1. The plaintiff is the appellant. This appeal arises out of a suit filed by the plaintiff to recover Rs. 10,053-1-0 with further interest and costs claimed to be due in respect of a guarantee by the defendant guaranteeing payment of the sums that may be due by a firm which carried on business in the name of N. Nanchappa Chettiar. It is stated in the plaint that one N. Nanchappa Chettiar and two others, N. Krishnappa Chettiar and T. N. Krishnappa Chettiar, were carrying on business in partnership under the name and style of N. Nanchappa Chettiar at Olavakkod, that this firm required an overdraft to the extent of Rs. 10,000 and that this transaction was put through by the Bank on the guarantee of the defendant. The form that the guarantee took was the execution of a promissory note in favour of the firm by the defendant for Rs. 10,000 on the 15th March, 1923, the endorsement of the note to the Bank and the passing of a letter on the same date in which the terms of the guarantee are set out.
[Their Lordships set out the contentions of the parties, discussed the evidence and continued.]
2. The first question is whether in respect of these three promissory notes the Bank was entitled to make an entry jn the current account debiting the amount when the bills were dishonoured. There can be little doubt that these notes were endorsed over to the Bank in order that credit may be given in the account for the amount of the bills and the Bank took them upon the expectation that the monies would be paid by Govindan Nair. When they were not paid the Bank had a right to make the entries. It is not suggested that the Bank treated them as complete discharge. The general presumption is that a promissory note given for reducing a liability only operates as a conditional discharge for the liability. We need only refer to Palaniappa Chetty v. Arunachellam Chetty : (1911)21MLJ432 and the judgment of Bhashyam Aiyangar J., in Jambu Chetty v. Palaniappa Chettiar. I.L.R.(1902) M. 526 : 13 M.L.J. 252 As regards the right to re-appropriate it is clear in this case that no intimation was given to the surety of the first appropriation and therefore the Bank, when they sent a letter through their vakil, had a right to re-appropriate the amount. This is clear from the decision in The Mecca (1897) A.C. 286 and Chegganmull Sowcar v. Manicka Mudaliar (1925) 50 M.L.J. 242 where it was observed that so long as notice had not been given as to the appropriation of any amount to any particular account, it is open to the creditor to alter it and make re-appropriation. If the defendant is liable, he is liable also for the amount of the promissory notes accepted as conditional payment by the Bank and which were dis-honoured and on being dishonoured corresponding debits were made by the Bank in the account.
3. Then the last question is as regards the guarantee not being enforceable owing to concealment of facts. In this connection reference is made to Section 143 of the Contract Act which runs as follows :
Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
4. It is argued that the material circumstances in this case is that the fact that the date of the guarantee letter Ex. A about Rs. 5,000 was due by the firm already to the Bank not disclosed, and that on account of this non-disclosure the contract of indemnity is not enforceable. It is not disputed that on the date of Ex. A the amount which was due by Nanchappa Chettiar under the current account was not mentioned; and the question is whether such non-mention vitiates the contract of indemnity. We have already given our reasons for holding that Ex. A, the letter of guarantee, covers past indebtedness also and that this fact was within the knowledge of the defendant when he signed it.
[Their Lordships discussed the evidence and continued.]
