1. This is a plaintiff's appeal from the judgment and decree dated 15-2-1997 passed by the II Additional Civil Judge, Mysore, in O.S. No. 155 of 1992, whereby the Trial Court has decreed the plaintiffs claim against defendants 1 and 2 for a sum of Rs. 2,15,060.45 being the amount due in respect of two loans borrowed by the first defendant on 12-5-1989 along with interest at the rate of 17.05% p.a. from the date of suit till realisation.
2. The Trial Court dismissed the plaintiffs claim and the suit against defendant 3 i.e., respondent 3 herein, who was the surety/guarantor.
3. There appears no need to go into the facts of the case in detail as the decree passed in favour of the plaintiff against defendants 1 and 2 has not been challenged. It is intact. The only dispute in this appeal is whether the Trial Court erroneously and illegally dismissed the claim against defendant 3 (respondent 3 herein) who was a guarantor i.e., surety. Therefore, without going into the facts, I have come to the question that has been urged before this Court.
4. The scope of the appeal is confined to the question as to 'whether the Trial Court had rightly dismissed the plaintiffs claim against the guarantor or surety. The Trial Court has dismissed the plaintiffs claim against the surety taking the view that because of negligence or implied consent of the plaintiff-bank the first defendant has been able to transfer the business and the goods that has been hypothecated with the plaintiff-bank to a third person. Therefore, the surety stands discharged in view of Section 141 of the Contract Act.
5. Sri A. Keshava Bhat, learned Counsel appearing for the appellant has contended that the benefit of Section 141 of the Contract Act, could not be available to the surety. The learned Counsel submitted that the question of releasing security by the creditor or its being operated with by the creditor, even if, without the consent of the surety will only arise in case it is established that the hypothecator or the principal debtor has placed the properties hypothecated in the hands of the plaintiff-bank. The learned Counsel contended that unless the possession of hypothecated goods, stock etc., had been put under the control and possession of the plaintiff-bank by the principal debtor (defendant 1), the question of the creditor releasing the securities cannot arise, nor can any question arise to the effect that the creditor has operated with the security. So, the surety is discharged to the extent of the value of the security. The learned Counsel submitted that all the goods and stocks which was hypothecated were under the control and possession and use of the principal debtor and that the surety knew it. Therefore, when the principal debtor transferred it in the name of a third person, the plaintiff-bank cannot be fastened with the liability, or with the consent for the transaction of transfer of business and goods by the principal debtor to a third person. Hence, the Court below illegally held that the surety was discharged and erred in law in dismissing the plaintiff-bank's suit against the surety or guarantor. The learned Counsel submitted that the suit ought to have been decreed in favour of the plaintiff-bank against all the defendants including the guarantor/surety. The learned Counsel for the appellant-plaintiff, in this connection, has made reference to the Division Bench decision of this Court in the case of Karnataka Bank Limited v Gajanan Shankararao Kulkarni and Another, and the decision of the Punjab and Haryana High Court in the case of Bank of India, Bombay v Yogeshwar Kant Wadhera. The learned Counsel for the appellant further contended that it is not the duty of the creditor to every time runand follow the debtor. He submitted that the duty of the creditor, who takes security from the principal debtor is to see that the security remains enforceable against the principal debtor and that all and any of formalities required by law to be-observed in connection with such securities are observed, beyond this the creditor has no obligation to it. The learned Counsel contended that in the present case all the goods hypothecated including the stocks, business and furnitures etc., remained with the principal debtor. The learned Counsel contended that when the securities remained in possession of the principal debtor, it would be too onerous and difficult, impractical and unrealistic to expect that each and every movement of the hypothecator should be watched by creditor. There could not be any and had been no negligence nor inaction on the part of the creditor and the hypothecated goods were lost because of the inaction of the principal debtor without any consent of the creditor express or implied, so the surety cannot claim to have been discharged under Section 141 of the Contract Act. The learned Counsel for the appellant has made reference to the decision of the Bombay High Court in the case of Bank of India Limited v Rustom Fakirji Cowasjee , for this proposition. The learned Counsel has further made reference to the decision of the Andhra Pradesh High Court in the case of Jayant T. Shah v Andhra Bank Limited, and submitted that when the goods are hypothecated and they are in possession of the creditor, there is no question of leasing with or operating the goods and as such the surety could not claim the benefit of discharge of surety's liability under Section 141 of the Contract Act. The learned Counsel further made reference to the Single Judge decision of this Court in the case of M/s. Shiv Machine Tools v Canara Bank. The learned Counsel contended that the case relied on by the Court below viz., the decision of the Supreme Court in the case of State of Madhya Pradesh v Kaluram, the goods were at the relevant time were in possession of the State Government itself and which had control over it and then they were lost and in that context the Court has held that the security was lost when the goods were in possession of the creditor and it was operated with the consent of the surety/guarantor. So, that case does not apply to the facts of the present case.
