K. Nataraja Pillai and Another vs Indian Bank

Ramanujam, J.—Defendants 1 and 2 in Original Side No. 28 of 1973 on the file of the Sub-Court, Sivaganga are the Appellants herein.

The Respondents herein filed the suit for recovery of a sum of Rs. l,21,006.98 said to be due under an equitable mortgage from Defendants 1 and 2 as well as their son, one Narayanan, the third Defendant. The case as set out in its plaint was as follows. The first Defendant obtained from the Plaintiff bank a medium term loan of Rs. 10,000 on 11th September, 1970 for the purpose of installing a pump set and an engine and for digging a well and effected an equitable mortgage in respect of 7.86 acres of lands as security therefor. He also accrued a short term loan of Rs. 2000 on 18th December, 1970 on the security of crops raised in his lands. The second Defendant, the wife of the first Defendant had obtained a short term loan of Rs. 2000/- on 25th March, 1971. Similarly the third Defendant, the son of the first Defendant had obtained two short term loans of Rs. 2000/- each on 25th May 1971 and 15th December 1971. On the guarantee agreement executed by the first Defendant on 14th June 1971 the Plaintiff had granted a short term production loans to 37 persons to the extent of Rs. 7.000/-, The total of the above outstanding come to Rs. 93,229 03, For the purpose of discharging the said liability the Defendants were sanctioned a loan of Rs. 1,00, on 18th August 1971. The Defendants executed a promissory note in favour of the Plaintiff for a consideration of Rs. 1,00,000 on 26th August 1971 agreeing to repay the same with interest at 4� per annum over and above the official rate of interest of the Reserve Bank of India. On the same day the Defendants executed a hypothecation of their pump-set and engine set out in A schedules to the plaint by way of security for re-payment of the said loan. They also executed another hypothecation bond in respect of the crops on 26th August 1971. The Defendants on the same day, deposited the (sic) deeds relating to the properties with the Plaintiff Bank at Madurai by way of equitable mortgage in respect of 27.02 acres of punja and punja lands set out in the B. schedule so the plaints as security the said loan of Rs. 1,00,000-. Out of the said loan of Rs 1,00,000-covered by the promissory note, the earlier outstanding of Rs. 93,239-0 was discharged and the balance of Rs. 6,760 97 had been paid to the Defendant. The Defendants are not entitled to the benefits of Tamil Nada Act. IV of 1918 as the Plaintiff is a banking institution and, therefore, the Plaintiff is entitled to recover the suit amount which represents the principal of Rs. 1,00,000 and the interest (sic) these on till the date of suit.

The said suit was resisted by all the three Defendants. The first Defendant admitted his personal borrowing and the loans advanced to Defendants 2nd and, 3rd but denied that he ever guarantied repayments of the amounts payable by 37 persons to the extent of Rs. 71,000-. He also contended that the Defendants had individually applied to the Plaintiff for the accommodation of loan for their benefit in or about May, 1971 and they have not append for a loan of Rs. 1,00,000 in lump. They had not executed any promissory note in favour of the Plaintiff for Rs. 1,00,000-. They had not also executed any hypothecation band in respect of the lands and standing of crops for the sum of Rs. 2,00,00-. They have not also deposited the document of title towards the said loan of Rs. 00,000. One Krishnamurthy Iyer, who was the agent of the Plaintiff bank at Sivaganga got blank printed papered signed from the Defendants on the pretext that in the matter of grant of loans to the said 37 persons he is facing some enquiry from the head office, that with a view to save him from those enquiries the re-payment of the loans by the 37 persons may formally be guaranteed by the Defendants, The agent got the signature of the Defendants on two unfilled printed papers and blank papers representing that the were required to prepare statements regarding the details and value of the properties. The promissory note and the other document have been brought out by exercise of fraud, undue influence; coercion and misrepresentation by the Agent of the Sivaganga Branch of the Plaintiff Bank. The first Defendant had complained to the head office of the Plaintiff Bank about the conduct of the Agent and that, therefore, the Defendants cannot, in any event, be made liable for the sum of Rs. 71,000/- said to be due from the said 37 persons with whom the Defendants had nothing to do.

