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J. Harigopal Agarwal and anr. Vs. the State Bank of India, Ambattur Industrial Estate and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtChennai High Court
Decided On
Reported in(1976)1MLJ250
AppellantJ. Harigopal Agarwal and anr.;The State Bank of India, Ambattur Industrial Estate
RespondentThe State Bank of India, Ambattur Industrial Estate and ors.;madras Bolts and Nuts (Private) Limited
Excerpt:
.....the bank against the borrower or any other account whatsoever had been fully..........the account to be operated upon either at the madras branch of the bank or any other branch of the bank, the guarantors agreed to guarantee repayment of whatever might be due on the overdraft account. they also agreed that the cash credit account was to be secured by the hypothecation and pledge of goods and documents of title to goods under separate agreements to be taken from time to time. they further agreed that no failure in requiring or obtaining the security or in the observance or performance of any of the stipulations or terms of the said agreement and no default of the plaintiff-bank in requiring or enforcing the observance or performance of any of the stipulations or terms should have the effect of releasing the guarantors from their liability or of prejudicing the bank's.....
Judgment:

K. Veeraswami, C.J.

1. This appeal against a decree of N.S. Ramaswami, J., is brought by defendants 3 and 4. The first respondent-plaintiff, the State Bank of India, allowed the first defendant, a private limited company, to draw from it on three accounts, at its Pondicherry Brand, Lock and Key Credit account, Cash Credit Factory account and Overdraft against bills account. As on 15th September, 1964, the debts on these accounts respectively were Rs. 26,992-94, Rs. 30,160.00 and Rs. 61,707.89. On that date, the appellants became Directors of the Company and executed fresh documents to continue the accounts. On 9th December, 1964 the three accounts were transferred to Madras as NO. 1 account, as the Company's headquarters had been shifted to Ambattur by then. It appears that, on 18th August, 1965 there was due a sum of Rs. 2,36,762.

On that date a new agreement, was executed for Mandy type of account and defendants 2 to 4 executed a guarantee for two lakhs of rupees. On 12th August, 1966 the appellants resigned their directorship. The transactions of deposits and withdrawals by the company continued even thereafter until a suit was instituted. Pendente lite goods worth about Rs. 95,000 were sold with the permission of Court. The trial Judge granted a decree for the entire balance due against the first defendant company, as also the second defendant. So far as the appellants-defendants 3 and 4 were concerned, the decree stated that, since after the filing of the suit a sum of Rs. 95,000 was said to have been realised by the plaintiff-Bank by selling the securities, whatever amount had been realised should go in partial satisfaction of the decree. On 18th August, 1965 the appellants executed a surety agreement securing overdraft account with the State Bank of India to an extent of two lakhs of rupees. It started by saying that, in consideration of the State Bank of India having agreed at their request to grant to the first defendant-company accommodation by way of cash credit to the extent of two lakhs of rupees, the account to be operated upon either at the Madras Branch of the Bank or any other Branch of the Bank, the guarantors agreed to guarantee repayment of whatever might be due on the overdraft account. They also agreed that the cash credit account was to be secured by the hypothecation and pledge of goods and documents of title to goods under separate agreements to be taken from time to time. They further agreed that no failure in requiring or obtaining the security or in the observance or performance of any of the stipulations or terms of the said agreement and no default of the plaintiff-Bank in requiring or enforcing the observance or performance of any of the stipulations or terms should have the effect of releasing the guarantors from their liability or of prejudicing the Bank's rights or remedies against them under the promissory note which they had, as primary security for re-payment of whatever was outstanding on the overdraft account. The document went on to say that the guarantors agreed that they should have no right to the benefit of any other security that might be held by the Bank until the claim of the Bank against the borrower in respect of the cash credit and of all other claims of the Bank against the borrower or any other account whatsoever had been fully satisfied.

2. N.S. Ramaswami, J., on a construction of the agreement of guarantee and after considering Sections 140 and 141 of the Indian Contract Act, held that each of the defendants was liable to pay the Bank the amount outstanding by way of the first defendant's borrowings upto the date of filing of the suit, with the reservation that the liability of the appellants would be with reference to the outstandings as on the date when they resigned as Directors of the Bank. There was also a further reservation, as we have already noted, that any realisation by way of sale of goods pendente lite should also go in reduction of the decree liability of the appellants.

3. On the view we take, it seems to us to be unnecessary to cover the entire area of the issue as settled at the trial. There is no dispute that the liability of the appellants should be confined to that upto the date of their resignation as Directors. The controversy between the appellants and the Bank is whether the appellants as guarantors would not be entitled to a reduction proportionate to the value of the goods available with the Bank as on the date of their resignation as Directors of the Company. The other question is whether the guarantors' liability was also covered by the borrowings of the first defendant prior to the appellants becoming Directors of the Company.

