The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs-surety as a collateral guarantee against the loan amount. Lower Appellate Court, in my view, has rightly read the averments contained in para 3 and 4 of plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if mature before payment, is referable to a period earlier to three years from the date of such contract and not to the extent of period of contract beyond three years. To that extent, there was a clear averment that contract was only for three years or earlier
Delivered on 28.05.2013
Allahabad High court
Citation;AIR 2013 Allah 198
Case :- SECOND APPEAL No. - 517 of 2009
Appellant :- Punjab National Bank
Respondent :- Sri Ram Dutt Sharma And Others
Hon'ble Sudhir Agarwal,J.
1. Heard Sri R.N. Singh, Advocate, for appellants and Sri P.K. Sinha, Advocate, for respondents.
2. This is defendant's Second Appeal under Section 100 of Code of Civil Procedure, 1908 (hereinafter referred to as "Code"). Plaintiffs Sri Ram Dutt Sharma and his wife Smt. Saroj, instituted Original Suit No. 579 of 1993, impleading New Bank of India, Baghpat, Sri Chhote Lal Sharma, son of Sri Khacheru Singh and Smt. Saroj, wife of Sri Shiv Charan as defendants. The relief sought in the aforesaid suit was a mandatory injunction directing defendant no. 1 to auction Truck No. UHN 1077, belong to defendants no. 2 and 3, and in possession of defendant-Bank towards security/ guarantee against the amount of loan, advanced to defendants no. 2 and 3, and realize outstanding dues, before encashing Fixed Deposit Receipts (hereinafter referred to as "FDRs") of plaintiffs, lying with defendant-Bank.
3. The plaint case set up is that defendants no. 2 and 3 are running a transport business. They purchased a new Truck in 1985 bearing Registration Number UHN 1077. The financial assistance in the aforesaid transaction was tendered by the Bank, advancing a loan of Rs. 1,50,000/-, whereagainst Truck itself was hypothecated. Besides, the plaintiffs' FDRs of Rs. 10,000/- and 70,000/- were pledged in security for a period of three years or till repayment of loan amount, whichever is earlier. There appears to be some default towards repayment of loan amount, on the part of defendants no. 2 and 3, but defendant no. 1, instead of realizing defaulted amount from defendants no. 2 and 3, by sale/auction of mortgaged vehicle, proceeded to encash FDRs of plaintiffs lying in security with the Bank, hence the suit.
4. Suit was contested by defendant no. 1, i.e., Punjab National Bank (hereinafter referred to as "PNB") stating that the proceeds of FDRs have already been adjusted against loan amount and there remains nothing to be done by it. The basic facts of advancement of loan to defendants no. 2 and 3 were not disputed but it is said that loan amount of Rs. 1,58,000/- was advanced on 12.2.1985, for purchase of 1210 SE 42 Truck. Sri Har Narain Sharma and Shiv Dutt Sharma stood guarantors in the loan account. The plaintiffs pledged their FDRs to the Bank. Liability of plaintiffs and defendants no. 2 and 3 is joint, several and co-extensive. The Bank is entitled to recover the amount in whatever manner it is convenient and easily recoverable. The two FDRs, pledged, were of Rs. 10,000/- (FDR No. 271013/2/82 dated 12.1.1982) with maturity value of Rs. 27,786/-, and FDR No. 027562/74/81 dated 17.7.1981 of Rs. 7,000/- with its maturity value of Rs. 20,407/- on 22.2.1983, were adjusted against loan amount. In total Rs. 48,193/- was adjusted against the loan amount and there remained nothing whereagainst any relief can be asked for by the plaintiffs.
5. Thereafter plaint was amended and a relief was inserted that the maturity amount of two FDRs should be recovered from the Bank and paid to the plaintiffs.
