The Indian Bank, Madras vs S. Krishnaswamy and others

Bakthavatsalam, J.—The defendants appeal from a common Judgment of Shanmukham, J., in C.S. Nos. 31 and 33 of 1974.

Originally these suits were instituted in the City Civil Court, Madras, and were transferred to this Court. C.S. No. 31 of 1974 is a suit for a

declaration that the debt or debts in respect of which the respondents/plaintiffs stood liable as sureties or otherwise in respect of the loan to Shree

Bharathy Mills Limited, Pondicherry, for the appellant defendant is are no longer in existence, for a declaration that the arrangement between the

appellant defendant and the principal debtor, Shree Bharathy Mills Ltd. represented by its Authorised Controller on 7-1-1967 and 23-1-1967

discharged the respondents/plaintiffs from all or any liability to the appellant/defendant bank as it, extinguished the original debt in respect of which

the respondents/plaintiffs undertook liability whether as sureties or otherwise, and for a direction to the appellant/defendant bank to handover to

the respondents plaintiff all the documents of title to property, share certificates and life insurance policy. C.S. No. 33 of 1974 is a suit for a

declaration that respondents/plaintiffs'' liability to the appellant/defendant on the over draft account on pledge of shares came to an end on 3-8-

1967, when the respondents tendered Rs. 10.000/- to the appellant and that the appellant had no right to retain the shares pledged, and for return

of all the shares and documents of title to shares namely 120 ordinary Mettur Industries Ltd., shares, 55 jrdinary Mettur Industries Ltd., shares,

3396 ordinary Cauvery Spinning and Weaving Mills shares, 32 preference shares in Cauvery Spinning and Weaving Mills Ltd. and 4350 ordinary

shares in India Cements Ltd. all belonging to the respondents.

It is necessary to set out the facts in C.S. Nos. 31 and 33 of 1974:--

The appellant/defendant bank gave certain financial facilities to Shree Bharathy Mills Limited, Pondicherry such as key loan and open loan, cash

credits, F.X. Loan, overdraft facilities, documentary bills purchase and negotiation of foreign bills. In respect of such loans and facilities extended

by the bank to the said Shree Bharathy Mills Limited Pondicherry, the respondents/plaintiffs acted as sureties, and deposited documents of title to

immovable property belonging to the second respondent/second plaintiff, life insurance policy belonging to the first respondent/first plaintiff and

shares in India Cements Limited, Cauvery Spinning and Weaving Mills Ltd., and Vanguard Insurance Company Limited belonging to the

respondents/plaintiffs as security in their capacity as sureties. The original agreement between the appellant bank and Shree Bharathy Mills Limited

continued from early 1960 till about 1965; thereafter, the respondents had not signed any documents, nor had they renewed their undertaking or

liabilities. In November, 1965, the Principal debtor Shree Bharathy Mills, Pondicherry, was notified under the Industries (Development and

Regulation) Act, 1951 by the Government of India and on 5-5-1966, the Authorised Controller took control of the said Principal debtor. In 1965,

the appellant bank seems to have discovered a short fall of Rs. 19 1/2 lakhs in the key loan, cash credit account, that is to say, there were not

enough stocks in the godown for which the keys were with the bank agent, even though the accounts showed the stocks as available. These facts

were never made known to the respondents/plaintiffs, who were sureties. The appellant bank by way of additional security, took a second

mortgage from the principal debtor, viz. Shree Bharathy Mills Limited, Pondicherry, for Rs. Twenty lakhs on 26-11-1965. This was done without

the knowledge and behind back of the respondents. The appellant had also taken a letter from the persons in management of the principal debtor,

authorising the bank to sell all the pledged goods and textiles at the best possible price and adjust the sale realisation against the various loan

accounts. This was a power given by the principal debtor to the appellant bank on 2-12-1965 and the first respondent concurred in the said

arrangement. The outstandings due to the appellant by the principal debts were stated to be Rs. 37,39,858.44 as on 31-5-1966. After the take

over of the principal debtor company by the Authorised Controller, a fresh arrangement was entered into between the said principal debtor and the

appellant bank on 7-1-1967 and 23-1-1967 in and by which the sale proceeds of the key loan, cash credit account was adjusted to the extent of

Rs. 19,68,282/-and the remaining outstanding liabilities viz. Rs. 20,46,154.44 inclusive of interest on the various accounts were to be consolidated

and debited to a term account which was to be repaid in five yearly instalments commencing from 2-1-1968. Neither the respondents arc parties

nor are they made aware of such arrangement. Consequently, the respondents caused a lawyer''s notice to be sent to the appellant bank, calling

upon it to return the respondents various shares, life insurance policies and documents of title to property, since the loan in respect of which they

were sureties, was no longer in existence and was discharged by reason of the fresh loan arrangement between the appellant bank and the

Authorised Officer of the principal debtor. Though the appellant was promising to allow inspection of documents, the appellant put off the

respondents and their counsel on various pretexts and the documents of which inspection was sought, were not available. The appellant bank had

no right to retain the documents of title to the property, insurance policies and shares belonging to the respondents and are bound to return them to

the respondents. The appellant bank is after the trustees in respect of them. The respondents reserve their right to claim damages for the illegal

detention. Hence the suit for the reliefs stated above.

In C.S. No. 33 of 1974 the facts are:--

The respondents/plaintiffs a registered firm of partnership, had certain loan facilities with the appellant/defendant bank, among which there was an

overdraft account on security of shares. On 20-7-1967, the appellant''s Esplanade Agent called upon the respondents to adjust the amounts due

on the overdraft account and take back the shares at once. The respondents were called upon to pay a sum of Rs. 10,000/- as that was the

amount due then to the appellant bank. The respondents at once sent a cheque for Rs. 10,000/- through their broker M/s. Subramaniam and Co.

for return of the shares pledged with the appellant bank. However, the appellant bank refused to deliver the said shares pledged and purported to

exercise the banker''s lien in respect thereof, stating that the appellant''s letter was a mistake and that the shares could not be released, unless

monies owed by the respondent''s partners in respect of other accounts are settled. The said claim and action of the appellant bank are illegal and

unauthorised and cannot be supported in law. There is no right of lien in respect of a firm on a specific undertaking and contract? The said sum was

sent for the specific purpose of return of the shares under instructions from the appellant''s agent, There is no right over a firm''s shares in respect of

monies due by its partners in their individual names, in capacities other than as partners. The appellant cannot plead mistake on the part of its agent.

Hence the suit for the reliefs stated above.

The defence of the appellant/defendant in C.S. 31/74 was that the respondents/ plaintiffs were not only sureties but also principal debtors and

that as such they continued to be liable for the liabilities incurred by them, by signing the joint and several promissory notes and agreeing to be

liable in their personal capacities. It is not correct to say that all the shares pledged with the appellant bank by way of collateral security for the

advances made and facilities granted to Shree Bharathy Mills Ltd. Pondicherry, belonged exclusively to the respondents. The only shares standing

in the name of the first respondent are 500 shares of Cauvery Spinning and Weaving Mills Limited. The other shares stand in the name of third

parties and as owners of such shares, they had pledged them with the bank by way of collateral securities granted to Shree Bharathy Mills Limited

and as such the respondents are not entitled to ask for the return o''f such securities standing in the name of third parties. The third parties had

further agreed that, notwithstanding that the particular debt for which the shares were given as security became discharged, the appellant bank is

entitled to hold the said shares for other liabilities of Shree Bharathy Mills Ltd. and that the said shares will continue to remain security. The taking

over of Bharathy Mills Ltd., by the Authorised Controller under the Industries (Development and Regulation) Act, 1951 and the agreement

entered into by the appellant and the said Authorised Controller in no way affected the continued legal liability of the respondents. The said

transaction does not discharge the respondents under the promissory note executed by them and the equitable mortgage created by the second

respondent. Such arrangement with Shree Bharathy Mills Limited after it was taken over by the Authorised Controller, was an independent

transaction and does not in fact or in law, amount to a variation of the original contract which has the effect in law of discharging the surely whose

consent was not obtained for such variation. The respondents 1 and 2 are not entitled to ask for the return of all the title deeds relating to the

properlies including those belonging to Chenniappa Mudaliar. 11 is the case of the appellant that even the first respondent and Chenniappa were

not only sureties but have made themselves personally liable for the liabilities of Shree Bharathy Mills Limited being the directors of the said Mills

and had requested the appellant to grant various facilities agreeing to be personally liable for them. The further defence of the appellant was that the

suit as framed is not maintainable in law and the suit is bad for non-joinder of necessary parties. The first respondent being a director was fully

aware of the various steps taken by the Mills after it was taken over by the Authorised Controller. The second mortgage taken over by the

appellant cannot have the legal effect of discharging the sureties. At any rate, no prejudice is really caused to the respondents by taking such a

second mortgage. The arrangement between the Authorised Control-, ler and the appellant does not in any manner effect the liability of the Mills

for the balance due to the bank before the take over. The respondents and their counsel had full inspection of the documents asked for by them.

The suit for bare declaration is clearly unsustainable.

The defence in C.S. No. 33 of 1974 by the appellant was that all the shares pledged to the appellant/defendant do not belong to the plaintiff

firm. Only 32 preference and 3396 ordinary shares of Cauvery Spinning and Weaving Mills Ltd. stood in the name of the respondent firm and the

other shares stood in the name of S. Krishnan alias S. Krishna-swamy and P. Suryanarayana. It is not correct to say that the appellant had no right

of lien over the firm''s shares in respect of monies due by its partners in their individual names. The pledge was made not by the firm alone, but also

by the individual partners in respect of the shares standing in their names. The partners had also signed the letter dt. 18-7-1967 (Ex. D-l) wherein

they agreed that, notwithstanding that the debt for which the shares are specifically pledged as security may at any time become discharged by

payment, the shares shall continue to be security for any other liability or indebtedness or oustanding due by them or in any other account and at

any office of the appellant whether alone or jointly with another and that the appellant shall have the right to treat the shares as security as if they

were pledge to secure such liability, or indebtedness or outstanding, and it was also further agreed that, notwithstanding that the loan account or

overdraft account may be discharged at any time or the overdraft account is brought to credit, the shares pledged shall remain as a continuing

security till all the liabilities of the firm are fully discharged. In view of the specific agreement above referred to and having regard to the shares

being in the names of the individual partners also, the respondents are not entitled to the return of the shares on the adjustment of the overdraft

account alone. Mr. S. Krish-naswamy and Mr. P. Suryanarayana, part- ncrs of the respondents/plaintiffs firm are personally indebted to the firm in

various accounts jointly and severally along with others; as such, the appellant/defendant under the terms of the agreement and in law, is entitled to

retain the shares as security for the other liabilities of M/s. S. Krishnaswamy and P. Suryanarayana either jointly or severally to the bank. This legal

position was communicated as early as 7-8-1967 and it is surprising that the respondents/plaintiffs should have come forward with this suit towards

the end of 1971. This communication of the agent in ignorance of the other liabilities of M/s. S. Krishnaswamy and P. Suryanarayana cannot defeat

the rights of the appellant to retain the shares as security for the other liabilities, notwithstanding the fact that the overdraft account is settled and

completely discharged. So, the respondents are not entitled to the declaration asked for. The suit as framed is not maintainable.

Shanmukham, J. rested his decision upon the issues which are as follows:--

In C.S. No: 31 of 1974:

Issue No. (1) : Whether the liability of the

plaintiffs as sureties had

been extinguished for the

reasons set out in the plaint?

In C.S. No. 33 of 1974:

Issue No. (4) : Is the plaintiff entitled to the

declaration asked for?

(5) Is the plaintiff entitled to

claim return of the shares

standing in plaintiff''s name?

Shanmukham, J. decreed the suit C.S. No. 31 of 1974 with costs as prayed for by the respondents/plaintiffs except that they are entitled to claim

return of the shares and decreed the suit C.S. No. 33 of 1974 as prayed for with cost except that the respondent/ plaintiffs arc entitled to claim

return of the shares, subject to the payment of Rs. 10,000/-to the appellant/defendant.

Mr. Dolia, the learned counsel for appellant bank, submits in O.S.A. No:40 of 1980, that under O.VI R.4, C.P.C. the necessary particulars

should be stated in the pleadings and that it is settled law that evidence could not be let in regard to., particulars not contained in the pleadings. As

such, the learned counsel contends that P.W. 1 Mr. Krishnaswami admits to have signed the tetter Ex. D. 1 dated : 18-7-1967 and that he has not

mentioned anywhere in his prayer or pleadings that he had signed the same without knowing the averments contained therein. The learned counsel

further contends that, if a businessman having a dealing with a bank for 10 years did not care to know the contents and the implication of the

documents signed by him, he cannot turn around and say that he signed it blindly. The learned counsel further contends that on the ground of lack

of pleading and the contents of Ex. D. 1, the respondents cannot plead for any relief in the suit. The learned counsel further submits that under S.

171 of the Contract Act there is an express contract and as such the principle that the security given by the firm cannot be retained for dues by

partners in their individual capacity will apply to the facts of this case. The learned counsel vehemently contends that the approach of the learned

single Judge is not tenable in law, especially when there is neither a pleading nor such a plea raised according to law. The learned counsel further

contends that the learned single Judge ought not to have relied upon the decision in Sayyaparaju Surayya v. Koduri Hondamma 1940 (2) MI.J

682.

With regard to O.S.A. No; 240 of 1986 Mr. Dolia, the learned counsel for appellant contends that there was no ground specifically alleging that

the appellant bank has lost goods worth Rs. 19-1/2 lakhs which was in their custody and hence the surety is discharged. The learned counsel

draws our attention to Ex. D.3, dt. 22-5-1965 in which the first respondent has stated as follows :--

As regards the Bank all of us are separately liable as principal debtors and none of us, our heirs, executors or administrators shall be discharged

or exonerated by any dealings with any one or more of us without any further assent or knowledge of the rest of us, whether by way of granting

time or indulgence or varying, exchanging or releasing any other securities held or to be held by you or by compounding or making other

arrangements or by proving and receiving for any dividend in any bankruptcy proceeding or by any other various (sic) in the terms of the

contract."".

The learned counsel draws our attention to Ss. 133, 134, 136, 139 and 140 of the Contract Act. The learned counsel relied upon a decision in

A.V.S. Perumal Vs. Vadivelu Asari, , in which a Division Bench of this Court has held that in similar circumstances the surety is not discharged and

that the lender is entitled to receive the balance from the surety. The learned counsel further contends that in the instant case the language of the

guarantee bond is more wide and as such by taking additional securities as second mortgage on 7-1-1967 and 23-1-1967 by the Authorised

Controller who represents Bharathi Mills Ltd. or consolidating all the accounts and giving time or indulgence will not discharge the surety. The

learned counsel stresses that the decision of the Bombay High Court in K.R. Chitguppi and Co. Vs. Vinayak Kashinath Khadilkar, which was

relied upon by the learned single Judge, is not relevant in view of the judgment of the Division Bench of this Court. The learned counsel further

relies upon the decision in Sabanayagam, K. V. The Secretary to Government of Tamil Nadu, Housing Department, (1984)1 Lab LJ 87 of

Mohan, J. (as he then was) and Pandurang Mahadeo Kavade and Others Vs. Annaji Balwant Bokil and Others, . which dealt with the point of

waiver so to say that the provisions of the Contract Act referred to above, confer benefits on the surety and it is perfectly open to him to waive

such benefits and such waiver will not be against public policy. The learned counsel further contends that, though Exs. P. 16 to P. 28 were marked

by consent, they did not amount to proof of their contents, relying upon the judgment of this Court reported in A.V.S. Perumal Vs. Vadivelu Asari,

, wherein it has been held that marking of documents by consent only dispenses with the formal proof of the documents but the contents are to be

proved in the manner known to law. The learned counsel relies upon the decision in Karuppanna Thevar (died) and Others Vs. Rajagopala Thevar

and Others, , in which it has been observed as follows:

But agreeing to documents being marked by consent did not mean that the plaintiff accepted the correctness of every statement made by the

doctor in those two documents. The correctness of the allegations contained in the certificate given by the Doctor and in his reply would have to be

proved only in the recognised ways as contained in the Evidence Act. Merely putting the documents to the witness will not amount to proof of Ihe

documents.

As such, the learned counsel contends that in the instant case there is no novation of the original contract. The learned counsel further contends that

the respondents have accepted in their deposition that the appellant took permission to sell the goods and adjust the same towards the dues. Mr.

Dolia, the learned counsel for the appellant, refers to two passages in Rowlatt on Principal and Surety (Fourth Edition -- 1982) at pages 151 and

175 which run as follows:--

Thus a surety may find that the terms of the guarantee provide that he shall not have benefit of the securities. However the terms often found in

guarantee that the creditor may treat the surety should not be discharged by any giving of time or act or omission of the creditor which would

normally discharge the surety, do not disentitle the surety to the creditors securities if and when the surely pays.....

......the surety remains bound where either the guarantee authorises the indulgence which has been given to the principal or the surety has assented

to it at the time, or even upon hearing of it afterwards has ratified it or promised to pay notwithstanding where a guarantee expressly provides that

the creditor may give time or enter into a composition with the debtor, the right of the creditor against the surety remains by virtue of that clause

whether the latter is precluded from having any remedy over against the debtor or not....

Per contra, Mr. Vedantham Srini-vasan, the learned counsel for respondents, submits, in O.S.A. No: 40 of 1980, that the appellant/defendant

bank has no right in law to claim a lien or a set off in respect of a firm on a specific undertaking and contract since the sum of Rs. 10,000/- was

sent for the specific purpose of return of the shares under instructions from the appellant''s agent. The learned counsel vehemently contends that

there is no right of lien over a firm''s share in respect of monies due by its partners in their individual names, in capacities other than as partners. The

learned counsel draws our attention to paragraph 4 of the plaint, in support of his argument. The learned counsel relies upon Tannan - Banking

Law and Practice (16th Edition) for the proposition that there was no lien on money deposited for a specific purpose and credit and liability must

be in the same rights. The learned counsel contends that a banker cannot set off any credit balance of a partnership account against monies due

from one or more of its partners in their individual accounts. The learned counsel further contends that as per O. VIII R. 6, C.P.C. there will be no

set off unless they be in the same capacity and in the same right. The learned counsel further contends that both oral and documentary evidence of

the plaintiffs/respondents stands unchallenged as found by the learned single Judge, and there is no proof by the appellant bank that monies are

owed by the partners in any other capacity also and as such the bank cannot rely upon a defunct document of lien. The learned counsel further

contends that the clause cited in the decision relied upon by the learned counsel for appellant bank, is only an enabling clause which gives a right to

set off but not in any other capacity whatsoever.

Mr. Vedantham Srinivasan, the learned counsel for respondents, submits, in so far as O.S.A. No. 240 of 1986 is concerned, that the

respondents arc only sureties and not principal debtors, that it is settled law, after the pronouncement of the Supreme Court in S. Chattanatha

Karayalar v. Central Hank of India, AIR 1965 SC 1856 that the sureties were discharged from their liabilities by the negligence of the appellant

bank in losing Rs. 19-1/2 lakhs which was not denied and as such Ss. 141 and 143 of the Contract Act arc attracted. It is further submitted by the

learned counsel for respondents that the respondents were discharged by virtue of the fresh arrangement between the appellant bank and the

principal debtor represented by the Union of India to which the respondents were neither parties nor were they made aware thereof. It is further

submitted by the learned counsel for respondents that these two agreements are dated : 7-1-1967 and 23-1-1967 and that they are admitted by

P.W. 1 and D,W. 1 in their evidences. It is further submitted by the learned counsel that, on the principle of novation also, ihe respondents cannot

be made liable. The learned counsel relies upon S. 133 of the Contract Act and submits that there was no exclusion by a contract to the contrary in

this case and cited the decision in K.R. Chitguppi and Co. Vs. Vinayak Kashinath Khadilkar, for that proposition.

We have considered the arguments of both counsel. As far as O.S.A. No. 240 of 1986 is concerned, we find that the respondents/ plaintiffs

gave certain securities as sureties in respect of certain financial facilities given by the appellant bank to Sree Bharathy Mills Ltd. Pondichcrry. They

gave documents of title to immovable property, L.I.C. Policy and shares in certain companies in their capacity as sureties. After 1965, the

respondents have not signed any documents nor renewed their undertaking as sureties to the appellant bank in respect of loans or in respect of

their liabilities. In November 1965, the principal debtor Sree Bharathy Mills Ltd., was notified under the Industries (Development and Regulation)

Act and an Authorised Controller was appointed by Government of India to take charge of the company. On 5-5-1966 the Authorised Controller

took control. It seems in November 1965 there was a shortfall of Rs. 19-1/2 lakhs in respect of the K.L.C.C. account in respect of securities

under the lock and key of the appellant bank. The respondents were not informed about the same. But the appellant bank took additional security

by way of second mortgage from Bharathy Mills on 26-11-1965 without fhe knowledge of the respondents, who were not Parties to the

arrangement and without informing the respondents about such shortfall. The appellant bank again entered into a fresh arrangement with the

principal debtor on 7-1-1967 and 23-1-1967 by which all outstanding accounts were adjusted and converted into a term loan for Rs. 35 lakhs.

To this arrangement also the respondents were not parties and they did not have the knowledge also about the same. We are of the view that the

respondents are only sureties and not principal debtors, and that the sureties were discharged from their liabilities by the negligence of the bank in

losing Rs. 19-1/2 lakhs worth of goods in their custody which was not denied. In Amrit Lal Goverdhan Lalan Vs. State Bank of Travancore and

Others, , where a creditor lost part of security due to its negligence or for some other reason, it was held that the surety was discharged to that

extent. In our view, the respondents were discharged by virtue of the fresh agreement between the appellant bank and the principal debtor

represented by Union of Jndia to which the respondents sureties were neither parties nor were they made aware thereof. These two agreements

dated; 7-1-1967 and 23-1-1967 were admitted by D.W. 1 in the course of his cross-examination which runs as follows: -

Q: And the Bank said that it will give the term loan of Rs. 35 lacs after converting the existing balance into a fresh loan and after adjusting a

shortfall of Rs. 19 lacs of the subsisting amount?

A: Yes.........

Q : Therefore your statement that the Co-obligants are still liable which you said in your Chief-examination, cannot be correct, because the old

loan has been merged, into the new loan advanced by the bank?

A : At the time of sanctioning of loan, it was agreed that, the old debt should be merged into the new loan. But, for this shortfall of Rs. 19 lacs for

which a simple mortgage was taken, the Authorised Controller did not agree to undertake the liability of short fall.

Q: After that date, did you inform the plaintiff or any one of the co-obligants that the Authorised Controller has gone back from the contract and

refused to accept the shortfall. Have you informed any of the plaintiffs?

A: 1 do not remember to have seen any such documents in the files......

It is well settled that under S. 62 of the Contract Act, if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it,

the original contract need not be performed. In Commercial Bank of Tasmania v. Jones, (1893) AC 313 the principle is set out succinctly.

Where a creditor released his principal debtor and accepted a third party as full debtor in his stand, and the surety for the former debt or agreed

to give a guarantee for the latter, and to continue his former guarantee until he did so, and then died without having given it:--

Held, in an action by the creditor against his executors, that, the former debt having been extinguished by the release, the remedy against the

deceased was gone.

Novation of debt operates as a complete release of the original debtor, and cannot be construed as a mere covenant not to sue him.

Under S. 153 of the Contract Act, any variance, made without the surety''s consent in the terms of the contract between the principal debtor and

the creditor, discharges the surety as to transactions subsequent to the variance. (See Pollock and Mulla on Contract --- 10th Edition at page

1040).

Mr. Dolia, the learned counsel for appellant bank, has relied upon the decision of a Division Bench of this Court in A.R. Krishnaswami Ayyar

v. The Travancore National and Qwilon Bank. Limited, (U.R (1940) Mad 757 : AIR 1940 Mad 437That case turns upon the construction of Cl.

No. 9 of Exhibit I, a surety bond. In those circumstances, the Division Bench held that the surety was not discharged and that the lender was

entitled to receive balance of the debt from the surety. On the facts of this case, we are of the view, that, unless the sureties had expressly bound

themselves unto the creditor even in the case of the creditor''s negligence, the appellant-bank cannot take advantage of the covenant in Ex. D.3 to

fasten the liability of the respondents as sureties. We are not able to appreciate the arguments of Mr. Dolia, the learned Counsel for appellant, that

the sureties bad waived the benefits conferred under Ss. 133, 134, 136, 139 and 140 of the Contract Act. We are of the view that the decision

relied upon by the learned Counsel for appellant-bank, mentioned above, will not apply to the facts of this case.

We are entirely in agreement with the view of the learned Judge that the appellant-bank is not entitled to hold the respondents liable as

principal debtors taking advantage of the covenant contained Ex. D.3, The decision in K.R. Chitguppi and Co. Vs. Vinayak Kashinath Khadilkar,

has been rightly relied upon by the learned Judge. In Amrit Lal Goverdhan Lalan Vs. State Bank of Travancore and Others, , the Supreme Court

has laid down as follows:

Under S. 140 of the Contract Act the surety is, on payment of the amount due by the principal debtor, entitled to be put in the same position in

which the creditor stood in relation to the principal debtor. Under S. 141 of the Act, the surety has a right to the securities held by the creditor at

the date when he has become surety. The word ''security'' is not used in any technical sense and includes all rights which the creditor has against

the property at the date of the contract. Therefore, if the creditor has lost or parted with the security without the consent of the surety, the latter is

by the express provisions contained in S. 141, discharged to the extent of the value of the security lost or parted with.

Therefore, we are of the view that there is no escape from the conclusion that to the extent of Rs. 19-1/2 lacs, the appellant-bank cannot hold the

respondents liable as guarantors. We are of the view that, in any event, there was a fresh arrangement between the appellant-bank and the Central

Government and it has brought about a new contract whereby the original contract of guarantee stood rescinded. At this juncture, it is important to

note that to a series of letters written by respondents which are marked as Exs. P. 16 to P.28, the appellant-bank has not at all replied. It is not

and could not be the case of the appellant-bank, that the letters produced by the respondents as documentary evidence in this case, were got up

for the purpose of this case. We are not satisfied with the evidence of D.W. 1 that the bank had acted fairly and cared to produce all the

documents before this Court. We have to agree with the learned Judge that the appellant/defendant-bank was satisfied with the guarantee executed

by the President of India and had closed the accounts of the respondents and was rest content to look to the President of India for all the liabilities

that were occasioned by the principal debtor-Mills. In our view, the bank''s conduct in accepting the guarantee from the President of India, after

taking over of the Mills under the Industries (Development and Regulation) Act, 1951 put an end to the original contract of guarantee executed by

the respondents.

Insofar as O.S.A. No. 40 of 1980 is concerned, we are of the view that the appellant-bank has no right to claim a set-off in respect of a firm

on a specific undertaking and contract, since the sum of Rs. 10,000/-was sent for the purpose of return of the shares under instructions from the

appellant''s agent. In para 4 of the plaint in C.S. No. 33 of 1974, it has been clearly pleaded that there is no right of lien over a firm''s share in

respect of monies due by its partners in their individual names, in capacities other than as partners and that the defendant-bank cannot plead

mistake on the part of its agent. It is useful to refer to a passage in Banking Law and Practice in India by M. L. Tannan (Fourteenth Edition-1973)

at page 137 which runs as follows .-

Credit and Liability must be in the same Rights:-- No lien arises on the current account balance or the deposit account of a partner in respect of a

debt due from the firm, as the credit on the one hand and the liability on the other do not exist in the same rights (Wolstenhokm v. Sheffield Bank,

(1886) 54 LT 746Similarly, a banker cannot set-off any credit balance of a partnership account against moneys due from one or more of its

partners on their individual accounts.

Moreover, under 0. VIII, R. 6, C.P.C. there is no set-off unless they are in the same capacity and in the same right. (See Official Assignee v.

Harikrishnaand Sons, AIR 1935 Rangoon 201. In A.S.S.R. St. Veerappa Chettiar Vs. J.V. Pirrie and Another, , it has been held that the amounts

can be set-off if on evidence it can be shown that A is solely entitled to the amount standing in name of A and B. Section 171 of the Contract Act

deals with general Hen of bankers, factors, wharfingers, attorneys and policy-brokers and it is stated therein that where a member of a firm

deposited a lease to secure a particular advance to the firm, it was held that the banker had no lien for the general balance due from the firm. In our

view, both the oral and documentary evidence of respondents in this case stands unchallenged, as found by the learned single Judge. We arc of the

view that there was no proof by the appellant-bank that monies are owed by the partners in any other capacity also. It has to be seen that on 20-

7-1967 the appellant''s Esplanade Agent called upon the respondents to adjust the amounts due on the over-draft account and take back the

shares at once and that after that adjustment only a sum of Rs. 10,000/- was due. In our view, the learned single Judge is right in holding that there

is no consideration for the respondents-firm to stand sureties for its guarantors. Finally we are not impressed with the arguments of Mr. Dolia, the

learned Counsel for appellant-bank, that there are no pleadings under O. VI, R. 4, C.P.C. A reading of the plaints in these two cases shows that

everything is pleaded elaborately. In our view, only the oral and documentary evidence on the side of the appellant-bank are lacking. We have

already stated how irresponsible the appellant-bank was in not replying Exs. P. 16 to P. 28.

In view of our aforesaid conclusion we agree with the learned single Judge and dismiss both the appeals with costs.

Appeals dismissed.