915

STATE BANK OF SAURASHTRA

v .

.. ~/

CHITRANJAN RANGNATH RAJA AND ANR.

April 30, 1980

[A. C. GUPTA, D. A. DESAI AND E. S. VENKATARAMIAH, JJ.] B·

Indian Contract Act, Section 141, scope of-Discharge of surety-Conditions

under which surety can be discharged under sections 139-141 of the Act,-Secu-

1 rity of pledged goods was lost on account of the negligence of the Creditor­

Wheiher "the Surety would not be discharged in the instant case on ti proper con-

,-_ struction of clauses 5, 7 and 13 of, the letter of guarantee. c·

Civil Procedure Code, 1908-Sect~on 144 as amended by Amendment Act of

1976, scope o/-Re.stitution-Dir'ections by the SUpreme Courl) in the instant

case, whether could be made-"Court of first instance", meaning of.

· The appellant bank allowed a cash credit facility limited to Rs. 75,000/-to

the principal debtor Harilal Parmananddas Adatia on his pledging 5,000 tins of

groundnut oil under the lock and key of the Bank and

on personal guarantee of

D'

the surety, respondent No. ·2. The principal debtor executed a demand promis-

sory note Ext.

81 in

fayour of the Bank on Sept'ernber 16, 1957, and on the same

day the principal debtor also executed a. demand promissory note, Ext. 30, in

favour of the surety which the surety endorsed in favour of the Bank. Along

with the rwo demand promissory notes, simultan'eously the surety executed a letter

of guar.:intee F...xt. 31 in favour of the Bank and the principal debtor executed· a

--.J.. bond Ext. 83 in favour of the Bank. The principal debtor also passed letter of E

continuity of the bond and the promissory note Ext. 82. Thereafter the principal

debtor enjoyed the cash credit facility by borrowing various amounts. By the

end of February 1959 the principal debtor owed Rs. 76,368.04 P in this account

to the Bank. Principal debtor died in November 1959. The Bank wrofe to the

surety letter Ext.

32 dated December 24, 1959, calling upon him to pay the outstanding balance of Rs. 70,879/-in cash credit account of principal debtor as

in the circumsta.nces mentioned in the letter the balance was required to be r'e-F

~vered from the surety. Some correspondence ensued thereafter between the

· Bank and the surety and ultimately the Bank filed the suit for recovery of

ii Rs. 76,368.04 P . .;;:.gainst defendant 1, the legal representative of princi:Pal debtor

and defendant.

2, the surety.

The

trial· court found tb2.t there was negligence on the part of th'e Bank with

regard

to the safe custody of the pledged

oil tins but as the contract of guarantee

enfered into by the surety with the Bank was independent of the pledge of

goods given by the principal debtor, the sur'ety is not discharged from his

liability under the guarantee. So oOOerving the trial court decreed the suit.

The .surety pai<l the entire amount demanded and appealed to t'he High Court.

The High Court held that the two promissory notes, on'e executed by the

principal debtor in favour of the Bank Ext. 81, and another by the principal

debtor

in favour of the

surety· and· endorsed by the surety to the Bank, Ext. 30,

and the letter of guarantee Ext. 31 executed by the surety in favour of the Bank

as also the bond executed by the principal debtor

in

favoor Qf the Bank Ext. 83

•

G

H

916 SUPREME COURT REPORTS [1980] 3 S.C.R,

A and the letter of conlinuity Ext. 82 executed by the principal debtor in favour of

the Bank, all on September 16, 1957, constituted one composite transaction and

they evidenced that the principal debtor bad offered two securities, one the

pledge

of oil

!ins and another personal guarantee of the surety. The High Court J.._

further held th~t the Bank was utterly negligent and had not exercised. such care

as a prudent man would in the circumstances of th'e case which resulted in the

loss of security, namely, pledged oil tins and, therefore, in view of combined

B operation of sections 139' and 141 of the Indian Contract Act, the surety is d.i£..

charged. Accordingly, the appeal of th'e surety was allowed and the suit against

him wlis dismissed. Hence this appeal by plaintiff Bank.

c

D

F

Dismissing the appeal by certificate, the Court,

HELD : 1. In order to attract section 141 of the Contract Act, it must be

shown that the creditor had' ta.ken more than one security from the principal

-~

debtor at the time when the contract of guarantee was enfered into and irrespec-

tive

of the

fact whether the sur'ety knew of such other security offered by the

principal debtor,

if the creditor loses or without

the consent of the surety parts

with the other security the surety would be discharged 16 th:e extent of theo value

of the security. In the instant case as found by the High Court and not contro­

verted, the principal debtor had offered two securities, (i) the pledge of goods,