6. The learned Counsel for the appellant further contended that the decision of the Supreme Court in the case of State Bank of Saurashtra v Chitranjan Rangnath Raja and Another, is not applicable to the facts of the case in hand and has been wrongly relied by Court below.
7. The above contentions of the learned Counsel for the appellant have hotly been contested by Sri C.K. Narayana Rao, learned Counsel appearing for the respondents.
8. It has been contended by the learned Counsel for the respondents that as per the deed of agreement to advance money on hypothecation ofgoods the properties that were made subject-matter of security and hypothecation, they were put under the control of the plaintiff-bank. The learned Counsel contended that no doubt the business could be carried on by the principal debtor, but as per the terms of the agreement of hypothecation, the plaintiff-bank was given full control and even to take actual possession of the goods hypothecated from the principal debtor. He submitted that the principal debtor, as the deed indicates, was acting as an agent of the plaintiff-bank and the goods were in possession of the bank through its agent. It means, the goods were under the control of the bank and the goods were lost because of the negligence in exercising control over the security. Therefore, the Court below was justified in taking the view that Section 141 of the Contract Act did apply and the security has been discharged.
9. The learned Counsel for the respondents, in this connection, has made reference to the decisions of the Supreme Court in the case of State of Madhya Pradesh, supra, and in the case of The State Bank of Saurashtra, supra.
10. I have applied my mind to the contentions advanced by the learned Counsel appearing on both sides.
11. Before proceeding further, it will be appropriate to refer and quote Section 141 of the (Indian) Contract Act, 1872 which reads as under:
'141. Surety's right to benefit of creditor's securities.--Asurety 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'.
12. Section 141 of the (Indian) Contract Act, 1872 referred to above, confers right on the surety to take the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is/has been entered into. It provides that it is immaterial whether the surety knows of the existence of such security or not. The securities which the creditor has got against the principal debtor at the material time when the contract of surety was entered into, the surety will be entitled to take benefit of those securities. This section further provides that if the creditor loses or parts with the security or any part thereof, without the consent of the surety, then the liability of the surety stands discharged to the extent of the value of the surety that has been lost. It means, if some valuable security has been provided to the creditor against the principal debtor, may be in the form of hypothecation, but if the creditor loses the same whether on account of his negligence or on account of inaction in keeping with the security into existence, then the surety may get discharged. The use of expression 'creditor has' is indicative of the intention of the Legislature that thesecurity provided by the principal debtor to the creditor must be in his possession and control may be either direct, actual or constructive. If the creditor has the control and possession either direct, actual or constructive, of the securities then if he loses as mentioned earlier, the surety gets discharged. If he does not prove or show that the securities provided by the principal debtor to the creditor had been given or placed under the possession or control of the creditor, but instead it remain in the possession and effective control only of the principal debtor and during that period when it is lost the surety may not be discharged, because then it may not be a case of creditor losing or parting with the security. The factual position depends upon the terms of the agreement. In the present case, as such, it will be appropriate to make reference to the provisions of the agreement of loan against hypothecation of movables/goods. The material documents to be referred at Ext. P. 2 and Ext. P. 6. Ext. P. 2 is dated 12-6-1989. The material clauses of Ext. P. 2 reads as under:
'2. The borrower undertakes and agrees to maintain a marginof 25% during the continuance of this security and in ease of depreciation of the security the borrower undertakes to make good the shortfall by giving other sufficient property as security.
