Kerala High Court
Grindlays Bank Ltd. vs M. Joy Mathew And Anr. on 19 October, 1989
JUDGMENT Shamsuddin, J.
1. These appeals arise out of G.O. No. 302 of 1977 on the file of the First Addl. Sub-Court, Ernakulam.
2. The above suit was filed for recovery of money due to the plaintiff-bank from the first defendant-company by sale of the plaint schedule properties described in the schedule and also by sale of stocks of raw materials described in the schedule and book debts described in C schedule and for a decree for sale of the properties described in B schedule in enforcement of the equitable mortgage created by the deposit of title deeds and letter of undertaking as also for a declaration that the third defendant is not entitled to any right or title to the property described in B schedule, and that the plaintiff is entitled to proceed against the said land and building constructed thereon for recovery of the whole amount due to the bank in execution of the decree passed in the suit.
3. The first defendant is a private limited company carrying on business of manufacturing containers or covers of batteries. The company was promoted by defendants Nos. 2 to 5. The second defendant was the managing director of the company. Defendants Nos. 3, 4 and 5 were directors. The company approached the plaintiff-bank for financial assistance by way of loan, overdraft and bill discounting facilities and the plaintiff-bank granted to the company facilities by way of term loan, overdraft and bills discounting facility. Pursuant to this, the first defendant borrowed from the plaintiff-bank a sum of Rs. 9 lakhs by way of medium term loan. The second defendant for and on behalf of the first defendant-company and as duly authorised by a resolution of the hoard of directors of the company, executed a promissory note dated September 3, 1915, in favour of the bank for the aforesaid loan of Rs. 9 lakhs. As security for the amount covered by the said promissory note, a deed of hypothecation was executed on September 3, 1973, by the first defendant hypothecating the plant and machinery, electrical installations, equipment, furniture, fixtures, etc., which existed in the first defendant's factory at Kalamassery. The promissory note was renewed by the first defendant executing a fresh promissory note on September 3, 1976. Interest on the principal sum of Rs. 9 lakhs due on the earlier promissory note was debited against the first defendant-company in the overdraft account which the first defendant had with the plaintiff-bank. Overdraft facility also was availed of and the first defendant-company operated the overdraft account and withdrew large sums of money exceeding the overdraft limit of Rs. 4 lakhs. In 1975, it was agreed between the plaintiff-bank and the first defendant-company that from out of the outstanding debit under the overdraft account, a sum of Rs. 8 lakhs be converted into a second term loan. Accordingly, the first defendant-company, through its managing director, the second defendant, executed a promissory note for Rs. 8 lakhs on 31st January, 1975. The company also executed a supplemental deed of hypothecation dated 15th May, 1975, agreeing that the goods, articles and machinery hypothecated to the bank by the letter of hypothecation dated 3rd September, 1973, will enure to and be a charge on and continue as security for the sum of Rs. 9 lakhs and Rs. 8 lakhs aggregating to Rs. 17 lakhs advanced by the bank.
4. The plaintiff averred that a sum of Rs. 19,16,658,15 was due as principal and interest accorded as on 30th September, 1977, and that defendants Nos. 2, 4 and 5 executed a letter of guarantee dated 6th September, 1973, agreeing to pay on demand all and every sum that may be owing to the plaintiff-bank to the extent of Rs. 17 lakhs with interest, and that the letter of guarantee also provided that the admission or acknowledgment in writing by the first defendant or by any person authorised to act on behalf of the first defendant, would be binding and conclusive on defendants Nos. 2, 4 and 5. On July 17, 1975, the plaintiff-bank made a demand by letters that in case of default of payment by the first defendant, proceedings would be taken against them. Thereupon defendants Nos. 2 and 5 executed fresh letters of guarantee on October 25, 1975, guaranteeing payment of all sums due to the plaintiff-bank from the first defendant.
5. The plaintiff averred that defendants Nos. 2 and 3 with a view to defeat the plaintiff-bank, unlawfully diverted large sums of money belonging to the first defendant and utilised the same for purchasing B schedule property in the name of the third defendant and for construction of a residential building thereon and that the third defendant is not entitled to any right, title or interest in the said property.
