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Lloyds Bank, Ltd. Vs. P.E. Guzdar and Co. - Court Judgment

LegalCrystal Citation
Subject Property
CourtKolkata
Decided On
Reported inAIR1930Cal22,121Ind.Cas.625
AppellantLloyds Bank, Ltd.
RespondentP.E. Guzdar and Co.
Cases ReferredBriggs v. Jones
Excerpt:
- page, j.1. this is a case of conflicting equities. the defendant firm p.e. guzdar & co. mortgaged 42, chowringhee road, calcutta, to the national bank of india by delivery of the title deeds to secure an overdraft in their current account with the bank, and afterwards, having regained possession of the title deeds, mortgaged the property in like manner to lloyds bank to secure a loan of rs. 5,00,000. the question is, which of the two mortgages in the circumstances is entitled to priority? now, the defendant firm consisted of two partners e.p. guzdar and m.c. guzdar, and, by a power-of-attorney executed on 23rd november 1922, the partners invested their respective sons, j.b. guzdar and k. m. guzdar, with a general power to manage and carry on the business of the firm.2. it appears from the.....
Judgment:

Page, J.

1. This is a case of conflicting equities. The defendant firm P.E. Guzdar & Co. mortgaged 42, Chowringhee Road, Calcutta, to the National Bank of India by delivery of the title deeds to secure an overdraft in their current account with the bank, and afterwards, having regained possession of the title deeds, mortgaged the property in like manner to Lloyds Bank to secure a loan of Rs. 5,00,000. The question is, which of the two mortgages in the circumstances is entitled to priority? Now, the defendant firm consisted of two partners E.P. Guzdar and M.C. Guzdar, and, by a power-of-attorney executed on 23rd November 1922, the partners invested their respective sons, J.B. Guzdar and K. M. Guzdar, with a general power to manage and carry on the business of the firm.

2. It appears from the evidence and I find that at all material times the business of the firm - at any rate in connexion with the plaintiff and defendant banks - was carried on by J.B. Guzdar; that J.E. Guzdar was the only representative of the firm who had any dealings personally with either of the banks, and in the transaction relating to the mortgages in suit J.E. Guzdar alone was interviewed by the officials of the banks. The title deeds of 42, Chowringhee Road, stood in the name of E.P. Guzar, and on 17th September 1924, when the deeds for the first time were deposited by J.E. Guzdar, and again on 26th November 1927, when they were redeposited by him with the defendant bank, J.E. Guzdar produced a letter, which the defendant bank retained, purporting to have been written by E.P. Guzdar admitting that the title deeds had been deposited as security for the repayment of the advances. No such letter was produced when J.E. Guzdar subsequently deposited the title deeds with Lloyds Bank, but both Thomas and Allan stated that when the title deeds were deposited they dealt with J.E. Guzdar upon the footing that he was acting as the agent of the firm under the power of attorney, and having regard to the course of business, the power-of-attorney, and the fact that the members of the firm have never denied the authority of J.E. Guzdar to mortgage the firm's property by delivery of the title deeds to secure advances from the banks or either of them. I am of opinion that J.E. Guzdar in effecting the mortgages in suit purported to be, and was, acting, within the scope of his authority as the1 agent of the firm. Now, prima facie and apart from notice the priority of mortgages in India depends upon the respective dates of their creation, the earlier in date having the precedence Transfer of Property Act (4 of 1882), Sections 48, 58, 59, 78, 79, 80; Imperial Bank of India v. U. Rai Gyaw Thu & Co. Ltd. A.I.R. 1923 P.C. 211, Webb v. Macpherson [1903] 31 Cal. 57, Coggan v. Pogose [1884] 11 Cal. 158, Gokul Dass v. Eastern Mortgage and Agency Co. [1905] 33 Cal. 410.