6. Trial Court decreed the suit vide judgment and decree dated 21.5.2003, directing defendant-Bank to pay Rs. 48,193/- along with interest, as per the rates provided in Rules, within one month. Thereagainst defendant no. 1 came in Civil Appeal No. 129 of 2003 wherein vide judgment and decree dated 18.2.2009, Trial Court's judgement and decree has been modified, partly, by directing Bank to pay Rs. 48,193/-, treating the same to be FDR with effect from 22.2.2003 and pay admissible interest thereupon. The defendant no. 1, thus, has came up in this appeal.
7. The substantial questions of law, arising in this case, which, require consideration by this Court, are:
(1) Whether plaintiff-respondents 1 and 2 stood discharged from their status as guarantor/surety after expiry of three years from the date, FDRs were pledged with Bank as security, against the loan amount, in absence of any overt or otherwise action on the part of plaintiff-respondents 1 and 2 to continue their liability after three years.
2) Whether the appellant-Bank was entitled to treat continuing guarantee/surety of plaintiff-respondents no. 1 and 2, after expiry of period of three years and their action was consistent with Section 133, 135 and 139 of the Indian Contract Act, 1872 (hereinafter referred to as "IC Act, 1872")?
(3) Whether the Courts below are justified in taking the view that the alleged FDRs cannot be held as surety and continuing guarantee under Section 129 of IC Act, 1872?
(4) Whether the Courts below are justified in holding that the Bank was not entitled to adjust/ redeem loan amount by adjusting maturity value of FDRs in question, pledged to them by plaintiff-respondents no. 1 and 2.
(5) Whether the placement of FDRs as security against loan amount, constituted "contract of guarantee" or "contract of pledge"?
(6) Whether the suit for recovery of maturity proceeds of FDRs was barred by limitation?
8. Sri R.N. Singh, learned counsel for the Bank, vehemently contended that the Courts below have misconstrued the letter dated 4.4.1985, Paper No. 46-Ka, containing the terms and conditions of pledge of FDRs of plaintiff-respondents no. 1 and 2 and have illegally held that the same does not amount to furnishing security of re-payment of loan to the Bank. He argued that letter dated 4.4.1985 as well as endorsement on FDRs by plaintiffs constituted and created a right in favour of Bank to appropriate proceeds of FDRs against outstanding loan amount, in case of default by principal borrower, i.e., respondents no. 3 and 4. He urged that terms and conditions, which are part of a contract or a document, could not have been explained or contradicted by oral evidence, and, the Courts below, relying on oral evidence tendered by respondents no. 1 and 2, contrary to the stipulation contained in the documentary evidence, have clearly erred in law and it was inconsistent with Section 91 and 92 of Indian Evidence Act, 1972 (hereinafter referred to as "IE Act, 1972"). He lastly submitted that Courts below have completely misdirected themselves by holding that pledge of FDRs was only for a period of three years and their observations and findings are also contrary to law contained in Sections 172, 176 and 177 of the IC Act, 1872.
9. Sri P.K. Sinha, learned counsel appearing for plaintiff-respondents no. 1 and 2, on the contrary, argued that unilateral extension of security or guarantee is not permissible in law. Plaintiffs have never extended their security or pledge of FDRs beyond period of three years, which was initially agreed between the parties. The mere fact that FDRs were renewed from time to time would not extend liability of plaintiffs as surety or guarantor against the loan amount. The day on which Bank claimed to have adjusted maturity proceeds of FDRs, plaintiffs did not stand either as guarantor or surety in respect of amount of loan or defaulted money, which the Bank was entitled to recover from defendant-respondents no. 3 and 4 and, therefore, Courts below have rightly decreed the suit by means of impugned judgements.