6. Defendants Nos. 1 and 2 in their written statement disputed the correctness of the amount claimed and the rate of interest. It was also averred therein that the second defendant has not made any unauthorised drawing from the company or diverted any of its funds as alleged, that really the first defendant-company owed a substantial amount to the second defendant, that the plaintiff was not entitled to relief against the third defendant and the property described in schedule B and that in any event such a relief cannot be sought in a suit for recovery of money advanced by the plaintiff to the first defendant.
7. The third defendant in a separate written statement contended that the second defendant had not diverted any money of the first defendant-company, that the land described in B schedule was purchased by her for a sum of Rs. 45,000 which the second defendant gave her as gift, that the said gift was made out of his own funds, that the same will be evidenced by the books of account of Kerala Tyre and Rubber Products of which he was the proprietor, that the residential building constructed thereon was put up by the third defendant by monies obtained from the second defendant as loan and that the suit was bad for misjoinder of parties.
8. The fourth defendant in his written statement averred that he was a director of the first defendant-company till his resignation on January 23, 1975, that by subsequent conduct of the plaintiff and defendants Nos. 1, 2 and 5 his liability had been discharged, that he was not bound by any acknowledgment made by the first defendant or by any person purporting to act on behalf of the first defendant and that the suit is barred by limitation against him. He further averred that the plaintiff demanded the defendants to pay the amounts due to them and thereupon defendants Nos. 1, 2 and 5 requested the plaintiff to abstain from taking legal action, that in consideration thereof defendants Nos. 2 and 5 executed fresh guarantee letters, that the plaintiff extended the time for payment and that since the plaintiff-bank varied the terms of the original contract without his consent by extending the time for payment, he was discharged of his liability.
9. The trial court passed a decree for recovery of a sum of Rs. 17 lakhs from defendants Nos. 1, 2, 4 and 5 and directed them to pay the decree debt within six months from the date of judgment. The decree also provided that, on failure, the plaintiff can proceed against plaint A, B and D schedule properties by bringing them to sale through the court and that if the sale proceeds of A, B and D schedule properties are found insufficient to discharge the decree-debt, the plaintiff can proceed against defendants Nos. 2, 4 and 5 personally, The trial court also held that the plaintiff is entitled to get interest at the rate of 12 per cent. per annum from the date of suit. A decree was also given for a sum of Rs. 19,18,658.15 with future interest at the rate of 12 per cent. per annum against defendants Nos. 1, 2 and 5 from the date of suit till recovery. The claim against the third defendant and B schedule properties was disallowed.
10. In A. S. No. 285 of 1980, the plaintiff-bank has challenged the finding of the lower court refusing relief against the third defendant and B schedule property. Learned counsel for the plaintiff-bank very strenuously contended that there is a clear admission by the third defendant that B schedule property was purchased by her utilising the funds provided by the second defendant, that the evidence would also show that the second defendant provided funds for the construction of building also, that, therefore, the third defendant has not derived any right, title or interest in the said land and building, that in the circumstances, the plaintiff is entitled to a declaration that the third defendant has no right, title or interest over plaint B schedule properties, that the said land and building thereon are liable for the debts of defendants Nos. 1 and 2 and that the plaintiff-bank is entitled to proceed against the same for recovery of its dues from defendants Nos. 1 and 2.
11. Learned counsel also invited our attention to the pleadings in the written statements of defendants Nos. 1 and 2 and the evidence of DWs 2 and 3 that plaint B schedule property was purchased by the third defendant with funds provided by the second defendant and that similarly, for construction of building also funds of the second defendant were utilised. Based on those facts, learned counsel contended that the transfer made in favour of the third defendant would fall within the purview of Section 53 of the Transfer of Property Act. Section 53 of the Transfer of Property Act in so far as it is relevant to this case, reads as follows :
"53. Fraudulent transfer.-(1) Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed.
(2) Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of such transferee."
12. Sri M.A. George, learned counsel for the third defendant on the other hand, submitted that Section 53 of the Act has no application to the facts of this case. Exhibit A-1 dated April 9, 1974, is the document under which B schedule property was purchased. It is a sale deed executed by one John Kuruvilla in favour of the third defendant. It is not a transfer effected by the second defendant in favour of the third defendant. He also pointed out that, going by the plaint allegations, the money for the purchase of plaint B schedule property was diverted from the funds of the first defendant-company. In the circumstances, learned counsel argued that there is no scope for application of Section 53 of the Transfer of Property Act.