3. It is necessary, therefore, to ascertain the circumstances in which the two mortgages in suit were created in order to determine whether in law the mortgage to the National Bank, which is earlier in date, has lost its right to priority. I will consider first the circumstances attending the creation of the mortgage in favour of Lloyds Bank, the plaintiff. It is common ground that at all material times prior to 3rd July 1928, when P.E. Guzdar & Co., failed, the defendant firm was regarded as a sound and reliable commercial undertaking, and that neither bank, where the deeds were deposited, was under the impression that the firm would not be able to carry out its obligations. In each case, however, the deeds were deposited by way of security for monetary advances, and each bank relied upon the title deeds as effective security for repayment of its loan. It appears that since 1926 the firm had been customers of the plaintiff bank, and from time to time had obtained loans from the bank, which had duly been repaid. In the early part of June 1928, J.E. Guzdar obtained an interview with Thomas, the manager of the bank, and informed him that Guzdar & Co., would be requiring a temporary loan at the end of June for the purpose of floating a limited company to acquire their aluminium business, and Thomas said that the bank would provide the necessary accommodation if reasonable security was forthcoming. At that time the current account of the firm was in debit to the extent of about Rs. 60,000. On 20th June, J.B. Guzdar called at the bank; produced the title deeds of 42, Chowringhee Road; asked Thomas to satisfy himself that there were no encumbrances upon the property, and said that he would return in a few days and formally deposit the deeds. Now, it is of importance to bear in mind that under Section 59, T.P. Act, a mortgage may be created by delivering to the mortgagee the documents of title to immovable property in Calcutta and in certain other districts. Such mortgages being created merely by depositing the title deeds ex necessitate rei would not be registered, and Thomas stated that when J.E. Guzdar referred to 'encumbrances upon the property' he understood him to mean registered encumbrances, and not mortgages by way of the deposit of title deeds which in India are commonly, though loosely and inaccurately, called equitable mortgages. On 21st June the plaintiff bank instructed their solicitors, Morgan & Co., to have the registers searched for encumbrances, and were informed, though not before 30th June that no encumbrances had been registered. Meanwhile, on 26th June, J.E. Guzdar personally deposited the title deeds with the bank by way of security for a loan of live lacs, and signed a promissory note for that amount in the name of the firm. The loan was placed in deposit account, and against the five lakhs so deposited J.E. Guzdar became entitled to overdraw on the firm's current account. On 27 June, J.E. Guzdar drew cheques against the loan of five lacs, and the total sum due from the firm to the.plaintiff bank in respect of the loan and the current account when the present suit was filed was Rs. 4,65,747-3-9. In the course of his examination Thomas was asked:

Q. 31. - You gave him accommodation for five lacs against the deposit of these title deeds? Yes.

Q. 33. - When you did that had you any suspicion at all that there were any encumbrances on this property? None whatever, otherwise I should not have accepted them.

Q. 34.-Had you any suspicion that there was an equitable mortgage attached to this property? None, there could not be.

Q. 35.- Why do you say 'there could not be'? Because I had the deeds.

Q. 36. - Because he produced the deeds? Yes.

4. Upon the evidence I am satisfied and find that the plaintiff bank was induced to advance five lacs to the defendant firm upon the security of 42, Chowringhee Road, because J.E. Guzdar produced the title deeds, thereby fraudulently representing to the plaintiff bank and inducing it to believe that there was no equitable mortgage upon the property.

5. No doubt it would have been wiser policy for the bank to have refused to accept the mortgage until the result of the search had been received, but the action of the bank in not waiting for the search report in no way affected the course of events, and I find that there was no act or omission on the part of the plaintiff bank which can deprive it of such rights as accrued to the bank by the creation of the mortgage in its favour. It was also not disputed, and I find, that it was the action of the defendant bank in handing back the title deeds to J.E. Guzdar that enabled him to induce the plaintiff bank to advance the five lacs on depositing the title deeds as security.

6. Allan was asked:

Q. 109 - I suppose it is fair to say that if you had not given these deeds over to Mr. Guzdar he would not have been able to take them to Lloyds Bank? That is so,

Q. 110. - And if the deeds had remained in your safe there would have been no transaction on them with Lloyds Bank? That is so.

Q. 111. - You don't suggest that Mr. Thomas acted in any other way than in good faith in this matter? None whatever.

Q. 112. - And he must genuinely have believed that the man who brought him these deeds had power to pledge them or mortgage them? He apparently had.

