JUDGMENT
1. This appeal by Union Bank of India the plaintiff in O.S. No. 3 of 1982 on the file of the Sub Court, Ernakulam is directed against that part of the judgment and decree by which the court below while granting a decree as prayed for against the assets of the deceased principal debtor (deceased 1st defendant in the suit) in the hands of his legal representatives, defendants 4 to 12, negatived the claim against the sureties-defendants 3 to 5 and defendants 13 to 22 the legal representatives of another deceased surety, who are respectively respondents 1 to 3 and 13 to 20 in this appeal.
2. Briefly the relevant facts are thus: Deceased 1st defendant was running a Vaidyasala, for the expansion of which the plaintiff sanctioned a loan with a limit of Rs. 11,500/ – under the scheme titled “Loan to self employed”. The loan was repayable with interest at the stipulated rate in 33 equal installments. Under the loan so sanctioned the deceased 1st defendant received Rs. 5,000/-executing Ext. A1 demand promissory note on 30-10-1975. On the same day deceased 1st defendant executed Ext. A2 bond hypothecating all kinds of Ayurvedic medicines and raw materials stored in his Vaidyasala. Deceased 2nd defendant and 3rd defendant executed Ext. A3 letter of guarantee also on the same day limiting their liability to Rs. 5,000/-. Thereafter on 10-11-1975 and 1-12-1975 deceased 1st defendant executed Exts. A4 and A5 demand promissory notes and received Rs. 2,000/ – each under the loan sanctioned already. On the same day defendants 4 and 5 are alleged to have executed Ext. A7 letter of guarantee agreeing to discharge the loan liability of deceased 1st defendant limiting their liability to Rs. 11,500/-. Again an amount of Rs. 2,500/-was received by deceased 1st defendant on 7-1-1976 by executing Ext. A6 demand promissory note and Ext. A8 bond hypothecating stock in trade on the same terms contained in Ext. A2. The amount mentioned in Ext. A8 was Rs. 11,500/-. On 25-9-1978 deceased first defendant executed Ext.A9 demand promissory note and Ext. A10 hypothecation bond for an amount of Rs. 14,533.19 which was the amount due to the Bank from him as on that date. On the same day the 3rd defendant is alleged to have executed Ext. All letter of guarantee agreeing to discharge the liability of deceased first defendant to the extent of Rs. 14,533.19. Suit was filed alleging default in repayment of the amount due from deceased 1st defendant. A total amount of Rs. 21,995.04 together with Rs. 2,741.05 as interest till the date of suit was claimed in the suit. Future interest at the rate of 15% till realisation as provided in the documents executed by deceased 1st defendant was also claimed in the plaint, apart from costs.
3. Legal representatives of deceased first defendant, namely, defendants 4 to 12 filed written statements and contested the claim. Since defendants 4 and 5 were impleaded as sureties originally itself they filed a separate written statement. Defendants 6 to 12 filed another joint written statement. While 3rd defendant filed a separate written statement, defendants 13, 14, 16, 17, 19 and 20 filed a separate joint written statement disputing their respective liabilities.
4. Third defendant while admitting execution of Ext. A3 letter of guarantee contended that the upper limit of liability fixed therein is only Rs. 5,000/-. Even if the guarantors are found liable as per Ext. A3 their liability cannot exceed Rs. 5,000/-. Valuable stock in trade and other movable belonging to the borrower have been hypothecated as security for the loan and the debt incurred under the loan could have been easily realised by proceeding against the hypothecated goods. The plaintiff is liable to proceed first against the hypothecated goods and then alone it can proceed against the sureties. The amount realised by the sale of hypothecated goods should be deducted from the loan liability and the sureties can be made liable if at all only for the balance if any due after such deduction. A further contention was also taken to the effect that in as much as plaintiff has voluntarily abandoned its claims on goods hypothecated the 3rd defendant may be burdened with the whole sum of Rs. 5,000/- with interest. It was also contended that the 3rd defendant cannot be made liable for amounts advanced subsequent to the execution of Ext. A3 since such amounts were granted without reference to him.
