M.R. Chakrapani Iyengar Vs. Canara Bank - Court Judgment

Excerpt:
- labour & services. dismissal from service: [subhash b adi, j] articles of charges against the respondent regarding obtaining employment by producing false transfer certificate enquiry report finding of disciplinary authority that the charges is proved order of dismissal-challenge to delay in completing the enquiry proceedings reinstatement without back wages pleaded against held, a person, who practices fraud for achieving his object, cannot perpetuate much less on the ground of delay. even one acquires certain rights, they get vitiated once it is proved that the acquisition by means of fraud. the allegation of fraud having been proved, there is no justification for the labour court to set aside the punishment. further, the gravity of the charge cannot be ignored, unless the workman establishes that the delay has vitally prejudiced his case. just because there is delay, the punishment cannot be altered when the charge of fraud is proved. award was set aside. - according to him, the bank did not take any steps to seize the property to sell it and recover its dues which could easily have been done and since the bank had failed and omitted todo so and was negligent in this regard, that his liability stood discharged. 's learned advocate is that undoubtedly the liability of the surety is co-extensive with that of the principal debtor but he contends that having regard to the provisions of section 139 of the contract act, that it was obligatory on the part of the bank to have ensured that the hypothecated property did not vanish and more so, when his client pointed out precisely where that property was, for the bank to have taken all necessary steps to have seized it, that by not having done so, the bank has virtually forfeited the remedy that was open to it to recover the sums in question and that this situation brings the case clearly within the four corners of section 139 of the contract act whereunder his liability stands discharged. 's learned advocate submitted that the principle enunciated in section 139 is well defined in so far as if the bank creates a situation whereunder the liability which could easily have been discharged gets unnecessarily foisted on the surety, that the law in such a situation immunises the surety. he submitted that the supreme court had not dealt with this aspect of the law and that consequently, it is this decision which would still hold good on the facts of the present case. t refrain from making any observations vis-a-vis, the bank because these aspects of the matter has come up before the court for the first time and therefore, the officers themselves were probably not very well informed of the alternate means available. it ishowever made clear that the bank's right to execute the decree against the first defendant is enforceable as also the bank's other rights if they come to know as to where precisely the hypothecated oven is at present.order1. a very important aspect of the law relating to the obligations of banks in relation to property that is pledged or hypothecated has indirectly fallen for decision in this dispute. the main controversy concerns the question as to whether the present petitioner who was the surety for the principal borrower can be said to have discharged the liability having regard to the provisions of section 139 of the contract act. the only few facts which are material arc that the principal borrower had taken a loan from the respondent-bank and was repaying it in installments. he had defaulted with regard to the clearance of the loan. at this stage, the bank decided to take action against the principal borrower as also the surety who was none other than his own brother. the surety replied to the notice pointing out that there is a small amount of money due to the bank and that the principal debtor had hypothecated the electric oven of the bakery which was worth a substantial amount of money. he also pointed out that the oven had been sold to a particular party and gave the details. according to him, the bank did not take any steps to seize the property to sell it and recover its dues which could easily have been done and since the bank had failed and omitted todo so and was negligent in this regard, that his liability stood discharged. the trial court negatived this contention and passed a decree against the principal borrower as also the surety who is the present petitioner holding both of them jointly and severally liable. the principal debtor has not challenged that decree but the surety has filed the present c.r.p. wherein he has contended that his liability stood discharged and that therefore the decree as against him must be set aside.2. the principal contention raised by the petr.'s learned advocate is that undoubtedly the liability of the surety is co-extensive with that of the principal debtor but he contends that having regard to the provisions of section 139 of the contract act, that it was obligatory on the part of the bank to have ensured that the hypothecated property did not vanish and more so, when his client pointed out precisely where that property was, for the bank to have taken all necessary steps to have seized it, that by not having done so, the bank has virtually forfeited the remedy that was open to it to recover the sums in question and that this situation brings the case clearly within the four corners of section 139 of the contract act whereunder his liability stands discharged. in this regard, the learned advocate has relied on a decision of the supreme court reported in : [1980]3scr915 (state bank of saurashtra v. chitranjan r. raja) wherein the court held that if such negligence was established on the part of the bank, the surety would stand