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Annadana Jadaya Goundar Vs. Konammal and anr. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtChennai
Decided On
Reported inAIR1933Mad309; (1933)64MLJ386
AppellantAnnadana Jadaya Goundar
RespondentKonammal and anr.
Cases Referred and Cragoe v. Jones
Excerpt:
.....urges that there is a well-recognised exception to the rule that the surety is released when the principal debtor is discharged and that on the facts of this case it is the exception and not the rule that applies. this argument is clearly well founded. ) the rule as well as the exception are very clearly stated in the following passage in rowlatt on principal and surety, second edition, p. the following passage from white and tudor expresses this idea very clearly and concisely: 12. the principle that a contract by a creditor to give time to the principal debtor discharges the surety is well recognised. c, held that he was clearly entitled to such an injunction on the ground that his rights had been interfered with behind his back by granting time to the principal debtors. but does..........interpret that as meaning that, although defendant 1 was not to proceed against the principal debtor, konammal, for two months, his right to proceed against the surety at once was reserved. in my opinion it is impossible to interpret the order in that way. the order gives two months' time to konammal and provides, not that defendant 1 may at once proceed against the security, but that he may proceed against the security in default of payment by konammal within those two months. it is clear, therefore, i think, that the right of the creditor to proceed at once against the security or the surety in spite of time being given to the principal debtor was not reserved in this case, and the exception to the rule in regard to granting time to the principal debtor does not apply here.16. mr......
Judgment:

Venkatasubba Rao, J.

1. This is an appeal against the order refusing to make the surety, the respondent (Anganna Reddi) liable in execution. The facts may be briefly stated. A lady by name Konammal obtained a decree against one Annadana Jadaya Goundar for possession of a jaghir, and an appeal was preferred by the latter to the High Court. Konammal was allowed to execute the decree pending the appeal on her furnishing security. A security bond was thereupon executed by four sureties, including, the respondent Anganna Reddi. The material portion of that bond runs thus:

We hereby undertake that the 1st plaintiff (Konammal) will restore the jaghir which she had taken delivery of in execution, that she will act according to the decree of the Appellate Court, that she will pay whatever amount she is liable to pay in accordance with the appellate decree in connection with the said jaghir, that if she commits default in so paying, the amount that she is liable to pay may be realised from the properties hereby given as security.

2. In the appeal Goundar succeeded and got back from Konammal the jaghir in question by way of restitution. Then he applied also by way of restitution for payment of mesne profits. But without any inquiry by the Court, Goundar and Konammal entered into a private arrangement as to the. claim to the mesne profits. To this proceeding the surety Anganna Reddi was not a party. The amount claimed in respect of mesne profits was Rs. 33,000, but by the arrangement the profits were fixed at Rs. 20,000 and it was agreed that Goundar should receive towards this amount Rs. 9,000 odd standing to the credit of Konammal in Court and that the balance of Rs. 10,000 odd should be paid by Konammal within a period of two months. In default (then follow the important words) 'Goundar should take execution proceedings against the immovable properties which were offered as security by the sureties'. The agreement then goes on to say, 'All reliefs which the petitioner prays for in this petition have been settled by the aforesaid arrangement'. An order was made by the Court on the 10th September, 1926, embodying this compromise. It is alleged by Goundar that towards the amount due under the order, namely, Rs. 10,000 odd, one of the sureties subsequently paid Rs. 5,000, and he now claims in execution the balance of Rs. 5,000 odd against Anganna Reddi, the respondent. It is not disputed, though the instrument is not happily worded in this respect, that the claim to mesne profits by way of restitution is covered by its terms.

3. Anganna Reddi contends that the claim made by Goundar in respect of mesne profits was an extravagant one and that the compromise and the order based thereon were collusive and fraudulent. Whether it is open to Anganna Reddi to raise this plea in these proceedings is a question which does not arise in the view I have taken.