5. Defendants 4 and 5 totally denied the execution of Ext. A7 letter of guarantee and contended that it is a false document created collusively with P.W1, the then Manager of the Bank and deceased first defendant who were on very friendly terms. They also contended that even if it is found that Ext. A7 is a genuine letter of guarantee executed by them, they cannot be made liable since the plaintiff has not taken any steps to realise the debt from the goods hypothecated. Since the plaintiff has lost or parted with the hypothecated goods and is not in a position to hand over such goods to them, the sureties should be treated as discharged from their liability. They also alleged that the deceased 1st defendant has with the active connivance of the Manager of the Bank squandered away the entire goods hypothecated and have appropriated the sale proceeds without discharging his liability.
6. Defendants 6 to 12 adopted the contentions of defendants 4 and 5 and contended further that they should not be made liable as they have not inherited any assets from the deceased 1st defendant.
7. Defendants 13, 14, 16, 17, 19 and 20 also disowned liability as legal heirs of deceased second defendant stating that they are not possessed of any assets left by deceased 2nd defendant and that even if they are found liable, their liability should be restricted to a limit of Rs. 5,000/-.
8. Plaintiff produced Exts. A1 to A20 documents and examined two of the Managers of the Bank who were in the concerned office during the relevant period and also the then Accountant as P. Ws. 1 to 3/ Defendants produced Exts. B1 and B2 and examined D.Ws. 1 to 3 who are respectively defendants 3 to 5.
9. The learned Judge found that Ext. A7 letter of guarantee alleged to have been executed by defendants 4 and 5 is not a genuine document and as such they cannot be made liable as guarantors. It was also found that the plaintiff Bank ‘has lost or parted away’ the hypothecated goods without taking any action to seize the hypothecated goods and selling them diligently and as such as the guarantors cannot be made liable for the debt. Accordingly it was found that all the sureties are discharged from their respective liabilities under Section 141 of the Indian Contract Act. On the basis of the above findings sureties were found to be not liable applying the provisions contained in Sections 139 and 141 of the Indian Contract Act (hereinafter referred to as “the Act”) to the facts of the case. The accounts produced by the plaintiff was found to be genuine. As such a decree for the realisation of the plaint amount from the assets of the deceased 1st defendant in the hands of defendants 4 to 12 was passed. As against the sureties, defendants 3 to 5 and the legal representatives of deceased 2nd defendant another surety, the suit was dismissed.
10. In the light of the contentions raised before the court below and pursued in this appeal by the parties to , the appeal, the questions that arise for consideration in the appeal are: (1) Whether the finding of the learned Judge that Ext. A7 letter of guarantee is not a genuine document executed by defendants 4 and 5 is sustainable in law? (2) Whether the finding that plaintiff Bank has by its negligent conduct lost the securities furnished by the borrower is legally sustainable? (3) If the sureties are not discharged under the provisions contained in Sections 139 and 141 of the Act, to what extent they are liable under the letters of guarantee? and (4) Whether Ext. All is a genuine letter of guarantee executed by the 3rd defendant?
