Venkatasubba Rao, J.
1. This case raises a question of law of some importance. The plaintiff-Fund seeks to enforce an equitable mortgage. The 1st defendant is the father of the 2nd defendant, and they form members of an undivided Hindu family. On the 27th of March, 1920, the defendants executed in favour of the plaintiff-Fund a promissory note for Rs. 9,000 agreeing to repay the sum, on demand, with interest at 7 per cent. per annum. The defendants deposited with the Fund the title-deeds of the house described in the plaint with a view re create an equitable mortgage over the property. On the 7th of December, 1920, they borrowed from the plaintiff a further sum of Rs. 600 and executed another promissory note with terms similar to those contained in the first note. They agreed that the property already mortgaged should be treated as security for this further loan.
2. The 1st defendant is a share-holder of the plaintiff-Fund, and the terms on which the Fund can make loans are governed and regulated by its Articles of Association. The plaintiff claims that, although in the notes the interest payable is 7 per cent., it is entitled to charge interest at 12 1/2 per cent. per annum upon the expiry of three years from the dates of the notes. The question to be decided is--and this is the only question raised in the suit--is the plaintiff entitled to this enhanced rate of interest?
3. The Articles provide that loans shall be of two kinds, 'ordinary' and 'special'. Loans can be granted only to the share-holders subject to the terms and conditions contained in the Articles of Association (Articles 12 and 13) . It will thus be seen that the Fund can advance loans only to its share-holders, and that the loans can be made only subject to the Articles of Association.
4. 'Special loans' are described in Articles 30 to 35. A 'special loan' may be on 'share basis' or on 'non-share basis'. The loans in the present instance were made on ''share basis'. Whereas in the case of 'ordinary loans' they may be either simple or mortgage (Article 15), in the case of 'special loans' they may be granted only on mortgage of immoveable property, or. pledge of Government promissory notes, jewels or gold and silver articles. It is further explained that a mortgage of immoveable property may be created by deposit of title-deeds (see Article 30, which is not happily worded).
5. Then we come to an important Article--Article 33--the relevant portion of which runs as follows:
Subject to the other terms in the instrument of mortgage for demanding re-payment before the period fixed therefor, special loans are repayable within three years.
6. Article 43 says that 'on any balance of special loan and interest remaining payable after it falls due under Article 33, interest at 2 pies per rupee per month (in other words, 12 1/2 per cent. per annum) is payable.'
7. So far it will be seen that the Articles contain no provision for a 'special loan' being evidenced by a promissory note. Under the Articles a 'special loan' is 'repayable within three years' and it carries interest at 7 per cent. during that term and after the expiry of the three years interest is payable at 12 1/2 per cent. on the amount of the principal and interest then due. The plaintiff's claim to interest is based on these various Articles of Association.
8. In accordance with the Articles, the 1st defendant who was a share-holder applied in due form for the loan. In his application he mentioned that the loan he wanted was a 'special loan'. The Directors sanctioned the loan, and it must be taken that it was sanctioned on the basis of the loan application and subject to the Articles of the Fund. If the matter stopped at this point. there would have been no difficulty. But what really happened was, that not only were the title-deeds deposited in pursuance of the Articles, but the 1st defendant was also required to execute a promissory note containing two distinct provisions, (1) that the amount was payable on demand, and (2) that it was payable with interest at 7 per cent. In both these respects there is a deviation from the Articles of Association. Rule 12 of Part II of the Bye-laws framed by the Fund provides that 'applicants for loan on deposit of title-deeds shall execute promissory notes in printed forms supplied free at the office.' One other point to notice is, that each of the promissory notes executed by the defendants contains as the heading the words 'Special loan on deposit of title-deeds''.