10. First of all, it would be necessary to determine the nature of contract between the plaintiffs and the Bank. The contract between the Bank and respondents 3 and 4 was admittedly that of loaner and loanee. A "contract of guarantee" is defined in Section 126 of IC Act, 1872. It says that a "contract of guarantee" is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called "surety", person in respect of whose default the guarantee is given is called the "principal debtor" and the person to whom the guarantee is given is called the "creditor". In case this Court finds that the plaintiffs entered into a contract of guarantee with the Bank in terms of Section 126 of IC Act, 1872 the plaintiffs would be "surety", respondents 3 and 4 would be the "principal debtor", and the Bank would be "the creditor". A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail. The distinction between the "contract of guarantee" and "contract of indemnity" comes out from the definitions of two. The phrase "contract of indemnity" is defined in Section 124 of IC Act, 1872 which says that a contract by which one party promises to save the other from loss caused to him by the conduct of promiser himself or by the conduct of any other person is called "contract of indemnity". One of the apparent distinction between two is that a "contract of guarantee" requires concurrence of three persons, namely, the principal debtor, surety and the creditor, while "contract of indemnity" is a contract between two parties and promiser enters into such contract with other party. In other words, a person who is party to a contract, if executes a promise to other party to save him from loss on account of promiser's conduct or by the conduct of any other person, it is a "contract of indemnity", while for the purpose of "contract of guarantee", it requires presence of three parties at least.
11. "Surety" is always liable to the extent of precise terms of his commitment and not beyond that. In the case of "contract of guarantee", Section 128 of IC Act, 1872 says that the liability of surety is co-extensive with that of principal debtor unless it is provided otherwise by the contract. In State of Maharashtra Vs. M. N. Kaul AIR 1967 SC 1634, it has been held that a guarantor can not be made liable beyond the terms of agreement.
12. In the light of distinction between the "contract of indemnity" and "contract of guarantee", I have no manner of doubt that the contract between the Bank and the plaintiffs was a "contract of guarantee". In case the creditor finds that principal debtor has committed default as a result whereof liability has accrued, it is not necessary that the creditor must proceed first against the principal debtor or to give a notice to it but the creditor can directly proceed against the surety.
13. In Hukumchand Insurance Co. Ltd. Vs. The Bank of Baroda and others AIR 1977 Kant. 204, it was held that liability of principal debtor and surety being co-extensive are really separate though arising out of the same transaction. The guarantor alone can be proceeded against or be sued, as the case may be, without so proceeding against the principal debtor. The condition precedent is that the default on the part of principal debtor must exist.
14. The above decision has been followed by this Court also in U.P. Financial Corporation Vs. Garlon Polyfeb Industries and others AIR 2001 All. 286.
15. The liability of surety, however, may cease if there is any variation in terms of contract between the creditor and the principal debtor, without consent of surety, and such variation shall discharge surety in respect of transactions subsequent to the variation vide Section 133 of IC Act, 1872. Similarly, if the creditor discharges the principal debtor, the legal consequence would be that surety would also stand discharged vide Section 134 of IC Act, 1872. Similarly, if there is a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor(s), such act shall result in discharge of the surety, unless surety assents to such contract of variation etc. This is what is provided in Section 135 of IC Act, 1872.
16. The next question would be the nature of this placement of FDRs in the Bank. It has to be examined as to what is the nature of relation between the Bank and the customer in respect to such deposits.
17. In the present case, there was not a simple case of contract of guarantee between the plaintiffs and Bank but in furtherance thereof, the plaintiffs pledged FDRs with the Bank, duly discharged in favour of Bank, so as to entitle the Bank to realize defaulted amount by adjusting value of FDRs, at the relevant time against the defaulted amount.
18. In Tilendra Nath Mahanta Vs. United Bank of India and others AIR 2002 Gau. 1, a passage from Paget's "Law of Banking", 9th edition, at page 411, has been quoted wherein it is said that the fixed deposit is one of the three bank deposits and current deposits. Money lodged with bank as fixed deposits stricto jure is a loan to the bank. The banker in connection with the 'fixed deposit', therefore is a "debtor". The depositor accordingly would cease to be the owner of money in fixed deposit and it becomes the money of bank, enabling the bank to do as the bank likes, subject however, to the obligation of re-payment of the said amount on maturity. To the same effect is the view taken by Kerala High Court in Union Bank of India Vs. K.V. Venugopalan and others AIR 1990 Ker. 223 and Madhya Pradesh High Court in State Bank of India Vs. Smt. Goutmi Devi Gupta and others AIR 2002 MP 81.