3. The borrower hereby agrees and hypothecates the said provisions/stationery/cosmetics etc., purchased/to be purchased from out of the bank advance as security, along with other assets as per the Schedule given hereunder by way of first charge for the due repayment of the instalments due to the Bank.
8. The borrower agrees not to create any other charges/lien over the property now hypothecated to the Bank and also agrees to keep the same in Trust for the Bank and unencumbered as long as the loan is due.
9. In case of default of payment of instalments of principal or interest on demand, the Bank will have the right to seize and take possession of the property and sell the same either by public auction or by private contract and adjust the net sale proceeds towards the loan account and recover the balance due after such adjustment, from the borrower without prejudice to the Bank's rights to proceed against the borrower personally. The borrower undertakes to deliver possession of the hypothecated goods demanded by the Bank consequent on the default committed by the borrower.
14. The borrower undertakes to permit access to the place of business or any other place wherein the hypothecated property/goods are kept by the officers of the Bank as and when required by the Bank, to inspect to value and/or to take possession of the said security'.
The Schedule of the agreement indicates that the properties have been hypothecated.
13. Ext. P. 6 is an agreement for demand cash credit on the hypothecation of movable property goods, it is dated 12-6-1989. The relevant clauses of Ext. P. 6 read as under:
'1. That the borrower's goods produce and merchandise described in General terms Stationery, provisions, Cosmetics etc., the Schedule hereto which have been already stated in the premises at Saraswathipuram and the goods which shall hereafter be stated in the said premises in addition to the goods now stated, by way of substitution or for and in lieu of any goods which may from time to time have been withdrawn and the whole of the borrower's stock, whether raw or in the process of manufacture and all articles manufactured therefrom which now or hereafter from time to time, during the continuance of this security shall be brought into stored or be in or about the borrowers godowns or premises at 410, Agraveeraiah Complex, 4th Main, Saraswathipuram, Mysore, are hereby hypothecated and be deemed and to have been hypothecated by way of first charge as security for payment to the Bank on demand of all monies at any time payable by the borrower to the Bank in respect of the Cash Credit Account. That the borrower's goods, produce and merchandise described in general terms in the Schedule herein, wherever stated by the borrower from time to time during the continuance of this agreement shall be deemed to have been hypothecated by way of first charge as security for payment to the Bank on demand of all monies at anytime payable by the borrower to the Bank in respect of the Cash Credit Account.
4. That a Register of the goods, produce, merchandise and stock hypothecated as such security as aforesaid shall be kept by the borrower and be at all times open to the inspection of the Bank, in which shall be entered particulars of all goods, produce, merchandise and stock hypothecated to the Bank under this agreement. That all the said goods and all documents under this security shall always be kept distinguishable and held as Bank's exclusive property specifically appropriated to this security to be dealt with under the directions of the Bank. The borrower shall furnish to the Bank weekly or such intervals as the Bank may require a Schedule or copy of all the entries which shall have been made in the said register as well as a statement of stocks which stand hypothecated to the Bank and as contained in the said Register at the close of the previous day and duly certified under the signature of the borrower. The submission of the statement of stocks from time to time held by the borrower will be as agent for the Bank and is in the nature of render-ing of account by agent to principal and the statement so submitted shall be the returns of the borrower in his capacity as agent for holding the goods hypothecated to the Bank.
7. That the borrower shall be at liberty from time to time in the ordinary course of business to sell or dispose off any of the said goods but the proceeds of sale of any of the goods sold shall be held in trust for the Bank and as soon as the same are received shall be paid to the Bank to the Cash Credit Account.