Defendants 2 and 3 filed a written statement contending that the loan advanced to the 37 persons are not binding upon them, that they are liable to pay only the amount of loans advanced to them personally that the third Defendant was a minors the date of the execution of the promissory note, he having been born on 12th November, 1955 and therefore, the suit promissory note was void as against him.

The Plaintiff filed a reply statement denying that the third Defendant was born on 12th November, 1953 and, stating that the third Defendant while applying for a loan on 16th May, 1971 has given his age as 20, that the first Defendant sent described the third Defendant as major in a communication has by him to the Custodian of the Bank on 30th August, 1971 and, therefore, the Defendants are estopped from raising the plea of minority of the third Defendant.

On the above rival pleadings the trial Court framed as many as 7 issues. Issues 1 to 3 related to the truth and validity of the suit promissory note exhibit A-1 dated 26th August, 1971 executed by the Defendants and issue 4 related to the truth and validity of equitable mortgage created by the Defendants in favour of the Plaintiff on 28th August, 1971 by deposit of title deeds, and issues 5 and 6 related to the truth and validity of the guarantee said to have been executed by the first Defendant in favour of the Plaintiff on 14th June, 1971. On issues 1 to 3 the Court below held that the promissory not exhibit A-1 dated 26th August, 1971 was true, valid and fully supported by consideration, but that the same is void as against the third Defendant, who was a minor at the time of the execution, he having been born on 12th November, 1953. On issue 4 the court below held that the equitable mortgage by deposit of title deeds created by the Defendant is true and valid. On issues 5 and 6 to the truth of the deed of guarantee agreement, exhibit A-8, said to have been executed by the first Defendant on 14th June, 1971 for repayment of the agricultural short term production loans advanced to 37 persons, the Court below held that the said deed of guarantee is true and is not effected by any infirmity such as fraud, undue influence, coercion and misrepresentation. In view of its finding on issues 1 to 6 the Court below held under issue 7 that Defendants 1 and 2 alone are liable for the suit amount, that the Plaintiff is entitled to a mortgage decree in respect of the properties owned by Defendants 1 and 2 alone, and that the. Plaintiff is not entitled to any relief as against the third Defendant The result was the Court below passed a preliminary decree in favour of the Plaintiff as against Defendants 1 and 2 for the entire suit amount with costs and dismissed the suit as against the third Defendant without costs.

In this appeal filed by Defendants 1 and 2 they have challenged the correctness of the findings of the Court below on all the issues Mr. T.R. Mani, learned Counsel for the Appellants contends that the Appellants having contended that the suit promissory note exhibit A-1 has been brought about by fraud, undue influence and coercion and the Court below having accepted in away that the Agent of the Plaintiff bank at Sivaganga has acted in an unusual and fraudulent manner it should have held that suit promissory note is not supposed by consideration to the full extent but that it is supported by consideration only to the extent of the personal that even assuming that the promissory note exhibit A-1 was in fact executed by the Defendants, consideration for exhibit A-8 the guarantee bond as it become into existence not at the time of the giant of loans in favour of 37 persons but on subsequent date, the promissory note exhibit A-1 cannot be taken to be supported by consideration to the extent of Rs. 74,190.56 representing Rs. 71,000/- advanced to the laid 37 persons and interest thereon. Thirdly it is contended that exhibit A-4, dated 26th August, 1971 which is said to be an equitable mortgage by deposit of title deeds is invalid for want of registration. Fourthly it is said that the entire transaction is vitiated by the fraud committed by the Agent of the Plaintiff Bank at Sivaganga to cover the irregularity committed by him an granting the loans in favour of 37 persons and to saddle that entire liability on the Defendants.