(ii) personal guarantee of the surety. Verily, the General Manager of the Bank

accepted tire proposal for cash credit facility on the specific condition that the

principal debtor

s.hall offer two securities, one the pledge of goods to be kept

under the lock and key

of the Bank to be supervised by the

Bank's 'employee, and

secondly, the personal guarantee

of the surety. The surety himself agreed to give

p'ersonal

guarant4ee on the specific understanding a.nd with the full knowledge of

the Bank that the principal debtor was offering another security, namely, pledge

of goods. The' surety contracted on the good faith Of the principal contract when

entering into contract of guarantee in which case h'e is d'eemed so to contract that

both the securities would

be available to the creditor. If the two

promisoory

notes Exts. 81 and 30 coupled with the letter of guarantee Ext. 31 executed by

the sufety and the bond Ext. 83 executed by the principal debtor at one sitting

on September 16, 1957, evidence one composite tr,ansaction, it is an inescapable .

concluSion that the principal debtor offered two securities, one the pledge of goods

and the other the-personal guarantee of th'e surety. The surety in good faith

contracted

to offer personal guarantee on the dear understanding that the

princi-

pal debtor has offered security by way of pledge of goods and the goods were ~ -

be· in the custody of the creditor Bank. On this conclusions. 141 of the Act Wl11 )

be indubitably attracted. [922 A-Fl

Sanderson v. Aston, [1873] L. R. 8 Exch. 73 at 76, quoted wit.h npproval.

2. ,&ction 141 comprehends a situation where the debtor has offered more

G than one security one of which is the personal guarantee of the surety. Even if

the surety of personal guarante'e 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 the consent of the surety parts with the security, the

H surety is discbarged to the extent of tire security lost as provided by s. 141. [922

F-HJ

State of Madhya Pradesh v. Kaluram, [1967] 1 SCR 266. followed .

•

STATE BANK V. C. R. RAJA 91 7

. Wulff and Billing v. Jay, (1872) 7 QB 756, quoted with approval. A.·

3. Jn the instant case, clauses 5, 7 and 13 of the letter of guarantee, Ext. 31

would'be of no assistance to the Bank. [926 B, G, HJ

(a) Clause 5 confers right upon the creditor Bank to gra.nt any time or

indulgence in payment of the deht or to determine, enlarge or vary its credit and

to vary, exchange or take other securities or relea~e any other securities held by

the Bank but such an act on the part of the Bank would not have the effect of

disi:Qarging the surety or in any manner affecting his liability under the letter of

guarantee. It is not a case of granting time or indulgence to the principal debtor

or variation of the credit or taking one set of security in substitution of some

other security or release of any s'ecurity. Release of security implies a volitional

r

act on the part of the Bank. Loss on· account of negligence cannot be e<luated

with release. [925 G-H. 926 A-Bl

I

•

(b) Clause 7 provides for non-Oischarge of surety even if the creditor Bank

enter~ into a composition with the principal debtor and that the surety would

nonetheless be liable even if the Bank has other guarantee, security or reniedy

guarantees, securities or remedies from the principal debtor. UpOn a true cons­

truction

of clause 7, the expression 'any other guarantee, s'ecurity or remedy'

therein mentioned must be security other than the pledged goods. [926 B-C]

Amrit Lal Goverdhan Lal and Ors. v. State Bank of Travancore and Ors.,

[19681 3 S.C.R. 724 @ 731, followed.

(c) aause 13 provides for continuing the guarantee where the principal

debtor

is an

association of persons and for continuance of the guaralitee in the

event

of death,

retirement, etc. of one of such association of persons or the

guarantee remaining intact and effective and legally enforceable in'Cspective of

some defect arising from the internal management of such association of persons.

First security, namely, the pledged goods are lost to the Bank and the concurrent

finding again incontrovertible is that the pledged goods were lost on account of

the negligence of the creditor Bank. Whole of the security was lost and, there­

fore, the surety would

be discharged in entirety because it

is crystal clear that

the principal debtor had agreed and had in fact pledged 5,000 tins of oil which

even

if sold at the then current

market price would have satisfied the Bank's

,_.entire claim. Accordingly, the surety would be discharged in entirety. ['>26 G-H,

927 A-Bl

4. Accepting a contention that section 141 would not be attracted· and the

surety would not

be discharged even if it is found that a creditor has taken more

than one security on the basis of

whiph ad'vance was mad'e and the surety gave

pelllonal guaranteei on the good faith of other security being offered by the prlnci­

plli debtor which itself may be a consideration for th'e surety offering his personal

guarantee and the creditor by its own negligence lost one of the securities, would

tantamount

to putting a premium on the negligence of the creditor to the

detri­

ment of the surety who is usually described as a 'preferred debtor'. A Q>urt

shonld not by its construction of such letter of guarantee enabre the creditor to ·

act negligently and yet be not in any manner accountable. [927 B-E]

