Bank of India vs M/s. Mayur Engineers and Others

Valmiki J Mehta, J.—This Regular First Appeal filed u/s 96 of the Code of Civil Procedure, 1908 (CPC) impugns the judgment of the trial Court dated 5.3.1997 dismissing the suit for recovery of Rs. 81,663.52/- filed by the appellant/plaintiff-bank against ten defendants. Defendant Nos.1 to 6 were the principal borrowers with the defendant No.1, being a partnership firm and the defendant Nos.2 to 6 being partners of defendant No.1. Defendant Nos.7 to 10 were sued as guarantors. Reference in this judgment is made to the parties as per their original numbering as defendants in the suit. Before proceeding ahead, I may note that the appellant during the pendency of the appeal dropped its claim against defendant No.3,5,6,8, 9 and 10. The liability therefore has to be seen in this appeal only of the defendant No.1 (the partnership firm), defendant No.2(continuing partner of the defendant No.1), defendant No.4 (the retiring partner) and defendant No.7 (guarantor who is now deceased and represented by his legal heirs).

The facts of the case are that the appellant/plaintiff-bank gave a cash credit facility to the defendant No.1/respondent No.1 partnership firm on 1.8.1979 of an amount of Rs. 2 lacs. In consideration of grant of the aforesaid cash credit facility, the defendant Nos.2 to 6 as partners of defendant No.1 executed various security documents dated 1.8.1979 i.e. demand promissory note, continuity security letter, deed of hypothecation, letter of undertaking and letter of declaration and lien and set off. Defendant Nos.7 to 10 stood as guarantors in consideration of the cash credit facility being advanced to the defendant Nos.1 to 6 and executed the guarantee letter on 1.8.1979 in favour of the appellant/plaintiff-bank. The sanctioned facility was utilized by defendant Nos.1 to 6. The defendant Nos.4 and 5 retired from the partnership firm/defendant No.1 from 21.8.1980, and also informed the appellant/plaintiff-bank. On such information being received by the appellant/plaintiff-bank the appellant/plaintiff-bank is stated to have crystallized the liability of the retiring partners/defendant Nos.4 and 5 and thereafter allowed the continuing partners to operate the account. This stand of the appellant is best understood by reference to para 8 of the plaint which reads as under:- "8. That the plaintiff bank respectfully submits that in August, 1980 defendants 4 and 5 advised the plaintiff bank having resigned from the partnership of defendant No.1 whereby the defendant No.1 stood duly dissolved. Hence for appropriate accounting and for the purpose of crystallizing the joint and several liability of the defendants, the plaintiff bank had frozen the operation of the said cash credit account of defendant No.1 in August, 1981. The plaintiff bank, however, permitted the, separate account to be operated in the name of defendant No.1, operations against credit duly received in the said account. It is submitted that the account was broken to crystallize the liability of out-going partners in August, 1980.

The plaintiff has, before filing of the suit appropriated and adjusted the entire credit balance amounting to Rs. 31,959.56 P in the said account towards the amount due and outstanding in the said cash credit account of defendant No.1 whereby the balance due and outstanding comes to a sum of Rs. 81,663.52 P as on 29.7.82.

The subject suit thereafter came to be filed as the amount due in cash credit facility was not paid and which balance amount was said be a sum of Rs. 81,663.52/- as on 29.7.1982. This amount was claimed alongwith pendente lite and future interest @ 15% per annum with quarterly rests.

Defendant No.4 filed a joint written statement alongwith defendant Nos.5 and 8. In the written statement there are averments of these defendants being not liable as guarantors as there is variation in terms of the contract as entered into between the appellant and the said defendants. There are also averments in the written statement of these defendants that the bank having not accounted for hypothecated goods as on the date of the dissolution of the firm besides of other continuing partners taking benefit of the various assets of the partnership firm including amounts received from the debtors. The relevant averments are contained in para (vi) of the preliminary objection and in para 10 of the reply on merits in the written statement. These paras read as under:-

