Amrit lal Goverdhan Lalan v/s State bank of Travancore, AIR 1968 SC 1432

CaseAmrit lal Goverdhan Lalan v/s State bank of Travancore, AIR 1968 SC 1432
CourtSupreme Court of India
Case numberCivil appeal number 930 of 1965
BenchBefore JC Shah and V Ramaswami, JJ.
Author of the judgmentJustice V Ramaswami
Decided OnApril 11, 1968
Advocate for the appellantK. Viswanatha Iyer, Kutty Krishna Menon and R. Gopalakrishna
Advocate for the respondentCK Daphtary, Attorney general of India (HL Anand, Advocate of Anand, Das Gupta and Sagar, and KB Mehta, Advocate, with him)
Author of the briefAditya Gor, admin@lawbriefs.in

Brief facts and procedural history:

On February 27, 1956, Respondents 3 to 6, as partners of Respondent 2 firm, entered into an agreement with the then Travancore Forward Bank Ltd. undertaking to open a cash credit account in the books of the Bank at Ernakulam to the extent of Rs 1,00,000. (Para 2)

For entering into this agreement the bank entered into the following agreement with the customer: (Para 2)

  1. The account was to be secured by the goods pledged with the bank.
  2. If the respondents failed or neglected to repay the bank then it shall be lawful for the bank to sell or otherwise dispose of all the securities and apply the net proceeds of such sale towards the liquidation of the debt without giving notice to the customer.
  3. If any balance was still left the bank shall be at the liberty to apply for any other money in the hands of the bank standing to the credit of the said respondents towards repayment of the debt.
  4. It was also agreed under clause 2 of the document that the respondent shall not pledge or encumber the security which was given to be a bank in any manner such that the property will be prejudicially affected.
  5. Under clause 3, it was provided that the respondents will be in the position to withdraw the goods provided that in advance he has paid the amount of those goods or have substituted those goods.
  6. Under clause 8 and 9, the respondents were to make and furnish to the bank statements and returns of the cost and market value of the securities and a full description thereof and produce such evidence in support of the goods in favour of the bank from time to time as required and maintained by the bank. It was also mentioned that the borrowers shall be responsible for the quantity and quality of the goods pledged with the Bank and also for the correctness of Statements and Returns furnished by them to the Bank from time to time as mentioned above.

On March 7, 1956, the appellant executed the letter of guarantee in favour of the Bank, guaranteeing the liability of the borrowers in respect of the cash credit account up to a limit of Rs 1,00,000 and in respect of liability under bills discounted up to a limit of Rs 45,000. (Para 2)

Respondents 2 to 6 neglected to pay the amount due to the Bank in the said account and the goods pledged with the Bank were consequently sold with notice to the said respondents and the proceeds were credited to the account of the respondents. The amount due to the Bank as on September 30, 1957, was Rs 73,931.35. (Para 3)

The Bank served registered notices of demand on Respondents 2 to 6 as well as the Appellant and on their failure to make the payment of the amount due the Bank filed a civil suit against the said respondents and the appellant, for recovery of Rs 40,933.58 in the Court of the Subordinate Judge at Ernakulam. Respondents 2 to 6 did not contest the suit. The appellant, however, contested and filed a written statement exonerating himself from the liability on the allegation that the contract of guarantee was discharged on account of the misconduct of the creditor-bank. The Subordinate Judge of Ernakulam granted a decree in favour of the Bank as against Respondents 2 to 6 and also against the appellant by his judgment dated December 9, 1958. The judgment of the Subordinate Judge was confirmed on appeal by the High Court of Kerala on September 11, 1963. (Para 3)

During the pendency of the proceedings in the High Court, Respondent 1, State Bank of Travancore, a subsidiary of the State Bank of India was substituted in place of the Travancore Forward Bank Limited as successor-in-interest of the said Bank. (Para 4)

Arguments of the appellant:

  1. There was a variation made in the terms of the contract between the principal-debtor and the creditor in the present case and the appellant was accordingly discharged of his liability under the contract of guarantee. Reference was made to Section 133 of the Indian Contract Act. (Para 5)
  2. It was pointed out that the maximum limit of Rs 1,00,000 allowed as credit was reduced to Rs 50,000 and that it was again raised to Rs 1,00,000 subsequently without consulting the appellant. (Para 5)
  3. It was pointed out that the appellant had withdrawn Rs 5000 out of Rs 10,000 deposited by him with the Bank towards security for advances to the firm. (Para 5)
  4. It was contended that the bank had given time to Respondents 2 to 6 to make up the shortage of the goods pledged to the value of Rs 35,690. It appears that when the quantity of the goods actually in stock was verified with the weekly statement dated April 18, 1957, the shortage of goods to the value of Rs 35,690 was found. The Bank immediately requested Respondents 2 to 6 to make up the deficit but the respondents failed to do so. It was contended on behalf of the appellant that the conduct of the Bank in giving time to the principal debtor to make up the deficit in the quantity of goods absolved the appellant of all liability under the guarantee. Reference was made to Section 135 of the Indian Contract Act. (Para 6)

Ratio of the author:

  • The only evidence in support of the 2nd contention of the appellant is certain entries in the pages of accounts maintained by the Bank of the “limit” as Rs 50,000 (Para 5)
  • There is no written agreement between Respondent 1 Bank on the one side and the respondent firm on the other side reducing the limit of cash credit accommodation as contended by the appellant in argument 3. In view of the formal record in the agreements, it is difficult to hold that the variation of the terms would have been made without any written record. The High Court has taken the view that the entry in the books of account of the Bank might well be a private instruction to the Cashier that advances were not to be made by him beyond Rs 50,000 which instruction may not be legally binding upon the other respondents. No inference may also be drawn from the withdrawal of Rs 5000 from the initial deposit of Rs 10,000 by the appellant. The reason is that there is no obligation imposed upon the appellant to make any deposit of money with the Bank and the circumstance that he made an initial deposit of Rs 10,000 to reinforce his guarantee or that he withdrew Rs 5000 out of the deposit appears to be quite immaterial. Thus the High Court was right in reaching the conclusion that there was no variation of the contract between the creditor and the principal debtor without the consent of the appellant and the provisions of Section 133 of the Indian Contract Act was not attracted. (Para 5)
  • With regards to the 4th argument, the court held that there is no warrant for the argument of the appellant. It is manifest that the act of giving time to the borrowers to make up the quantity of the goods found to be short on weight by the Bank cannot be considered to be a “promise to give time” to the borrowers as contemplated by Section 135 of the Indian Contract Act. In this connection, reference should be made to clause 9 of Ex. P-1 which provides that the borrowers shall be responsible for the quantity and quality of goods pledged and also for the correctness of the statements and returns furnished to the Bank from time to time. The act of the Bank in giving time to the principal debtor to make up the quantity of the goods pledged is not tantamount to the giving of time to the principal debtor for making the payment of the money within the meaning of Section 135 of the Indian Contract Act. (Para 6)
  • Further with regards to the question arising in this case, namely, whether a portion of the security was lost by the creditor or parted with without the surety’s consent and whether the surety is discharged to the extent of the value of the security so lost it was held by the court that the expression “any security” in clause 5 of agreement should be properly construed as “any security other than the pledge of goods mentioned in the primary agreement, between the Bank and the firm”. Thus there is nothing in clause 5 of agreement to indicate that the appellant is not entitled to invoke the provisions of Section 141 of the Indian Contract Act. It follows therefore that the principle of Section 141 of the Indian Contract Act applies to this case and the surety is discharged of the liability to the Bank to the extent of Rs 35,690. We accordingly hold that the respondent Bank is entitled to a decree against Respondent 6, the appellant only to the extent of Rs 5243.58 and not to the sum of Rs 40,933.58 and to proportionate costs. (Para 7)

Held:

The appeal was allowed and the decree of the High Court was accordingly modified by the Supreme Court bench. The parties were to bear their respective cost. (Para 8)

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