4. Three points have been urged by Anganna Reddi, the surety, who contends that his liability under the surety bond has become extinguished. First, he says that, the order made not being after contest but by consent, he is not bound by it. There is no force in this contention. The true test is, whether a consent order is excluded by, or is outside the scope of, the surety bond. As held in Appunni Nair v. Isack Mackadan I.L.R. (1919) 43 Mad. 272 : 37 M.L.J. 435 in the absence of any special stipulation in that behalf, there is no ground for limiting the liability only to a decree passed after contest. The same case points out that, if there has been collusion between the plaintiff and defendant in obtaining the decree, the surety is not without remedy. The same view was taken in Haji Ahmed v. Maruti Ramji I.L.R. (1930) 55 Bom. 97. The learned Judges observe, whether a compromise as such is or is not excluded by the terms of a surety bond is a question of fact in each case. As a compromise was not in terms excluded from the surety bond, they held that the surety was bound by the compromise, although it had been entered into without his knowledge. In this Bombay case, Appunni Nair v. Isack Mackadan I.L.R. (1919) 43 Mad. 272 : 37 M.L.J. 435 was approved and followed. This view receives support also from Jia Bat v. Joharmull Bothra (1932) 36 C.W.N. 749. In that case Rankin, C. J., considers at length Tatum v. Evans (1885) 54 L.T. 336, a decision cited for the contrary position, and points out how it is clearly distinguishable. The agreement there was the result of an elaborate arrangement embracing a great many different matters, and it would be impossible to hold that the surety, when he entered into the bond, bound himself in the expectation that such an arrangement would be made. In other words, the question in each case is, would the terms of the bond reasonably warrant that the arrangement come to by consent was or was not within the contemplation of the parties? Some cases where a different view has been taken have been cited to us, and I do not think it necessary to refer to them. This contention of Mr. Venkatachari, the surety's counsel, must be overruled.

5. Secondly, it is argued for the surety that under the consent order the principal debtor having been discharged, his own obligation has become extinguished. Under the order quoted above, on Konammal failing to pay the balance of Rs. 10,000 odd in two months, the creditor's remedy is confined to proceeding against the surety: in other words, the creditor has abandoned his remedy against the principal debtor. It is on the strength of this clause that the contention has been put forward that the surety's liability has become extinguished. But Mr. Sesha Aiyangar, the learned Counsel for Goundar, urges that there is a well-recognised exception to the rule that the surety is released when the principal debtor is discharged and that on the facts of this case it is the exception and not the rule that applies. This argument is clearly well founded. The rule of law that the discharge of the principal debtor necessarily carries with it the release of the surety is founded on this principle: it would be a fraud on the principal debtor, for the creditor to release him from liability, if the latter were then able to proceed against the surety, who in his turn might sue the principal debtor and thus render the alleged release nugatory. (15 Hals., Section 1056.) See also Sami Aiyar v. Ramaswami Chettiar : (1923)44MLJ171 at the bottom of page 177. But if the deed releasing the principal debtor itself contains a reservation of remedies against the surety, the release is reduced to a mere covenant not to sue. (See 15 Hals, same section.) The rule as well as the exception are very clearly stated in the following passage in Rowlatt on Principal and Surety, Second Edition, p. 260:

The doctrine under which a surety is discharged by an arrangement on the part of the creditor either not to sue, or to give time to the principal debtor, resting as it does upon the principle that otherwise a fraud would be committed upon the principal, does not apply if it is made a condition of the agreement that the rights of the creditor to sue or receive the money from the surety are reserved; for in that case the principal takes the indulgence upon the footing that he must continue exposed to a claim at the instance of the surety, and the arrangement becomes one, the observance of which does not involve the suspension of any right of the surety. The surety is therefore not discharged.

6. The principle is this: If a creditor agrees to discharge the principal debtor, it would be a breach of the agreement so entered into, for the creditor to pursue his remedy against the surety, for the latter would in his turn enforce his remedy against the principal debtor and thus the creditor's agreement to discharge would be rendered inoperative; but if the very agreement to discharge the principal debtor contains a reservation of rights against the surety, the agreement cannot operate as an absolute release, for the obvious reason that the principal debtor has notice that the creditor's remedies against the surety are preserved and that the latter's right of recourse against him is not extinguished. The following passage from White and Tudor expresses this idea very clearly and concisely:

A release, with a reservation of rights against the sureties, operates as a covenant not to sue between the creditor and the debtor and does not release the sureties. And language importing an absolute release may be construed as a covenant not to sue the principal debtor, when that intention appears, leaving the debtor open to any claim of relief at the instance of his sureties.' White and Tudor's Leading Cases in Equity, Vol. II, p. 544.