discharged. the court had occasion to refer to some of the earlier decisions reported in : [1967]1scr266 and : [1968]3scr724 . the learned advocate also relied on another decision reported in wherein, on more or less similar facts the court took the view that the liability of the surety stood completely discharged. the petr.'s learned advocate submitted that the principle enunciated in section 139 is well defined in so far as if the bank creates a situation whereunder the liability which could easily have been discharged gets unnecessarily foisted on the surety, that the law in such a situation immunises the surety. he therefore submitsthat as far as the present case is concerned, the decree passed against the petr. is liable to be set aside.3. mr. aithal who represents the bank has . seriously contested this position. he submits that a surety for all intends and purposes is responsible in the same manner and to the same extent as the principal debtor and that by its very connotation the term surety presupposes that if for any reason the whole or part of the liability is not recoverable from the principal debtor that the institution may recover it from the surety. in this regard, the learned advocate has drawn my attention to a division bench decision of this court reported in : air1977kant14 . the division bench of this court had occasion to view the question from a slightly different angle in so far as it took cognizance of the fact that merely because there is 'passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security that it 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.' learned advocate submitted that it is always open to the surety to recover the amount from the principal debtor and that this in fact is the correct view of the matter. he submitted that the supreme court had not dealt with this aspect of the law and that consequently, it is this decision which would still hold good on the facts of the present case.4. with regard to the legal position, it is necessary for this court to take note of the fact that undoubtedly, the division bench of this court and the supreme court were dealing with slightly different aspects of the law. the division bench laid down the salutary principle that the liability of a surety is a serious one and that the surety should not be permitted to get away on mere technicalities because of some minor lapses. on theother hand, the supreme court examined a deeper aspect of the law namely the question as to whether at all the liability of the surety could continue if the creditor virtually abdicates an opportunity of recovering the debt from the security that was either pledged or hypothecated. the gravity of the lapse or inaction is what distinguishes the two cases and to my mind, applying the principles that have been enunciated, the present case would come under the latter category.5. mr. aithal has vehemently submitted that the courts must take cognizance of the position in which the banks are placed and the same applies to the officers and employees who man the bank. he has pointed out to me that the pressures in relation to running a financial institution and dealing thousands and lakhs of loan and recovery transactions necessarily creates a heavy burden on the banks and that in this background, the so-called duty that the law envisages from them will have to be very carefully construed. mr. aithal has satisfactorily demonstrated to me that as far as pledged goods are concerned that the banks have greater control in so far as the premises where they are stored are locked or sealed and that necessary security arrangements are made to safeguard the goods. despite this care and caution, occasions do come up where theft occurs whether real or engineered, or situations come up where a dishonest client may brow-beat or hoodwink even security guards. he points out that if the goods either deteriorates or become unsaleable or not traceable, that it is not at all the fault of the institution and that therefore neither inaction nor negligence can be alleged against the bank. as far as this aspect of the matter is concerned though i do concede that everything pointed out by the learned counsel is correct, it is necessary to point out that the banks wilt have to evolve a more efficient and more effective system where pledged goods are concerned. security of the goods and ensuring that they are not tampered with or taken away is one aspect of the matter which requires a high degree of personal attention but more importantly, in numerous instances the storage conditions and facilities are improper. the nature of the goods is nottaken cognizance of as a result of which the goods deteriorate to such an extent that they do not fetch any value if they are to be sold. a greater degree of care and* caution and professionalism will therefore have to be injected into the manner in which these goods are looked after and in appropriate cases where the goods are perishable, the banks must ensure that they are sold when the value is at its highest. also, it is necessary to take note of the economics of the transaction and to avoid transactions where the price of goods could register a fall because they are outmoded and also in cases where the storage costs keep on mounting and the debt grows out of proportion. in all such cases timely recovery is of the essence.6. coming to the facts of the present case, mr. aithal has vehemently refuted the allegation that there was either inaction or negligence on the part of the bank. he points out that it is in the evidence of p. w. 1 having told the bank where the oven in question was, efforts were made to trace it out but it was not found there. mr. aithal submitted that the bank is only required to take the normal steps which one would