Skip to content


Parvateneni Bhushayya Vs. Potluri Suryanarayana and ors. - Court Judgment

LegalCrystal Citation
Subjectcontract ;civil
CourtChennai
Decided On
Reported inAIR1944Mad195
AppellantParvateneni Bhushayya
RespondentPotluri Suryanarayana and ors.
Cases ReferredA.E. Mitchel v. C.L. Phillips
Excerpt:
- - the payees endorsed the promissory note in favour of the imperial bank and received the sum of rs. 6000 executed by hanumara venkayya in favour of the same debtors, potluri suryanarayana brothers, chitta venkateswarlu and anne veerayya and by them endorsed in favour of the imperial bank. 5000 executed by koduri janakiramayya and uppalapati janakiramayya in favour of the same individuals as in the other two promissory notes and similarly endorsed by them in favour of the bank. 5000 failed to discharge the decree passed against them in o. 45 of 1933 as well as the mortgaged deed dated 15th april 1931 to hanumara venkayya (defendant 10). the deed of assignment (ex. this deed as well as the plaint in o. as regards the third promissory note, the sureties failed and neglected to perform.....krishnaswami ayyangar, j.1. the suit out of which this appeal has arisen was instituted by a surety who has paid the principal debt and who therefore claims to be entitled to the benefit of the security held by the creditor at the time when the debt was discharged. the suit having been dismissed, the surety has preferred this appeal. in order to appreciate the questions which arise for consideration in the appeal, it is necessary to refer to a few facts. on 23rd may 1930, bhushayya the appellant executed an on-demand promissory note in favour of potluri suryanarayana and brothers, chitta venkateswarlu and anne veerayya promising to pay at the imperial bank of india, bezwada, a sum of rs. 6000 for value received. the payees endorsed the promissory note in favour of the imperial bank and.....
Judgment:

Krishnaswami Ayyangar, J.

1. The suit out of which this appeal has arisen was instituted by a surety who has paid the principal debt and who therefore claims to be entitled to the benefit of the security held by the creditor at the time when the debt was discharged. The suit having been dismissed, the surety has preferred this appeal. In order to appreciate the questions which arise for consideration in the appeal, it is necessary to refer to a few facts. On 23rd May 1930, Bhushayya the appellant executed an on-demand promissory note in favour of Potluri Suryanarayana and brothers, Chitta Venkateswarlu and Anne Veerayya promising to pay at the Imperial Bank of India, Bezwada, a sum of Rs. 6000 for value received. The payees endorsed the promissory note in favour of the Imperial Bank and received the sum of Rs. 6000 from the endorsee. It is now common ground that by this transaction, whatever its form, the Imperial Bank lent the sum of Rs. 6000 to the endorsers, the appellant Bushayya being merely the surety for them. Although strictly under Section 37, Negotiable Instruments Act, the maker would be the principal debtor and the endorsers the sureties yet it is clear that there was here a contract to the contrary within the meaning of the section. It may be mentioned that the transaction in question was in accordance with the method ordinarily adopted by the Imperial Bank whenever it advanced loans of this type. There were two other transactions similar in nature, the sureties however being different. The earlier of these is evidenced by a promissory note dated 26th April 1930 for Rs. 6000 executed by Hanumara Venkayya in favour of the same debtors, Potluri Suryanarayana brothers, Chitta Venkateswarlu and Anne Veerayya and by them endorsed in favour of the Imperial Bank. The later one is represented by a promissory note dated 19th May 1930 for Rs. 5000 executed by Koduri Janakiramayya and Uppalapati Janakiramayya in favour of the same individuals as in the other two promissory notes and similarly endorsed by them in favour of the bank. The business relationship between the several payees under the promissory notes is not disclosed in the promissory notes themselves, but it appears from a letter, Ex. F, executed and delivered by them to the Imperial Bank on 24th July 1928. In this letter they declared that they were trading in partnership under the style of 'Potluri Suryanarayana brothers and Chitta Venkateswarlu, Anne Veerayya Dosapadu' and agreed that all transactions entered into by either or any of them whether under the signature of the firm or subscribed by the individual signature of the persons entering into the transaction might be regarded by the bank as entered into and on behalf of the firm. This admission of the existence of the relationship of partners between the endorsers has been sought to be got rid of as being untrue in fact and we shall revert to this point later.

2. To proceed with the narrative, when the Imperial Bank found that the monies advanced were not repaid within the stipulated time, it insisted upon the security of immovable property being furnished and accordingly Potluri Suryanarayana (defendant l) on behalf of himself and his minor sons (defendants 3 and 4) and his brother Potluri Venkataratnam (defendant 2) on behalf of himself and his minor son (defendant 5) executed in favour of the Imperial Bank a deed of simple mortgage to secure the repayment of the balance due on the three promissory notes which at the time amounted to Rupees 15,190-1-9. The deed contains the recital that the mortgagors were unable to pay the said amount of Rs. 15,190-1-9 and requested the bank to forbear from suing them and in consideration thereof they offered to execute the mortgage deed 'to further secure the due repayment' of the said sum and interest due and payable under the promissory notes. The mortgagors covenanted to pay the bank the money due to it on 15th July 1931; but inasmuch as the moneys were not paid within the extended time the Imperial Bank instituted three suits on the three promissory notes, O.S. Nos. 43,44 and 45 of 1933, respectively in the Subordinate Judge's Court of Bezwada for the recovery of the amounts and in due course obtained decrees thereon against the makers and the endorsers of the several promissory notes and the members of their family. Bushayya, the surety in respect of the promissory note of 23rd May 1930, was amongst others, impleaded in O.S. No. 43 of 1933 and became liable as a judgment-debtor for the decree passed therein. Between 4th August 1934 and 9th January 1935 Bushayya discharged the decree debt in full by payment in instalments of a total sum of Rs. 8878-3-0. Hanumara Venkayya, who was the surety in respect of the promissory note of 26th April 1930 and who was one of the judgment-debtors in O.S. NO. 44 of 1933 the suit instituted by the Imperial Bank to enforce it, similarly discharged the decree by payment of a sum of Rs. 5726-10-6 on several dates between 25th October 1934 and 25th June 1935. But the sureties in respect of the third promissory note dated 19th May 1930 of Rs. 5000 failed to discharge the decree passed against them in O.S. No. 45 of 1933. There were negotiations between the bank on the one hand and one Yemeni Satyanarayanamurthi, the brother-in-law of Potluri Suryanarayana on the other for the transfer of the decree in O.S. No. 45 of 1933 and the mortgage aforesaid in favour of the former and accordingly a sum of Rs. 500 was paid by him on 18th August 1936 and a further sum of Rs. 3250 was paid on 15th September 1936. On thus receiving a total sum of Rs. 3750 the bank assigned the decree in O.S. No. 45 of 1933 as well as the mortgaged deed dated 15th April 1931 to Hanumara Venkayya (defendant 10). The deed of assignment (ex. I) contains the recital that the sum of Rs. 3750 was received by the bank from Yemeni Satyanarayanamurthi on behalf of the assignee. This deed as well as the plaint in O.S. No. 43 of 1933 show that the mortgage deed had been taken as an additional security and without prejudice to the rights of the bank under the several promissory notes. The importance of this circumstance will appear later when we discuss the legal argument put forward on behalf of the respondents.