11. Point No. 1. In support of the finding that Ext. A7 letter of guarantee is not a genuine document executed by defendants 4 and 5 the learned Judge has pointed out 4 or 5 circumstances or reasons. Firstly the learned Judge has pointed out that in as much as the thumb impression of the 4th defendant, who is admittedly an illiterate woman, has not been taken, the Bank has clearly violated its own regulations which insist upon taking thumb impression at the time when illiterate persons execute documents in favour of the Bank. The second circumstance pointed out is that though on the date of exeuction of Ext. A7 the 5th defendant was not employed as an Ayurvedic Medical Officer in the Government Dispensary at Panathady in Kannur District; she was described in Ext. A7 as the Ayurvedic Medical Officer in the Government Dispensary at Panathady. The said circumstance as pointed out by the learned Judge is certainly a circumstance which would indicate that Ext. A7 is not a genuine document executed by the 5th defendant, on the date on which it purports to have been executed. Thirdly it has to be noted that when Ext. A7 was executed for an amount of Rs. 11,500/- the liability of deceased 1st defendant was only Rs. 7,000/-. It would again indicate that the document is not one executed on the date on which it purports to have been executed. Lastly it was also found that contrary to the practice followed by the Bank while getting letters of guarantee, the signatures of the guarantors were obtained only in the last page of the letter of guarantee. Learned counsel for the appellant was not able to show that the above circumstances are totally irrelevant or insufficient to come to the conclusion reached by the learned Judge regarding to the execution and genuineness of Ext. A7. The above circumstances and various other facts and circumstances pointed by the learned Judge in paragraph 9 of his judgment, in my view, are sufficient to sustain the conclusion reached by the learned Judge as far as the genuineness of Ext. A7 is concerned. Accordingly, I would confirm the said finding.
12. Point No. 4. Though the 3rd defendant has not specifically denied the execution of Ext. A11 and disputed its genuineness in the written statement he has denied its execution and genuineness while examined as D.W. 1, P.Ws. 1 and 2 were cross-examined at length on those points by the counsel for the 3rd defendant. The question regarding the execution and genuineness of Ext. All raised by the 3rd defendant may have to be gone into on merits in this case even though it was not raised specifically in the written statement for the reason that originally by an obvious mistake the allegation in the plaint was that Ext. A11 was one executed by the 2nd defendant. The said mistake was corrected only on 6-8-1985 as per the order in I.A. No. 5148 of 1985, 18 days prior to the pronouncement of the judgment in the suit on 24-8-1985. It would appear that after the correction was carried out the 3rd defendant was not given a further opportunity to file a written statement and dispute his liability with reference to the corrected allegations in the plaint.
13. As D.W. 1 third defendant has categorically deposed that even though the signature seen in Ext. A1 is his, he has not executed any letter of guarantee other than the letter of guarantee marked as Ext. A3 in the suit. On the date shown in Ext. A11 as the date on which it was executed, he was really on inimical terms with deceased first defendant and the document now produced as Ext. All is clearly a forgery. Deceased 1st defendant was at the relevant time prosecuting a criminal case against him in the Magistrate’s Court, Aluva (C.C. No. 580 of 1976). He has also deposed that himself and his wife have jointly availed of certain agricultural loans from the plaintiff Bank in the previous two years and in that connection the Bank officials have taken his signatures in certain blank forms and in all probability one such form might have been used for creating Ext. A 11 document. Questions suggesting the above case have been put to PWs 1 and 2 during their cross-examination also. On a consideration of the evidence of DW 1, I do not find any reason to disbelieve the evidence given by him especially with regard to the criminal case instituted by deceased 1st defendant against him, though no documentary evidence as such has been produced by him to establish the same. If the third defendant was being prosecuted by deceased first defendant before the Magistrate’s court, Aluva as deposed by him, it is most unreasonable to hold that he would have stood as a guarantor for the liability of deceased 1st defendant to the plaintiff bank. The only evidence on the side of the bank to establish due execution and genuineness of Ext. A 11 is the interested testimonies of the 2 Managers of the Bank, examined as PWs 1 and 2. In the facts and circumstances of the case, I am of the view that it is totally unsafe to rely upon the interested testimonies of PWs 1 and 2 to hold that Ext. All is a genuine document executed by the 3rd defendant as contended by the plaintiff. Accordingly I hold that 3rd defendant cannot be made liable on the basis of Ext, A 11 letter of guarantee.