Q. 113. - You have no reason to suppose otherwise? None whatever.

Q. 114. - To that extent at any rate you will admit, Mr. Allan, that the fault was yours? It was, to that extent.

7. I must now consider the circumstances under which the defendant bank handed back the title deeds to Guzdar in order to determine whether the conduct of the defendant bank was such that the mortgage to the defendant bank, though prior in date, is to be postponed to that of the plaintiff bank. Prom 1921, until the firm failed on 3rd July 1928. P.E. Guzdar & Co. had been customers of the defendant bank, and when the firm's account was opened the title deeds of 42, Chowringhee Road, were deposited with the bank to secure an overdraft to a miximum limit of 6 lacs. In 1921 the overdraft limit was increased to 10 lacs, and in December 1927, J.E. Guzdar, on behalf of the firm, applied for a further temporary advance of five lacs, pending the result of negotiations for the sale of 42, Chowringhee Road, on the further security of other immovable property and the hypothecation of the firm's stocks in their godowns. It was expected at that time that, the sale of 42, Chowringhee Road, would realize about eight lacs, and it was arranged that the proceeds of the sale should be utilized to reduce the indebtedness of the firm on the overdraft of its current account. It was further agreed that if 42, Chowringhee Road, was not sold by 30th June 1928, the limit of the overdraft should be reduced to 10 lacs. Allan, the sub-manager of the dependant bank, stated that while the firm was a customer of the bank there never had been any trouble between the bank and the firm, and in June 1928, the bank had no reason to suppose that the firm was not a reliable undertaking or in a condition of financial embarrassment. On 22nd September 1927, J.E. Guzdar, who was the only representative of the firm with whom Allan at any time had any business dealings, asked Allan to allow him to take away the title deeds of 42, Chowringhee Road, for the purpose of showing them to a prospective purchaser of the property, and Allan thereupon handed the title deeds to J.E. Guzdar. J.E. Guzdar returned the deeds on 7th November 1927, stating that the negotiations for the purchase had proved abortive. On 13th June 1928, J.E. Guzdar called at the bank, and again asked Allan to allow him to have possession of the title deeds. At that time the current account of the firm was in debit to the extent of about 16 lacs, and, as appears from the letter of 30th June from the bank to the firm and the statement, Ex.'9 (which was adduced in evidence by the defendant bank), the bank was anxious that the firm should not fail to reduce its indebtedness by 30th June according to the arrangement made in December 1927. Further, as the firm was under an obligation to find more than five lacs by 30th June, it would be for the benefit of the bank that a purchaser of 42, Chowringhee Road, should pay as high a price for the property as he could be induced to give, for the higher the price the greater the facilities at the disposal of the firm to enable them to reduce their indebtedness to the bank. In these circumstances, J.E. Guzdar requested the bank to hand the title deeds to him to show to a purchaser of the property, 'as they had finally concluded an arrangement for the sale.' On 15th June Allan gave back the deeds to J.E. Guzdar.

8. I am bound to say that I was not impressed by the way in which Allan gave his evidence as to the reasons which induced him to part with the title deeds by handing them to J.E. Guzdar on 15th June. The prudent and normal practice of the defendant bank and of other responsible bankers in Calcutta who hold the title deeds of property deposited with them as security for an advance, when the mortgagor applies that the title deeds may be shown to a purchaser of the property, is not to allow the mortgagor to have possession of the title deeds, but to hand over the title deeds to the bank's solicitors on their accountable receipt in order that the bank's solicitors should arrange with the solicitors of the purchaser for the examination of the documents. To adopt this practice is not only a prudent but the only safe course for a bank to follow in Calcutta and in the districts to which Section 59, T.P. Act applies, for such mortgages are not capable of registration, and to permit the mortgagor to have possession of the title deeds is to put it in his power to raise money on the property by representing that no mortgage thereon by way of deposit of title deeds had been effected. Allan stated that he suggested to J.E. Guzdar that the usual course should be followed, and that inspection should be given through the solicitors. Now, if the property had already been sold, there could have been no objection to the usual practice being followed, and Allan at first stated that Guzdar told him that the property had been sold, and that he had handed over the deeds to him as he trusted him and had no reason to suppose that Guzdar would be dishonest. But it must be borne in mind that Allan knew that, although the estimated value of the securities held by the bank was sufficient to cover the firm's indebtedness, the firm's account was an overdraft account, and the debit balance was about 16 lacs; that previous attempts to sell the property had come to nothing, and that the firm was under a legal obligation to find at least five lacs within two or three weeks in order to reduce their indebtedness within the agreed limit. I am of opinion that in such circumstances the bank was running an unreasonable risk in departing from what admittedly was the usual and prudent practice, and in allowing J.E. Guzdar to obtain possession of the documents of title. Later in his evidence Allan changed his ground, and stated:

I am not positive that he said definitely that the sale had been concluded. Ho gave us to understand that it was practically on the point of being sold, and it was only a question of inspection.

9. It was essential for the case that Allan was then making that lie should have understood that the matter was still in the stage of negotiation and that the sale had not been concluded, because he stated that a special reason or excuse had been given by J.E. Guzdar which, in part at any rate, had induced him to depart from the usual practice and the excuse given would have been no reason at all justifying a departure from the usual prudent course taken by bankers if the property had already been sold. Allan was asked:

Q. 154. - You said there was some particular remark that he made which made you depart from the usual course? Yes, he said if we handed the documents through the usual course, which meant through our solicitors over to the buyer's solicitors, then the buyer would know that the deeds had been pledged, and he would probably attempt to beat us down in price thinking we needed money.

Q. 155. - That is what he said? Yes.

Q. 156. - You are quite sure? Yes, quite certain. And again:

Q. 226. - You remember that little conversation with Mr. Guzdar when he said 'it will be a pity for the deeds to go through the solicitors' and so on? Yes.

Q. 227. - Did you understand from him that he did not want his buyer to know that there was an encumbrance on the property? Yes.

Q. 228. - When you handed over these documents to him did you do so in order that he might represent or to facilitate his representing to the buyer that there was no encumbrance on the property? That did not enter into my mind at all, that ho did want to do so; he was merely selling the property. He wanted to get as good a price as he could.

Q. 229. - You understand that he did not want the buyer to know that there was an encumbrance? That is so.

Q. 230. - And what he was asking was to effect that purpose, for that purpose? Yes.

Q. 231. - Then your handing over the deeds to him was in order to represent to the buyer that there was no encumbrance? That may be so.