5. By section 144 of Civil PrO\Xl<lure Code 1908, as amended by the Amend·

IOllD!. Act, 1976, the jurisdiction to grant restitution is conferred upon "the Court

wl!i~h p~ed the decree or order". By an explanation added to section 144 by

the Amendment Act of 1976, the expression "Court which passed the decree or

•

B

c

E

F

c

E

F

G

H

918 SUPREME COURT REPORTS [1980] 3 s.c.R.

order" shall be deemed to include where the decree or order has been varied or

reversed in exercise of appellate or revisional jurisdiction, the Court of first

instance. [927 G-H, 928 Al

In the illstant case (i) the appellant was the plcintiff and its suit was decreed

by the trial Court, i.e. the Court of Civil Judge, Senior Division, Gonda!, on

November 18, 1960. The present appellant by its letter dated February 14, 1961,

demanded from the surety a sum of

Rs. 84,828.07

P. inclusive of costs and in·

terests on the principal amount decreed. The surety respondent 1 in this Court

paid the appellant Rs. 84,828.07 P. on April 3, 1961. In the appeal by the

surety

the High Court reversed the decre'e and dismissed the suit

against the

surety. Accordingly, the surety .is entitled to restitution; and (ii) the present

one is

th'e simplest case where the suit in f.avour of the appellant and

against the

surety was decreed by the trial court, i.e. the Court of first instance, and this ·-~

decree has been reversed by the High Court in 'exercise of its a.ppellate jurisdic~

ti on. In such a situation clause (a) of the explanation w6uld be attract.ed and

an application for restitution will have to be mad'e to the Court of first instance,

i.e. the Court of Civil Judge, Senior Division, Gonda!. It is nowhere suggested

that such a Court does not exist. Therefore, it would not be prop'er for this

Court to direct restitution. However, there will be no justification for the appel-

lant Bank to withhold the amount which was collecfed from the surety on a

mere demand. Therefore, an application for restitution, made by the surety

would not lie to this Court [928 B-D, F-H].

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1058 of 1970.

From the Judgment and Decree dated 25-4-1969 of the Gujarat

'"~h Court in Appeal No. 22/61.

S. N. Kackar, K. J. John and Sri Narain for the Appellant.

S. T. Desai, H. S. Parihar and I. N. Shroff for the Respondents.

The Judgment of the Court was delivered by

DESAI, J.~· This appeal by certificate under Article 133(1) (a) of

the Constitutionlis by;the'original plaintiff-StateflBank of Saurashtra

('the Bank',for]short)-w,hose suit for recovery.of Rs.' 76,368 ·04SP.~

from the legal representative of the deceased principal debtor Harilal

Parmanaddas Adatia and his surety original defendant 2 Chitranjan

Rangnath Raja. ('Surety' Jor short) was decreed by the trial court I

both against the legal representative of the principal debtor and the

surety but on appeal by the surety, was dismissed by the High Court

.·only against the surety .

•

Harilal Parmananddas Adatia, hereinafter referred to as 'principal

-debtor', approached

the

·Mmager of the Bagasra Branch of State

.-Bank ofSaurashtra seeking facilityl for cash credit

1

upto' Rs. 75,000/·.

"'i'k"Silbmitted proposal form Ext." 66 on September 10, 1957, offering

to give security for the cash credit by pledge

of groundnut oil tins as

also a personal guarantee

of defendant 2 Chitranjan Rangnath Raja ..

•

l

r·

~

(

STATE llANK v. c. R. RAJA (Desai, J.) 919

After obtaining !be approval of tbe ©eneral Manager of the Bank cash

credit facility to the extent

of

Rs. 75,000/-was sanctioned against the

pledge

of approved goods nnder the lock and key of the Bank and on

personal guarantee

of the surety. The principal debtor executed a

~emand promissory note, Ext. 81 in favour of the Bank on September

16, 1957, and on the same day the principal debtor also executed a

demand promissory note, Ext. 30, in favour of the surety which the

surety endorsed in favour

of the Bank.

•Along with the two

demand promissory notes, simultaneously the surety execufed a

letterof guarantee Ext.

31 in favourofthe Bankand' the principal

debtor executed a bond Ext.

83 in favour of the Bank. The principal

debtor also passed letter of continuity

of the bond and the promissiory

note Ext.