14. Point No. 2. The most important point pressed by the counsel on both sides in this case is the one regarding the sustainability of the finding of the learned Judge that the plaintiff bank has lost the securities furnished by the borrower in the form of hypothecated goods by its negligent conduct. While the learned counsel for the appellant has contended that the said finding is unsustainable in law, the learned counsel for respondents has submitted that it is perfectly justifiable. The question to be decided is how far the above conclusion reached by the court below (which I may refer to hereafter as the basic finding in the case) is sustainable on the basis of the evidence in the case. If on the evidence in the case the basic finding is sustainable, the further conclusion that the sureties are discharged from their respective liabilities by operation of the provisions in Sections 139 and 141 of the Act is perfectly justifiable and is only to be confirmed,
15. Before going into the above question, it may be useful to refer to the relevant sections of the Act and the decisions of the Supreme Court and High Courts referred to and relied upon by the learned counsel on both sides for the purpose of understanding the nature of the statutory requirement to be satisfied for the appreciation of the provisions contained in Sections 139 and 141 of the Act. Such an understanding would be helpful to ascertain whether the evidence in the case is sufficient to establish the statutory requirements to be satisfied for the application of the provisions of Sections 139 and 141 of the Act.
16. Relevant Sections of the Act are Sections 137, 139 and 141 which are thus :
“137. Creditor’s forbearance to sue does not discharge surety.– Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.
139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.– If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
141. Surety’s right to benefit of creditor’s securities.– A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts, with such security, the surety is discharged to the extent of the value of the security.”
From the provisions contained in Section 137 of the Act it is clear that mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. The surety will get his discharge under Section 139 of the Act only if it is established that the creditor has done any act which is inconsistent with the rights of the surety or omits to do any act which his duty to the surety requires him to do and as a result of such act or omission the eventual remedy of the surety himself against the principal debtor is impaired. Section 141 of the Act makes it clear that a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into and if the creditor loses or without the consent of the surety, parts with such security the surety will be discharged to the extent of the value of the security lost or parted with.
17. I may now refer to the relevant decisions on the point. In State of M. P. v. Kaluram, AIR 1967 SC 1105, while upholding the contention of the surety in that case to the effect that he stood discharged on account of the fact that the State had lost or parted with the security, namely, forest produce, the Supreme Court has quoted with approval the following passage of Hannen, J. in the decision reported in Wulff v. Jay, (1872) 7 QB 756:
“….. take it to be established that the defendant became surety upon the faith of there being some real and substantial security pledged, as well as his own credit, to the plaintiffs, and he was entitled, therefore, to the benefit of that real 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 it out of their power to hand 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 Rees v. Barrington — 2 White and Tudor’s L.C. 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 the debtor, or does not make them effectual by giving proper notice the surety to the extent of such security will be discharged. 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’.”
18. Kaluram’s case, AIR 1967 SC 1105, was a case where the surety had executed a bond undertaking to discharge the liability arising out of any act or omission, 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 instalments. The forest contract rules provided for preventing the contractor from removing the forest goods in case he made default in payment of the instalments due. The forest goods were in the possession of the State. The authority responsible for supervising the contract allowed the contractor to remove the felled trees without making the subsequent payments. It was in the light of the relevant provisions in the rules and in view of the action of the officers supervising the contract in allowing the contractor to remove the felled trees without making the subsequent payments, that the Supreme Court has held that the State had lost or parted with the security, namely, the forest produce and that liability of surety would stand discharged on that ground under Section 141 of the Act.
19. I may also point out in this connection that Wulff v. Jay, (1872) 7 QB 756, decided by Hannen, J. whose observations were quoted and relied upon by the Supreme Court in Kaluram’s case, AIR 1967 SC 1105, was also a case where the creditor has failed or omitted to perform certain duties undertaken by them specifically as per the document creating the security and thereby lost their control over the securities and deprived themselves of the power to assign the security to the surety.
20. In Amrit Lal v. State Bank of Travan-core, AIR 1968 SC 1432, V. Ramaswami, J. speaking for the Court has made the following observations:
“….. Yet once the right of the surety against
the principal debtor is impaired by an 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”.
