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S. Chattanatha Karayalar Vs. the Central Bank of India and ors. - Court Judgment

LegalCrystal Citation
SubjectBanking
CourtSupreme Court of India
Decided On
Judge
Reported in[1965]3SCR318
ActsIndian Contract Act - Sections 126, 132 and 141; Indian Evidence Act - Sections 92; Indian Law
AppellantS. Chattanatha Karayalar
RespondentThe Central Bank of India and ors.
Cases ReferredVenkata Krishnayya v. Karnedan Kothari A.I.R.
Excerpt:
.....suit for recovery - defendant no. 2 and 3 pleaded that they executed promissory note only as surety - bank gave loan to defendant no. 1 beyond limits agreed upon therefore they were discharged from obligation - subordinate judge decided in favour of respondent bank - appeal dismissed by high court holding appellant co-obligants - in appeal supreme court opined that case based upon overdraft and overdraft credited in favour of all defendants - all defendants liable for balance due - supreme court observed appellant's contention for discharge from liability as surety as respondent allowed loan to defendant no.1 without consent of defendant no. 2 and 3 should remand back to high court as it deals with mix question of fact and law. - section 100: [dr.arijit pasayat & dr.mukundakam..........and the amount of loss sustained should be setoff against the claim of the plaintiff-bank. defendants nos. 2 and 3 pleadedthat they had executed the promissory note only as a surety for the 1stdefendant and that they are not co-obligants. it was further alleged that theplaintiff-bank had granted loan to the 1st defendant in other forms such as outagency loans against goods which were security for the open loan. it was saidthat the plaintiff-bank had made adjustments in the open loan account and inthe clean over-draft account by debiting and correspondingly crediting in otheraccounts without the consent of defendants 2 and 3. the plaintiff-bank has alsoallowed defendant no. 1 to over-draw freely in the clean overdraft and openloan accounts far beyond the limits agreed upon......
Judgment:

Ramaswami, J.

1. This appeal by certificate is brought on behalf of the 3rd defendantagainst the judgment and decree of the High Court of Kerala dated July 18, 1962in A.S. No. 561 of 1961 which affirmed the judgment and decree of the Court ofthe Subordinate Judge of Alleppey in O.S. No. 114 of 1957.

2. By a resolution Ex. BD dated November 25, 1946 the Board of Directors ofthe 1st defendant Company authorised the 2nd defendant to obtain financialaccommodation from the plaintiff bank to the extent of Rs. 15 lakhs underdifferent kinds of loans. Pursuant to this resolution the Company by its letterEx. DE dated November 26, 1946 asked for accommodation for Rs. 1 lakh underclean overdraft, for Rs. 4 lakhs under open loan and for Rs. 10 lakhs under outagency and key loans. On November 26, 1946 all the three defendants executed apromissory note Ex. B in favour of the plaintiff-bank for a sum of Rs. 4 lakhs.The promissory note was sent to the plaintiff-bank along with a letter - Ex. Astyled letter of continuity dated November 26, 1946. Ex. A reads as follows :

'Alleppey,26th November, 1946.

The Agent,

The Central Bank of India Limited,

Alleppey.

Dear Sir,

We beg to enclose an on demandpro-note p. Rs. 4,00,000 (Rupees Four lacs only) signed by us which is given toyou as security for the repayment of any overdraft which is at presentoutstanding in our name and also for the repayment of any overdraft to theextent of Rs. 4,00,000 (Rupees four lacs only) which we may avail of hereafterand the said Pro-Note is to be a security to you for the repayment of theultimate balance of sum remaining unpaid on the overdraft and we are to remainliable to the Pro-Note notwithstanding the fact that by payments made into theaccount of the overdraft from time to time the overdraft may from to time bereduced or extinguished or even that the balance of the said accounts may be atcredit.

Yours faithfully,

for CASHEW Products CorporationLtd.

For General Agencies Ltd.(Respondent 2)

Sd/- P. S. George. Sd/- P. S. George

(Respondent 3) Managing Director,

ManagingAgents.

Sd/- S. Chattanatha Karayalar

(Appellant).

