Union Bank of India, Hyderabad vs M. Anantha Sarma and another

The plaintiff-Bank is the appellant. OS 1251 of 1981 was filed on the file of the II Additional Judge, City Civil Court, Hyderabad, for recovery of Rs.35,495-60 ps. against the defendants.

For the sake convenience the parties in this appeal would be referred to in accordance with their ranking in the suit.

The plaintiff is a Nationalised Bank and the 2nd defendant approached the plaintiff-Bank for a loan of Rs.20,000/- on 8-4-1976 for running business in general stores. The plaintiff-Bank sanctioned the afore-mentioned loan to the 2nd defendant to run business under the name and style of ''M/s. Om Coffee and General Stores'' at Hyderabad. The loan facility provided by the plaintiff is called ''cash credit facility''. The 2nd defendant executed a demand promissory note and also executed hypothecation agreement dated 8-4-1976 in favour of the plaintiff hypothecating stocks in trade of the first defendant. Defendants 3 and 4 stood as sureties to repay the loan and hence they are also jointly liable to repay the loan. Defendants 1 and 2 also signed letters of continuing guarantee in favour of the plaintiff on 8-4-1976. The plaintiff informed the 1 st defendant by its letter dated 9-5-1980 that the outstanding amount payable was Rs.30,360/- and that the 1st defendant was requested to regularise the account. The plaintiff by its letter dated 6-2-1981 informed defendants 3 and 4 about the outstanding amount payable by the 1st defendant and to see that it is cleared. The 3rd defendant by his letter dated 23-2-1981 informed the plaintiff-Bank to take possession of the hypothecated goods of defendants 1 and 2 for realising the amount due to the plaintiff-Bank. The plaintiff through his officers on 31-3-1981 seized the hypothecated stocks in the shop bearing No.2-1-563/1/1 Nallakunta, Hyderabad and sealed shop. Defendants 1 and 2 signed the inventory of the stocks and also gave a letter to the effect that they have voluntarily handed over the stocks and the shop premises for sale by the plaintiff. The 3rd defendant by his letter dated 19-4-1981 requested the plaintiff to inform the progress if any towards the sale of the seized stocks and the balance if any. The 3rd defendant was informed by the plaintiff that the stocks would be disposed of and the balance if any will be informed to the 3rd defendant. It is the contention of the 3rd defendant and also the 4th defendant that inspite of seisure of stocks in trade they did not care to sell the hypothecated goods and had they sold the goods immediately they would have realised the loan amount with interest. The plaintiff has rushed to the Court in posthaste without selling the hypothecated goods and hence the suit is liable to be dismissed,

The trial Court, based on the above pleadings, has framed appropriate issues mainly as to whether the plaintiff is entitled to recover the suit amount and whether the guarantee is subsequently altered and if so defendants 3 and 4 are liable to pay the suit amount.

Based on oral and documentary evidence, the trial Court decreed the suit against defendants 1 and 2 and dismissed the suit against defendants 3 and 4 holding that they are not liable for the suit amount since the contract has been altered without their knowledge. The present appeal has been filed by the appellant-plaintiff contending that the trial Court ought to have decreed the suit against defendants 3 and 4 also.

. At the outset it would be convenient and necessary to refer to the evidence of PW1 in brief, PW1 is an officer of the plaintiff-Bank, He has marked Exs.A1 to A20 documents relating to the suit transaction. Ex-A1 is a letter addressed to the Manager of the plaintiff-Bank signed by the 2nd defendant on behalf of the 1st defendant and it is dated 8-4-1976. In Ex.A1 it was stated that a demand promissory note for Rs.20,000/- was executed by defendants 1 and 2 as security for payment of any cash credit which is at present outstanding and also for the repayment of any cash credited to the extent of Rs.20,000/-. Ex.A2 is the goods hypothecated agreement executed by defendants 1 and 2 in favour of the plaintiff-Bank. Exs.A1 and 2 are dated 8-4-1976. Ex.A3 is the letter of guarantee executed by defendants 3 and 4 in favour of the plaintiff-Bank and it is also dated 8-4-1976. Ex.A3 is the crucial document in this appeal for the reason that the liability of defendants 3 and 4 in respect of the suit transaction, if any, would arise only on the terms and conditions contained in Ex.A3. Ex.A4 is the postal acknowledgment in respect of the letter addressed to the 1st defendant by the plaintiff-Bank. Ex.A5 is the promissory note dated 8-4-1976 executed by defendants 1 and 2 in favour of the plaintiff-Bank for Rs.20,000/-. Ex.A6 is the letter addressed by the plaintiff-Bank to the 1st defendant dated 9-5-1980 and Ex.A7 is another letter dated 22-5-1980. Ex.A8 is another letter by the plaintiff-Bank to the 1st defendant dated 29-8-1980. Ex.A9 is the letter addressed to defendants 3 and 4 by the plaintiff-Bank. Ex,A10 is a letter addressed by the 3rd defendant to plaintiff-Bank, and it is dated 23-2-1981. In short, the plaintiff filed Exs.A1 to A20 for establishing the liability of defendants 1 and 2. Insofar as the liability of defendants 3 and 4 is concerned, Ex.A3 is the important document. The short question that falls for consideration in the present appeal is whether there is a substitution in the place of the original agreement. In this connection it is necessary to refer to the relevant portion of the evidence of PW1 which is as follows:

".... It is clear from Ex.A6 that a sum of Rs.30,000/- was advanced. Yes, we agreed to lend upto Rs.30,000/-. In June, 1979 we substituted the original agreement for Rs.20,000/- into one for Rs.12,000/-. It is true that in Ex.A6 it is mentioned for the last 8 to 10 months there is an outstanding of Rs.30,000/-."

Apart from the afore-mentioned admission, the plaintiff has not filed any further agreement taken from the 1st defendant to the effect that the limit was enhanced to Rs.30,000/- and it was reduced to Rs.12,000/-. Further there is an entry in the statement of account indicating purchase of stamps. That is at page 40 in Ex.A18 as against the date 2-1-1979 Rs.15/- was shown towards the cost of the stamp. PW1 was not able to explain the entries relating to the cost of the stamp and the only inference that can be drawn is that it is debited for purchase of stamps for the value of Rs. 15/- and that it has been utilised for an agreement dated 2-1-1979 from the defendants. When there is a variation or substitution in the agreement, defendants 3 and 4 are entitled to notice and their consent is necessary for such variation or substitution. In this connection the Privy Council in Pratapsingh v. Keshavlal, AIR 1935 PC 21, held as follows:

"The surety, like any other contracting party, cannot be held bound to something for which he has not contracted. If the original parties have expressly agreed to vary the terms of the original contract no further question arises. The original contract has gone, and unless the surety has assented to the new terms there is nothing to which he can be bound, for, the final obligation of the principal debtor will be something different from the obligation which the surely guaranteed. Presumably he is discharged forthwith on the contract being altered without his consent, for the parties have made it impossible for the guaranteed performance to take place."

Thus, it is clear that the plaintiff-Bank has not obtained the consent of defendants 3 and 4 and therefore they are not liable for the suit debt. In another judgment of this Court reported in State Bank of India Vs. Praveen Tanneries and Another, , a Division Bench of this Court has held that by the conduct of the Bank acting in violation of the terms and conditions of the agreement in advancing loans to the firm without notice to surety and in not acting prudently by bringing the securities to sale at the right time and thus allowing the goods to decay and perish and making the securities not available to surety for being proceeded against and thereby resulting in the impairment of surety''s rights the Bank will not be entitled to recover the amount from the sureties. The Division Bench had an occasion to deal with a case the facts of which are identical to the facts of this case and has preferred to the judgment of the Privy Council in Pratapsingh v. Keshavlal, (supra). The Division Bench also had an occasion to refer to the latest decision of the Supreme Court, having a bearing on the facts of the present case, reported in State Bank of Saurashtra Vs. Chitranjan Rangnath Raja and Another, .

From the afore-mentioned decisions it is clear that not only the variance in the terms and conditions of the contract by the creditor without notice to or consent of the surety would discharge the surety from liability but it would equally discharge him from liability if the creditor cannot, on payment by his surety, give him the securities in the same condition as they formerly stood in his hands, thereby rendering impairment.

Sri S. V. Sundar Rajan, the learned Counsel for the appellant-Bank has contended that it is a continuing guarantee and there is no need to give notice to defendants 3 and 4. I am unable to agree with the submission of the learned Counsel for the appellant in view of the clear admission made by the PW1 and I have no hesitation to come to the conclusion that a new contract has been substituted in the place of the old one and that defendants 3 and 4 are entitled to notice and consent. The trial Court has rightly dismissed the suit as against defendants 3 and 4 and I do not find any reason to interfere with the findings of the trial Court.

The appeal, therefore, fails and is accordingly dismissed. There will be no order as to costs.