19. In Syndicate Bank Vs. Vijay Kumar AIR 1992 SC 1066, it has been held that with respect to negotiable instruments including FDRs which are remitted to the Bank by the customer, the Bank can exercise banker's lien. The FDRs have been held "goods" within the meaning of Section 176 of IC Act, 1872 and Section 2 (7) of Sale of Goods Act, 1952 in State Bank of India Vs. Smt. Neela Ashok Naik and another AIR 2000 Bom. 151. The bank, in case, the contingency to realize the amount from surety has arisen, can do so by adjusting the amount of FDRs against the defaulted money.
20. These legal principles have to be followed subject to the terms of the contract between the surety and creditor i.e. the Bank and plaintiffs-respondents no. 1 and 2. The initial term of guarantee/surety was alleged to be three years or earlier thereto till the entire loan money is paid. The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs-surety as a collateral guarantee against the loan amount. Lower Appellate Court, in my view, has rightly read the averments contained in para 3 and 4 of plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if mature before payment, is referable to a period earlier to three years from the date of such contract and not to the extent of period of contract beyond three years. To that extent, there was a clear averment that contract was only for three years or earlier thereto when the entire loan amount is paid. The word "earlier" rules out any possibility of a continuing contract of guarantee beyond three years. Collateral security of FDRs was, therefore, available to the Bank for a period of three years only and not beyond that, unless consented by surety, i.e. plaintiffs. Admittedly, no such consent was obtained by plaintiffs-surety and, on the contrary, the Bank on its own gave extension to the principal debtor in the matter of re-payment of loan amount.
21. However, the matter does not rest here. A letter dated 4.4.1985 (Paper No. 46-Ka) has been made sheet anchor by the Bank to argue that therein surety has agreed to continue with his FDRs amount as collateral security till the entire loan amount is re-paid. It is submitted that there is no period or time mentioned therein and, therefore, the Lower Appellate Court has clearly erred in law by restricting contract of guarantee only for a period of three years. Learned counsel for Bank also drew my attention to discharged FDRs pledged by the surety in favour of Bank. Having gone through the aforesaid letter dated 4.4.1985 and also the judgment of Lower Appellate Court, whether letter dated 4.4.1985 was made a part of contract of guarantee or not between the Bank and Surety, is it an offer by plaintiff to the Bank for advancing a loan of Rs. 1,58,000/- to Sri Chhotey Lal and Smt. Saroj Devi; whether the contract of guarantee was executed making terms of the aforesaid letter, to be part of the said contract, whether the terms of letter were accepted by the Bank in its entirety, or, Bank in the ultimate acceptance of such offer, made certain changes and such counter offer having been accepted by the plaintiff formed contract of guarantee, are some of the aspects on which I find that the Courts below have not looked into the matter at all. If plaintiffs' letter dated 4.4.1985 itself has been accepted as such and it formed part of contract between the parties, then what has been held by Lower Appellate Court cannot hold good. Similarly, Trial Court in decreeing the suit has not been right in holding that the Bank, first should have proceeded against principal debtor or hypothecated goods and not directly against surety by realizing the amount of FDRs pledged with the Bank, as collateral security by the plaintiffs. The approach of Courts below in the case in hand is not correct and the real aspects have not been examined correctly. In these facts and circumstances, I find that judgments impugned in this Second Appeal cannot sustain.
22. In the result, impugned judgment and decree dated 21.5.2003 passed by Trial Court in Original Suit No. 579 of 1993 and judgment and decree dated 4.2.2009 passed by Lower Appellate Court in First Appeal No. 129 of 2003 are set aside. The matter is remanded to Trial Court to treat the suit as originally registered and decide the same afresh in the light of the observations made above and in accordance with law.