Exhibit B states :

'Br. Rs. 4,00,000

Alleppy, 26th November 1946.

On Demand we, the Cashew ProductsCorporation Ltd., S. Chattanatha Karayalar and P. S. George jointly andseverally promise to pay The Central Bank of India Limited or order the sum ofBritish Rs. Four Lacs only together with interest on such sum from this date atthe rate of Two per cent over the Reserve Bank of India rate with a minimum ofFive per cent per annum with quarterly rests for value received.

For CashewProducts Corporation Ltd.

For GeneralAgencies Ltd.

Sd/- P. S.George (Respondent 2)

Managing Director,............ ..... ............... ........ .... Managing Agents.

Sd/- P. S. George (Respondent No.3).

Sd/- S. Chattanatha Karayalar

(Appellant).

On the same day, defendant No. 1as 'Borrower' executed in favour of the plaintiff-bank Ex. G, a deedof hypothecation of its stocks of goods for securing the Demand Cash credit.Ex. G is to the following effect :

'Hypothecation of goods tosecure a Demand cash Credit.

No.

Amount No. 4,00,000.

Name. The Cashew ProductsCorporation, Limited, Quilon.

3. The Central Bank of India, Limited (hereinafter called 'the Bank') havingat the request of the Cashew Product Corporation Ltd., Quilon, (hereinaftercalled 'the Borrowers' opened or agreed to open in the Books of the Bank atAlleppey a Cash Credit account to the extent of Rs. Four lacs only with theBorrowers to remain in force until closed by the Bank and to be secured bygoods to be hypothecated with the Bank it is hereby agreed between the Bank andthe Borrowers (the Borrowers agreeing jointly and severally) as follows :-

* * * * *

14. The Borrowers agree to acceptas conclusive proof of the correctness of any sum claimed to be due from themto the Bank under this agreement a statement of account made out from the booksof the Banks of the Bank and signed by the Accountant or other duly authorisedofficer of the bank without the production of any other voucher, document orpaper.

15. That this Agreement is tooperate as a security for the balance from time to time due to the Bank andalso for the ultimate balance to become due to on the said Cash Credit Accountand the said account is not to be considered to be closed for the purpose ofthis security and the security of hypothecated goods is not to be consideredexhausted by reason of the said Cash Credit Account being brought to credit atany time or from time to time or of its being drawn upon to the full extent ofsaid sum of Rs. 4,00,000 if afterwards reopened by a payment to credit.

* * * * *

4. In witness whereof the Borrowers have hereto set, their hands this Twentysixth day of November the Christian Year one thousand nine hundred andfortysix.

For Cashew Products Corporation Ltd.,

For General Agencies Ltd;

Sd/-

Managing Director,

Managing Agents

Sd/-

Schedule of goods referred to in the foregoing instrument, Stocks ofcashewnuts, cashew kernels, tin plates, Hoop Iron and other packing materialsstored and or to be stored in the factories at Kochuplamood, Chathanoor,Ithikara, Kythakuzhi, Paripalli, Palayamkunnu and any other factories in whichwe may be storing from time to time and at Cochin awaiting shipment.

For Cashew Products Corporation Ltd;

For General Agencies Ltd;

Sd/-

Managing Director,

Managing Agents.'