We will proceed to consider the contentions in seriatim. As already pointed out, the suit is based on exhibit A-1, dated 26th August, 1971 the promissory note executed by the Defendants for a sum of Rs. 1,00,000 exhibit A-2 the hypothecation agreement of the same date relating to the pumpset, exhibit A-3, the hypothec ion agreement relating to the standing crops and exhibit A-4, dated 28th August, 1971, list of title deeds relating to the lands owned by the Defendants and deposited with Plaintiff bank as collateral security. Since the hypothecation agreements exhibits A-2 and A-3 and the deposit of title deeds under exhibit A-4 are based on the liability created by the promissory note exhibit A-1 their enforceability will naturally depend on the truth and validity of exhibit A-1 and the extent to which exhibit A-1 is found to be supported by consideration. Therefore the main and substantial question is to had out whether exhibit A-1 was in fact executed by the Defendants and whether the same is fully supported by consideration. Though on behalf of the Appellants it was contended that only blank printed forms were got signed from the Appellants watch had been later on filled up by P.W. 1 the Agent of the Sivaganga Branca of the Plaintiff bank, on the materials on record, we are inclined to agree with the view taken by the Court below that exhibit A-1 was signed by the Defendants after the printed forms had been filled up and with the full knowledge that it is a promissory note for Rs. 1,03,030. While considering the question of the due execution of the promissory note by the Defendants, the other question whether the Defendants are bound to undertake the liability of the 37 borrowers and whether the suit promissory note is supported by full consideration is not relevant. That exhibit A-1 contains the signatures of the Defendants has not been disputed. The only plea advanced by the Defendants is that their signatures were taken in blank forms which had been filled up later. That plea cannot be taken to have been established in view of the following circumstances. The promissory note exhibit A-1, has been followed up by the hypothecation agreements exhibits A-2 and A-3 on the same day as also the deposit of title deeds on 28th August, 1971, two days later. It is true the Defendants have not been shown to have applied in writing for a loan of Rs. 1,00,000 at any time. Exhibit A-121, a letter from the Head Office of the Plaintiff indicates that an indemnity bond had been obtained from the first defend tat undertaking to reimburse the agricultural loan to the intent of Rs. 71,033 advanced to 37 ryots of Pappakuty village, that the aforesaid loanees are ordinary lab outers without any assets whatsoever and that if the bank sanctions loan of Rs. 1, 03,000 on the security of the landed properties of the Defendants, the loans advanced to those persons could be made easily recoverable (sic) the suggestion for the grant of loan came from the Head Office and not on a request from the Defendants. Exhibit A-1 22 which is a reply of exhibit A-121 sent by P.W. 1, agent of the Sivaganga branch, furnishes the particulars of the security offered by the first Defendant and the value of the same. Under exhibit A-123, P.W. 1 has made a recommendation to the Head Office of the Bank to accept the suggestion of Chellayya Pillai to grant a consolidated loan of Rs. 1,00,000 to the first Defendant on the security of about 27 acres of land belonging to the Defendants. The above documents indicate that it is on the suggestion of Chellayya Pillai, P.W.2, a loan of Rs. 1,00,000 had been sanctioned by the head office of the Indian Bank mainly to safeguard us interest and to recover the amounts due by the said 37 borrowers, and it is in pursuance of the said sanction a promissory note, exhibit A-1 was executed by the Defendants. The subsequent correspondence between the first Defendant and the bank authorities clearly indicate that the Defendants had Knowingly and voluntarily executed the promissory note exhibit A-1 for Rs. 1,00,000. In exhibit A-36, dated 21st August, 1971 the Bank has informed the first Defendant about the sanctioning of the medium term loan of Rs. 1,00,000 under certain conditions and called upon the first Defendant to contact the Bank with the necessary documents with reference to the Properties which are to be given as collateral security. By a letter exhibit A-37, dated 26th August, 1971 sent by all the Defendants, they admitted the execution of the promissory note for Rs. 1,00,000 and agreed to create an equitable mortgage of all their lands and authorised the bank to adjust as against the said sum of Rs. 1,00,000 their personal liabilities as well as the liability of the 37 persons who have been recommended and whose liability had been guaranteed by the first Defendant. In exhibit A-38, dated 30th August. 1971 which is a registered letter sent by the first Defendant to the custodian of the Plaintiff-Bank there is a clear admission that the Defendants executed a promissory note for Rs. 1,00,000 after giving all their properties to the bank as security and seeking a further short term loan of Rs. 20,000. In exhibit A-12, dated 16th September, 1971 the first Defendant was informed by the bank that with reference to the promissory note for Rs. 1,00,000 executed by him jointly with his wife and son, a sum of Rs. 6,796.97 stands to '' his credit after adjusting all the liabilities. The said letter exhibit A-12, contains an enclosure showing how the balance of Rs. 6,769-97 was arrived at. These correspondences clearly establish the due execution of the promissory note by all the Defendants. Therefore the plea of the Defendants that they did not execute exhibit A-1 knowingly and that they merely signed plan printed forms at the instance of P.W.1, has rightly been rejected by the Court below.