23. The appeal is, accordingly, allowed with cost throughout.
Dt. 28.5.2013
Print Page
Delivered on 28.05.2013
Allahabad High court
Citation;AIR 2013 Allah 198
Case :- SECOND APPEAL No. - 517 of 2009
Appellant :- Punjab National Bank
Respondent :- Sri Ram Dutt Sharma And Others
Hon'ble Sudhir Agarwal,J.
1. Heard Sri R.N. Singh, Advocate, for appellants and Sri P.K. Sinha, Advocate, for respondents.
2. This is defendant's Second Appeal under Section 100 of Code of Civil Procedure, 1908 (hereinafter referred to as "Code"). Plaintiffs Sri Ram Dutt Sharma and his wife Smt. Saroj, instituted Original Suit No. 579 of 1993, impleading New Bank of India, Baghpat, Sri Chhote Lal Sharma, son of Sri Khacheru Singh and Smt. Saroj, wife of Sri Shiv Charan as defendants. The relief sought in the aforesaid suit was a mandatory injunction directing defendant no. 1 to auction Truck No. UHN 1077, belong to defendants no. 2 and 3, and in possession of defendant-Bank towards security/ guarantee against the amount of loan, advanced to defendants no. 2 and 3, and realize outstanding dues, before encashing Fixed Deposit Receipts (hereinafter referred to as "FDRs") of plaintiffs, lying with defendant-Bank.
3. The plaint case set up is that defendants no. 2 and 3 are running a transport business. They purchased a new Truck in 1985 bearing Registration Number UHN 1077. The financial assistance in the aforesaid transaction was tendered by the Bank, advancing a loan of Rs. 1,50,000/-, whereagainst Truck itself was hypothecated. Besides, the plaintiffs' FDRs of Rs. 10,000/- and 70,000/- were pledged in security for a period of three years or till repayment of loan amount, whichever is earlier. There appears to be some default towards repayment of loan amount, on the part of defendants no. 2 and 3, but defendant no. 1, instead of realizing defaulted amount from defendants no. 2 and 3, by sale/auction of mortgaged vehicle, proceeded to encash FDRs of plaintiffs lying in security with the Bank, hence the suit.
4. Suit was contested by defendant no. 1, i.e., Punjab National Bank (hereinafter referred to as "PNB") stating that the proceeds of FDRs have already been adjusted against loan amount and there remains nothing to be done by it. The basic facts of advancement of loan to defendants no. 2 and 3 were not disputed but it is said that loan amount of Rs. 1,58,000/- was advanced on 12.2.1985, for purchase of 1210 SE 42 Truck. Sri Har Narain Sharma and Shiv Dutt Sharma stood guarantors in the loan account. The plaintiffs pledged their FDRs to the Bank. Liability of plaintiffs and defendants no. 2 and 3 is joint, several and co-extensive. The Bank is entitled to recover the amount in whatever manner it is convenient and easily recoverable. The two FDRs, pledged, were of Rs. 10,000/- (FDR No. 271013/2/82 dated 12.1.1982) with maturity value of Rs. 27,786/-, and FDR No. 027562/74/81 dated 17.7.1981 of Rs. 7,000/- with its maturity value of Rs. 20,407/- on 22.2.1983, were adjusted against loan amount. In total Rs. 48,193/- was adjusted against the loan amount and there remained nothing whereagainst any relief can be asked for by the plaintiffs.
5. Thereafter plaint was amended and a relief was inserted that the maturity amount of two FDRs should be recovered from the Bank and paid to the plaintiffs.
6. Trial Court decreed the suit vide judgment and decree dated 21.5.2003, directing defendant-Bank to pay Rs. 48,193/- along with interest, as per the rates provided in Rules, within one month. Thereagainst defendant no. 1 came in Civil Appeal No. 129 of 2003 wherein vide judgment and decree dated 18.2.2009, Trial Court's judgement and decree has been modified, partly, by directing Bank to pay Rs. 48,193/-, treating the same to be FDR with effect from 22.2.2003 and pay admissible interest thereupon. The defendant no. 1, thus, has came up in this appeal.
