1 IN THE HIGH COURT OF BOMBAY AT GOA FIRST APPEAL NO. 118 of 1997 State Bank of India, a body corporate constituted under the State Bank of India Act, 1955 and having its Head Office Office at Bombay and one of its Branch at Margao, Goa, duly represented by its Manager, (SIB Division), Shri D.R. Naik, resident of Margao, Goa. ... Appellant. Versus 1. Shri Jairam P. Kamat, Executive Director of M/s. Spark (Goa) Pvt.Ltd., resident of Assnora, Bicholim, North Goa. 2. M/s. Spark (GOA) Pvt. Ltd., a Company constituted under the Companies Act, 1956, having its registered office at Gosalia Building, Ground Floor, Margao, Goa, represented by its Managing Director, Shri Pramod P. Dhond, major in age, resident of Bicholim, Goa. 3. Shri Pramod P. Dhond, Managing Director of R.2, resident of Bailipath, Bicholim, North Goa. 4. Shri Suresh S. Rajadhyax, Director of the Company- R.2, resident of Shirodkar Building, Opp. St. Anne's School, Borda, Margao, Salcete, Goa. ... Respondents. Shri P.P. Singh, Advocate for the Appellant. 2 Shri S.D. Lotlikar, Senior Advocate with Ms. S. Naik, Advocate for the Respondent No.1. CORAM: N. A. BRITTO, J. DATE OF RESERVING THE JUDGMENT: 19.03.2004 DATE OF PRONOUNCING THE JUDGMENT: 22.03.2004 J U D G M E N T: The appellant/State Bank of India has filed the present appeal against the Judgment /Decree in Special Civil Suit No.81/1981 passed by the learned First Additional Civil Judge Senior Division, Margao, by which the Suit filed by the Bank against the defendant No.3 has been dismissed. 2. The said suit filed by the said Bank was earlier decreed against all the defendants by Judgment dated 16.07.1988, but only defendant No.3 (Respondent No.1) preferred an appeal to this Court, being First Appeal No.111/1988, and the Division Bench of this Court by Judgment dated 26.11.1996 allowed the appeal and set aside the said Judgment /Decree dated 16.7.1988 only to the extent it related to the defendant No.3 and directed the learned Civil Judge Senior Division to frame fresh issues in the light of the pleadings of the defendant No.3 and decide the matter afresh according to law. 3. Accordingly the learned First Addl. Civil Judge Senior 3 Division framed as many as eight issues and after the parties represented before him that they did not wish to lead any further evidence, proceeded to decide the suit based on the evidence earlier recorded. 4. The case of the appellant/Bank, briefly stated was that the defendant No.1 (Respondent No.2) was a Company carrying on business of manufacturing agricultural implements, ... etc. having its registered office at Gosalia Building, Margao and its manufacturing premises at B-3-3, St. Jose de Areal Industrial Estate, Margao, Goa of which defendant No.2 (Respondent No.3) was the Managing Director, Defendant No.3 (Respondent No.1) was the Executive Director and defendant No.4 (Respondent No.4) was the Director. Further it was the case of the Bank that in the year 1976 the said defendant Company was granted by the plaintiff at their request cash credit limit of Rs.1 lakh which was secured by stocks for working capital purposes and that the said cash credit facility was irregulary being operated due to financial crisis by the said defendant Company and, as such, the said defendant Company requested the Bank to put their account under the Bank's Rehabilitation Programme to enable the Company to carry out the operations on profitable lines and so the said defendants in November, 1978 approached the Bank and requested the Bank to grant to them a Demand Cash Credit limit of Rs. 2 lakhs i.e. Rs1 lakh for Ghamellas Division and Rs.1 lakh for 4 Stainless Division agreeing to pay to the plaintiff interest on the amount so advanced at the rate of 3.55% p.a. Below State Bank Advance Rate with a minimum of Rs.12.95% p.a. Further agreeing to hypothecate with the Bank movables, goods, book debts and other assets belonging to them. The Bank also stated that the defendants also requested the Bank to grant to them a Clear Term Loan to the extent of Rs.70,000 /- agreeing to pay to the plaintiff interest on the amount so advanced at the rate of 5.50% p.a. below State Bank Advance Rate with a minimum of 11% p.a. And that the Bank accepted the said proposals/requests against the terms and conditions laid down in their letter dated 8.2.1979 and offered to grant to the defendants the said credit facilities. 