5. There is therefore no statement of the defendant that if he had been informed of this already existing debt of Rs. 5,000 he would not have signed the letter of guarantee. We must therefore treat the case on the footing that there is a duty cast on the Rank to disclose the past indebtedness under the current account of N. Nanchappa Chettiar irrespective of the defendant's knowledge to presume that that duty not having been performed the guarantee is invalid. We do not think that the authorities cited by Mr. Menon lead to this conclusion. The balance of authority is that there is difference between fiduciary guarantees and guarantees by persons in favour of Ranks and that though in the former case there may be a duty to disclose all material acts there is no such duty in the case of a Rank which takes a guarantee from a person to disclose the indebtedness of the person guaranteed at the date of the guarantee. In Hamilton v. Watson (1845) 12 Cl. & F. 107 : 8 E.R. 1339 it was held by the House of Lords that a surety is not of necessity entitled to receive, without enquiry, from the party to whom he is about to bind himself, a full disclosure of all the circumstances of the dealings between the principal and the party and that if he wants to know any particular matter he must take it the subject of a distinct enquiry. The learned Judges who took part in this decision wereVhe Lord Chancellor, Lord Brougham and Lord Campbell. In The North British Insurance Company v. Lloyd (1854) 10 Ex. 523 : 156 E.R. 545 it was held that the rule which prevails in assurances upon ships and lives, that all material circumstances known to the assured must be disclosed, though there be no fraud in the concealment, does not extend to the case of guarantees and that in the latter case, the concealment, to vitiate the guarantee, must be fraudulent. In Wythes v. Labouchcre (1859) 3 De G. & J. 593 : 44 E.R. 1397 a similar view was taken. In that case Lord Chelmsford observes as follows:
I will consider the question of concealment solely upon the footing of the duty of the defendants towards the. plaintiff as surety. It must of course be conceded that if the plaintiff had applied to the bankers, and they had given him a false account of the transactions between them and M' Gregor, the plaintiff would be entitled to be relieved from his suretyship. But not only was there no application to the defendants by the plaintiff, but they never came into communication with each other directly or indirectly in the transaction. Was there, under these circumstances, any legal, or, I would add, any moral obligation upon the bankers, when they learnt that the plaintiff was willing to become security to them for a large advance to M'Gregor, to search for him, and warn him against the danger of such a step, by communicating the condition of his old account, the security which they had taken, and the circumstances connected with the Parliamentary qualification? No case which has been cited goes this length or near it. Indeed the case of the North British Insurance Company v. Lloyd (1854) 10 Ex. 523 : 156 E.R. 545 expressly decides that the obligation of the creditor to communicate even material circumstances that are known to him is not co-extensivc with the rule which prevails in insurances upon ships and lives; and that unless the non-disclosure amounts to a fraud upon the surety, he is not entitled to relief.
6. These cases have been considered in London General Omnibus Company, Ltd. v. Holloway (1912) 2 K.B. 72 where it was held that suretyship for the fidelity of a servant is distinct from a guarantee in respect of a banking account. In that case Farwell, L.J., observes :
There is a wide distinction between a case like the present and the cases which have been cited of guarantees for overdrafts given to bankers, such as Hamilton v. Watson (1845) 12 Cl. & F. 107 : 8 E.R. 1339 and Wythes v. Labouchere (1859) 3 De G. & J. 593 : 44 E.R. 1397 and he points out the difference.
7. He further observes :
No surety asked to guarantee a banking account is entitled to assume that the customer of the bank has not been in the habit of overdrawing; the proper presumption in most instances is that he has been doing so, and wishes to do so again. That is a legitimate carrying on of business, and that is what the surety is asked to guarantee.
8. Kennedy, L.J., observes :
On the other hand, in the case of the suretyship or guarantee of a financial account, the previous pecuniary dealings between the creditor and the person whose future liability the surety is invited to secure constitute only extrinsic circumstances. They may be material circumstances, such as might affect the judgment of the person who is asked to be surety. But, in the language of Sir Frederick Pollock (Principles of Contract, 8th Ed, p. 568), 'the creditor is not bound to volunteer information as to the general credit of the debtor or anything else which is not part of the transaction itself to which the suretyship relates : and on this point there is no difference between law and equity.' The bank or other creditor cannot reasonably be taken as affirming, by mere silence respecting earlier dealings, the financial ability of the person whom the proposed surety is asked to guarantee.
9. Then the learned Judge quotes with approval a passage from Mr. Justice Rowlatt's work on Principal and Surety, p. 155. At page 154 the following passage occurs:
A guarantee will fail if the creditor misrepresents to the surety the state of accounts between the principal and himself. But a surety proposing to guarantee a banking account should enquire whether there is any adverse balance already existing; he is not entitled to assume there is not.
10. So far as the Indian cases are concerned, in Balkrishna V. N. Kirtikar v. The Bank of Bcngal (1891) I.L.R. 15 B. 585 Sir Charles Sargent, C.J. and Bayley, J., took a similar view and held that the expression 'keeping silence' in Section 143 of the Contract Act clearly implies intentional concealment as distinguished from mere nondisclosure and the withholding must be fraudulent, as necessarily is the case when a material circumstance is intentionally concealed. This case, so far as we are aware, has not been dissented from and is on a line with the English cases we have referred to. It is contended by Mr. Menon that there is no difference between fidelity contracts and contracts of guarantee in respect of banking accounts, that some eminent English Judges have dissented from the view that there should be any such difference and that in each case the question is whether there is evidence to go to the jury to say that the non-disclosures of the past liability which was existing at the date of the guarantee amounts to concealment of a material fact or not; and Lee v. Jones (1864) 17 C.B. (N.S.) 482 : 144 E.R. 194 is referred to. In that case there was a difference of opinion, Crompton, J., Channell, B., Blackburn, J. and Shee, J., taking one view and Pollock, C.B and Bramwell, B., taking another view. We may state that Blackburn, J., refers to the decision in Hamilton v. Watson (1845) 12 Cl. & F. 107 : 8 E.R. 1339 and notes the distinction between the contracts referred to. He says :
Now, whether the handing the agreement by the plaintiffs to the defendant amounted to an inaccurate representation or not, depends, as I think, on the question whether in such a transaction as that described In the agreement, it might or might not naturally be expected that the masters might have allowed a balance of this extent to accumulate, and might have allowed the account to Stand over unsettled for so long a time. In Hamilton v. Watson (1845) 12 Cl. & F. 107 : 8 E.R. 1339 the transaction was a security for a banker's cash account ; and the decision of the House of Lords was that, in such a case, it might be so naturally expected that the proposed principal had already overdrawn his account, that there was no evidence of a representation that he had not.