3. From this statement of facts, it would appear that the two sureties Bushayya and Hanumara Venkayya duly discharged the debts due to the Imperial Bank by payment of the respective amounts for which they had made themselves liable to the bank. As regards the third promissory note, the sureties failed and neglected to perform their obligations and the decree in O.S. No. 45 of 1933 and the rights of the mortgagee to recover the decree amount from out of the properties mortgaged under the mortgage of 15th April 1931, were assigned to Hanumara Venkayya for consideration paid by him. There was some faint argument that the consideration really came from the Potluri defendants (defendants 1 to 5), but when analysed, it rests on no better foundation than the suspicions arising out of the relationship between Potluri Suryanarayana and Hanumara Venkayya. This is too slender a basis for holding that the money came not from Hanumara Venkayya but from his brother-in-law Potluri Suryanarayana. We must accordingly negative the contention that it was Potluri Suryanarayana who really discharged the decree in O.S. NO. 45 of 1933.

4. The substantial question which arises for consideration on these facts is what precisely are the rights of Bushayya and whether in the events which have happened he has become entitled solely or along with Hanumara Venkayya to enforce the mortgage of 15th April 1931. His prayer in the suit was that he may be declared to be solely entitled to the benefit of the mortgage deed but in the alternative he has prayed that he may be declared entitled to an interest therein proportionate to his claim along with Hanumara Venkayya and the Imperial Bank. On the footing that the interest of the Imperial Bank has passed to Hanumara Venkayya, the second of these prayers means that Bushayya claims an interest in the mortgage in the proportion which the amount he has paid bears to the full amount due on the mortgage. Hanumara Venkayya being entitled to a similar interest in respect of the payments made by him to discharge the two decrees in O.S. Nos. 44 and 45 of 1933. This indeed is precisely the appellant's claim before us as adumbrated by his learned advocate. It is resisted by Potluri Suryanarayana and the members of his family who are defendants 1 to 5-principal debtors - and also by Hanumara Venkayya who is defendant 10. Defendants 6 to 9 are members of the family of Anne Veerayya who is now dead. The Imperial Bank of India, Bezwada, was joined as defendant 11. But in the events which have happened it has no interest in the litigation and hence was exonerated from the suit. Defendants l to 5 pleaded that they were not in fact partners with Chitta Venkateswarlu and Anne Veerayya as stated in Ex. F, the letter passed to the Imperial Bank on 24th July 1928. Defendant 1 stated that he was never in fact a partner and that he gave the letter merely to oblige Anne Veerayya and Chitta Venkateswarlu so that their firm might obtain loans from the bank for the purpose of their business. He also stated that he acted only as a surety to procure loans to that firm and that in consideration of the loans to be obtained from the bank on the strength of the partnership letter he was promised a sum of Rs. 2000 every year by way of commission. It was never intended it was said that they should become partners in it. This contention formed the subject-matter of issue 2. The learned Subordinate Judge has accepted this contention and has found that defendants 1 to 5 were not partners in the business carried on by the firm of Anne Veerayya and Chitta Venkateswarlu, but were only capitalists, who advanced their funds for a certain consideration for the carrying on of the business of the borrowers. In our opinion, this finding is entirely unjustified by the evidence on the record. Defendant 1 having unequivocally declared that he and the members of his family were partners in the business, the burden is heavily upon them to make out their contention to the contrary. In his evidence he stated that Anne Veerayya and Chitta Venkateswarlu had been carrying on business from 1926, and that in July 1928 the name of the firm was changed with his knowledge to P. Suryanarayana Brothers and C. Venkateswarlu and Anne Veerayya, P. Suryanarayana being his own name. In fact, from July 1928 onwards the accounts of the business ran in the new name and this was admittedly known to defendant 1. He then gave the explanation:

My name was added in the firm's name merely to get loans from the bank. For supplying money to the firm I was given some commission. I was always looking into the accounts. I never objected to the inclusion of my name in that firm's name. I was to be paid Rs. 2000 a year irrespective of loss or profit. I had to advance Rs. 30,000 and I was to be paid interest also on it.

These answers do not indicate that he was not to be a partner, but only that he agreed to become a partner on certain special terms and conditions agreed to between the parties. But it is difficult to accept the evidence of this witness at its face value because we have in Ex. 15-A, an entry in the day book of the firm made in his presence which runs as follows:

Debit-to profit and loss account. Amount relating to the balance transferred to the accounts of Chitta Venkateswarlu and Anne Veerayya, according to the deed of partnership executed on 15th July 1928.

