MANU/SC/0001/1968

Equivalent Citation: AIR1968SC 1432, [1968]3SC R724

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 930 of 1965
Decided On: 11.04.1968
Appellants:Amrit Lal Goverdhan Lalan
Vs.
Respondent:State Bank of Travancore and Ors.
Hon'ble Judges/Coram:
J.C. Shah and Vaidynathier Ramaswami, JJ.
Case Note:
(i) Banking - liability of the surety - Sections 135 and 140 of Indian Contract
Act, 1872 - respondent 3 to 6 as partners of respondent 2 entered into an
agreement with bank to open in book of Bank an account of one lakh -
amount to remain in force till Bank survives - agreement provided that in
event of failure to repay Bank entitled to sell or dispose of all security without
notice - appeal by special leave from judgment of High Court - agreement
between bank and respondent disputed - meaning of - "promise to give time"
- extension of time period at which debtor was originally obliged to pay
creditor - giving time to borrower to make up quantity of goods found short on
weighment does not amount to promise to give time - time given to make up
quantity of goods without consent of surety doesn't absolve surety from his
liability.

(ii) Liability of bank - Sections 140 and141 of Indian Contract Act, 1872 -
whether surety is discharged to extent of value of security lost by creditor -
creditor bank held liable for all securities which were lost by bank without
surety's consent under Section 141 - surety is entitled to security which
creditor has against principal debtor at time when contract entered into.
JUDGMENT
Vaidynathier Ramaswami, J.
1 . This appeal is brought, by special leave, from the judgment of the High Court of
Kerala dated September 11, 1963 in Appeal Suit No. 444 of 1960.
2 . On February 27, 1956 respondents 3 to 6, as partners of respondent No. 2 firm,
entered into an agreement with the then Travancore Forward Bank Ltd. undertaking to
open in the books of the Bank at Ernakulam a Cash Credit Account to the extent of Rs.
1,00,000 to remain in force until closed by the Bank and to be secured by goods to be
pledged with the Bank. The said respondents also agreed that if they failed or neglected
to repay the Bank on demand the amount due to the Bank, it shall be lawful for the
Bank, without any notice to them, to sell or otherwise dispose of all securities, either by
public auction or by private contract and to apply the net proceeds of such sale towards
the liquidation of the debt. It was also agreed that if any balance was still left the Bank

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shall be at liberty to apply any other money in the hands of the Bank standing to the
credit of the said respondents towards repayment of the debt. The agreement between
the Bank and the said respondents is Ex. P1. By cl. 2 of the document the borrowers
agreed not to pledge or encumber the security nor permit any act whereby the security
hereinbefore expressed to be given to the Bank shall be in any way prejudicially
affected. Clause 3 provided as follows :
"That the Borrowers shall with the consent of the Bank be at liberty from time
to time to withdraw any of the goods for the time being pledged to the Bank
and forming part of the Securities the subject of this Agreement provided the
advance value of the said goods is paid into the said account or goods of a
similar nature and of at least equal value, are substituted for the goods so
withdrawn. Provided always that with the previous consent of the Bank the
Borrowers shall be at liberty to withdraw any of the goods for the time being
pledged to the Bank without paying into the said account such advance value as
aforesaid or substituting any goods as aforesaid provided the necessary margin
required hereunder is fully maintained."
3. Clauses 8 and 9 are to the following effect :
"8. That the Borrowers shall make and furnish to the Bank such statements and
returns of the cost and market value of the securities and a full description
thereof and produce such evidence in support thereof as the Bank may from
time to time require and shall maintain, in favour of the Bank a margin of 10
per cent at Bank's discretion between the market value from time to time of the
Securities and the balance due to the Bank for the time being. Such margin
shall be calculated on such valuation of the Securities as fixed by the Bank from
time to time and shall be maintained by the Borrowers either by the delivery of
further securities to be approved by the Bank or by cash payment by the
Borrowers immediately on the market value for the time being of the securities
becoming less than the aggregate of the balance due to the Bank plus the
amount of the margin as calculated above;
9 . That the Borrowers shall be responsible for the quantity and quality of the
goods pledged with the Bank and also for the correctness of Statements and
Returns furnished by them to the Bank from time to time as mentioned above.
The Borrowers have assured the Bank that all information regarding the
quantity, quality, value, etc., and other description of the goods pledged with
the Bank as given in the said statements and returns is or wound be correct and
the Bank has agreed to advance monies under the above account on such
representations. The Borrowers further declare and agree that the goods
pledged with the Bank have not been actually weighed and/or valued and in
order to verify the quantity or quality of the goods pledged or Statements and
Returns furnished by the Borrowers, the Bank shall be at liberty at any time, in
its discretion, to get the goods weighed and valued at the expense of the
Borrowers and the Borrowers agree to accept as conclusive proof the result of
such weighment and valuation as certified by an authorised officer of the Bank.
If, on such weighment and valuation the goods pledged are found to be short
or less than the weight as shown by the Borrowers, or of a lower value so as to
effect the stipulated margin, the Borrowers undertake to make up the deficit on
demand and to reimburse the Bank for all losses, damages or expenses incurred
by the Bank on that account." On March 7, 1956, the appellant executed Ex. P-
4, the letter of guarantee in favour of the Bank, guaranteeing the liability of the