5. On the basis of those documents the plaintiff-bank opened an overdraftaccount in the name of defendant No. 1. On December 21, 1949, the threedocuments - Ex. A, B, and G were renewed in identical terms by Ex. C, D and F.On January 1, 1950 a sum of Rs. 3,24,645/12/2 became due to the plaintiff-bankand on that date a demand notice - Ex. 'O' was sent by the plaintiff-bank forrepayment of the amount. A second notice - Ex. L - was sent by theplaintiff-bank on April 26, 1950. On September 8, 1950, the plaintiff-bankbrought a suit for the recovery of Rs. 2,86,292/11/11 from all the threedefendants. The suit was contested by all the defendants. The case of defendantNo. 1 was that it had sustained loss on account of sudden termination of creditfacilities by the plaintiff-bank and the amount of loss sustained should be setoff against the claim of the plaintiff-bank. Defendants Nos. 2 and 3 pleadedthat they had executed the promissory note only as a surety for the 1stdefendant and that they are not co-obligants. It was further alleged that theplaintiff-bank had granted loan to the 1st defendant in other forms such as OutAgency loans against goods which were security for the open loan. It was saidthat the plaintiff-bank had made adjustments in the open loan account and inthe clean over-draft account by debiting and correspondingly crediting in otheraccounts without the consent of defendants 2 and 3. The plaintiff-bank has alsoallowed defendant No. 1 to over-draw freely in the clean overdraft and openloan accounts far beyond the limits agreed upon. It was alleged that theplaintiff-bank had converted secured loans into simple loans by releasing goodscovered by Bills of Lading against trust receipts and had thereby deliberatelyfrittered away such securities. They contended that they were discharged fromobligation as sureties to the contract for these reasons. Upon these rivalcontentions the learned Subordinate Judge of Alleppey took the view thatdefendants 2 and 3 were not merely sureties but they were co-obligants, becausethey had executed the promissory notes - Exs. B & D. In view of thisfinding the learned Subordinate Judge considered it unnecessary to go into thequestion whether defendant No. 3 was absolved from his liability 'for allor any reasons set forth in para 5 of the Consolidated Written Statement filedby him'. Against the judgment and decree of learned Subordinate Judge,Alleppey defendant No. 3 presented an appeal in the High Court of Kerala underA.S. 561 of 1961. Defendants 1 and 2 did not appeal. The appeal was dismissedby the High Court of Kerala on July 12, 1962. It was held by the High Courtthat defendant No. 3 was a co-obligant and not a surety. On July 16, 1962,defendant No. 3 filed C.M.P. No. 5032 of 1962 praying that the argument of theappellant with regard to his liability as co-obligant may be expressly dealtwithin the judgment of the High Court and complaining that the appellant wouldbe seriously prejudiced if the omission was allowed to remain. Thereupon, thelearned Judges of the High Court wrote a supplementary judgment on July 18,1962 rejecting the further arguments addressed on behalf of the appellant.

6. The first question presented for determination in this case is whetherthe status of the 3rd defendant in regard to the transaction of overdraftaccount is that of a surety or of a co-obligant. It was argued by Mr. Desai onbehalf of the appellant that the High Court has misconstrued the contents ofExs. A and B in holding that the 3rd defendant has undertaken the liability asa co-obligant. It was submitted that there was an integrated transactionconstituted by the various documents - Exs. A, B and G executed between theparties on the same day and the legal effect of the documents was to confer onthe 3rd defendant the statues of a surety and not of a co-obligant. In ouropinion, the argument put forward on behalf of the appellant is well-foundedand must be accepted as correct. It is true that in the promissory note - Ex. Ball the three defendants have 'jointly and severally promised to pay thecentral Bank of India Ltd. or order a sum of Rs. 4 lakhs only together withinterest on such sum from this date', but the transaction between theparties is contained not merely in the promissory note - Ex. B - but also inthe letter of continuity dated November 26, 1946 - Ex. A which was sent by thedefendants to the plaintiff-bank along with promissory note - Ex. B on the samedate. There is another document executed by defendant No. 1 on November 26,1946 - Ex. G - Hypothecation agreement. The principle is well-established thatif the transaction is contained in more than one document between the sameparties they must be read and interpreted together and they have the same legaleffect for all purposes as if they are one document. In Manks v. Whiteley,[1912] 1 Ch. 735 Moulton, L.J. stated :

'Where several deeds form part of one transactionand are contemporaneously executed they have the same effect for all purposessuch as are relevant to this case as if they were one deed. Each is executed onthe faith of all the others being executed also and is intended to speak onlyas part of the one transaction, and if one is seeking to make equities apply tothe parties they must be equities arising out of the transaction as awhole.'