21. In State Bank of Saurashtra v. Chitranjan Rangnath, AIR 1980 SC 1528 : (1980 All LJ 654), the Supreme Court after considering the scope and effect of Sections 139 and 141 of the Act has held that “if the creditor loses, or, without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security lost as defined in Section 141 of the Act.” That was again a case where the surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor had offered security by way of pledge of goods and the goods were to be in the custody of the creditor bank. In the said decision it was concurrently found that the bank was utterly negligent with regard to the safe keeping and handling of pledged goods and the security was lost on account of the negligence of the bank. It was in the light of the above concurrent findings that the Supreme Court has held that the surety in that case stood discharged to the extent of the security lost by the bank. While holding so, the Supreme Court has quoted with approval the statement of law contained in Halsbury’s Laws of England, 4th Edn. Vol. 20, para 280, page 152 which is to the following effect;
“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 surety ship 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 suretyship, discharge him altogether. Thus, where there is a mortgage security given in respect of a debt which is subsequently guaranteed, the creditor must hold the security for the benefit of surety, so that, on paying the debt, the surety may obtain a transfer of the mortgage in its original unimpaired condition. If the creditor does not fulfil his duty in this respect the surety is discharged.”
The principles laid down in the above decisions of the Supreme Court would clearly show that in order to apply the provisions of Sections 139 and 141 of the Act, it is necessary to find that the creditor has lost or parted with the securities as a result of his negligent acts or omissions. The above decisions cannot obviously be pressed into service to contend that mere omission to institute proceedings for recovery of debt from the principal debtor or mere omission to proceed against the securities will discharge the sureties in the light of Section 137 of the Act. Omission to proceed against the securities whether in the actual possession of the creditor or otherwise would amount to negligent omission only in case where it can be shown that the creditor was bound to do certain duties to preserve the securities under the control or power of the creditor as in the case of Wulff v. Jay, (1872) 7 QB 756. In the absence of circumstances justifying a conclusion that there was a duty to proceed against the securities and that the creditor has omitted to do the same, it may only be a case of mere omission coming within the provisions in Section 137.
22. In this connection it is pertinent to note the very relevant observations of a Division Bench of the Karnataka High Court in a decision reported in Karnataka Bank Ltd. v. G. S. Kulkarni, AIR 1977 Kant 14, where M. N. Venkatachaliah, J. as he then was has highlighted the above aspect of the law regarding liabilities of sureties thus (at page 18):
“….. A mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient, in itself, to discharge the surety, for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Thus tested, the inaction on the part of the creditor-bank could not of itself, mitigate sureties’ liability. …..”
While taking the above view the learned Judge has quoted and relied upon the statement of law contained in American Jurisprudence Vol. 50, page 978, para 114 which is to the following effect:
“114. Failure to enforce Security. — While the authorities appear to be in entire agreement on the proposition that a surety is discharged, at least to the extent of the value of the security lost, where the creditor, without the surety’s consent, affirmatively releases collateral security, there seems to be some difference of opinion where a loss is claimed to have occurred through the inactivity of the creditor. The general rule, however, is that in the absence of an express agreement to use diligence, or a special request to act, or such peculiar circumstances as to render prompt action of the creditor an absolute duty, mere inaction or passive negligence on the part of the creditor in failing to take steps to secure the collection of his debt from collateral security given to him by the principal debtor is not sufficient of itself to discharge or release a surety from his obligation to pay the debt. The reason for this rule is that a surety is amply protected against the inaction or passive neglect of the creditor by virtue of the fact that if he desires to expedite payment, he may himself pay the debt, acquire all the securities held by the creditor, and become subrogated to all the rights of the creditor. Thus, as respects collateral securities, the rule is the same as respects the collection of the debt of the principal debtor. The creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains active. Until the surety moves in the matter, it is enough that the creditor holds himself in readiness to transfer to him, when he applies, all the securities he holds, that he may have the benefit of such securities in aid of his own responsibility. The mere failure of a creditor to sell or foreclose against collateral in his hands will therefore not ordinarily discharge the surety.