The question then is whether exhibit A-l, is fully supported by consideration. Exhibit A-1 is for a sum of Rs. 1,00,000 and from the enclosure to the letter exhibit A-12 it is seen that the said sum of Rs. 1,00,000 comprised of (1) the personal liability of the first Defendant in respect of two earlier loans taken on 11th September, 1970 and 18th December, 1970 amounting to Rs. 11,899.98, (2) the liability of his wife Pappathi Ammal in respect a short term loan, dated 26th March, 1971 for Rs. 2,955.30, (3) the liability of the third Defendant in respect of two loans taken on 25th May, 1971 and 15th February, 1971 amounting to Rs. 4,193.19 and (4) the liability of 37 borrowers, who had been granted loans on the basis of the guarantee given by the first Defendant amounting to Rs. 74,190.56. There is no dispute about the truth of the personal borrowings of Defendants 1 and 2 and their liability in respect thereof. The third Defendant had disputed his liability on the ground of his minority. According to him he was a minor at the time of the borrowings and that he has been used as a tool by his father and, therefore, the liability cannot be enforced against him in respect of the two promissory notes said to have been executed by him and the suit promissory note exhibit A-1. The Court below has found that the third Defendant was a minor on the date of the alleged borrowing of Rs. 2,000 on 25th May, 1971 and another Rs. 2,000 on 15th December, 1971. That finding of the Court below has not been challenged before us by the Respondent Bank. Therefore the liability arising out of the alleged loans taken by the minor giving rise to an aggregate liability of Rs. 4,193.19 referred to in paragraph 3 of the plaint cannot be enforced. Though the Court below has held that since the third Defendant was a minor at the time of the execution of the promissory note exhibit A-1 the suit as against him has to fail, it has chosen to pass a decree for the full amount of the promissory note without excluding the liability referable to the third Defendant of a sum of Rs. 4193.19 as on the date of the promissory note with subsequent interest.

This brings us to the substantial dispute between the parties which relates to the sum of Rs. 74,190 56 which represents the amounts due by 37 borrowers for which the first Defendant is said to have given guarantee. According to the Plaintiff-bank loans were advanced to the 37 persons on the recommendation and the guarantee of the first Defendant and, therefore, the first Defendant undertook the said liability and agreed for the same being deducted out of the sum of Rs. 1,00,000 which is the consideration for the promissory note exhibit A-1. As against this the first Defendant''s stand is that he neither introduced the borrowers to the bank nor stood guarantee for the due payment of the amount borrowed by them and that, in any event, the promissory note so for as it related to the sum of Rs. 74,190.56 should be taken to be without consideration as the guarantee said to have been given by him, was long subsequent to the lending of the amounts by the bank to the said 37 borrowers. As already pointed out, the Court below has held that the first Defendant had guaranteed repayment of the loans by the 37 borrowers under exhibit A-8, dated 14th June, 1971 and it is in pursuance of the guarantee agreement the first Defendant agreed for adjustment of the loan amounts due by the 37 borrowers from the sum of Rs. 1,00,000 sanctioned to him as a loan. Mr. T.R. Mani, learned Counsel for the Appellants contends that the finding of the Court below that the liability for a sum of Rs. 74,190.56 has been imposed on the first Defendant as a guarantor and therefore the deduction of the amount from the loan of Rs. 1,00,000 sanctioned to the first Defendant was justified and, therefore, the promissory note should be taken to be supported by consideration to that extent cannot legally be supposed. According to the learned Counsel, exhibit A-5 the guarantee agreement said to have been executed by the first Defendant is void for want of consideration and that the liability to the extent of Rs. 74,190.56 cannot legally be fastened on the first Defendant. It is pointed out by the learned Counsel that the loan has been advanced to the 37 borrowers, as seen from exhibit-6 itself on various dates between 17th December, 1970 to 4th May, 197 and, therefore, the amounts cannot be said to have been advanced to the borrowers on the subsequent guarantee given by the first Defendant under exhibit A-8. The learned Counsel submits that as the amounts had already been advanced to 37 persons the liability for repayment of the amounts cannot be fastened on the first Defendant on the basis of exhibit A-8 as exhibit A-8 is void for want of consideration,. There appears to be considerable force in the (sic) submission of the learned Counsel for the Appellants.