5. It was the case of the Bank that the defendants in its Board meeting on 9.2.1979 passed a resolsution in order to obtain an advance to the tune of Rs.2 lakh s by way of cash credit, secured by hypothecation pledging of the Company's assets and guarantee of its Directors in their individual capacity, and also a Term Loan of Rs.70,000 /- on terms and conditions laid down by the plaintiff and accordingly the defendants in respect of the said Demand Cash- Credit limit of Rs.2 lakh s, executed on 1.3.1979 an agreement for the grant of Small Industrial Advances and Hypothecation of movables, book debts and other assets and a supplemental Agreement and defendant Nos.2 to 4 signed a Guarantee Agreement on the same date (1.3.1979) 5 guaranteeing the payment in their individual capacity and jointly and severally. It is also the case of the Bank that the defendants in respect of the same Clean Term Loan of Rs.70,000/- executed on the same date (1.3.1979) a General Agreement for the grant of Medium Term Advances to Small Scale Industries and Hypothecation of movables, book debts and other assets. And the defendant Nos.2 to 4, on the same day signed a Guarantee Agreement for Small Industrial Advances, guaranteeing the payment in their individual capacity and jointly and severally. The Bank stated that in view of the defaults committed by the defendants in their obligation under each of the said Agreements, the plaintiff recalled the various amounts lent and advanced under each of the said Agreements and ultimately by their Notice/letter, through their Advocate, dated 11.3.1981 called upon the defendants to pay to the Bank the amount then due in respect of the said Agreements, but defendant No.1 refused the said Notice/letter and defendant Nos.2 to 4 received the same on 13.3.1981, but none of the defendants replied to the said Notice nor tried to repay the dues. The case of the Bank therefore was that there is now due and payable jointly and severally by the defendants to them a sum of Rs.1,11,627.54 under the Agreement relating to the Demand Cash Credit limit of Rs.2 lakh s and a sum of Rs.88,966.29 under the Agreement relating to Clean Term Loan, both inclusive of interest upto 6 11.6.81 plus further interest from 12.6.81 till the date of effective payment. 6. On the other hand, the case of the defendant No.3 was that one Ramesh Sitaram Kanerkar along with defendant Nos.2 and 4 were the guarantors for the repayment of the said Demand Cash Credit of Rs.1 lakh granted to defendant No.1 and that the said Demand Cash Credit limit was not cancelled by the Bank at any time till the filing of the suit and that the outstanding in the said Demand Cash Credit limit together with interest are claimed in the present suit. Defendant No.3 therefore pleaded that the cause of action arose under the Agreement contained in the letter dated 26.2.1976 and that all the defendants were jointly interested in the said cause of action arising under the said letter dated 26.2.1976 and therefore the present suit was bad for multifariousness and non- joinder of necessary party. The defendant No.3 admitted the execution of General Agreement and Ancillary Agreement on 1.3.79 (Exhs.P- 1 and P-4) but denied the execution of the Guarantee Agreement on the same date (Exh.P- 5) and stated that the defendant No.3 was induced to execute the Guarantee Agreement on 5.3.79 without disclosing the contents of the same. Defendant No.3 stated that he signed the Guarantee Agreement in printed form on the assurance of the Bank's Agent that 7 the said guarantee was to effectuate the terms and conditions as aggred to by the Bank and the first defendant in their primary Agreement dated 8.2.79 and therefore the said Guarantee Agreement was void and unenforceable as the same was not supported by consideration. Defendant No.3 also stated that the original consideration for General Agreement both dated 1.3.79 could not form the consideration for the guarantee Agreement dated 5.3.79. Defendant No.3 stated that the said Guarantee Agreement dated 5.3.79 was executed by way of security in terms of primary agreement dated 8.2.1979 and that the defendant No.3 never agreed to execute any guarantee as independent guarantee and/or as different from the security the plaintiff was bound to take from the lst defendant in terms of primary agreement dated 8.2.79. Defendant No.3 stated that the Bank accepted the proposal for Demand Cash Credit facility on the specific condition that the first defendant offered two securities: one of hypothecation of movables i.e. stocks of raw materials to the plaintiff to be kept under lock and key of the Bank to be supervised by the Bank's agent and secondly the personal guarantee of 2 nd, 3 rd and 4 th defendants and that the defendant No.3 agreed to give personal guarantee on this specific undertaking and with the full knowledge of the Bank that the first defendant was offering another security namely mortgage of stocks of raw materials, semi- finished goods and finished products of the first defendant. 