13. Learned counsel for the appellant, however, pointed out that the second defendant in his evidence admitted that he paid the money required for payment of consideration by way of gift to his wife and that would render the transfer in favour of the third defendant one made by the second defendant himself. Viewed in this angle, he argued that the transfer evidenced by exhibit A-l is hit by Section 53 of the Transfer of Property Act.
14. In support of his contention, learned counsel placed reliance on the dissenting judgment in Kanaharathanammal v. V.S. Loganatha Mudaliar, AIR 1965 SC 271. In that case, the consideration for purchase proceeded from the husband. The majority of the judges, consisting of their Lordships P.B. Gajendragadkar, K. Subba Rao, K.A. Wanchoo, N. Rajagopala Ayyangar and J.R. Mudholkar JJ. held that the transfer was in favour of the wife. The question arose in the context of the interpretation of Sections 10(2) and 12 of the Mysore Hindu Law Women's. Rights Act (10 of 1933). The majority took the view that the property purchased by the wife with the amount of sale consideration given by the husband is not a gift of the property in favour of the wife falling under Clause (b) of Section 10(2). His Lordship Justice J.R. Mudholkar took the view that it would be difficult to split up the transaction into two parts, namely, a gift of money by the husband to the wife in the first instance and the purchase by the wife of the property subsequently with that money, that transaction is one indivisible whole, that, therefore, in effect it was the husband who purchased the property with the intention of conferring benefit solely upon the wife and that such a transaction must, therefore, amount to a gift coming under Clause (2) of Section 10 of the Mysore Hindu Law Women's Rights Act. On the basis of the minority judgment, learned counsel for the appellant argued that the gift by the second defendant of money for payment of consideration for the purchase and subsequent transfer in the name of the wife by the owner of the property is an indivisible transaction that, therefore, the transfer of property in favour of the third defendant has to be treated as one made by the debtor himself falling within the mischief of Section 53 of the Transfer of Property Act. We are unable to accept the contention of learned counsel in view of tbe contrary view clearly expressed in the majority judgment. In view of Section 4 of the Benami Transactions (Prohibition) Act, 1988, it is not open to the plaintiff to contend that the first defendant or the second defendant is the beneficial owner of the property and that the title really vested either in the first defendant or in the second defendant. Section 3(2) of the Benami Transactions (Prohibition) Act provides that the prohibition contained in Section 3(1) of the Act against entering into benami transactions will not be applicable in the case of purchase of property by any person in the name of his wife or unmarried daughter and that it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife or the unmarried daughter. In a recent decision in Mithilesh Kumari v. Prem Behari Khare [19891 177 ITR 97 ; [1989] 1 KLJ 424, the Supreme Court held that the legislation of the Benami Transactions (Prohibition) Act, 1988. is retroactive. Once a property is found to have been held benami, the real owner is bereft of any defence against the person in whose name the property is held. The foregoing discussion would show that the transaction evidenced by exhibit X-1 would not fall under Section 53(1). There is no transfer of any property by the debtor involved therein so as to bring it within the purview of Section 53(1) of the Transfer of Property Act. In the circumstances, the lower court was right in holding that the plaintiff was not entitled to a declaration that the third defendant was not entitled to any right, title or interest in or over the land and building described in schedule B.