7. It should be noted in the present case that the promissory note - Ex. B -was enclosed by the defendants along with the letter of continuity - Ex. Abefore sending it to the plaintiff-bank. In the letter - Ext. A it is clearlystated that the promissory note Ex. B was given to the plaintiff-bank 'assecurity for the repayment of any overdraft to the extent of Rs.4,00,000'. It is further stated in Ex. A that 'the said promissorynote is to be a security to you for the repayment of the ultimate balance orsum remaining unpaid on the overdraft'. In the hypothecation agreement -Ex. G it is stated that the plaintiff-bank has agreed to open a cash Creditaccount to the extent of Rs. 4 lakhs at the request of the Cashew ProductsCorporation Ltd., Quilon. According to para 15 of the hypothecation agreementit operates as a security for the balance due to the plaintiff-bank on the CashCredit account. Para 12 of the hypothecation agreement states that if the netsum realised be insufficient to cover the balance due to the plaintiff-bank,defendant No. 1 should pay the balance of the account on production of astatement of account made out from the books of the bank as provided in the14th Clause. Under this Clause defendant No. 1 agreed to accept as conclusiveproof of the correctness of any sum claimed to be due from it to the bank astatement of account made out from the books of the Bank and signed by theAccountant or other duly authorised officer of the Bank without the productionof any other document. If the language of the promissory note - Ex. B isinterpreted in the context of Exs. A & G it is manifest that the status ofthe 3rd defendant with regard to the transaction was that of a surety and notof a co-obligant. This conclusion is supported by letters - Exs. AF dated November27, 1947, AM dated December 17, 1947 in which the Chief Agent of theplaintiff-bank has addressed defendant No. 3 as the 'guarantor'.There are similar letters of the plaintiff-bank, namely, Exs. CE dated December28, 1947, CG dated January 13, 1948, AS dated February 23, 1949, V datedOctober 21, 1949, III dated December 16, 1949, IV dated January 12, 1950 and'O' dated March 29, 1950, in which defendant No. 3 is referred to either as'guarantor' or as having furnished a guarantee for the loan. Ourconcluded opinion, therefore, is that the status of the 3rd defendant withregard to the overdraft account was that of a surety and not of co-obligant andthe finding of the High Court on this issue is not correct.