(vi). That the defendant No.8 is not bound as guarantor. There is variance in the terms of the contract between the plaintiff and the answering defendants. No notice which is required under law has been served on the guarantor before the filing of the suit, no such notice having been given by the plaintiff, the suit is liable to be dismissed on this ground alone. xxxx xxxx xxxx xxxx

Para No.10 of the plaint as stated is not admitted to be correct. It is, however, submitted that the plaintiff has not accounted for the hypothecated goods. In fact the goods hypothecated with the bank are more than the alleged loan amount and particularly as on 21st August, 1980 when the balance of the money due to the bank was approximately Rs. 90,000/- the goods hypothecated with the bank were:

(i) H.B.B. Motor (Electric) : Rs. 66,000.00

(ii) Kirloskar Pumps 47 Nos. : Rs. 27,000.00

(iii) Mayur Pumps : Rs. 19,600.00

(iv) Greaves Pumps & Base Plates: Rs. 1,550.00

(v) Indra Pumps : Rs. 4,000.00

(vi) Mayur cooled engine radiator : Rs. 12,500.00

(vii) (1) 7 nos. Kangaroo Diesel Engine (2) 3Nos. Mayur -do- (3) 12 Nos. Mayur Pumps : Rs. 34,550.00 Total : Rs. 1,66,200.00

That thus the value of the hypothecated goods lying with the bank was much more than the money, if any legally due to the plaintiff-bank and in case the goods have been spoiled and/or their value goes down due to deterioration it will be due to the plaintiff''s own fault and responsibility. The above statement would show that not only nothing is due to the bank but even the bank is liable to pay to the defendant firm. In any case the answering defendants are not at all liable to pay any amount. The defendant No.1 and the continuing partners had following assets in their hand when the answering defendants 4 and 5 left the firm with effect from 21.8.80 and bank informed. In fact, the defendant firm was running in profits and the answering defendants No.4 & 5 had retired after taking their share of investment and profits as shown in the dissolution deed, copy enclosed. The firm''s assets as on 21.8.80 are also shown below:-

Various Dealers in Uttar Pradesh, Rajasthan & Haryana : Rs. 1,72,000.00 2. Office Premises, Security : Rs. 5,000.00

Balance payments from Punjab & Haryana Government. : Rs. 96,000.00

Security & CDR as Earnest Money deposits from State Govt. Punjab & Haryana : Rs. 80,280.00 5. Office furniture : Rs. 3,500.00

Balance payments from PWD Muktsar & Ropar : Rs. 14,000.00

M/s Trust Worthy : Rs. 14,100.00

M/s Economic Traders, Rajkot : Rs. 6,100.00

Total : Rs. 2,90,880.00

Defendant No.7 filed his written statement jointly alongwith defendant No.9 and in which once again discharge from liability was claimed as the guarantee was said to be given for old firm and not for the new firm. There are also averments in the written statement of the guarantor/defendant No.7 being discharged as the reconstitution of the firm was done at the back of the said defendant. Relevant averments in the written statement are contained in para 2 of the preliminary objections and para 5 of the reply on merits which read as under:- "2. That the suit has been filed in violation of the provisions of law and the answering defendants were relieved from the guarantee, if any, executed after Firm defendant No.1 was dissolved and reconstituted and duly accepted by the plaintiff vide their letter dated 5-11-80. As the guarantee was given by the answering defendants not for the new firm but for the old one and the constitution was changed which was duly accepted by the plaintiff and the answering defendants never executed any guarantee bonds for the new firm with changed constitution.

xxxx xxxx xxxx xxxx

That the contents of para-5 are wrong, false and denied and the plaintiff be put to strict proof. It is submitted that the answering defendants had given guarantee for a firm which was duly dissolved and thereafter it was reconstituted at the back of the answering defendants and the reconstitution was duly accepted by the plaintiff vide their letter dated 5-11-80 and the acceptance of re-constituted firm by the plaintiff itself immunes the answering defendants from liability, if any, and otherwise also the guarantee bonds, if any executed stand discharged. In any case, the execution of guarantee deed, if any, is denied and the answering defendants are not at all liable.

After completion of pleadings, trial Court framed the following issues:-

Whether the suit has been signed, verified and filed by a duly authorized person in accordance with law? OPP

Whether the suit is within time? OPP

Whether the suit is bad for mis-joinder of parties and causes of action as alleged? OPD

Whether defendants No.4,5 and 8 were absolved of their liability as per the dissolution deed dated 21.8.80 as alleged? OPD

Whether the promissory note is insufficiently stamped as alleged, if so its effect? OPD-4,5 and 8.

Whether there is any variance in the original agreement, if so, its effect? OPD-4,5 & 8.

Whether plaintiff has misappropriated/not accounted for the pledged goods before filing of the suit? OPD 4,5 & 8.

Whether the document in question had been got signed by the plaintiff bank from the defendants in blank, if so its effect as alleged? OPD

Whether plaintiff is entitled to the claim suit amount as alleged? OPP

Whether plaintiff is entitled to interest, if so, at what rate, for what period and to what amount? OPP

Relief.

Trial Court has dismissed the suit by holding with respect to issue No.1 that the suit was not validly instituted as there was no appropriate notarization of the power of attorney in terms of Section 85 of the Evidence Act, 1872. With regard to liability of defendant Nos. 4 and 7, trial Court while dealing with issue No.3 has held that bank failed to get executed fresh documentation from these defendants after reconstitution of the firm and therefore the outgoing/old partners and the guarantors stood absolved from their liability.

I agree with the above conclusions as the assets of a dissolved partnership firm and moneys of a dissolved partnership firm are surely available to the outgoing partners and the guarantors for discharge of their liability, unless fresh set of documentation are executed by these persons for claiming to be liable for the liabilities of the new firm. It is not in dispute that neither from the defendant Nos.4 and 5 (retired partners) and nor from the guarantors (defendant Nos.7 to 10) was any fresh documentation got signed. Therefore, the appellant/plaintiff-bank should not have allowed operation of the account in the name of the defendant No.1/partnership firm inasmuch as in such account the amounts which would be due of the partnership firm before retirement of the defendant Nos.4 and 5 as on 21.8.1980 would have in fact been credited and which amounts have been lost to the outgoing partners and the guarantors and which would have been available for discharge of their liability. In the entire evidence which is led on behalf of the appellant/plaintiff-bank i.e. its witnesses PW-1 and PW-2 there is not a single averment that amounts which were due of the old partnership firm were not allowed to be credited in the new account of the defendant No.1 which was maintained post the dissolution on 21.8.1980. No doubt, the statement of account of the new firm was filed as Ex. PW2/18 but no one can make out from it that the credit entries which have been made in this account are only with respect to the credit entries of the new partnership firm and not the old partnership firm. Therefore, in my opinion, trial Court has arrived at a correct finding of the defendant No.4 and the defendant No.7 having been discharged as the appellant/plaintiff-bank illegally allowed the account to be operated even post dissolution and which has resulted in loss of valuable securities to these defendant Nos.4 and 7 being lost.

So far as the finding with respect to issue No.1 is concerned, counsel appearing for defendant Nos.4 and 7 in this Court do not dispute that such findings can be set aside and the suit can be said to be validly instituted against the defendants, moreso in view of the judgment of the Supreme Court in the case of United Bank of India Vs. Naresh Kumar and others,

I may note that otherwise the appellant/plaintiff-bank has filed and proved on record the security documents as Ex. PW1/2 to Ex. PW1/9, statements of account as Ex. PW2/17 and Ex. PW2/18. The appellant/plaintiff has thus duly proved its case against defendant Nos.1 and 2. In view of the above, the appeal is dismissed qua defendant Nos.4 and 7 viz. respondent Nos.4 and 7 (now represented by his legal heirs as per the original memo of parties). Appeal will however stand allowed and a decree will be passed in favour of the appellant/plaintiff-bank against defendant Nos.1 and 2 for a sum of Rs. 81,663.52/- alongwith pendente lite and future interest @ 9% per annum simple. Appellant/plaintiff is also entitled to costs against defendant Nos.1 and 2. Decree sheet be prepared. Trial Court record be sent back.