F.I. Rebello, J.
1. The defendant was a director of Artwood Products Private Limited, a company incorporated under the provisions of the Companies Act, 1956 and since wound up by order dated July 12,1976, in Company Petition No. 582 of 1975. On January 13, 1971, at the request of the company, the plaintiffs granted to the company a term loan in the sum of Rs. 2,00,000 on the company agreeing to pay interest thereon at the rate of 5 per cent. per annum above the Reserve Bank of India rate subject to minimum 10 per annum with quarterly rests. The company agreed to hypothecate in favour of the plaintiffs all the moveable plant, machinery etc. In consideration thereof a loan was granted in the sum of Rs. 2,00,000 and the same was secured by the company, by demand promissory note, a letter of waiver and letter of continuity. On January 13, 1971, the company had executed a deed of hypothecation whereby several articles including moveable plant and machinery were hypothecated and charge has been registered with the Registrar of Companies.
2. On January 13, 1971, at the request of the company, the plaintiffs granted to the company a cash credit facility in the limit of Rs. 2,50,000 on the terms and conditions and the company agreed to hypothecate in favour of the plaintiffs stock of raw materials such as plywood, timber, etc. In consideration of the cash credit facility being granted, the company on January 13, 1971, executed in favour of the plaintiffs by way of security a demand promissory note with interest as set out therein, letter of waiver and letter of continuity. On January 13, 1971, the company executed a deed of hypothecation. The same has been registered with the Registrar of Companies.
3. On the plaintiffs having granted to the company term loan and cash credit facility, the defendant executed in favour of the plaintiffs, deed of indemnity and guarantee, thereby guaranteeing repayment of the amount that may become due and payable. The liability was restricted to Rs. 8,00,000 with interest as set out therein. The defendant also agreed that as between plaintiffs and defendant, the defendant would be liable as principal debtor jointly with the company and would not be entitled to claim any rights conferred on the defendant by virtue of sections 133, 134, 135, 139 and 141 of the Indian Contract Act, 1872. The said deed further provided that liability of the defendant would extend to all accounts of the company.
4. Pursuant to the arrangement, the plaintiffs advanced to the company various amounts from time to time. In August/September, 1973, the company requested the plaintiff to increase the cash credit facility to Rs. 4,00,000, on the company agreeing to pay interest at the rate of 5 per cent. per annum and procuring a deed to guarantee from the defendant for an increased limit of Rs. 9,50,000. On September 8, 1973, the cash credit facility was increased from Rs. 2,50,000 to Rs. 4,00,000, in consideration whereof various securities were given including a deed of hypothecation. The defendant also executed a deed of indemnity and/or guarantee in favour of the plaintiffs whereby the liability was raised to Rs. 9,54,000 and interest thereon. The guarantee contains similar terms and conditions as the guarantee of 1971 being on printed forms.
5. Pursuant to the increased limits, various amounts were advanced to the company. On June 30, 1975, the company acknowledged liability to the tune of Rs. 3,25,325.20 inclusive of interest up to June 26, 1975. On December 31, 1975, the company executed a writing acknowledging liability of Rs. 3,29,117.89 inclusive of interest up to December 25, 1975.
6. In so far as term loan of Rs.2,00,000 is concerned, a sum of Rs. 42,500 has become due and payable by the company as on December 3, 1975. The company through its directors including the defendant requested the plaintiffs to grant further time to pay the amount with interest as set out in the pleadings in para. 1 of the plaint. Various documents by way of securities were also executed. On December 4, 1975, the company by a letter admitted a sum of Rs. 42,500 as due and payable as on December 3, 1975, including interest from October 1, 1974, on the term loan as set out. On June 30, 1975, by writing the company acknowledged and admitted liability in the sum of Rs. 34,000 inclusive of interest up to June 25, 1975. In so far as term loan is concerned, by writing dated December 31, 1975, the company acknowledged its liability of Rs. 25,500 as due and payable.
7. Apart from term loan, and cash credit facility, the company was having current account with the plaintiff-bank at Pune. The company was withdrawing money from the said current account. As on September 1, 1976, the said amount was overdrawn to the extent of Rs. 13,718.59.
8. On June 30, 1976, the defendant executed a deed of guarantee and/or indemnity in favour of the plaintiffs and guaranteed the replacement of the amounts due to the plaintiffs by the company in terms of the conditions contained therein. The liability of the defendant was restricted to Rs. 9,50,000 as set out therein.
9. Upon the winding up order being passed, the plaintiffs by their attorney's letter dated May 11, 1976, drew attention of the official liquidator that they were secured creditors of the company and the amounts set out therein were due ahd payable to them.
