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TMI Blog1976 (7) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and 3, on the basis of the surety bond, Exhibit P-3; the said transactions under Exhibits P-1, P-2 and P-3 having been entered into by the defendants with the Bank of Karnataka Ltd., Hubli. Appellant claims that the assets and liabilities of the said Bank of Karnataka are taken over by the appellant on 29-12-1966. 3. The defence urged by respondents 1 and 2 in the Court below, inter alia, was that appellant was not the holder in due course of the negotiable instrument. Exhibit P-1 and was not competent to maintain the action thereon, and that the appellant and the Bank of Karnataka from which appellant derives title having allowed the security under the hypothecation bond, Exhibit P-2 to be impaired and lost owing to their own Negligence and defaults and having thereby rendered themselves disabled from giving to the sureties the benefit of the security, the liability of respondents 1 and 2 as sureties has had to be reduced to the extent of the value of the security so impaired 4. On these pleadings, the court below framed the following issues: 1. Whether the Bank of Karnataka Ltd., Hubli with its assets and liabilities, has on 29-12-1966 merged with the plaintiff Bank as alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orbearance which does not have the effect of discharging the sureties; (b) Under the express terms of Exhibit P-3 the sureties had 'waived' and 'contracted out' of the benefit of Section 141 of the Contract Act and that therefore the liability of the sureties which was co-extensive with that of the principal debtor subsisted; and, (c) The security under Exhibit P-2 was not in the possession of the creditor and that therefore the question of impairment or loss of the security at the instance of the creditor does not arise at all. 7. Sri V. Krishnamurthy, learned counsel for the respondents, however, sought to sustain the decree of dismissal as against the sureties, his principal contentions being that the hypothecation of a moveable was merely an extended concept of a pledge; that the right to the possession of the chattel, in the context of the statutorily recognised obligations all the creditor towards the sureties in the matter of preservation of the security for the benefit of the sureties, is equivalent to actual possession; that the obligation to preserve the collateral security extends not merely to the security the creditor has but also to what the creditor o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit 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. It is plain that the expression is invested with all the rights which the creditor has against the principal debtor in the section brings about even without the necessity of a transfer and by operation of law, the vesting in the surety of all the security held by the creditor against the principal debtor. The rule of English Law is however modified in the Indian Statutory formulation of the rule by limiting the entitlement of the surety only to the security held by the creditor as -at the date of the contract of suretyship. 9. Sri V. Krishnamurthi invited our attention to the exposition of this principle of equity in Rees v. Barrington, 2 Wh and T. L. C. (4th ed.) at p. 1002, which was referred to with approval by Fannen, J, in Wulff and Billing v. Jay 1872 7 QB 756. The passage relied upon by Sri V. Krishnamurthi reads thus: ........... That doctrine is very clearly expressed in the notes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r parted with it in any sense of those expressions within the meaning of See. 141 of the Contract Act. But, Sri V. Krishnamurthi maintains that hypothecation of goods is an extended idea of pledge and that the obligation to preserve the security enjoined by law upon a creditor extends not merely to the security the creditor has 'in his hands' but also to what the creditor 'ought to have'. 11. After a careful consideration of the matter, we are of the opinion that having regard to the nature of the security in the present case, the sureties cannot make an appeal to the provisions of Section 141 of the Contract Act. In our opinion, the true principle governing the matter is stated in American Jurisprudence Vol. 50; page 978, para. 114 in terms following: 114. Failure to enforce Security. -While the authorities -appear to be in entire agreement on the proposition that a surety is discharged, at least to the extent of the value of the security lost, where the creditor, without the surety's consent, affirmatively releases collateral security, there seems to be some difference opinion where a loss is claimed to have occurred through the inactivity of the creditor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scharged to the extent of the loss thereby resulting. What emerges from this enunciation is that a mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient, in itself, to discharge the surety, for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Thus tested, the inaction on the part of the appellant or the Bank of Karnataka from which it derives title will not, of itself, mitigate sureties' liability. 12. We will now consider the decisions cited by Sri V. Krishnamurthi for the respondents. They are the following: (i) Rainbow and Wife v. Juggins 1879 5 QBD 138 was a case where defendant was surety for the repayment of a sum of money advanced by the plaintiff to the principal debtor. As a further security for the advance, the principal debtor deposited with the plaintiff a policy of life insurance. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods sold as well as the right to remain in possession till payment of the instalments of price by the contractor. In those circumstances, the fact that Jagatram was permitted by the authorities to remove the goods without pre-payment was held by the Supreme Court to be an 'act which under Section 141 of the Contract Act, had the effect of discharging the liability of the surety pro tanto. In the case of Amrit Lal Goverdhan Lalan (supra) the appellant had executed a letter of guarantee in favour of the Travancore Forward Bank Ltd., respecting the liability of the borrowers who had agreed to open in the books of the Bank a Cash Credit Account to the extent of Rupees 1,00,000/- to be secured by goods pledged, one -of the conditions of that contract being that borrowers had to remit the advance value or make a substitution of goods of equal value before withdrawing any of the pledged goods from the custody f the Bank. The pledged goods were verified by the employees of the Bank and on 18-4-1957 when an inventory was taken, there was a shortage of goods to the value of Rs. 35,690/-. In the suit against the sureties filed by the State Bank of Travancore as the successor-in-interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the appellant to clarify whether the assignment of the debt under the pronote Exhibit P-1 by the Bank of Karnataka Ltd., in favour of the appellant would also operate to assign the benefit of the security under Exhibit P-3. Sri B. P. Holla, learned counsel for the appellant took time and filed an application under Order 41, Rule 27, Civil Procedure Code seeking to produce a letter dated 25-61976 from the Reserve Bank of India, Department of Banking Operations and Development, Bombay, on the basis of which he contends that the scheme of transfer of the assets and liabilities of the Bank of Karnataka Ltd., in favour of the appellant attracts the provisions of Section 44-A(6) of the Banking Regulation Act, 1949, and that the assignment of the benefit of the security is also effectuated by operation of law. He also sought to rely upon the provisions of Section 8 of the Transfer of Property Act. 15. The additional evidence sought to be produced by the appellant requires to be admitted as being required to enable this Court to pronounce judgment and the said letter of the Reserve Bank of India whose authenticity is not disputed is marked as a part of the documentary evidence in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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