resort to in such situations and that no superhuman or extraordinary measures are expected from the bank. he submits that only where gross negligence and total dereliction of duty is established, the provisions of s. 139 could come into operation. on this basis therefore he submits that this is not a case in which any interference is called for. as regards this last aspect of the matter, i need to lay down that in the case of hypothecated goods unlike in the case of pledged goods, the position of the banks is much worse. the goods are invariably movable property and they are under the custody and control of the borrower. it is true that although the bank is obliged to prominently display where the machinery or the goods are, that they are hypothecated to the bank, affixation of such labels and boards even though done, does not attract much attention. mr. aithal is right when he points out that no such measures deter the customer from clandestinely disposing of the property or even falsely contending that it has been stolen. under these circumstances, he points out thatit has come in evidence that the banks did periodical checks and that the bank was not aware of the fact that the principal borrower had quietly sold the oven and disappeared. mr. aithal submitted that in this background, the main ingredients of s. 139 are absent in so far as there is no serious lapse on the part of the bank as a result of which the debt could not be realised.7. in this regard, i need to lay down that in the case of hypothecated goods a greaterdegree of vigilance is required on the part of the banks. while it may be true that periodical checks are very essential, it is equally important that the banks must take all available measures which have hitherto not been resorted to. in a situation where it is pointed out to the bank that the hypothecated property has disappeared, it is always assumed that the only remedy open to the bank is to file a suit or for an attachment order but what is overlooked is that the law gives the banks straight remedies by way of a complaint to the police or to a criminal courtwhereby the property can be traced out, and whereby the bank can take possession of the property and have it sold and clear the dues. this is an aspect of the matter which undoubtedly may not have been focussed upon but it is essential that it should be brought to the notice of the financial institutions and their officers for future guidance.8. it is in this background that the last aspect of the matter requires to be looked into with regard to the special facts of the present case namely the question as to whether the bank was obliged to have made all necessary efforts to recover its debt through the seizure and sate of the electric oven in question. the amount due was hardly about rs. 4,000/- at that time and could have easily been recovered had the oven been seized. assuming that the bank manager is right when he states that the oven was not traceable at the address given by the surety, to my mind, nothing stopped the bank from lodging a complaint to the police who would have traced the property in question. also, no satisfactory' explanation is given as to why no steps were taken against the principal debtor through a criminal court or through the law enforcement machinery for having disposed of the property that was hypothecated to the bank. since mr. aithal stated that the bank was of the opinion that such steps were useless, again what is overlooked is that these are the very authorities who would have traced out the property and the debtor. though this is a borderline case having regard to the fact that the surety did take the trouble to point out to the bank that the property had been disposed of and since he also intimated as to where the property was, to my mind, the surety has established his bona fides and having regard to the provisions of s. 139 i am of the view 'that on the facts of the present case he would have to be treated as having been discharged of the liability. it would, on the facts of the present case be a little harsh to hold that the bank has been guilty of negligence or gross inaction though the cumulative effect of what has happened is a situation whereby the petitioner has wrongly been foisted with the liability which would otherwise have been discharged through the seizure and sale of the property. it is for this limited reason that the petitioner gets the benefit of that situation. t refrain from making any observations vis-a-vis, the bank because these aspects of the matter has come up before the court for the first time and therefore, the officers themselves were probably not very well informed of the alternate means available.9. the last submission of mr. aithal was that having regard to the fact that the surety is the brother of the principal debtor that he should not be given any benefit because obviously he knew the brother's whereabouts and he could have informed the same to the bank as also where the property was. mr. aithal submitted that one could not rule out the possibility of collusion. unfortunately, there is nothing on record to cast any suspicion on the conduct of the petitioner andone must accept the position that instances do arise where one brother does not really know what his own blood brother is doing or for that matter where he must be. having regardto the aforesaid situation, the c.r.p. succeeds. the decree as far as the present petitioner is concerned is set aside. it ishowever made clear that the bank's right to execute the decree against the first defendant is enforceable as also the bank's other rights if they come to know as to where precisely the hypothecated oven is at present.10. the c.r.p. is accordingly allowed. no order as to costs.11. petition allowed.

