Case: Amrit Lal Goverdhan Lalan Vs. State Bank Of Travancore &amp; Ors

convection it is necessary to consider the provisions of Section 140 of the Indian Contract Act, 1872 which states:"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 (s)."This section embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery in Crythorne v. Swinburne, ( 1807) 14 yes. 160, namely :"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."The language of the section which employs the words "is invested with all the rights which the creditor had against the principal debtor" makes it plain that even without the necessity of a transfer, the law vests those rights in the surety. Section 141 of the Indian Contract Act, 1872 states :"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"As pointed out by this Court in State of Madhva Pradesh v Kaluram. 1967-1 SCR 266 = (AIR 1967 SC 1105 ). the expression "security" in this section is not used in any technical sense, it includes all rights which the creditor has against the property at the date of the contract. The surely is entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability. The surety is therefore on payment of the amount due by the principal debtor entitled to he put in the same position in which the creditor stood in relation to the principal debtor. 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.In Wulff and Billing v. Jay, (1872) 7 QB 756, Hannen J. stated the law as follows :"......... I take it to he established that the defendant became surety upon the faith of there being some real and substantial security pledged, as well as his own credit, to the plaintiff; and he was entitled, therefore, to the benefit of that real and substantial security in the event of his being called on to fulfill his duty as a surety, and to pay the debt for which he had so become surety. He will, however, be discharged from his liability as surety if the creditors have put it out of their power to hand over to the surety the means of recouping himself by the security given by the principal. That doctrine is very clearly expressed in the notes in Rees v. Barrington, 2 White and T. L. C., (4th Ed.) at p. 1002-As a surety, on payment of the debt, is entitled to all the securities of the creditor, whether he is aware of their existence or hot, even though they were given after the contract of suretyship, if the creditor who has had, or ought to have had, them in his full possession or power, loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor, by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands."It is true that Section 141 of the Indian Contract Act has limited the suretys right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety. But subject to this variation, Section 141 of the Indian Contract Act incorporates the rule of English Law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him. Upon the evidence adduced by the parties in this case we are satisfied that there was shortage of goods of the value of Rs. 35,690 brought about by the negligence of the Bank or for some other reason and to that extent there must be deemed to be a loss by the Bank of the securities which the Bank had at the time when the contract of surety was entered into. It follows therefore that the principle of Section 141 of the Indian Contract Act applies to this case and the surety is discharged of the liability to the Bank to the extent of Rs. 35,690. We accordingly hold that the respondent Bank is entitled to a decree against respondent 6, the appellant only to the extent of Rs. 5,243.58 and not to the sum of Rs. 40,933.58 and to proportionate costs.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In our opinion, there is no warrant for the argument of the appellant. It is manifest that the act of giving time to the borrowers to make up the quantity of the goods found to be short on weighment by the Bank cannot be considered to be a "promise to give time" to the borrowers as contemplated by Sec. 135 of the Indian Contract Act. In this connection reference should be made to Clause 9 of Ex. P-1 which provides that the borrowers shall be responsible for the quantity and quality of goods pledged and also for the correctness of the statements and returns furnished to the Bank from time to time. It is stated in Ex. P-1 that the borrowers have declared and agreed that the goods pledged with the Bank have not been actually weighed or valued in order to verify the quantity and quality of the goods pledged. It is in the light of these clauses of the agreement that the act of giving time to the principal debtor has to be considered. The act of the Bank in giving time to the principal debtor to make up the quantity of the goods pledged is not tantamount to the giving of time to the principal debtor for making the payment of the money within the meaning of Section 135 of the Indian Contract Act. What really constitutes giving of time is the extension of the period at which, by the contract between them, the principal debtor was originally obliged to pay the creditor by substituting a new and valid contract between the creditor and the principal debtor to which the surety does not assent.The reason why an agreement to give time discharges the surety is because if after making such an agreement, the creditor were to sue the surety the latter would at once be turned on the principal debtor in breach of the agreement to given time so that the effect of such an agreement is to prevent the surety from either requiring the creditor to call upon the principal debtor to pay of the debt or himself having off the debt, and then suing the principal debtor, thereby causing prejudice to the surety [Rouse v Bradford Banking Co., 1894-2 Ch 32 CA at p. 75. per A L. Smith, L J.]"Thus to substitute for payment in one sum payment by instalments amounts to a giving of time. Again, whenever the taking of a new security from the principal debtor by the creditor operates as a giving of time, the surety is no longer liable, but not where that transaction has no such effect." (Halsburys Laws of England, Vol. 18, p.our opinion, the provisions of Section 1.35 of the Indian Contract Act are not attracted to the present case and the argument of the appellant on this point must be rejected.7. We proceed to consider the next important question arising in this case, namely,whether a portion of the security was lost by the creditor or parted with without the suretys consent and whether the surety is discharged to the extent of the value of the security so lost.It was pointed out on behalf of the appellant that when the quantity of the goods actually in stock was verified with the weekly statement dated April 18, 1957 shortage of goods to the value of Rs. 35,690 was found. The weekly statement dated March 15, 1957 shows that the stock was valued at Rs. 99,991 and odd and in the course of his evidence the Agent of the respondent Bank said that "he did not know how the shortage occurred" and "there was a possibility of defendants 1 to 5 taking away the goods" On behalf of the respondent Bank reference was made to Clause 5 of Ex. P-4 which has already beenis true that Section 141 of the Indian Contract Act has limited the suretys right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety. But subject to this variation, Section 141 of the Indian Contract Act incorporates the rule of English Law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him. Upon the evidence adduced by the parties in this case we are satisfied that there was shortage of goods of the value of Rs. 35,690 brought about by the negligence of the Bank or for some other reason and to that extent there must be deemed to be a loss by the Bank of the securities which the Bank had at the time when the contract of surety was entered into. It follows therefore that the principle of Section 141 of the Indian Contract Act applies to this case and the surety is discharged of the liability to the Bank to the extent of Rs. 35,690. We accordingly hold that the respondent Bank is entitled to a decree against respondent 6, the appellant only to the extent of Rs. 5,243.58 and not to the sum of Rs. 40,933.58 and to proportionate costs.