Q. 232 - It is so? Yes.

Q. 233. - You know, of course, that here in Calcutta and in India generally there is a system of registration, that is to say, regular mortgages are registered? Yes.

Q. 234 - Of course, there is no registration of equitable mortgages? That is so.

Q. 235 - Did you make enquiries as to who the buyer was? I can't remember.

10. In these circumstances Allan handed over the title deeds to J.E. Guzdar, and took from him a receipt in the following, terms:

Received from the National Bank of India,. Limited, title deed of 42, Chowringhoo, held by them as security against overdraft in our current account.

We undertake to pay the sale proceeds of the property sold by us otherwise we undertake to return the said title deeds to the Bank.

P.E. Guzdar & Co.

Calcutta, 15th June 1928.

11. On 27th June, Cook, the manager of the bank, telephoned to J.E. Guzdar inquiring when the money would be paid, and J. B. Guzdar said that payment would be made on 30th June. On 30th June, Cook wrote to P.E. Guzdar & Co. requesting that the reduction of the overdraft should immediately be carried out, and calling upon the firm to return the title deeds without further delay. On 3rd July, the firm failed.

12. The question is whether in these circumstances the mortgage to the defendant bank is to be postponed to that of the plaintiff bank.

13. The material section of the Transfer of Property Act is Section 78, which is in the following terms:

Where, through the fraud, misrepresentation or gross neglect of a prior mortgagee, another person has been induced to advance money on the security of the mortgaged property, the prior mortgagee shall be postponed to the subsequent mortgagee.

14. Now, the origin of the rules of equity which regulate the priority of mortgages in England is to be found in the conscience of the Chancellors which was offended by the notion that a mortgage, though prior in date, should have precedence in circumstances which rendered it inevitable that injustice would be done if its rights to priority was sustained.

15. But, in seeking to penetrate the dark recesses of the cases decided by the English Courts administering equity 'as furnishing by way of illustration a useful clue to the meaning' of the terms of this section: see per Jenkins, J., in Monindra, Chandra Nandy v. Troyluckho Nath Burat [1898] 2 C.W.N. 750, a Judge in India is embarking upon a perilous though interesting adventure, for the equity Judges in England in endeavouring to evolve rules by which to regulate the priority of mortgages in accordance with the principles of equity and good conscience found themselves confronted with the sanctity attaching to the legal estate with which English law was saturated, and were constrained to interfere with the legal rights of a owner of the legal estate in such circumstances only as plainly violated the fundamental principles of justice. The result has been that:

in cases of this class injustice is sometimes done, and, but for the honour and integrity generally shown by the persons engaged in these transactions, much more might frequently be done. It is impossible to reflect on this injustice without finding, very cogent arguments in favour of some attempt to improve the state of the law as to the title of real estate, and to get rid of the difficulty which arises from the distinction between a, legal and an equitable estate : per Lord Selborne, L.C., in Diron v. Mucaleston [1872] 8 Ch. 155.

16. In India, however, a Judge is able to approach the subject with his mind untrammelled by the peculiar rights and privileges by which in England the legal estate is hedged about; for:

it is to be observed that there is hero no-distinction between legal and equitable mortgages as in English Law, where the legal mortgage will always prevail against the equitable unless the holder of the legal estate has done or omitted to do so something which prevents him in, equity from asserting his permanent rights : per Lord Dunedin in Imperial Bank of India v. U. Rai Gyaw Thu & Co. Ltd. A.I.R. 1923 P.C. 211.

17. In England a mortgage by deposit of title deeds, such as the mortgages in suit, is not regarded in law as an actual conveyance of the property, although in equity 'such deposit might effect a mortgage good against the mortgagor;' but in India:

unless the deposit of title deeds effects the transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced it is absolutely nothing at all. Further, the concluding words of Section 59 actually use the word 'mortgage' to denote the security effected by delivery of documents of title.

18. The learned Advocate General urged that in India a mortgage by way of deposit of title deeds having the same status as a mortgage created in any other way, the mortgage to the defendant bank could only be postponed to that of plaintiff bank upon grounds which would justify the postponement of a 'legal' mortgage in England. I entirely demur to such a proposition, which, in my opinion is wholly untenable; for:

as stated by the Judicial Committee in the case of Webb v. Macpherson [1903] 31 Cal. 57, the law of India, speaking broadly knows nothing of the distinction between legal and equitable property in the sense in which that was understood when equity was administered by the Court of Chancery in England. The case of the company, as presented to us, is that they are 'legal' mortgagees and that they are in the same position as a legal mortgagee in England, who has obtained the legal estate without notice of the prior equitable encumbrance. But the reasoning is fallacious, because in India-there is no such distinction between legal and equitable estates as is known to the English Law : per Maclean, C.J., in Gokul Dass v. Eastern Mortgage and Agency Co. [1905] 33 Cal. 410.

