters were also executed by defendants acknowledging the availment of credit facilities. However, thereafter, the defendant's account became irregular and they committed defaults. The applicant Bank, therefore, issued legal notice recalling the outstanding amount which was due to the Bank, but there was no response. Hence, the Bank was constrained to file the O.A. in DRT, Bangalore.
4. Defendant No. 1 firm remained ex pane despite service. Defendant No; 4 filed Written Statement, which was adopted by defendant Nos. 2 and 3.
Defendant Nos. 5 and 6 filed heir respective Written Statements separately.
5. Defendant Nos. 2 to 4 admitted being partners of defendant No. 1 firm. Sanction of two facilities by the applicant Bank was also admitted. It was pleaded that loans were availed from the applicant with complete consensus between the defendant Nos. 4 to 6. It was also contended that the entire transaction was carried by defendant Nos. 5 and 6 only and that they could not turn around and repudiate their liability. In short, it was contended that defendant Nos. 5 and 6 were managing the affairs of the partnership firm and the transaction with the Bank, that defendant No. 4 was induced by defendant Nos. 5 and 6 to start a business with involvement of other family members with the partnership firm. But they complained of foul play played by defendant Nos. 5 and 6. Thus, the thrust of the entire defence of defendant Nos.
2 to 4 was that only defendant Nos. 5 and 6 were liable to the Bank.
6. Defendant No. 5 filed a separate Written Statement denying that he approached the Bank for credit facilities as averred in the plaint. He pleaded ignorance about sanction on terms and conditions. According to him, defendant No. 4 was exclusively handing the loan transaction and that defendant No. 1 firm had incurred loss due to maladministration and mishandling of financial matter solely by defendant No. 4 and, therefore, defendant No. 5 should not be held responsible.
7. Defendant No. 6 contended that the OA was misconceived. He admitted having stood as guarantor but his contention was that he stood as guarantor only for the 5th defendant in respect of the business agreed to be carried on and also in accordance with the ratio (i.e. 25%) of the partnership capital under the terms and conditions of the partnership deed. According to him, the applicant and defendant Nos. 2 to 4 took undue advantage of his goodness and that on several nominal printed forms his signatures were obtained. Contention is taken that applicant Bank should proceed first against the principal debtors and, thereafter, for the balance amount, if any, the Bank should approach the guarantors.
8. Parties filed their respective Affidavits and arguments of both sides were heard by the learned Presiding Officer. Thereafter, the learned Presiding Officer came to the conclusion on the basis of the material placed before him that the Bank had proved its case against all the defendants.
As far as the case of defendant No. 6 was concerned, the learned Presiding Officer observed that though the Guarantee Agreements were not disputed by any of the executants including defendant No. 6, status of defendant No. 6 was totally different from the status of defendant Nos. 2 to 5. The learned Presiding Officer observed that defendant Nos.
2 to 5 were not only partners but were also guarantors while defendant No. 6 was an outside guarantor and that because of the negligence of the Bank with respect to the hypothecated goods, defendant No. 6 was entitled protection given by Section 139 of the Indian Contract Act.
Observing as above with respect to defendant No. 6, the learned PO, however, said that though, defendant No. 6 was entitled to be absolved from the entire guarantee liability, he could not avoid any liability with respect to mortgage because his liability as a mortgagor remained intact. He observed that liability of defendant No. 6 emanating from his status as a mortgagor. He observed that defendant No. 6 had mortgaged 'C' Schedule property to secure the loans given to defendant No. 1. He, however, went on to observe further that though liability of defendant No. 6 was fixed in his capacity as a mortgagor, the fact remained that defendant No. 6 was not the principal borrower and, therefore, he was inclined to extend the benefit of the decision given by the Karnataka High Court in 1997 (2) Kar, L.J. 610, which held that surety's asset should be sold only as a last resort. Therefore, he gave a peculiar direction that property of defendant No. 6 i.e. 'C' Schedule property should be taken resort to by the applicant Bank only as a last resort.