4. So far as the second question is concerned, we have no doubt that the liability of the appellants as guarantors would arise only with reference to the borrowings or outstandings arising subsequent to the date of their becoming Directors and entering into a guarantee agreement and not anterior to that date. The learned Judge who tried the suit, construed the guarantee agreement as covering the liability for the borrowings earlier to the date of the guarantee agreement. We are unable to agree with the construction which he has placed upon the document. Exhibit P-10 is specific in its recitals, and there is nothing in it to indicate that the guarantor's liability would also cover the liability of the Company by way of borrowing on the overdraft account anterior to the date of the guarantee agreement.

5. On the first question, first we shall dispose of the arguments addressed to us with reference to the scope of Sections 139, 140 and 141 of the Indian Contract Act. The first of these sections relates to the discharge of surety by creditor's act or omission impairing surety's eventual remedy. This section has no application to the facts of the present case. Section 140 provides for subrogation where the guarantor clears his liability by payment. He is invested with all the rights which the creditor had with the principal debtor. Section 141 reads :

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, whether the surety knows of the existence of such security or not; and if the creditor loses or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

While the appellants rely on Section 141 for their contention that their liability as guarantors would be confined only to the extent to which the securities were not realised, the learned Advocate-General for the first respondent-Bank contends that the appellants could place no reliance upon Section 141 unless they had made payment towards the guaranteed liability. For the rival contentions, our attention has been invited to a few decided cases and also to Pollock and Mulla Indian Contract Act, 9th Edition. We have given our careful attention to the citations, but feel that, where interpretation of the scope of a particular section is involved, we have first to apply our minds to the language used in the section and the context in which the section occurs. It seems to us that Sections 140 and 141 deal with different situations. Section 140 applies where a guarantor has paid the whole or part of the liability which is guaranteed and, in that case, the guarantor pro tanto will be surrogated to the position of the creditor and as sub-rogee he will be entitled to all the rights which the creditor had against the principal-debtor. In other words, this section, by reason of payment by the guarantor, entitled him to enforce the securities in his own right, which were originally available to the creditor. Section 141, however, applies to a different situation. It is designed to protect the guarantor against the acts of the creditor losingor without the consent of the surety or guarantor parting with the security. The protection, according to the learned Advocate-General, is available only when the surety has paid. We are unable to accept this contention, for there is no such indication in the section. In fact, the first illustration to the section shows that payment is not a requisite for the benefit contemplated by the section to accrue to the surety. This is not a case of subrogation but a case where the surety is entitled to a discharge of his liability pro tanto the value of the security discharged in proportion to the extent of the value of security which the creditor has lost or which without the consent of the guarantor he has parted with. This is what is brought out by the first illustration. Where payment has been made by the guarantor, there is no need to resort to Section 141. While Section 140 relates to the enforcement of liability under the security available to a creditor, Section 141 deals with the protection of a guarantor and reduction of his liability in proportion to the security lost or parted with by the creditor without the guarantor's consent.

6. In the light of this construction which we arc inclined to place on those two sections, argument had been addressed to us for the appellants that, as on the date of the appellants resigning as Directors of the Company, goods worth more than two lakhs of rupees were available with the creditor as security for the outstandings, and that these should go in reduction of the guarantor's liability. But this approach had not been made at the trial in that form. A petition, C.M.P. No. 9777 of 1974, has been filed to amend the written statement to take the plea. We have allowed that petition. In the light of this plea, the question arises what was the security available with the Bank at the time the contract of suretyship was entered into. That expression in Section 141, namely, 'when the contract of suretyship is entered into', only means that the surety cannot claim any benefit to any security available before that date. Having regard to the peculiar nature of the security, namely, the goods which according to the agreement between the Bank and the appellants should be sold from time to time and the proceeds should be brought to the credit of the borrower for adjustment, we are inclined to think that, the account being a continuous one and so too the transactions of sale of goods brought in from time to time, the value of the goods available as security at the time the appellants resigned as Directors of the Company should be taken into account, for purposes of adjusting the guarantor's liability.

7. Since we have only the figures furnished by the Bank as to the various transactions relating to the sale of the goods available as on the date of the appellant's resignation as Directors of the Company and prior to the institution of the suit, it is necessary that further evidence will have to be taken. The learned Advocate-General represents to us that such evidence is necessary to explain the entries. We accept his contention.

8. On that view, we allow the appeal, set aside the decree of the learned trial Judge in so far as it related to the appellants and direct that the suit be disposed of afresh in respect of them after taking further evidence, oral and documentary. Since we remit the matter to the trial Court, the Court fee paid by the appellants will be refunded to them. The costs of the appeal will abide the result of the suit as regards the appellants.


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