8 7. The defendant No.3 admitted the execution of the General Agreement for grant of Medium Term Advances/Loan for Rs.70,000 /- and the Personal Guarantee of Defendant Nos.2, 3 and 4 in respect of the said loan to be granted by the Bank to the first defendant. The defendant No.3 stated that the General Agreement for the grant of Medium Term Advances/Loan and the Personal Guarantee executed has no connection with the outstanding under Demand Cash Credit Account from the Bank to the 1 st defendant dated 26.2.76. Defendant No.3 stated that the General Agreement for grant of Medium Term Advances /Loan did not provide for conversion of outstandings in the first defendant's earlier Demand Cash Credit Account into a term loan for the purpose of the said General Agreement. Defendant No.3 therefore stated that these two accounts were separate,independent and open and the repayment of loan to be granted by the Bank to the first defendant under General Agreement was secured by the personal guarantee of defendant nos.2, 3 and 4 and the repayment of outstandings under Demand Cash Credit was secured by personal guarantee of defendant nos.2, 4 and one Ramesh Sitaram Kanekar. Defendant No.3 stated that the personal guarantee signed by him is void and unenforceable as the same is not supported by consideration. Defendant No.3 stated that the Bank was utterly negligent with respect of the handling of stocks of raw materials, mortgage and the security of raw materials was lost on account of the negligence of the Bank and the plaintiff having lost the security of 9 hypothecated movables and raw materials, the defendant No.3 stood discharged to the extent of the value of the security. The defendant No.3 stated that after the execution of the General Agreement for Medium Term Advances/Loan for Rs.70,000 /- no amount was granted and/or paid by the defendant to the Bank and therefore guarantee given by the defendant No.3 could not be invoked. The defendant No.3 stated that he became Director of the first defendant on 24.11.78 and therefore he had nothing to do with the outstanding in the aforesaid account granted in 1976. Defendant No.3 denied that he was liable to pay Rs.88,966.29 or any part thereof. 8. Before going to the submissions made at the hearing of this appeal, a brief reference is required to be made to the evidence on record. 9. P.W.1 Mahadev Vishnu Kanerkar was the Acting Branch Manager of the Bank and he stated that somewhere in the year 1976 the Bank granted Cash Credit facility to the defendant No.1 upon the defendant executing: (i) General Agreement; (ii) Guarantee Agreement; and (iii) Arrangement Letter. He stated that subsequently they increased the limit of Cash Credit facility granted to the defendants and as a result they cancelled the aforesaid documents and fresh documents were executed and as the defendants were not maintaining the accounts properly and they were facing financial 10 difficulties they felt necessary to increase the limit of the facility and in November, 1978 they finalised rehabilitation programme for defendant No.1 and the Cash Credit facility was thereupon increased frojm Rs.1 lakh to Rs.2 lakhs as the defendants had informed them that they wanted to diversify their activities to mobilise their production of stainless steel. He stated that Rs.1 lakh was granted for existing activity and another Rs.1 lakh was granted for establishing stainless steel division and Rs.70,000 /- was granted as Clean Term loan for the purpose of boosting the production activity and thereupon the defendants executed the documents namely: (i) General Agreement for the Small Scale Industries Advances and Hypothecation of Movables (Exh.P- 1); (ii) Ancillary Agreement (Exh.P- 2) for the grant of Small Advances regarding hypothecation of goods; (iii) Guarantee Agreement (Exh.P- 3); (iv) General Agreement for the grant of Medium Term Advances (Exh.P- 4;) and (v) Another Guarantee Agreement (Exh.P- 5). He has also produced the resolution of the defendant no.1 dated 9.2.79 at Exh.P- 6 and the Arrangement Letter dated 8.2.79 at Exh.P- 7. He has further stated that in respect of the Cash Credit Account a sum of Rs.1,11,627.54 was outstanding and regarding the Term loan a sum of Rs.88,966.29 was outstanding with further interest on both from 12.6.81. In cross- examination he has stated that he could not say what was the outstanding balance due to be paid by the defendants in the Demand Cash Credit loan on 28.2.79. In further cross- examination he stated that the stock 11 hypothecated by the defendants to the Bank was lying in their factory premises and further admitted that they had not advanced any loan after execution of the Agreement (Exh.P- 4). He admitted that the Bank had in its possession one key of the premises of the factory where the hypothecated goods were kept, but he did not know what was the value of the hypothecated assets as on the date of the filing of the suit. As regards the said Mr. Kanerker, he stated that he was the guarantor for the defendant No.1 in the year 1976, but was relieved by the Bank at the instance of the defendants. On the other hand, the defendant No.3 admitted that he became Director of defendant No.1 on 24.11.78 in place of the said Kanerker after he resigned. He stated that before he became the Director, the Bank had given credit facility of Rs.1 lakh to the first defendant and the earlier Directors were guarantors for the credit facility. He admitted that under the rehabilitation programme the Bank offered to give advance of Rs.2 lakhs against hypothecation of goods and Clean Term Loan of Rs.70,000 /- were executed and that the same were at Exhs.P- 1 and P-4. He stated that thereafter on 5.3.1979 he was again called by the Bank and they were asked to execute two guarantee agreements namely Exh.P- 3 and Exh.P- 5 and the said Exh.P- 5 was executed on 5.3.79, but no loan was given by the Bank under the Agreement for Medium Term advance of Rs.70,000 /- . He admitted having received a notice from the Advocate 12 of the Bank and contacted the Bank officials since he was told by the Bank officials at the time of rehabilitation programme that the advance would be given for hypothecation of goods by the first defendant and therefore he asked the Bank (plaintiff) to hand over to him the goods hypothecated to the Bank by first defendant and he was told by the Bank that no goods were hypothecated with the Bank (plaintiff) by the first defendant and therefore he told them that in case he has given the goods, he could not pay the amount. He admitted that he was guarantor to the Bank by way of collateral security only. In cross- examination he admitted that defendant No.1 and other Directors had approached the Bank to put their Company under rehabilitation programme as their Company was running at a loss and that he and the other Directors of the Company had signed the documents in favour of the Bank. 10. It has been submitted by learned Advocate Shri Lotlikar, that the statement of D.W.2 Jairam has gone unchallenged as regards demand made by him to hand over the goods hypothecated to the Bank. However, it is to be noted that D.W.2 Jairam has not specified as to which of the officers of the Bank he met and told them to hand over the said goods when it is an admitted position that the said hypothecated goods were lying in the factory of the defendants. It is also not the case of the defendant No.3 that he had made any demand in writing. Defendant No.3 also did not raise a plea to that 13 effect in his written statement and therefore the defendant No.3 is not to be believed when he states that at his request the Bank refused to hand over the hypothecated goods to him. In the above background three submissions have been made on behalf of the defendant No.3. The first is regarding multifariousness and non- joinder probably of the said R.S.Kanerker . This plea was part of Issue No.1. The learned Civil Judge, Senior Division came to the conclusion that the said Ramesh S. Kanerker was required to be joined as a party to the suit. However, I am not inclined to accept the said conclusion. It is an admitted position that under the rehabilitation scheme, all the defendants had executed fresh documents and, if at all, the suit was filed by the Bank, it was filed based on the said fresh documents executed by the defendants and therefore there was no question of the said R.S. Kanerker being a necessary party to the present suit. The proposal dated 8.2.79 – Exh.P- 7 did stipulate that although the said Kanerker was permitted to retire from the Directorship, he would not be relieved as original guarantor in his personal capacity. But the defendants were fully aware at the time of execution of fresh documents that the same were being executed under the Rehabilitation Scheme and by way of regularisation of the earlier cash credity facility and therefore since the present suit was filed based on documents executed in March, 1979, there was no question of the said Kanerker being a necessary 14 party to the suit. Multifariousness is commonly referred to misjoinder of claims. There was no other claim in this suit except against the present defendants who had executed the said documents. Issue No.1, therefore, ought to have been answered against the defendant No.3. 