Karnataka High Court
Ibrahim Abdul Latif Shaikh vs Corporation Bank And Anr. on 3 July, 2002
Equivalent citations: AIR2003KANT98, 2003(2)ARBLR564(KAR), ILR2002KAR5386
Author: K. Sreedhar Rao
Bench: K. Sreedhar Rao
JUDGMENT K. Sreedhar Rao, J.
1. The appeal filed against the judgment and decree of the Principal Civil Judge (Sr. Dn.) in O.S. No. 20/2001. The appellant is the 2nd defendant in the suit. The first respondent Bank is the plaintiff filed suit for recovery of money by the appellant and second respondent who is the principal debtor for a sum of Rs. 1,17,990/- with interest and costs. The suit against the defendants came to be decreed. Being aggrieved, the 2nd defendant has filed this appeal.
2. The loan was advanced to the second respondent by the first respondent for commissioning an ice-cream manufacturing unit. In that regard loan documents were obtained. The appellant stood as guarantor for the transaction. Ex. P.3 is the guarantee agreement. The first defendant who is the 2nd respondent has filed cross-objections. The Counsel for the 2nd respondent submitted that the cross-objections may bedismissed for non-prosecution as he has not received any instructions from his client and some of the objections remained uncomplied. Therefore, the cross-objections came to be dismissed for non-prosecution.
3. The appellant who had filed the written statement before the Trial Court has contended that he does not incur any liability in respect of the suit transaction, since at the earliest point of time in the year 1997, when the second respondent was irregular in keeping up the repayment schedule and was acting dishonestly by a legal notice Bank Manager was informed to take immediate legal action against the 2nd respondent and to proceed against the security, since the Bank deliberately omitted to take action against the security, the value of the property was diminished at the time when it was auctioned in the year 2000. The appellant does not become liable as the Bank was negligent in not protecting the rights of the surety.
4. Secondly, the Counsel submitted that by the legal notice Ex. D. 1 dated 23.2.97, the appellant had revoked the guarantee agreement and also said that he would not execute any revival letters. The acknowledgement of debt is made only by the second respondent. As against the appellant the suit is barred by time, since he has not acknowledged the debt. In that view contended that the suit against the 2nd defendant should have been dismissed. It is also contended that the Trial Court has failed to formulate proper issues with regard to the negligent conduct of the Bank in dealing with the securities in question, although, sufficient pleadings were made out.
5. In support of the contentions raised, the Counsel for the defendant relied on the ruling of Supreme Court in State Bank of Sourashtra v. Chiranjan Ranganath Raja and Anr., . The ratio laid down has no application to the facts of the case in view of the distinguishable facts. In the said case, obviously, the hypothecated goods were in the possession of the Bank, the lock and key of the godown was with the Bank. During the continuous custody of the hypothecated goods with the Bank, they were destroyed by negligent conduct of the Bank. In the said transaction multiple securities were obtained and it appears that the security in question which got destroyed on account of the negligent conduct of the petitioner was not within the knowledge of the guarantor. Yet the Supreme Court in para 10 holds thus :
"10. If the two promissory notes Exts. 81 and 30 coupled with the letter of guarantee Ext. 31 executed by the surety and the bond Ex. 83 executed by the principal debtor at one sitting on September 16, 1957, evidence one composite transaction, it is an inescapable conclusion that the principal debtor offered two securities, one the pledge of goods and the other personal guarantee of the surety. The surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor has offered security by way of pledge of goods and the goods were to be in the custody of the creditor Bank. On this conclusion Section 141 of the Act will be indubitably attracted. Section 141 comprehends a situation where the debtor has offered more than one security, one of which is the personal guarantee of the surety. Even if the surety of personal guarantee is not aware of any other security offered by the principal debtor yet once the right of the surety against the principal debtor is impaired by any action or inaction, which implies negligence appearing from lack of supervision undertaken in the contract, the surety would be discharged under the combined operation of Sections 139 and 141 of the Act. In any event, if the creditor loses or without the consent of the surety parts with the security, the surety is discharged to the extent of the security lost, as provided by Section 141",
6. In the instant case, however, security hypothecated was never in the possession of the Bank and they were in the custody of the principal debtor. Obviously in that view, the ratio laid down does not apply to the facts.
7. Thirdly, the Counsel relied on the ruling of this Court in P. Janakiran Chetty v. Punjab National Bank Ltd, New Delhi & Anr, AIR 1968 Mysore 56. On careful reading of the said decision, I find that the ratio laid down has no application to the facts of the case. In the cited case, the Bank had allowed the principal debtor to part with the securities with third parties without reference to the surety, the surety liability was held to be discharged by virtue of the provisions contained in Sections 139 and 141 of the Contract Act. In the present case, no such situation is available to invoke the said provisions on the said contingency.
