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TMI Blog1943 (8) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... lant Bushayya being merely the surety for them. Although strictly under Section 37, Negotiable Instruments Act, the maker would be the principal debtor and the endorsers the sureties yet it is clear that there was here a contract to the contrary within the meaning of the section. It may be mentioned that the transaction in question was in accordance with the method ordinarily adopted by the Imperial Bank whenever it advanced loans of this type. There were two other transactions similar in nature, the sureties however being different. The earlier of these is evidenced by a promissory note dated 26th April 1930 for ₹ 6000 executed by Hanumara Venkayya in favour of the same debtors, Potluri Suryanarayana brothers, Chitta Venkateswarlu and Anne Veerayya and by them endorsed in favour of the Imperial Bank. The later one is represented by a promissory note dated 19th May 1930 for ₹ 5000 executed by Koduri Janakiramayya and Uppalapati Janakiramayya in favour of the same individuals as in the other two promissory notes and similarly endorsed by them in favour of the bank. The business relationship between the several payees under the promissory notes is not disclosed in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th August 1934 and 9th January 1935 Bushayya discharged the decree debt in full by payment in instalments of a total sum of ₹ 8878-3-0. Hanumara Venkayya, who was the surety in respect of the promissory note of 26th April 1930 and who was one of the judgment-debtors in O.S. NO. 44 of 1933 the suit instituted by the Imperial Bank to enforce it, similarly discharged the decree by payment of a sum of ₹ 5726-10-6 on several dates between 25th October 1934 and 25th June 1935. But the sureties in respect of the third promissory note dated 19th May 1930 of ₹ 5000 failed to discharge the decree passed against them in O.S. No. 45 of 1933. There were negotiations between the bank on the one hand and one Yemeni Satyanarayanamurthi, the brother-in-law of Potluri Suryanarayana on the other for the transfer of the decree in O.S. No. 45 of 1933 and the mortgage aforesaid in favour of the former and accordingly a sum of ₹ 500 was paid by him on 18th August 1936 and a further sum of ₹ 3250 was paid on 15th September 1936. On thus receiving a total sum of ₹ 3750 the bank assigned the decree in O.S. No. 45 of 1933 as well as the mortgaged deed dated 15th April 1931 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the proportion which the amount he has paid bears to the full amount due on the mortgage. Hanumara Venkayya being entitled to a similar interest in respect of the payments made by him to discharge the two decrees in O.S. Nos. 44 and 45 of 1933. This indeed is precisely the appellant's claim before us as adumbrated by his learned advocate. It is resisted by Potluri Suryanarayana and the members of his family who are defendants 1 to 5-principal debtors - and also by Hanumara Venkayya who is defendant 10. Defendants 6 to 9 are members of the family of Anne Veerayya who is now dead. The Imperial Bank of India, Bezwada, was joined as defendant 11. But in the events which have happened it has no interest in the litigation and hence was exonerated from the suit. Defendants l to 5 pleaded that they were not in fact partners with Chitta Venkateswarlu and Anne Veerayya as stated in Ex. F, the letter passed to the Imperial Bank on 24th July 1928. Defendant 1 stated that he was never in fact a partner and that he gave the letter merely to oblige Anne Veerayya and Chitta Venkateswarlu so that their firm might obtain loans from the bank for the purpose of their business. He also stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try, it is perfectly clear that a deed of partnership came into existence on 15th July 1928. The entry Ex. 15B, takes the matter further. It shows that a sum of ₹ 2000 was credited to defendant l's family, being, the amount of commission settled to be paid to you upto this day in accordance with the deed of partnership executed on 15th July 1928. Thus, there can be no doubt that there was, as disclosed by these entries, a deed of partnership which governed the rights and liabilities of defendant 1 and the other partners in the firm. The deed, has been suppressed and a mendacious explanation was sought to be given by defendant 1 in the box. He stated that that date 15th July 1928 in Ex. 15-B, was a mistake for 13th July 1928 and that there was in fact no partnership deed other than Ex. 14. It is perfectly plain that this is a false statement because Ex. 14 does not contain any provision for the payment of commission to defendant 1. The learned Subordinate Judge erred in not attaching due weight to the non-production of the deed of partnership and the falsity of the explanation given. He is also in error in thinking that defendants 1 and 2 were not shown as partners in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final stages of the hearing of the suit. The history of this contention, however, shows that the learned Judge was not warranted in raising or considering such an issue. Issues in the suit were framed as early as 16th March 19S8 and as we already indicated, there is no reference to the contention in the issues, or even in the written statements of the parties. On 22nd August 1938 I.A. No. 753 of 1938 was filed by the defendants asking for an amendment of the written statement by the addition of the following paragraph: The plaintiff and his three brothers, Venkataratnam, Ramakrishnayya and Brahmayya, were all joint and formed an undivided Hindu family by the date of the alleged payment of the suit debt to the Imperial Bank of India by the plaintiff and if the said payment is true, the plaintiff's brothers were also entitled to three-fourths of the suit debt. This defendant submits that the plaintiff became divided with his three brothers subsequent to the said payment and this defendant learns that the suit claim is not partitioned amongst themselves. This defendant submits that the plaintiff alone is not entitled to bring the suit for the whole amount in which his brother ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is