From this entry, it is perfectly clear that a deed of partnership came into existence on 15th July 1928. The entry Ex. 15B, takes the matter further. It shows that a sum of Rs. 2000 was credited to defendant l's family, being,

the amount of commission settled to be paid to you upto this day in accordance with the deed of partnership executed on 15th July 1928.

Thus, there can be no doubt that there was, as disclosed by these entries, a deed of partnership which governed the rights and liabilities of defendant 1 and the other partners in the firm. The deed, has been suppressed and a mendacious explanation was sought to be given by defendant 1 in the box. He stated that that date 15th July 1928 in Ex. 15-B, was a mistake for 13th July 1928 and that there was in fact no partnership deed other than Ex. 14. It is perfectly plain that this is a false statement because Ex. 14 does not contain any provision for the payment of commission to defendant 1. The learned Subordinate Judge erred in not attaching due weight to the non-production of the deed of partnership and the falsity of the explanation given. He is also in error in thinking that defendants 1 and 2 were not shown as partners in the accounts. In fact, the heading of the account says that they were partners. That defendants 1 to 5 were not to share the profits and losses of the business is by itself not sufficient to make out their case that they were not partners.. The Court must in every case have regard to the true contract and intention of the parties as appearing from the whole fact's of the ease. We are of opinion that the only conclusion possible in this case is that defendants 1 and 2 and the members of their family became in 1928 partners in the business which was previously carried on by Chitta Venkateswarlu and Anne Veerayya. It follows that they were among the debtors to the Imperial Bank, with reference to the debt guaranteed by Bhushayya,

5. The first contention advanced by the respondents' learned Counsel is that the suit is not maintainable because the debt due to the Imperial Bank has not been fully discharged. It is said that the decree in O.S. No. 45 of 1933 which related to the promissory note executed by Koduri Janakiramayya and Uppalapati Janakiramayya has not been discharged; and it has been only assigned to defendant 10. In the alternative it is contended that defendant 10 has, standing in the shoes of the Imperial Bank, a superior and not a co-ordinate right with the plaintiff in respect of the rights assigned and effect must accordingly be given to those rights. Before examining these contentions, it is necessary to dispose of two other objections raised by the contesting defendants which are entirely without substance; but which were unfortunately allowed to prevail by the learned Subordinate Judge. The learned Judge has held that Bhushayya is not entitled to maintain the suit inasmuch as his brother Venkataratnam became entitled to the suit amount under a partition arrangement between Bhushayya and his three brothers. This question was considered by the learned Judge in Para. 29 of his judgment in which he refers to an additional issue (16). No such issue however appears on the record, not even in the judgment. The precise form of the issue is not therefore known; though it is not difficult to understand what the learned Judge had in mind. It is conceded that he proceeded to consider the point in his judgment without an issue before him and he raised the point itself at the time of writing the judgment, in response to an invitation to do so in the final stages of the hearing of the suit. The history of this contention, however, shows that the learned Judge was not warranted in raising or considering such an issue. Issues in the suit were framed as early as 16th March 19S8 and as we already indicated, there is no reference to the contention in the issues, or even in the written statements of the parties. On 22nd August 1938 I.A. No. 753 of 1938 was filed by the defendants asking for an amendment of the written statement by the addition of the following paragraph:

The plaintiff and his three brothers, Venkataratnam, Ramakrishnayya and Brahmayya, were all joint and formed an undivided Hindu family by the date of the alleged payment of the suit debt to the Imperial Bank of India by the plaintiff and if the said payment is true, the plaintiff's brothers were also entitled to three-fourths of the suit debt. This defendant submits that the plaintiff became divided with his three brothers subsequent to the said payment and this defendant learns that the suit claim is not partitioned amongst themselves. This defendant submits that the plaintiff alone is not entitled to bring the suit for the whole amount in which his brothers also have got interest and without impleading them as parties to the suit. The suit for the whole claim by the plaintiff alone is not maintainable.

There was also a prayer for amending the written statement by the addition of a prayer for relief under the Madras Agriculturists' Belief Act. This latter prayer was granted, but the amendment which sought to raise the plea of the non-joinder of the brothers of the plaintiff was disallowed by order of Court dated 20th October 1938. A revision petition against this order was filed in this Court, but was dismissed by Abdur Rahman J. with the remark that the Court was bound to decide the questions which arose between the parties to the suit and no further, and that if the plaintiff had no right to maintain the suit himself, he would not succeed; but if he had, the non-joinder of other persons was immaterial. The matter was thus definitely closed. But still the defendants were allowed to rake up the matter again in the cross-examination of the plaintiff. The following answer was elicited from him:

It is Venkataratnam that is entitled to this amount under the terms of our partition. There is an oral agreement that I should recover this amount and my brother of course taking the risk of it. Our partition is under lists.

The questions which resulted in these answers were clearly inadmissible as they did not relate to the issues before the Court. Fearing that the plea of non-joinder might be allowed to be resuscitated, the plaintiff filed I.A. No. 537 of 1940 on 19th July 1940 praying for the addition of his three brothers, Venkataratnam, Brahmayya and Ramakrishnayya. An affidavit was filed in support of the application in which it was stated:

If, per chance, for any reason, the Court should hold that arguments on the said point may be heard, it is necessary in the interests of justice that necessary evidence therefor on behalf of the plaintiff also should be taken. The plaintiff's three divided brothers are ready to say that the plaintiff has absolute powers to file this suit, to obtain decree and to recover the suit debt and they are ready to join as plaintiffs in this suit.

The application was opposed and it was dismissed on 29th July. The order was,

For abundant caution the Court cannot proceed on unnecessary matters. Dismissed.