8. Counsel also relied on the ruling of this Court in The Karnataka Bank Ltd. v. Gagnan Shankararao Kulkarni and Anr., . At page 17, para 11 of the judgment the material proposition of law has been laid down thus :
"11. After a careful consideration of the matter, we are of the opinion that having regard to the nature of the security in the present case, the sureties cannot make an appeal to the provisions of Section 141 of the Contract. In our opinion the true principle governing the matter is stated in American Jurisprudence Vol. 50; page 978, para 114 in terms following :
'114. Failure to enforce security--While the authorities appeal to be in entire agreement on the proposition that a surety is discharged, at least to the extent of the value of the security lost, where the creditor, without the surety's consent, affirmatively releases collateral security, there seems to be some difference of opinion where a loss is claimed to have occurred through the inactivity of the creditor. The general rule, however, is that in the absence of an express agreement to use diligence, or a special request to act, or such peculiar circumstances as to render prompt action of the creditor an absolute duty, mere inaction or possible negligence on the part of the creditor in failing to take steps to secure the collection of his debt from collateral debtor is not sufficient of itself to discharge or release a surety from his obligation to pay the debt. The reason for this rule is that a surety is amply protected against the inaction or passive neglect of the creditor by virtue of the fact that if he desires to expedite payment, lie may himself pay the debt, acquire all the securities held by the creditor, and become subrogated to all the rights of the creditor. Thus as respects collateral securityism, the rule is the same as respects the collection of the debt of the principal debtor. The creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Until the surety moves in the matter, it is enough that the creditor holds himself in readiness to transfer to him, when he applies, all the securities he holds, that he may have the benefit of such securities in aid of his own responsibility. The mere failure of a creditor to sell or foreclose against collateral in his hands will, therefore, not ordinarily discharge the surety.
In general, sureties are not released by the failure of a creditor to enforce a mortgage or other lien which he has taken to secure the payment of his debt. Where, however, there is an agreement or understanding between the creditor and the surety, with reference to the enforcement of the security, the creditor is bound to active diligence, and if by his negligence the property held as collateral is lost or destroyed, or surrendered, the surety will be exonerated to the extent of the loss, for the reason that the understanding or agreement to look after the security and see that the property pledged as security shall be applied to the debt destroys the duty of the surety to be vigilant and produces a false confidence, but for which he might take security for his own indemnification. Also, ofcourse, if the creditor undertake to enforce the collection of the collateral and is negligent in the manner of enforcing it, the surety is discharged to the extent of the loss thereby resulting.' What emerges from this enunciation is that a mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient, in itself, to discharge the surety, for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Thus tested, the inaction on the part of the appellant or the Bank of Karnataka from which it derives title will not of itself, mitigate sureties' liability."
9. No doubt, under the Contract Act, it is within the domain of the parties to stipulate the logistic details of the performance and execution of the contract agreed upon. In the normal course, it is in the discretion of the creditor to choose the time and situation to proceed against the securities. However, by a contract, it is permissible for the parties to stipulate the contingencies and situation as to when the creditor shall proceed against the securities and if there is any such clear stipulation with regard to the contingencies under which the creditor has to proceed and if there is a failure, it would necessarily assumed to result in impinging the rights of surety. In the present case, it is the contention of the appellant, that despite the insistence and notice under Ex. D. 1, the plaintiff Bank did not proceed against the security. As a result value diminished otherwise the loan would have been fully satisfied with the securities available. In the light of the ratio laid down by the Division Bench of this Court referred to above, it is not within the right of the appellant to insist to proceed against the security at the time pointed out by him in the absence of specific contract to that effect. There is nothing to show that under the contract, the plaintiff Bank had conceded to au against the security at the insistence of the guarantor. In the absence of such contractual obligation, it is impermissible for the appellant to contend that there is failure on the part of the Bank in not proceeding against the security at the appropriate time pointed by him. Counsel for the respondent Bank relied on the "KARNATAKA BANK CASE" to support his contention in para 10 the following observations are made :
"10. Section 137 of the Contract Act provides that 'mere forbearance' on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. What emerges from a reading of the provisions in Sections 137 and 141 together is that while a 'mere forbearance' to enforce the security against the principal debtor will not discharge the surety, any act by which the creditor loses, or, without the consent of the surety, parts with the security, has the effect of discharging the surety to the extent of the value of the security. Whether any particular act on the part of the creditor constitutes 'mere forbearance' without more or constitutes an act by which the creditor puts it out of his power to hand over the security to the surety, will depend upon the facts and circumstances of the particular case. While the principles are clear, the difficulty arises in their practical application to a given situation. The contention of Sri B.P. Holla is that the security 'in the hands' of the creditor in this case is in the form of a document, Exhibit P-2 and that the creditor not having been in physical possession of the subject matter of the security, cannot be said to have lost or parted with it in any sense of those expressions within the meaning of Section 141 of the Contract Act. But Sri V. Krishnamurthi maintains that hypothecation of goods is an extended idea of pledge and that the obligation to preserve the security enjoined by law upon a creditor extends not merely to the security the creditor has 'in his hands' but also to what the creditor 'ought to have'."