The plaint specifically proceeds on the basis that the firs Defendant had guaranteed repayment of the amounts due by the 37 borrowers under exhibit A-8 and, therefore, the aggregate amount due by them has been adjusted from the loan sanctioned to he Defendants and is on that basis issue. 5 and 6 came to be framed by the trial court as to whether the guarantee agreement said to have been executed by the first Defendant in favour of the Plaintiff is true and valid as contended by the Plaintiff or it has been brought about by undue influence, coercion and misrepresentation as contended by the Defendants. Even assuming that the guarantee agreement exhibit A-8 has been duly executed by the first Defendant and there was no coercion, undue influence and misrepresentation on the part of the Agent of the Plaintiff bank a Sivaganga, the question will still remain, whether it is void for want of consideration. In paragraph 4 of the plaint it has been averred:

On the guarantee and agreement executed by the first Defendant on 14th June, 1971 thirty-seven persons had been granted a short term production loan of a total of Rs. 71,000. The balance in respect of these loans was Rs. 74,19056.

But this averment is entirely wrong and erroneous as would be clear from a perusal of exhibit A-8, dated 14th June, 1971, the guarantee agreement, which clearly shows that the loans were granted long before the execution of exhibit A-8. Exhibit A-8 gives the names of the 37 persons, the loan amounts granted to them and the date of the loans. The date of the loans range from 17th December, 1971 to 4th May, 1971. It is therefore, clear that none of the 37 borrowers was granted any loan after the execution of exhibit A-8 by the first Defendant. It is well-established that a creditor should have done or agreed to do something in consideration of the surety''s giving guarantee. If the execution of the surely bond is simultaneous with the borrowing for which the guarantee has been given, then the original lending by the creditor will itself form sufficient consideration for the surety bond. But where the surety bond comes into existence after the original borrowing by the principal debtor, the creditor must prove if he wants to proceed against the surely that in consideration of the contract of surety or guarantee he did something or refrained from doing something. In this case it has been seen that the original borrowing by the 37 persons was long before exhibit A-8, the guarantee agreement given by the first Defendant. It is also seen from exhibit A-8 that the amounts advanced to the 37 persons have not become due for payment on the date of exhibit A-8. It is not also the case of the bank that the 37 persons were threatened with suits for recovery of the amounts borrowed by them and the first Defendant intervened and stood as a guarantee so as to prevent the impending legal proceedings as against the 37 borrowers. In these circumstances, the bank cannot be taken to have refrained from doing anything in respect of the said loan to form the consideration for the guarantee agreement exhibit A-8.

