1 PGK IN THE HIGH COURT OF JUDICATURE AT BOMBAY APPELLATE SIDE Writ Petition No.7087 of 2009 Sadanand Dombaya Amin .. .. Petitioner v/s. The Mogaveera Co-operative Bank Ltd. & anr. .. .. .. Respondents Mr.Umesh Shetty with Ms.Sharila D Souza i/by M/s.Umesh Shetty & Co. for Petitioners. Mr.K.B. Adyanthaya for Respondents. ----- CORAM : SMT.ROSHAN DALVI, J. DATED : 13th January, 2010 P.C. : 1.Heard the learned Counsel for the parties. 2.Rule. Rule is made returnable forthwith. 3.The Petitioner guaranteed the loan granted by Respondent No.1-Bank (the Bank) to Respondent No.2, the principal debtor. Clause 7 of the Agreement of loan/overdraft shows the Agreement of guarantee which is at the foot of the Loan Agreement. Respondent No.2, as the principal debtor, has signed the Loan Agreement on 7th July 1990. The Petitioner has signed at the foot 2 of Clause 7 of the Agreement as the first guarantor. Respondent No.3 has signed as the 2nd guarantor. The signatures of the principal debtor as well as the guarantors have been witnessed by an independent witness. 4.The principal debtor has also signed the receipt of Rs.7 Lakhs taken as loan from the Bank. The Bank took an equitable mortgage of shop/gala No.243 at Mulund (West), in Gobind Udyog Bhawan Industrial Premises Co- operative Society Ltd., Bombay. The share certificate standing in the name of proprietary concern of the principal debtor and the agreement entered into by the principal debtor with his predecessor-in-title, were annexed to the equitable mortgage. The shop of the principal debtor, therefore, came to be mortgaged and formed a part of the security given to the Bank. 5.Further, the Bank executed an Agreement of hypothecation of movable machinery, the Schedule of which shows the description of the machine as per the invoice number mentioned therein together with value of the machine put as Rs.12,94,895/-. It was signed by the principal debtor. 6.These were the documents executed by the principal debtor offering security of 2 properties to the Bank- 3 his shop/gala and his machinery. The other security given to the Bank was the personal guarantees of the Petitioner and Respondent No.3. A separate Deed of Guarantee has not been executed. The Petitioner and Respondent No.3 as such guarantors have merely put their signatures below Clause 7 and the signature of the principal debtor on the application of the loan/overdraft itself. 7.The Bank sued for recovery of the loan which remained fully unpaid. The Bank filed its Dispute in the Co- operative Court No.1 at Mumbai. The Bank, inter alia, averred in that Dispute that two guarantors/sureties guaranteed the amount and that the principal debtor offered to create and created the equitable mortgage in respect of his Gala/shop No.243 described above. The Bank relied upon 6 documents, including the letter of the equitable mortgage, the Agreement of hypothecation dated 17th July 1990 and the Agreement for loan which included, as Clause 7 thereof, the guarantee/surety given by the Petitioner. 8.The Bank prayed, inter alia, that the principal debtor as well as the two guarantors (one being the Petitioner herein) were jointly and severally liable to pay the Bank the sum calculated with interest thereon at the agreed rate. The Bank also applied for a declaration 4 that the repayment of the dues was secured by a valid and subsisting equitable mortgage of the ownership Gala/shop. The Bank also prayed for an order and direction that the principal debtor as well as the two guarantors pay the Disputant Bank jointly and severally the amount mentioned in prayer (a) [wrongly typed as prayer (b)] and the costs of the Dispute by the date fixed for redemption of the mortgaged Gala. The Bank applied for sale by public auction or private treaty of the said Gala towards the repayment of its claim and other incidental reliefs. 9.The Petitioner herein filed his Written Statement disputing his liability. He contended that he was not a borrower or surety but a mere witness. He also contended that the documents were got up. In the alternative, and without prejudice to these defences, in paragraph 6 of his Written Statement, he contended that the Bank had not taken any steps for recovery of the loan by enforcing the securities given by the principal debtor which discharged all the persons from the loan liability. He further contended that there was no liability. 10.The learned Co-operative Court framed 4 issues being, inter alia, whether the Petitioner herein was jointly and severally liable to pay the claim amount to the 5 Bank. Evidence was recorded. In the evidence of the Recovery Officer of the Disputant-Bank the facts with regard to the premises secured by mortgage were brought out in cross-examination. The evidence has disclosed that the Bank had taken the Title Deeds of the property being its share certificate. The Bank did not have any original documents of the mortgaged property. The Bank had not valued the property before advancing the loan. 11.The Bank did not file the Deed of hypothecation on record. The Bank did not re-possess the machinery hypothecated to it. The Bank did not take inspection of the machinery after it was installed. The Bank did not have the stock statement filed by the principal debtor. The Bank Officer did not visit the place of the principal debtor before filing the Dispute to see if the machineries were in the premises or not. The officer also never visited to see if the mortgaged Gala/shop was existent or not. The Bank did not make any inquiry with the Society to ascertain whether the principal debtor was still the owner of the Gala. Upon default committed by the principal debtor, the Bank did not take any action against the mortgaged property. 