7. See also Murugappa Mudaliar v. Munusami Mudali (1919) 38 M.L.J. 131 and the notes to Section 135 of the Indian Contract Act in Pollock and Mulla's Commentaries. In this case there is such a contract for reserve against the surety, and it is the exception and not the rule that applies. I cannot therefore accept Mr. Venkatachari's contention that the surety's liability became extinguished on this ground.

8. But the third contention of Mr. Venkatachari, the one accepted by the Lower Court, must prevail. By the terms of the order passed on the arrangement come to by consent, Konammal was given two months' time for the payment of the balance of the amount declared to be due. For the surety it is contended that this giving of time has had the effect of discharging him. Can this compromise be regarded as having been within the contemplation of the surety when he executed the surety bond He agreed under it to pay whatever amount might be found due; that is to say, the payment became due on the date it was in due course ascertained. It was held in Mahomedalli Ibrahimji v. Laxmibai (1929) I.L.R. 54 Bom. 118 that a compromise providing for the payment of the decretal amount by instalments had the effect of discharging the surety, the test laid down being, is the compromise consistent with the obligations which the surety had undertaken to discharge ?

9. Kemp, A.C.J., observes:

His (surety's) rights against the debtor are prejudiced by this compromise, and, I think, it can fairly be said that such a compromise was not one which was contemplated by him when he entered into the suretyship.

10. There are observations in the judgment of Kemp, A. C. J., to the effect that the very fact that the decree was one passed on consent had the effect of releasing the surety. I have already said that I take a. different view on this point but I agree that if an arrangement provides for postponed payment or for the amount being paid by instalments, the surety is discharged from his obligation. Appul Gafur v. Mannalal : AIR1927Cal239 and Kunj Lal v. Batuk Prasad (1929) 120 I.C. 552 support this view. The observations of Rankin, C.J., in Jia Bai v. Joharmull Bothra (1932) 36 C.W.N. 749, already cited, are obiter. In an old English case, Bowsfield v. Tower (1812) 4 Tau 456 : 128 E.R. 405, heard by four judges, the headnote runs thus:

If a plaintiff accepts from the principal defendant a cognovit whereby he gives him time for payment by instalments, he thereby discharges the bail, unless they are parties to the arrangement.

11. Gibbs, J., observes:

I was of counsel in the cause in the Court of King's Bench in which it lately was ruled, that by giving a cognovit payable by instalments, the bail were discharged by analogy to the cases where a creditor, by giving time to the principal, discharges the surety.

12. The principle that a contract by a creditor to give time to the principal debtor discharges the surety is well recognised. The reason of the rule is this: the surety is entitled at any time to require the creditor, to call upon the principal debtor to pay off the debt or himself pay off the debt and when he has paid it off he is at once entitled to sue the principal debtor; and if the creditor has bound himself to give time to the principal debtor, the surety cannot do either the one or the other of these things until the time so given has elapsed. (See Rouse v. Bradford Banking Co. (1894) 2 Ch. D. 75 and White and Tudor's Leading Cases in Equity, Vol. II, page 539.)

13. Mr. Sesha Aiyangar argues that in this case also the rule does not apply, as there is a contract for reserve against the surety. The question is, is there any reservation of rights as contended? If the arrangement, which said that Konammal was given two months' time, had also provided that Goundar could proceed against the surety in the meantime, there would then have been a reservation and Mr. Sesha Aiyangar's contention would have been right. But the consent order, far from containing any such reservation, says in terms that only in the event of Kenammal failing to pay within the two months, the surety could be proceeded against. The facts of the present case bring it within the rule as to the giving of time and not the exception relating to the reservation of rights. I must uphold therefore the third contention of the surety, and, agreeing with the Lower Court, hold that he is not liable.

14. In the result, the appeal fails and is dismissed with costs.

Reilly, J.