The arguments in question in the suit commenced on 29th July, and it is quite apparent that the plea of non-joinder was pressed. Thereupon a fresh application I.A. No. 563 of 1940 was filed by the plaintiff on 30th July 1940 requesting the Court to reopen the suit, add the plaintiff's brothers as co-plaintiffs and take the necessary evidence. The brothers filed separate affidavits consenting to their being joined as co-plaintiffs. The application was opposed by the contesting defendants and was disposed of along with the suit. The learned Judge dismissed the petition along with the suit itself in his judgment holding that the application was belated and that the claim was evidently barred. We are firmly of opinion that the learned Judge was wholly wrong both in allowing the point to be raised and in negativing the successive attempts made by the plaintiff to remedy the error, if error it was. Having considered the matter fully, we hold that the plaintiff is entitled to maintain the suit because he was eo nomine the surety and the person who discharged the debt. That the debt fell to the share of a brother of his as a result of the partition in the family is no reason for holding that he is not entitled to maintain the suit because under the self-same arrangement he was the person charged with the duty of collecting the money.

6. The learned Subordinate Judge also held, and again quite wrongly, that the suit is barred by time. It is evident to him from the dates of the several payments made by Bhushayya that except in respect of the last payment the suit was time-barred. The fact however is that all the payments are within three years of the suit. It is unfortunate that the learned Judge has not taken the trouble to look at the dates of the relative payments in Ex. B series. Otherwise he could not have committed such a palpable mistake.

7. The question still remains whether in the circumstances of this case and the events which have happened the appellant Bhushayya is entitled to an interest in the benefit of the mortgage Ex. H held by the Imperial Bank, the creditor at the time when he as surety discharged the decree debt in O.S. No. 43 of 1933. As already stated, he claims that he is entitled to a share in the mortgage proportionate to the amount of the debt he had discharged, defendant 10 being entitled to the remaining interest in the mortgage on the ground that he has similarly discharged the debt that he had guaranteed and also obtained an assignment of the third debt still remaining undischarged. It is conceded that the position of defendant 10 as a surety pure and simple is identical in every respect with that of the appellant. But what is urged is that he is now clothed with the rights and privileges of the Imperial Bank by virtue of the assignment made by it in his favour and he must therefore be regarded as occupying the position of the creditor in respect of the third debt represented by the decree in O.S. No. 45 of 1933. The contention of Mr. Sitarama Rao is that the three debts though originally several and distinct had been consolidated into one single debt in the mortgage Ex. H with the result that the surety Bushayya cannot claim the benefit of the mortgage or any interest in it until he has fully discharged the debt. It is argued that the third debt had not yet been paid and so long as it is not paid the surety can claim no interest in it, much less enforce it by suit. The question of law thus; raised falls to be decided by a consideration of the provisions of Sections 140 and 141, Contract Act, 1872. Section 140 states:

Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

The section embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court in Craythorne v. Swinburne (1807) 14 Ves. 160, namely:

The surety will be entitled to every remedy which the creditor has against the principal debtor; to enforce every security and all means of payment; to stand in the place of the creditor; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety; having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon contract, but upon a principle of natural justice.

The language of the section which employs the words 'is invested with all the rights which the creditor had against the principal debtor' makes it plain that even without the necessity of a transfer the law vests those rights in the surety. In the present case the surety has paid all that he was liable for and it would therefore seem on the language of the section that he has thereby become invested with all the rights which the creditor had against the principal debtors. The Imperial Bank had, owing to its three distinct debts guaranteed by three several sureties and in respect of the balances of the debts remaining unpaid, obtained an additional security in the shape of the mortgage, Ex. H. That the bank continued to regard the three debts as still remaining distinct is borne out by the fact that three separate suits were instituted for enforcing each of them. There is no support in the evidence or in the con-duet of the parties for the suggestion that there was a consolidation of the three debts into one single debt. Indeed, it seems to us that such a consolidation cannot be made without the consent of the sureties who are likely to be affected by it. That each of the sureties still remained liable for the debt originally guaranteed by him and not for the consolidated amount is made perfectly clear by the statement contained in the deed of mortgage, Ex. H, and in the plaint filed by the bank in the three suits in which it is stated that the mortgage was taken by way of further or additional security for the due repayment of the debts. It may be that if there was but one debt for which there were three sureties, the entire debt must be discharged before any of the sureties can claim the rights conferred by Section 140. That however is not the case here. The position of Bushayya is not dissimilar to the case, much considered in the English Courts, of a surety who had guaranteed a definite fraction of a debt for the whole of which the creditor held a common security. Before referring to those cases, we may point out that there is little doubt on the language of Section 140 that the surety is entitled to demand all the securities held by the principal debtor at the time of payment whether they had been received simultaneously with the loan advanced or subsequently. Section 141, when it says that a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, only means that a surety cannot complain if before payment the creditor loses or parts with a security obtained by him after the contract of suretyship was entered into. That appears to have been the rule of equity as understood in England when the Act was passed (see Newton v. Chorlton (1853) 10 Hare 646). The rule has however been extended by later decisions of the English Courts so as to cover securities given to the creditor both before and after the contract of suretyship. This is clear from Forbes v. Jackson (1882) 19 Ch. D. 615 and Campbell v. Rothwell (1878) 47 L.J.Q.B. 144. This extension however has not been introduced into the statutory law of India which remains as codified in 1872. What is important to remember in this connexion is that Section 141 does not enable the creditor to withhold from the surety any security actually held by him at the time when the debt is paid or in any other way to detract from the rights of the creditor as declared by Section 140. Section 141 only gives him liberty of action in respect of securities not held by him at the time of the contract of suretyship provided he exercises it before payment.