12.Based upon this evidence, the guarantor contended that he stood discharged as averred in paragraph 6 of his Written Statement. The learned Judge of Co-operative 6 Court No.1 at Mumbai, decreed the Dispute. He held that the principal debtor as well as the two guarantors were jointly and severally liable to pay the Bank the amount claimed by the Bank. The Bank did not seek to enforce the mortgage or the hypothecation. The learned Judge has not granted that relief. It appears that it is not granted as it was not pressed. The Bank has simplicitor pressed the relief of monetary decree of the principal amount together with interest as calculated by the Bank. 13.This Award came to be challenged by the Petitioner herein before the Maharashtra State Co-operative Appellate Court. It was contended, inter alia, by the Petitioner herein in that Appeal that the Bank never informed him about the facilities sanctioned to the principal debtor and he was not aware of any transaction of the Bank with the principal debtor until he was summoned in the trial Court. It is also averred by him as one of the grounds in Appeal that the Bank had made no efforts to enforce the security available to it to realise its dues. He alleged collusion between the Bank and the principal debtor. The Appellate Court considered the liability of the principal debtor as well as the guarantors for the monetary relief granted, whether the Petitioner herein was a witness and not a surety or guarantor and whether the Bank must proceed 7 against the mortgaged and the hypothecated property first. The Appeal has been dismissed, which order is challenged. 14.It is seen that the guarantee is merely by way of Clause 7 in the Loan Agreement. It is simplicitor signed, inter alia, by the Petitioner. Nevertheless, it is a legally enforceable guarantee. The liability of the Petitioner would be co-extensive with that of the principal debtor upon such guarantee. It is also seen that the Bank has obtained 2 other securities. These are of the mortgage of the Gala/shop and of the hypotehcation of the movables being the machineries described in the schedule to the Agreement of hypothecation. The Bank is required to secure and protect the security offered to it for its own execution as well as for transferring the securities to the guarantor, should the Bank call upon the guarantor to discharge his liability first. The Bank must, therefore, see that the security offered by the principal borrower is not lost or impaired, for it to be able to recover the amounts under its co-extensive liability. This obligation of the Bank arises from Section 140 of the Indian Contract Act, which runs thus:- 140. Rights of surety on payment or performance.- 8 Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 15. Consequently, upon the debt being due upon default of payment by the principal debtor, the surety would be called upon to make payment or perform the guarantee. Once that is done, he is invested with all the rights which the Bank, as the creditor, had against the principal debtor. In this case, the rights of the Bank against the principal debtor could be enforced from the securities offered by the principal debtor. These were under the Agreement for mortgage of the machineries as well as the Gala/shop premises. The Petitioner, as the guarantor, whose liability was co-extensive with the principal debtor, would be liable and called upon to discharge the liability upon the Bank reciprocally giving to him the securities to be enforced by him against the principal debtor after the loan is discharged by the guarantor. This investment of the rights granted to the guarantor under Section 140 is to enable the guarantor to successfully exercise his rights against the secured property. 9 16. If this property is not secured for the guarantor, the guarantor would not be entitled to enforce the rights against the principal debtor statutorily invested in him under the aforesaid provision. 17. This is because the surety or guarantor has a right to benefit from the creditor s securities under Section 141 of the Indian Contract Act, which runs thus:- 141. Surety s right to benefit of creditor s securities.- A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. Since he is entitled to the benefit of every security which the creditor has against the principal debtor when the contract of guarantor/surety was entered into, in this case, the Petitioner would be entitled to the benefit of 10 the Agreement of hypothecation and the Agreement of mortgage against the principal debtor. This is, whether or not the Petitioner as guarantor/surety, knows of the existence of the securities. This implies that the Petitioner would be entitled to the benefit of the Agreement for hypothecation and the equitable mortgage whether he knew that those documents were executed or not by the principal debtor at any time in favour of the Bank. Consequently, under the aforesaid section itself, if the creditor loses or parts with the security, the surety would be discharged. Hence if the Bank failed to take the Title Deeds of the property, did not have the original documents, agreement/sale Deed of the principal debtor, had not valued the property, did not inspect or re-possess the machineries, did not take any stock statement, did not even visit the place of the principal debtor being the Gala/shop, which was mortgaged and where the machinery, which was hypothecated, was kept, and did not know whether the Gala was in existence or whether the principal debtor continued to be the owner thereof or take any action against the mortgaged property or the mortgaged property is lost by transfer to the third party by the principal debtor despite the equitable mortgage created in favour of the Bank, or if the hypothecated machinery, which is the other security, is lost or impaired, the Petitioner and Respondent No.3 as sureties would be discharged to the extent of the value of the security under Section 141. The 11 value of the machinery itself, which is reflected in the Schedule of assets of the Agreement of hypothecation, is shown to be over Rs.12 Lacs. The market value of the shop is not shown. The initial loan was Rs.7,00,000/-. The extent of the value of the securities would far exceed the decretal amount of the Bank, including the interest amount. 