10. As on September 3, 1976, in so far as term loan is concerned, the company was owing to the plaintiffs a sum of Rs. 18,099.80. In so far as cash credit facility is concerned, as on September 3, 1976, the company was due and owing to the plaintiffs a sum of Rs. 3,41,374.47. In so far as the current account at Pune is concerned, as on September 3, 1976, company was due and owing a sum of Rs. 13,730.97.
11. It is the case of the plaintiffs that various amounts have been guaranteed by the defendant and as the company is ordered to be wound up, the defendant is bound and liable to pay the amounts that have become due and payable to the plaintiffs.
12. The defendant filed his written statement. It is contended that the claim is barred by limitation. The suit was not maintainable as a necessary party viz., M/s. Artwood Products Pvt. Ltd. (in liquidation) had not been joined. The plaintiffs had no cause of action against the defendant unless the plaintiffs have suffered loss or damage and could recover the amount claim from the company by enforcing the securities. It was contended that the suit is premature.
13. With specific reference to the plaint, the defendant agreed to the contents of paragraphs 1 and 2 and pointed out that the winding up order dated July 12, 1976, relates back to the date of the petition which was filed on December 9, 1975. In so far as the guarantees are concerned, the defendant had agreed that he has signed the printed guarantee form on January 13, 1971. However, the forms were a blank and subsequently had been filled up by the plaintiffs. It is pointed out that the total liability by way of cash credit facility was Rs. 4,50,000. There was, therefore, no question of the defendant giving indemnity or guarantee in the sum of Rs. 8,00,000 with interest as provided therein. It is also contended that various promissory notes given by the company were without consideration. It is contended that so far as the term loan is concerned, the company had agreed to pay Rs. 40,000 which was due and payable on December 3, 1974 and the promissory note for Rs. 2,00,000 was without consideration. It is contended that the term loan has become barred by limitation. In so far as guarantee of September 8, 1973, is concerned, the defendant does not deny having signed the said guarantee. It is contended that writings in the guarantee have been subsequently filled in. This contention finds support according to the defendant from the fact that amounts under three accounts do not exceed Rs. 4 lakhs whereas guarantee is purported to have been given for Rs. 9.5 lakhs. In so far as guarantee dated April 30, 1976, is concerned, it is contended that the defendant has executed a blank guarantee form and the plaintiffs had filled in the details subsequently and it is shown to be dated April 30, 1976. The defendant has not admitted the correctness of the amounts in term loan, cash credit facility and current account at Pune. The defendant denied that he was bound and liable to pay the amounts claimed. It is further pleaded that the company had given to the plaintiffs various securities but the plaintiffs failed to enforce or encash such securities. It is contended that the property hypothecated by the company is more than sufficient to realise the plaintiffs' claim, but the plaintiffs having failed to take action in time, the value of the goods had subsequently been reduced and as such defendant-guarantor stood discharged.
14. An additional written statement was filed on November 19, 1981. At the stage of subsequent written statement it is contended that after the filing of the written statement, sale of the hypothecated goods was effected in a gross negligent manner and the property had been sold at a very less price which is detrimental to the interest of the defendant and as such, the defendant is entitled to be discharged from the guarantee or indemnity. The company contended that the value of the goods and assets hypothecated was far in excess of the liability of the company. Since the company was ordered to be wound up, the defendant had been requesting the plaintiffs to sell the machinery and stock immediately, so that the best price could be fetched for the same. It is contended that the plaintiffs did not take steps to sell the machinery or stock. It is further contended that in spite of the court's order dated December 8, 1977, no action has been taken in the matter. Thereafter, it is contended that with the consent and collaboration the plaintiffs after advertising the sale, sold the machinery and stock by public auction. On February 26, 1979, an auction sale was held and the highest bid was for Rs. 1,18,000 and report was submitted to the company court. However, the court confirmed the sale in respect of certain items and did not confirm the sale so far as machinery is concerned. The auctioneer thereafter put up the machinery lying at Bhandup for sale on April 14, 1979 and it fetched Rs. 1,16,000. There are several other contentions.
15. Based on the above, the following issues had been framed :
1. Whether the plaintiff proves that the plaintiff is entitled to recover an amount of Rs. 3,73,841.06 from the defendant ?
2. Whether the plaintiff is entitled to claim interest including penal interest and compound interest as claimed in the plaint ?
3. Whether the defendant proves that the suit is barred by the law of limitation as alleged in: paras. 1 and 26 of the written statement ?
4. Whether the defendant proves that M/s. Artwood Products P. Ltd. (in liquidaiton) is a necessary party to the suit ?
5. If the answer to issue No. 4 is in the affirmative, whether the suit is bad for non-joinder of necessary party as alleged in paras. 2 and 24 of the written statement ?