Judgment:
ORDER

1. A very important aspect of the law relating to the obligations of banks in relation to property that is pledged or hypothecated has indirectly fallen for decision in this dispute. The main controversy concerns the question as to whether the present petitioner who was the surety for the principal borrower can be said to have discharged the liability having regard to the provisions of Section 139 of the Contract Act. The only few facts which are material arc that the principal borrower had taken a loan from the respondent-bank and was repaying it in installments. He had defaulted with regard to the clearance of the loan. At this stage, the bank decided to take action against the principal borrower as also the surety who was none other than his own brother. The surety replied to the notice pointing out that there is a small amount of money due to the bank and that the principal debtor had hypothecated the electric oven of the bakery which was worth a substantial amount of money. He also pointed out that the oven had been sold to a particular party and gave the details. According to him, the bank did not take any steps to seize the property to sell it and recover its dues which could easily have been done and since the bank had failed and omitted todo so and was negligent in this regard, that his liability stood discharged. The trial Court negatived this contention and passed a decree against the principal borrower as also the surety who is the present petitioner holding both of them jointly and severally liable. The principal debtor has not challenged that decree but the surety has filed the present C.R.P. wherein he has contended that his liability stood discharged and that therefore the decree as against him must be set aside.

2. The principal contention raised by the petr.'s learned advocate is that undoubtedly the liability of the surety is co-extensive with that of the principal debtor but he contends that having regard to the provisions of Section 139 of the Contract Act, that it was obligatory on the part of the bank to have ensured that the hypothecated property did not vanish and more so, when his client pointed out precisely where that property was, for the bank to have taken all necessary steps to have seized it, that by not having done so, the bank has virtually forfeited the remedy that was open to it to recover the sums in question and that this situation brings the case clearly within the four corners of Section 139 of the Contract Act whereunder his liability stands discharged. In this regard, the learned advocate has relied on a decision of the Supreme Court reported in : [1980]3SCR915 (State Bank of Saurashtra v. Chitranjan R. Raja) wherein the Court held that if such negligence was established on the part of the bank, the surety would stand discharged. The Court had occasion to refer to some of the earlier decisions reported in : [1967]1SCR266 and : [1968]3SCR724 . The learned advocate also relied on another decision reported in wherein, on more or less similar facts the Court took the view that the liability of the surety stood completely discharged. The petr.'s learned advocate submitted that the principle enunciated in Section 139 is well defined in so far as if the bank creates a situation whereunder the liability which could easily have been discharged gets unnecessarily foisted on the surety, that the law in such a situation immunises the surety. He therefore submitsthat as far as the present case is concerned, the decree passed against the petr. is liable to be set aside.

3. Mr. Aithal who represents the bank has . seriously contested this position. He submits that a surety for all intends and purposes is responsible in the same manner and to the same extent as the principal debtor and that by its very connotation the term surety presupposes that if for any reason the whole or part of the liability is not recoverable from the principal debtor that the institution may recover it from the surety. In this regard, the learned advocate has drawn my attention to a Division Bench decision of this Court reported in : AIR1977Kant14 . The Division Bench of this Court had occasion to view the question from a slightly different angle in so far as it took cognizance of the fact that merely because there is 'passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security that it 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.' Learned advocate submitted that it is always open to the surety to recover the amount from the principal debtor and that this in fact is the correct view of the matter. He submitted that the Supreme Court had not dealt with this aspect of the law and that consequently, it is this decision which would still hold good on the facts of the present case.

4. With regard to the legal position, it is necessary for this Court to take note of the fact that undoubtedly, the Division Bench of this Court and the Supreme Court were dealing with slightly different aspects of the law. The Division Bench laid down the salutary principle that the liability of a surety is a serious one and that the surety should not be permitted to get away on mere technicalities because of some minor lapses. On theother hand, the Supreme Court examined a deeper aspect of the law namely the question as to whether at all the liability of the surety could continue if the creditor Virtually abdicates an opportunity of recovering the debt from the security that was either pledged or hypothecated. The gravity of the lapse or inaction is what distinguishes the two cases and to my mind, applying the principles that have been enunciated, the present case would come under the latter category.

5. Mr. Aithal has vehemently Submitted that the Courts must take cognizance of the position in which the banks are placed and the same applies to the officers and employees who man the bank. He has pointed out to me that the pressures in relation to running a financial institution and dealing thousands and lakhs of loan and recovery transactions necessarily creates a heavy burden on the banks and that in this background, the so-called duty that the law envisages from them will have to be very carefully construed. Mr. Aithal has satisfactorily demonstrated to me that as far as pledged goods are concerned that the banks have greater control in so far as the premises where they are stored are locked or sealed and that necessary security arrangements are made to safeguard the goods. Despite this care and caution, occasions do come up where theft occurs whether real or engineered, or situations come up where a dishonest client may brow-beat or hoodwink even security guards. He points out that if the goods either deteriorates or become unsaleable or not traceable, that it is not at all the fault of the institution and that therefore neither inaction nor negligence can be alleged against the bank. As far as this aspect of the matter is concerned though I do concede that everything pointed out by the learned counsel is correct, it is necessary to point out that the banks wilt have to evolve a more efficient and more effective system where pledged goods are concerned. Security of the goods and ensuring that they are not tampered with or taken away is one aspect of the matter which requires a high degree of personal attention but more importantly, in numerous instances the storage conditions and facilities are improper. The nature of the goods is nottaken cognizance of as a result of which the goods deteriorate to such an extent that they do not fetch any value if they are to be sold. A greater degree of care and* caution and professionalism will therefore have to be injected into the manner in which these goods are looked after and in appropriate cases where the goods are perishable, the banks must ensure that they are sold when the value is at its highest. Also, it is necessary to take note of the economics of the transaction and to avoid transactions where the price of goods could register a fall because they are outmoded and also in cases where the storage costs keep on mounting and the debt grows out of proportion. In all such cases timely recovery is of the essence.