quite apparent that the plea of non-joinder was pressed. Thereupon a fresh application I.A. No. 563 of 1940 was filed by the plaintiff on 30th July 1940 requesting the Court to reopen the suit, add the plaintiff's brothers as co-plaintiffs and take the necessary evidence. The brothers filed separate affidavits consenting to their being joined as co-plaintiffs. The application was opposed by the contesting defendants and was disposed of along with the suit. The learned Judge dismissed the petition along with the suit itself in his judgment holding that the application was belated and that the claim was evidently barred. We are firmly of opinion that the learned Judge was wholly wrong both in allowing the point to be raised and in negativing the successive attempts made by the plaintiff to remedy the error, if error it was. Having considered the matter fully, we hold that the plaintiff is entitled to maintain the suit because he was eo nomine the surety and the person who discharged the debt. That the debt fell to the share of a brother of his as a result of the partition in the family is no reason for holding that he is not entitled to maintain the suit because under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efault 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. The section embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court in Craythorne v. Swinburne (1807) 14 Ves. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by him after the contract of suretyship was entered into. That appears to have been the rule of equity as understood in England when the Act was passed (see Newton v. Chorlton (1853) 10 Hare 646). The rule has however been extended by later decisions of the English Courts so as to cover securities given to the creditor both before and after the contract of suretyship. This is clear from Forbes v. Jackson (1882) 19 Ch. D. 615 and Campbell v. Rothwell (1878) 47 L.J.Q.B. 144. This extension however has not been introduced into the statutory law of India which remains as codified in 1872. What is important to remember in this connexion is that Section 141 does not enable the creditor to withhold from the surety any security actually held by him at the time when the debt is paid or in any other way to detract from the rights of the creditor as declared by Section 140. Section 141 only gives him liberty of action in respect of securities not held by him at the time of the contract of suretyship provided he exercises it before payment. 8. The question that falls to be decided is whether all the three debts must be fully discharged before any of the sureties can claim an interest in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present before us. The plaintiff Bhushayya, one of the sureties, on paying the principal creditor would be entitled to stand in his place for the sum paid, that is, entitled along with the bank to the benefit of the security. In Paley v. Field (1806) 12 ves. 435 the plaintiff who was a surety for monies advanced and to be advanced by certain bankers had by the terms of the guarantee executed by him limited his liability to a sum of . 1500 making it clear that the bankers were not to be indemnified by the plaintiff for any loss which they should sustain by giving credit to the debtor beyond the sum of . 1500 and interest. On the adjudication of the debtor, the creditors proved, for . 3000 which was the amount for which the debtor had made himself liable and received dividends thereon. The surety paid the sum of . 1500 with interest and then sued for the recovery of the dividends received in so far as they related to the Sum of . 1500 guaranteed by him. The creditors contended that they were entitled to apply the sum of . 1500 received from the surety as far as that will extend, to satisfy the loss they might ultimately sustain by the bankruptcy of the debtor and that they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debt guaranteed by him. Only when his liability is limited, as it was limited in the case before the Court, the part is by the contract of the parties to be regarded as the whole. The facts, no less the decision, bear a close resemblance to the later case in Hobson v. Bass (1871) 6 Ch. A. 792 to be noticed later. In Thornton v. McKewan (1862) 11 W.R. 140, a guarantee for a fixed sum of 5000 was given by the plaintiff to a banking company to secure the advances made to the debtor. The bank advanced a larger sum to the debtor and on his death proved against his estate under administration for the full amount of the advance and received dividends thereupon. Afterwards the guaranteed amount, namely, 5000 was recovered from the surety. It was held that the surety was entitled to the dividends received in the proportion which the sum guaranteed bore to the whole debt proved notwithstanding that the guaranteed debt alone and not the whole of the debt given to the banker had been paid. Coates v. Coates (1863) 33 Beav. 249 is a decision on analogous facts. Benjamin Coates first lent a sum of 1000 on the joint promissory notes of John Green and William Green. William Green joined in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Vice Chancellor dismissed the claim. On appeal Lord Hatherly L. C. reversed the decision and upheld the claim observing: If a person guarantees a limited portion of a debt, all the authorities show that if he pays that portion he has in respect of it all the rights of a creditor. The question is, whether the guarantor means 'I will be liable for 250 of the amount which A B shall owe you,' or 'I will be liable for the amount which A B shall owe you, subject to this limitation, that I shall not be called upon to pay more than 250.' The words of the guarantee are so similar to those in some of the cases cited that it would be splitting hairs to distinguish them. The words 'at any time' are material, and I think the meaning of the instrument is 'I guarantee the payment of all goods supplied, but my liability is not to be increased by their amount exceeding 250. When it reaches that sum I am to be a surety for it with all the rights of a surety.' It is not then competent to the creditor to say 'I will increase my debt, I will take a dividend on the whole; and