Case: H.B. Basavaraj by LRs. and Anr Vs. Canara Bank and Ors

2. The relevant facts, which would assist us in appreciating the controversy involved, are narrated in a nutshell, which are as follows:Lokashikshana Trust (LST) was a public Trust registered under the Bombay Public Trust Act, 1950 which was engaged in the publication of a Kannada daily "Samyukta Karnataka" and some other periodicals. In 1974, the Board of Trustees entered into an agreement with M/s Karnataka Patrika Pvt. Ltd. (hereinafter referred to as "the KPP") for the transfer of publication and printing rights and machineries as also to create a lease in the buildings owned by the Trust. Some interested persons filed a suit being O.S. No. 4/1997 before the Principal District Judge, Dharwad, praying for removal of trustees, scheme for management of the trust, etc. While this suit was pending, the KPP entered into an agreement with M/s Jaya Karnataka News and Printers Pvt. Ltd. – appellant No. 2 (hereinafter referred to as "the JKNP") for transfer of all its rights, interest and liabilities. There was a loan transaction between JKNP and the respondent bank whereby a loan of Rs. 15 lakhs was sanctioned to the former at an interest of 15% p.a. by open cash credit compounded quarterly. Appellant No. 1 along with otherof the said company allegedly executed a demand note. One he same day, JKNP through its Executive Director requested for an Over draft facility of Rs. 5 lakhs which was granted on anpromissory note with an interest of 15% p.a. compounded quarterly. This loan was secured by book debts and appellant no. 1 Basavaraj (since deceased) along with the Executive Director of JKNP also executed a hypothecation agreement to provide collateral security to the bank. Subsequently, JKNP and its Executive Director executed afor a term loan of Rs. 2,86,000/at the same interest rate as before. The appellants herein also executed an agreement of guarantee to the tune of Rs. 13 lakhs with a maximum of Rs. 30 lakhs as seen from ExhibitJKNP became a public limited company on 28th of September 1978. The respondent bank filed a suit being O.S. No. 119/1984 against the appellants for recovery of the loan amount. Appellants contested the suit and denied material allegations. O.S. No. 119/1984 was decreed by the Principal Civil Judge, Hubli at the Trial Court level on 1st of August 1994 directing the appellant to pay Rs. 19,97,839.51 with future interest at 17% p.a. and other reliefs and costs.Meanwhile, an interim order was passed in O.S. No. 4/1997 appointing JKNP as the receiver of the properties in its possession subject to the conditions mentioned in the order. On 9th of September, 1980 the Charity Commissioner, Belgaum was appointed the new receiver. Again the Court at Dharwad relieved the Charity Commissioner of receivership of the property and instead appointed a District Judge to be the receiver and manage the Trust publication and movable properties. Meanwhile, the Governor of Karnataka had issued the Lokashikshana Trust (Taking over of management) Ordinance in 1991 which was later replaced by the Lokashikshana Trust (Taking over of management) Act (hereinafter referred to as "the LST Act"). The LST Act was aimed at taking over the management of the Trust by the State Government due to the prolonged litigation pending before the Courts at first for two years and extendable to the extent of five years. Accordingly, the trust properties came to be vested in the Administrator appointed by the Government. This action of the Government was validated by a Division Bench of the High Court of Karnataka in Shri RK Joshi & Ors v. State of Karnataka [1984(1) KLJ 158] which held that the management of the public trust was a matter of public concern and hence within the ambit of the State Governments powers. Only the explanation to Section 2(c) of the LST Act was declared to be invalid in as much as the same related to the properties sold by the Trust to KPP and which were in the possession of the receiver and, hence, arbitrary. The suits in the High Court were related to three different loan transactions that had taken place between the respondent Banks and the appellants between 1977 and 1981. The first out of these have been taken by the KPP in 1977, the second by JKNP in 1978 and the third loan loan was taken by the administrator appointed by the Government under the LST Act. The subject matter of these appeals has been to decide as to who should be liable to pay the loan amounts. O.S. No. 4/1997 was dismissed by the District Court, Dharwad. The first set of appeals in the High Court had been against the decree of the Trial Court, which was passed against KPP and JKNP regarding a loan of Rs. 90,000/from Syndicate Bank where three different appeals were filed by KPP, JKNP and the Bank separately. The issues gone into by the High Court were multifarious and not required to be delved into at this point of time.