8. The question that falls to be decided is whether all the three debts must be fully discharged before any of the sureties can claim an interest in the security taken by the creditor or whether as each debt is discharged the right to a proportionate part of the security passes to the surety making the payment leaving the balance alone of the security available for the creditor for the remaining debts or debt. These questions are by no means easy of solution on the language of Sections 140 and 141, Contract Act, which prima facie have reference to the simple case of a surety for a single debt for which the creditor holds a security or securities. We are therefore obliged to seek our guidance from the English decisions which explain the underlying rule of equity in complex cases of the nature now before us. In Ex parte Rush-forth (1805) 10 ves. 409, the debtors who were carrying on business had a running account with a bank which was guaranteed by a surety. But the guarantee was limited by an express contract to a sum not exceeding . 10,000. The surety was secured by the mortgage of an estate given to him by the debtors. The Lord Chancellor Lord Eldon, observed:

The agreement was to advance all such sums as should be required; but it is limited by an express contract for an obligation to secure all those sums; and the question is, whether that limitation in the extent of the obligation is not a sufficient ground for the inference, that those sums were not to be extended beyond . 10,000, to the destruction of every right of the surety. Take the case of two sureties, each for the separate sum of &. 10,000; each, paying the principal creditor, would be entitled to stand in his place for the sum paid. It would be very wrong to hold, that, as they have taken but one surety, he shall be in a worse situation. I think, the bankers are not entitled in equity to say, as against the surety, that their demand is more than . 10,000, the amount of the bond he has given; upon which he would be prima facie entitled to stand in their place; as to the residue of their debt, they ought to be considered, if I may so express it, as their own insurers. He is entitled to stand in their place, but not for the whole sum of . 10,000, for the money produced by the sale of the estate must be considered as received by the bankers. He will, therefore, be entitled to stand in their place for the difference.

If we substitute three for two in the illustration given by the Lord Chancellor it would very nearly represent the facts present before us. The plaintiff Bhushayya, one of the sureties, on paying the principal creditor would be entitled to stand in his place for the sum paid, that is, entitled along with the bank to the benefit of the security. In Paley v. Field (1806) 12 ves. 435 the plaintiff who was a surety for monies advanced and to be advanced by certain bankers had by the terms of the guarantee executed by him limited his liability to a sum of . 1500 making it clear that the bankers were not to be indemnified by the plaintiff for any loss which they should sustain by giving credit to the debtor beyond the sum of . 1500 and interest. On the adjudication of the debtor, the creditors proved, for . 3000 which was the amount for which the debtor had made himself liable and received dividends thereon. The surety paid the sum of . 1500 with interest and then sued for the recovery of the dividends received in so far as they related to the Sum of . 1500 guaranteed by him. The creditors contended that they were entitled to apply the sum of . 1500 received from the surety as far as that will extend, to satisfy the loss they might ultimately sustain by the bankruptcy of the debtor and that they were entitled to receive and apply the dividends paid upon the whole debt until they received full satisfaction of the debt due to them from the debtor. Sir William Grant, the Master of the Rolls, was of opinion that there was no substantial distinction between this case and Ex parte Rush-forth (1805) 10 Ves. 409. Indeed he considered the case before him as stronger and clearer of the two as the instrument between the parties made it clear that the sum for which the surety was to be answerable was as against him to be considered as the whole amount of the creditor's demand, whereas in Ex parte Rush-forth (1805) 10 Ves. 409 there was no specified limit to the engagement except what was implied by the obligation of the bond. The Master of the Rolls observed:

Then upon what ground is the equity, which the plaintiff seeks by this bill resisted? Upon this ground only, that these defendants have given credit to the bankrupt beyond that stipulated sum; a case, with which by express provision the plaintiff was to have nothing to do. If in consequence of those ulterior advances the bankers are to keep dividends, of which they would otherwise be trustees for the plaintiff, does not he contribute in effect to indemnify them for a loss against which it is expressly provided that he shall not be called upon to indemnify them; viz., a loss occasioned by their advancing more than the sum of 1500? It is clear, that as between these parties, that sum is to be considered as the amount of the debt. The law resulting from that view of the facts is not a subject of controversy between the parties; for it is agreed upon that statement the plaintiff is entitled to the equity he seeks by his bill; to consider them as trustees for him of whatever dividends they draw from the bankrupt's estate on account of this sum of 1500.

The Master of the Rolls here makes it clear that the dividends received in respect of that part of the debt which was guaranteed by the surety ought not to be appropriated by the creditor towards the part not guaranteed or to any other debt owing from the same debtor. On payment of the whole of the debt guaranteed whether that whole was a part of a larger debt or not, the surety is entitled to be subrogated to the rights of the creditor in respect of the debt discharged. This does not detract from the principle that the surety must pay the whole of the debt guaranteed by him. Only when his liability is limited, as it was limited in the case before the Court, the part is by the contract of the parties to be regarded as the whole. The facts, no less the decision, bear a close resemblance to the later case in Hobson v. Bass (1871) 6 Ch. A. 792 to be noticed later. In Thornton v. McKewan (1862) 11 W.R. 140, a guarantee for a fixed sum of 5000 was given by the plaintiff to a banking company to secure the advances made to the debtor. The bank advanced a larger sum to the debtor and on his death proved against his estate under administration for the full amount of the advance and received dividends thereupon. Afterwards the guaranteed amount, namely, 5000 was recovered from the surety. It was held that the surety was entitled to the dividends received in the proportion which the sum guaranteed bore to the whole debt proved notwithstanding that the guaranteed debt alone and not the whole of the debt given to the banker had been paid. Coates v. Coates (1863) 33 Beav. 249 is a decision on analogous facts. Benjamin Coates first lent a sum of 1000 on the joint promissory notes of John Green and William Green. William Green joined in the note as surety only. Coates afterwards lent to John Green a further sum of 1000 on his own promissory note. Sometime later the debtor John Green deposited with the creditor a policy of assurance for 2000 on his own life as a further security for both the debts. In the insolvency of John Green, Coates having died, his executrix proved for 1500, for the two debts and received a dividend of 97 and a sum of 97, 10s. upon surrender of the policy which was the common security for both the debts. The guaranteed debt was fully discharged by a set-off claimed by the executrix against the surety and allowed by the Court. The Master of the Rolls, Sir John Romilly, held that the 97,10s. which was the produce of a collateral security for both debts, ought to be set off rateably against the amount due on the two notes, on one of which William Green was liable as surety. The result could not have been reached except on the footing that on the discharge of the debt for which the surety was liable, he became invested pro tanto with the rights of the creditor in respect of the security held by him for that as well as the other debt. In Hobson v. Bass (1871) 6 Ch. A. 792, the creditors Bass and Company were supplying goods to Edmund Hobson. On 23rd July 1868 Jesse Hobson agreed to stand guarantee for Edmund Hobson for the due payment of all such goods whether supplied previously or supplied from time to time afterwards to him, until the guarantee should be withdrawn by notice, but so as the surety's liability under the guarantee was not at any time to exceed the sum of 250. A similar guarantee was given on the same date by another person Elizabeth de Lannoy. On 16th November 1868, Edmund Hobson was adjudicated bankrupt. At the time the debtor was indebted to Bass in the sum of 657 for the whole of which Bass proved in the bankruptcy. On 23rd June 1869 he claimed under the guarantees the sum of 250 from each of the two sureties, and received payment accordingly. On 29th April 1870 Bass received the sum of 68-8-9 from the trustee in bankruptcy by way of dividend at the rate of 2s. 1d. on the whole of the outstanding debt of 657. The question was whether each of the sureties was entitled to recover from the creditor a share of the dividends received and to be received in respect of the & 657, bearing the same proportion to the whole of the debt, as 250 to 657. The Vice Chancellor dismissed the claim. On appeal Lord Hatherly L. C. reversed the decision and upheld the claim observing:

If a person guarantees a limited portion of a debt, all the authorities show that if he pays that portion he has in respect of it all the rights of a creditor. The question is, whether the guarantor means 'I will be liable for 250 of the amount which A B shall owe you,' or 'I will be liable for the amount which A B shall owe you, subject to this limitation, that I shall not be called upon to pay more than 250.' The words of the guarantee are so similar to those in some of the cases cited that it would be splitting hairs to distinguish them. The words 'at any time' are material, and I think the meaning of the instrument is 'I guarantee the payment of all goods supplied, but my liability is not to be increased by their amount exceeding 250. When it reaches that sum I am to be a surety for it with all the rights of a surety.' It is not then competent to the creditor to say 'I will increase my debt, I will take a dividend on the whole; and though you have paid me the 250 you shall have no rights as a surety till I am paid in full.' It is true that a surety may enter into an obligation to be liable to a limited amount for the ultimate balance remaining after all monies obtainable from other sources have been applied in reduction of the debt, but a guarantee of the nature must be in a very different form from the present.

The meaning is that when the guaranteed part of the debt is discharged, the surety is entitled to stand in the shoes of the creditor quod that part, though the rest of the debt remains undischarged. In respect of each pound of the debt, the creditor received a dividend which ought to go to the surety who had paid, because it is a benefit attached to the debt and accruing from it. Similarly a security held by a creditor for a debt or for several debts in common is to be apportioned to every part of the debt, or to each of the several debts proportionately. On payment, the benefit of the security pro tanto passes to the surety who pays, unless he has waived or abandoned it. Goodwin v. Grey (1874) 22 W.R. 312 is an application of the principle laid down in Thornton v. McKewan (1862) 11 W.E. 140. The head-note which runs as follows makes the position sufficiently clear:

A person who becomes surety for a limited amount of a debt has, on paying the amount for which he is liable, all the rights of a creditor in respect of that amount, and is entitled to share in the security held by the principal debtor for the whole debt.

These and certain other earlier cases were reviewed in the judgment of the Court of appeal in Ellis v. Emmanuel (1875) 1 Ex. D. 157 and the distinction was pointed out between a case where a guarantee is given for the whole-debt with a limitation on the liability of the surety to a specific amount, and the case where the guarantee is in respect of a specified part only of a given debt. The case was held on the facts to fall within the former class and it was accordingly decided that the surety was not entitled to the benefit of the security as the whole of the debt had not been paid. Blackburn J. observed:

I think in such case it is a question of construction on which the Court is to say whether the intention was to guarantee the whole debt, with a limitation on the liability of. the surety, or to guarantee a part of the debt only. And, as I have already pointed out, I think the bond in the present case expresses an intention that the sureties should each guarantee the whole 7000 though their liability respectively was limited to the stipulated amounts.

The point is further elucidated by Vaughan Williams J. in (1896) 2 Q.B. 1212 A debtor became bankrupt and subsequently the surety on demand by the creditor paid him 303-11-9 under his guarantee and then tendered a proof against the bankrupt's estate for 755-16-1, being the whole amount due from the bankrupt. The trustee rejected the proof insisting that it ought to be reduced by 303-11-9 which the bank had received from the surety. Vaughan Williams J. held that he was wrong in so doing. He pointed out that the Common law right of the creditor was to sue the debtor for the whole of the amount that was due from him, irrespective of the sum which was paid by the surety unless that sum amounted to 20s. in the pound. The following observations indicate the correct legal position:

When bankruptcy supervened the right of the principal creditor-the bank - was to prove for that amount, unless there was a surety and that surety was a surety for a part of the debt. In that case if the surety is a surety for the part of the debt, and the surety has paid that part, then by virtue of that payment, the right of proof, which would have been the right of proof of the principal creditor, becomes pro tanto the right of proof by the surety. The surety has a right having paid part of the debt in that way; to stand pro tanto in the shoes of the principal creditor; and even if the principal creditor has proved and has received the dividend, and the surety comes and repays the full amount, the principal creditor would then be trustee for the surety of the amount of the dividend which he had so received. In my judgment that right of the surety as against the principal creditor only arises in a case where the surety has paid the whole of the debt. It is quite true that where the surety is surety for a part of the debt as between the principal creditor and the debtor, the right of the surety arises merely by payment of the part because that part, as between him and the principal creditor, is the whole.

Holding that the surety in the case before him was a surety for the whole debt with a limited liability, the Court held that he had only paid a part of the guaranteed debt and was therefore not entitled to prove in preference to the creditor.