15. No other point has been raised in A. S. No. 288 of 1980 and it is accordingly dismissed.
16. A.S. No. 128 of 1981 was filed by the fourth defendant. The lower court passed a decree allowing the plaintiff to recover a sum of Rs. 17 lakhs from defendants Nos. 1, 2, 4 and 5. There is a direction to pay the aforesaid sum within six months from the date of the judgment. The decree also provided that on failure, the plaintiff can proceed against plaint A, B and D schedule properties by bringing them to sale through the court and if the sale proceeds are not sufficient to discharge the decree debt along with interest at the rate of 12%, the plaintiff can proceed against defendants Nos. 2, 4 and 5. The fourth defendant challenged the decree in so far as it related to him. The fourth defendant was a director of the first defendant company from 1973 onwards till July 23, 1985, on which date he resigned. The plaintiff-bank gave a mid-term loan of Rs. 9 lakhs to the first defendant-company and as stated above, the fourth defendant stood surety along with other defendants Nos. 2 and 5 for the loan and the maximum limit of which was fixed at Rs. 17 lakhs. The first defendant company had an overdraft account for Rs. 4 lakhs. Exhibit A-9 is the guarantee executed by the fourth defendant along with defendants Nos. 2 and 5 to the extent of Rs. 17 lakhs in respect of the loans. The bank made a demand to pay the amounts on July 17, 1977, and the guarantors were also informed of the demand on July 18, 1977. Learned counsel for the fourth defendant submitted that at that stage defendants Nos. 2 and 5 requested the bank to refrain from legal action and agreed to execute fresh letters of guarantee. Pursuant to this, exhibits A-10 and A-11 dated October 25, 1975, were executed by the second defendant and the fifth defendant. According to learned counsel, in consideration of execution of these documents of guarantee, the plaintiff granted extension of time for payment and refrained from taking legal action for realisation of the amounts due from the first defendant. Learned counsel for the fourth respondent submitted that the fourth defendant had not agreed to the extension of time for payment or variation of the terms of the original contract. According to learned counsel, extension of time for payment enabled the second defendant to sell many articles belonging to the company and to appropriate the sale proceeds for his own purpose. The value of the security also came down on account of the delay in initiating the action. He submitted that in the circumstances the fourth defendant is discharged of his guarantee and liability. In this connection, strong reliance was placed on Section 135 of the Contract Act which reads as follows :
"A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor discharges the surety unless the surety assents to such contract."
17. The fourth defendant in this connection relied on the averments contained in the plaint. It was averred in paragraph 9 of the plaint that on July 17, 1975, the plaintiff-bank made a demand and also informed the guarantors that in case of default of payment by the first defendant, proceedings would be taken against them also, that defendants Nos. 2 and 5 requested the bank to abstain from legal action and agreed to execute fresh guarantee letters, that accordingly fresh letters of guarantee were executed by the second and fifth defendants on October 25, 1975, guaranteeing payment of all sums due to the plaintiff and that the bank refrained from the threatened legal action for the time being.
18. Learned counsel for the fourth defendant heavily relied on the decisions of this court in Kurian v. Alleppey C.C.M.S. Society [1974] KLT 541 and John v. Parameswaran Pillai [1979] KLT 885. In both decisions, the court held that a contract by a creditor to give time to a principal debtor discharges the surety of his obligations in view of Section 135 of the Contract Act. In Amrit Lal Goverdhan Lalan v. State Bank of Travancore, [1968] 38 Comp Cas 751 ; AIR 1968 SC 1432, the Supreme Court considered the question as to what really constitutes giving time within the meaning of Section 135 of the Contract Act. At page 1436 of this decision, the Supreme Court observed that (at page 756) :
"In our opinion, there is no warrant for the argument of the appellant, It is manifest that the act of giving time to the borrowers to make up the quantity of the goods found to be short on weighment by the bank cannot be considered to be a "promise to give time" to the borrowers as contemplated by Section 135 of the Indian Contract Act .... What really constitutes giving of time is the extension of the period at which, by the contract between them, the principal debtor was originally obliged to pay the creditor by substituting a new and valid contract between the creditor and the principal debtor to which the surety does not assent."
19. There is nothing in exhibit A-10, or exhibit A-11 to show that it was in consideration of the agreement of the bank with defendants Nos. 2 and 5 to extend time for payment that these documents were executed. Those documents indicate that they were executed in addition and without prejudice to any other securities or guarantees executed in favour of the bank.
20. Here acceptance of fresh guarantee will not constitute extension of time. Nor are the averments in paragraph 9 of the plaint that the defendants requested the plaintiff-bank to abstain from the threatened legal action and agreed to execute a fresh guarantee and accordingly defendants Nos. 2 and 5 executed fresh letters of guarantee sufficient to constitute an extension of lime within the meaning of Section 135 of the Contract Act.