9. I have heard Mr. S. Sethuraman, Advocate for the appellant Bank and the respondent/ original defendant No. 6 Mr. V.N. Anantha Krishnan, who appeared in person. I have also gone through the proceedings and relevant case laws cited across the Bar and in my view, the view taken by the learned Presiding Officer of DRT, Bangalore is contrary to the Judgment of the Hon'ble Supreme Court and it has to he said that the reliance placed upon by the learned. PO on Karnataka High Court (supra) was erroneous. Section 128 of the Indian Contract Act, 1872, lays down categorically that liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
In AIR 1969 Supreme Court 297. The Bank of Bihar Ltd. v. Dr. Damodar Prasad and Anr., "Under Section 128, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety thus becomes liable to pay the entire amount. His liability is immediate. It is not deferred until the creditor exhausts his remedies against the principal debtor. In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against principal in some other proceedings. Likewise, where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal." 10. Again, the Supreme Court in II (1992) BC 243 (SC)=AIR 1992 SC 1740, State Bank of India v. Indexport Registered and Ors., stated that when the decree is a composite money decree being both personal against all the defendants including guarantor as well as mortgage decree without limitation on execution, then the decree holder cannot be forced to first exhaust remedy by way of execution of mortgage decree alone and then to proceed against guarantor.
11. In view of the above stated Supreme Court Judgments, the reliance placed by the learned Presiding Officer on the Karnataka High Court Judgment reported in II (1997) BC 157, S.V. Apparao v. Vijaya Bank and Anr., was erroneous. It was held by the Karnataka High Court, inter alia, in this case that liability of the surety commences when execution against principal debtor is impossible and that the precaution that the executing Court must take is to first ensure that reasonable efforts for execution have been made as against the principal debtor. It has to be stated that the proposition of law enunciated in the Karnataka High Court judgment is not in consonance with the law laid down by the Supreme Court in the above mentioned two cases (supra) and, therefore, has to be ignored.
12. The learned Presiding Officer also appears to have unduly placed reliance upon the statement made by the Bank's witness in cross-examination that the Bank was not knowing the exact hypothecation goods and hence they were not shown in the Schedule of the application.
Relying only on this statement the learned Presiding Officer has sought to give benefit of Section 139 of the Indian Contract Act to defendant no. 6. For the sake of convenience, Section 139 of the Contract Act can be reproduced below: "139. Discharge of surety by creditor's act or omission impairing surety's eventual remedy--If the creditor does any act which is inconsistent with the right 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 impaired, the surety is discharged." The proceedings, in fact, reveal that the Bank sold the hypothecated goods and secured Rs. 25 lakhs. There was no question of any negligence and the statement quoted by the learned Presiding Officer in his impugned judgment appears to be torn out of context. His finding, therefore, on this point is also be to rejected.
13. In view of the provision of law incorporated in Section 128 of the Contract Act and reiterated by the Supreme Court, the learned Presiding Officer was not correct in giving the direction to the Bank that the Bank should proceed against the 'C' Schedule property of defendant No.6, only as a 'last resort'. In fact, it ought to have been held that property of defendant No. 6 also was liable and accessible and available for execution of the decree against defendant Nos. 1 to 5, and the decree ought to have been joint and several against all the defendants including defendant No. 6. The learned Presiding Officer placed defendant No. 6 in a special category as "outside guarantor", when no such category exists in law. The impugned Order will have, therefore, to be set aside and the appeal will have to be allowed.
Accordingly, following order is passed.
Regular Appeal RA No. 43/2004 is hereby allowed in terms of Prayer Clause 6 of the Appeal Memo and the impugned Order dated 29.10.2004, passed by the learned Presiding Officer of DRT, Bangalore, is set aside as against defendant No. 6 and is substituted as follows: O.A. is allowed with cost and defendant Nos. 1 to 6 are held jointly and severally liable to pay to the applicant Bank sum of Rs. 11,19,479.19 p with further interest at the rate of 15.80% p.a.
compounded quarterly from the date of filing of the OA till realisation.
Direction given by the learned Presiding Officer in the last two lines of the impugned Order giving direction to the Bank to proceed against the 'C' Schedule property of defendant No. 6, only as a last resort, is hereby set aside. Rest of the Order remains as it is