10. Confers right on the Bank that in default of such payment as last aforesaid the Bank may, at any time hereafter and without any notice to the borrower (without prejudice to the Bank's right of suit) either by public auction, or by private contract sell or otherwise dispose off the goods hypothecated to the Bank under this agreement or any part thereof and apply the net sale proceeds in or towards liquidation of the balance then due to the Bank.
15. That all the goods, produce and merchandise which are now hypothecated and which stand hypothecated from time to time to the Bank, when left in the possession of the borrower shall be held by him and be deemed to be held by him, only as agent for the Bank in trust for the Bank and that the borrower be accountable to the Bank for all the goods hypothecated under this agreement and placed in the possession and control of the borrower as agent for the Bank. And that all goods which may, at any time, remain, in the place where other goods stand hypothecated to the Bank exist and which the borrower has the capacity to hypothecate shall be deemed to be under hypothecation to the Bank and in the possession of the borrower as agent for the Bank and in trust for the Bank.
16. That the Bank, its Agents and Nominees shall be entitled, at times, without notice to the borrower, but at the borrower's risk, expense and responsibility and if so required as Attorney for and in the name of the borrower, to enter any place where the said goods may be inspect, value, insure, superintend disposal and or to take particulars and charge of all or any part of the said goods and check any statement, accounts, reports and information and also on any default of the borrower in payment of any money hereby secured or default in the performance of any obligation of the borrower to the Bank, or the occurrence of any circumstance which, in the opinion of the Bank has endangered or is likely to endanger the security, to take possession of, recover, appoint receivers, remove and/or sell by public auction or private contract, despatch for realisation or otherwise dispose of or deal with all or any part of the said goods, and to enforce, realise, settle, compromise and deal with all or any rights or claims relatingthereto without being bound to exercise any of these powers or being liable for any loss in the exercise thereof and without prejudice to the Bank's rights and remedies of suits or otherwise, notwithstanding there may be any pending suit, action or other proceeding. The borrower undertakes to give immediate possession to the Bank on demand of the said goods and to transfer and deliver to the Bank all relative bills contracts, securities and documents and agrees to accept the Bank's accounts of sales and realisation as sufficient proof of amounts realised and relative expenses and to pay to the Bank any shortfall or deficiency thereby shown, provided that the Bank shall be entitled at all times to apply any other money or monies in its hands standing to the credit of or belonging to the borrower in or towards payment of any amount for the time being payable to the Bank on the said Cash Credit Account, or otherwise as aforesaid and to recover at any time from the borrower by suit or otherwise the balance remaining payable to the Bank on the said Cash Credit Account or otherwise notwithstanding that all or any of the securities may not have been realised, provided, also that subject to these powers of the Bank the borrower may, with the approval of the Bank, sell the goods from time to time in due course of business provided the margin of security required by the Bank is fully maintained and on the terms of payment or delivery to the Bank of the proceeds thereof or documents therefor immediately on receipt thereof.