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 borrowers in respect of the cash credit account up to a limit of Rs. 1,00,000
and in respect of liability under bills discounted up to a limit of Rs. 45,000.
Clause 5 of the letter of guarantee reads as follows :
"To the intent that you may obtain satisfaction of the whole of your
claim against the customer, I agree that you may enforce and recover
upon this guarantee the full amount hereby guaranteed and interest
thereon notwithstanding any such proof or composition as aforesaid,
and notwithstanding any other guarantee, security or remedy,
guarantees, securities or remedies, which you may hold or be entitled
to in respect of the sum intended to be hereby secured or any part
thereof, and notwithstanding any charges or interest which may be
debited in your account current with the customer, or in any other
account upon which he may be liable."
5. Respondents 2 to 6 neglected to pay the amount due to the Bank in the said account
and the goods pledged with the Bank were consequently sold with notice to the said
respondents and the proceeds were credited to the account of the respondents. The
amount due to the Bank as on September 30, 1957 was Rs. 73,931.35. Respondents 3
to 5 had a Suspense Account with the Bank to the extent of Rs. 5,000 and the said
amount was adjusted in the account. Respondent No. 6 had a deposit of Rs. 5,000 with
the Bank and the same was also adjusted in the said account. Under the Cash Credit
Account, the balance due to the Bank as on May 21, 1958, stood at Rs. 40,856.34. A
sum of Rs. 77.24 was due to the Bank from respondents 2 to 6 as per short bills
account as on April 23, 1958. The Bank served registered notices of demand on
respondents 2 to 6 as well as the Appellant and on their failure to make the payment of
the amount due the Bank filed a civil suit against the said respondents and the
appellant, being Original Suit No. 171 of 1958 for recovery of Rs. 40,933.58 in the
court of the Subordinate Judge at Ernakulam. Respondents 2 to 6 did not contest the
suit. The appellant, however, contested and filed a written Statement exonerating
himself from the liability on the allegation that the contract of guarantee was discharged
on account of the misconduct of the creditor-bank. The Subordinate Judge of Ernakulam
granted a decree in favour of the Bank as against respondents 2 to 6 and also against
the appellant by his judgment dated December 9, 1958. The judgment of the
Subordinate Judge was confirmed in appeal by the High Court of Kerala on September
11, 1963 in Appeal Suit No. 444 of 1960.
6. During the pendency of the proceedings in the High Court, respondent No. 1, State
Bank of Travancore, a subsidiary of the State Bank of India was substituted in place of
the Travancore Forward Bank Limited as successor-in-interest of the said Bank.
7 . On behalf of the appellant it was contended in the first place that there was a
variation made in the terms of the contract between the principal-debtor and the
creditor in the present case and the appellant was accordingly discharged of his liability
under the contract of guarantee. Reference was made of s. 133 of the Indian Contract
Act which states :
"Any variance, made without the surety's consent in the terms of the contract
between the principal debtor(s) and the creditor, discharges the surety as to
transactions subsequent to the variance".
8. It was pointed out that the maximum limit of Rs. 1,00,000 allowed as credit in Ex. P-
1 was reduced to Rs. 50,000 and that it was again raised to Rs. 1,00,000 subsequently