Court's reasoning:
6. An examination of the agreement executed between the appellant Basavaraj (since deceased) and the Bank would clearly show it to be one of a continuing guarantee. Section 129 of The Indian Contract Act, 1872 (hereinafter referred to as "the Act") defines a continuing guarantee as "A guarantee which extends to a series of transactions is called a "continuing guarantee". Section 130 of the Act says that "A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor." A reading of the agreement clearly shows that the guarantee was to continue to all future transactions except when the guarantor disclaimed from his liability through a written statement. The deed also clearly mentions that while between the guarantor and borrower, the guarantor is only a surety; yet between the bank and the guarantor, the surety is the principal debtor and his liability would beto that of thethe present facts and circumstances, we, therefore, do not find any difficulty in affirming the concurrent findings of the High Court and of the trial Court on the point that the agreement executed for the purpose of a continuing liability despite the variation of terms of the contract and in the absence of a specific written document by Basavaraj (since deceased) revoking the guarantee, the guarantee stands and the legal representatives of the deceased are liable to repay the loan.8. With regard to the second issue, the learned counsel for the appellants contended that the contract between JKNP, the Bank and the guarantor Basavaraj had been substituted by a fresh contract by which LST was required to liquidate the amount outstanding. The learned counsel based this on two facts mainly. One was the transfer of the loan accounts from JKNP to LST and the other factor was the deposit of amounts by the receivers appointed by the Court in O.S. no. 4/1977 for liquidation of outstanding amounts of money indeed gives rise to substitution by a new contract. The respondents on the other hand contended that substitution of an old contract by a new one under Section 62 of Act would require the express consent on behalf of both the parties.From the facts and circumstances of this case, however, we are unable to uphold the contentions of the learned counsel for the appellant. There was no record to show that there were withdrawals from the loan account of JKNP from which it could be inferred that the Bank had permitted the receivers to withdraw money. We agree with the High Court in recognizing the fact that only a withdrawal from the said loan account would constitute acquiescence on behalf of the bank to a change in the liability by novation. Mere deposit of amounts by a supposed third party towards liquidation of an outstanding amount cannot ipso facto lead to the novation of a contract.From the facts and circumstances of this case, however, we are unable to uphold the contentions of the learned counsel for the appellant. There was no record to show that there were withdrawals from the loan account of JKNP from which it could be inferred that the Bank had permitted the receivers to withdraw money. We agree with the High Court in recognizing the fact that only a withdrawal from the said loan account would constitute acquiescence on behalf of the bank to a change in the liability by novation. Mere deposit of amounts by a supposed third party towards liquidation of an outstanding amount cannot ipso facto lead to the novation of atherefore, agree with the views expressed by the trial Court and disapprove the finding of the High Court on this count. The Board of Trustees was competent to take any loan, which would be considered to be loan taken by the Trust. In such a case, any loan taken by administrator appointed by the State shall also be deemed as loan taken by the trust and, hence, the trust would be liable to repay theis a complex legal notion, involving a combination of several essential elements, namely, statement to be acted upon, acting on the faith of it, resulting detriment to the actor. Estoppel is often described as a rule of evidence, as indeed it may be so described. But the whole concept is more correctly viewed as a substantive rule of law. Estoppel is different from contract both in its nature and consequences. But the relationship between the parties must also be such that the imputed truth of the statement is a necessary step in the constitution of the cause of action. But the whole case of estoppel fails if the statement is not sufficiently clear and unqualified.14. In the present case, the Bank has granted the loan or proper functioning of the trust and on hypothecation of the properties of the trust itself. From the very beginning, all the transactions which had been entered into had clearly been for the sake of the running of the publications of the "Samyukta Karnataka" and other periodicals like the "Kasturi". In fact, first KPP and then JKNP, both private limited companies were formed for the sole purpose of the management of the running of the business of LST. These companies had been formed because LST was running losses and unable to properly manage its affairs. Even the appointment of receivers and the subsequent transactions entered into by the administrators appointed under the LST Act had been for the purpose of furthering the business concerns of LST itself.In S. Shanmugam Pillai v. K. Shanmugam Pillai (AIR 1972 SC 2069 ), it was observed that there are three classes of estoppels that may arise for consideration; being: (1) that which is embodied in Section 115 of the Evidence Act, (2) election in the strict sense of the term whereby the person electing takes a benefit under the transaction, and (3) ratification i.e. agreeing to abide by the transaction. It might be said that the action of the trust falls under the third category whereby it ratified all actions taken by others and benefiting from the same. Hence, the trust being the sole beneficiary is not only liable for the repayment but is also estopped from denying its liability under the contract.