19. In India where, except as provided by statute, no distinction exists in the status of mortgages, in like manner, apart from statute, no distinctioni s made in the rules that regulate their priority. It behoves an Indian Court, therefore, to interpret Section 78 in the light of the conditions prevailing in India, and not to put a forced or peculiar construction upon the terms used in the section through attaching undue importance to the moaning attributed to similar words by English Courts diverso intuitu, and in circumstances that do not obtain in India.

20. Now, in this case I am relieved from the necessity of interpreting the meaning of the term 'fraud' in Section 78, T.P. Act, because there is no allegation in the plaint that the plaintiff bank was induced to advance money on the security of 42, Chowringhee Road, by reason of any fraud on the part of the defendant bank. If a plaintiff desires to press a claim to relief against a defendant upon the ground of fraud, fraud must be pleaded and particulars of the fraud alleged must specifically be set out. I refrain, therefore, from expressing an opinion as to whether, if fraud had aptly been pleaded, the defendant bank in this transaction was or was not guilty of fraud in the sense in which that term is used in Section 78. I am bound, however, to consider whether the plaintiff bank was induced to accept the mortgage of 26th June by reason of the 'gross neglect' of the defendant bank.

21. Now, what is the meaning of 'gross neglect' in this section? The decisions at common law in this connexion are not of much assistance, for:

the action at law for negligence imports the existence of a duty on the part of the defendant to the plaintiff, and a loss suffered as a direct consequence of the breach of such duty;

22. Whereas it cannot, I think, fairly be said that a mortgagee owes a duty to all persons who in the future may become puisne mortgagees of the same property to take care that the mortgagor is not enabled to commit a fraud upon subsequent encumbrances by allowing him to be in possession of the documents of title.

23. Title deeds are not in the eye of the law analogous, to fierce dogs or destructive elements where from the nature of the thing the Courts have implied a general duty of safe custody on the part of the person having their possession or control' Per Fry L.J. in Northern Counties of England Fire, Insurance Co. v. Whipp [1884] 96 Ch. D. 482 and a person in possession of title deeds is not under an absolute obligation at all events to retain possession of them lest, perchance, if inadvertently he allows them to pass out of his possession, he thereby enables another person to commit a fraud. Further, (there must be a direct connexion between the 'gross neglect' and the inducement to make the subsequent, advance, for to cite a familiar illustration in one sense every man who sells a pistol or a dagger enables an intendin gmurderer to commit a crime; but is he, in selling a pistol or a dagger to some person who comes to buy in his shop acting in breach of any duty? Does he owe any duty to all the world, as is suggested here, to prevent people taking advantage of his selling pistols or daggers in his business, because he does in one sense enable a person to commit a cime?', Per Lord Halsbury, L.J. in Farguharson v . King [1902] AC. 282; see also Per Lord Watson in Scholfield v. Earl of Londesborough [1896] A.C. 514.

24. Before a prior mortgage can be postponed under Section 78 the Court must be satisfied that the subsequent encumbrarer was induced directly and not remotely to advance money on the security of the property by reason of the gross neglect of the prior mortgagee.

25. What then is 'gross neglect' within Section 78? I respectfully agree with Lord Cranworth that

cases are very difficult to deal with when you are obliged to use vituperative epithets of that sort to enunciate a principle. What constitutes 'gross negligence' is always excessively difficult to define or by way of anticipation to illustrate,' Cclyer v. Finch [1856] 5 H.L.C. 905, but it must be something which raises a positive equity against him, upon the principle which in equity, as distinct from law, is conveniently designated by the term 'estoppel.' In other words, the man who has conducted himself in such a manner is not entitled to deny the truth of his own representations if it be a case of express representation he is not entitled to deny being bound by the natural consequences of his own acts if it be a case of positive acts ho is not entitled to refuse to abide by the consequences of his own wilful and unjustifiable neglect, if that is the nature of the case. By one or other of those means he may have armed another person with the power of going into the world under falso colours; and if it be really and truly the case that by his act, or his improper omissions, such an apparent authority and power has been vested in that other person, he is bound upon equitable principles by the use made of that apparent authority and power. But as that is a doctrine resting upon the highest principles of justice, the Courts of Equity have been very careful that it should not be extended beyond the point at which it is consonant with practical justice; and this particular class of cases has presented very difficult questions for determination on that point' Per Lord Selborne L.C. in Dixon v. Mackleston [1872] 8 Ch. 155.

