T.N. and Q. Bank Ltd. vs Official Assignee

Leach, C.J.—The question in this appeal is whether the liquidators of the Travancore National and Quilon Bank Ltd., now in liquidation

under a compulsory winding up order made by this Court on 7th September 1933, are entitled to certain security deposited in the Court of Small

Causes, Madras, or whether the Official Assignee as representing the estate of an insolvent named M. Elayaperumal Naicker is entitled to it. In

Small Cause Suit No. 5185 of 1936 the bank sued one Dr. A. R. Krishnaswami Ayyar and another to recover a sum of Rs. 1728. On 22nd July

1936 the suit was decreed ex parte. Defendant 1 then moved the Court to set aside the decree and on 4th August 1936 it was set aside on terms.

Defendant 1 was to deposit in Court in cash a sum of Rs. 750 or furnish security for this sum to the satisfaction of the Registrar of the Court.

Security was furnished by M. Elayaperumal Naicker, who deposited in Court five shares of the Reserve Bank of India and together with defendant

1 executed a bond in favour of the Court. The condition of the bond is stated in these words: ""Now the condition of this bond is such that if the suit

is decreed as against defendant 1 and if he pays the decreed amount or satisfies the decree debt otherwise as per the terms of the decree to be

passed and complies with all orders of Court that might be passed from time to time, then this bond shall become null and void, otherwise it shall

remain in full force and virtue."" In March 1937 defendant 1 applied to this Court for an order u/s 39, Presidency Small Cause Courts Act, 1882,

and Section 3, City Civil Court and Presidency Small Cause Courts (Amendment) Act, 1916, for the transfer of the case to the City Civil Court.

The application was granted. After the suit had been transferred to the City Civil Court it was renumbered as No. 353 of 1937. On 22nd March

1938, a decree was passed against both the defendants for the payment of the sum of Rs. 1296 with costs. In O.S. No. 325 of 1936 of the City

Civil Court the bank obtained another decree against defendant 1. Here the decretal amount was Rs. 2486. In Small Cause Suit No. 5186 of

1936 of the Court of Small Causes, Madras, the bank obtained a decree against him for the sum of Rs. 292-12-11. On 12th August 1941, Dr.

Krishnaswami Ayyar applied to this Court u/s 234, Companies Act, for an order granting leave to the Official Liquidators to compound with him.

He suggested that the Court should accept in respect of these decrees a composition of two annas in the rupee. The Official Liquidators were

agreeable to an order being passed, but they suggested that the composition should be on the basis of eight annas in the rupee. On 24th October

1941, Venkataramana Rao J. granted leave to the Official Liquidators to compound with Dr. Krishnaswami Ayyar who was to pay to them Rs.

2500 in five monthly instalments of Rs. 500 beginning from 15th November 1941. The Official Liquidators compounded with the debtor on these

terms but he has made no payment to them.

On 14th July 1942, the surety was adjudicated an insolvent and thereupon the Official Assignee applied to the Judge sitting in Insolvency

(Chandrasekhara Ayyar J.) for an order directing the Court of Small Causes to deliver to him the five shares in the Reserve Bank. This application

was made on the ground that the order of 24th October 1941 amounted to a compounding of the debt and the giving of time to the principal

debtor, which relieved the surety of his obligation under the bond. The learned Judge accepted this contention. He was of the opinion that if

Section 135, Contract: Act, did not apply, Section 133 would operate to discharge the surety. We are unable to agree with the learned Judge that

the provisions of the Contract Act with regard to contracts of guarantee apply here. Section 126 of that Act defines a ""contract of guarantee"" as, ""a

contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the

''surety''; the person in respect of whose default the guarantee is given is called ''the principal debtor'' and the person to whom the guarantee is

given is called the ''creditor''."" As pointed out in Madanlal v. Radhakishan AIR 1935 Nag. 258 when a security bond is given to the Court under

the CPC there is no tripartite agreement between the surety, the principal debtor and the creditor, as in the ordinary contract of guarantee. The

surety''s contract is with the Court. In Annadana Jadaya v. Konammal AIR 1933 Mad. 309 this Court held that the sections of the Contract Act

did not apply but the principles underlying them did. This opinion is shared by the Bombay High Court; see Parvatibai Harivallabhdas Vani Vs.

Vinayak Balvant Jangam, . We are bound by Annadana Jadaya v. Konammal AIR 1933 Mad. 309 with which we respectfully agree, and

therefore this appeal has to be decided, not on the provisions of the Contract Act, but on the general principles which underlie its provisions. It is a

fundamental rule of law that a surety is relieved from liability if the creditor compounds or gives time to the principal debtor without his consent.

The surety was not made a party to the application made by Dr. Krishnaswami Ayyar u/s 234, Companies Act, and the order which was passed

on that application was passed with the consent of the creditor. Clearly it amounted to a compounding with the debtor and allowing him time to

pay the reduced amount. Therefore the decision of the learned Judge that the Official Assignee is entitled to the security must be upheld.

We may add that our reference to Parvatibai Harivallabhdas Vani Vs. Vinayak Balvant Jangam, does not imply that we are in agreement with all

that was said there. In one respect the judgment certainly goes further than we are prepared to go. In that case certain execution proceedings had

been adjourned from time to time by orders of the Court pending an appeal. The adjournments extended over a period of six. years. The learned

Judges considered that this amounted to giving time to the debtor, and the fact that the Court was itself responsible for this made no difference. An

order which has the effect of giving time to the debtor may be passed by a Court in spite of strong opposition on the part of the creditor. In such

circumstances is he to lose the benefit of the security? Surely the principles underlying the sections in the Contract Act do not go to this length. The

giving of time by the Court is quite a different matter from the giving of time by the creditor. Of course, if the creditor is a consenting party as was

the creditor in this case, the surety will be relieved of liability unless he also consents. The Official Assignee is entitled to his costs which will come

out of the assets of the bank.