82. Thereafter the principal debtor enjoyed the cash

~redit facility by borrowing various amounts. By the end of February

1959 the principal debtor owed Rs. 76,368 ·04 P. in this account to

the Bank. Principal debtor .died in November

1957. The Bank

wrote to the surety letter Ext. 32dated December

24, 1957, calling upon

him to pay the outstanding balance of Rs. 70,879/-in cash credit

account

of principal debtor as in the circumstances mentioned in the

letter the balance

was required to be recovered from the surety. Some

~orrespondence ensued thereafter between the Bank and the surety

and ultimately the Bank

filed the suit for recovery of Rs. 76,368

·04 P.

against defendant 1, the legal representative of principal debtor and

defendant

2, the surety.

Defendant 1 contested the suit,

inter alia,

conten,ding that the

court had no jurisdiction to hear the suit and

he had no knowledge

about the suit transaction. The allegation

of fraud made against him

in the plaint

was denied. He also denied his liability for the claim

of the Bank as heir and legal representative of deceased principal

debtor. Defendant

2, the surety, contested the suit as per written

statement Ext.

7, inter alia, contending that the Bank had agreed to

grant cash credit facility to deceased principal debtor on the security

.of

goads by way of pledge and that though the goods were to be kept

in the godown in the compound

of Vijay

Oil Mills Pvt. Ltd., but the

godown

was to be kept under the lock and key of the Bank. It was also

contended that the principal debtor would provide such quantity

of

goods as would provide full cover to the outstanding balance in the

cash credit account and the Bank was to

be responsible for the safe

. custody and keeping

of the pledged goods. It was also contended that .

the principal debtor had all throughout pledged sufficient quantity

of

goods to provide full cover for the Bank's claim but the Bank either

wrongfully lost the goods

or was negligent in retaining the goods within

A

B

c

D

E

F

G

H

920 SUPREME COURT REPOIITS [1980) 3 S.C.R.

A its custody or the Bank wrongfully parted with the goods without the

co'lsent of the surety and, therefore, the surety was discharged.

B

c

D

E

F

H

The trial Court found that there was negligence on the part of the

Bank with regard to the safe custody

of the pledged oil tin.s but as the

contract

of guarantee entered

[into by the surety with the· Bank was

independent o"f the pledge of goods given by the principal debtor, the

surety

is not discharged from his liability under the guarantee.

So

observing the trial court decreed the suit.

On appeal by the surety, the High Court held that the two promis­

sory notes,' one executed by the principal:debtor in favour

of the Bank,

Ext.

81, and another by the principal debtor in favour of the surety

and endorsed by the surety to the Bank, Ext.

30, and the letter of guaran­

tee Ext.

31 executed by the surety in favour of the Bank as also the bond

executed by the principal debtor in favour of the Bank Ext.

83 and the

letter

of continuity Ext. 82 executed by the principal debtor in favour of

the Bank, all on September 16, 1957, constituted one composite tran­

saction and they evidence that the principal debtor had offered two

securities, one the pledge

of oil tins and another personal guarantee of

the surety. The High Court further held that the Bank was

·utterly

negligent and had not exercised such care as a prudent man would in

the circumstances

of the case which resulted in the loss of security,

namely, pledged oil tins

and,)herefore, in view of combined operation

of sections 139 and 141 of the Indian Contract Act, ('Act' for short),

. the surety is discharged. Accordingly, the appeal of the surety was

allowed and the suit against him was dismissed. Hence this appeal

by the plaintiff Bank.

Uncontroverted facts concurrently found and not sought to be

reviewed in this appeal are that the principal debtor as per his application "!!!'ii

Ext. 65 sought cash credit facility to the extent of Rs. 75,00-0/-pur-- )

suant to which the Bagasra Branch

of the Bank submitted a proposal

~

Ext. 66 seeking permission of the General .Manager of the Bank to

extend the facility. The General Manager

of the Bank sanctioned

4

advance, inter a/ia, on the following terms:

"A cash credit limit of Rs. 75,000/-(Rupees Seventyfivethousand

only) is hereby

sanctioned against pledge of

approved ·

goods under Bank's lock and key and on the personal guarantee

of Shri C. R. Raia, Junagadh.

Noted that the Bank's godown keeper already posted at

Amrali would look after the goods pledged

by the above

party also. •

•

I

I

'

STATE BANK v. c. R. RAJA (Desai, !.) 921

B

, .r.