15. I agree that we must uphold the learned District Judge's order for the reason given by him, that by the consent order made between Plaintiff 1, Konammal, and Defendant 1 on the 10th September, 1926, time was given to Konammal to pay the balance of the Rs. 20,000 fixed for mesne profits and that therefore the surety was discharged. The learned District Judge has said that this is so under Section 135 of the Contract Act. Mr. Sesha Aiyangar is right in contending that Section 135 of the Contract Act does not apply to this case. This is not a case to which the provisions of the Contract Act directly apply. But Sections 133, 134 and 135 of the Contract Act and some of the following sections embody equitable principles which have long been established in England, and I have no doubt that a surety can claim the protection of those principles in such proceedings as these. So long ago as 1795 in Rees v. Berrington (1795) 2 Ves. 540 : 30 E.R. 765 a creditor gave time to the principal debtors, and, when they did not pay in the time so given, instituted an action against the surety: the surety preferred a bill in the Court of Chancery praying for an injunction that the action should be stayed, and Lord Loughborough, L. C, held that he was clearly entitled to such an injunction on the ground that his rights had been interfered with behind his back by granting time to the principal debtors. That principle-that the granting of time without the consent of the surety to his principal discharges the surety in such a case-has been reiterated very many times. But, as Mr. Sesha Aiyangar pointed out, there is one exception to it. If, though time is granted by the creditor to the principal debtor by agreement with him, nevertheless under that agreement the creditor's right to proceed at once against the surety is reserved, then, as pointed out by Page Wood, V.C., in Webb v. Hewitt (1857) 3 K. & J. 438 : 69 E.R. 1181, the surety is not discharged, the reason being obviously that the creditor may proceed at once against the surety and the surety in his turn may proceed at once against the principal debtor. Mr. Sesha Aiyangar suggests that this is such a case. In the consent order made on the 10th September, 1926, it is provided that the balance of Rs. 10,000 shall be paid to the petitioner, i. e., Defendant 1, by Koisiammal within a period of two months: in default the petitioner shall take execution proceedings against the immovable property charged as security.' Mr. Sesha Aiyangar urges that we should interpret that as meaning that, although Defendant 1 was not to proceed against the principal debtor, Konammal, for two months, his right to proceed against the surety at once was reserved. In my opinion it is impossible to interpret the order in that way. The order gives two months' time to Konammal and provides, not that Defendant 1 may at once proceed against the security, but that he may proceed against the security in default of payment by Konammal within those two months. It is clear, therefore, I think, that the right of the creditor to proceed at once against the security or the surety in spite of time being given to the principal debtor was not reserved in this case, and the exception to the rule in regard to granting time to the principal debtor does not apply here.

16. Mr. Sesha Aiyangar however contends that in this case there was no extension of time, there was really no giving of time at all to Konammal. It is quite true that we have not in this case a definite time fixed by contract, which was afterwards extended. But does that take this case out of the rule about the giving of time What the sureties undertook in this case was to discharge out of the property which they gave as security and, if that was not enough, to discharge personally whatever was eventually decided to be due in connection with the decree to be made in respect of the jaghir, if Konammal failed to pay it. That must mean that they undertook to pay what she might be found liable to pay and to pay it when she was found so liable. I do not think it is possible to attach any other reasonable meaning to their undertaking. In this particular case it was found and settled by the consent order on the 10th September, 1926,. that what she was liable to pay was Rs. 20,000, out of which Rs. 9,900 was to be paid from money which she had deposited in Court. But, instead of her being made liable to pay the balance at once, she was given by the consent order-that is in effect by the creditor, Defendant 1-two months' time to pay it. It is impossible, I think, to suggest seriously, when the matter is fully considered; that the sureties were not injuriously affected by that postponement, by the allowing of two months to Konammal after her liability had been finally fixed, provided that the order meant in effect, as I have no doubt it meant, that the sureties or their property could not be proceeded against for the balance during those two months and they in turn could not proceed against Konammal during those two months. 'It is obvious that during those two months Konammal would be at liberty to secrete any movable property or to make away with her property in other manners, if she wished to do so. And there has been an allegation in this case that she did during that time draw Rs. 4,000 from Court and put it away somewhere. That allegation has not been proved; but at any rate it illustrates the way in which the sureties' interests might be very seriously affected by Konammal being given two months' time, as she was in this case.

17. There is one other point taken by Mr. Sesha Aiyangar, to which I may refer. He quoted an Irish case, Provincial Bank v. Cussen (1886) 18 L.R. Irish 382 (C.A.) as an authority to show that the rule about a surety being discharged when time is given to his principal debtor does not apply when that is done by a judicial act with the consent of the creditor. Now that, if I may say so, is not either fully or accurately the effect of that case. But I do not think it necessary to discuss that case at length because it arose in connection with Bankruptcy proceedings, where obviously very different considerations apply. And moreover the order, which was made on the 10th September, 1926, in this case, though made with the consent of the creditor, was not in my opinion a 'judicial act' in the sense suggested by Mr. Sesha Aiyangar in connection with this Irish case. There was a compromise between the two parties concerned and on the face of it a perfectly lawful compromise. All that the Court had to do was to accept the compromise and make an order accordingly' There was in no sense an adjudication between the parties. There is really not much meaning in calling that a 'judicial act,' nor do I think it of any use to try to show that for that reason the order so made was not one to which the principles in regard to the discharge of a surety, which we have been discussing in this case, apply.