6. Whether the defendant proves that the suit is premature and not maintainable as the plaintiff failed to enforce the security by way of hypothecation created by M/s. Artwood Products Pvt. Ltd. in favour of the plaintiff as alleged in paras. 3 and 24 of the written statement ?
7. Whether the deed of guarantee signed by the defendant dated January 13, 1971 (exhibit A to the plaint), the deed of guarantee dated September 8, 1973 (exhibit E to the plaint) and the deed of guarantee dated April 30, 1976, are invalid and not binding on the defendant for any of the reasons mentioned in paras. 8, 10, 12 and 16 of the written statement ?
8. Whether the defendant proves that the document executed on behalf of M/s. Artwood Product Pvt. Ltd. and by the defendant could not revive the debt and were invalid as contented in paras. 13 and 14 of the written statement ?
9. Whether the defendant proves that the deed of guarantee executed on April 30, 1976, was in substitution of the deed of guarantee dated September 8, 1973 ?
10. Whether the defendant proves that the deed of guarantee dated April 30, 1976, was bad in law and not enforceable as it was signed after M/s. Art-wood Products Pvt. Ltd. went into liquidation ?
11. Whether the defendant proves that the plaintiff acted negligently and to the detriment of the interest of the defendant in respect of the hypothecated property and realization of the monies due from M/s. Artwood products Pvt. Ltd. ?
12. If the answer to the above issue is in the affirmative, whether the defendant is discharged as guarantor ?
13. To what relief the plaintiff is entitled ?
16. The plaintiffs examined as PW1 C.S. Raman, manager of the plaintiffs and PW-2 S. G. Oke, deputy chief officer of the plaintiff-bank. The plaintiffs through the said witnesses brought on record documentary evidence which has been put together in compilation P-l to P-2 which are exhibits P-l to P-72. Apart from that the plaintiffs have also produced as exhibit P-110 statement of accounts in respect of term loan, exhibit P-111 cash credit facility and as exhibit P-112 current account.
17. The defendant has examined DW-1 on commission which evidence is found in compilation of documents which are D-l to D-66.
18. In oral arguments, it was contended on behalf of the plaintiffs that the plaintiffs are entitled to a decree against the guarantor i.e., the defendant. It is further contended that by virtue of exhibits P-110, P-111 and P-112 the plaintiffs have proved the amounts outstanding against Artwood Products Pvt. Ltd. The plaintiffs have also proved that the company was advanced various amounts and the company had acknowledged the said amounts. So far as the amount outstanding against the term loan and cash credit facility are concerned, the company had admitted the dues by specific acknowledgments. The guarantor i.e. the defendant is liable for the same in terms of the guarantees. The acknowledgments by the company are binding on the defendant as the defendant was a director of the company.
19. On behalf of the defendant, his learned counsel firstly contended that the plaintiffs have been unable to prove that any amount is due and payable by the defendant to the plaintiffs. It is further contended that the plaintiffs have been unable to prove that they were entitled to claim interest as claimed and further that they were entitled to penal or compound interest. It is contended that mere production of entries in the books of account is not proof of the contents thereof which are to be independently established. It is further contended that the plaintiffs have lost the securities given by the principal debtor and/or allowed the securities to reduce in value. Consequently, it is contended that the defendant is liable to be discharged to the extent of loss of securities or erosion of value of securities. It is also pointed out that the deeds of guarantee are invalid. So far as the deed of guarantee dated April 30, 1976, is concerned, it is further contended that on the purported date of deed of guarantee, a provisional liquidator had been appointed for the company and consequently, the question of the defendant giving any guarantee after that date would not have arisen. Considering all the above, the suit should be dismissed.
20. Learned counsel have relied on various authorities in support of their respective contentions. Considering the above, the issues may now be decided.
21. Issues Nos. 3, 4, 5 and 6 need to be decided first since they are in the nature of preliminary issues which go the root of the matter. We may, therefore, take up issue No. 3.
22. Issue No. 3 :
This issue is based on the deed of guarantee exhibit P-32. The other guarantees are exhibit P-21 dated September 8, 1973, at exhibit P-13 which is dated January 31, 1971. It is contended on behalf of the defendant that the suit is filed beyond the prescribed period of three years, even if deed of guarantee P-21 is considered. The case of the defendant, in so far as exhibit P-32 is concerned is that the guarantee was written on a blank form which has been subsequently filled in. It is also pointed out that the company was wound up and the order of winding up is dated July 12, 1976. The provisional liquidator was appointed on April 8, 1976 and the petition was filed on December 9, 1975.Considering these circumstances, it is contended that it is impossible to conceive a situation where defendant would sign a deed of guarantee on April 30, 1976, when the provisional liquidator has already been appointed on April 8, 1976. On a perusal of the deed of guarantee it is seen that it was endorsed with stamp on July 25, 1975, whereas it is supposed to have been signed on April 30, 1976. This by itself must create a doubt/suspicion about the genuineness of the document and its execution on April 30, 1976. The guarantee could have been executed before July 25, 1975, or earlier to that. If exhibit P-32 guarantee is excluded then, we have to consider the guarantee exhibit P-21 dated September 8, 1973. The suit was lodged on September 8, 1976. If that be the case, the suit would be within limitation if exhibit P-21 is deemed to be duly proved. Even otherwise, issue No. 9 as framed is that the guarantee dated April 30, 1976, was given in substitution of the guarantee dated September 8, 1973. The attack on exhibit P-21 is not that the signature on deed of guarantee is not that of the defendant. The challenge is that entries were subsequently made. The defendant has been unable to prove that the entries were entered subsequently. The plaintiffs at any rate, have been able to prove that P-21 was duly executed. If that be the case, issue No. 3 must be answered in the negative.
We will now proceed to answer issues Nos. 4 and 5.
23. Issues Nos. 4 and 5 :
These two issues are in the nature of preliminary issues. The question is whether the company viz. M/s. Artwood Private Ltd. which is the principal debtor is a necessary party to the suit. It is now settled as per the law declared by the apex court that a suit against a guarantor can be independently maintained without joining the principal debtor. Once that is the position, it cannot be said that M/s. Artwood Private Ltd. (in liquidation) is a necessary party. That being the case, issue No. 4 has to be answered in the negative.
Answer to issue No. 5 depends on answer to issue No. 4. Once issue No. 4 is in the negative, issue No. 5 also has to be answered in the negative.
24. Issue No. 6 :
This issue is also to be decided with the other preliminary issues as it proceeds on the footing that the suit is premature and not maintainable. It is the contention of the defendant that the suit is premature as the plaintiffs have failed to enforce the securities towards cash credit facility by M/s. Artwood Private Ltd. as alleged in paras. 3 and 24 of the written statement. The pleadings on the issue are that the principal debtor has given security in terms of section 141 of the Indian Contract Act and that should be realised first by sale. There is nothing in the Contract Act which requires that the hypothecated goods must be first sold to maintain the suit ,nor do the documents on record between the parties provide that no suit can be filed against the defendant-guarantor if the securities are not first enforced. In the absence of such provision or term in the contract, it is difficult to hold that suit can be maintained only after securities covered by the deed of hypothecation are enforced. Even otherwise, this would be contrary to Section 140 of the Contract Act which requires that the securities must be made available to the guarantor if he pays the debt. To my mind, the deed of hypothecation was security for due repayment of loan amount and no duty is cast upon the plaintiffs to first proceed against the hypothecated goods to maintain the suit. Once this be the position, Issue No. 6 must be answered in the negative.
25. Issues Nos. 1 and 2 :
The burden of proving these issues is on the plaintiffs. The plaintiffs in support of their case have examined Shri C.S. Raman, manager of the plaintiffs and through him various documents marked exhibits P-l to P-112 have been brought on record. Exhibit P-l10 is a certified copy of the ledger account in respect of the term loan account maintained by the bankers. Entries up to September 9, 1976, show that a sum of Rs. 18,128.76 was due and payable by the company to the bank. There is no challenge to these entries except for the contention that the plaintiffs have not proved the principal amount with interest due thereon and as such, mere production of ledger entries does not constitute proof of debt. Exhibit P-111 are ledger entries duly certified in respect of cash credit account. As on September 7, 1976, a sum of Rs. 3,41,947.59 is shown as due and payable. The objection to this is the same as objection to exhibit P-110. Exhibit P-112 is in respect of the current account at Pune. As on September 1, 1976, a sum of Rs. 13,755.75 is shown as due and payable. The challenge to the said amount is challenge to exhibit P-111. This challenge is basically based upon the judgment of the apex court in the case of Chandradhar Goswami v. Gauhati Bank Ltd. : [1967]1SCR898a . The apex court therein has observed as under (p. 111) : '... no person can be charged with liability merely on the basis of entries in books of account even where such books of account are kept in the regular course of business. There has to be further evidence to prove payment of the money which may appear in the books of account in order that a person may be charged with liability thereunder, except where the person to be charged accepts the correctness of the books of account and does not challenge them.'
26. In that case, there was challenge as to whether the principal amount itself had been advanced. To show that principal amount had been advanced, reliance was sought to be placed on the ledger entries relying on the provisions of the Bankers Book Evidence Act. The apex court held that as the challenge was to the principal amount itself the bank was bound to prove by independent evidence that the amount was advanced. Mere production of the entries would not be sufficient and for that purpose the provisions of the Bankers Books Evidence Act could not be used by the plaintiffs to prove that the defendant was owing some money. The judgment therefore, at the highest is for the proposition that ledger entries maintained by the bank under the Bankers Books Evidence Act cannot be used to prove the principal amount advanced without proof that the amount was lent. In State Bank of India v. Yumnam Gouramani Singh : AIR1994SC1644 , the apex court held that if entries in the books of account were corroborated by other evidence including oral evidence, then, that should be the evidence of amount due and payable. In the case of United Industrial Bank Ltd. v. G. C. Dey, : AIR1974Cal151 , the Calcutta High Court held that where a plaintiff has produced a statement of account showing the amount due by the defendant and the statement of account was duly certified under the Act, then the statement of accounts must be admitted as prima facie evidence. Considering the above, let us look at the nature of evidence produced in this case.
27. As pointed out earlier, the defendant has not denied deeds of guarantee exhibits P-13 and P-21, except that the blanks in the printed form had been filled in afterwards. In the plaint, there are averments that the plaintiffs had given to the company, a term loan, cash credit facility and also the facilities against the current account at Pune. There has been no challenge to those averments. The plaintiffs in support of their contention have produced exhibit P-2 which is a letter of waiver by the company, exhibit P-3 is a letter of continuity of guarantee and exhibit P-4 is a deed of hypothecation. Similarly, the plaintiffs have proved exhibits P-5, P-6, P-7, P-8, P-9, P-10, P-11 as also exhibits P-12 and P-13. These are documents in respect of term loan, cash credit facility and current account executed in the year 1971. Similarly, exhibit P-14 to exhibit P-22 except exhibit P-21, are documents issued by the bank in respect of cash credit facility which was enhanced. There is no challenge to the said documentary evidence. Exhibits P-22 and P-23 are confirmation letters by the company in so far as the cash credit facility is concerned and they have been duly proved. Ex P-20 is acknowledgement by the company dated September 8, 1973, that the amount due and payable therein is Rs. 3,63,116. In the same acknowledgment the company has also agreed to the rates of interest. The said acknowledgment, apart from the managing director, has also been signed by the directors. The defendant, who was the director of the company has also signed the same. What therefore, has been proved is that as on September 7, 1973, plaintiffs have proved by way of acknowledgement from the company which was also signed by the defendant, as director of the company, that a sum of Rs. 3,63,117 was due and payable with interest from June 28, 1973, as set out therein. By exhibits P-29 and P-30, the company has accepted that on December 25, 1975, a sum of Rs. 3,29,117.89 was due and payable under the cash credit facility. By acknowledgement exhibit P-31 outstanding in the term loan has been admitted as on December 31, 1975, amounting to Rs. 25,500 which is inclusive of interest up to December 25, 1975. These documents have not been challenged by the defendant. In terms of exhibits P-13 and P-21, the defendant has agreed to pay amount together with interest etc. In other words the defendant is liable to pay the amount due and payable by the company. To my mind, therefore, the plaintiffs by these documents have proved the amount outstanding against the term loan, and cash credit facility. In the cross-examination, there is no challenge to exhibit P-110 and exhibit P-111. In other words, the plaintiffs have been able to prove that the company was due and payable to the plaintiffs amounts as set out in the particulars of claim with interest thereon. In so far as the current account is concerned, there is no challenge to the entries by way of documentary evidence exhibit P-112 produced through evidence of PW-1. Once the amounts are proved against the company, the defendant in terms of exhibit P-21, the deed of guarantee, the defendant is liable to pay the said amount. The plaintiffs have been able to prove that the defendant is bound and liable to also pay the outstanding balance amount in the current account at Pune. Considering the above, the plaintiffs have been able to prove issues Nos. 1 and 2.
28. It was contended strenuously that there was no provision for penal interest or for compound interest. By guarantees exhibits P-13 and P-21 the defendant has agreed to pay amounts outstanding against the company along with interest etc. This would include penal or compound interest payment in terms of the documents executed by the company. The deed of guarantee which shows the amount due and payable, also provides for payment of interest as set out therein. Issues Nos. 1 and 2 are, therefore, duly proved.
December 2, 1999.
29. Issue No. 7 :
This issue is based on the pleading as set out in paragraphs 8, 12 and 16 of the written statement. The plea in para. 8 is that the guarantee signed on January 13, 1971, was a blank form and has been filled in subsequently. Similarly, in para. 10, the defendant has taken plea that he as a guarantor had requested the plaintiffs to increase the limits of cash credit facility from Rs. 2.5 lakhs to Rs. 4 lakhs. In para. 12 of the written statement there is a denial as to the acknowledgement in terms of the term loan and it is contended that the alleged acknowledgement is only in respect of cash credit account. In para. 16, the defendant has denied that he has executed guarantee on April 30, 1976. It is contended that he had signed the blank printed form only and particulars have been filled in subsequently.
30. The onus of proving this issue is on the defendant. While answering issues Nos. 1 and 2, I have held that in so far as exhibit P-32 is concerned, considering the plea by the defendant, and considering the date on which it was stamped it is not possible to hold that the defendant signed the guarantee on April 30, 1976. The plaintiffs, therefore, failed to prove that guarantee exhibit P-32 was duly executed by the defendant on April 30, 1976. However, in so far as exhibit P-13 and exhibit P-21 are concerned, which are guarantees dated January 13, 1971 and September 8, 1973, I have held that they are duly proved. This considering the fact that the defendant herein was a director of the company and on September 8, 1973, had signed the acknowledgement in respect of cash credit facility. The defendant also has not denied his signature on the two guarantees. The only plea was taken that blanks were interpolated later on. The plaintiffs have examined PW 1 and PW 2 through whom the plaintiffs have proved the documents. In the light of that, it must be held that the plaintiffs have duly proved execution of exhibits P-13 and P-21 and consequently, the contention on behalf of the defendant must be negatived. There is also no convincing oral evidence on the point led by the defendant to rebut the evidence led by the plaintiffs. Issue answered against the defendant.
31. Issue No. 8 :
The burden of proving issue No. 8 is on the defendant based on the pleading in paras. 13 and 14 of the written statement. In para. 13, the defendant has pleaded that he a a guarantor had requested the plaintiff-bank to grant further time to repay the term loan. It is then stated that writing referred to para. 11 could not revive the claim in respect of term loan which was time-bound and consequently invalid and as such it cannot amount to admission of the liability. In para. 12 it is again pleaded that writing cannot be construed as acknowledgment.
32. The plaintiffs through documentary evidence viz., exhibit P-30 which is executed on June 30, 1975, have proved the said document. The document is a letter by the manager to the company showing that as on June 30, 1975, an amount of Rs. 34,000 was due and payable. On the reverse of the said document on October 20, 1975, the company has confirmed in writing that this amount of Rs. 34,000 was due and payable. This therefore, is an acknowledgement in writing by the company of the term loan. The present defendant by his deed of guarantee exhibit 21 agreed to pay all the amount outstanding as dues of the company. Once the plaintiffs have proved exhibit P-30 the defendant herein is liable in that amount. So also, plaintiffs have proved exhibit P-31. The defendant herein is liable in that amount. So also, plaintiffs have proved exhibit P-31. This is a letter dated December 31, 1975, by the branch manager to the company setting out therein that on July 1, 1976, the company has admitted as outstanding amount of Rs. 25,500. In the evidence, the signatures of the directors have been proved by PW 1. The signatures have not been disputed or challenged in cross-examination. Considering the above, I am of the considered view that issue No. 8 has to be answered in the negative.
33. Issue No. 9 :
As the guarantees executed on April 30, 1976, have been held not to be proved, this issue need not be answered.
34. Issue No. 10 :
I need not answer this issue in view of answer to Issue No. 7, namely, the plaintiffs have been unable to show that the guarantee was executed on April 30, 1976. In view thereof, as document itself has been held to be suspicious, this issue need not be answered.
35. Issues Nos. 11 and 12 :
These are two issues on which arguments were advanced at length. It is contended that the plaintiff as creditor has either lost the securities given by the principal debtor or securities at the time of sale had depreciated in value and consequently, the defendant would be discharged from his liability by virtue of Section 141 of the Indian Contract Act. On the other hand, on behalf of the plaintiffs it is contended that as per the deed of guarantee which is a contract between the parties defendant had agreed to act as principal debtor. If that be so, the defendant was not entitled to avail of the benefit of Section 141 of the Indian Contract Act. It is further contended that as on the date of filing of the suit, the assets of the company were already in the possession of the liquidator. The possession of the official liquidator and depreciation in the value thereof in the hands of the official liquidator cannot be said to be either loss of securities or decrease in value of the securities in the hands of the plaintiffs. It is further contended that there is distinction between pledge and hypothecation. In so far as pledge is concerned, possession of the goods is with the person in whose favour the goods are pledged whereas in the case of hypothecation, a charge/right is created but possession of the goods remains in the hands of the debtor. This is a case of hypothecation. In the circumstances, the question of the creditor bank losing the securities does not arise. It is further contended that even if there is delay in disposing of the securities, the surety cannot claim any right in law as it was always open to the surety under Section 140 of the Indian Contract Act to pay the amount outstanding and thereby get the securities. For all these reasons, it is contended that the plea raised by the defendant has no merit and consequently must be rejected.
36. For the purpose of contending that the surety is entitled to all the benefits of Section 141 of the Indian Contract Act and that he could not opt out of the provisions pertaining to guarantee, reliance is placed on the judgment of two Division Benches of this court sitting at Panaji, in the case of Mahadev Rama Bhonsle v. Central Bank of India : 1998(2)BomCR244 and in the case of Chistovan Vaz v. Indian Overseas Bank : 1998(2)BomCR522 . The two Division Benches while proceeding to hold in favour of the surety have relied upon the judgment of the apex court in the case of the State Bank of Saurashtra v. Chitranjan Rangnath Raja, : [1980]3SCR915 . In the case of State Bank of Saurashtra, : [1980]3SCR915 , what the apex court was considering was the issue as to loss of securities which were pledged in favour of creditor and which were in the possession of the creditor. In a case of pledge, there cannot be any difficulty in holding that if security is lost, the surety would be entitled to discharge as the pledgee is entitled to return of the securities on his agreeing to pay the amounts outstanding. This distinction between pledge and hypothecation was not apparently brought to the notice of both the Division Benches which pronounced the above cited judgments. This argument will be developed later.
37. Even otherwise, the facts in the present case can be distinguished from the facts before the Division Benches. In the deed of guarantee the surety i.e., the defendant had agreed to as under :
'Though as between the principal debtor and ourselves we are sureties only, we agree that as between yourselves and us we are principal debtors jointly with him, and accordingly, we shall not be entitled to any of the rights conferred on sureties by sections 133, 134, 135, 139 and 141 of the Contract Act.'
38. By a term of the contract in this case the parties have agreed that the said sections would not be applicable between themselves. The said sections are to applicable between creditor and principal debtor. Those sections are applicable between creditor and surety. Section 128 of the Contract Act provides that the liability of the surety is co-extensive, unless it is otherwise provided by contract. In the instant case, by agreement itself, it is agreed by the defendant that he will be the principal debtor, as between himself and the creditor so the issue of application of the said sections does not arise. The only question is, whether there can be contract between creditor and surety whereby surety agrees to hold himself as the principal debtor. Useful reliance for that purpose may be placed on the judgment of the Delhi High Court in the case of Citibank (N. A.) v. Juggilal Kamlapat Jute Mills Co. Ltd., : AIR1982Delhi487 , wherein the Delhi High Court has reproduced and relied on the following observation from Chitty on Contracts, 24th edition volume II, page 1014, para. 4803 (page 539 of Comp Cas) :
'Contract of suretyship as against principal debtor alone.--It is by no means unusual for a party to a contract to be a principal debtor as against the creditor, but a surety as against another debtor. Such an arrangement is commonly entered into where the creditor wishes to avoid the technical rules relating to contract of suretyship under which the surety may become discharged from liability in various circumstances. In this event the transaction takes effect according to its terms, that is to say, there will be a contract of suretyship between the principal debtor and the surety, but there will be no contract of suretyship between the surety and the creditor. The creditor is accordingly entitled to treat the surety as a principal debtor in every respect.'
39. This proposition was accepted by the Privy Council in Hodges v. Delhi and London Bank Ltd. [1900] 27 IA 168. The said proposition has also found favour with the Madras High Court in the case of A.R. Krishnaswami Aiyar v. Travancore National Bank Ltd. [1940] 10 Comp Cas 162 (Mad); AIR 1940 Mad 437. The said proposition was also accepted by the learned single judge of the Delhi High Court. I am in respectful agreement with the views of the Madras High Court and the Delhi High Court based on the judgment of the Privy Council. Once that is the position, then in terms of exhibit P-21, the defendant had agreed as between the plaintiffs and himself to act as principal debtor. The issue whether the defendant shall be treated as a surety does not arise. The defendant had executed a writing whereby he had agreed to act as the principal debtor. Once that position is accepted, both the judgments of the Division Bench of this court, Panaji Bench can be distinguished as also another judgment of the learned single judge in Central Bank of India v. Ali Mohamed [1993] MLJ 1092, sitting at Nagpur.
40. We shall now consider the issue of loss of securities. For that purpose we will have to consider the distinction between pledge and hypothecation. Useful reliance to bring out distinction between pledge and hypothecation can be found in the case of Bank of India v. Yogeshwar Kant Wadhera, , which relied on the judgment of the Madras High Court in Union of India v. Ct. Shentilanathan [1978] 48 Comp Cas 640. The issue before the Division Bench of the Punjab and Haryana High Court was whether a surety was entitled in the event of hypothecated goods being lost, for discharge. The Division Bench held that the surety would not be entitled to be discharged, as in a case of hypothecation, possession of the hypothecated goods is with the borrower and that it would be wrong to say that the possession of the goods are in the constructive possession of the creditor-bank because it has no effective control over the said goods. The Division Bench of the Punjab and Haryana High Court has placed reliance on the judgment of Madras High Court in the case of Union of India v. Ct. Shentilanathan [1978] 48 Comp Cas 640. The Madras High Court had observed as under :
'Hypothecation of goods is a concept which is not expressly provided for in the law of contracts, but is accepted in the law merchant by long usage and practice. Hypothecation is not a pledge and there is no transfer of interest or property in the goods by the hypothecator to the hypothecatee. It only creates a notional and an equitable charge in favour of the hypothecatee and the right of hypothecatee as already stated, is only to sue on the debt and proceed in execution against the hypothecated goods, if they are available. As delivery of possession is not a sine qua non for the creation of a notional charge under a deed of hypothecation and as possession of the hypothecated goods is always with the hypothecator, a wide door is open to the owner to deal with the goods without reference to the hypothecatee. If, however, the hypothecator, contrary to the stipulation under the hypothecation bond, deals with the property, the breach on his part would certainly be noticed by the hypothecatee and he would be dealt with independently by him. It is in this context that rights of a bona fide transferee for value of such goods are protected in law, for, the hypothecatee who fails to sequester the goods and reduce them into his custody, takes the risk of such clandestine dealings of the hypothecator. If the hypothecatee expressly or constructively notifies the equitable charge, matters would be different, even so, when the hypothecatee has constructive possession of the goods, though not physical possession of the same.'
41. The position in law, therefore, would be that the goods being in the hands of the borrower, the creditor cannot be held liable for the loss of goods. The surety is therefore not discharged or entitled to set-off in law in the case of hypothecation of goods. It must be made clear that there would be marginal cases where the creditor takes possession of the hypothecated goods and during the possession they are lost or depreciated in value. That question is not being answered in this case as it does not directly arise. Incidentally a question has also arisen as to the effect of the property remaining in the possession of the provisional liquidator pursuant to the order passed in the company petition. It was sought to be contended that on account of goods being in the possession of the official liquidator the official liquidator was informed that the plaintiffs would be standing outside the winding up. In this context, it is contended on behalf of the defendant that once the plaintiffs stood outside the winding up proceedings, a safe of the hypothecated goods even through the official liquidator is a private sale and to that extent loss suffered would have to be set off. To a specific query from the court, as to what loss was suffered, learned counsel contended that it will be the difference of the value of goods and the price realised at the sale. The documents executed, according to him, would show the value of the goods. The provisions of the Companies Act are very clear. Once the official liquidator is appointed it is the official liquidator who comes into custody of the securities. In the present case, securities were in the custody of the company, when the official liquidator was appointed. Merely because according to the defendants, the company handed over the keys to the plaintiffs that would not mean that the plaintiffs were put in custody of the securities after appointment of the official liquidator. It would be the official liquidator who would be entitled to have custody of the securities. The plaintiffs, accordingly, handed over the keys to the official liquidator who took possession of securities. The sale was conducted by the official liquidator which was confirmed by the company court. Even though the plaintiff-bank was a secured creditor and had informed the official liquidator that they would be standing outside the winding up proceeding they did not take any steps to sell or realise the property outside the winding up proceeding.
42. The issue to my mind, need not further be dealt with at length as in the present case the surety has agreed as between himself and the creditors to be treated as a principal debtor.
43. Considering the above, I am clearly of the opinion that the defendant has failed to prove that securities which were by way of hypothecation have been lost by the plaintiffs and by failure to sell at the earliest, loss is suffered and to that extent defendant is discharged. Issues Nos. 11 and 12 will have therefore, to be answered against the defendant.
44. Hence the following order :
ORDER
45. The suit is decreed in the sum of Rs. 3,73,841.05 with further interest on the principal sum of Rs. 3,73,205.24 at the rate of 12 per cent. per annum from the date of the suit till decree and at the same rate from the date of decree till realisation.
46. Amount realised by way of sale of securities will have to be credited to the defendant's account on the date of its receipt and accounts accordingly drawn up.
47. Costs will be costs in the cause.
48. Advocate fees as per rules.
49. Certified copy expedited.