Brahmayya And Co. Official … vs K. Srinivasan Thangirayar And … on 11 February, 1958

Madras High Court
Brahmayya And Co. Official … vs K. Srinivasan Thangirayar And … on 11 February, 1958
Equivalent citations: AIR 1959 Mad 122
Author: R Iyer
Bench: P Rajagopalan, R Iyer


Ramachandra Iyer, J.

1. This appeal is directed against the judgment of Balakrishna Aiyar J. on the original side of this Court in Appln. No. 3639 of 1951 in O. P. No. 192 of 1947. The appellants who were the applicants before the learned Judge are the Official Liquidators of the Hanuman Bank Ltd.. which is now under liquidation. The application was filed under the provisions of Sections 45-A and 45-B of the Banking Companies Act to direct the first respondent to pay both personally and out of the properties charged to the bank and his other properties a sum of Rs. 34,000, with further interest thereon from the date of application till the date of realisation and for certain other reliefs.

The other respondents are the children of the first respondent and it is unnecessary for the purpose of this case to set out the nature of the reliefs sought against them. One Munia Servai was a constituent of the bank having overdraft facilities and in connection with his overdraft he executed a deed of security on 2-1-1945 for a sum of Rs. 20,000. Munia Servai was in need of further moneys and wanted further credit from the bank and the bank therefore, demanded proper security of immoveable properties for affording further monetary facilities.

Srinivasa Thangirayan the first respondent was requested to offer such security by Munia Servai, and the former executed a document styled as a deed of security (Jamin Pattarom) dated 23rd September 1945 in favour of the bank for a sum of Rs. 25,000. Munia Servai failed to pay the moneys that he owed to the bank and on 3rd March 1949

the appellant obtained a preliminary mortgage decree against him for a sum of Over Rs. 4,00,000, the final decree followed on 24th July 1951.

In the meantime the application out of which this appeal arises., viz. Appln. No. 3639 of 1951, was filed by the appellant against the respondents for the reliefs set out above. When this application was pending there were applications by Munia Servai regarding reduction of his liability to the bank, and on 21st October 1953, an order was made on the original side of this Court in terms of a consent memo filed by the Official Liquidators and Munia Servai.

Under that order the amount due from Munia Servai was compounded and fixed at Rs. 2,15,000. and after giving credit to a sum of Rs. 40,000, and odd paid By him, the balance of his liability to the bank was fixed at Rs. 1,74,238-8-0. Certain other directions followed which enabled Munia Servai to pay that sum in instalments, and this arrangement was stated to be in full quit of all liability under the decree against Munia Servai dated 3rd March 1949 and his other liabilities.

Munia Servai did not pay even this reduced sum, and in the application out of which this appeal arises the appellant prayed for an order for payment against Srinivasa in terms of the bond executed by him. Various defences were taken by Srinivasa, but Balakrishna Aiyar J. disposed of the matter on a preliminary point on the admitted facts between the parties.

The learned Judge held that the security bond dated 23rd September 1945 executed by Srinivasa was a mere contract of guarantee within the meaning of Section 126 of the Indian Contract Act and that by reason of the compromise entered into on 21st October 1953 by the appellant with the principal debtor, Munia Servai, without Srinivasa being a party thereto, Section 135 of the Contract Act was attracted and that the liability of Srinivasa stood discharged.

2. In the appeal against this order of the learned Judge it is contended on behalf of the appellants that on a true construction of the bond, the liability of Srinivasa does not arise on the default of Munia Servai and that what Srinivasa undertook was an original liability, and that he was not a mere surety.

3. To appreciate this contention it is necessary to set out the operative portions of the bond. This bond is styled as Jaminpathram or a deed of security. It then proceeds to set out the liabilities of Munia Servai to the bank, his need to raise further monoys and the demand of the bank for additional security. It proceeds further to set out in the preamble that Munia Seryai requested Srinivasa to offer security to the bank in a sum of Rs, 25,000 and that Srinivasa agreed to the same.

It then stated “I hereby offer as security for the sum of Rs. 23,000 and interest thereon as per the terms of this deed and the rules of the bank the wet and dry lands set out in schedule A here-under………. as well as the properties set out in
schedule B hereunder”. A covenant of title in regard to the properties and an undertaking to reimburse in case there was loss on account of any defect in title followed. The bond then proceeded thus:

“I also agree to pay the bank all its dues without raising any question of any pro tanto discharge or liability. My heirs, executors, and administrators shall also be bound to pay the amount due to the bank on the charge of the properties aforesaid, I shall not let or lease the charged properties for a period of more than a year, shall not subject the properties further by way of security, charge

or mortgage unless after intimating the bank I had obtained the prior consent of the bank in writing. All the moneys which I may receive in respect of any such transfer by way of advances of lease amounts, rent or any Other sum skill be paid by me towards the discharge of this debt. If I commit default and fail to pay any amount as aforesaid, such shall not operate against the provisions of this deed…, ……I shall abide by the terms aforesaid and in the event of the bank closing the accounts (Siar Kahakkugalai Mudivu Katti) of the said Munia Servai and determining the amounts payable by him under the accounts of the bank either for the reason that his transactions are not satisfactory or for any other reason, I hereby agree to pay all the sums to the extent of this deed of security as may be demanded without raising any objection.”

4. It is clear from the terms of the bond that the primary liability was that of Munia Servai no portion of the debt being advanced to Srinivasa by the bank. The surrounding circumstances also indicate that the bank wanted additional security for granting increased monetary facilities to Munia Servai. who was their constituent having overdraft account.

It is, no doubt, true that there is no express statement in the document that the liability of Srinivasa was to arise on the default of payment by Munia Servai, but in our opinion, such a clause must be necessarily, implied on the terms of the bond in the circumstances of the case. On a fair reading of the document, it is clear that ihe principal obligation or indebtedness was that of Munia Servai, and that the obligation of Srinivasa was only a collateral or secondary engagement to perform the promise or discharge, the liability which was essentially and primarily that of Munia Servui.

This is supported by the fact that the document itself is styled as Jaminpattram which means that it is a surety or security bond. Munia Servai was already a debtor to the bank, and Srinivasa came in to furnish the additional security that was demanded in respect of Munia Servai’s transactions. It is not possible to infer from the bond that the executant became principally liable.

For one thing, it was not a case of novation. Srinivasa’s undertaking was not in substitution of any portion of the debt of Munia Servai, .Further, under the terms of the bond Rs. 25.000 is only the upper limit of Srinivasa’s objection, and if Munia Servai’s liability is reduced to less than Rs. 25,000, Srinivasa’s liability would also be re-duced. It cannot therefore be said that the obligation of Srinivasa was an independent original obligation.

It was next suggested for the appellants that Srinivasa became a joint debtor with Munia Servai. There is nothing ‘in the bond to warrant this contention. There is no joint promise made by Munia Servai and Srinivasa to the bank. The advance of money was to be made to Munia Servai alone and he was the person principally liable, and security was demanded only with respect to his liability.

It is, therefore, clear that the liability of Srinivasa was only secondary arising on the default of Munia Servai who was primarily liable to the bank, Learned counsel for the appellants sought to rely on the decision reported in Vynivan Chettiar v. Official Assignee, Madras, ILK 55 Mad 949: 63 Mad LJ 6J5: (AIR 1938 Mad 39). In that case two persons Vyravan Chettiar and Rama-nathan Chettiar borrowed from a bank on joint promissory notes certain sums of money. They divided the amounts thus borrowed equally between themselves.

Ramanathan Chettiar was adjudged an insolvent with the result that Vyravan Chettiar had to pay the entire debt due to the bank. The claim-of Vyravan Chettiar was that he was subrogated to the benefit of the lien which the creditor bank had in respect of the liabilities of Ramanatha. The Official Assignee, who represented the creditors in the insolvency of Ramanatha contested this claim. On the facts it was found that there was no agreement between Ramanatha and Vyravan that each debtor was to be surety in respect of the half taken by the other.

The learned Judges held that the liability on the promissory note to the bank was joint and several there being one debt which is equally the debt of both the persons, and therefore, there was no question of primary and secondary liability, and that the agreement inter se the debtors having been found against there was no scope for the application of the principle underlying Section 141 of the Contract Act which would entitle Vyravan to the benefit of the securities held by the bank. In our opinion the principle of this decision has no bearing on the facts of the present case. It must also be noted that the question as to whether Vyravan was a surety or not did not arise between this creditor and Vyravan.

5. Mr. Swarninathan for the appellants next relied on the decision reported in Manalinga lyer v. Union Bank Ltd., Kumbakonam, 1942-2 Mad LJ 532: (AIR 1943 Mad 216), as supporting his-position, that the present case is a case of joint debtors and not one of principal and surety. In that case a promissory note was executed in favour of the plaintiff bank by two persons who bound themselves jointly and severally to pay the sum mentioned in the note. The promissory note was no doubt given as security for the overdraft for one of them, but that security in the shape of promissory note was enforced in an action, against both the executants.

One of the executants who did not get the benefit of the monies, claimed that he was a mere surety, and that the bank had lost its right to proceed against him is the other executant had executed a trust deed for satisfying the claims of his creditors to which the creditor bank had also assented, and that, therefore, he was discharged from his liability to the bank. The learned Judges held that the appellant (the executant who did not get the benefit of the amount) would not be-entitled to the benefits of Section 135 of the Contract Act as it was not open to him to plead that he was only a surety.

It may he noticed that under the joint promissory note executed in favour of the bank the alleged surety undertook unconditional liability not depending either expressly or impliedly on the default of the principal debtor. This decision, cannot, therefore be relied on as authority for the position, that Srinivasa who had executed the security bond should be treated only as a joint debtor and not as a surety, as there is neither an unconditional nor a joint promise to the creditor.

6. Mr. Swamminathan next urged that for a contract of guarantee or suretyship there must he a tripartite arrangement between the credior, the principal debtor and the surety. This is, of course, obvious. He went further and suggested that there should be a definite agreement between the principal debtor and the surety regulating their rights-inter se, and in the absence of such an agreement or arrangement the document should be construed as one importing1 a joint liability and not a mere contract of guarantee.

In support of this argument he relied on the
decision in Kamachandra v. Shapurji, AIR 1940 Bom 315.. In that case a broker, who was the defendant in the action, employed a sub-broker to introduce constituents to him. The sub-broker, who was the plaintiff in the action, executed an agreement under which he held himself liable to the broker for the performance of the obligations by, the constituents introduced by him. In an action by the sub-broker fur an account of the commission payable to him by the broker the latter pleaded that certain constituents introduced by the sub-broker defaulted by reason of which the broker sustained loss, and he relied upon the contract executed by the sub-broker as an answer to his claim.

The sub-broker claimed that he was discharged from the liability which arose on the default of the constituents introduced by him, as a compromise had been entered into between the broker and those constituents without his consent. The question arose whether the agreement executed by a sub-broker to the broker was a contract of indemnity or a contract of guarantee or suretyship to which alone the provisions of Section 135 of the Contract ‘Act would apply.

The learned Judges held that the contract was
one of indemnity and not of guarantee, and that, therefore, the broker was entitled to compromise the claim in respect of the amounts due from the
constituents without the consent of the sub-broker arid without prejudice to his claim under the
agreement. While discussing the distinction between a contract of indemnity and a contract of
guarantee Beaumont C. J., at page 3.16 observed as


 "I agree with the view taken by the Madras High Court in Periyamianna Marakkayar and Sons v. Banians and Co., ILR 49 Mad 156, that a contract
of guarantee   involves   a   contract  to  which    those

parties are privy. Of course the contract need not e embodied in a single document hut I think there must be a contract or contracts to which the three parties referred to in Section 126 are privy. There must be a contract first of all, between the principal debtor and the creditor. That lays the foundation for the whole transaction. Then there must’ be a contract between the surety and the creditor by which the surely guarantees the debt, and no doubt the consideration for that contract may move either from the creditor or from the principal debtor or both. But if those are the only contracts, in my opinion, the case is one of indemnity. In order to constitute a contract of guarantee there must be a third contract by which the principal debtor expressly or impliedly requests the surety to act as surety. Unless that element is present, it is impossible in my view to work out the rights and liabilities of the surety under the Contract Act.”

Kania J, stated at page 318 thus: ‘There must be a third contract either expressly made or arising by the conduct of the parties by which the principal debtor agrees to satisfy the claim of the surety.” The next case cited was the one in Periyamianna Marakkayar and Sons v. Banians and Co., ILR ’49 Mad 156: (AIR 1926 Mad 544). where the distinction between a contract of indemnity and that of a suretyship is set out. Kumaraswami Sastri J. at page 172 (of ILR Mad): (at p. 549 of AIR) observes :

“Reading Ss., 126 and 145 together it seems to me that there can no contract of guarantee as distinguished from a contract of indemnity unless there is privity between the principal debtor and

the surety as it is difficult to speak of an implied promise between persons between whom there is no privity of contract. Section 126 refers to a contract of guarantee and speaks of three persons with reference to that contract, namely, the persons who gives the guarantee. The person in respect of whoso default the guarantee and ihe person to whom the guarantee is given. Section 127 refers to consideration for the guarantee which is sulficient to support the guarantee. Nanak Ram v. Mehinlal, ILR 1 All 487 is authority for the view that, privity is necessary in all cases of suretyship between the three parties. Ss. 140 and 141 only prescribe the methods by which the rights of the surety can be worked out and I find it difficult to sec how a person who agrees to perform the obligation of another without reference to him can clothe himself with the right of action against him on the contract or how a person can become a surety without the knowledge and consent of the principal debtor and clothe himself wish the rights mentioned fn Sections. 140 and 141 or Section 145.”

In the two cases cited above the question was whether the document sued on in the respective cases were contracts of indemnity Or contracts of suretyship. In the case of a contract of indemnity; it is not necessary for the indemnifier to act at the request of the debtor, whereas in the case of a contract of suretyship it is necessary that the: surety should give the guarantee at the request of the debtor.

The decisions merely emphasise the distinction between a contract of indemnity and a contract of guarantee. In the former case it is a direct engagement between the two parties thereto, whereas in the latter case there are three parties, the creditor, the debtor and the surety who under- takes at the request of the debtor to answer the debt default or miscarriage of the debtor. It is not the case of the appellants, and indeed it could not be, having regard to the terms of the deed; that the present case is one of indemnity.

In the present case reference is made in the bond to the request of the principal debtor to the surety to give security and the surety thereupon agreed to comply with the request of the, principal debtor, and on that basis he executed! the bond in favour of the creditor, bank, which accepted the same.

There is no doubt that this satisfies the test of the document being a surety bond, and this is undoubtedly a tripartite arrangement, but the argument of Mr. Swaminathan is that the relationship inter se the surety and the principal debtor should also be the subject of an express contract to which the creditor should be a party. We do not agree with that contention; nor do we understand the cases cited by him as supporting this proposition. In our view the bond is the basis for the present claim is a surety bond.

7. It was next argued that under the terms of the bond it was open to the bank to release the principal debtor and to sue the surety. Reliance was placed on the terms of the bond where the surety says :

“I shall abide by the terms aforesaid and in the event of the bank closing the accounts of the said Munia Servai and determining the amounts payable by him under the accounts of the bank cither for the reason that his transactions are not satisfactory to the bank or for any other reason.” We do not think that by this clause Sri nivasa has undertaken to guarantee the liability even in the event of the hank adjusting or compromising its claim with the principal debtor without reference to him.

In that view it is unnecessary to pursue the matter and consider the decision in Perry v. National Provincial Bank of England 1910-1 Ch 464 cited by the learned counsel for the appellant as an authority for the position, that where the bond expressly provides that the creditor may enter into a composition with the debtor the right of the creditor would subsist against the surety, even if he entered into a composition with the debtor without reference to the surety. The clause in question relates only to the ascertainment of the amounts due on the accounts by the bank, and it does not envisage a composition, with the debtor by the bank.

8. It was next contended for the appellants that the composition was by an order of the court and not by the liquidator on his own responsibility. Although this argument did not appear to have been advanced before Balakrishna Aiyar J. who heard the application, we allowed the learned counsel to argue this point. Learned counsel relied on the decision in Ex parte Jacobs; In re Jacobs (1875) 10 Ch A 211.

That was a case where the acceptor of a bill of exchange filed an application under the Bankruptcy Act, 1869 and he was adjudged a bankrupt on the application. There was then a composition under the Bankruptcy laws to which the endorsee of the bill of exchange assented. A question arose whether the endorsee could maintain an action against the drawer. At page 213, Sir W. N. Tames L. T. observed.

“There can be no doubt that if the holder of a bill by becoming a party to the deed or agreement independently of any bankruptcy Act agrees to accept a composition from the acceptor, he thereby discharges the drawer- but, on the other hand, it is equally clear that if the acceptor is discharged from his liability by operation of law by becoming a bankrupt, the liability of the drawer to the holder is not thereby affected.”

The learned Lord Justice further says at page 214:

“We think that a discharge of a debtor under a liquidation or a composition is really a discharge in bankruptcy by operation of law. Where a creditor voluntarily agrees to a composition by deed or agreement with the acceptor it is by his act alone that the acceptor is discharged and the position of the drawer altered.”

It was held that the discharge was by operation of law and that the drawer was not thereby discharged from his liability.

9. The principle enunciated above cannot obviously apply to the present case, because there is no question of any composition by reason of the insolvency of the debtor. Here the creditor bank was in liquidation, and the permission of the court was sought by the Official Liquidator to compound with the debtor, and no question of composition under operation of law could arise.

10. A passage from the decision in the Bombay Co. v. Official Assignee of Madras, 40 Mad LJ 414: (AIR 1921. Mad 230). occurring at page 417 (of Mad LJ): (at p. 243 of AIR) was next cited. It is unnecessary to deal with that case as in that case even the composition was one in the insolvency of the principal debtor and with notice to the surety. We therefore hold that there is no validity in any of the submissions made by the learned counsel for the appellant.

11. Learned counsel for the respondents wanted to support the judgment of the learned Judge even on the footing; that Srinivasa was a joint debtor with Munia Servai., He argued that by reason of the fact that the entire money ad-

vanced by the bank was taken by Munia Servai, Srinivasa was only in the position of a surety as contemplated in the judgment of Lord Selborne in Duncan, Fox and Co. v. North and South Wales Bank (1880) 6 AC 1. He referred to the third class of liabilities mentioned in that case and referred to in ILR 55 Mad 949 : (AIR 1933 Mad 39) and contended that the first respondent would be a surety mentioned in the second and third categories enumerated therein.

According to him even if Srinivasa was not a surety within the meaning of Section 126 of the Contract Act he would only be a surety loosely described as such and on certain equitable principles ha would be discharged from his liabilities by the principle of Section 135 of the Contract Act. He was not however, able to cite any authority in support of his contentions, but he argued that the principle underlying the provisions of Section 135 was held to apply to the case of a surety bond which does not come under Section 126 of the Indian Contract Act.

In this connection he relied on the decisions reported in Mahomedalli Ibrahimji v. Laxmibai, ILR 54 Bom 118: (AIR 1930 Bom 122) and Parvati Bai v. Vinayak Balvant, ILR 1938 Bom 794: (AIR 1939 Bom 23). It may be noticed that the principle of these decisions is not consistent with the decision of our High Court in. Appunni Nair v. Isaak Mackadam, ILR 43 Mad 272: (AIR 1920 Mad 355) but it is unnecessary to pursue the matter any further, as in our opinion the respondents are entitled to succeed in the view we have taken in regard to the other aspects of the case.

12. We agree with Balakrishna Aiyar J. that the bond was a surety bond, and that the first respondent was discharged from his liability there under by reason of the appellant, entering into-a composition with the principal debtor without any reference to the surety.

13. In the result we dismiss this appeal with
costs. The appellants would be entitled to take
their costs out of the estate.

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