18. That is really sufficient for the disposal of this case, as we uphold the decision of the learned District Judge on this objection of the surety. But, as my learned brother has mentioned, another question has been argued before us at considerable length. Among the objections raised in the surety's counter-statement in the District Court was one to the effect that, as Konammal was released altogether by the consent order of the 10th September, 1926, the surety was thereby discharged. Oddly enough at first sight, the learned District Judge in enumerating the three points actually pressed before him at the hearing of the case does not mention that objection at all. It was suggested by Mr. Venkatachari for the surety that the learned Judge was mistaken in supposing that the surety did not intend to press that point in the case. Certainly the learned District Judge does not say that the point was given up; but he does not enumerate it among the points pressed before him, and he says nothing whatever about it in his judgment. It was a point for serious discussion, if the surety thought fit to press it, though, as we have found, he could succeed on a narrower point. The words of the consent order have already been quoted in part. On the face of it the order provides that Konammal should pay the balance of Rs. 10,000 within two months and that in default of her so doing Defendant 1 should take execution proceedings against the immovable property offered as security by bringing it to sale in pursuance of the charge created over it. But after that there is another sentence, which it is suggested is of considerable importance, namely, 'All reliefs which the petitioner prays for in this petition have been settled by the aforesaid arrangement'. It is urged that, taking those three provisions together, Konammal was entirely released if she did not happen to pay within the two months, and the result of that would be that the surety must have been discharged. Now, it must be noticed that the order contains no explicit release of Konammal. If there is a release, we have to find it by implication. And on the other hand there is an explicit statement that in default of payment by Konammal Defendant 1 is to proceed in execution against the property charged as security. In the absence of any explicit release of Konammal and in the face of the definite statement that Defendant 1 is to proceed against the property given as security I cannot interpret the provision that 'all reliefs which the petitioner prays for in this petition have been settled by the. aforesaid arrangement' as meaning that Konammal was released. On the other hand we have here something even more than a reservation of the right to proceed against the security in spite of the supposed release. Even if the language of the order was clearly in its literal meaning a release of Konammal, nevertheless, if a right to proceed against the charged property or against the surety was reserved, then the surety would not be discharged. Here we have something even more serious against the surety, namely, an explicit statement that Defendant 1 is to proceed against the charged 'property. As my learned brother has pointed out, even if by agreement there is an explicit release of the principal debtor by his creditor, when that is combined with a reservation of the creditor's right to proceed against the surety, that does not discharge the surety. The effect of such an agreement. with such a reservation is that the principal debtor agrees that the liability of the surety shall continue with the corollary that the right of the surety to exact his remedy in turn from the principal debtor also continues. There are many authorities for that, such as Kearsley v. Cole (1846) 16 M. & W. 128 : 153 E.R. 1128, Bateson v. Gosling (1871) L.R. 7 C.P. 9 and Cragoe v. Jones (1873) L.R. 8 Exch. 81. The principle behind both the rule regarding the granting of time to the debtor and the rule regarding the release of the debtor is the same. If by agreement between the creditor and the principal debtor without the surety's consent the surety's right of recourse against the principal debtor is destroyed or impaired or interfered with, then the surety's liability goes and the surety is discharged. But the reservation to the creditor of a right to proceed against the surety in either class of cases prevents the discharge of the surety, as with the reservation the surety's right of recourse against the principal debtor also is preserved. In this case we cannot find, when we examine the matter carefully, that Konammal was released by the consent order of the 10th September, 1926, and, even if part of the wording of the order had implied that, the provision regarding execution against the security would make the release ineffective. That very probably explains why this particular point was not urged with any persistence before the learned District Judge.

19. But the other point remains, that time was given to Konammal and thereby the surety was discharged.

20. I agree that this appeal should be dismissed with costs.


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