The decision in Nanak Ram v. Mehin Lal ILR (1877) All. 487, lays down that where a surety bond comes into existence after the original borrowing the credit or must prove, if he wants to proceed against the surety separate consideration apart from the original lending and such a consideration may be in the form of the creditor doing something or refraining from doing something with reference to the original borrower. In Muthukumarappa v. Kathappaudavan 27 M.L.J. 249, a Division Bench of this Court went to the extent of holding that even, if the original lending was made on the specific recommendation of the surety that is not a sufficient consideration in law for a subsequent promise by surety guaranteeing the repayment. Paragraph 116 in volume XX of Halsbury''s Law of England, fourth edition enunciates that the consideration for a person becoming a surety for the debt already existing should be such as is capable of being enforced by the surety. In a recent decision in Bank of India v. Matha Gounder (1980) T.C.N.J. 117, a Bench of this Court to which one of us was a partly has gone to the extent of holding that an indefinite extension of time for payment of the debt already due will not form a proper consideration for a letter of guarantee given by a surety, as such a promise to extend time so long as the bank thinks fit is vague and as such cannot be enforced either by the surety or by the original debtor and as such the guarantee bond should be taken to be without consideration.

As already pointed out, in this case the loans were advanced to the 37 persons by the bank long before the guarantee agreement, exhibit A-8 was executed by the first Defendant. Therefore the original lending cannot form the consideration for exhibit A-8. It is not the case of the bank either in the pleadings or in the evidence that the first Defendant approached the bank either for extension of time for re-payment of the amounts by the 37 borrowers or for bearing the bank from taking proceedings against them for recovery of the loans. It has already been seen that on the date of exhibit A-8 the re-payment of the loans granted to the 37 persons had not become due and there is no question of the bank initiating any proceedings against the original borrowers and the first Defendant coming a forward as a guarantor in lieu of the bank''s forbearance to sue. In this view of the matter the guarantee agreement exhibit A-8 has to be taken to be void and unenforceable for want of consideration.

Perhaps realizing this difficulty of sustaining the Plaintiff''s claim based on the guarantee agreement. Exhibit A-8, Mr. Dolia learned Council for the Respondent-Bank submits that the first Defendant had taken over liability of the 37 borrowers and had agreed for its adjustment as against exhibit A-1 and, therefore, the first Defendant''s liability for the (sic) borrowed by the 37 person can be upheld on the principle of novation. As a matter of fact the learned Counsel did not seek to sustain the Plaintiff''s claim based on the guarantee agreement, exhibit A-8 but, sought to sustain the decree of the Court below only on the principle of novation. The learned Counsel formulated his point thus. The amounts had been advanced by the bank to the 37 borrowers on the faith of the recommendation and the oral guarantee of the first Defendant. It is for this reason he took over their liability in entirely and agreed for the adjustment of the said liability out of the amount payable to him under exhibit A-1. The subsequent conduct of the first Defendant in withdrawing the balance of Rs. 6,000 and odd after adjustment of all the liabilities and asking for the promissory notes executed by the 37 persons would normally establish the Plaintiff''s plea based on novation. According to the learned Counsel even if the Plaintiff''s plea Lased on the guarantee agreement exhibit A-8 tails, the Plaintiff entitled to succeed on the basis of novation,

The learned Counsel for the Appellants, however, pointed out that the plaint is based on the contract of guarantee given by the first Defendant, that it does not proceed on the basis of novation of the original contract and that, therefore, it is not open to the Respondent at the stage of the appeal to put forward a new plea which cannot be spelt out from the plaint. It is also pointed out that the oral evidence on record does not establish the plea of novation now put forward by the Respondent.

Section 62 of the Indian Contract Act deals with novation of contracts. That section says that, if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it the original contract need no be performed. That section contemplates all the parties to the original contract entering into a new contract in substitution of the earlier contract. Novation according to Anson can only take place by agreement between the original parties. Novation has been defined by the House of Lords in In re United Railways of the Havana & Pegla Warahouse (1959) 1 All E.R. 214, as. There being a contract in existence some new contract is substituted for it either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. Novation of a contract comprises two elements. The discharge of one debt or debtor and the substitution of a new debt or debtor. The discharge is governed by the proper law of the contract.