26. As the issue raised is one of general importance, and of special concern to the commercial community, I have taken time to look into the authorities, and in my opinion, 'gross neglect' in Section 78 means and involves a failure on the part of the prior mortgagee to take such reasonable precautions against the risk of a subsequent encumbrancer being deceived as in the circumstances renders it unjust that the earlier mortgage should retain its priority. Bach case must turn upon its own facts, and it is undesirable even if it were practicable, that I should attempt to define the term with more particularity or precision. For instance, an act or omission that would amount to gross neglect in a banker or a man of business might not so be regarded in the case of an ill-educated man or a woman Again,

where the relation between the equitable incumbrancer and the person in possession of the title deeds is not merely that of mortgagee and mortgagor, but is of a fiduciary nature (as for example, that of cestui que trust and trustee, or client and solicitor), there is a great body of authority to shew that the equitable incumbrancer is not to be deprived of his priority by reason of the improper act uf the person entrusted with the deeds, so long, at all events, as the incumbraneer has no ground to suppose that there has been any want of good faith on the part of the custodian of the deeds; Par Parker, J. in Walker v. Linom [1907] 2 Ch. 104

Or again, where the prior mortgagee has surrendered the title deeds to the mortgagor but the prior mortgage had been registered and a later prospective encumbrancer by searching the register would thus be in a position, if he made reasonable enquiry, to discover its existence, the Court would, I conceive, be slow to hold that the prior mortgagee had been guilty of 'gross neglect,' or that the action of the prior mortgagee in failing to retain possession of the title deeds had in any direct way caused or induced the later encumbrancer to advance money on the security of the property: see Agra Bank Limited v. Barry [1874] 7 H.L. 135. I am bound to state with all respect for the opinion of that distinguished Judge that I am unable to subscribe to the view which Jenkins, J., appears to have expressed in Monindra Chandra Nandy v. Troyluckho Nath Burat [1898] 2 C.W.N. 750, that 'gross neglect' in Section 78 means neglect that amounts to evidence of fraud, as laid down in the cases of Evans v. Bicknell [1801] 6 Ves. 174, Martinez v. Cooper [1826] 2 Russell. 198, and Farrow v. Rees [1840] 4 Beav. 18, to which he referred. I confess that I have never been able to understand how negligence can be evidence of fraud, although, no doubt, the facts proved may be evidence of negligence or evidence of fraud. Lord Eldon, who enunciated this doctrine obiter in Evans v. Bicknell [1801] 6 Ves. 174, in that case was laying down the equitable rules for postponement of a 'legal' mortgage, and, for the reasons that I have stated, Lord Eldon's observations in such circumstances must, be received with caution, and may prove to be an unrealiable guide to a true construction of Section 78. The fact that a 'legal' mortgagee without any reasonable excuse had made no enquiry as to the whereabouts of the title deeds may be; perhaps, evidence of a dishonest refusal; to make such an enquiry because the; mortgagee had reason to suspect the existence of a prior encumbrance, but how negligence in surrendering the title deeds to the mortgagor can be evidence of fraud I am bound to say that I find it, difficult to understand.

27. Lord Justice Fry seems to have experienced the same difficulty, for in Nothern Counties of England Fire Insurance Co. v. Whipp [1884] 26 Ch. D. 482, he referred to the language of Lord Eldon in Evans v. Bicknell [1801] 6 Ves. 174 and Martinez v. Cooper [1826] 2 Russell. 198, as:

'loose and difficult to construe,' and observed that 'the expression 'gross negligence' that amounts to evidence of a fraudulent intention is certainly embarrassing, for negligence is the not doing of something from carelessness and want of thought or attention ; whereas a fraudulent intention is a design to commit some fraud, and leads men to do or omit doing a thing not carelessly but for a purpose.'

28. The doctrine of equity upon which Jenkins, J. relied in Monindra Chandra Nandy v. Troyluckho Nath Burat [1840] 4 Beev. 18, has not been approved or followed in recent cases, and, the true rule that regulates the postponment of 'legal' mortgages in England, in my opinion, was laid down by Lindley, M.R. in Oliver v. Hinton [1899] 2 Ch. 264, and in substance is the same as what I have stated to be the meaning and effect of the rule for postponement on the ground of gross neglect in Section 78, T.P. Act. His Lordship held that:

to deprive a purchaser for value without notice, of a prior encumbrance of the protection of the legal estate it is not, in my opinion, essential that he should have been guilty of fraud; it, is sufficient that he has been guilty of such gross negligence as would render it unjust to deprive the prior encumbrancer of his priority. : see also among other cases Madras Hindu Union Bank, Ltd. v. C. Venkatrangiah [1889] 12 Mad. 424, Shan . [1901] 15 C.W.N. 813, Shropshire Union Railways & Canal Co. v. Reg. [1875] 7 H.L. 496, Hewitt v. Loosemore [1851] 9 Hare 449, Waldron v. Sloper [1852] 1 Drewry 193, Manners v. Mew [1885] 29 Ch. D. 725, In re, Vernon, Ewens & Co. [1886] 33 Ch. D. 402, Farrand v. Yorkshire Banking Co. [1888] 40 Ch. D. 182, In re, Castell & Brown, Ltd. [1898] 1 Ch. 315, Rimmer v. Webster [1902] 2 Ch. 163, Burgis v. Constantine (1908) 2 K.B. 484, Grirson v. National Provincial Bank of England, Ltd. [1913] 2 Ch. 18, Hudston v. Viney [1921] 1 Ch. 98.