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without consulting the appellant. The only evidence in support of this contention is
certain entries in the pages of accounts maintained by the Bank of the "limit" as Rs.
50,000. It was also pointed out that the appellant had withdrawn Rs. 5,000 out of Rs.
10,000 deposited by him with the Bank towards security for advances to the firm. But
there is no written agreement between respondent no. 1 Bank on the one side and the
respondent-firm on the other side reducing the limit of cash credit accommodation
under Ex. P-1. In view of the formal record in the agreements, Ex. P-1 and Ex. P-4 it is
difficult to hold that the variation of the terms would have been made without any
written record. The High Court has taken the view that the entry in the books of account
of the Bank might well be a private instruction to the Cashier that advances were not to
be made by him beyond Rs. 50,000 which instruction may not be legally binding upon
the other respondents. No inference may also be drawn from the withdrawal of Rs.
5,000 from the initial deposit of Rs. 10,000 by the appellant. The reason is that there is
no obligation under Ex. P-4 imposed upon the appellant to make any deposit of money
with the Bank and the circumstance that he made an initial deposit of Rs. 10,000 to
reinforce his guarantee or that he withdraw Rs. 5,000 out of the deposit appears to be
quite immaterial. In our opinion, the High Court was right in reaching the conclusion
that there was no variation of the contract between the creditor and the principal debtor
without the consent of the appellant and the provisions of s. 133 of the Indian Contract
Act are not attracted. We accordingly hold that the Counsel for the appellant has been
unable to make good his argument on this aspect of the case.
9. It was contended, in the second place, on behalf of the appellant that respondent no.
1 Bank had given time to respondents 2 to 6 to make up the shortage of the goods
pledged to the value of Rs. 35,690. It appears that under the agreement, Ex. P-1
respondents 2 to 6 had pledged goods which were verified by the employees of the
Bank. When the quantity of the goods actually in stock was verified with the weekly
statement dated April 18, 1957, the shortage of goods to the value of Rs. 35,690 was
found. The Bank immediately requested respondents 2 to 6 to make up the deficit. On
April 23, 1957 the respondent firm intimated that the deficit will be made up within one
month (See Ex. P-13). According to the Bank, one month's time was granted by it to
enable respondents 2 to 6 to make up the deficit in the quantity of goods. P.W. 1, the
Agent of the respondent Bank admitted that within one month the deficit was not made
up and thereafter even though the time for making up the deficit was extended,
respondents 2 to 6 did not, in fact, make up the deficit by supplying goods to the value
of Rs. 35,690. It was contended on behalf of the appellant that the conduct of the Bank
in giving time to the principal-debtor to make up the deficit in the quantity of goods
absolved the appellant of all liability under the guarantee. Reference was made to s.
135 of the Indian Contract Act which states :
"A contract between the creditor and the principal debtor, by which the creditor
makes a composition with, or promises to give time to, or not to sue, the
principal debtor discharges the surety, unless the surety assents to such
contract."
10. 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 s. 135 of the Indian Contract Act. In this
connection reference should be made to cl. 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

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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 s. 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 give 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 off the debt,
or himself paying off the debt, and then suing the principal debtor, thereby causing
prejudice to the surety [Rouse v. Bradford Banking Co. [1894] 2 Ch. 32, per A. L.
Smith, L.J.]. "Thus, to substitute for payment in one sum payment by installments
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." (Halsbury's Laws of England,
Vol. 18, p. 509). In our opinion, the provisions of s. 135 of the Indian Contract Act are
not attracted to the present case and the argument of the appellant on this point must
be rejected.
11. 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
surety's 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 cl. 5 of Ex. P-4 which
has already been quoted. It was contended that on account of this clause in Ex. P-4 the
appellant has opted out of the benefit of s. 141 of the Indian Contract Act. We are
unable to accept the argument put forward by the Attorney-General on behalf of the
respondent Bank. In our opinion, the expression "any security" in cl. 5 of Ex. P-4 should
be properly construed as "any security other than the pledge of goods mentioned in the
primary agreement, Ex. P-1 between the Bank and the firm." We consider that there is
nothing in cl. 5 of Ex. P-4 to indicate that the appellant is not entitled to invoke the
provisions of s. 141 of the Indian Contract Act. In this connection it is necessary to
consider the provisions of s. 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)."
12. This section embodies the general rule of equity expounded by Sir Samuel Romilly
as counsel and accepted by the Court of Chancery in Craythorne v. Swinburne [1807]
14 Ves. 160., namely :

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 "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."
1 3 . 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 pain 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."
1 4 . As pointed out by this Court in State of Madhya Pradesh v. Kaluram
MANU/SC/0068/1966 : [1967]1SCR266 , 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 surety is entitled on payment of the debt or
performance of all that he is liable for 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 be 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 s. 141, discharged to
the extent of the value of the security lost or parted with.
In Wulff and Billing v. Jay L.R. (1872) 7 Q.B. 756. Hannen, J. stated the law as follows
:
"......... I take it to be 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 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 & Tudor's L.C., 4th Edn. 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 not, 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.'"

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15. It is true that s. 141 of the Indian Contract Act has limited the surety's 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, s. 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 s. 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.
16. For these reasons we allow the appeal to the extent indicated above and modify the
decree of the High Court accordingly. The parties will bear their respective costs in this
Court.
17. Appeal allowed.

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