It is well-settled that parties to an original contract can by mutual agreement enter into a now contract in substitution of the old one. It is this principle that has been recognized in Section 62 of the contract Act. According to Section 62 the agreement to substitute a new contract should be between the same parties or between the original parties as well as other third parties. Section 62 also contemplates a new contract superseding or rescinding or altering the original contract. In a contract by novation there must be anitatmus novandi and substitution of new contract for the old one. Dealing with the distinction between novation and assignment he shire and foot on their treatise on Jaw of contract, (sic) edition at page 508 point out:

Novation is a transaction by which, with the consent of all the parties concerned, a new contract is substituted for one that has already been made. The new contract may be between the original parties e.g. where a written agreement is later incorporated in a deed or between different parties, e.g., whore a new person is substituted for the original debtor or creditor. It is this last form the substitution of one creditor for another, that concerns us at the moment.

The learned authors further point out that an assignment of a debt operates as an effective transfer without the consent or the collaboration of the debtor and therefore it is distinguishable from novation and that novation unlike assignment does not involve the transfer of any property at all for it comprises of the announcement of one debt and the creation of another debt in its place. That the essential element distinguishing a transaction of novation, from assignment is that the substitute should extinguish the contract and. the liability there under discharged, otherwise the novation will fall for want of consideration. If as in this case these is a subsisting debt between the bank and the 37 debtors the liability arising out of the (sic) can only be transferred to the first Defendant, a third party to the original agreement only by a tripartite contract which will amount to novation. We will take a case where A owes a debt to B. If B alone enters into a contract with C under which C takes over the liability of A, that transaction cannot mount to novation. To constitute novation there should be a contract binding on all the parties to the original contract.

If C has taken over the liability of A in a contract with B to which A is not a party, B will be in a position to enforce the old contract as against A and also the new contract as against C. There is (sic) way of A enforcing the new contract as against B and resist the claim that might be made by B as against him. It is for this reason the subsequent contract cannot be treated as a novation which normally results in the extinguishment of the old debt and the creation of a new debt In this case it has neither been alleged nor proved that all the 37 borrowers from the bank were parties to the arrangement under which the first Defendant is said to have taken over their liability Nor is there any evidence that the first Defendant''s taking over liability of the 37 borrowers had resulted in the extinguishment of the debts due by the 37 original borrowers to the bank. As already pointed out, the essential characterizes of a contract by novation is extinguishment of the existing debt and coming into existence of a new debt. Apart from the fact that there is absolutely no evidence that there was any agreement between the parties to extinguish the existing debt due by the 37 borrowers there is a enough material to indicate that he original debt was intended to subsist. In exhibit A-38 dated 30th August, 1971 the first Defendant has complained to the Custodian of the Indian Bank that the local agent has not returned the promissory ones and other concerned documents and therefore instructions may be issued to him to return the same so as to enable him to proceed to collect the amounts from the parties for whom he has given surety and by its letter exhibit A-39, dated 13th September, 1972 the bank has called upon the first Defendant to take delivery of the promissory notes executed by the 37 persons. These letters indicate that the alleged taking over of the liability of the said 37 persons by the first Defendant was on the condition that the first Defendant will collect the amounts due under the promissory notes executed by the said 37 borrowers. Thus, even, if we accept the plea put forward by the learned Counsel for the bank before us at he stage of the appeal after giving up the plea of guarantee that the first Defendant took over the liabilities of the 37 persons and agreed for the adjustment of the same from the amount due to him under the promissory note the question will still remain whether the contract entered into between the Bank and the first Defendant by which the first Defendant took over the liability can be taken to be a new contract by novation without the original debtors being parties thereto.

Exhibit A-38 on which considerable reliance was placed by Mr. Dolia for the Respondent as establishing the plea of novation itself indicates the true nature of the contract, entered into between the bank and the first Defendant. The arrangement debt could be gathered from exhibit A-38 is that in respect of the debts due by the 37 persons the first Defendant will pay over the debt to the bank subject to his having recourse against the original borrowers for the amounts payable by them to the bank. If such an arrangement could be spelt but from exhibit A-38, then the arrangement will fall for want of Consideration for the original debt due by the 37 persons had not been agreed to be extinguished, but on the other hand, it was agreed that the first Defendant will collect the amounts due under the promissory notes from the borrowers instead of the Bank. Such a transaction, even, if it is construed as a novation, will fail for want of consideration as the original debt due by the 37 persons still subsists and the bank can enforce the same as against the said 37 persons as they were not parties to the subsequent arrangement entered into between the bank and the first Defendant. In this view of the matter, we are not inclined to uphold the plea of the learned Counsel for the Respondent based on novation.