21. Even assuming that the averments contained in the plaint and execution of A-10 and A-11 and abstinence of the bank to proceed against defendants Nos. 1, 2, 4 and 5 are sufficient to constitute extension of time within the meaning of Section 135 of the Contract Act the fourth defendant cannot legally invoke the aid of Section 135 for the following reasons. Exhibit A-9 is the earlier guarantee executed by the fourth defendant along with defendants Nos. 2 and 5, for the advances fixing a maximum limit of the loan at Rs. 17 lakhs. It is specifically recited in exhibit A-9 that the guarantee would be binding as a continuing security, that any demand under the guarantee shall be considered as having been duly made if signed by any one of the managers or other authorised officials of the bank and that any admission or acknowledgment in writing by the debtor or any person authorised by the debtor shall be binding and conclusive on the guarantors in all courts of law. It is also provided in exhibit A-9 that the bank is at liberty to determine or vary the amount of any credit to the debtor, to vary, exchange, renew, modify or release any securities or guarantees held or to be held by the bank from or on account of the debtor or in respect of the moneys thereby guaranteed, to renew, bills or promissory notes in any manner and to compound or give time for payment, to make any other arrangements with the debtor or guarantors or any obligants on guarantees, bills, notes or securities held or to be held by the bank in respect of the money thereby guaranteed and also to release any one of the guarantors from liability thereunder without prejudicing or affecting the rights of the bank in any way against the other guarantors. Learned counsel for the plaintiff submitted that these provisions would constitute an assent to a contract for granting extension of time or not to sue and that, therefore, the fourth defendant cannot invoke the benefit of Section 135 of the Contract Act. We are in agreement with the contention of learned counsel in this regard.
22. The next contention raised by learned counsel for the fourth defendant is that the suit is barred by limitation against the fourth defendant. In New Era Manufacturing Co. Ltd., In re [1967] 37 Comp Cas 796 (Ker) ; [1968] KLT 104, it was held that a resolution of the board duly signed by the chairman of the meeting by which the entries in the suspense account of the amounts in fact due were ratified, amounts to acknowledgment of liability under Section 18 of the Limitation Act and that the resolution must be regarded as an acknowledgment of liability made in writing and signed by the company itself and that it would constitute an acknowledgment of liability sufficient to give a fresh starting point for limitation.
23. Learned counsel for the bank submitted that the acknowledgment made by the principal debtor when the debt is alive and not extinguished is binding on the surety and it is not open to the surety to contend that it is without his knowledge that the acknowledgment was made by the principal debtor and that it was not binding on him. This view has been taken in Popular Bank Ltd. v. United Coir Factories [1961] KLT 434 and Wandoor Jupitor Chits (P.) Ltd. v. K.P. Mathew [1979] KLT 566. Exhibits A-21, A-22 and A-23 are the balance-sheets of the company and the amounts due to the bank have been shown as debts outstanding and these documents would constitute valid acknowledgments.
24. Further, exhibit A-9 shows that the guarantee is to be binding as a continuing security.
25. The Supreme Court had occasion to consider the question of limitation in respect of a continuing guarantee in Mrs. Margaret Lalita Samuel v. Indo-Commercial Bank Ltd. [1979J 49 Comp Cas 86 ; AIR 1979 SC 102. It observed thus fat page 92 of 49 Comp Cas) :
"The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the fool of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the Schedule to the Limitation Act. 1908."
26. Article 55 of the Schedule to the Limitation Act, 1963, corresponds to Article 115 of the Schedule to the 1908 Act.
27. Under Section 126 of the Contract Act, a contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default and, therefore, the cause of action against the guarantor can arise only when the principal debtor fails to perform his promise or to discharge his liabilily and a demand is made to the guarantor to discharge the liability. Section 129 of the Indian Contract Act lays down that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
28. This is the view taken by a Division Bench of this court to which one of us was a party (Shamsuddin J.) in Canara Bank v. Gokuldas Shenoy [1989] 2 KLT 281 ; [1991] 72 Comp Cas 298. Another Division Bench of this court also took the same view in Union Bank of India v. T. ]. Stephen [1989] 1 KLJ 759 ; [1989] 66 Comp Cas 96 (Ker). In the circumstances, the contention raised by learned counsel for the fourth defendant that the suit is barred against the fourth defendant on the expiry of three years' period from exhibit A-9 cannot be accepted.
29. Both the appeals fail and are accordingly dismissed with costs.