29. The decision in Hall v. West End Advance Co. Ltd. [1883] 1 Cab. & Ell. 161, upon which the learned Advocate General relied, may be supported on the ground that the loss which the later encumbrancers sustained was:

quite as much due to their own neglect and want of care as to the plaintiff's original carelessness.

30. If the construction that I have put upon the term 'gross neglect' in Section 78 is correct, I am clearly of opinion that the mortgage of the defendant bank must be postponed to that of the plaintiff bank. In my judgment Allan, the sub-manager of the defendant bank, was guilty of gross and wilful negligence in surrendering the title deeds to J.B. Guzdar in the circumstances disclosed by the evidence. He knew that the defendant firm were under an obligation to find about six lacs within less than three weeks; he knew that previous negotiations to sell the property had failed; he knew that J.E. Guzdar intended to raise money by means of the title deeds of the property; he knew that, in order to find money to reduce the overdraft to the bank, J.E. Guzdar was minded, by producing the title deeds to a prospective purchaser, dishonestly and falsely to represent to the purchaser that there was no existing equitable mortgage on the property and thereby to induce him to purchase the property, or to pay a higher price than otherwise lie might have paid; and he knew that in surrendering the title deeds to J. E.Guzdar he was departing from the normal and prudent practice of the defendant bank and of all responsible bankers in Calcutta. And yet with all this information at his disposal, and being fully aware that the bank was relying upon the title deeds as a substantial security for repayment of the firm's overdraft, Allan stated that he banded the title deeds to J.E. Guzdar because he believed that the partners of the firm were reliable and trustworthy persons, and J.E. Guzdar himself on a previous occasion had duly returned the title deeds to the bank. I am of opinion that, in surrendering the title deeds to J.E. Guzdar, in the circumstances obtaining in this case, the defendant bank was guilty of gross neglect, and as the plaintiff bank by reason of such gross neglect was induced to advance money on the security of the property, the mortgage of the defendant bank must be postponed to that of the plaintiff bank.

31. I arrive at the same conclusion on a further or alternative ground. The rule of equity to which I wish to refer is explained in the judgment of the Court in Perry Herrick v. Attwood [1857] 2 De. G. & J. 21, Briggs v. Jones [1870] 10 Eq. 92, Brocklesby v. Temperance Building Society [1895] A.C. 173, In re Castell & Brown, Ltd. [1898] 1 Ch. 315, and Rimmer v. Webster [1902] 2 Ch. 163. In the case of In re Castell and Brown [1905] 33 Cal. 410, Homer, J., observed:

I take it to be established that if a first mortgagee, oven though he has the legal estate, authorizes the mortgagor to retain the deeds in order that the mortgagor may thereby, as ostensible owner of the property, be able to deal with it though only to a limited extent, yet if the mortgagor, takes advantage of the deeds so loft with him to deal with the property to an extent beyond what was authorized, then the mortgagee cannot sat up his charge as against an incumbrancer for value without notice, who claims under the unauthorized dealing and relied on the deeds and the apparent ability of the owner to deal with the property free from incumbrances.

32. His Lordship added:

this being the case as between a prior legal mortgagee and a subsequent equitable incumbrancer it is an a fortiori case where the first mortgage is only equitable.

33. And in Rimmer v. Webster [1902] 2 Ch. 163, Farewell, J., laid down that if the action of the prior mortgagee

is also consistent with an intention that the person to whom the indicia of title are entrusted should deal with them; and if it is once proved, or admitted, that such was the intention, the case then falls to be decided in accordance with the principles governing the cases of authority given by a principal to an agent; and the owner comes under a duty to the persons whom he intends to act on such authority to give them notice of any limit that he places on the authority, which he has by his own act made apparently co-extensive with absolute ownership. This disposes of Mr. Upjohn's contention that the cases of Perry Herrick v. Attwood [1857] 2 De. & J. 21, and Brocklesby v. Temperance Perminent Building Society [1895] A.C. 173 are confined to an excess of the limit of borrowing, and do not extend to a mortgage when the authority is only to sail. The authority which the owner has given can only be limited by the indicia of property which he has given.

34. In my opinion, the present case is covered by the election in Briggs v. Jones [1870] 10 Eq. 92 and whether this equitable rule is founded upon estoppel by representation or agency it is clearly established that conduct on the part of the first mortgagee which violates the rule has the effect of postponing the mortgage of the prior mortgagee to that of the later encumbrancer.