In general, sureties are not released by the failure of a creditor to enforce a mortgage or other Hen which he has taken to secure the payment of his debt. Where, however, there is an agreement or understanding between the creditor and the surety, with reference to the enforcement of the security, the creditor is bound to active diligence, and if by his negligence the property held as collateral is lost or destroyed, or surrendered, the surety will be exonerated to the extent of the loss ……”
23. I may immediately refer to the Division Bench decision of the Punjab and Haryana High Court reported in State Bank of India v. Quality Bread Factory, Batala, AIR 1983 P & H 244 which was very heavily relied upon by the learned counsel for the respondents stating that the principle laid down therein is squarely applicable to the case on hand. That was a case where State Bank of India had granted a loan under open credit system on the security of pledge of machineries, movables and other merchandise in the factory of the borrower. As the loan was not granted under key loan system the pledged goods were in the possession of the borrower as in this case. The account was not settled and the suit was filed for the realisation of the outstanding in the account, against the borrower and the sureties and by sale of the pledged goods. The borrower remained ex parte. The surety the third defendant in the suit alone contested the suit. On behalf of the 3rd defendant it was contended that the Bank had lost the securities on account of the negligence or inaction of the Bank. In the above case the relevant passage where the learned Judges have come to the conclusion that the Bank has lost the securities as a result of the negligence is in the following terms at pages 249 and 250:
“………. In the plaint also, the Banke equested the Court that a Receiver be appointed to take into possession the hypothecated goods. It also requested that the defendant be restrained from dealing with, disposing of or parting with the possession of the hypothecated goods. If the hypothecated goods did not exist on the aforesaid dates, there was no idea of making the said prayers. However, the Bank did not make any separate application for the aforesaid purpose and did not press the matter before the Court. If appropriate action had been taken by the Bank at that stage, the possession of the goods could have been obtained by it after institution of the suit. Gurbachan Singh, defendant, when appeared as his own witness deposed that if the hypothecated goods were given to him by the Bank, he was ready to pay the balance amount. There is also no evidence that the hypothecated machinery was got insured. If the Bank had been vigilant about the sureties, at least the hypothecated machinery which was worth about Rs. 30,000/-, would not have been lost. The stand of the respondent, at the time of the argument before me was the same. However, the learned counsel for the appellant candidly admitted that the goods were no longer available. After taking into consideration all the abovesaid circumstances I am of the opinion that the securities have been lost on account of negligence or inaction of the Bank”.
Further it was found as follows:
“….. The said defendants also did not file the returns as undertaken by them and the Bank took no action against them for non-filing of the returns. No evidence has been led by the Bank to the effect that anybody on its behalf inspected the hypothecated machinery etc. or tried to take possession thereof as agreed”.
It was under the above facts and circumstances that the learned Judges have come to the conclusion that the Bank has on account of their negligence lost the securities. In the facts and circumstances of the case, the decision is in consonance with the principles indicated in the Supreme Court decisions referred to above.
24. However, the learned counsel for the 3rd respondent has strongly relied upon some of the observations in the above decision in support of his submission that ‘any negligence or inaction on the part of the creditor’ resulting in loss of securities would absolve the sureties from their liability. Thus the learned counsel has relied strongly upon the following observations:
“….. It is true that in the key loan system the creditor has more effective control than that in the open credit system, but that does not mean that different principles of law are applicable to these two systems. In the open credit system, the debtor is required to furnish statements of stocks manufactured goods, machinery etc. hypothecated at regular intervals and the creditor is entitled to examine and take them into possession at any time. It is, therefore, expected from the creditor that he should keep requisite vigilance on the debtor in order to protect himself and the surety against the illegal actions of the debtor. Any negligence or inaction on his part by which he loses the security absolves the surety from his liability. The question of discharge of the surety has to be determined by taking into consideration the facts and circumstances of each case.”