14. A reading of the agreement and the above mentioned clauses coupled with other clauses thereof, reveals that the goods hypothecated were no doubt placed under the control and supervision of the Bank, but, the actual possession remained with the borrower, who had also to carry on the business, but the power had been given to the Bank to inspect, to take accounts, to evaluate the goods hypothecated and the goods taken in stock, as well as, to issue directions to the borrower in the matter of use or sale of goods stored in the godown and any other matters relating thereto and that the borrower in whose actual possession the goods were, was held was allowed to hold not in his own right the hypothecated properties, but in trust for the Bank and to act as an agent of the Bank and also to act as per the directions and control of the Bank itself. The Bank had to exercise those powers, supervise and control over it. From the perusal of the document, these powers were conferred on the Bank to see that the goods be available at the time when the security has to be enforced. However, if the powers are conferred and the corresponding duties are not followed the damage is bound to be caused. The person or authority on whom the powers are conferred is expected to exercise those powers and perform the duties which may be necessary for the purpose of fulfilment of the object for which the power has been conferred. In this case, the properties hypothecated has beenput or placed under the control and supervision of the Bank. It had also been given power in the circumstances mentioned to take actual possession of the properties/goods, such as when securities were lost because action of principal debtor it was really lost because of the negligence and inaction of the creditor i.e., the Bank also. A complete perusal of the agreement clearly reveals that it is a misconception to say that the Bank was not in actual possession of the goods hypothecated. The correct is that plaintiff-bank was in possession of those goods/securities and was acting through its agent and the borrower who was in actual possession and dealt with the goods hypothecated was acting, as per the agreement between the borrower and the Bank, as bank's agent and in accordance with the terms of the agreement and the directions issued by the Bank from time to time. Therefore, the Bank even if was not in actual possession, it was in constructive possession of the properties through its agent, having the full rights and control over the properties hypothecated. Therefore, it was the duty of the Bank to have been vigilant in the matter of control and supervision with reference to the hypothecated goods as securities which the Bank placed and allowed those goods to continue with the borrower acting as an agent of the Bank. In such circumstances, the Bank has failed to exercise those powers conferred under the agreement and because of that negligence, inaction and lack of proper supervision of the goods/properties hypothecated and subject-matter of the agreement by Bank goods were lost. For the negligence or inaction on the part of the Bank, the surety/guarantor cannot be blamed and the surety cannot be deprived of the benefit of Section 141 of the Contract Act. Because of the lack of proper supervision and control by the Bank being exercised by it over the hypothecated goods under Exts. P. 2 and P. 6 and the securities were lost, the surety, can well be said under Section 141 of the Contract Act, to have stood discharged to the extent of the value of the security lost. When, I so opine, I find support for my view from the decision of their Lordships of the Supreme Court in the case of State of Madhya Pradesh, supra. It will be appropriate to quote paragraphs 11 and 12 of the said report which read as under:
'Kaluram by executing the surety bond had undertaken to discharge the liability arising out of any act, omission, negligence or default of the forest contractor. The surety Kaluram contends that because the State lost or parted with the security, he be discharged. By Section 140 of the Indian Contract Act, 1872 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 he is liable for, is invested with all the rights which the creditor had against the principal debtor and by Section 141 it is provided:
'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, whether the surety knows of the existence of such security or not, and if the creditor loses or, without consent of the surety parts withsuch security, the surety is discharged to the extent of the value of the security'.The State had, as already observed, a first charge over the goods. The State was also entitled to prevent the goods from being removed without payment of the instalments due. The expression 'security' in Section 141 is not used in any technical sense, it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefits of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability, he is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of the surety, the latter is by the express provision contained in Section 141 discharged to the extent of the value of the security lost or parted with.
12. The State had a charge over the goods sold as well as the right to remain in possession till payment of the instalments. When the goods were removed by Jagatram that security was lost and to the extent of the value of the security lost the surety stood discharged'.
15. In paragraph 13 of the said report, their Lordship further observed as under:
'The Forest Officers of the State of Madhya Pradesh parted with the goods before receiving payment of the amount due by the contractor Jagatram. Thereby the charge in favour of the State was seriously enquired and the statutory power to sell the goods for non-payment of the amount remaining due became for all practical purposes ineffective. Again under the terms of the contract the Forest authorities had the right to prevent removal of goods sold until the price was paid that right was also lost'.
16. In the case of The State Bank of Saurashtra, supra, it has been laid down as principle of law that the surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor has offered security by way of pledge of goods and the goods were to be in the custody of the creditor Bank. On this conclusion Section 141 of the Act will be indubitably attracted. Section 141 comprehends a situation where the debtor has offered more than one security, one of which is, the personal guarantee of the surety. Even if the surety of personal guarantee is not aware of any other security offered by the principal debtor, yet once the right of the surety against the principal debtor is impaired by any action or inaction which implies negligence appearing from lack of supervision undertaken in the contract, the surety would be discharged under the combined operation of Sections 139 and 141 of the Act. In any event, if the creditor loses or without theconsent of the surety parts with the security, the surety is discharged to the extent of the security lost as provided by Section 141. Their Lordship followed with the approval of law laid down in the case of State of Madhya Pradesh, supra, which has been referred to above. In this view of the matter, in my opinion, the Trial Court definitely was justified in dismissing the suit of the plaintiff-appellant.
