The Bank of Hindustan Ltd. vs N. Govindarajulu Naidu

Vepa Ramesam, Kt. Officiating C.J.

The facts of this second appeal may at first be stated. The 1st defendant executed a promissory note, dated the 28th April, 1930, in favour of

the 2nd defendant for Rs. 2,500 payable 74 days after date, i.e., on or after the 11th July, 1930. The 2nd defendant endorsed it to the plaintiff, the

Bank of Hindustan, Ltd., on the 1st May, 1930. The plaintiff''s case is that he paid full consideration and that he is a holder in due course. He

presented the note (which is described as a hundi in the judgment of the Lower Courts) to the 1st defendant for payment after the due date but the

1st defendant dishonoured it; hence the suit under appeal. The District Munsif gave a decree against both the defendants. On appeal by the 1st

defendant alone, the appeal was allowed so far as the 1st defendant is concerned. The plaintiff files this second appeal against the 1st defendant.

The 1st defendant''s plea was that the suit hundi was an accommodation note, that no consideration passed under it and he was only a surety for

the 2nd defendant, and that as the plaintiff entered into a composition deed with the 2nd defendant he was exonerated from liability in the

transaction. To this argument the plaintiff''s reply was that the 1st defendant was not merely a surety and that, even if he was, under the

composition deed of the second defendant the rights against the 1st defendant were reserved. The District Munsif decided in favour of the plaintiff

on the second plea. On appeal the District Judge also found that the money was really taken by the 2nd defendant and that therefore the note was

really an accommodation note; and he therefore held that the 2nd defendant was the principal debtor and the 1st defendant was the surety. He next

held, differing from the District Munsif, that Section 39 of the Negotiable Instruments Act does not apply to the case of a note and that therefore

the reservation in the composition deed does not help the plaintiff. He refers to three cases, namely, a decision of the Oudh Chief Court (Bellew,

F.W. v. Bank of Upper India, Ltd. (1910) 7 I.C. 727), a decision of this Court (Ramakistnayya v. Kassim ILR (1889) Mad. 172) and the

decision of the House of Lords in Liquidators of Overend Gurney & Co. v. Liquidators of Oriental Financial Corporation (1874) L.R. 7 H.L. 348

and he finally observes in paragraph 5:

This case although it relates to English Law, does, in my opinion, govern the present case and it has not been shown that on this point there is any

difference between the English and Indian Law.

In Second Appeal it is contended for the plaintiff that the 1st defendant is the principal debtor and the 2nd defendant is the surety and that

therefore the composition with the 2nd defendant cannot have the effect of discharging the 1st defendant who is the principal debtor. The

respondent''s reply to the argument is substantially the same as the reasoning of the District Judge, namely, that the principle of English Law applies

to this case, that the English Law does not differ from the Indian Law in this matter, that under the English Law the 2nd defendant would be the

principal debtor and the 1st defendant the surety and that, if so, he is discharged by the further transaction between the plaintiff and the 2nd

defendant. The respective contentions about the plaintiff''s rights against the 1st defendant being reserved urged in the Lower Court have also been

repeated here.

Taking up the first point, it is desirable now to notice what the English Law on the subject is and to see how far, if at all, the Indian Law differs

from the English Law. It seems to me that on the question who is the principal debtor and who is the surety in an accommodation note or

accommodation bill the English Law has fluctuated through five different stages. The earliest case is the decision in Mallet v. Thompson (1804) 5

Esp. 178 : (1804) 170 E.R. 778. In that case the endorsee of the payee for whose accommodation the note was made knowing that it was an

accommodation note entered into a composition deed with him. It was held by Lord Ellenborough that the maker was not discharged. But soon

after Lord Ellenborough seems to have arrived at a different conclusion in two nisi prius cases. In Laxton v. Peat (1809) 2 Camp. 185 : (1809)

170 E.R. 1123 the endorsee of a bill received it* knowing that it was accepted for accommodation of the drawer and he then gave time to the

drawer when it became due upon his paying a part. It was held by Lord Ellenborough that the acceptor was discharged. He held that, as the bill

was an accommodation bill to the knowledge of the endorsee, the acceptor should be considered only as a surety for the drawer and he was

therefore discharged by the endorsee giving time to the principal debtor. Again in another case, Collott v. Haigh (1812) 3 Camp. 281 : (1812) 170

E.R. 1382 Lord Ellenborough held that the acceptor is a surety and the drawer is the principal debtor and giving time to the acceptor would not

discharge the drawer. The doctrine of Lord Ellenborough was soon doubted by Gibbs, J. in Kerrison v. Cooke (1813) 3 Camp. 362 : (1813) 170

E.R. 1411 and by Lord Mansfield in Raggett v. Axmore (1813) 4 Taunt. 730: (1813)128 E.R. 517 and Fentum v. Pocock (1813) 5 Taunt. 192 :

(1813)128 E.R. 660 and held not to apply where the acceptor promised to pay the bill when demand was made at maturity. The decision in

Fentum v. Pocock (1813) 5 Taunt. 192 : 128 E.R. 660 was in the Court of Common Pleas and up to 1853 this judgment of Lord'' Mansfield was

regarded as the settled doctrine of the Courts of Common Law in England, the last of such decisions being the one in Manley v. Boycot (1853) 2

E1. & B1. 46 : 118 E.R. 686 decided just before the introduction of equitable pleas: all the decisions between 1813 and 1853 being noticed in the

footnote ''t'' at page 5 of Rowlatt on ""The Law of Principal and Surety"". The doctrine of the Common Law was only limited to cases where the

creditor at the time of taking the instrument agreed to regard the drawer or the maker of the bill or the note as surety and the acceptor or the payee

as the principal debtor. In equity a wider rule of law prevailed according to which the creditor was constrained to regard the drawer or the maker

as a surety only even when there is no express contract but by notice of the fact that it is an accommodation bill or note; and it was also held that

notice even after the endorsement in favour of the principal debtor will do. One such decision is the case in Ewin v. Lancaster (1865) 6 B.&S. 572

: (1865) 122 E.R. 1306. In the course of the argument Crompton, J. observed that the decision of Lord Mansfield in Fentum v. Pocock (1813) 5

Taunt. 192 : (1813)128 E.R. 660 must be regarded as-virtually overruled. In this case the holder knew by the time of the composition that the note

was really an accommodation note. All the cases are noticed at p. 5 of Rowlatt''s book. This state of uncertainty with some conflict between the

Common Law and the Equity seems to have continued in England until 1894 when Rouse v. Bradford Banking Co. (1894) A.C. 586 was decided

by the House of Lords finally establishing the law. Until that decision as Rowlatt, J. observes (at p. 6, Principal and Surety):

It was doubtful whether a notification to the creditor, after the contract, of the fact that one of a number of debtors had since the contract become,

as between himself and the others, a surety only, would bind the creditor to respect his position as a surety, if it could not be made out that the

creditor had consented to a modification of the original position and actually agreed to regard him as surety.

See Swire v. Redman (1876) 1 Q.B.D. 536. Meanwhile the Indian Legislature passed the Negotiable Instruments Act in 1881. What rule did

the Indian Legislature adopt in this state of uncertainty which prevailed in England ? An attempt must have been made to adopt the better of the

two doctrines. In Daniel on Negotiable Instruments in paragraph 1334 (Vol. II) it is observed:

And even where the holder knew that the apparent principal party was really signing for the accommodation of another, at the time when he

received the instrument, the better opinion is that that circumstance does not alter his rights or duties, as such party has held himself out and

obligated himself in a certain character, and has no just ground to demand or expect greater consideration than that legally incident to that character

which he has assumed. If he intended to insist on the privileges of a surety, he should have refused to bind himself except in a recognised form of

suretyship. Furthermore, it may be observed, that while the indulgence or release of an acceptor (or other principal) materially affects the remedies

of the drawer (or other surety) who is thereby delayed or entirely deprived of recourse against the acceptor upon the bill itself, to which he would

be entitled and upon which he might sue the acceptor on making payment, no such injury can possibly be inflicted on the acceptor for

accommodation by indulgence to or release of the drawer. The acceptor may at any time at or after maturity of the bill pay it, and no matter what

may be the arrangements between the holder and the drawer, sue the latter not upon the bill but for money paid to his use.

Again in paragraph 1335 it is observed:

There is strong authority for what seems to us the better doctrine, that even if the holder knew at the time he received the bill or note that it was

accepted or made for accommodation, his rights and duties are in no respect altered; and no indulgence to or release of a drawer or indorser will

discharge the acceptor or maker.

That is, so early as 1873, when the first edition of Daniel was published, in spite of weighty English and American decisions to the contrary, this

view was considered the better doctrine. This was also the opinion of Story on Promissory Notes, Section 418 and Story on Bills, Section 253.

Now let us turn to what the Indian Legislature has done. Section 37 of the Negotiable Instruments Act says:

The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance and the acceptor are, in the absence of a contract to

the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or

acceptor, as the case may be.

This section makes no distinction between an accommodation note or bill and other notes and bills. One rule of law is laid down for all kinds of

notes and bills. It sweeps away the distinction which seems to have troubled the English Courts between accommodation notes and bills and other

notes and bills. The second circumstance which appears in the section is that the only method of changing the position of the parties is by ""a

contract to the contrary"". This provision sweeps away the doctrine of notice prevailing in the English Courts. Mere knowledge on the part of the

endorsee of the fact that the bill or note is an accommodation note or bill whether the knowledge is at the time of the endorsement or afterwards

has become absolutely irrelevant. All that we have got to see is whether there is ""a contract to the contrary"". Knowledge at the time but not

amounting to such contract has got the same result as if there is no knowledge at all, or if the knowledge is some time after the endorsement. It is

obvious in the face of Section 37 that the rule of law prevailing in the English Law Courts prior to 1853 was adopted by the Indian Legislature and

if we are left to conjecture perhaps because it was thought to be the better doctrine by eminent jurists. But whatever the reason may be, that the

Indian Legislature adopted the common law doctrine of Lord Mansfield in Fentum v. Pocock (1813) 5 Taunt. 192 : (1813) 128 E.R. 660 is plain

from Section 37. It is noticeable that so far as the application of the law of guarantee to the relations between parties to negotiable instruments is

concerned, the subject has not been codified in England there being no sections like Sections 37 and 39 of the Negotiable Instruments Act in the

Bills of Exchange Act. So that, though the law of negotiable instruments is now codified in the Bills of Exchange Act of 1882, so far as the

application of the law of suretyship to parties to negotiable instruments is concerned it is left open for evolution and development by case-law; and

we have seen that it was finally settled only by the decision of the House of Lords in 1894 by adopting the doctrine of the Equity Courts. But long

before 1894, the Indian Legislature has adopted the doctrine of the Common Law Courts. Not only has it not adopted the doctrine that even if the

fact relating to accommodation is not known it is immaterial but it has also gone to the extent that even if it is known at the time of the endorsement

it is equally immaterial. Not knowledge but actual contract to the contrary is the only thing that will effect a reversal of the prima facie position,

namely, that the maker or the acceptor is the principal debtor and the payee or the drawer is the surety. A perusal of Section 37 plainly shows that

in this matter the Indian Law differs from the English Law and that the conclusion of the learned District Judge that there is no difference between

the two is erroneous. The decision in Ratmakistnayya v. Kassim ILR (1889) Mad. 172 appears on a superficial reading to support the respondent

but, if the judgment of Shephard, J. is carefully perused, it is plain that he was perfectly alive to the change made in the Indian Law. In that case at

the time of the endorsement all the facts were known to the endorsee and the circumstances appearing from the evidence were such that the

learned Judge was able to infer that the endorsee agreed to regard the maker as the surety and the payee as the principal debtor. He actually found

that there was ""a contract to the contrary"". At page 175 the learned Judge observed:

It is for the defendant to show that he is not, as he prima facie appears to be, the principal debtor. I think he has sufficiently proved this.

The learned Judge starts on the basis of Section 37 and finally finds ""a contract to the contrary"" and that by reason of that contract the position

of creditor and principal debtor is reversed. At page 177 he observes;

That section (Section 135 of the Contract Act) has to be read with the provisions of the Negotiable Instruments Act; and as here there was--within

the meaning of the Negotiable Instruments Act, Section 37--a ''contract to the contrary'' making defendant a surety instead of principal debtor, the

defendant is entitled to be discharged if he can bring the case within the terms of Section 135 of the Contract Act.

It seems to me that these observations in Shephard, J.''s judgment in Ramakistnayya v. Kassim ILR (1889) Mad. 172, far from being an

authority in favour of the respondent, are really an authority against him. That decision conclusively shows that we must start with the position that

the maker of an accommodation note is the principal debtor and the payee is only a surety and that until ""a contract to the contrary"" appears that is

the prima facie position. In that case there was ""a contract to the contrary"" found on the facts. There is no such ""contract to the contrary"" that has

been pleaded or that can be found in this case. The decision of the lower appellate Court must, therefore, by reason of my conclusion on the first

point, be reversed, and the plaintiff given a decree against the 1st defendant also with costs here and in the lower appellate Court and the decree of

the District Munsif restored.

Coming to the second point, I observe that my learned brothers Venkatasubba Rao and Reilly, JJ. held in Annadana Jadaya v. Konammah

ILR (1932) Mad. 625 : (1932) 64 M.L.J. 386 that entering into an agreement with a principal debtor granting him time will not discharge the

surety if the right against the surety is reserved. Mr. Rajah Aiyar has not contended that that decision is erroneous. He only relies on Section 39 of

the Negotiable Instruments Act. The mere fact that Section 39 of the Negotiable Instruments Act provides in respect of a Bill of Exchange for such

reservation does not show that the main principle recognised as part of the law of contracts does not apply to other negotiable instruments. Section

39 would, therefore, seem to be a provision inserted ex abundanti cautela. On this point also the appeal has got to be allowed.

Venkatasubba Rao, J.

This second appeal has been referred to a Bench by Krishnan Pandalai, J. on the ground that it raises important questions of law. The Lower

Courts have: found, and quite rightly, that the promissory note executed by the 1st defendant in favour of the 2nd is an accommodation note. The

note was endorsed by the payee (the 2nd defendant) in favour of the plaintiff-Bank. At the time when it was so endorsed, the Bank had no notice

that it was an accommodation note; but on a later date they obtained knowledge of the true character of the note. Subsequent to their obtaining

such knowledge, the plaintiffs entered into an arrangement with the 2nd defendant, the effect of which was, that the Bank agreed not to proceed

against him but reserved their rights against the maker of the note. The 1st defendant''s plea is that by reason of the agreement referred to above,

he became discharged. The trial Court has disallowed his plea and passed a decree in favour of the plaintiffs; but the learned District Judge has

reversed the trial Court''s decision and dismissed the suit. The plaintiff-Bank have filed the present second appeal. The question raised is, whether

if the holder of an accommodation note having no notice of its true character at the time of his taking the note, but after notice thereof gives

indulgence to the payee (the party accommodated), he thereby discharges the maker (the accommodation party). Section 37 of the Negotiable

Instruments Act runs thus:

The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to

the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or

acceptor as the case may be.

Under this section the maker of a promissory note is, in the absence of a contract to the contrary, liable to the holder as principal debtor and

the payee as surety. Mr. Rajah Aiyar has most strenuously contended that where between the parties to the note, the normal position is reversed

(i.e., where the payee is the principal debtor and the maker, the surety as in the case of an accommodation note), the holder by giving time to or

releasing the payee, discharges the surety. The short question to be decided is, whether this is the true effect of Section 37.

To sustain his position, Mr. Rajah Aiyar has had to contend that the words "" a contract to the contrary "" in the section refer to a contract

between the maker and the payee. The section deals with the rights of the holder and provides that at his instance the maker shall be liable as

principal debtor. What then, can the contract to the contrary mentioned in the section, have reference to? It must refer to a contract which

displaces the normal right which the holder possesses in law. Moreover, according to this contention, the section goes further than even the rule as

understood in English Law, for under the English decisions, a contract between the maker and the payee is not by itself sufficient, but further the

holder must have notice of it. If Mr. Rajah Aiyar''s argument be accepted, the question of notice on the part of the holder becomes immaterial, as

the moment a note is shown to be an accommodation note, the payee vis-a-vis the holder becomes the principal debtor. As the section stands, it

does not provide that in the case of an accommodation note a different rule shall prevail; it recognises no exception, but enacts in general terms,

that at the instance of a holder the maker shall be liable as principal debtor and the other parties, ""the payee being one such party, as sureties.

The learned Counsel contends that the section must be interpreted in the light of the English Law on the point. This cannot be done for two

reasons: first, the terms of the section being plain and unambiguous, it is not desirable or proper to turn to the English Law for guidance; and

secondly, it is difficult to say with any degree of certainty what the English Law was understood to be by the framers of the Act.

The English Law was fluctuating and the text-books treat the doubts on the point as having been entirely removed, only recently, by the House

of Lords in Rouse v. Bradford Banking Co. (1894) A.C. 586. There are four stages noticeable in the development of the law, so far as the English

decisions go. It was held by Lord Ellenborough at nisi prius that where a bill was accepted for the accommodation of the drawer, the drawer was

to be considered the principal debtor, and the acceptor as his surety; and, therefore, that time given to the drawer by a holder with knowledge of

the accommodation acceptance would discharge the acceptor, but time given to the acceptor would not discharge the drawer (Laxton v. Peat

(1809) 2 Camp. 185 : (1809) 170 E.R. 1123 and Collott v. Haigh (1812) 3 Camp. 281 : (1812) 170 E.R. 1382). This marks the first stage. But

this view was afterwards overruled at law, the acceptor even in the case of accommodation bills being considered as the principal debtor, though

the holder, at the time of making the agreement (giving the indulgence), or even of taking the bill, knew the acceptance to have been without value:

Fentum v. Pocock (1813) 5 Taunt. 192 : (1813) 28 E.R. 660. See also Harrison v. Courtauld (1832) 3 B.& Ad. 36 : (1832) 110 E.R. 14 and

Price v. Edmunds (1830) 10 B. & C. 578 : (1830) 109 E.R. 566. It was otherwise where the holder at the time of taking the instrument actually

agreed to treat the accommodation party as surety only: Manley v. Boycot (1853) 2 E1. & B1. 46 : (1853) 118 E.R. 686. This marks the second

stage. But the equitable doctrine slowly gained ground, that the holder discharges the accommodation party, if after knowledge of his true

character he gives indulgence to the party accommodated; in other words, ""the creditor was constrained to regard the position of the surety not by

contract but by notice only"". (Rowlatt on ""Principal and Surety,"" 2nd Ed., p. 5) : Vide Davies v. Stainbank (1855) 6 De G.M. & G. 679 : (1855)

43 E.R. 1397, Pooley v. Harradine (1857) 7 E1. & B1. 431 : (1857) 119 E.R. 1307, and Greenough v. M''Clelland (1860) 30 L.J.Q.B. 15

Overend Gurney & Co. v. Oriental Finance Co. (1874) L.R. 7 H.L. 348. This marks the third stage. The last and the fourth stage was reached

when the decision was given by the House of Lords in Rouse v. Bradford Banking Co. (1894) A.C. 586, already referred to. Owing to the loose

reporting of Oakley v. Pasheller (1836) 4 C. & F. 207 : (1836) 7 E.R. 80 and the decision in Swire v. Redman (1876) 1 Q.B.D. 536 it was

regarded doubtful whether a notice to the holder given not at the time of his taking the bill but later would bind him to respect the position of the

accommodation party as surety only. But the doubt seems to have been set at rest finally by the decision in Rouse v. Bradford Banking Co. (1894)

A.C. 586. It is now indisputable that, irrespective of any actual assent by the holder, any indulgence given by him after obtaining knowledge of the

real position to the party accommodated, has the effect of discharging the accommodation party, whether the knowledge was obtained at the time

of his taking the note or later. (See Byles on ""Bills of Exchange,"" (1931) 19th Ed., p. 276, where the subject is most lucidly treated; also Rowlatt

on ""Principal and Surety,"" (1926) 2nd Ed., pp. 4 .)

At the time of the enacting of the Negotiable Instruments Act, the English Law was thus in a state of flux; that being so, it is difficult to impute to

the Legislature an intention which is not strictly in accordance with the wording of the section. As I have shown above, the strict doctrine at

Common Law was, that there should be an actual agreement by the holder at the time of taking the instrument to regard the accommodation party

as surety only. (See Rowlatt on ""Principal and Surety,"" p. 4.) The plain construction of Section 37 of the Negotiable Instruments Act leads one to

suppose that it was this view of the English Law that was adopted by the framers of the Act. It must be remembered that in the present case the

creditor obtained knowledge that the note was an accommodation one, not at the time of his taking it but subsequently. In any event, where the

obtaining of the knowledge was after the taking of the note, it cannot be said that the English Law at the time of the passing of the Indian Act could

be regarded as having been finally settled: Swire v. Redman (1876) 1 Q.B.D. 536.

I may in passing refer to Section 132 of the Contract Act (although that section, as it refers to joint debtors, does not apply to the case in

hand) for the purpose of showing that the framers of the Indian Act have not, as regards the law of suretyship, always adhered to the English

principles.

I therefore hold that the agreement entered into between the plaintiff-Bank and the payee of the note did not have the effect of discharging the

1st defendant, the maker.

I have so far held that by reason of Section 37 the maker, even in the case of an accommodation note, remains liable as principal and the

payee as surety only, from the point of view of the holder''s rights. If that be so, as a discharge of the surety does not result in a discharge to the

principal, it follows that the maker, the 1st defendant, continues liable. Granting, however, that Mr. Rajah Aiyar''s contention is well founded, that

the position is inverted in the case of an accommodation note, that is to say, that the 2nd defendant (the payee) must be treated as the principal, it

is conceded that under the agreement in question, the holder''s right to proceed against the maker (on this hypothesis, the surety) has been

reserved. In such a case by giving indulgence to the principal, the creditor does not discharge the surety. I dealt with this point at length recently in

Annadana Jadaya v. Konammal ILR (1932) Mad. 625 : (1932) 64 M.L.J. 386, decided by Reilly, J. and myself. Mr. Rajah Aiyar accepts the

correctness of this decision, but contends that the general law as to the reservation of remedies has no application to the case of negotiable

instruments, except to the limited extent recognised in Section 39 of the Act. That section runs thus:

When the holder of an accepted bill of exchange enters into any contract with the acceptor which, u/s 134 or 13S of the Indian Contract Act,

1872, would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such ease they are not

discharged.

Why the Legislature has thought fit to enact a special section in these terms, it is not easy to tell; but I am not prepared to hold that Section 39

by necessary implication abrogates the law as to the reserving of rights in the case of all negotiable instruments other than bills of exchange dealt

with by it. I think that the proper canon of construction is that contended by Mr. Parthasarathi, the learned Counsel for the plaintiffs (appellants).

Maxwell states this rule of interpretation thus:

Provisions sometimes found in statutes enacting imperfectly or for particular cases only that which was already and more widely the law have

occasionally furnished ground for the contention that an intention to alter the general law was to be inferred from the partial or limited enactment,

resting on the maxim, expressio uniusest exclusio alterius. But that maxim is inapplicable in such cases. The only inference which a Court can draw

from such superfluous provisions (which generally find a place in Acts to meet unfounded objections and idle doubts), is that the Legislature was

either ignorant or unmindful of the real state of the law, or that it acted under the influence of excessive caution. If the law be different from what the

Legislature supposed it to be, the implication arising from the statute, it has been said, cannot operate as a negation of its existence, and any

legislation founded on such a mistake has not the effect of making that law which the Legislature erroneously assumed to be so."" Maxwell on the

Interpretation of Statutes, 7th Ed., p. 268.

I therefore hold that even assuming that the payee is the principal debtor and the maker surety only, the plaintiffs are entitled to a decree against

the 1st defendant, their rights having been expressly reserved by the agreement in question.

In the result, the second appeal is allowed and the suit is decreed with costs throughout.