7. The substantial questions of law, arising in this case, which, require consideration by this Court, are:
(1) Whether plaintiff-respondents 1 and 2 stood discharged from their status as guarantor/surety after expiry of three years from the date, FDRs were pledged with Bank as security, against the loan amount, in absence of any overt or otherwise action on the part of plaintiff-respondents 1 and 2 to continue their liability after three years.
2) Whether the appellant-Bank was entitled to treat continuing guarantee/surety of plaintiff-respondents no. 1 and 2, after expiry of period of three years and their action was consistent with Section 133, 135 and 139 of the Indian Contract Act, 1872 (hereinafter referred to as "IC Act, 1872")?
(3) Whether the Courts below are justified in taking the view that the alleged FDRs cannot be held as surety and continuing guarantee under Section 129 of IC Act, 1872?
(4) Whether the Courts below are justified in holding that the Bank was not entitled to adjust/ redeem loan amount by adjusting maturity value of FDRs in question, pledged to them by plaintiff-respondents no. 1 and 2.
(5) Whether the placement of FDRs as security against loan amount, constituted "contract of guarantee" or "contract of pledge"?
(6) Whether the suit for recovery of maturity proceeds of FDRs was barred by limitation?
8. Sri R.N. Singh, learned counsel for the Bank, vehemently contended that the Courts below have misconstrued the letter dated 4.4.1985, Paper No. 46-Ka, containing the terms and conditions of pledge of FDRs of plaintiff-respondents no. 1 and 2 and have illegally held that the same does not amount to furnishing security of re-payment of loan to the Bank. He argued that letter dated 4.4.1985 as well as endorsement on FDRs by plaintiffs constituted and created a right in favour of Bank to appropriate proceeds of FDRs against outstanding loan amount, in case of default by principal borrower, i.e., respondents no. 3 and 4. He urged that terms and conditions, which are part of a contract or a document, could not have been explained or contradicted by oral evidence, and, the Courts below, relying on oral evidence tendered by respondents no. 1 and 2, contrary to the stipulation contained in the documentary evidence, have clearly erred in law and it was inconsistent with Section 91 and 92 of Indian Evidence Act, 1972 (hereinafter referred to as "IE Act, 1972"). He lastly submitted that Courts below have completely misdirected themselves by holding that pledge of FDRs was only for a period of three years and their observations and findings are also contrary to law contained in Sections 172, 176 and 177 of the IC Act, 1872.
9. Sri P.K. Sinha, learned counsel appearing for plaintiff-respondents no. 1 and 2, on the contrary, argued that unilateral extension of security or guarantee is not permissible in law. Plaintiffs have never extended their security or pledge of FDRs beyond period of three years, which was initially agreed between the parties. The mere fact that FDRs were renewed from time to time would not extend liability of plaintiffs as surety or guarantor against the loan amount. The day on which Bank claimed to have adjusted maturity proceeds of FDRs, plaintiffs did not stand either as guarantor or surety in respect of amount of loan or defaulted money, which the Bank was entitled to recover from defendant-respondents no. 3 and 4 and, therefore, Courts below have rightly decreed the suit by means of impugned judgements.