All other terms as proposed." {underlining ours). Accordingly, on

tile strength of two pronotes Exts. 30 and 81 and on the strength of

Jdtter of guarantee Ext. 31 and the bond Ext. 83 cash credit facility

.was extended to the principal debtor. The pledged goods were kept

in the godown in the compound of Vijay Oil Mills under the lock and

key of the Bank and the Bank had appointed a Godown keeper to look

after the goods pledged by

the principal debtor. Two

promissory

n!)tes Exts. 30 and 81 and letter of guarantee Ext. 31 and the bond

executed by the principal debtor Ext.

83 all of September 16, 1957,

constituted one transaction. The High Court held that the

surety

had agreed to become surety, on the principal debtor pledging oil

tins as

and by way of security for the advance and, therefore, two

secu­

rities were offered, namely, pledge of goods and the Personal guarantee

of the surety. The High Court also found that 5,000 tins of oil had

eome to

be transferred by

Vijay Oil Mills in the name of the deceased

principal debtor

and they were treated as pledged with the Bank as

security for cash credit facility. It is concurrently found thatthe

Bank was utterly negligent with regard to the safe keeping and

handl­

ing of pledged oil tins and the security of pledged oil tins waspostfon

account of the negligence of the Bank. Disagreeing with the trial

court the High Court held that the pledge and the personal guarantee

were not two independent transactions but they formed part and parcel

of one composite tranasaction. The High Court, therefore, held that

the creditor having lost one security, namely, the pledg¢ goods, the

s111ety was discharged to the extent of the value of secluity and that as

in this case the entire security ~was lost, the surety was wholly

diseharged.

c

;;

D

E

Only contention canYassed in this appeal is that in view of elauses

. 5, 7 and 13 of letter of guarantee Ext. 31, even if it is found as a fact that . F

V-· negligence of the creditor Bank was responsible for the loss of security

~ of pledged oil tins, Yet the surety would not be discharged. Before we

refer to clauses 5, 7 and 13, it is necessary to notice section 141 of the

Indian Contract Act under which the surety claims the relief of dis-]

charge. Section 141 reads as under:

"141. A surety is entitled to the benefit of every security which

the creditor

has against the principal debtor at the time when

G

the contract

of suretyship is entered into, whether the surety

knows

of the existence of such security or riot; and if the

creditor loses, or, without the consent

of the surety, parts

If

with such security, the surety is discharged to the extent of

the value of the security."

W--463 SCI/80 .

(

A

B

c

D

•

:r

G

H

922 SUPREME COURT REPORTS [1980] 3 S.C.R.

In order to attract s. 141 it must be shown that the creditor had

taken more than one security from the principal debtor

at the time

wlien

the conn:act of guarantee was entered into and irrespective of the fact

whether the surety knew

of such other security offered by the principal

debtor,

if the creditor loses or without the consent of the surety parts

with the other security the surety would be discharged to the extent

of

the value of the security. In the instant case as found by

th~ High

· Court and not controverted, the fprincipal debtor had offered two

securities,

(i) the pledge of goods, (ii) personal guarantee of the surety.

Verily, the General Manager

of the Bank accepted the proposal for

cash credit facility

on the specific condition that the principal debtor

shall offer two securities, one the pledge

of goods to be kept under

the

lock and key of the Bank to be supervised by the Bank's employee, and

secondly, the personal guarantee of

the surety. The surety

himself

agreed to give personal guarantee on the specific understanding and

with the full knowledge of the Bank that the principal debtor was offer-,

ing another security, namely, pledge of goods. · The surety contracted

on the good faith of the principal contract when entering into contract

of guarantee in which case he is deemed so to contract that both the

securities would be availabe to the creditor (see Sanderson v. Aston)(!)

If the two promissory notes Exts. 81 and 30 coupled with the lettei:

of guarantee Ext. 31 .executed by the surety and the bond Ext. 83

executed by the principal debtor at one sitting on September 16, 1957, ~

evidence one composite transaction, it is an inescapable conclusion that

the principal debtor offered two securities, one the pledge of goods and

the other the personal guarantee of the surety. 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 s. · 141 of the Act will be indubitably attracted. ·1

Section 141 comprehends a situation where the debtor ha& offered .1

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 j. , /. ~

other securitY offered by the principal debtor yet once the right of the

surety against the principal debtor

is

impairedi\ly any,action or inaction, . '

which implies riegligence appearing from lack. of supervision undertaken

in the contract, the surety would be discharged under the combined ·v-

operation of sections 139 and 141 of the Act. In any event, if the 1

creditor loses or without the consent of the surety parts with the

security, the surety is discha1ged to the extent of the security lost as]

provided by s. 141.

-(!) [1873] LR 8 Exch. 73 at 76.