9. It seems to us that the crucial question to be determined in cases of this description is whether the surety is a surety for the whole debt with a limited liability or whether he is a surety for a part of the debt only. The present case undoubtedly falls within the latter category, because Bushayya was the surety in respect of a distinct debt the whole of which he has discharged and there was no further liability so far as he was concerned. Indeed the nature of the guarantee given by him confined as it was to the promissory note of 26th April 1930, sails clear of the compilation which the English Courts were called upon to solve in the cases noticed. That being so, his right to a proportionate share in the mortgage security appears to be beyond question. We were however pressed with a decision of a learned Judge, Farran J., of the Bombay High Court reported in Goverdhandoss Gokuldas v. The Bank of Bengal (89)15 Bom. 48 as establishing the proposition that until the entirety of the debts due to the Imperial Bank inclusive of the third debt is paid, none of the sureties can claim any portion of the security held by it. The facts were these: one Khimji Jairam Saoji was indebted to the bank of Bengal in the sum of Rs. 3,15,000 for which the debtor gave securities which the bank accepted as good only to the extent of Rs. 1,90,000 that being the value as estimated by it. On this footing the bank considered itself unsecured to the extent of the balance of Rs. 1,25,000 and therefore refused to honour certain bills of the debtor, which then fell due. Thereupon the debtor prevailed on the plaintiff to stand surety for him, and the plaintiff accordingly guaranteed the payment of the sum of Rs. 1,25,000, treated by the bank as remaining unsecured. Subsequently the surety paid the full amount guaranteed by him and then instituted a suit for a declaration that he is entitled to a proportionate share of the securities held by the bank. It was held that the claim was not sustainable. No exception : can be taken to the decision on the facts actually before the Court. The securities had been accepted as cover not for the entire debt of Rs. 3,15,000 but only for a definite part of it, namely, Rs. 1,90,000. The plaintiff's guarantee did not relate to this part but to other part, namely, Rs. 1,25,000 which was apparently treated as a distinct and separate debt in itself. In this view the plaintiff could not claim to share in the securities because they did not relate to the debt guaranteed by him. But the decision was rested on the broad ground that the surety cannot claim the benefit of the securities until the whole of the debt due to the bank had been paid. The learned Judge arrived at this conclusion on a review of most of the English cases on the point, the only case he had not before him being (1896) 2 Q.B. 1212 which came some six years later. With all respect to the learned Judge, we find ourselves wholly unable to agree with him in his appreciation of the effect of the cases considered. The question for decision was formulated in theses terms, viz.:

Whether a surety, who has guaranteed an aliquot and defined portion of a past due debt secured by a mortgage, is, on payment by him of the portion of the debt which he has guaranteed, entitled to' share in such mortgage in proportion to the amount of the debt which he has guaranteed and paid, before the mortgagee has been paid the full amount of his mortgage debt?

The learned Judge answered it in the negative. In his view, the Contract Act has omitted to state when the surety is entitled to have the security made over to him wholly or in part, whether it is when the debt of the creditor is paid off or when the surety pays the amount of his guarantee. Section 140, in our opinion, leaves no room for doubt on the point, because it expressly says that the surety upon payment of all that he is liable for is invested - that is, immediately invested - with all the rights which the creditor had against, the principal debtor. The condition laid down by the section for this right to arise, is the payment by the surety of all that he is liable for, and not the payment of all that may be due to the creditor who holds the securities. Where the guaranteed debt is a fraction only of the debt, the surety's right comes into existence immediately on payment of that fraction, for that fraction is, so far as he is concerned, the whole : see In re Sass, Ex parte National Provincial Bank of England, Ltd. (1896) 2 Q.B. 12. After referring to Ex parte Rush-forth (1805) 10 Ves. 409, Paley v. Field (1806) 12 Ves. 435 and Hobson v. Bass (1871) 6 Ch. A. 792 and granting that where a surety limited to a certain amount pays that amount he is entitled to prove against the debtor's estate for the amount so paid, the learned Judge expresses the opinion that the principle does not apply in the case of the creditor applying the securities he holds in payment of the residue of the debt after he has been paid one portion of it by the surety. For according to him, this works no apparent injustice to the surety, for he can still sue the debtor and prove against his estate. With respect, we are unable to accept the reasoning as correct. In the first place, it is clear both under Section 140, Contract Act, and under the English law that the surety's right to the benefit of the security vests in him the moment he pays the guaranteed amount. The creditor cannot afterwards make an appropriation to the prejudice of the rights of the surety which have accrued to him. Indeed he cannot do so even before, as the surety is entitled to the benefit of every security held by the creditor at the time when the contract of suretyship was entered into. Secondly, the question is not whether the surety has a remedy against the principal debtor, which of course he has either to sue him or prove against his estate if he is adjudicated bankrupt, but whether he has any, and if so, what right against the creditor in respect of the securities held by him. We must say that the grounds on which the learned Judge held that the English cases were not applicable do not commend themselves to us. The case in Goodwin v. Grey (1874) 22 W.R. 312 was referred to and put aside on the ground that it is irreconcilable with what has been said by Lord Selborne in Duncan Fox and Co. v. North and South Wales Bank (1881) 6 A.C. l-indeed he seems to think that the case has been wrongly reported. He then quotes the following passage from Lord Hatherley's judgment in Hobson v. Bass (1871) 6 Ch. A. 792,

If a person guarantees a limited portion of a debt, all the authorities show that if he pays that portion of the debt he has in respect of it all the rights of a creditor;

and explains it away by stating that it means that the rights of the creditor referred to were his rights against the principal debtor or his estate in bankruptay and not all the rights of the creditor whose debt he guarantees. This comment is, if we may say so respectfully, not justified either by the decision itself or by the earlier cases referred to by Lord Hatherley in his judgment. The substance of the reasoning of Farran J. is, we think, really to be found in the following passages occurring at page 64 of the report:

It seems to me to be a strange doctrine that a creditor, not fully secured by a mortgage, who obtains the benefit of a surety for part of his mortgage debt in order to further secure himself, by that very act is ' deprived of portion of the security the inadequacy of which was a reason for demanding the surety; or that a person advancing, say, Rs. 10,000 on a mortgage, which is valued only at Rs. 5000 and has Rs. 5000 of his advance guaranteed by a surety, is only in reality secured to the extent of Rs. 7500 by reason of the surety's right to claim the benefit of half the mortgage security on paying his half of the debt. To hold so would, I think, defeat the intention of the parties to such a transaction. A principle of equity is seldom adopted, which has that effect.