10. First of all, it would be necessary to determine the nature of contract between the plaintiffs and the Bank. The contract between the Bank and respondents 3 and 4 was admittedly that of loaner and loanee. A "contract of guarantee" is defined in Section 126 of IC Act, 1872. It says that a "contract of guarantee" is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called "surety", person in respect of whose default the guarantee is given is called the "principal debtor" and the person to whom the guarantee is given is called the "creditor". In case this Court finds that the plaintiffs entered into a contract of guarantee with the Bank in terms of Section 126 of IC Act, 1872 the plaintiffs would be "surety", respondents 3 and 4 would be the "principal debtor", and the Bank would be "the creditor". A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail. The distinction between the "contract of guarantee" and "contract of indemnity" comes out from the definitions of two. The phrase "contract of indemnity" is defined in Section 124 of IC Act, 1872 which says that a contract by which one party promises to save the other from loss caused to him by the conduct of promiser himself or by the conduct of any other person is called "contract of indemnity". One of the apparent distinction between two is that a "contract of guarantee" requires concurrence of three persons, namely, the principal debtor, surety and the creditor, while "contract of indemnity" is a contract between two parties and promiser enters into such contract with other party. In other words, a person who is party to a contract, if executes a promise to other party to save him from loss on account of promiser's conduct or by the conduct of any other person, it is a "contract of indemnity", while for the purpose of "contract of guarantee", it requires presence of three parties at least.
11. "Surety" is always liable to the extent of precise terms of his commitment and not beyond that. In the case of "contract of guarantee", Section 128 of IC Act, 1872 says that the liability of surety is co-extensive with that of principal debtor unless it is provided otherwise by the contract. In State of Maharashtra Vs. M. N. Kaul AIR 1967 SC 1634, it has been held that a guarantor can not be made liable beyond the terms of agreement.
12. In the light of distinction between the "contract of indemnity" and "contract of guarantee", I have no manner of doubt that the contract between the Bank and the plaintiffs was a "contract of guarantee". In case the creditor finds that principal debtor has committed default as a result whereof liability has accrued, it is not necessary that the creditor must proceed first against the principal debtor or to give a notice to it but the creditor can directly proceed against the surety.
13. In Hukumchand Insurance Co. Ltd. Vs. The Bank of Baroda and others AIR 1977 Kant. 204, it was held that liability of principal debtor and surety being co-extensive are really separate though arising out of the same transaction. The guarantor alone can be proceeded against or be sued, as the case may be, without so proceeding against the principal debtor. The condition precedent is that the default on the part of principal debtor must exist.
14. The above decision has been followed by this Court also in U.P. Financial Corporation Vs. Garlon Polyfeb Industries and others AIR 2001 All. 286.
15. The liability of surety, however, may cease if there is any variation in terms of contract between the creditor and the principal debtor, without consent of surety, and such variation shall discharge surety in respect of transactions subsequent to the variation vide Section 133 of IC Act, 1872. Similarly, if the creditor discharges the principal debtor, the legal consequence would be that surety would also stand discharged vide Section 134 of IC Act, 1872. Similarly, if there is a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor(s), such act shall result in discharge of the surety, unless surety assents to such contract of variation etc. This is what is provided in Section 135 of IC Act, 1872.
16. The next question would be the nature of this placement of FDRs in the Bank. It has to be examined as to what is the nature of relation between the Bank and the customer in respect to such deposits.
17. In the present case, there was not a simple case of contract of guarantee between the plaintiffs and Bank but in furtherance thereof, the plaintiffs pledged FDRs with the Bank, duly discharged in favour of Bank, so as to entitle the Bank to realize defaulted amount by adjusting value of FDRs, at the relevant time against the defaulted amount.
18. In Tilendra Nath Mahanta Vs. United Bank of India and others AIR 2002 Gau. 1, a passage from Paget's "Law of Banking", 9th edition, at page 411, has been quoted wherein it is said that the fixed deposit is one of the three bank deposits and current deposits. Money lodged with bank as fixed deposits stricto jure is a loan to the bank. The banker in connection with the 'fixed deposit', therefore is a "debtor". The depositor accordingly would cease to be the owner of money in fixed deposit and it becomes the money of bank, enabling the bank to do as the bank likes, subject however, to the obligation of re-payment of the said amount on maturity. To the same effect is the view taken by Kerala High Court in Union Bank of India Vs. K.V. Venugopalan and others AIR 1990 Ker. 223 and Madhya Pradesh High Court in State Bank of India Vs. Smt. Goutmi Devi Gupta and others AIR 2002 MP 81.