15. The second plea taken on behalf of defendant No.3 is that there was no consideration for the clean loan of Rs.70,000/- . This was part of Issues Nos.3 and 4. As already seen, defendant No.3 has admitted having gone along with the other Directors to the Bank and having signed the said Deed of Guarantee (Exh.P- 5) on 5.3.1979. He has also admitted that all the defendants had approached the Bank to put their Company under rehabilitation programme and that thereafter they had signed the said documents. There is no doubt that when the said Agreement (Exh.P- 5) was executed there was no actual payment made of Rs.70,000 /- but it is an admitted position the said document was executed by way of regularisation of the earlier advance under the rehabilitation programme and that was sufficient consideration for execution of the said Agreement (Exh.P- 5). 12. Learned Advocate Shri P.P. Singh has placed reliance on the case of Prasanjit Mahtha v. The United Commercial Bank Ltd. (A.I.R. 1979 Patna, 151) wherein it is observed that the very nature of a contract of guarantee does not stipulate for the 15 surety to receive or, for that matter, retain the money or advantage himself as the actual beneficiary is the principal debtor. In my opinion, the guarantee (Exh.P- 5) was executed by way of regularisation of the earlier account under the rehabilitation scheme and therefore the defendants cannot be heard to say it was executed without consideration. This Court in the case of Central Bank of India v. Tarseema Compress Wood Manufacturing Company and others (A.I.R. 19 97 Bombay, 225) has reiterated the legal position that consideration can be either past or present or even future. 13. The third submission made on behalf of the defendant No.3 is that the hypothecated goods were lost on account of the negligence of the Bank. This was part of Issue No.6. Learned Advocate Shri Lotlikar on behalf of the defendant No.3 placed reliance on Section 141 of the Indian Contract Act which reads as follows :- ``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.'' 14. Learned Advocate Shri Lotlikar has further submitted that the security in this case were the hypothecated goods which have been lost by the Bank. Shri Lotlikar has placed reliance on the cases 16 of Amrit Lal Goverdhan Lalan (dead) by his legal representative v. State Bank of Travancore and others (A.I.R. 1968 S.C., 1432) and The State Bank of Saurashtra v. Chitranjan Rangnath Raia and another (A.I.R. 1980 S.C., 1528). 15. In the first case the goods were pledged with the Bank and the Hon'ble Supreme Court in that context observed that: ``The surety will be entitled to every remedy which the creditor has against the principal debtor; to enforce every security and all means of payment; to stand in the place of the creditor ; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon contract but upon a principle of natural justice.'' Further the Hon'ble Supreme Court observed that if the creditor has lost or parted with the security without the consent of the surety the latter is, by the express provision contained in Section 141, discharged to the extent of the value of the security lost or parted with. The Hon'ble Supreme Court therefore concluded that the principle of the Indian Contract Act applies to that case and th e surety was discharged of the liability to the Bank to the extent of Rs.35,690 /- . The second case was again a case of pledge which were kept under lock and key and under the supervision of the Bank and 17 again the Hon'ble Supreme Court upheld the contention that Section 141 was attracted. In this case a reference was made to the case of State of Madhya Pradesh v. Kaluram (A.I.R. 1967 SC 1105). It was a case where the said Kaluram had executed a surety bond undertaking to discharge the liability arising out of any act or omission or negligence or default of a forest contractor whose bid was accepted at an auction held for sale of felled trees and who was required to pay the bid amount in four instalments. The forest contract rules provided for