10. In view of the ratio laid down, it becomes explicit, mere forbearance on the part of the creditor not to proceed against the security does not amount to per se the negligent conduct which could exonerate the liability of a security under Section 141 of the Contract Act. In the instant case, the facts stated are very similar to the one available in the cited decision. The contention that the appellant did point out the Bank to proceed against the security by Ex. D. 1 cannot make any difference legally. Since there is no special contract to that effect which obligated the Bank to act upon such insistence and in the normal course discretion would be with the Bank to choose the appropriate time to proceed against the security in the event of default.
11. That apart the statement of accounts, payments made by the second respondent to the loan account continuously. May be, that strict adherence to the schedule of repayment not followed. But nonetheless, it is in the discretion of the Banks to interpret the defaults leniently and not to proceed against the security. After all banking is a business, mere non-adherence to the repayment schedule shall not bona fide payments of amount towards the loan liability, the Bank was well within its discretion to condone the lapse if any of marginal nature and allow the terms of loan to continue. It is a matter of banking prudence and discretion. Therefore, in view of the facts available from the statement of loan account, it cannot be said that the manager was negligent in not proceeding against the securities despite the defaults committed by the principal debtor.
12. The Counsel relied on the ruling of Gujarat High Court in Union Bank of India, Bombay v. Suresh Bhailal Mehta and Anr., 1997, 48 para 20, it is held thus :
"20. While dealing with the independent contentions raised by the second defendant guarantor, in the context of issue No. 9, the Trial Court has found that on account of the negligence of the plaintiff Bank and the lengthy inaction on its part, the security in the form of hypothecated foods has been lost or diminished and, therefore, the same would discharge the second defendant from his obligations and liabilities as a surety. There is no serious controversy on the facts upon which such a submission is based. The second defendant has deposed that when he signed the guarantee deed, the goods hypothecated with the Bank were worth Rs. 25,000/- to 30,000/-, and this statement made by the second defendant, is not challenged. Furthermore, the second defendant has further asserted in his deposition that on the date of the suit and also on the date of his deposition, the goods which were the subject matter of hypothecation agreement were no longer in existence, apparently because the first defendant has on account of the negligence or inaction of the plaintiff Bank, managed to dispose of the same. Even this assertion of the second defendant has not been successfully challenged in his cross-examination by the plaintiff Bank. From these facts it becomes obvious that the second defendant has lost his remedy against the first defendant, to proceed against the security of the hypothecated goods. The allegations of the second defendant that this result has been brought about on account of the negligence and inaction on the part of the plaintiff Bank, must be held to have been established from the material on record. Under the circumstances that part of the decree passed by the Trial Court, dismissing the suit as against the second defendant, at least on this ground, is required to be upheld."
(Underlining emphasised by me)
13. Counsel strenuously contended that in the instant case also the appellant has testified as D.W. 1. In his pleadings he makes a categorical pleading of negligence and collusion on the part of the Bank with the principal debtor and in evidence also he testifies the said fact and there is no cross-examination on that aspect.
14. I find that the ratio laid down has no application to the facts of the case. Although, a plea is taken that the Bank is negligent in not proceeding against the security after issuance of Ex. D.I does not appear to be a legally acceptable plea of defence in view of the law laid down by the Division Bench of this Court in "Karnataka Bank" case. Inaction to proceed against the security cannot be termed as negligence, any amount of averments in the plaint or repeated emphasised statements in the evidence cannot make it a legally tenable plea to absolve the surety from the liability. In that view, I find that the contention of the Counsel for the appellant that the Bank was negligent in not proceeding against the security is untenable contention. Besides, it is of importance to note that in Ex. P.3 the appellant has waived rights of surety envisaged under the Contract Act. The ruling of this Court in Lilavati v. Bank of Baroda and Ors., , wherein at para 7 it is held thus :
'The Contract Act has created rights and liabilities. But the parties have got a right to contract out of the rights and liabilities mentioned in the contract. That is envisaged by Section 128 of the Contract Act. Therefore, merely because the words 'notwithstanding anything contained to the contrary', etc., do not occur in Section 141, it does not follow that the parties cannot contract out of the rights and liabilities laid down in Section 141 of the Contract Act.