18. I am told that the shop/gala has been transferred to a third party by the principal debtor despite the equitable mortgage of the shop/gala created by him in favour of the Bank. The principal debtor has left the premises and his whereabouts are not known. In fact the Petitioner alleged collusion between the Bank and the principal debtor in the Appeal itself in which the impugned judgment is passed. 19. Under Section 139 of the Indian Contract Act, upon the creditor impairing the surety s eventual remedy, the surety would stand discharged. Section 139 runs thus:- 139. Discharge of surety by creditor s act or omission impairing surety s eventual remedy. -If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety 12 himself against the principal debtor is thereby impaired, the surety is discharged. 20. It must be appreciated that if the Bank chooses to obtain a money decree against the principal debtor and the guarantor, and chooses to enforce it and against the guarantor in absence of the principal debtor under his co-extensive liability, the Bank, as the creditor, must be able to transfer the rights of the Bank towards the securities offered by the principal debtor to the surety since the surety would have a remedy against the principal debtor by enforcement of the securities offered by the principal debtor. Consequently, if the Bank impairs that eventual remedy also the surety would stand discharged. 21. The purpose and object of these equitable provisions is clear. A creditor is entitled to have his debt secured. The security of his movable and immovable property can be offered by the principal debtor himself. The security also extends to the personal guarantee of another person. The creditor is entitled to look only to the guarantor for repayment, as his liability is co-extensive with the principal debtor, but that the creditor is entitled to do, if the creditor is in a position to hand over the other securities obtained by the creditor from the principal 13 debtor to the guarantor for ultimately executing it against the principal debtor to obtain the remedy eventually. Consequently, the guarantor is given specific statutory rights upon payment of the amount given by the creditor to the principal debtor or upon performance of his guarantee. These are all the rights that the guarantor would get which the creditor initially had. One of the creditor s rights was against the mortgaged or the hypothecated property. That right would then enure for the benefit of the guarantor. If the creditor loses the security, which is the mortgaged or the hypothecated property, or if he impairs the guarantor s eventual remedy, the creditor would, in law and equity, not be entitled to enforce his liability against the guarantor. 22. In this case, the Agreement of loan is simplicitor signed by the Petitioner. He initially claimed to be only the witness. Though it cannot be taken to be dishonestly made as he is shown to have just put one signature on the form of application of loan/overdraft signed by the principal debtor and has not executed any Agreement or Deed of guarantee, he has signed in the column of guarantors and not of witness. Hence his contention that he was merely a witness is incorrect and has been rightly rejected. His alternate defence was that he was discharged as the guarantor from the 14 loan liability as the Bank did not take any steps for enforcing the security. The Bank indeed did not press even for the relief of enforcing the security in the Dispute and none has been granted. The Bank has substantially looked upon and called upon the guarantor to perform the guarantee and discharge the liability. The reciprocal protection, which is given to the guarantor, has been lost and impaired by the Bank. Under these circumstances, it would be illegal as well as inequitable to hold the guarantor liable. 23.The Petitioner s, challenge to the Award of the Co- operative Court as well as the judgment of the Appellate Co-operative Court passed again him, as the guarantor, simplicitor may be correct in view of his co-extensive liability. However, such Award cannot be enforced against the guarantors, including the Petitioner herein, as the guarantors are statutorily discharged from their liability under the guarantee. It is, therefore, contended on behalf of the Petitioner, as the guarantor, that the Award could not have been passed because he stood discharged from the guarantee. That aspect has not been considered either in the Award that is passed or in the appellate order. The Award could have been passed against the Petitioner or Respondent No.2 only if and upon the Bank investing the Petitioner and Respondent No.3 with all the rights 15 which the Bank had against the principal debtor including the shop/gala duly secured under the equitable mortgage. Such Award could not have been passed against the Petitioner or Respondent No.3 as the Bank did various acts inconsistent with the rights of the Petitioner and Respondent No.3 to be subrogated and to obtain their eventual remedy against the securities offered by the principal debtor as reflected in the evidence shown above. Such Award could not have been passed as the securities have been lost and impaired by the Bank. 24.Mr.Adyanthaya argued that the fact that the guarantee was impaired has not been averred in the Written Statement. He also argued that no issue was framed by the Co-operative Court with regard to the impairment of the securities offered to the Bank and hence this aspect cannot now be challenged. An issue whether the guarantee was impaired or not has not been raised. However, the Court framed the issue with regard to the joint and several liability of the guarantors as issue No.1. In any event, this argument is counterproductive. If the Co-operative Court failed to frame a proper issue, and failed to consider it, the Award, which the Bank propounds, can be challenged on that ground itself. 