9. The question to be decided is, what are the legal consequences that follow from these words being written across the notes? The effect of the referring words is to incorporate into the document all the provisions in the Articles relating to ''special loans'. The question has, therefore, to be decided on the footing of there being one document which contains the terms in the Articles as well as those expressly mentioned in the note. The rule of incorporation by referring words is a rule of construction. But it is obvious that if the term to be incorporated is at clear variance with a term in the main document itself, it is the latter term that must prevail and not the former. The question in each case is one of intention and it cannot reasonably be presumed that, when the parties make a distinct provision in the main document, they intended that that term was to be subject to, and directly contradicted by, a term in the subsidiary document, the terms of which have become a part of the bargain only by force of the referring words. I am, therefore, clearly of the opinion that, if there is evidence of an intention to depart from the Articles, it is the terms of the promissory note that must be enforced and that we cannot look at the terms of the Articles where they are at variance with the terms of the note. But in this case it seems to me that the real bargain is to be found in the Articles and that the promissory note is a mere formality. In the first place, the Fund is bound by its Articles of Association and it cannot grant a 'special loan' payable on demand. It can curtail the period only 'subject to the other terms in the instrument of mortgage for demanding repayment before the period fixed therefor' (Article 33) . As in the present instance there was no instrument of mortgage, the Fund was not competent to make the loan repayable otherwise than provided in Article 33. The 1st defendant as a share-holder knew that it would be ultra vires the Directors to grant a loan except on terms mentioned in the Articles of Association. They constitute a contract between each member and the Company and they bind the Company and the share-holders alike. Secondly, there can be no doubt that the parties regarded the promissory note as a mere formality. Article 12 of the Bye-laws says that a promissory note shall be executed 'in a printed form supplied free at the office'. It cannot be regarded that the parties deliberately intended to depart from the Articles while they used special words to import them into, and incorporate them, in the final document. The bargain became * complete without the promissory note, and the Articles, as I have shown, do not contemplate a promissory note being executed at all. It is the Bye-laws that provide for the execution of such a note and the reference to 'printed forms supplied free' shows that the note was merely regarded in the light of an additional voucher.
10. I may mention that the same view as I am taking was taken by Srinivasa Aiyangar, J., in some cases heard by him between the present plaintiff and certain third parties, although the grounds of my decision are somewhat different from the reasons given in the judgments of that learned Judge.
11. The case may be disposed of also on a short ground. When the Fund made demands after the due date, the 1st defendant wrote agreeing to pay the amount claimed, which included interest at the higher rate. There was consideration for the promise to pay enhanced interest as the 1st defendant asked for time and the Fund granted time and refrained from suing.
12. The 2nd defendant, so far as the promissory notes are concerned, must be regarded as surety and his liability is, therefore, co-extensive with that of the principal debtor. By signing the notes which contain the words 'special loan,' he must be deemed to have been aware of the real contract between the 1st defendant and the Fund and made himself liable for the obligations under that contract. The 2nd defendant is also, therefore, bound to pay the enhanced rate of interest.
13. An argument has been advanced that, if the Articles as well as the promissory note constitute the contract between the parties, the equitable mortgage cannot be proved as the various documents constituting the contract have not been registered under the Registration Act. This is a plea not taken in the written statement and, as indicated in Krishnaiya v. Ponnuswami Aiyar 46 MLJ 295 the question involved is a mixed question of law and fact. I cannot, therefore, allow this plea now to be raised for the first time.
14. The only defence directly raised is that which relates to enhanced rate of interest. This indirectly raises the question of limitation, for the promissory notes were executed in 1920 and the plaint was presented in 1925. The suit regarded as one merely on the promissory notes will be clearly out of time; but, if as I have held, the contract between the parties is contained also in the Articles of Association, the plaintiff's right to sue accrued only on the expiry of the three years from the dates of the notes. Article 33 says that special loans are repayable within three years.' Under this clause the defendants have an option to repay the amount at any time during a period of three years commencing from the execution of the notes. It was open to the defendants to pay the sum or any part of it earlier; but, so far as the Fund was concerned, it could not demand payment before the expiry of the 3 years. For instance, if the Fund claimed the amount, say at the end of two years, the defendants could have said in answer, 'The clause gives us the option to pay the amount at any time within the three years. We do not propose to make any payment now.' That would be a complete answer. Although the point of limitation has not been directly raised, I have considered the point and have come to the clear conclusion that the suit is not barred by limitation.
15. Another contention advanced by the defendants requires notice. It is argued that the term relating to enhanced rate of interest cannot be enforced as it is in the nature of a penalty. I cannot accept the contention. The original rate of interest is 7 per cent. and, if the amount is not paid on the due date, the sum then payable carries interest at 12 1/2 per cent, simple, not compound. It is common knowledge that 12 1/2 per cent. is not an exorbitant rate. The mere fact that the higher rate is to be calculated on the total amount due (principal and interest) cannot make the term a penal term.
16. In the result there will be a mortgage decree against both the defendants for Rs. 14,428-8-3 and costs of the suit. Time for redemption three months.