In the instant case, the surety had agreed that she would not claim the benefit given to her under Section 141 of the Contract Act. She herself was party to that surety bond;
Held, the surety, having waived her right under Section 141, she was bound by the clause under which she waived her right and could not contend that the clause was invalid and unenforceable. AIR 1984 NOC 113 (Guj.) Disting."
15. In view of the clear stipulation in the contract, it is no longer permissible for the appellant to contend that his rights under Section 141 of the Contract Act have been impaired.
16. On the question of limitation, the Counsel for the appellant strenuously contended that by Ex. D. 1, he had revoked the surety agreement. Therefore, he does not continue to be a surety after issuance of Ex. D. 1. In view of the fact that Ex. P.3 the guarantee agreement, enables the surety to revoke the contract. It is further argued that under Ex. D. 1 the appellant informed the Bank that he would not execute any revival letters or acknowledgement to the Bank hence forth and states that he would no longer be liable for the transaction if Bank fails to proceed against the sureties. In view of the said averment in the notice, it was argued that the revival letter executed by the principal debtor would not bind the surety nor gives a fresh lease of limitation as against the appellant.
17. After carefully going through the terms of Ex. P.3, I find that the sailent stipulations of the document intends to make a contract of continuing guarantee. But imprudently drafted with mutually inconsistent stipulations enables the surety to revoke the agreement which of course is totally in conflict with the concept of continuing agreement. May be under the terms under specified conditions, the guarantor is entitled to revoke the guarantee, the conditions mentioned, if read they do not have any nexus with the right given to the guarantor to revoke the agreement. Nonetheless, from the stand point of the appellant/layman by bare perusal and reading of the stipulations in the guarantee agreement, it does convey impression that under the contract, he is entitled to revoke the guarantee. In that view, I hold that it was within the right of the appellant to revoke the guarantee in view of the categorical stipulation to that effect.
18. It was the contention of the Counsel for the appellant that the guarantee having been once revoked and the appellant having said that he is not prepared to execute the revival letters, no fresh lease of limitation would run against him by revival letter executed by the principal debtor. In this regard, I disagree with the Counsel for the appellant. It is necessary to advert to relevant stipulations which reads thus :
"The guarantor authorises the borrower to execute acknowledgement of debt/liability on behalf of the guarantor and acknowledgement of debt/liability, either in writing or by part payment under the signature made by the borrower shall constitute a valid acknowledgement of debt/liability on behalf of the guarantor also.
Notwithstanding the borrower's account or accounts with the Bank being brought to credit or the credit given to the borrower fully exhausted or exceeded howsoever the said financial accommodation be varied or changed or renewed from time-to-time; notwithstanding any payments from time to time or any settlement of account or payments in full settlement of the balance that may be due from time-to-time, this guarantee shall to the extent aforesaid, be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the borrower, until notice in writing of revocation of the guarantee as hereinafter provided is received by the Bank."
19. The appellant as a guarantor, authorises the borrower to execute the acknowledgement of debt liability on behalf of the guarantor and acknowledgement of debt liability either in writing or by part payment under the signature made by the borrower shall constitute a valid acknowledgement of debt liability on behalf of the guarantor also. In view of the said stipulation, it becomes explicit that the appellant had constituted any agency in the principal debtor to execute acknowledgement or revival letters so as to bind himself. May be, there appears to be some confusion in understanding the rights of the parties with reference to the notice issued under Ex. D. 1. The appellant contends that he would not execute any revival letters. But there is no mention in the letter that the agency created in the principal debtor to execute the acknowledgement or revival letters has been revoked. Ex. P.3 if legally construed, is a document with multiple purpose. In one face, it is a guarantee agreement and in another face, it also incorporates creation of agency in the principal debtor for executing the acknowledgement and that part of the stipulation is a distinct agreement and a document by itself. In the absence of revocation of the agency created by the principal debtor, it would not be permissible for the appellant to contend that he is not bound by the acknowledgement effected by the principal debtor. In the instant case, it clearly discloses revival letters have been executed within the time. Merely by the say in Ex. D. 1 that he would not execute any revival letters cannot be construed as to revoke the agency under Ex. P.3 or to take away the right of the principal debtor, to execute the revival letters or acknowledgement. In that view of the matter, the plea that the suit is barred by time against the appellant does not hold water. Accordingly, the appeal dismissed.