6. Coming to the facts of the present case, Mr. Aithal has vehemently refuted the allegation that there was either inaction or negligence on the part of the bank. He points out that it is in the evidence of P. W. 1 having told the bank where the oven in question was, efforts were made to trace it out but it was not found there. Mr. Aithal submitted that the bank is only required to take the normal steps which one would resort to in such situations and that no superhuman or extraordinary measures are expected from the bank. He submits that only where gross negligence and total dereliction of duty is established, the provisions of S. 139 could come into operation. On this basis therefore he submits that this is not a case in which any interference is called for. As regards this last aspect of the matter, I need to lay down that in the case of hypothecated goods unlike in the case of pledged goods, the position of the banks is much worse. The goods are invariably movable property and they are under the custody and control of the borrower. It is true that although the bank is obliged to prominently display where the machinery or the goods are, that they are hypothecated to the bank, affixation of such labels and boards even though done, does not attract much attention. Mr. Aithal is right when he points out that no such measures deter the customer from clandestinely disposing of the property or even falsely contending that it has been stolen. Under these circumstances, he points out thatit has come in evidence that the banks did periodical checks and that the bank was not aware of the fact that the principal borrower had quietly sold the oven and disappeared. Mr. Aithal submitted that in this background, the main ingredients of S. 139 are absent in so far as there is no serious lapse on the part of the bank as a result of which the debt could not be realised.

7. In this regard, I need to lay down that in the case of hypothecated goods a greaterdegree of vigilance is required on the part of the banks. While it may be true that periodical checks are very essential, it is equally important that the banks must take all available measures which have hitherto not been resorted to. In a situation where it is pointed out to the bank that the hypothecated property has disappeared, it is always assumed that the only remedy open to the bank is to file a suit or for an attachment order but what is overlooked is that the law gives the banks straight remedies by way of a complaint to the police or to a criminal Courtwhereby the property can be traced out, and whereby the bank can take possession of the property and have it sold and clear the dues. This is an aspect of the matter which undoubtedly may not have been focussed upon but it is essential that it should be brought to the notice of the financial institutions and their officers for future guidance.

8. It is in this background that the last aspect of the matter requires to be looked into with regard to the special facts of the present case namely the question as to whether the bank was obliged to have made all necessary efforts to recover its debt through the seizure and sate of the electric oven in question. The amount due was hardly about Rs. 4,000/- at that time and could have easily been recovered had the oven been seized. Assuming that the Bank Manager is right when he states that the oven was not traceable at the address given by the surety, to my mind, nothing stopped the bank from lodging a complaint to the police who would have traced the property in question. Also, no satisfactory' explanation is given as to why no steps were taken against the principal debtor through a criminal Court or through the law enforcement machinery for having disposed of the property that was hypothecated to the bank. Since Mr. Aithal stated that the bank was of the opinion that such steps were useless, again what is overlooked is that these are the very authorities who would have traced out the property and the debtor. Though this is a borderline case having regard to the fact that the surety did take the trouble to point out to the bank that the property had been disposed of and since he also intimated as to where the property was, to my mind, the surety has established his bona fides and having regard to the provisions of S. 139 I am of the view 'that on the facts of the present case he would have to be treated as having been discharged of the liability. It would, on the facts of the present case be a little harsh to hold that the bank has been guilty of negligence or gross inaction though the cumulative effect of what has happened is a situation whereby the petitioner has wrongly been foisted with the liability which would otherwise have been discharged through the seizure and sale of the property. It is for this limited reason that the petitioner gets the benefit of that situation. T refrain from making any observations vis-a-vis, the bank because these aspects of the matter has come up before the Court for the first time and therefore, the officers themselves were probably not very well informed of the alternate means available.

9. The last submission of Mr. Aithal was that having regard to the fact that the surety is the brother of the principal debtor that he should not be given any benefit because obviously he knew the brother's whereabouts and he could have informed the same to the bank as also where the property was. Mr. Aithal submitted that one could not rule out the possibility of collusion. Unfortunately, there is nothing on record to cast any suspicion on the conduct of the petitioner andone must accept the position that instances do arise where one brother does not really know what his own blood brother is doing or for that matter where he must be. Having regardto the aforesaid situation, the C.R.P. succeeds. The decree as far as the present petitioner is concerned is set aside. It ishowever made clear that the bank's right to execute the decree against the first defendant is enforceable as also the bank's other rights if they come to know as to where precisely the hypothecated oven is at present.

10. The C.R.P. is accordingly allowed. No order as to costs.

11. Petition allowed.