11. Although Shee, J., took the view that there was no difference in principle between the contracts and that the question in the case was whether there 'was evidence for the jury to say that the suppression was material, Pollock, C.B., and Bramwell, B., took the opposite view. Reference was also made by Mr. Menon to Railton v. Mathews (1844) 10 Cl. & F. 934 : 8 E.R. 993 where the Judges were of opinion that undue concealment need not be wilful or intentional with a view to the advantages the employers were thereby to gain, but it was sufficient if it was material. This case related to a fidelity contract. A party became surety in a bond for the fidelity of a commission agent to his employers. The commission agent was entrusted with the property of his employers. The employers discovered irregularities in the agent's accounts and put the bond in suit. The surety then instituted a suit on the ground of concealment by the employers of material circumstances. It was held by the House of Lords that
Mere non-communication of circumstances affecting the situation of the parties, material for the surety to be acquainted with and within the knowledge of the person obtaining a surety bond, is undue concealment, though not wilful or intentional, or with a view to any advantage to himself.
12. We think that the balance of authority is clearly in favour of the view that where a person stands surety for another as regards an advance to be made by a bank, the bank is under no obligation to disclose any past indebtedness existing at the date of the contract of suretyship and that it is a matter on which the person standing as surety has to inform himself. If, of course, he wanted information and the bank gave wrong information it might vitiate the contract of suretyship. In the present case the defendant did not require any information as to the state of the account between the firm and the bank on the date of the suretyship. There can therefore be no question of the guarantee being invalid because of the non-disclosure by the bank-that about Rs. 5,000 was due. Further, the defendant does not plead this in his written statement as a ground; he doese not state that if he had been aware of the fact he would not have become surety. Even assuming that in every case it is for the surety there is nothing in the evidence which would entitle the jury to hold that if the defendant had been told that Rs. 5,000 was due by the firm he would not have stood surety. We find that Rs. 7,000 went in discharge of the indebtedness under the current account under which money was already due by the firm.
13. As regards the question of estoppel it is difficult to see where estoppel comes in on the pleadings in the written statement. What is stated is that because the bank said in Exhibit III that Rs. 2,000 and odd was due the defendant put in a petition mentioning that figure to adjudicate the principal debtors as insolvents. It is not suggested that he would not have done so if Rs. 10,000 had been claimed instead of Rs. 2,000; all that is stated is that he had to amend this petition by stating the correct amount due and this would involve some additional expenditure, however trifling it may be. The fact is that Exhibit II the notice sent by the bank through their vakil giving full particulars, is dated 16th of June, 1924. The insolvency petition was filed on the 12th of June, 1924. Admittedly until the 18th of September, 1925, nothing was done as the Judge points out. The mere filing of the insolvency petition would not amount to proof or admission of the amount due. That has to be proved in subsequent proceedings. It is not suggested that when the stage came the defendant relying upon the Exhibit III minimised his claim and got it admitted for a smaller sum whereas, as a matter of fact, a larger sum was clue. In these circumctances it is difficult to see how there can be any estoppel by the defendant putting himself in a worse position owing to the conduct of the plaintiff.
14. We do not think that the decision of the Subordinate Judge can be supported on any of the grounds stated by him. The decree of the Subordinate Judge is set aside and in lieu thereof there will be a decree in favour of the plaintiff for Rs. 8,470-10-7 with interest at 6 per cent from the date of the plaint to the date of payment with costs in this and the Lower Court on the entire amount decreed.
15. The Subordinate Judge's decree allowing any costs to the defendant will be set aside.
16. The case having been set down for being spoken to this day the Court made the following order:
17. Credit will be given for the amounts already collected and no interest will run on the amounts collected.