16 25. To show the discharge from the liability, the Petitioner herein has cross-examined the officer of the Bank. In the cross-examination, as set out above, the impairment of the securities of the Bank has been specifically set out. It must be appreciated that the question of whether or not the Petitioner was liable as a guarantor was to be considered. It was the Petitioner s case and his submission that he was not. The Petitioner has to tender evidence to show how he was not. Evidence is not a part of the pleadings. Evidence is not the case of a party. The case of the party is proved by the evidence led by the party. The case of the Petitioner that he was not liable jointly or severally with the principal debtor is made out by his evidence showing the impairment of the securities of the Bank which discharges him from his initial co- extensive liability. Hence upon leading evidence to show that the securities are impaired, the Petitioner s case that he is no longer jointly and severally liable is sought to be made out. 26. The guarantor would stand discharged under Section 141 of the Contract Act, whether or not he knew even of the existence of the security. If the guarantor were to be held liable, and if the creditor would call upon the guarantor to make payment under the Contract, the creditor would have to invest the guarantor with all 17 the rights under the Contract and consequently, the guarantor would be entitled to the securities which the principal debtor had. Even if the guarantor did not know about existence of such securities and if the creditor parted with the securities, the guarantor would be discharged. In this case, admittedly, the Bank had two securities, one of the immovable properties being the shop/gala and the other of the machinery, neither of which is available to be invested in the Petitioner. Doing of any act inconsistent with the rights of the Petitioner is a matter of evidence. That evidence has been led. Admission in the cross- examination by the officer of the Bank shows how the Bank has acted inconsistent with the rights of the Petitioner and omitted to do various things which the Bank has to prudently do for safeguarding the property for itself or in the alternative, for the guarantor. 27. It is argued by Mr.Adyanthaya that the Bank is not required to enforce its securities for recovery of the loan before holding the guarantor liable. He further argued that the contention of the Petitioner in paragraph 6 of his Written Statement filed in the dispute before the Co-operative Court, was that the Bank should have first taken steps for recovery of the loan by enforcing the securities and for not doing so, the Petitioner was discharged from his liability. This 18 contention is legally correct. The Bank is entitled only to obtain a monetary decree against the principal debtor. The Bank is entitled only to obtain a monetary decree against the guarantor. The Bank may sue for monetary decree against both the principal debtor as well as the guarantor, both of whom have joint as well as several liabilities. Their liabilities are co- extensive with one another. However, the Bank must transfer all the securities to the guarantor, if the Bank desires to sue the guarantor and obtain a money decree against the guarantor. The Bank must, therefore, have such securities, as would be enforceable. The Bank has not shown any such security being available. It is because of this that in practice and in equity the Bank proceeds against the secured assets to discharge at least a part of the liability of the principal debtor before enforcing its liability from the guarantor. 28. For the Bank to enforce its claim against the guarantor the securities which are taken by the Bank must be shown to be present and enforceable. And for the Court to pass a decree against the guarantor in a case where securities have been offered by the principal debtor but not proceeded against, the Court must invest the guarantor with the rights which the Bank, as the creditor, had, but which are not sought to 19 be enforced. It is only thus that the joint or several liability of the guarantor could be adjudicated. The order imputing liability upon the guarantor without investing him with the statutory rights which the creditor had but which the creditor has not enforced is to that extent illegal. 29. It must be appreciated that the Petitioner has signed only because he knew the principal debtor. He is stated to be his acquaintance. By a mere signature on the form of the application for loan/overdraft, the Petitioner has been sued as guarantor. This is not a case where the partners of a partnership Firm or the Directors of a private Limited Company which owned certain movable and/or immovable properties have been made guarantors in the Contract. Those cases would be different. In those cases, the impairment of the security by the principal debtor would not be shown because the partners of the