35. It cannot be doubted, I think, that the action of Allan in surrendering the deeds to J.E. Guzdar brings the present case within the principle of this rule of equity. It is apparent from the evidence that Allan intended that J.E. Guzdar should use the title deeds for the purpose of raising money by the sale of the property, and if the sale was completed that J.E. Guzdar should not be under any obligation to restore the title deeds to the defendant bank. To permit the defendant bank to retain priority for its mortgage, when it deliberately had entrusted J.E. Guzdar with the indicia of title for the purpose of dealing with the property in order to raise money to reduce the bank's overdraft and thereby had directly enabled Guzdar to obtain a mortgage from the plaintiff bank upon the security of the property, would be against the plainest equity. For these reasons, therefore, I hold that the mortgage of the defendant bank must be postponed to that of the plaintiff bank, and there will be a declaration to that effect in favour of the plaintiff bank.

36. A further question arises as to the extent to which the plaintiff bank is entitled to claim priority. That depends upon the amount of the advance which the plaintiff bank was induced to make upon the security of the title deeds.

37. On behalf of the defendant bank it is urged that the sum advanced was only four lacs, because it was four lacs only which was drawn out by Guzdar on 27th June.

38. This contention does not appear to be in accordance with the facts.

39. On 27th June, J.E. Guzdar drew four cheques upon the plaintiff bank for Rs. 50,000, Rs. 1,50,000, Rs. 2,00,000 and Rs. 1,00,000 respectively, aggregating five lacs. Of these five lact cheques to the value of four lacs were cashed by the firm and found their way into the Bank of India.

40. As regards the cheque for one lac, a transfer cheque by the firm appears to have been paid into Lloyds Bank for a like amount. It is not quite clear whether this was so, or whether the cheques drawn upon the bank in favour of the firm of an aggregate value of five lacs were all paid into the Bank of India, and a cheque for. one lac drawn by the firm on the Bank of India and paid, into Lloyds Bank to the credit of the firm. In my opinion, it does not matter which course was taken; for, in substance, what took place on 27th June was that the plaintiff bank advanced upon the security of the title deeds five lacs of which four lacs was paid in cash while the bank credited the firm in current account to the extent of a further lac. The one lac represented by the cheque paid into the plaintiff bank on 27th June, to the credit of the firm was allocated to the current account, and the effect of so doing was to wipe out the debit on the current account on 26th June, namely, Rs. 63,105-14-3, the balance being appropriated in reduction of the five lacs which had been advanced to the firm on the security of the title deeds. On 5th July, a further sum of Rs. 6,982-8-0 was paid into the bank to the credit of the firm, and appropriated in further reduction of the loan of five lacs.

41. On 5th July, it appears that the plaintiff bank debited the firm with a sum of Rs. 25,000 in respect of a hundi drawn on F.P. Walladar in favour of the firm, for which the bank had given credit to the firm, but which was not paid on presentation by the acceptor. The sum received by the firm from the bank in that transaction, however, was not advanced on the security of the title deeds, and, therefore, the plaintiff bank is not entitled to treat that sum as an advance for which they are entitled to priority as against the defendant bank.

42. In my opinion, the sum in respect of which the plaintiff bank is entitled to priority as against the defendant bank is five lacs with interest amounting to Rs. 780-5-0 less the amounts paid by the firm in reduction of such an advance, and that is Rs. 4,39,754-3-9.

43. There will be the usual mortgage decree for Rs. 4,65,747-3-9 and interest as agreed in the mortgage against the defendant firm, and as the defendant bank has also obtained a mortgage decree against the firm in the taking of the mortgage accounts, as between the plaintiff bank and the defendant bank the plaintiff bank will be entitled to priority to the extent that I have mentioned. The firm will pay the plaintiff bank's costs on scale No. 1.

44. As against the defendant bank the plaintiff bank is entitled to costs on scale No. 2.

45. It appears that in the course of criminal proceedings taken against J.E. Guzdar the Chief Presidency Magistrate ordered that the defendant bank should hold the title deeds in suit, and the plaintiff bank a certain sum in cash amounting to about four lacs, pending the further orders of the Court. The plaintiff bank is not willing to accept this sum in cash in payment pro tanto of its secured debt, and by consent the title deeds now held by the defendant bank will forthwith be handed over to the plaintiff bank, and the cash now held by the plaintiff bank will be handed over to the defendant bank upon the defendant bank giving an undertaking in writing to indemnify the plaintiff bank against any claim which may be made against the plaintiff bank by reason of the plaintiff bank having handed over this sum in cash to the defendant bank.

46. It appears that this sum has been held in cash by the plaintiff bank and segregated from the bank's other money, and was not utilised by them in any way until 21st February 1929, when by an agreement between the two banks Rs. 3,90,000 in cash out of the said sum was to be treated as earning interest in the hands of the plaintiff bank at the rate of 2 per cent, and interest at that rate from 21st February 1929, must be paid by the plaintiff bank to the defendant bank.


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