17. Before parting with the judgment, it will be appropriate to refer to the cases referred to by the learned Counsel for the appellant.
18. The learned Counsel for the appellant, as mentioned earlier, has made reference to the case in Jayant T. Shah, supra. In the above case, the learned Single Judge of the Andhra Pradesh High Court laid down that where the goods are not in possession of the creditor, there is no question of his leasing or parting with the goods. In the present case, a perusal of the agreement reveals that the goods were in possession and control of the Bank. The principal debtor, no doubt, was dealing with them, but was acting as an Agent of the Bank in terms of the contract. Further, the power of supervision and control to check, inspect, take accounts of the goods and stock and even to take the actual possession of the goods had been conferred on the Bank. If the Bank failed to exercise its duty of inspecting and taking accounts of stock etc., during this period, then it is to be blamed for failure to perform its duties. But, no doubt under the contract the hypothecated goods were placed under the control and supervision of the Bank and so the goods were in possession of the Bank acting through its Agent viz., principal debtor who has described authorised to act as an Agent for the Bank and who was required to follow the directions of the Bank issued from time to time. The case of the Andhra Pradesh High Court is not of any assistance to the learned Counsel for the appellant.
19. The learned Counsel for the appellant relied on the Division Bench decision of this Court in Karnataka Bank Limited's case, supra, wherein this Court has laid down that mere inaction of the creditor by tailing to realise the debt from the collateral security does not mitigate the surety's liability. In this case, the question before the Bench was not to the effect that as if the creditor in whose favour the hypothecation of goods and securities have been furnished and in whose control and supervision the hypothecated goods were placed and creditor was acting through principal debtor. The principal debtor was acting as an agent of the Bank, the creditor, under the supervision and direction of the Bank, and if the Bank failed to discharge or exercise its supervision and control and discharge its obligation of inspection, control, supervision etc., over the acts of the agent i.e., the principal debtor, as well as on the hypothecated goods and securities were lost because of inaction of the creditor as above the surety will stand discharged or not? This question was not before the Bench. In my opinion, the decision in the case of The Karnataka Bank Limited, supra, is of no help to the learned Counsel for the appellant.
20. The learned Counsel for the appellant, no doubt, referred to the decision of the Division Bench of Punjab and Haryana High Court in the case of Bank of India Limited, supra. The decision in the case of Bank of India Limited, supra, is also distinguishable for the reason that the principle laid down in that case is that in case of hypothecation of goods when the goods are not in possession of hypothecated there is no question of losing or dealing with the same. But when the hypothecated is in constructive possession of the goods though not fiscal possession of the same it would stand on different footing. In other words, when the hypothecated or the creditor had control and possession of the security or the goods hypothecated through its agent then if those goods are lost or parted with by the creditor, then the surety will stand discharged. In the case of M/s. Shiv Machine Tools, supra, is distinguishable on the facts of this case as in that case the hypothecated goods were not shown or established to be in possession or control of the creditor. In that case, it was held that the hypothecated goods were in possession of the principal debtor and there was nothing to indicate that the creditor had any control over the action of the principal debtor in relation to those goods. In this view of the matter, this decision also is of no assistance to the learned Counsel for the appellant.
21. Thus, considered in my opinion the 1st appeal is devoid of merit and is liable to be dismissed. It is accordingly dismissed.
22. The judgment and decree passed by the II Additional Civil Judge, Mysore, in O.S. No. 155 of 1992 on 15th February, 1997 are maintained and confirmed.