The counsel has also pointed out that while making the above observations, the learned Judges have distinguished the “Karnataka Bank case” and the decisions of the other High Courts taking the same view. Of course it is true that the Karnataka Bank’s case, AIR 1977 Kant 14 and a few other cases have been referred to and distinguished on facts. To that extent I find that the learned Judges were perfectly justified. However, the learned Judges have gone to the extent of observing that the decisions distinguished by them are not in consonance with the principles laid down by the Supreme Court especially Ranganath’s case, AIR 1980 SC 1528. With respect I cannot agree with the above reasoning given by the learned Judges far distinguishing those cases especially the Karnataka Bank case. All the decisions on the point referred to in the State Bank’s case, AIR 1983 P & H 244 including the decision in Wulff v. Jay, (1872) 7 QB 756 were considered in the Karnataka Bank case except of course Ranganath’s case, AIR 1980 SC 1528. All those cases are cases where the creditor was either having physical possession of the pledged goods or have undertaken certain duties or responsibilities specifically to realise the debt from the securities or to preserve the securities over and above the legal control or power which the creditor gets on hypothecation of goods. As a general rule, in the absence of an express agreement to use diligence or a special request to act, or such peculiar circumstances as to render prompt action of the creditor an absolute duty, mere in action or passive negligence on the part of the creditor to realise the debt from the securities may not be sufficient to discharge the sureties from their obligation. It is this aspect of the law which has been highlighted in the Karnataka Bank case relying upon the very illuminating statement of the law contained in the American jurisprudence. I would accordingly prefer to follow the principles stated in the Karnataka Bank case as the correct principle to be followed in cases like the one on hand, where the hypothecated goods were left in the possession of the borrower with full power of disposal in the ordinary course of business treating them as ordinary stock in trade.
25. Now to the facts of the case. The goods hypothecated were mainly the move-able and the stock in trade consisting of Ayurveda medical preparations kept in the Vaidyasala of the 1st respondent. Though as per the recitals in the Hypothecation deeds it is declared that the hypothecated goods shall be the absolute property of the Bank and the Bank can exercise all rights as absolute owners, it was also declared that all such rights are subject to the right of the borrower to sell such goods in the ordinary course of business till a prohibition in writing is issued by the Bank. There is no specific provision insisting upon the borrower to file periodical statements showing the position of the hypothecated goods except when demanded by the Bank. There is no reliable evidence in the case as to how the borrower has disposed of the goods hypothecated. Similarly except the interested evidence of the Bank Managers examined in the case there is no reliable evidence to show whether the Bank has taken any steps to verify the availability of the goods hypothecated periodically. Evidently the goods were all disposed of by the borrower long before the institution of the suit itself. Nothing has been brought out in evidence except by the fact of default in repayment of the loan amount by the borrower to establish that the Bank was aware of the fact that the borrower was disposing of or was about to dispose of the goods hypothecated otherwise than in the ordinary course of business or any other circumstances which made it the responsibility of the Bank to proceed against the security. The evidence in the case, in view, would only go to show that there was mere inaction or passive negligence on the part of the creditor. Though the wife and daughter of the deceased borrower have stated that the Bank Manager was a very close friend of the borrower and it is with his connivance that the goods were all disposed of, there is no independent and reliable evidence to corroborate the case nor spoken to by them. Such suggestions have been emphatically denied by the Managers examined in the case. Further it has come in evidence that it is the third defendant who has introduced the borrower to the Bank and he was on very close terms with the borrower when Exts. A2 and A3, hypothecation bond and letter of guarantee, were executed in favour of the Bank. Their relationship became strained only later as deposed by D. W. 1. In fact the borrower was occupying a building belonging to the 3rd defendant and situated in the same compound where the residential house of 3rd defendant is situated. The 3rd defendant was using the said premises for preparing the medical preparations at the relevant time. Daily he used to pass by that premises. All these circumstances would show that 3rd defendant was having close connection with the borrower. There is no case for the 3rd defendant that in his capacity as surety of the borrower the had given any information to the Bank about the illegal disposal of the goods by the borrower or requested the Bank to proceed against the goods hypothecated pointing out any of the acts of the borrower in violation of any of the terms of the borrower in violation of any of the terms of the hypothecation bond. As is evident from the nature of the goods hypothecated and terms of the bond permitting the borrower to sell the goods in the ordinary course of business, it was a very unsafe and vulnerable security. As contended by the Bank it was really a nominal security and that may be the reason why the Bank has insisted upon personal security from the sureties also apart from the hypothecation of goods. In the circumstances, I would hold that the evidence in the case is insufficient to hold that the Bank has lost or parted with goods hypothecated from its control or power as a result of its negligent conduct in the sense that it has derelicted any of the duties undertaken by it as per the letter of guarantee. The Bank was, in my view, guilty only of mere inaction and passive negligence while not proceeding against the hypothecated goods even after default in repayment of the loan by the borrower. The evidence in the case is totally insufficient to establish that the Manager of the Bank has permitted the borrower to dispose of the goods in violation of the terms in the hypothecation deeds.
26, Further in this connection it is relevant to note more over clause 5 of Ext. A3 letter of guarantee admittedly executed jointly by defendants 2 and 3 which has the effect of excluding the operation of the provisions contained in Section 139 of the Act. The relevant clause is in the following terms:
“The Bank shall have full discretionary power with or without reference or notice or consent to or from me/us to grant time or other indulgence to or accept or make any composition or arrangement with the Principal or any person or person liable in respect of any indebtedness or liability hereby Guaranteed and also vary, abstain from perfecting, renew, discharge, release, enforce and deal with in whole or in part and from time to time any bills, notice, mortgages, charges, liens or any securities obligations or decrees now or hereafter held by the Bank in respect thereof and generally to treat me/us as though I/we were primarily and severally liable with the Principal”.
The above provision would in my view clearly exclude the application of the provivions contained in Section 139 to the facts of this case. In the light of the above provision also 1 would hold that there is no scope for the application of the provisions in Section 139 of the Act in this case.
27. For the reasons discussed above, I would set aside the finding of the court below to the effect that the plaintiff Bank has lost the hypothecated goods as a result of its negligent conduct and would hold that the omission or inaction on the part of the Bank in proceeding against the hypothecated goods in this case amounts only to mere inaction and passive negligence which conduct may not be sufficient to attract the provisions of Section 139 of the Act. As a necessary result, I would also hold that the sureties in this case will not be discharged from their liabilities as a result of the operation of the provisions contained in Sections 139 and 141 of the Act.
28. Point No. 3 The only letter of guarantee enforceable in this case is Ext. A3 admittedly executed jointly by both defendants 2 and 3. The guarantee under Ext, A3 is ony to the extent of Rs. 5,000/-. The third defendant and the legal representatives of deceased 2nd defendant are accordingly made jointly liable for discharge the liability of deceased 1st defendant to the extent of Rs. 5,000/-. It is made clear that the legal representatives of deceased 2nd defendant will be liable only to the extent of the assets inherited by them from deceased 2nd defendant. In view of the inaction and passive negligence shown by the Bank in proceeding against the 1st defendant and the goods hypothecated, I would hold that the Bank is not entitled to get costs from the sureties in the suit and in this appeal.
29. In the result in addition to the decree granted against the 1st defendant there will be a decree against defendant No. 3 (respondent No. 1) and legal representatives of deceased 2nd defendant, namely, defendants 13 to 22 (respondents 11 to 20) for the realisation of an amount of Rs. 5,000/ -towards the liability of deceased 1 st defendant in their capacity as the surety/legal representatives of deceased surety. Costs against defendants 3 and 13 to 22 is disallowed.
Appeal is allowed in part as indicated above. No costs.