We will take up the question whether the plea of novation can be set up at the stage of the appeal without the necessary averment in the plaint. As already pointed out, in the plaint there is no averment which could form the basis for the plea of novation. The Defendants therefore had no opportunity to controvert such a plea in the written statement.

There is also no issue regarding the plea of novation. The learned Counsel for the bank, however, points out that though there are no pleadings and no issue on the plea of novation, the Court below in a way finds the plea of novation established. But after going through the judgment of the Court below, we are not in a position to agree with the learned Counsel for the bank that the Court below, either directly or indirectly dealt with the question of novation. The learned Counsel refers to the following observation of the Court below in paragraph 27 of its judgment:

It is reasonable to hold from the above that Defendants 1 and 2 had thereby agreed to pay the whole liability of a lakh of rupees forming the consideration of exhibit A-1. It may also be pointed out that by executing exhibits A-1 and A-4 the contract has undergone a change and that exhibit A-8 had become useless. It has been clearly found that the Defendants had unequivocally admitted their individual liability as well as the liability of the 37 persons under exhibit A-8, A-4 and A-37. There is practically no evidence worth while on record to show that the suit document is not supported by consideration to the extent of the loan amounts advanced to 37 persons. As such, Defendants land 2 are liable to pay the said amount. Hence I find that exhibit A-1 is true and supported by consideration.

It is not possible for us to consider the observation as relating to the plea of novation. What the Court below save in the extract is that the guarantee agreement exhibit A-8 has been superseded by the execution of the promissory note exhibit A-1 and the subsequent conduct of the Defendants in executing exhibits A-1 to A-4 showed that they have agreed for the adjustment of the amount due by the 37 persons out of the consideration referred in exhibit A-1. This will not, in any way, be taken to establish a contract by novation now pleaded by the Respondent. What the Court below purports to say in the said extract is that whether exhibit A-8 is valid or not, since the Defendants had agreed for the adjustment of the amount due by the 37 person out of the consideration of exhibit A-1, they are bound by such adjustment. Having regard to the fact that the plea of novation has net been raised either in the pleadings or as an issue or at the stage of the trial, the Respondent cannot be allowed to raise a pale of novation at the stage of the appeal. Even otherwise, we have already held that even if the first Defendant has undertaken to pay the dues of the 37 persons, such an undertaking will fail for want of consideration unless it is shown to be a novation and the evidence on record for from establishing the arrangement to be a novation actually established that it is an arrangement entered into exclusively between the Plaintiff and the first Defendant without reference to the original debtors and that the debts due by the original debtors were not intended to be extinguished.

In this view of the matter, we are of the view is at exhibit A-1 should be taken to fail for want of consideration to the extent of Rs. 74,190.56. It has already been pointed out that the consideration for exhibit A-1 has failed so far as the amount advanced to the third Defendant, the liability in respect of which came to Rs. 4,193.19. Therefore the promissory note exhibit A-1 can be taken to have been supported by consideration only to the extent of Rs. 21,616 25 which represents the amount due by Defendant 1 and 2 on their personal borrowings from the bank. The Plaintiff will, therefore, be entitled to claim the said amount with interest as stipulated in the promissory note exhibit A-1 from the date of the promissory note to the date of filing of the suit, at 10� percent per annum from the date of the plaint till the date of the decree of the lower Court and at six per cent per annum from the date of the decree till the date of recovery

The appeal is partly allowed and the decree of the lower court will be modified as indicated above. The patties will pay and receive proportionate costs beth in the suit and in the appeal. Time for payment is there months from today.