19. In Syndicate Bank Vs. Vijay Kumar AIR 1992 SC 1066, it has been held that with respect to negotiable instruments including FDRs which are remitted to the Bank by the customer, the Bank can exercise banker's lien. The FDRs have been held "goods" within the meaning of Section 176 of IC Act, 1872 and Section 2 (7) of Sale of Goods Act, 1952 in State Bank of India Vs. Smt. Neela Ashok Naik and another AIR 2000 Bom. 151. The bank, in case, the contingency to realize the amount from surety has arisen, can do so by adjusting the amount of FDRs against the defaulted money.
20. These legal principles have to be followed subject to the terms of the contract between the surety and creditor i.e. the Bank and plaintiffs-respondents no. 1 and 2. The initial term of guarantee/surety was alleged to be three years or earlier thereto till the entire loan money is paid. The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs-surety as a collateral guarantee against the loan amount. Lower Appellate Court, in my view, has rightly read the averments contained in para 3 and 4 of plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if mature before payment, is referable to a period earlier to three years from the date of such contract and not to the extent of period of contract beyond three years. To that extent, there was a clear averment that contract was only for three years or earlier thereto when the entire loan amount is paid. The word "earlier" rules out any possibility of a continuing contract of guarantee beyond three years. Collateral security of FDRs was, therefore, available to the Bank for a period of three years only and not beyond that, unless consented by surety, i.e. plaintiffs. Admittedly, no such consent was obtained by plaintiffs-surety and, on the contrary, the Bank on its own gave extension to the principal debtor in the matter of re-payment of loan amount.
21. However, the matter does not rest here. A letter dated 4.4.1985 (Paper No. 46-Ka) has been made sheet anchor by the Bank to argue that therein surety has agreed to continue with his FDRs amount as collateral security till the entire loan amount is re-paid. It is submitted that there is no period or time mentioned therein and, therefore, the Lower Appellate Court has clearly erred in law by restricting contract of guarantee only for a period of three years. Learned counsel for Bank also drew my attention to discharged FDRs pledged by the surety in favour of Bank. Having gone through the aforesaid letter dated 4.4.1985 and also the judgment of Lower Appellate Court, whether letter dated 4.4.1985 was made a part of contract of guarantee or not between the Bank and Surety, is it an offer by plaintiff to the Bank for advancing a loan of Rs. 1,58,000/- to Sri Chhotey Lal and Smt. Saroj Devi; whether the contract of guarantee was executed making terms of the aforesaid letter, to be part of the said contract, whether the terms of letter were accepted by the Bank in its entirety, or, Bank in the ultimate acceptance of such offer, made certain changes and such counter offer having been accepted by the plaintiff formed contract of guarantee, are some of the aspects on which I find that the Courts below have not looked into the matter at all. If plaintiffs' letter dated 4.4.1985 itself has been accepted as such and it formed part of contract between the parties, then what has been held by Lower Appellate Court cannot hold good. Similarly, Trial Court in decreeing the suit has not been right in holding that the Bank, first should have proceeded against principal debtor or hypothecated goods and not directly against surety by realizing the amount of FDRs pledged with the Bank, as collateral security by the plaintiffs. The approach of Courts below in the case in hand is not correct and the real aspects have not been examined correctly. In these facts and circumstances, I find that judgments impugned in this Second Appeal cannot sustain.
22. In the result, impugned judgment and decree dated 21.5.2003 passed by Trial Court in Original Suit No. 579 of 1993 and judgment and decree dated 4.2.2009 passed by Lower Appellate Court in First Appeal No. 129 of 2003 are set aside. The matter is remanded to Trial Court to treat the suit as originally registered and decide the same afresh in the light of the observations made above and in accordance with law.
23. The appeal is, accordingly, allowed with cost throughout.
Dt. 28.5.2013
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