8. On behalf of respondent No. 1 Mr. Pathak stressed the argument that thereis no contract of suretyship in the present case in terms of s. 126 of theContract Act and the plaintiff-bank is not legally bound to treat the 3rddefendant merely in the character of a surety. Mr. Pathak relied upon the decisionof the Madras High Court in Vyravan Chettiar v. Official Assignee of MadrasA.I.R. 1933 Mad. 39 in which it is pointed out that persons who are jointlyand severally liable on promissory notes are not sureties under s. 126 of theContract Act, nor do such persons occupy a position analogous to that of asurely strictly so called to attract the provisions of s. 141 of the ContractAct. Reference was made, in this connection, to the decision of the House ofLords in Duncan Fox & Co. v. North & South Wales Bank [1881] 6 A.C.I.in which Lord Selbourne L.C. distinguished between three kinds of cases; (1)those in which there is an agreement to constitute, for a particular purpose,the relation of principal and surety, to which agreement the creditor therebysecured is a party; (2) those in which there is a similar agreement between theprincipal and surety only, to which the creditor, is a stranger, and (3)thosein which, without any such contract of suretyship, there is a primary and asecondary liability of two persons for one and the same debt, the debt being asbetween the two that of one of those persons only, and not equally of both, sothat the other if he should be compelled to pay it, would be entitled toreimbursement from the persons by whom (as between the two) it ought to havebeen paid. It is pointed out by the learned Lord Chancellor that in all thesekinds of cases the person who discharged the liability due to the creditor,would be entitled to the benefit of the security held by other creditor thougha case of suretyship strictly speaking would fall only under class 1, as acontract of guarantee is confined to agreements where the surety agrees withthe creditor that he would discharge the liability of the principal debtor incase of his default. It is manifest that classes 2 and 3 are not cases ofsuretyship strictly so called. Lord Selbourne observed that the case before himdid not fall within the first or the second class but it fell within the 3rdclass in which strictly speaking there was no contract of suretyship. But theLord Chancellor held in that case that even in the second and third class ofcases the surety has some right to be placed in the shoes of the creditor wherehe paid the amount. The argument of Mr. Pathak was that the position in Indianlaw is different and the principles relied upon by Lord Selbourne, L.C. inDuncan Fox & Co. v. North & South Wales Bank 1881.6 A.C.I. did notapply to the present case. Mr. Pathak referred, in this connection, to the illustrationto s. 132 of the Contract Act in support of his argument. We consider that thelegal proposition for which Mr. Pathak is contending is correct, but theargument has not much relevance in the present case. It is true that s. 126 ofthe Contract Act requires that the creditor must be a party to the contract ofguarantee. It is also true that under s. 132 of the Contract Act the creditoris not bound by any contract between the co-debtors that one of them shall beliable only on the default of the other even though the creditor may have beenaware of the existence of the contract between the two co-debtors. In thepresent case, however, the legal position is different, because theplaintiff-bank was a party to the contract of guarantee - Ex. A which is contemporaneouswith the promissory note - Ex. B. The plaintiff-bank was also a party to thecontract of hypothecation executed by defendant No 1 in which it is stated thatthe plaintiff-bank had agreed to open a Cash Credit Account to the extent ofRs. 4 lakhs in favour of defendant No. 1. It is manifest, therefore, in thepresent case that the requirements of s. 126 of the Contract Act are satisfiedand defendant No. 3 has the status of a surety and not of a co-obligant in thetransaction of overdraft account opened in the name of defendant No. 1 by theplaintiff-bank. On behalf of respondent No. 1 Mr. Pathak also referred to thedecision in Venkata Krishnayya v. Karnedan Kothari A.I.R. 1935 Mad. 643 andsubmitted that defendant No. 3 cannot be permitted to give evidence in regardto a collateral transaction in view of the bar imposed by s. 92 of the EvidenceAct and his position is as co-obligant and that the terms of the promissorynote cannot be altered by any other transaction. We are unable to accept this argumentas correct. The provisions of s. 92 of the Evidence Act do not apply in thepresent case, because defendant No. 3 is not attempting to furnish evidence ofany oral agreement in derogation of the promissory note but relying on theexistence of a collateral agreement in writing - Exs. A & G which formparts of the same transaction as the promissory note - Ex. B. The decision ofthe Madras High Court in Venkata Krishnayya v. Karnedan Kothari A.I.R. 1935 Mad. 643 is, therefore, not applicable and Mr. Pathak is not able to make goodhis submission on this aspect of the case.

9. It was also contended by Mr. Pathak on behalf of respondent No. 1 thatthe suit is based on the promissory note - Ex. B against all the threedefendants and not on the overdraft account. We do not think there is anysubstance in this argument. In this connection Mr. Pathak took us through thevarious clauses of the plaint but there is no mention about the promissory notedated December 21, 1949 except in para 6 of the plaint which recites that thedefendant executed a promissory note 'as security for the repayment of thebalance outstanding under the overdraft'. We are satisfied, on examinationof the language of the plaint, that the suit is based not upon the promissorynote but upon the balance of the overdraft account in the books of theplaintiff-bank. In para 11 of the plaint the plaintiff-bank asked for a decreeagainst the defendants jointly and severally 'for the recovery of Rs.2,86,292/11/11 as per accounts annexed'. In the plaint it is stated thatthe plaintiff had given two notices to the defendants - Ex. 'O' dated January1, 1950 and Ex. L dated April 26, 1950 but in neither of these notices has theplaintiff referred to the promissory note executed by the defendants or thatthe suit was based upon the promissory note. On the contrary, theplaintiff-bank referred in Ex. 'O' to the open loan accounts and asked thedefendants to pay the amounts due to the bank under these accounts. It is,therefore, not possible for us to accept the contention of Mr. Pathak that thesuit is based upon the promissory note and not upon the amount due on theoverdraft account. In this connection, we may incidentally refer to the factthat in its statement of the case before this Court, respondent No. 1 hasclearly stated that the claim on the overdraft account against the appellantwas valid 'because the overdraft was treated as in favour of all thedefendants (appellant and respondents 2 and 3 herein) and that respondent No. 2was only authorised to operate independently on that account and that the limitunder the overdraft was placed at the disposal of respondent No. 2 by anexpress authority given by all the defendants (the appellant and respondentsNos. 2 and 3)'. This shows that respondent No. 1's case is that a suit isbased on an overdraft, and since the overdraft was treated as in favour of allthe defendants the appellant is liable for the balance due on it.