though you have paid me the 250 you shall have no rights as a surety till I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the sureties should each guarantee the whole 7000 though their liability respectively was limited to the stipulated amounts. The point is further elucidated by Vaughan Williams J. in (1896) 2 Q.B. 12.12 A debtor became bankrupt and subsequently the surety on demand by the creditor paid him 303-11-9 under his guarantee and then tendered a proof against the bankrupt's estate for 755-16-1, being the whole amount due from the bankrupt. The trustee rejected the proof insisting that it ought to be reduced by 303-11-9 which the bank had received from the surety. Vaughan Williams J. held that he was wrong in so doing. He pointed out that the Common law right of the creditor was to sue the debtor for the whole of the amount that was due from him, irrespective of the sum which was paid by the surety unless that sum amounted to 20s. in the pound. The following observations indicate the correct legal position: When bankruptcy supervened the right of the principal creditor-the bank - was to prove for that amount, unless there was a surety and that surety was a surety for a part of the debt. In that case if the surety is a surety for the part of the debt, and the surety ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndebted to the bank of Bengal in the sum of ₹ 3,15,000 for which the debtor gave securities which the bank accepted as good only to the extent of ₹ 1,90,000 that being the value as estimated by it. On this footing the bank considered itself unsecured to the extent of the balance of ₹ 1,25,000 and therefore refused to honour certain bills of the debtor, which then fell due. Thereupon the debtor prevailed on the plaintiff to stand surety for him, and the plaintiff accordingly guaranteed the payment of the sum of ₹ 1,25,000, treated by the bank as remaining unsecured. Subsequently the surety paid the full amount guaranteed by him and then instituted a suit for a declaration that he is entitled to a proportionate share of the securities held by the bank. It was held that the claim was not sustainable. No exception : can be taken to the decision on the facts actually before the Court. The securities had been accepted as cover not for the entire debt of ₹ 3,15,000 but only for a definite part of it, namely, ₹ 1,90,000. The plaintiff's guarantee did not relate to this part but to other part, namely, ₹ 1,25,000 which was apparently treated as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to prove against the debtor's estate for the amount so paid, the learned Judge expresses the opinion that the principle does not apply in the case of the creditor applying the securities he holds in payment of the residue of the debt after he has been paid one portion of it by the surety. For according to him, this works no apparent injustice to the surety, for he can still sue the debtor and prove against his estate. With respect, we are unable to accept the reasoning as correct. In the first place, it is clear both under Section 140, Contract Act, and under the English law that the surety's right to the benefit of the security vests in him the moment he pays the guaranteed amount. The creditor cannot afterwards make an appropriation to the prejudice of the rights of the surety which have accrued to him. Indeed he cannot do so even before, as the surety is entitled to the benefit of every security held by the creditor at the time when the contract of suretyship was entered into. Secondly, the question is not whether the surety has a remedy against the principal debtor, which of course he has either to sue him or prove against his estate if he is adjudicated bankrupt, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chooses to accept the guarantee with respect to part only of the debt, the surety on payment of that part is by force of law entitled to a proportionate part of the security. There is nothing to prevent a creditor from stipulating and obtaining a guarantee for the whole debt and there is nothing again against the surety waiving the right to which he is entitled under law. In the absence however of any such arrangement or waiver the law must prevail. We are unable to see how it can be said that the surety's claim is inequitable. On the contrary, the English decisions appear to our mind to make it inequitable for the creditor to defeat the rights of the surety who pays the debt by making an appropriation to his own advantage and to the detriment of the surety. In C.L. Philips v. A.E Mitchell('30) 17 A.I.R. 1930 Cal. 17 it appears that the creditor had advanced to the debtor a loan of ₹ 40 lakhs on a guarantee given by three individuals. Although the guarantee was in respect of the whole debt the liability of the sureties was limited to a maximum of ₹ 18 lakhs. The creditor also had a mortgage given to him as cover for the debt. The debt not having been paid on d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iciently clear indication that the rights of the surety even if he is a surety for the whole debt but with a limited liability required careful consideration before it can be held that they had no security whatever before payment of the debt. The result of the discussion on a careful consideration of the decided cases is that a surety for a part only of a debt is on payment of that part entitled pro tanto to the security held by the creditor as cover for the debt as a whole. 10. Before concluding, we may refer to one other argument advanced by the learned Counsel for the respondents based upon Section 92, T. P. Act, which embodies the rule of subrogation. Section 91 enumerates the persons who besides the mortgagor are entitled to redeem or institute a suit for redemption of the mortgaged property. Section 92 goes on to state: Any of the persons referred to in Section 91 (other than the mortgagor) and any co-mortgagor shall, on redeeming property subject to the mortgage, have, so far as regards redemption, foreclosure or sale of such property, the same rights as the mortgagee whose mortgage he redeems may have against the mortgagor or any other mortgagee. The last clause of ..... 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