' STATE BANK V. c. R. RAJA (Desai, !.) 923

In Halsbury's Laws of England, 4th Edn., Vol. 20, para 280, p. A

152, the statement oflaw bearing on this point reads as under:

''280.

Effect of

loss of securities.-On paying the guaranteed debt

the surety is entitled

to have all securities held by the creditor

for the debt handed over

to him by the creditor in exactly

the same state and condition in which they were originally

provided whether they were

in existence at the date of the

contract

of suretyship or came into existence subsequently.

ConseqUently, any act of the creditor interfering with or

impairing that right

will, to the extent, at all events, of any

loss inflicted, relieve the surety from liability, and,

if it has the

effect

of altering or purporting to alter the contract of

suretY·

ship, discharge him altogether. Thus, where there is a

mortgage security given in respect

of a debt which is

subse­

quently guaranteed, the creditor must hold the security for

the benefit

of surety, so that, on paying the debt, the surety

B

c

may obtain a transfer of mortgage in its original unimpaired

.condition.

If the creditor does not fulfil his duty in this

'' I'

respect the surety is discharged."

Thi• statement oflaw is reflected in ss. 140 and 141 of the Act.

In State of Madhya Pradesh v. Ka'uram(I) the facts were that one

J(aluram had executed a surety bond undertaking to discharge the

liability arising out

of any act or omission or negligence or default of a

forest contractor whose bid was accepted at an auction held for sale

of

felled trees and who was required to pay the bid amount in four

instal­

ments. The forest contract rules provided for preventing the contrac·

tor from removing the forest goods in case he mage default in payment

valJ.f the instalments due. The authorities responsible for supervising

\-We contract allowed the contractor to remove the felled trees without

· making the subsequent payments. Subsequently the State of Madhya

Pradesh initiated proceedings to recover the balance of the amount

throuj!h surety Kaluram. The slirety Kaluram contended before this

Court that because the State had lost or parted witj) the security, name­

ly, forest produce, he stood discharged. Upholding this 'contention

this Court quoted

Wu ff and Bi!iing v. Jay, (2) wherein Hannen, J., stated the law as under:

''. ... I take it to be established that the defendant became

E

F

G

surety upon the faith

of there being

some real and substantial H

-----

{I) [19671 I S.C.R. 266.

{2) LR [18721 7 QB 156.

R

c

D

E

F

G

H

924 SUPREME COURT REPORT! [1~0] 3 s.c.R.

security pledged, as well as his own credit, to the plaintiff,

and he was entitled, therefore, to the benefit of that rea;I

and substantial security in the event of his being ~.

called on to fulfil his duty as a surety, and to pay the

debt for which he had so become surety. He will,

however, be discharged from his liability as surety

if the

creditors have put itout of their power to band over to the

~

'surety the means of recouping himself by the security given

by the principal. That doctrine is very clearly expressed

in

the notes in Kees v.

Bqrrington-2 White & Tudor's L.C. J

4th Edn. at p. 1002-As a surety, on payment of the debt,

is entitled to all the securities of the creditor, whether he is. ~

aware of their existence or not, even though they were given

after the contract

of suretyship, if the creditor who has had,

or ought to have had, them in his full possession or power,

loses them

or Permits them to

get into the possession of t)le

debtor, or does not make them effectual by giving proper

notice, the surety

to the extent of such security will be dis­

charged. A surety, moreover, will be released

if the

creditor, by reason

of what he has done, cannot, on payment

by the surety, give him the securities in exactly the same

condition as they formerly stood in his

hands."

This Court concluded that subject to certain variations s. 141 of the

Indian Contract Act incorporates the English law relating to discharge

from liability

of a surety where the creditor

parts with or losses t

security held by it.

Mr. Kackar, however, contended

that in view of clauses 5, 7 and

1J

of the letter'ofguarantee, Ext. 31, even ifit is held proved that security

of pledged goods was lost on account of the negligence ofthe creditor~

Bank, yet the surety would not be discharged from the obligation !

undertaken under the letter of. guarantee. Clauses 5, 7 and 13

may be extracted:

"5. You shall in any case, be· at liberty and without my/our

further assent

or knowledge, at

any .time, to grant to the

customer or any person liable with or for him, whether as

guarantor

or otherwise, any

time or indulgence and to deter­

mine, enlarge or vary its credit and t<J vary exchange or take

other securities or release any other securities held or to be

held by you for or on account of the moBeys intended to be

hereby secured

or any part thereof or to renew any bills,

notes

or other negotiable

s.ecurity and to compound or

make any· other arrangements with the customer or any

. ,,

t

UA['E BANI:: v. c. R. RAJA (Desai, J.) 92 5

Person so liable with or for the customer as you may think fit A

r

without dischar_ging or in any manner affecting my/our

liability under this guarantee."

"7. To tho.extent that you may obtain satisfaction of the whole

of your claim ll8ainatthe customer, I/we agree that you may

enforce and recover upon this guarantee the full amount

hereby guaranteed and interest thereon notwithstanding

any such proof

or composition as aforesaid, and

notwith·

standing any other guarantee, security or remedy, guarantees,

securities

or remedies which. you may hold or be entitled to

in respect of the sum

i~nded to be hereby secured or any

part thereof, and notwithstanding any charges or interest

which may be debited in your account current with the custo­

mer, or in any other accouµt upon which the customer may

be liable."

II

c

"13. Should the customer be a limited company, corporate or D

anincorporate body, committee, firm, partnership, trustees

or debtors on a joint account, the provisions hereinbefore

contained shall be construed and take effect where nece~sary

as if the words importing the singular number included also

the plural number. This my/our guarantee shall then

remain effective notwithstanding any death, retirement, E

change, accession o.r addition as fully as if the person or

persons constituting or trading or acting as, such body,

committee, firm, partnership, trustees, or debtors on joint

account, at the date

of the

customer's default or at and time

previously,

was or were the same as the date hereof. And

further you may recover against me/us to

the extent here in F

before mentioned notwithstanding

that any security given or

to be given to you may be void, defeetive, or informal, or

. notwithstanding that

the customer being a limitedJcompany,

corporate or unincorporate body or committee, may exceed

its borrowing powers or that the borrowing from you may

have been

ultra

vires." G

Clause 5 confers right upon the creditor Bank to grant any time

or

ii:idu!gence in payment of the debt or to determine, enlarge or vary its

credit and to vary, exchange or take other securities or release any

other securities held by the Bank but such an act on the part of the Bank

·would not have thedJ:ect of discharging the surety or in any manner

;affecting his liability under the letter of guarantee. We fail to see how

'.,,.

H

A

8

-

c

D

E

F

G

II

926 SUPREME COURT REPORTS [1980] 3 S.C.I!~

clause 5 can help the creditor Bank in any manner. It is not a case of

granting time or indulgence to the principal debtor or variation of the

credit

or taking one set of security in substitution of

some other security

. or release of any security. Release of security implies a volitional act

on the part

of the Bank.

·Loss on account of negligence cannot be

equated with release. Therefore, clause 5 would.not assist the Bank J.

in this case.

Clause 7 provides"for non-discharge

of surety

even if the creditor

Bank enters into a composition with the principal debtor and

that the

(.

surety would nonetheless be liable even if the Bank has guarantee,

security or remedy, guarantees, securities or remedies from the principal ~

debtor. Upon a true construction of clause 7, theeXPression 'any other

guarantee, Security

or remedy' therein mentioned must be security other

than

the

pledged goods. · In an almost iilentical situation with regard

to

an identical clauses in Amrit Lal Goverdhan La/an v.

State Bank of

Travancore and Ors,(1) this Court after referring to clause 5 in the

letter

of guarantee which is in pari materia with clause

7' of the letter

of guarantee under discussion, held as under:

"On behalf of the respondent Bank reference was made to cl.

5 of Ex. P-4 which has already been quoted. It was contend­

ed that on acccount of this clause in Ex. P-4 the apPel-

!ant has opted out of the benefit of s. 141 of the Indian >.-

Contract Act. We are unable to aceept the argument put

forward by the Attorney General on behalf of the reSpon-

dent Bank.

In our opinion, the expression

"any security,.

in cl.

5 of Ex.

P-4 should be prowly construed as "any

security other than the pledge of goods mentioned in the

primary agreement,

Ex.

P-1 between the Bank and the .

firm''. We consider that there is nothing in cl. 5 ofEx.P-4-e(

to indicate that the appellant is not entitled to invoke the J

provisions of s. 141 of the Indian Contract Act."

Therefore, cl. 7 is of no assistance to the Bank.

A bare perusal

of clause 13 would show that it provides for

continu­

ing the guarantee where the principal debtor is an association of persons.

and for continuance

of the guarantee in the event of death, retirement,

etc.

of one of such association of persons or the guarantee remaining

intact and effective and legally enforceable

irrespectiv~ of some defect

arising from the internal .management of such association of persons.

We faitto see how it can render any·assistance to the Bank.

-(I) [i968J 3 SCR724_at 731.

.).

I ,_

'

STATE BANK v. C. R. RA.TA (Desai, J.) 927

First•security, namely, the pledged goods are lost to the Bank an~.

the concurrent finding again incontrovertible is that the pledged goods

were lost on account of the negligence of the creditor Bank. WhoTe'

of the security was lost and, therefore the surety would be discharged

in entirety .because it

is crystal clear that the principal debtor had

agreed

and had in fact pledged 5,000 tins of oil which even if sold at the

then current market price would have satisfied the Bank's entire

claim. Accordingly, the surety would be discharged in entirety.

It is difficult to entertain a contention that s. 141 would

not. be attracted and the surety would not be discharged even if it is

found

that a creditor has taken more than one Security on the basis

of which advanee was made and the surety gave personal guarantee on

the good faith of other security being offered by the principal debtor

which

itself may be a consideratfon for the surety offering his personal

guarantee and the creditor by its own negligence lost lone of the

SeCUrities. Aceeptance of such a contention would tantainount to

putting a premium on the negligence

of the creditor to the detriment

of the surety who is usually described as a preferred debtor.

Should a

Court by its construction

of such letter of

guarantee~enable 'the'crditor

to act negligently and yet be not in any manner accountable ? Was

the guarantee a guarantee against proper performance

of the contract

evidencing advance

of loan and methods of its repayment, or a

guarantee covering Bank's utter disregard

of its responsibility or to

use the words of the High Court, the Bank's utter negligence in failing

to

eXercise the

care;ora prudent man which one would expect in manage­

ment

of one's own affairs

?

The appeal accordingly fails and is dismissed with costs.

~ The respondent surety has made an application that in comp 1tanct>

11

I._ with the decree made by the trial court he had paid the entire amount

and he should not be exposed to second round of litigation for resti-

1 tution of the amount and that this Court should give aldirection to the

Bank as part

of this judgment that the amount be returned with

interest

at current

rate to the respondent surety.

Bys.144

of the Code of Civil

Proeedure,il90S as it stooa prior to

amendment by the Code

of Civil Procedure (Amendment) Act, 1976,

the jurisdiction to grant reStitution was conferred upon the 'Court

A

B

c

D

E

G

of first instance'. Since the amendment the expressioni'the Court of · H

first instance' has been substituted by 'the Court which passed the

decree

or order'. An explanation has been added to s. 144 by the

A

B

c

D

E

G

e

928 SUPREME COURT REPORTS fl980] l S.t.R.

Amendment Act of 1976, the relevant portion of which reads as

under:

"Explanation-For the purpoSes of sub-section (I) the exprcliion

"Court which pasSed the decree or order" shall be deellled to

include-

(a) where the decree or order has been varied or rcvoned

in exerciSe of apJleUate or revisional jurisdictioa, the

Court of first instance.''

In the instant caSe the apjlellant was the plaintiff and its suit was

decreed by the trial court, i.e. the Court of Civil Judge, Senior Dfvi.

sion, Gonda!, on November 18, 1960. The present apjlellant by its

letter dated February 14, 196t,.demanded from the surety a sum of

Its. 84,828 ·07P. inclusive of costs and interest on the principal amo11nt

decreed. The surety respondent I in this Court paid the apPcllant

Rs. 84,828 ·07P. on April 3, 1961. In the apJleal by the ~ty the

High Court reVersed the deeree and dismisSed the suit against the

surety. Accordingly, the surety is entitled to restitution.

The limited question is whether this Court can grant restimtion.

Prior .to Amendment Act, 1976, an application for re&titution Wider

s.144 in all caSes had to be made to the Court of first instanee. EYer

since the amendment the substituted eXPreSSion 'the Court which pa8Scd

the decree or order' would as Jler clauSe(a) of the explanation, mean the

Court of first instance becauSe the expression 'the Court which palled

the decree or order' has ·been deemed to include where the decree or

order has been varied or reverSed in eXerCiSe of appellate or revisional

jurisdiction, the Court

of first instance. The present one is the

sim­

plest case where the suit in favour of the appellant and against the

surety was decreed

by the trial

court, i.e. the Court of first instance,

and this decree

has been reverSed by the High Court in

e:tercise

· of its apJlellatc jurisdiction. In such a situation clause (a) of the

explanation would be attracted and an application for re&titution will

have to be made to the Court of first instance, i.e. the Court of CiYil

Judge, Senior Division, Gonda!. It is nowhere suggested that au..m a

Court does

not exist. Therefore, it would not be

proJler for this Court

t~ direct restitution. However, there will 6e no justification for the

apjlellant Bank to withhold the amount which was collected from the

surety

on a

mere demand. Therefore, an applicat_ion for re&titu&ion

made by the surety would not lie to this Court and it would stand dis­

posed of accordingly.

l ., -.

S.R. Appeal dismissed.