10. We shall then consider the question whether defendant No. 3 isdischarged of his liability as a surety by reason of the alleged conduct of theplaintiff-bank in violating the terms of the agreement - Ex. G or by thealleged fraudulent or negligent conduct of the plaintiff-bank in other ways. Itwas submitted on behalf of the appellant that the plaintiff-bank had madeadjustments in the open loan account and in the clean overdraft made accountwith the 1st defendant by debiting and correspondingly crediting in otheraccounts without the consent of the appellant. It was further alleged that theplaintiff-bank had granted loans to the 1st defendant against goods covered byopen loan agreement and that it had converted secured loans into simple loansby releasing goods covered by the Bills of Lading against trust receipts andhad thereby deliberately frittered away such securities. The question at issueis a mixed question of law and fact and it is unfortunate that the High Courthas not properly dealt with this question or given a finding whether theappellant would be discharged from the liability as a surety for the overdraftaccount because of the alleged conduct of the plaintiff-bank. We consider itnecessary that this case should go back on remand to the High Court of Keralafor deciding the issue and to give proper relief to the parties. In thisconnection, it is necessary to point out that after the High Court deliveredits judgment on July 12, 1962, an application was made by the learned Advocateappearing for the appellant that some grounds which had been urged by himbefore the High Court had not been considered by it. The High Court, therefore,adopted the somewhat unusual course of delivering a supplemental judgment. Mr.Desai contends that even the supplemental judgment has failed to consider theappellant's contention that he had been discharged by reason of the fact thatadjustments were made by respondent No. 1 indiscriminately in respect of itsdealings in three or four different accounts with respondent No. 2 to theprejudice of the appellant. We have broadly indicated the nature of thecontention raised by Mr. Desai.

11. Ordinarily, we do not permit parties to urge that points raised on theirbehalf in the High Court had not been considered, unless it is established toour satisfaction that the points in question had in fact been urged before theHigh Court and the High Court, through inadvertence, had failed to considerthem. In the present case, we are not prepared to take the view that thegrievance made by Mr. Desai is not well-founded. It does appear that after thefirst judgment was delivered, an application was made by the learned Advocatewho argued the appeal himself before the High Court in which he set out hiscomplaint that some of the points which he had argued before the High Court hadnot been considered by it. That is why the High Court delivered a supplementaljudgment. Aggrieved by the said judgment, the appellant filed an applicationfor certificate before the High Court, and in this application again he hastaken specific grounds, e.g., under paragraph 6(k) and paragraph 8 that eventhe supplemental judgment has failed to consider some of the points urged byhim. While granting the certificate, the High Court has made no comment onthese grounds. It is to be regretted that when these grounds appear to havebeen urged before the High Court, the High Court should have failed to dealwith them even in its supplemental judgment. That is the reason why we think itis necessary that the matter must go back to the High Court for disposal of theappeal in the light of this judgment.

12. Mr. Pathak, no doubt, seriously contested the validity of Mr. Desai'sargument. He urged that the adjustments on which Mr. Desai has founded hisclaim for discharge do not really support his case. We propose to express noopinion on this point. As we have just observed, the contention thus raisedamounts to a mixed question of fact and law and we do not think it would beexpedient for us to deal with it ourselves when the High Court has omitted toconsider it.

13. For these reasons we allow this appeal, set aside the judgment anddecree of the High Court of Kerala dated July 18, 1962, in A.S. No. 561 of 1961and order that the case should go back for being reheard and determined by theHigh Court in accordance with the observations made in our judgment. Theparties will bear their own costs upto this stage.

14. Appeal Allowed.


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