With respect again the learned Judge here seems entirely to miss the principle involved in the decisions of the English Courts which is that the security held by the creditor as cover for a debt attaches to every rupee of the debt and if he chooses to accept the guarantee with respect to part only of the debt, the surety on payment of that part is by force of law entitled to a proportionate part of the security. There is nothing to prevent a creditor from stipulating and obtaining a guarantee for the whole debt and there is nothing again against the surety waiving the right to which he is entitled under law. In the absence however of any such arrangement or waiver the law must prevail. We are unable to see how it can be said that the surety's claim is inequitable. On the contrary, the English decisions appear to our mind to make it inequitable for the creditor to defeat the rights of the surety who pays the debt by making an appropriation to his own advantage and to the detriment of the surety. In C.L. Philips v. A.E Mitchell : AIR1930Cal17 it appears that the creditor had advanced to the debtor a loan of Rs. 40 lakhs on a guarantee given by three individuals. Although the guarantee was in respect of the whole debt the liability of the sureties was limited to a maximum of Rs. 18 lakhs. The creditor also had a mortgage given to him as cover for the debt. The debt not having been paid on demand, the creditor after giving notice instituted a suit against the sureties. The sureties pleaded that until the mortgage was realised the creditor was not entitled to sue. The question turned on the construction of the instrument of guarantee. The Court held that the claim against the sureties could not be enforced except for the balance remaining due after realising the security, limited to the maximum amount of their liability. The security not having been realised, the suit was dismissed as premature. On appeal to the Privy Council in A.E. Mitchel v. C.L. Phillips their Lordships reversed the decision of the High Court holding that upon the true construction of the guarantee the liability of the sureties was not restricted to the deficiency after the realisation of the mortgage and that they were liable for the amounts claimed even though the mortgage had not been realised. Referring to the form of the guarantee their Lordships observed that a contrast was there drawn between: (1) the whole of what may eventually become due from the principal debtor for principal and interest, and (2) a part of the total debt coextensive with the guarantor's maximum liability. This indeed, it will be observed, is the distinction which has been throughout drawn in the English cases- to which we have adverted. Their Lordships expressed the opinion that the ease fell under the former and not under the latter class and that the sureties were accordingly liable. It is important in this connexion to note that their Lordships while stating that it was unnecessary for them to express an opinion as to what would be the rights of the sureties in respect of the mortgage after their liability under the guarantee had been discharged uttered a warning that they must not be taken to approve the statement of Ghose J. in the judgment under appeal, namely,

not until the sureties in the present case have paid off the entirety of the mortgage debt due to Stephen, would they be entitled to the securities which Stephen held, i. e., even if the sureties paid off a sum of Rs. 18 lakhs, they would not be entitled to the said securities until the balance of forty lakhs was realised. The sureties would, in such a case, be without any security whatsoever during the interval.

In this passage there is, of course, no express decision, but there is a sufficiently clear indication that the rights of the surety even if he is a surety for the whole debt but with a limited liability required careful consideration before it can be held that they had no security whatever before payment of the debt. The result of the discussion on a careful consideration of the decided cases is that a surety for a part only of a debt is on payment of that part entitled pro tanto to the security held by the creditor as cover for the debt as a whole.

10. Before concluding, we may refer to one other argument advanced by the learned Counsel for the respondents based upon Section 92, T. P. Act, which embodies the rule of subrogation. Section 91 enumerates the persons who besides the mortgagor are entitled to redeem or institute a suit for redemption of the mortgaged property. Section 92 goes on to state:

Any of the persons referred to in Section 91 (other than the mortgagor) and any co-mortgagor shall, on redeeming property subject to the mortgage, have, so far as regards redemption, foreclosure or sale of such property, the same rights as the mortgagee whose mortgage he redeems may have against the mortgagor or any other mortgagee.

The last clause of the section is

Nothing in this section shall be deemed to confer a right of subrogation on any person unless the mortgage in respect of which the right is claimed has been redeemed in full.

It is clear on a reading of the section that the right of subrogation recognised by it is not available until the mortgage is redeemed in full. But we have here no question of the redemption of a mortgage. Indeed, the appellant Bushayya is not among the persons enumerated in Section 91 on whom alone Section 92 confers the right of subrogation. He is not a surety for the payment of the mortgage debt or any part thereof. The mortgage security was as we have already pointed out given by the principal debtors to the creditor by way of additional security. We are clearly of opinion that Section 92 is wholly inapplicable to the present case.

11. The result is the appeal must be and is hereby allowed. The appellant is declared entitled to a share in the mortgage security represented by the deed, Ex. H, dated 15th April 1931 in the proportion which the debt discharged by him bore to the other two debts now vested in Hanumara Venkayya. The . Court below will pass a preliminary mortgage decree for sale of the hypotheca; the appellant being entitled to the share of the proceeds specified above. Time for redemption shall be fixed at three months. The appellant is entitled to his costs of the appeal and of the suit from the respondents. The question whether the respondents are entitled to have the debt scaled down under the Madras Agriculturists' Relief Act has not been gone into by the learned Subordinate Judge. This question will now be decided and the result incorporated in the preliminary decree. The suit is remanded to the lower Court which will proceed to dispose of it in the light of the findings and observations contained in this judgment.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //