Bank of India Vs. Aiyars Advertising and Marketing Pvt. Ltd. and ors. - Court Judgment

S.N. Variava, J.

1. This is a Bank Suit for recovery of a sum of Rs.. 21,18,692-65 ps. with interest thereon at the rate of 17.1/4% per annum from the date of the Suit till judgment and at the rate of 6% per annum from judgment till payment or realisation thereof.

2. The facts are as follows :

By and pursuant to an application made by the 1st defendant company, on 19th November 1973, the plaintiffs granted to the 1st defendant company a Cash Credit Facility in a sum of Rs 20 lakhs with interest thereon. The amount due under said facility were guaranteed by defendants 2 to 8 under a Deed of guarantee dated 19th November 1973, and by defendant No. 9 under another Deed of guarantee dated 19th November, 1973. The suit is for recovery of the amounts due under the said Cash Credit Facility against the 1st defendant as the Principal Debtor and against the other defendants as guarantors.

3. After the date of the filing of the suit, by an order dated 30th April 1976 the 1st defendant has been ordered to be wound up and the Official Liquidator, High Court, Bombay is appointed as the Liquidator of the 1st defendant Company. The plaint has therefore been amended on 22nd September 1976 and the Official Liquidator has been brought on record.

4. The original 5th defendant expired on or about 15th or 16th June 1982. defendant Nos. 5-A and 5-B have been brought on record as the heirs and legal representatives of the Original defendant No. 5. They have been sued in their capacity as heirs and legal representatives. Even though a Written Statement has been filed on their behalf they have not appeared before this Court either personally or through an advocate.

5. The Official Liquidator has filed a Written Statement on behalf of the 1st defendant. In the Written Statement,the Official Liquidator states that he is not in a position to dispute or admit the correctness of the various transactions pertaining to the grant of the Cash Credit Facility or the execution of the various documents. He, therefore, puts the plaintiffs to a strict proof of the averments made in the plaint. The Official Liquidator then avers that at all material times the 1st defendant company carried on business as an Advertising Agency. It is averred that in the course of such business the company acted as Agents for various clients who wished to advertise their products and services in the newspapers. It is averred that most of the leading (English and Vernacular) newspapers in the Country in do not favour direct advertisements and thus clients who wish to advertise their products and services have to go through an Advertising Agency like the 1st defendant Company. It is averred that most of the leading newspapers were members of the Indian and Eastern Newspapers society. It is averred that the 1st defendant company was accredited to that society. It is averred that such a accreditation entitled the 1st defendant company to 15% commission from newspapers on all advertisements.

6. On behalf of the Official Liquidator it is further averred that a client would approach the 1st defendant Company. The 1st defendant Company would then contact a newspaper on behalf of that particular client and place advertisements for such client in the said newspaper at scheduled rates. It is averred that a client's name would be mentioned in the contract. It is averred that the newspaper in question would then submit its bill to the 1st defendant, mentioning in each case the name of the client and the amount of the bill less 15% commission for the advertisement. It is averred that the 1st defendant would recover the gross amount of the bill and after deducting 15% would make payment of the balance to the newspaper. It is averred that the entire amount of the bill quoted by the 1st defendant from the client would not be retained by it. It is averred that this practice is very well known to all Bankers and Advertisers and that with a little diligence the plaintiffs Bank would have also known the same.

7. It is further averred that the 1st defendant would hold 85% amount of the bill only as a Trustee for and behalf of the newspaper and that therefore, the 1st defendant had no authority to hypothecate the book debts in favour of the plaintiffs. It is averred that the hypothecation of the book debts in favour of the plaintiffs Bank is unauthorised, illegal and not binding on the Official Liquidator and the unsecured creditors of the 1st defendant Company. It is further averred that under these circumstances the plaintiffs could only rank as a unsecured creditors and that they must prove their debts before the Official Liquidator along with the other unsecured creditors.

8. On these pleadings, between the plaintiffs and the Official Liquidator, the following Issues were raised :

1. Whether the 1st defendant had no authority to hypothecate book debts in favour of plaintiffs Bank and the hypothecation is unauthorised, illegal and not binding on the Official Liquidator as alleged in para 4 of the Written Statement ?

2. Whether the plaintiffs are in effect unsecured creditors as alleged in para 6 of the Written Statement ?

3. Whether the plaintiffs are entitled to the sum of Rs. 21,18,692.65 ps. with or without interest as claimed or at all?

4. If the answer to Issue No. 1 is in the negative whether the Book debts are validly hypothecated in favour of the plaintiffs ?

5. What reliefs, if any, plaintiffs are entitled to?

6. And Generally.

9. Even though these Issues were raised, during the trial of the Suit the Official Liquidator has not cross examined any of the witnesses of the plaintiffs and has not lead any evidence on behalf of the 1st defendant Company. On 22nd November, 1993 the Deputy Official Liquidator stated to the Court that the Official Liquidator was now submitting to the Orders of the Court. In view of this statement, the Court is not answering the Issues raised by and on behalf of the Official Liquidator. Even otherwise, it must be stated that so far as Issue Nos. 1 and 2 are concerned, there is no evidence before the Court. These Issues would in any case have had to be answered against the Official Liquidator. So far as Issue Nos. 3, 4, 5 and 6 are concerned, these are common Issues along with the other defendants and the answer on these Issues would have been the same as that given in respect of the other defendants.

10. Except for slight variations the defences taken by all the other defendants are common. The defendants have all averred that the Demand Promissory Note, the Letter of Continuing Security and the Letter of guarantee were on printed forms. They aver that at the time that they endorsed the Promissory Note in favour of the plaintiffs and executed the Letter of Continuing Security and the Letter of guarantee, there were blanks in the said Promissory Note and the said Letters. The defendants aver that at time that they executed the Letter of guarantee on 19th November, 1973, the amount and the rate of interest were not filled in and that the same were left blank. Thus execution on 19th November, 1973 is admitted. The defendants aver that the amount and rate of interest were subsequently filled in by the plaintiffs. The defendants aver that the signatures of defendants on the Promissory Note, Letter of Continuing Security and the Letter of guarantee were obtained by the plaintiffs prior to the filling in the blank places. The defendants aver that by so filling in blanks there has been material and substantial alterations and that the defendants are discharged from their liability under the Promissory Note, Letter of Continuing Security and the Letter of guarantee. On behalf of defendants 2, 7 and 8 it has been averred in addition to the above that there was a blank in the date of the Promissory Note, Letter of Continuing Security and the Letter of guarantee.

11. All the defendants aver, in substance, that under the Deed of Charge and Hypothecation, the Book debts of the 1st defendant are charged and hypothecated in favour of the plaintiffs. The defendants aver that book debts of app. Rs. 46 lakhs were available. The defendants aver that under Clause 4 of the Deed of Charge, on default of 1st defendant the plaintiffs were given a right, at the risk and the expenses of the 1st defendant as Attorneys for and in the name of the 1st defendant to take possession of and/or appoint receivers of the debts hypothecated under the said security, and also to give notices of demand to the parties liable under the said debts and to demand, sue or receive the said debts, and to receive and give receipts and discharges for the same. The defendants aver that the plaintiffs have failed and neglected to take prompt and diligent steps for recovery of book debts under the Deed of Charge and Hypothecation of Book Debts. The defendants aver that as a result of negligence and lack of diligence on the part of the plaintiffs, the plaintiffs have lost a security created in their favour. The defendants aver that under section 140 of the Indian Contract Act this security would have been endured for the benefit of the Defendants. The defendants aver that the value of the security which has been lost and/or impaired is in excess of the sum claimed by the plaintiffs from these defendants. The defendants aver that as the value of the security is lost and/or impaired, these defendants are completely discharged from their liability.

12. All the defendants do not admit the correctness of the statement of account which has been annexed by the plaintiffs as Ex. 'E' to the plaint.

13. All the defendants challenge the rate of interest charged by the plaintiffs from time to time and as claimed in the plaint.

14. Defendant Nos.3, 4, 5-A and 5-B and defendant No. 6 also aver that prior to August 1973 the 1st defendant Company was wholly owned and controlled by Mr. V.S. Aiyyar and Mr. K.V. Aiyyar and members of their families. They aver that at that time the 1st defendant Company had a Cash Credit Facility with the State Bank of India to the extent of Rs. 9 lakhs. They aver that since 1972 the financial health of the Company started deteriorating and in or about 1973 the State Bank of India closed the Cash Credit Facility. They aver that the said Aiyyar and family members decided to relinquish their control and ownership of the 1st defendant Company. They aver that the members of the staff of the 1st defendant Company held various meetings between themselves and decided to take over 100% shareholding of the 1st defendant Company from the Aiyars. They aver that defendants 3,4, 5 were, as representatives of the employees, negotiating with the Aiyars. They aver that by an Agreement dated 29th September 1973, Aiyars agreed to sell their entire shareholding in the 1st defendant Company to defendants 3, 4 and 5 as representing members of the staff of the 1st defendant Company.

15. They aver that on 29th September, 1973 a letter was exchanged between the parties setting out the agreements to sell the entire shareholding to the workers. They aver that on 22nd October, 1973 a formal agreement to this effect was executed. The defendants crave leave to refer to and reply upon the letter dated 29th September, 1973 and the agreement dated 22nd October, 1973. These defendants aver that at the same time that these employees were negotiating with the Aiyars for purchase of the entire shareholding, they were also negotiating with defendants 2 to 9 to sell the controlling interest in the 1st defendant Company. It is averred that on 24th October, 1973 the controlling interest in the 1st defendant company was sold to defendants 2 to 9 by the employees. It is averred that defendants 2 to 9 undertook to provide and arrange necessary finance as and when required by the 1st defendant Company. It is averred that defendants 2 to 9 agreed and undertook that they would give all guarantees and/or indemnities as may be required by the 1st defendant Company for the purpose of the business of the 1st defendant Company. It is averred that it was agreed if any of the employees - Directors i.e. defendants 3, 4, 5 and 6 were required to give any guarantee or indemnity then defendants 2 to 9 would give in favour of such Director a suitable counter guarantee or indemnity. These defendants refer to and rely upon an agreement dated 24th October, 1973. It is averred that the 2nd defendant negotiated with the plaintiffs Bank for cash credit facility. It is averred that the 2nd defendant represented to the plaintiffs Bank that the 2nd defendant represented to the plaintiffs Bank that he would bring in additional finance to the extent of Rs. 10 to 15 lacs. It is averred that it was a condition that the 2nd defendant and his Associates would invest a further sum of Rs. 10 to 15 lakhs in the 1st defendant Company. It is averred that the defendants executed the guarantee in favour of the plaintiffs Bank on the basis of the representation that the 2nd defendant and his associates would invest a sum of Rs. 10 to 15 lakhs in the 1st defendant Company. It is averred that the 2nd defendant omitted to bring in a sum of Rs. 10 to 15 lakhs as agreed to. It is averred that the plaintiffs failed and neglected to enforce this condition and that these defendants are discharged from their guarantee for this reason.

16. On behalf of 6th defendant it has been averred that on 11th April, 1974 this defendant resigned as the Branch Manager of defendant No. 1. It is averred that on 12th April, 1974 this defendant also resigned as Director from the Board of Directors of defendant No. 1. The 6th defendant craves leave to refer to and rely upon the letters of resignation dated 11th April, 1973 and 12th April, 1974. It is averred that by letters dated 14th May, 1974, addressed to the Manager of the plaintiffs New Delhi branch and to one Mr. Shipchandler, (an Officer in the Loans Department at Bombay) as well as to the Chairman and Managing Director of the plaintiffs, notice was given to the effect that this defendant had resigned as the Manager and Director of defendant No. 1 and that this defendant should be relieved from the guarantee. It is averred that these notices in substance and effect these were one months notice of termination of the guarantee. It is averred that by the letters of 14th May, 1974, the 6th defendant had terminated the guarantee. It is averred that with effect from 1st July, 1974 this defendant ceased to be liable to the plaintiffs under the guarantee. It is averred that on 30th June, 1974 in the Cash Credit Account, the 1st defendant had a debit balance of Rs. 19,66,881-71 ps. It is averred that after 30th June, 1974 the plaintiffs permitted defendant No. 1 to continue to operate the said account. It is averred that after 30th June, 1974 the plaintiffs lent and advanced large amounts to defendant No. 1. It is averred that this defendant is not liable for the amounts lent and advanced by the plaintiffs to the 1st defendant after 30th June, 1974. It is averred that after 30th June, 1974, defendant No. 1 has re-paid to the plaintiffs amounts exceeding Rs. 19,66,881-71 ps. and interest thereon. It is averred that the plaintiffs are bound and liable to appropriate these payments towards the debit balance of Rs. 19,66,881-71ps. It is averred that on such appropriation the sum due and payable by defendant No. 1 to the plaintiffs on 30th June, 1974 will have been fully paid up. It is averred that if any amount is now due and payable by defendant No. 1 to the plaintiffs then the sum is in respect of the cash credit facility and loans or amounts lent and advanced by the plaintiffs to defendant No. 1 after 30th June, 1974 and that the 6th defendant is not liable for the same.

17. On these pleadings the following Issues have been raised between the parties :

ISSUES ON BEHALF OF DEFENDANT NOS. 2, 7, 8 AND 9:

1. Whether the plaintiff has lost the security created in their favour as alleged in para 1 of the Written Statements of defendant Nos. 2, 7 and 8 and of defendant No. 9?

2. Whether defendant Nos. 2, 7, 8 and 9 are discharged from their liability because of loss of security as alleged in paragraph 1 of the Written Statement of defendant Nos. 2, 7, 8 and 9?

3. Whether the Deed of guarantee was blank when signed by the defendant Nos. 2, 7, 8 and 9 as alleged in paragraph 1(a) of the Written Statement of defendant Nos. 2, 7, 8 and 9?

4. Whether the defendant Nos., 2, 7, 8 and 9 are discharged by the subsequent filling up of the said Deed of guarantee by the plaintiff as alleged in paragraph 1(a) of the Written Statement of defendant Nos. 2, 7, 8 and 9?

5. Whether the plaintiff is entitled to a decree for Rs. 21,18,692-65 ps. against defendant Nos. 2, 7, 8 and 9 as alleged in paragraph 9 of the plaint?

6. Whether the plaintiff is entitled to claim interest @ 17.1/4% p.a. as alleged in paragraph 9 of the plaint?

ISSUES ON BEHALF OF DEFENDANT NOS. 3 & 4

1. Whether the guarantee in Suit stands discharged for reasons set out in paras 1(a) to 1(d) of the Written Statement ?

2. Whether there were blanks in the said promissory note and the letter dated 19th November 1973 at the time of signing by defendant Nos. 3 and 4 as alleged in para 1-A of the Written Statement ?

3. Whether the amount and the rate of interest were left blank at the time of signing the letter of guarantee and subsequently filled in as set out in para 1-A of the Written Statement?

4. Whether filling in of the said blanks in the aforesaid documents after execution by defendant Nos. 3 and 4 amounts to material and substantial alterations and changes of defendant Nos. 3 and 4 from their liability as contended in para 1A of the Written Statement?

5. Whether the guarantee is voidable at option of this defendant and is avoided as alleged in para 2(a) of Written Statement ?

6. Whether these defendant are discharged from the guarantee for reason as alleged in para 2(b) and 2(c) of the Written Statement?

7. Whether defendant No. 3 is discharged as guarantor in view of the fact that the Writ of Summons was served only on 23rd December, 1981 which prevented him from recovering Valuable Securities as contended in paragraph 3 of Written Statement?

8. Whether the defendant No. 3 and 4 are discharged as guarantors in view of negligence on the part of plaintiff in recovering book debts as contended in para 5 of the Written Statement ?

9. Whether the plaintiffs are entitled to the sum of Rs. 21,18,692-65 with or without interest as claimed or at all as contended in paragraph 7 of the Written Statement?

10. Whether the book debts are hypothecated in favour of plaintiffs as alleged in para 4 of the plaint.?

11. Generaly.

ISSUES ON BEHALF OF DEFENDANT NO. 5(a) & 5(b) :

1. Whether the guarantee in suit stands discharged for reasons set out in paras 1(a) to 1(d) of the Written Statement of defendant No. 5?

2. Whether there were blanks in the said promissory note and the letter dated 19th November, 1973 at the time of signing by defendant No. 5 as alleged in para 1-A of the Written Statement ?

3. Whether the amount and the rate of interest were left blank at the time of signing the letter of guarantee and subsequently filled in as set out in para 1-A of the Written Statement of defendant No. 5.?

4. Whether filling in of the said blanks in the aforesaid documents after execution by defendant No. 5 amount to material and substantial alterations and discharges defendant No. 5 from their liability as contended in para 1-A of the Written Statement of defendant No. 5.?

5. Whether the guarantee is voidable at option of these defendants and is avoided as alleged in para 2(a) of Written Statement of defendant No. 5?

6. Whether these defendants are discharged from the guarantee for reason as alleged in para 2(b) and 2(c) of the Written Statement of defendant No.5?

7. Whether these defendants are discharged as Guarantors in view of negligence on the part of plaintiffs in recovering book debts as contended in para 5 of the written Statement of defendant No. 5?

8. Whether the plaintiffs are entitled to the sum of Rs. 21, 18, 692.65 with or without interest as claimed or at all as contended in paragraph 7 of the Written Statement of defendant No. 5?

9. Whether the book debts are hypothecated in favour of plaintiffs as alleged in para 4 of the plaint.?

10. Whether these defendants are liable to the plaintiffs to the extent of the estate of the 5th defendant coming to their hands?

11. Generally.

ISSUES ON BEHALF OF THE 6TH DEFENDANT :

1. Whether the guarantee in Suit stood terminated on and from 1st July, 1974 for the reasons set out in paragraph 1(c) and (d) of the Written Statement of the 6th defendant?

2. Whether the sum due and payable by the 1st defendant to the plaintiffs as on 30th June, 1974, namely, Rs. 19,66,881.71 has been fully paid as alleged in paragraph 1(e) of the Written Statement of the 6th defendant ?

3. Whether the amount claimed in Suit is in respect of money lent and advanced by the plaintiffs to the 1st defendant from and after 30th June 1974?

4. Whether the guarantee in Suit was procured from the 6th defendant by means of fraud and misrepresentations as alleged in paragraph 1(f) of the Written Statement of the 6th defendant ?

5. Whether the guarantee in Suit is avoidable at the option of the 6th defendant for the reasons alleged in paragraph 1(f) of the Written Statement?

6. Whether the guarantee in Suit stands avoided as alleged in paragraph 1(f) of the Written Statement of the 6th defendant ?

7. Whether the plaintiffs have charged interest to the 1st defendant at rates higher than those provided in the agreement between the plaintiffs and the 1st defendant as alleged in paragraph 1(g) of the Written Statement of the 6th defendant?

8. Whether the guarantee in suit stands discharged for the reasons alleged in paragraph 1(g) and (h) of the Written Statement of the 6th defendant ?

9. Whether there were blanks in the promissory note dated 19th November, 1973 and the letter of guarantee dated 19th November, 1973 when the 6th defendant signed the same as alleged in paragraph 1(A) of the Written Statement of the 6th defendant?

10. Whether on 19th November 1973 when the 6th defendant signed the letter of guarantee, the amount and the rate of interest were not filled in and were in blank as alleged in para 1A of the Written Statement of the 6th defendant ?

11. Whether the 6th defendant stands discharged from his liability under the guarantee in suit by reason of the filling in of the blanks in the documents referred to in paragraph 1A of the Written Statement of the 6th defendant ?

12. What relief, if any, is the plaintiff entitled to against the 6th defendant ?

18. The Issues are answered accordingly :

ISSUES ON BEHALF OF DEFENDANT NOS. 2, 7, 8 AND 9:

Issue No. 1. IN THE NEGATIVE

Issue No. 2. IN THE NEGATIVE

Issue No. 3. IN THE AFFIRMATIVE ONLY AS

REGARDS THE DATE

Issue No. 4. IN THE NEGATIVE

Issue No. 5. IN THE AFFIRMATIVE

Issue No. 6. AS PER ORDER

ISSUES ON BEHALF OF DEFENDANT NOS. 3 & 4

Issue No. 1. IN THE NEGATIVE

Issue No. 2. IN THE NEGATIVE

Issue No. 3. IN THE NEGATIVE

Issue No. 4. IN THE NEGATIVE

Issue No. 5. IN THE NEGATIVE

Issue No. 6. IN THE NEGATIVE

Issue No. 7. IN THE NEGATIVE

Issue No. 8. IN THE NEGATIVE

Issue No. 9. IN THE AFFIRMATIVE

& Issue No. 11 INTEREST TO BE AS PER ORDER

Issue No. 10. IN THE AFFIRMATIVE

ISSUES ON BEHALF OF DEFENDANT NO. 5(a) & 5(b):

Issue No. 1. IN THE NEGATIVE

Issue No. 2. IN THE NEGATIVE

Issue No. 3. IN THE NEGATIVE

Issue No. 4. IN THE NEGATIVE

Issue No. 5. IN THE NEGATIVE

Issue No. 6. IN THE NEGATIVE

Issue No. 7. IN THE NEGATIVE

Issue No. 8. IN THE AFFIRMATIVE

Issue No. 9. IN THE AFFIRMATIVE

Issue No. 10. IN THE AFFIRMATIVE

Issue No. 11. AS PER ORDER

ISSUES ON BEHALF OF THE 6TH DEFENDANT :

Issue No. 1. IN THE NEGATIVE

Issue No. 2. IN THE NEGATIVE

Issue No. 3. IN THE NEGATIVE

Issue No. 4. IN THE NEGATIVE

Issue No. 5. IN THE NEGATIVE

Issue No. 6. IN THE NEGATIVE

Issue No. 7. AS PER ORDER

Issue No. 8. IN THE NEGATIVE

Issue No. 9. IN THE NEGATIVE

Issue No. 10. IN THE NEGATIVE

Issue No. 11. IN THE NEGATIVE

Issue No. 12. AS PER ORDER

REASONS

19. As is seen many of the Issues of the defendants are common. Even though there are so many Issues there are only 3 or 4 main points for determination viz.:

a) Whether there were blanks in the documents at the time of execution of documents and if so whether the defendants are discharged by reason of the blanks having been subsequently filled in.

b) All the defendants do not admit and dispute the correctness of the amounts due and payable from the 1st defendant to the plaintiffs. The Court has therefore, to see whether the plaintiffs have proved their claim.

c) All the defendants dispute the rate of interest charged by the plaintiffs.

d) The main contest and one which has been most strenuously pressed is that the defendants 2 to 9 have, by reason of negligence on the part of the plaintiffs, lost the benefit of the securities which the plaintiffs had at the time the contract of guarantee was entered into viz. hypothecation of book debts. The Court has to consider whether the plaintiffs had an obligation to recover the book debts and/or whether they were negligent in not recovering the book debts. The Court has to decide whether defendants 2 to 9 are discharged from their guarantees by reason of the alleged negligence of the plaintiffs. The 3rd defendant has also raised an Issue that he is discharged because he was not served with the writ of summons till 23rd December, 1981.

20. Apart from the above defendants 3, 4, 5-A and 5-B and 6 have also averred and claimed that there was an Agreement that defendant No. 2 was to bring in about Rs. 10 to 15 lakhs in the Company and that the plaintiffs have not enforced this condition and that therefore,the defendants are discharged. The 6th defendant also claims that by the Letters dated 14th May 1974, the guarantee of the 6th defendant has stood terminated. It would therefore, be preferable and convenient to deal with the Issues under these heads. Issue Nos. 3 and 4 of defendants 2, 7, 8 & 9, Issue Nos. 2, 3, & 4 of defendants 3, 4, 5-A and 5-B and Issue Nos. 9, 10 and 11 of defendant No. 6.

21. These Issues are on the contention of the parties in respect of the blanks in the documents. These issues are taken up for consideration first. On these Issues the defendants have lead no evidence at all. They have only relied upon the evidence of the plaintiff and the cross-examination of the plaintiffs' witness No. 1 i.e. Mrs. Kasbekar. Before the evidence is considered, it must be noted that (except for defendants 2, 7 and 8) the defendants have averred that on 19th November, 1973 when the Demand Promissory Note and the Letter of Continuing Security were signed, there were various blanks and that these blanks were subsequently filled in. Therefore, between the parties it is an admitted position that the documents were executed on 19th November, 1973. Similarly it is averred that when the defendants signed the Letter of guarantee on 19th November, 1973 the amount and the rate of interest were not filled in the the same were left blank. Therefore, again there is an admission that the Letters of guarantee were executed on 19th November, 1973. The only contention in respect of the Letter of guarantee is that the amount and the rate of interest were not filled in. It is on the basis of these averments that the Issues have been raised. It is in the light of these averments that the Court has to consider these Issues. So far as defendants 2, 7 and 8 are concerned, they have averred that there was a blank in the date of the guarantee also. But in their case also it is an admitted position that the documents and the guarantee were executed on 19th November, 1973.

22. The P.W. No. 1 Mrs. Kasbekar has deposed that after proposal for granting Cash Credit facility had been sanctioned by the Head Office Committee, she got all the necessary documents as per the terms of sanction prepared. She has categorically deposed that all the blanks were filled in the documents. She has deposed that after the blanks were filled in, the documents were forwarded to the defendants along with a Letter dated 16th November, 1973. That letter forms part of the record of this Court and is at Exhibit '1'. She has deposed that the guarantee documents were not sent along with this letter. She has given evidence on who filled in all the blanks and in whose hand-writing certain hand-written portions are. She has deposed that the blanks were filled in by one Mr. Bangera who was entrusted the task of filling in, the blanks. She has deposed that Bangera did it under her instructions and that she knew the hand-writing of Mr. Bangera. She has deposed that after Mr. Bangera filled in all the blanks, she personally checked the documents to see that they were correctly filled in. She has deposed that all the documents were executed thereafter. She has very fairly and honestly stated that at the time of the execution the date in all the documents were left blank. She has deposed that this was as per the normal prevailing practice. She has deposed that as per this practice, the date which would be put in the documents would be the date on which the credit became operative. She has deposed that as the credit became operative from 19th November, 1973 the date 19th November, 1973 was filled in after the documents were received back by the Bank. She has deposed that after all the documents were received back she again checked whether all the documents were correctly filled in and executed and whether Board Resolutions were correctly passed. She has deposed that she thereafter gave the documents to the concerned clerk to fill in the date and to make the facility effective. She has deposed that the dates were filled in by one Mr. K.M. Jani. She has deposed that at the back of each document she had put a stamp and that she has initialed on each document in token of her having been checked the documents. All the relevant documents contain this stamp and the initial of this witness. In cross-examination this witness has not been shaken at all. In fact, on this aspect, there is not much serious cross-examination at all. The Court found this witness to be a very honest. There is no reason to disbelieve this witness. This particularly so when none of the defendants stepped into the box. Also the defendants have lead the evidence of the then Deputy Chief Accountant of the 1st defendant Company. The Deputy Chief Accountant has deposed that he was aware that the cash credit facility had been taken by the 1st defendant Company from the plaintiffs Bank. Even this officer does not depose that there were any blanks in the documents at the time that the company executed the document. Also if all the documents are looked at, it is clear that the hand-written portions except date are in the same hand writing and in the same ink. Further the date in all the documents is in the same handwriting and same ink. This is an indication that Mrs. Kasbekar has deposed to the truth. This supports the witness's version that these were all filled in at the same time and that the dates were put in thereafter. Further against all the hand written portions in the documents, the parties have initialed. This also supports the case that all blanks were filled in before execution. It is nobody's case that initials were put against blank spaces. Under normal circumstances itis most unlikely that initials would be put against blank spaces. One further fact or to be taken into account is that none of the defendants have stepped into the witness box to depose that there were blanks as alleged. To be noted that nobody has stated or even argued that the defendants or any of them were not available and/or unable to give evidence. It is also pertinent to note that in the written statements as originally filed only defendants 3 and 9 took up the contention of there being blanks in these documents and that too only about the amount and rate of interest being left blank. Thus initially none of the defendants had even contended that there were blanks in the dates. As stated above even after amendments of the written statements only defendants 2, 7 & 8 have contended that there were blanks in the dates. Under these circumstances, it will have to be held that except for the date there were no other blanks at the time that the documents were executed.

23. Mr. Mody submitted that even though most of the defendants had not pleaded anything in respect of the date being blank and that even though only defendants 2, 7 and 8 had raised an Issue in this behalf, all the defendants could still agitate this point as it had come out in evidence. He submits that now it was admitted that there was a blank in the date at the time that the Guarantees were executed. He submits that the plaintiffs witness has admitted that the date was filled in after the documents were received by the Bank. He submits that there has been thus been a material alteration in the documents and that the defendants stand discharged. In support of his contention Mr. Mody relied upon the authority in the case of S. Perumal Reddiar v. Bank of Baroda and ors, reported in : AIR1981Mad180 . In this case, there were alterations in the Deed of guarantee, in the rate of interest, the amount and the date. These alterations were made without the knowledge of the surety. The Court held that changes in the rate of interest, amount and date amounted to a material alteration and that the surety was discharged. However, as the judgment itself lays down, it is not every alteration or change which can discharge the surety. Only a material alteration, change or addition can discharge the surety. What is the material alteration necessarily depends upon the facts of each case and the character of the instrument. A mere addition or amplification of what is obvious does not become a material alteration. The date in all the documents is 19th November 1973. Between the parties it is an admitted position that the documents were executed on 19th November 1973. Therefore, filling in the date on which the documents are admittedly executed does not amount to any material alteration in this documents so as to discharge the sureties. Under these circumstances, it will have to be held that there is no addition or alteration in the documents which amounts to a material alteration so as to discharge defendants 2 to 9.

24. Under these circumstances, Issue Nos. 3 and 4 of defendants 2, 7, 8 and 9 are answered in the Negative, save and except that admittedly the date was filled in subsequently. However it is held that, that does not amount to a material alteration and does not discharge the defendants. Issue Nos. 2, 3 and 4 of defendants 3, 4, 5-A and 5-B are answered in the Negative. Issue Nos. 9, 10 and 11 of defendant No. 6 are answered in the Negative.

Issue No. 5 of defendants 2, 7, 8 & 9, Issue No. 9 of defendants 3 and 4, Issue No. 8 of defendants 5-A and 5-B and Issue No. 12 of defendant No. 6 along with Issue No. 6 of defendant Nos. 2 and 7 to 9 and Issue No. 7 of defendant No. 6.

25. These Issues deal with the contention of all the defendants that the plaintiffs have not proved their claim in Suit. defendant No. 6 takes this contention under his Issue No. 12. Along with this is the submission on interest. In this behalf, it has been submitted by Mr. Parikh, and he is supported in his submission by the other defendants, that all that the plaintiffs have done is to tender a copy of the account of the 1st defendant in their books of account duly certified under the Bankers Book Evidence Act. It is submitted that the plaintiffs have lead the evidence of only two witnesses viz. Mrs. Kasbekar and Mr. Kapadia. It is submitted that neither of these officers was concerned with the actual maintenance of the Leger of the plaintiffs. It is submitted that Mrs. Kasbekar has in fact admitted that she was not concerned with the maintenance i.e. writing of the ledger account and that the ledger accounts were maintained by a separate section. It is submitted that Mrs. Kasbekar has admitted that she was not personally concerned with the release of the funds to the 1st defendant. It is submitted that inspite of the denials of this witness, it is clear that this witness could never depose to the correctness of the ledger account. It is submitted that the fact that this witness had no knowledge is clear from the that she was admitted that without looking at the ledger it would not be possible for her to know what is due and payable by the 1st defendant at any particular time. It is submitted that this witness can not depose to the correctness of the ledger account as she was not concerned with that Department at all. It is submitted that the denial of this position by Mrs. Kasbekar and/or her assertions that the ledger account is correct are false and cannot be believed. It is submitted that therefore, apart from tendering this ledger account, the plaintiffs have lead no evidence to prove the correctness of these accounts. Reliance is placed upon the authority of the Supreme Court in the case of Chandradhar Goswami and Ors. v. Gauhati Bank Ltd., reported in : [1967]1SCR898a . In this case, the Supreme Court was considering section 4 of the Bankers Book Evidence Act read with section 34 of the Evidence Act. The Supreme Court has held that no person can be charged with liability merely on the basis of entries in the books of account even when such books of account are kept in the regular course of business. The Supreme Court has held that there has to be further evidence to prove payment of monies which may appear in the books of account in order that a person may be charged with liability thereof. The Supreme Court however clarifies and itself lays down an exception namely where a person charged accepts correctness of the books of accounts and does not challenge them. With reference to section 4 of the Bankers Book Evidence Act the Supreme Court states that under section 4 certified copies are admitted as prima facie evidence of the existence of the original entries and as evidence of matters, transactions and accounts therein, but that such admission is only where, and to the same extent as, the original entry itself would be admissible by law and not further or otherwise. The Supreme Court held that section 34 of the Evidence Act would govern such certified copies and instead of the original being produced under section 34, a certified copy could go in evidence and admitted in evidence. The Supreme Court held that thus even in respect of certified copies no person can be charged merely on the basis of the entries in the books of accounts even though the same may be kept in the regular course of event. It is urged that under these circumstances the plaintiffs have failed to prove the entries in the account and they have failed to prove what was due and payable by the 1st defendant to the plaintiffs. In support of this contention, reliance was also placed upon the authority in the case of Smt. Chandrakantaben J. Mody & N.J. Mody v. Vadilal B. Mody & Ors., reported in : [1989]2SCR232 .

26. There can be no dispute with the above propositions of law. However, as clarified by the Supreme Court in Goswami's case (supra), as well as in a case relied upon by Mr. Palan viz. Gordon Woodroffe & Co. (Madras) Ltd. v. Shaik M.A. Majid & Co., reported in : AIR1967SC181 , if a party who is sought to be charged with the account accepts the correctness of the account then there is no question of trying to prove each and every entry or any entry in the account. Once an account is accepted between the parties, it is an account stated. The acceptance may be expressed or it may even be inferred by the conduct of the parties. The Supreme Court has laid down that once an account has been accepted between the parties the equitable doctrine of settled account has to be taken into consideration. In this case, the plaintiffs witness Mrs. Kasbekar may not have been concerned with the maintenance of the ledger account. She is, however, an Officer of the Bank. She is an Officer who was at the relevant time dealing with and an incharge of this account. Her statement to the effect that the account became operative and that the 1st defendant operated the account has not been challenged at all in cross-examination. She has in fact not just relied upon the account, but has also given categoric evidence (on page 10 of the Notes of Evidence) that at the time of the filing of the suit, a sum of Rs. 21,18,692-68 ps. was due and payable. To this there is no challenge in cross-examination at all. Not a single question has been put to this witness, to the effect that this is not the correct figure and/or that nothing is due and payable. Her statement that this amount is due and payable has even not been tested in cross-examination. Not only that but Mrs.Kasbekar has gone further. She has stated that to her personal knowledge all the entries in the ledger account are correct. When asked how, she can say so, she has replied, that she could say so because the Bank regularly checks the account and also balances its book at the end of every month or periodically. To this statement, that the accounts are regularly checked and/or that the Books are balanced at the end of every month or periodically, there is no serious challenge. All that is put to the witness is that it is only her belief that the person who was supposed to check the books and balance them had done their job correctly. She denies this suggestion and asserts that the books were regularly checked and balanced. She has then asserted that the Bank always send statements of account to borrowers on a monthly basis. She has asserted that if there was anything wrong in the account, the borrower would have pointed out the mistake at that time. It is submitted that this is a general statement and not in respect of the account of the 1st defendant. In my view this is not correct. The statement was made in the context of the correctness of the statement of account (Ex. F). On evidence it is clear that the 1st defendant has never pointed out any mistake. In fact to the notice of demand made by the Bank setting out the amount due and payable, there is no denial of liability by the 1st defendant. Defendants 2 to 9 are guarantors. There liability is co-extensive with that of the principal debtor. If the principal debtor has accepted the amount the Guarantors are bound. It is clear that the ledger account of the plaintiffs was accepted by the 1st defendant. In fact, in this suit, at this stage that this witness was giving evidence the Official Liquidator was contesting the Suit, Yet the Official Liquidator has not cross-examined this witness at all. He has asked no question on the correctness of the account. The Official Liquidator has accepted the ledger account as being correct. On behalf of the defendants evidence has been led of one Mr. A.J. D'Souza. This witness was at the relevant time the Deputy Chief Accountant of the 1st defendant Company. Mr. D'Souza has deposed that he was aware that the 1st defendant had an account with the plaintiff Bank. This was a witness who was aware of whether or not any amounts were due and payable to the plaintiff Bank and if so how much. This witness did not deny or repudiate Mrs. Kasbekars statement that at time of filing of this Suit a sum of Rs. 21,18,692,68 ps. was due and payable. Having led the evidence of the Deputy Chief Accountant of the 1st defendant Company and not having denied that this sum was due and payable, it now hardly lies in the mouth of Mr. Parekh's client or the other defendants to now contend to the contrary. Also at all relevant times defendants 2 to 5, 7 and 8 were Directors of the 1st defendant Company. defendant No. 6 was also a Director till the early part of 1974. They were and are well aware of what is due and payable. Significantly none of them have stepped into the witness box to deny Mrs. Kasbekars statement that a sum of Rs. 21,18,692.68 ps. was due and payable. In my view, for reasons stated above, plaintiffs have proved their case. Even otherwise an adverse inference would have had to be drawn against the defendants. Under these circumstances, it will have to be held that the plaintiffs have proved their claim as against the 1st defendant and the other defendants. It will have to be held that the plaintiffs are entitled to sum of Rs. 21,18,692-68 ps. with interest at rate and in manner set out hereafter. The claim in respect of interest is dealt with hereafter.

27. The next question which arises for consideration is whether the plaintiffs are entitled to claim interest at the rate of 17.1/2% and/or whether the plaintiffs were entitled to debit the account by compounding the rate of interest. Except for defendants 2 to 9 and defendant No. 6 no other defendants has raised any categoric issue on this point. In the pleadings, the only averments are vague averments denying the liability to claim interest. Inspite of this the Court takes it that the challenge by all the defendants on the quantum of interest would be this challenge and deals with it accordingly.

28. On behalf of the defendants Mr. Mody has submitted, and he has been supported by all the other defendants, that the Bank cannot charge interest at a rate higher than 11.1/2% p.a. It has been submitted that no evidence has been lead on the rate of interest prevailing at any particular time. It has been submitted that no evidence has been lead as to how and when the rates were increased from 11.1/2% . It is submitted that on evidence it is clear that the 1st defendant has never been notified of any change in the rate of interest. It is submitted that under the Deed of guarantee the Bank is only entitled to charge interest @ 4.1/2% over Bank rate minimum of 11.1/2% p.a. It is submitted that there is no provision for charging interest with quarterly rests. It is submitted that in the Account (Ex. F) every quarter the interest has been debited and that interest has been charged with quarterly rests. It has been submitted that under the circumstances, the Plaintiff Bank can only charge simple interest at the rate of 11 1/2% p.a. Mr. Parikh has supported Mr. Mody and has further submitted that under the Letter of Continuing Security it has been agreed that the interest would be at the rate which would be notified to them from time to time by the Bank. He submits that as no change in the rate of interest was notified, the plaintiffs are not entitled to charge at a higher rate. This last argument of Mr. Parikh, in my view, merely needs to be stated to be rejected. The Letter of continuing security in fact states that it is the promissory note which is to continue to remain as a continuing security. The promissory note clearly sets out that interest is to be with quarterly rests.

29. On the other hand, Mr. Palan has argued that the liability of the Guarantors is co-extensive with that of the principal debtor. He has submitted that the Guarantors are liable for all amounts which are due and payable by the principal debtor. He has submitted that this is also clear from the fact that the Promissory Note has been made by the principal debtor in favour of the Guarantors Nos. 2 to 8 and that the Guarantors 2 to 8 have thereafter endorsed the promissory notes in favour of the plaintiffs. He submits that under the Deeds of Guarantees, the Guarantors have to pay interest at the rate of 4.1/2% over the Bank rate or at on such rate of interest which may be payable by the principal debtor or which may be notified to the principal debtor. He points out from, a documents on record i.e. a notice dated 11th November 1975, that the rate of interest has been set out. He submitted that therefore, the Banks were entitled to charge interest at 17.1/2% p.a. He also submits that in the Resolution which has been passed by the 1st defendant (which is part of Ex. H) the 1st defendants have agreed to pay interest @ 4.1/2% over the Bank rate minimum 11.1/2% per annum with quarterly rests. He points out that in the promissory notes executed in favour of the plaintiffs the interest is chargeable with quarterly rests. Mr. Palan points out that in Deed of Charge or Hypothecation of Book Debts it has also been mentioned that the interest would be with quarterly rests.

30. In my view Mr. Palan is right. The deeds of guarantee clearly provide that the Guarantors would be liable to pay interest at the rate at which the principal debtor is liable. Not only that in law the liability of a Guarantor is that co-extensive with that of principal debtor. The Guarantor is bound to pay all amounts as are payable by the principal debtor. All the documents shown by Mr. Palan clearly mention that interest can be charged with quarterly rest. Under these circumstances, the contention that interest could not be charged with quarterly rests upto the date of the Suit cannot be accepted and is rejected.

31. The next question is whether the plaintiffs Bank have debited in the account interest at prevailing Bank rates. It is a fact of which there can be no denial that Banks charge interest under the Banking Regulation Act. Banks can only charge interest at the rates prescribed by Reserve Bank of India. The Reserve Bank of India regularly issues Circulars prescribing the rates of interest which can be charged by the Bank. Mrs. Kasbekar has categorically averred that the entries in the ledger account are correct. There has been no cross-examination of this witness on the question that the rate of interest debited into the account are not at the correct rate or at the prevailing Bank rates. There has been no cross examination on this point. It is not even suggested that interest has, from time to time, been debited into the account, not at the prevailing Bank rates but at different rates. In the absence of any such challenge and in the absence of any proof to the contrary by the defendants, the burden being squarely on them, it cannot be said that the Bank has not debited at the prevailing Bank rate. Under these circumstances it will have to be held that upto date of the suit, the interest which has been debited at varying rates has been debited correctly and that the interest which has been debited with quarterly rests has also been debited correctly.

32. The question which further arises is what is the rate of interest and on what amount should interest be granted after the date of the Suit. Relying upon circumstances, which are set out hereafter, the defendants have been submitted that if not negligence there has been absolute inaction on the part of plaintiffs. It is submitted that this inaction has resulted in a loss to the defendants. It is submitted that even if Court is not accepting the submission of the defendants that this resulted in a discharge of the liability as Guarantors, still the Court should grant reliefs by way of reduction of interest. It has been submitted that from the date of the Suit the Court should not grant interest at more than 6% p.a. It is submitted that in any event interest can only be on the principal amount. On the other hand, Mr. Palan has submitted that the Court should grant the contractual rate of interest. He has submitted that here are parties who have no defence to the Suit and have merely used delays of law in order to withhold monies of the Bank. He submitted that even now there is no inclination to pay. He submitted that under these circumstances, there is no reason why the contractual rate of interest should not be applied by the Court. Mr. Palan submits that as interest is rightly compounded the amount claimed in the Plaint is the principal due.

33. I have considered the argument of both the parties. It must be admitted that initially the Court was inclined to reduce the rate of interest. However, on a reconsideration the Court feels that Mr. Palan is right. Here are parties who have no real defence to the Suit. They have, in effect, used the delays of law not to pay the amounts due and payable to the Bank for all these years. As is being set out hereafter, in my view, it is the duty of a debtor not to just find the creditor, but it is a duty of the debtor to pay amounts due and payable by the debtor to the creditors. This is the duty not merely in law but even a moral duty. A party who has no real defence to the Suit should not sit tight and use the delays of the law. On the date that the Suit was filed and earlier the defendants had no defence at all. Having sat tight and not repaid the amounts due and payable for all these years these parties are not now entitled to any equitable reliefs from this Court. It would be most inequitable if the plaintiffs were to be now told, after all these years, that they will get their rightful dues at a lower rate of interest. In my view, such parties must be made to pay a high rate of interest. To be noted in this behalf that even today the parties have not submitted to a decree and asked for installments. Even today they wish to continue to challenge plaintiffs claim and to delay payment for as long as possible. If Court is to reduce the rate of interest, it would tantamount to encouraging parties not to pay on time and to use Court's delays. So far as this Court is concerned, by virtue of the Full Bench Judgment of this court in the case of Union Bank of India v. Dalpat Gaurishankar Upadyay, reported in : AIR1992Bom482 , it is settled law that as and from the date of the Suit interest can only be granted on the principal sum. The plaintiffs in prayer (a) have claimed interest on sum of Rs. 21, 18,692-62 ps. This amount includes interest which has been debited into the Suit account upto the date of the Suit. The plaintiffs cannot be granted interest on interest. The plaintiffs are directed to calculate and inform in writing, within two months from today, the defendants advocates on record what the Principal amount, which was actually advanced to the 1st defendant is. In the event of any dispute liberty to the parties to apply. After the date of the Suit plaintiffs will only be entitled to interest as above on the principal amount.

34. Under these circumstances, it will have to be held that from the date of the Suit upto the date of the Judgment, the interest on the principal amount will have to be at the rate as indicated in the Notice dated 7th November 1975 i.e. @ 17.1/4% p.a. Interest on the principal amount from the date of the Judgment till payment will be as prayed. Accordingly Issue No. 5 of defendants 2 and 7 to 9 is answered in the Affirmative. Issue No. 9 of defendants 3 and 4 is answered in the Affirmative. Issue No. 8 of defendants 5-A and 5-B is also answered in the Affirmative. Their liability is however limited to the extent of the estate of original defendant No. 5 come into their hands. Issue No. 12 of defendant No. 5 come into their hands. Issue No. 12 of defendant No. 6 is answered as per the final Order. Issue No. 6 of defendants 2 and 7 to 9 and Issue No. 7 of defendant No. 6 are answered as per Order set out above.

Issues No. 1 & 5 of defendants 3, 4, 5-A and 5-B and Issue Nos. 4, 5 and 6 of defendant No. 6.

35. These Issues are on the submissions of defendants 3, 4, 5-A, 5-B and 6 that there was a condition that a sum of Rs. 10 to 15 lacs was to be brought in by defendant No. 2. These Issues may now be considered. Ashas been set out above, the claim of these defendants is that they had given the guarantee on the understanding and the condition that a sum of Rs. 10 to 15 lacs would be brought in by the 2nd defendant and his Associates. The submission of Mr. Mody was that the 1st defendant Company earlier belonged to one Mr. Aiyyar. He submitted that the 1st defendant Company was being taken over by Mr. Malhotra. He submitted Malhotras were to be the financiers and that the other defendants were mere ex-employees who were being retained as professional Managers in the Company. It is submitted that Malhotras had no connection with the State Bank of India who were the earlier Bankers of the 1st defendant Company. Mr. Mody submitted that the Malhotras had connection with the plaintiffs and therefore, the Malhotras negotiated with the plaintiffs. He submitted that the Malhotra's promised to close the account with the State Bank of India. Mr. Mody submits that as the guarantee was given on the condition that Rs. 10 to 15 lakhs would be brought in and as the plaintiffs did not enforce this condition his clients are discharged. Except for oral submissions, there is no oral evidence in this behalf at all. Mr. Mody, however, seeks to support this from a Letter dated 23rd October 1973 which is part of Ex. 'E'. This letter which has been sent by the 1st defendant to the Chairman and Managing Director of the plaintiffs. In the letter it has been mentioned that there will be a total change in the management of the 1st defendant Company with a professional group working along with Mr. Malhotra and his associates taking full control and responsibility of the 1st defendant Company. It has been mentioned in the letter that Mr. Malhotra is the Chairman of the 9th defendant. Mr. Mody also relies upn a letter dated 5th March 1975 (part of Ex. 1). This is a letter from the plaintiffs to the 1st defendant Company. In the letter it is stated as follows :

'1) At time of granting the cash credit facility of Rs. 20 lacs it was decided that a deposit of about Rs. 10 to 15 lacs was to be brought in by the Bombay Forgings Pvt. Ltd., in your Company and an undertaking was to be given that the same would not be withdrawn during the currency of the advance.

Please let us know whether this deposit has since been brought in by the Bombay Forgings Pvt. Ltd.'

Mr. Mody also relies upon the evidence of Mrs. Kasbekar, based upon this letter, that this letter was written under instructions from the Manager as per the discussion which Mr. Malhotra had with the Manager. Mr. Mody submits that this shows that the plaintiffs were aware that the 9th defendant was a Company of Mr. Malhotra and that the 9th defendant Company was to bring in a sum of app. Rs. 10 to 15 lacs and that the same was to be kept deposited during the pendency of the cash credit facility. Mr. Mody submits that admittedly this amount has not been brought in. Mr. Mody submits that as the plaintiffs failed to ensure that this money was brought in and kept deposited the defendants are discharged from their guarantee. Mr. Nanavati states that she is not pressing Issue Nos. 4, 5 and 6 of defendant No. 6. This statement of Mrs. Nanavati is fair and correct. The terms of Sanction are as per letter dated 16th November, 1973. This letter is on record as part of Ex. E. In the terms of sanction there is no condition or stipulation that any such amounts were to be brought in and kept deposited. The letter dt. 5th March, 1975 is a letter written much after the cash credit facility was sanctioned. It is clear that this letter is written by the Bank is reply to an application for a temporary Bill Discounting Facility. A letter written in 1975 for some other purpose cannot constitute evidence of terms of sanction for a facility granted in 1973. This because, on record of the Court there are contemporaneous documents showing what the terms of sanction were. As stated above the sanction was by letter dated 16th November, 1973. As stated above there is no such term in the letter of sanction. The relevant extracts of the minutes of the meetings of the 1st defendant Company whereby the 1st defendant was authorised to enter into the cash credit facility is on record as part of Ex. D. This sets out the terms of sanction. There is no such term or condition. The minutes of the meeting of the 9th defendent Company whereby 9th defendant was authorised to give the guarantee is also on record as part of Ex. D. In this also there is no such commitment. Thus at the highest there may have been an informal understanding to this effect. Also no defendant has stepped into the box to give evidence of any such understanding or condition. What is more important is that the defendants cannot be discharged by a mere existence of such a condition. What can discharge the defendants is only if they first prove that they had given the guarantee only on the basis that a sum of Rs. 10 to 15 lakhs would be brought in and kept deposited. It was for the defendants to prove such a case. There is no evidence at all to show that the guarantees were given on the basis of such a condition. Therefore, even if there was such a condition, there is no evidence before the Court to show that in the absence of such a condition the guarantee would not have been given. Accordingly, Issue No. 5 of defendants 3, 4, 5-A and 5-B and Issue Nos. 4, 5 and 6 of defendant No. 6 are answered in the Negative.

Issues 1, 2 and 3 of defendant No. 6.

36. This Issue deals with the contention of defendant No. 6 that with effect from 30th June 1974 he stood discharged from the liability on the guarantee. In support of this submission Mrs. Nanavati has submitted that the 6th defendant was only a Manager of the 1st defendant Company. She has submitted that his salary was only Rs. 1500/- per month. Apart from the submission there is no evidence to this effect. The evidence on record is that defendant No. 6 was a Director of the Company and working as Director of the Company. Mrs. Nanavati submitted that by Letters dated 11th April 1974 and 12th April 1974 (both part of Ex. C) the 6th defendant resigned from his position as Manager as well as Director of the 1st defendant Company. Mrs. Nanavati submitted that the resignation of the 1st defendant was accepted by letter dated 19th April 1974 (part of Ex. C). She submitted that on 14th May 1974 the 6th defendant wrote letters to the Manager of the Delhi Branch of the plaintiffs and to one Mr. Shipchandler, an Officer in the Loans Department of the plaintiffs Branch at Bombay (part of Ex. C). She submitted that by another letter dated 14th May 1974, addressed to the Chairman and Managing Director of the plaintiffs, (part of Ex. B) it was pointed out that the 6th defendant had so resigned. She submitted that these letters, in effect, amount to one months notice of termination as per the Deed of guarantee. As this submission turns upon these letters, the relevant portion of these letters may be reproduced. They read as follows :

'This is to inform you that I have resigned firm Aiyars Advertising and Marketing Private Limited and that I was relieved by the Company on April 22, 1974. A copy of my letter of Resignation dated April 11, 1974 along with Aiyars letter of April 19, 1974 relieving me are enclosed for your reference.

Since I was a Professional Director on the Board and had no share holding in the Company, may I request you to kindly relieve me of my personal guarantee given to you as Director of Aiyars Advertising and Marketing Pvt. Ltd.

37. Mrs. Nanavati has taken the Court through letters dated 25th July, 1974, 3 letters of 7th February 1975, letters of 12th February 1975, 26th February, 1975 and the Notice issued on 7th November, 1975 and the Reply dated 20th November, 1975. All these correspondence form part of Exs. B and C. Mrs. Nanavati has submitted that the 3 letters dated 14th May, 1974 in effect and substance amount to a Notice of termination of one month as stipulated under the Deed of guarantee. She has submitted that the 6th defendant stood discharged after the period of one month from 14th May, 1974. She submitted that, give or take a few days, the 6th defendant stood discharged at least from 30th June, 1974, if not earlier. She submitted that as on 30th June 1974 a sum of Rs. 19,66,881-71 ps. was due and payable by the 1st defendant Company to the plaintiffs. She submitted that the 6th defendant cannot be liable for any amounts lent and advanced to the 1st defendant Company after this date. She submitted that upto the period of 30th September, 1974 the 1st defendant Company had repaid the plaintiffs a sum of Rs. 27,70,354-30 ps. She submitted that under section 61 of the Contract Act, the plaintiffs are bound to appropriate these amounts towards the prior debts. She submitted that this sum of Rs. 27,70,354-30 ps. must compulsorily be appropriated towards the sum of Rs. 19,66,881-71 ps. She submitted that the sum of Rs. 27,70,354-30 ps. is more than enough to pay even the interest on the sum of Rs. 19,66,881-71 ps. She submitted that therefore, there is now nothing due and payable by the 6th defendant to the plaintiffs and that the 6th defendant therefore, stands discharged and no Decree can be passed against the 6th defendant.

38. I am unable to accept the submission of Mrs. Nanavati. A plain reading of letters of 14th May, 1974 clearly show that there is no termination. There is a mere request that 6th defendant be relieved of the guarantee. That request has never been granted. In fact, the 1st defendants by their letter dated 25th July, 1974 (part of Ex. B) informed the plaintiff that the 6th defendant was not to be relieved of his guarantee. That the 6th defendant was not, to his own knowledge, discharged is clear from the 3 letters dated 7th February, 1975 (two are part of Ex. B and one is part of Ex. (C). In these letters the 6th defendant states that he has not heard anything from the plaintiffs. He asks what action has been taken to relieve him of his personal guarantee. Thus, upto 7th February 1975, the 6th defendant was aware that he had not been discharged from the guarantee. Not only that but the plaintiffs by their letter dated 26th February, 1975 (part of Ex. C) categorically inform the 6th defendant that they cannot relieve him of the guarantee unless a request comes from the 1st defendant Company. The plaintiffs inform him that on receipt of such a request from the 1st defendant Company, his request for relieving would be considered by the plaintiffs Bank. It is an admitted position that no such request was even been made by the 1st defendant Company. Thus, from the correspndence, it is clear that the 6th defendant was never relieved of his liability. Even otherwise the plaintiffs witness Mrs. Kasbekar has, in her evidence, categorically stated that the 6th defendant was not relieved of his liability. That position is borne out from the correspndence. Under these circumstances the submission that the 6th defendant stood relieved with effect from 30th June, 1974 cannot be accepted. It will have to be held that the 6th defendant continues to be liable on the guarantee given by him. Under these circumstances, Issue Nos. 1, 2 and 3 of defendant No. 6 are answered in the Negative.

Issue Nos. 1 and 2 of defendants 2, 7, 8 & 9, Issue Nos. 6, 7 and 8 of defendants 3 and 4, Issue Nos. 1, 6 and 7 of defendants 5-A and 5-B and Issue No. 8 of defendant No. 6. Along with these may be taken up Issue No. 1o of defendants Nos. 3 & 4 and Issues Nos. 9 and 10 of defendants Nos. 5(a) and 5(b).

39. Issue No. 10 of defendants Nos. 3 & 4 and Issues Nos. 9 of defendants Nos. 5(a) and 5(b) are the same. That were raised because in the pleadings there is some controversy on this point. They are answered in the affirmative because during trial it has been admitted that the Book Debts are hypothecated in favour of the plaintiffs. Issue No. 10 of defendants Nos. 5(a) and 5(b) has also to be answered in the Affirmative as admittedly defendants 5(a) and 5(b) are sued in their capacity as heirs and legal representatives of original defendant No. 5.

40. The other Issues have been most strenuously pressed. As seen earlier, on merits, the defendants have had no defence at all. The defendants have taken advantage of the delays of litigation and have not paid a single penny upto date even though, on date of filing of the suit, they had no defence to the suit. Now, it is sought to be contended that inaction/negligence on the part of the plaintiffs has resulted in a discharge of these defendants.

41. The submission of the defendants is based upon sections 139 and 141 of the Indian Contract Act. Based on these two sections it is submitted that admittedly the plaintiffs Bank had, on the date that the Deed of Guarantees was obtained, another security from the 1st defendant by way of Hypothecation of Book Debts. It is submitted that the Hypothecation of Book Debts and Guarantees were not two independent transactions. It is submitted that they formed part and parcel of one composite transaction. It is submitted that this being so, the Sureties/Guarantors i.e. defendants 2 to 9 are, upon payment or performance, entitled to the benefits of all the rights which the Creditor had against principal debtor. It is submitted that this would include the benefit of any other security which the creditor had against the principal debtor. It is submitted that if the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is impaired, then the surety is discharged. It is submitted that the surety being entitled to the benefit of any security which the creditor had against the principal debtor is impaired, then the surety is discharged. It is submitted that the surety being entitled to the benefit of any security which the creditor had against the principal debtor and if the creditor loses, or, without the consent of the surety, parted with the security, the surety would be discharged of the value of the security. It is submitted that the plaintiffs filed the Suit on 3rd December, 1975. It is submitted that they which got the Court Receiver appointed Receiver of the Book Depots of the firm at the ad. interim stage. It is submitted that on 6th January, 1976 the ad interim Order was confirmed and an Injunction was granted restraining the 1st defendant Company from recovering the book debts. It is also submitted that on M/s. Bennett Coleman and Company had filed a Suit being Suit No. 850 of 1975 against the 1st defendant herein. In that suit M/s. Bennett Coleman & Company had got an Order of Injunction restraining the 1st defendant Company from recovering the book debts. It is submitted that on 9th October 1975 the plaintiffs the Order of Injunction, in Suit No. 850 of 1975, modified by reason of which the plaintiffs were permitted to realise the book debts of in their own right and not as collecting Agents of the defendants. It is submitted that the plaintiffs having obtained an Injunction and an Order appointing Court Receiver and having been obtained liberty of this Court in Suit No. 850 of 1975 to recover the book debts, were bound and liable to recover all the book debts. It is submitted that by now the right to file Suits, for recovery of book debts against various debtors of the 1st defendant Company, has become time barred. It is submitted that this right has become time barred due to the omission of the plaintiffs to do acts which they were bound to do. It is submitted that this omission amounts to negligence. It is submitted that this has resulted in the security being lost. It is submitted that by reason of the claim against the various debtors becoming time barred, in the event of the Guarantors paying up the amount, they would not be entitled to the benefit of the security of the book debts. It is submitted that book debts of the value of over Rs. 40 lacs were available. It is submitted that the book debts were sufficient to clear the entire claim of the plaintiffs. It is submitted that, under these circumstances, defendants 2 to 9 are discharged of the entire liability to the plaintiffs.

42. In support of these submissions, strong reliance has been placed upon certain authorities., Before these authorities are considered, in my view, it would be preferable to look at the law on the subject. In my view, the law on the subject is very clear. It does not require many or any authorities. The provision regarding Indemnities and Guarantees are contained in Chapter VIII - Sections 124 to 147 of the Indian Contract Act. It would be convenient to set out the relevant sections in this behalf. Section 128 reads as follows:

'Section 128: The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.'

Thus, it is clear that in law the surety's liability is co-extensive with that of the principal debtor. So far as far as the suit Guarantees are concerned, there is also an express provision that the Guarantors will be deemed to be principal debtors. The Clause in the guarantee reads as follows:

'To give effect to this guarantee you may act as if we are the principal debtor.'

'Section 137: 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.'

It must be emphasised that it has been settled law, as set out by the Privy Council in the case of Mahanth Singh v. U. Ba Yi, reported in , that there is no obligation or duty even to sue the principal debtor. The Privy Council has laid down that even though the failure to sue the principal debtor results in the claim against him being time barred the surety would not be discharged. This because the Surety's liability is independent of and co-extensive with that of the principal debtor. Thus even if a Suit against the principal debtor is not filed and the claim against the principal debtor becomes time barred, the surety does not get discharged. Thus it was open to the plaintiffs not to file any Suit against the 1st defendant Company. It was open to the plaintiffs not to enforce any other remedy against the 1st defendant, This would include the remedy of recovery of book debts. Thus in law it is clear that the plaintiffs were not bound or liable to recover book debts. What is worse for the defendants is that in the Deeds of Guarantees there are specific provisions which inter-alia provides as follows :

'You shall be at liberty ........ not to sue either the principal, or any person or persons on any such bills, notes, mortgages, charges, liens or other securities or any person liable as surety or collaterally liable for the principal, or any other person or persons.:

Thus plaintiffs need not have included 1st defendant in this Suit and/or filed any suit against the 1st defendant. In such a case the other defendants could never have claimed that they stood discharged. This even though the claim against the 1st defendant had become time barred. It will have to be seen whether the position can be said to be different, merely because the plaintiffs included the 1st defendant in this Suit. Section 139 reads as follows :

'Section 139: If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.'To be noted that before the surety is discharged under section 139, certain conditions have to be fulfilled viz:

a) the creditor must do an act which is inconsistent with the right of surety or

b) the creditor must omit to do an act which his duty to the surety requires him to do.

c) the eventual remedy of the surety is impaired by such conduct.

It is not any act or omission which discharges the surety. What are the acts which would be inconsistent with the right of surety or what are the duties which are required to be performed by the creditors are to a large extent matters of contract between the parties. However, section 137 makes it clear that, in the absence of a contract to the contrary a mere forbearance or omission to sue the principal debtor or a forbearance or omission to enforce any other remedy does not discharge the surety. Thus it is very clear that, in law, such forbearance or omission are not inconsistent with the right of a surety nor is there any duty to the surety to first recover from the collateral security. This is also clear from section 128 quoted above. Also as seen above the Deeds of Guarantees specifically provide that the plaintiffs need not sue to recover the other securities. In this case the contract also is against the defendants. To be noted that this clause is in consonance with law and not against any legal provision. It is thus a binding clause.

Section 140 reads as follows :

'Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that is liable for, is invested with all the rights which the creditor had against the principal debtor.'

When this section is read with section 128 it is clear that, on the guaranteed debt becoming due or on default of the principal debtor, there is an obligation or duty in the surety to pay and/or perform all that he is liable for. This duty or obligation is primary. It must be first performed before the benefits of this section are claimed. The surety must first pay before he can claim to be invested with all the rights which the creditor has against the principal debtor. Thus, in my view, section 140 does not just lays down a right. It also imposes a duty and obligation on the surety. The sureties are also well aware that, because of legal delays, by the time they get invested with the rights of the creditor against the principal debtor, the claim against the security would become time barred. A party who thus, uses the delays of law, fails to perform his own obligation or duty cannot then fall back upon other equitable provisions of law and claim that he had a right to be so invested and/or that right is lost. Further the legal position that forbearance to sue or recover does not discharge surety, is also known to all. It is therefore, all the more necessary that the surety pays up and gets invested with the rights of the creditor against the principal debtor before the claims get time barred. This being the position in law, in effect what the defendants as guarantors are seeking to do in this suit, and what the arguments on their behalf amount to, is that they could sit tight and not pay and force the plaintiffs to first recover from the book debts, if necessary by filing suits against the various debtors. What the defendants are submitting is that in effect the plaintiff should have first recovered from the book debts instead of looking to them. This is against all well established principles of law and equity.

Section 141 reads as follows :

'A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.'

Under this section, it is only when the creditor loses or without the consent of the surety parts with the security, that the surety is discharged. The discharge is to the extent of the value of the security. A creditor can only lose or part with security provided the creditor is in possession and control of the security. To be noted that section 141 is in addition to section 139 which would cover cases where the creditor was not in possession of the security. Therefore, in my view, section 141 can only apply in cases where the creditor is in actual possession or control of the security. Section 141 can have no application and will not apply to cases where the creditor has no control or possession of the security. Section 141 casts no obligation on the creditor to actively recover security which is not within his control or possession. By the ruse of not paying and taking advantage of legal delays the surety cant expect to force the creditor to keep alive or spend for recovery of another security. If that were to be permitted then the surety, in almost all cases, would sit back, take advantage of legal delays and force the creditor to first recover from the principal debtor or other security. This would negate section 128. It would negate section 137.

43. At this stage, it would be very necessary and relevant on the facts of this case and in view of the arguments which have been made to consider the distinction between a pledge and an hypothecation. No authorities need be cited in this behalf. This distinction has been aptly set out on page 809 of Pollock & Mulla's book on the Indian Contract and Specific Relief Act, 10th Edition which reads as follows :-

'Hypothecation and Pledge:-

In hypothecation the possession of of the property is retained by the owner and certain rights in that movable property are transferred to the person in whose favour the property is hypothecated. But in a pledge the possession of goods also passes to the pledgee by way of security though the possession may be constructive. The true distinction from hypothecation is that the constructive possession of the goods in the case of pledge is specifically secured by the terms of the contract and is continued unabated throughout.'

44. At this stage it must, on pain of repetition, it must be mentioned that as seen above neither in law nor under the Guarantees in this Suit is there any obligation or duty on the plaintiffs to recover and/or take possession of the hypothecated book debts. There is certainly no duty or obligation to proceed in law against the hypothecated book debts. In fact the Guarantees give a specific right not to sue. Undoubtedly under the Deed of Hypothecation of book debts, the plaintiffs have a right to sue or recover. But this is a right to so proceed if they so desire. This right cannot be converted into obligation or duty as is sought to be done in this particular case. The defendants conveniently ignore the fact that in the contract between them and the plaintiffs i.e. the Deed of guarantee the plaintiffs have been given a specific right not to sue the principal debtor or make any claim or file any Suit in respect of any of the securities.

45. Mr. Mody has in support of the submission, that defendants 2 to 9 have got discharged by the plaintiffs having neglected and failed to realise the book debts, placed reliance upon the authority of the Supreme Court in the case of The State Bank of Saurashtra v. Chitranjan Rangnath Raja and another, reported in : [1980]3SCR915 . This was a case where a cash credit facility had been granted by the Bank on pledge of certain goods and securities. The goods and securities were in possession of the Bank and under their lock and key and supervision. The pledged goods were lost. It was contended that by reason of the goods having been lost by the bank, the Guarantors were discharged. The Supreme Court upheld this contention. The Supreme Court held that the pledge and the personal guarantee were not two independent transactions but formed part and parcel of one composite transaction. On facts it had been concurrently found by the lower Courts that the Bank had been utterly negligent with regard to the safe keeping and handling of the pledged goods and the security of pledged goods was lost on account of negligence of the Bank. Under these circumstances the Supreme Court held that the Guarantors were discharged under section 141 of the Contract Act. Mr. Parikh also relied upon the authorities in the cases of Amrit Lal Goverdhan Lalan (dead) by his legal representative v. State Bank of Travancore & Ors., reported in : [1968]3SCR724 ; State of Madhya Pradesh v. Kaluram, reported in A.I.R (1968) Mys 1105 and P. Janakiram Chety v. Punjab National Bank, Ltd. New Delhi & Anr., reported in A.I.R.(1968) Mys 56. All these authorities deal with cases where the Creditor was in the possession and control of the security.

46. To be noted that the all above authorities deal with a case of pledged goods and/or where the goods were in the possession and control of the creditor. In such a case there was a duty not to loose the goods. This even under the law relating to bailments. These authorities are based upon negligence. This is a completely different situation from one where the goods are not in the possession or custody of the creditor. As seen earlier the creditor is under no obligation to recover other securities. As seen earlier, mere forbearance to sue cannot discharge the surety. Mere forbearance to sue cannot amount to negligence. In the present case the plaintiffs were not in possession of the Book Debts. They would have to take active steps to recover them. For that the plaintiffs would have to, not just send notices, but file many suits. Neither under the contract nor under law is there any obligation in the plaintiffs to do so. What the stand of the defendants amounts to is to force the creditor to actively recover from other securities and not from them. The whole purpose was to see that they did not have to pay anything. Thus they expect that the plaintiffs should have spend further monies for the purposes of filing suit thereby having to pay Court fees and the fees of lawyers. This when the plaintiffs would have no evidence to support of those suits. To be remembered that all the facts are within the knowledge of the defendants who at all relevant times were Directors. As is set out hereafter at no stage have the defendants offered to put the Court Receiver in funds, in order to enable him to file Suits. Thus by this ruse the defendants are in effect seeking to force the plaintiffs to first recover from other securities. This is against the provisions in law. For these reasons, in my view, the above authority can in no way help the defendants in this suit.

47. That the ratio laid down by the Supreme Court in the above referred to authority, in respect of pledged goods, can never apply to hypothecated goods is very clear from the observations of the Supreme Court as reproduced in the case of Bank of India v. Yogeshwar Kant Wadhera and ors., reported in A.I.R. (1967) P& H 176. A Single Judge of the Punjab and Haryana High Court, applied the ratio in the State Bank of Saurashtra's case (supra) to a case of hypothecation. This in the case of State Bank of India v. M/s. Quality Bread Factory, Batala and Ors., reported in . Against the decision ultimately an S.L.P. was filed in the Supreme Court. The Supreme Court observed as follows:

'The view taken by the High Court in the present case concerns only the hypothecation, and not that of pledge of goods so as to make the bank the bailee of goods highly debatable. But in view of the fact that the amount involved is very small, we do not think it fit to entertain the S.L.P. and hence it is rejected, but we may make it clear that we must not be deemed to have expressed our approval of the view taken by the High Court.'

To be noted that these are not causal observations. These are observations dealing with the merit of the matter. These observations would be binding on this Court. Thus, it is clear that the Supreme Court itself has held that principles laid down in the State Bank of Saurashtra's case (supra) cannot be applied to case of hypothecation of goods.

48. On the other hand, Mr. Palan has relied upon the authority in the case of Bank of India v. Yogeshwar Kant Wadhera, reported in . In this case most of the authorities cited by the defendants have been considered. The Division Bench of the Punjab and Haryana has, on a consideration of the entire law, held that in cases of hypothecation the surety is not entitled to invoke section 141 of the Contract Act. It has been held that under this section, it is only if the Creditor loses, or without the consent of the surety, parts with the security pledged, that the surety is discharged. It has been held that such a question cannot arise in case of hypothecation of goods for the simple reason that when the goods are not in possession of the hypothecatee, there can be no question of losing or parting with the same. It has been held 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. This because the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the right of the creditor. It has been held that 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. I am in complete agreement with the views expressed herein.

49. A similar view has also been taken in the case of The Karnataka Bank Ltd. v. Gajanan S. Kulkarni & Anr., reported in : AIR1977Kant14 . In this case, it has been held as follows :-

'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 Act. In our opinion, the true principle governing the matter is stated in America Jurisprudence Vol. 50; page 978, para 114 in terms following:

'114. Failure to enforce Security.- While the authorities appear 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 passive negligence on the part of the creditor in failing to take steps to secure the collection of his debt from collateral security given to him by the principal 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, he 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 securities, 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 force-close 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, of course, 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.'

It must be mentioned that the authority of the Supreme Court cited above was also considered herein.

50. Again in the case of Vasireddi Seetharamaiah v. Srirama Motor Finance Corporation, Kakinada and anr., reported in : AIR1977AP164 , the question arose as to whether the creditor is bound and liable to actively recover the security and an omission on the part of the creditor to actively recover the security discharges the surety under sections 139 and 141 of the Contract Act. The authorities of the Supreme Court in the State Bank of Saurashtra (supra) was also relied upon by the defendants in this case. After considering this and other authorities, it has been held that the plaintiffs having no possession or control over the security, there was no question of the plaintiffs having lost the security. It was held that there was no necessity for the plaintiffs to exercise their right to recover the property and the failure of the plaintiffs to exercise their right to recover cannot amount to an act or omission which could be said inconsistent with the right of the surety or which resulted in impairing eventual remedy against the principal debtor. The Court also noted that the surety could himself have taken immediate steps to pay up the amount and exercise whatever rights he wanted against the principal debtor. The Court noted the fact that surety did nothing in the matter. The Court held that surety having done nothing in the matter and there being no evidence of any positive act of negligence on the part of the creditor, the surety cannot claim to be discharged under section 139 or under section 141 of the Contract Act.

51. In my view the authorities of the Punjab and Haryana High Court in the Bank of India's case (supra), of the Karnataka High Court in the Karnataka Bank Ltd.'s case (supra) and the Andhra Pradesh High Court in Vasireddi Seethavamaiah's case (supra) lay down the correct law. I am in complete agreement with the views expressed therein.

52. Strong reliance has placed by the defendants upon a Division bench authority of this Court in the case of M/s. M. Ramnarain Pvt. Ltd. and anr. v. The State Trading Corporation of India Ltd., reported in : AIR1988Bom45 . To understand the ratio laid down in this case, it is necessary to know what were the facts of this case. In this case a loan was given by the plaintiffs to the defendants. A Deed of guarantee was executed by the defendants in favour of the plaintiffs by which the re-payment of the loan was guaranteed. The defendants drew Bills of Exchange on a Foreign Company. These Bills of Exchanges were delivered by the defendants to the plaintiffs by way of security with a request to have them discounted by the Bank. The Bills were accepted by the drawee who was a Foreign Company. On maturity the plaintiffs presented the Bills but the same were dishonoured. A notice of dishonour was sent to the defendants and a Suit for recovery of the amount was filed against the defendants. It is in this context that the Division Bench held that in cases of negotiable instrument the acceptor of the Bill of Exchange is the principal debtor and the drawer or endorsee of the Bill of Exchange is in position of a surety. No Suit was filed against the principal debtor and the period for filing a Suit against the principal debtor was over. The submission before the Division Bench was that the claim against the principal debtor having become time barred the surety was discharged under section 141 of the Negotiable Instrument Act. This contention was accepted by the Division Bench. It has been strongly urged before me that the authority of the Division Bench therefore, lays down the proposition that if suits are not filed within the period of limitation and as a result thereby the security is affected then the surety stands discharged. In my view, this authority no-where lays down the broad proposition which the defendants are canvassing. Section 137 clearly provides that mere forbearance to sue the principal debtor can never discharge a surety. The Division Bench is not laying down any law against this section. In fact section 137 has not even been considered or dealt with by the Division Bench. As is clear from the following observations in para 10 of the Judgment in this case there was a contractual obligation to file a suit and recover the amount.

'10. ..... The general rule is that the acceptor of a bill is the primary debtor and the drawer only a surety. The three bills of exchange were handed over by defendant No. 1 to the Corporation, who was payee, and Nichol accepted it with the result that Nichol became the principal debtor, while defendant No. 1, who was a drawer, becomes surety. The three bills were dishonoured by Nichol, but payment was subsequently made in respect of one of the bills. It is not in dispute that limitation for filing suit in respect of dishonoured bills is six years from the date of dishonour in accordance with Indonesian law. The Corporation, who was the holder of the bills did not institute any proceedings for realisation of the amount under the bills from Nichol, the principal debtor, and it is necessary to ascertain what is the effect of failure to do so.

It was contended on behalf of the defendants that the Corporation had undertaken a contractual obligation to institute proceedings and realise the proceeds under the two bills and the Corporation failed to discharge that obligation. As mentioned hereinabove, on July 18, 1967 defendant No. 1 had guaranteed repayment of Rs. 27,09,900/- which was advanced by the Corporation towards the full C & F value along with interest at 9% per annum until the foreign proceeds are realised. Relying on the expression 'until foreign proceeds are realised' it was urged that the Corporation had agreed to recover the foreign proceeds from the acceptor and that being a contractual obligation, the Corporation was duty bound to institute action against the acceptor on the bills being dishonoured ...... In our judgment, though there is considerable merit in the submission urged on behalf of the appellants on this aspect, we do not wish to rest our decision solely on the fact that there was a contractual obligation on the Corporation to realise the proceeds of the bills before making claim against the defendants on the basis of the guarantee given by letter dated July 18, 1967. ....

This breach of the contractual obligation undoubtedly played a part in the Court holding that there was an omission and a loss. Further before the Division Bench, it was shown that the drawer had called upon the creditor to specifically file a Suit against the principal debtor and had even agreed to indemnify the Creditor in respect of all expenses of the Suit. Not only that the Court found from the material on record that the principal debtor was a substantial party from whom the amounts could have been recoverd. Also in this case the surety could not have himself taken any steps for recovery of the other security. This is clear from para 14 of the Judgment. It is under those circumstances i.e. where the surety could not and were not in a position to themselves recover and where the surety had called upon the Creditor to file a Suit and undertook to indemnify the Creditor and yet the Creditor did nothing, that the Division Bench came to the conclusion that there was inaction which amounted to negligence. It is in those circumstances that the Division Bench has made the observations which it has made. The Division Bench is in no way laying down a new law different from what is set out hereinabove. The Judgment of the Division Bench is based entirely on the peculiar facts of that case.

53. Based upon the authority of the Supreme Court in the case of the State Bank of Saurashtra (supra) and the Division bench authority in the case of M/s. M. Ramnarain Pvt. Ltd. (supra) it was strenuously urged that under section 141 there is an obligation on the creditor to preserve the securities secured. It is urged that it is for the creditor to ensure that the securities are available on the date when the Judgment is secured for repayment. It is urged that the creditor is duty bound to institute suits for recovery of securities, in this case the Book Debts. It is pointed out that in Suit No. 850 of 1975 filed by Bennett Coleman & Co. against the 1st defendant, the Court had initially injuncted 1st defendant from recovering Book Debts. It pointed out that the plaintiffs intervened in that Suit and by Order dt 9th October 1975 the earlier order was modified and plaintiffs were allowed to realise the Book Debts in their own right and not as collecting against the first defendant, herein. To be noted that defendants 2 to 9 were not parties to Suit 850 of 1975. There was thus no Order of Injunction against them. It is however submitted that now only the plaintiffs could realise and that too only in their own right. It is pointed out that on 6th January 1976, apart from getting the ad-interim Receiver confirmed, the plaintiffs obtained an Order of Injunction interalia restraining the defendants from recovering book debts. It is submitted that because of these orders the 1st defendant and the other defendants could not recover or realise. It is submitted that by getting a Court Receiver appointed of the Book Debts the plaintiffs undertook and/or in any event became bound and liable to recover the Book Debts. It is submitted that the defendants were continuously calling upon the plaintiffs to recover the Book Debts. It is submitted that the defendants repeatedly informed the plaintiffs that the plaintiffs would be liable for the consequences of non-recovery of the Book Debts. It is submitted that even the Court Receiver called upon the plaintiffs to take steps. It is submitted that many of the parties from whom Book Debts were to be recovered were well known Companies in Bombay. It is submitted that even if only 10 suits were filed, the entire claim of the plaintiffs could have been recovered. It is submitted that it is an admitted position that the Book Depots were in the region of Rs. 40 lakhs, and that plaintiffs had addresses of all debtors. It is submitted that in spite of repeated requests the plaintiffs have failed and neglected to recover the Book Debts except for a paltry sum of app. Rs. 8000. It is submitted that the claim against all debtors have now become time barred. It is submitted that the negligence of the plaintiffs has resulted in the security being lost. It is submitted that by their inaction and negligence the plaintiffs have deprived the defendants of their right to be invested with all the rights (including the right to recover the Book Debts). It is submitted that the facts of this case are identical to M/s. M. Ramnarain Pvt. Ltd's case (supra). It is submitted that the provision in Contract which gives a right to the plaintiffs not to file any suit or take any action either against the principal debtor or against a security is inconsistent with the statutory provision under sections 139 and 141 of the Contract Act. It is submitted that section 139 is not subject to contract and the provision of section 139 would prevail over any contract. There can be no dispute with this proposition. It is submitted that the provisions of section 141 are not subject to the contract of the parties. It is submitted that under section 141 it is only if the security is parted with with the consent of the surety that the creditor is protected. This is self evident from the section itself. It is submitted that the provision in the Deed of guarantee whereby the creditor i.e. the plaintiffs are at liberty to vary the contract or any term or terms of the contract or to realise or discharge or do any act or omission, the legal consequence of which is to discharge or entered into any compensation or compound with or promise to grant time, or any indulgence or not to sue the principals, or any other person or persons would be contrary to the provisions of sections 139 and 141 of the Contract Act. It is submitted that consent or assent, duties and obligation under sections 139 and 141 can never be done away with and any contract to the contrary would be against the statutory provision and in any event even presuming that a surety could consent or assent, the consent must necessarily be at the time of the purported act. It is submitted that a consent given at a much earlier date namely in the document at the time of signing of the document cannot avail the plaintiff. In support of these submissions reliance is placed upon the authorities in the cases of Central Bank of India v. Ali Mohammad and anr., reported in 1993 M.L.J. 1092; K.R., Chitguppi & Co. v. Vinayak K. Khadilkar, reported in 22 B.L.R 659; (Union of India, Ministry of Food and Agriculture (Dept. of Food), New Delhi v. Pearl Hosiery Mills and ors, reported in and State Bank of India v. Machine Well Industries and ors., reported in (1983) 53 Comp Cas 830. It is submitted that the defendants are discharged as the plaintiffs have allowed the claim against third parties to become time barred.

54. To the general proposition in law, there can be no dispute. However, one has to remember that there is a difference between the contracting out of the provision of a statute and providing for certain rights and liabilities in the contract. So long as a term is not contrary to any provision of law it will bind the parties to the contract. Whether a term is binding or whether it is against a statute will depend on facts and circumstances of each case. No hard and fast rule can be laid down at all. It would depend upon the nature of the documents and the terms of the clause. In this particular case, in my view, there is no contracting out of this provision of sections 139 or 141 of the Contract Act. All that the abovementioned clause provides for is a right in the plaintiffs to do or not to do something permissible in law. This is a right which is governed by the Contract and he defendants being parties to the Contract are bound by this. Further the facts of this case are completely different from those in M/s. M. Ramanarain's case. In this case the plaintiffs have done all that was necessary for them to do. As stated above there was no obligation to actively recover Book Debts. The plaintiffs by getting the Receiver appointed did not undertake any obligation or liability to recover Book Debts. By getting Receiver appointed they secured the Book Debts for the Sureties. Not only that but by getting the Receiver appointed the plaintiffs effectively put the Guarantors/Defendants in a position to safe guard their own interest. This because all defendants (including defendant No. 3) were served with the Notice of Motion and knew about the appointment of Receiver. In fact all defendants have been represented before the Receiver. There is thus no substance in the contention of defendant No. 3 that he is discharged because he was served with the writ of summons only on 23rd December 1981. In my view a receiver acts for the benefit of all parties. He acts on behalf of the party who is to ultimately succeed or in this case the party who is to ultimately benefit from the action of the Receiver. If the defendants were so anxious to protect their rights and to ensure that the claims did not become time barred they could have moved the Receiver and/or put him in funds to file suits. On the facts of this case, it is clear that the defendants have never done this or even offered to do this. They have never even sought to indemnify the plaintiffs in respect of the cost which will be involved if litigations were to be filed against the debtors. Thus once the plaintiffs took the precaution of having the Court Receiver appointed, they enabled the defendants to take whatever steps were necessary to safeguard the security. As the plaintiffs were under no obligation to file suits. The defendants were now at liberty to move the Receiver and put him in funds to do so. The plaintiffs have thus done all that was required of a creditor. The defendants were well aware that if suits were not filed the claim would become time barred. There was no obligation or duty in the plaintiffs to file Suits. Thus it was for the defendants who were the really interested parties to have first paid and become invested with the rights of the plaintiffs or in any event protect their own interest by putting the Receiver in funds and getting him to file Suits. If defendants were not interested in protecting their own rights, how can they expect the plaintiffs to do so. The defendants have not done nothing except for calling upon plaintiffs to file Suits. They have chosen to use the delays of law and have sat tight even though they have had no defence at all. Not only that even after the plaintiffs got the Receiver appointed, they have taken no steps to assist the Receiver in Recovery of the book debts. Their submission therefore, amounts to saying that even though not bound to do so, even though there is no obligation in law or in contract to file Suits, the plaintiffs should have spent further monies and filed Suits against debtors so that we don't have to pay anything or spend anything. Their arguments amounts to saying that the plaintiffs must first recover from others. This so that these defendants then have to pay nothing. In my view, it is very clear, on the discussion set out above, that in this case there is no act of the plaintiff which is consistent with the right of defendants 2 to 8 nor is there omission to do any act which the plaintiff were duty bound to perform. Thus the defendants are not entitled and do not stand discharged under section 139 of the Contract Act. On the facts of this case section 141 can have no application at all. The plaintiffs were never in possession or control of the book debts. Thus the submissions of the defendants cannot be accepted. Under the circumstances it will have to be held that the defendants are not discharged. Accordingly, Issue Nos. 1 and 2 of defendants 2, 7, 8 & 9 are answered in the Negative. Issue Nos. 6, 7 and 8 of defendants 3 and 4 are answered in the Negative. Issue Nos. 6 and 7 of defendants 5-A and 5-B are answered in the Negative and Issue No. 8 of defendant No. 6 is answered in the Negative.

55. Under these circumstances, the Suit will have to be decreed. Accordingly there will be a Decree in favour of the plaintiffs and against the defendants in a sum of Rs. 21,18,692-65 ps. with interest on the principal sum @ Rs. 17.1/4% per annum from the date of the filing of the Suit till Judgment and thereafter @ 6% per annum till payment or realisation. The plaintiffs to work out the figure of principal sum due and show it to the defendants. In the event of there being dispute between the parties liberty to any of the parties to apply. There will also be a Decree in favour of the plaintiffs in terms of prayer (b). The defendants except the Official Liquidator shall pay to the plaintiffs the cost of the Suit.

56. All the defendants apply for stay of the Judgment. In my view it will take at least 6 months from today to draw up the Decree. The defendants therefore, have plenty of time to file an Appeal and obtain a stay. Therefore, granting of stay is not necessary under the circumstances