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Andhra Pradesh High Court
Judges : GANGADHARA RAO
Jayant T.Shah - Appellant
Versus
Andhra Bank Ltd - Respondent
Decided On : 12-31-76
CONTRACT - SURETY - SECTION 141 OF THE CONTRACT ACT - HYPOTHECATION - DISTINCTION BETWEEN HYPOTHECATION AND PLEDGE - LIABILITY OF CO-OBLIGANT - INTERPRETATION OF SECTION 141 OF THE CONTRACT ACT - APPLICATION OF SECTION 141 TO HYPOTHECATED GOODS - DISTINCTION BETWEEN PLEDGE AND HYPOTHECATION - SECURITY UNDER SECTION 141 OF THE CONTRACT ACT - INTERPRETATION OF SECTION 141 OF THE CONTRACT ACT IN THE CONTEXT OF HYPOTHECATION - LIABILITY OF CO-OBLIGANT NOT DISCHARGED DUE TO LOSS OF HYPOTHECATED GOODS.
Fact of the Case:
The plaintiff-bank granted an overdraft facility to the 1st defendant, a company, and the 2nd defendant, the proprietor of the company, signed the necessary documents as a co-obligant along with the 3rd defendant, who also signed as a co-obligant. The defendants defaulted on the loan, and the plaintiff-bank seized and sold the Fiat car hypothecated to it, but the proceeds were insufficient to cover the debt. The plaintiff-bank sued all three defendants for the balance due, and the 3rd defendant appealed the lower court's decision holding him liable as a co-obligant.
Finding of the Court:
The court found that the 3rd defendant was a co-obligant, not a surety, and therefore could not invoke the benefit of section 141 of the Contract Act, which discharges a surety to the extent of the value of security lost by the creditor. The court also found that the goods were not pledged with the plaintiff-bank but were only hypothecated, and that the plaintiff-bank did not have possession of the goods. Therefore, the court held that the 3rd defendant could not claim the benefit of section 141 of the Contract Act.
Issues: 1. Whether the 3rd defendant was a surety or a co-obligant. 2. Whether the goods were given as security to the creditor. 3. Whether the plaintiff-bank lost or parted with the security. 4. Whether the 3rd defendant was discharged from his liability as a co-obligant.
Ratio Decidendi: 1. The court interpreted section 141 of the Contract Act and held that it applies only to sureties, not to co-obligant. 2. The court distinguished between pledge and hypothecation and held that the goods in this case were only hypothecated, not pledged, and that the plaintiff-bank did not have possession of the goods. 3. The court held that the plaintiff-bank did not lose or part with the security because the goods were not in its possession.
Final Decision: The court dismissed the appeal and upheld the lower court's decision holding the 3rd defendant liable as a co-obligant.
( 2 ) THE Andhra Bank Limited, the plaintiff, filed the suit to recover Rs. 14,768- 57ps. with subsequent interest. The 1st defendant is M/s. M. A. C. Industries of which the 2nd defendant, Mrs. Maqbool Fatima, is the proprietor. The 1st defendant had an account with the plaintiff-bank. The 2nd defendant approached the plaintiff in the beginning of april, 1969 to extend the credit facilities to the extent of Rs. 20,000 and also wrote a letter to that effect on 5th April, 1969. The 3rd defendant Jayant T. Shah, subsecribed his signature to that letter. After discussion, the 2nd defendant sent a letter dated 9th June, 1969 addressed to the Chairman of the plaintiff-bank requesting for an overdraft facility to the extent of Rs. 20,000. She offered security of two planners with motors, Fiat car, Jawa motor-cycle and vespa scooter, of a total value of rs. 33,500. The plaintiff-bank granted overdraft facility. The defendants 1 to 3 executed the necessary documents in favour of the plaintiff including a promissory note dated 18th August, 1969 for Rs. 20,000 repayable with interest at 4l/2 % over and above the Reserve Bank of India rate of interest with a minimum of 9l/2 per annum with quarterly rests. The 3rd defendant also signed all the necessary documents as a co-obligant including the aforesaid promissory note undertaking joint and several liability along with the 2nd defendant and further signed a letter dated 18th August, 1969 in the printed form to the effect that the amount Rs. 20,000 might be paid to the 1st defendant. The 2nd defendant operated the account and drew the money as sanctioned by the plaintiff. The plaintiff called upon the defendants several times both orally and in writing, to adjust the amount but they did not pay the amount. Towards the end of November, 1970 the plaintiff wrote to the first defendant that the facility fell due on 18th August, 1970. Repayment due thereon was Rs. 19,995-06. The 2rd defendant sent a letter to the plaintiff -bank, dated 29th January, 1971 promising to repay the amount and requesting for further time. The plaintiff again wrote another letter, dated 12th April, 1971 intimating the balance then due. The plaintiff wrote another letter, dated 14th August, 1971 to the 2nd defendant intimating that a sum of Rs. 21,237-37 ps. was due and it was noticed that the 1st defendant-factory was not working and the defendants should adjust the amount within 7 days from the date of the receipt of the letter. A copy of that letter was also sent to the 3rd defendant. Still they did not pay. The 2nd defendant gave a reply stating that some more time might be given for payment. The 3rd defendant did not give any reply. Subsequently on 31st August, 1971, the plaintiff addressed another letter to the 1st defendant informing the 2nd defendant that no further extension of time would be granted. Still there was no payment. Again on 4th February, 1972, the plaintiff issued a notice through a lawyer calling upon them to adjust the amount completely within 3 days after the receipt of the registered notice failing which the hypothecated goods would be seized and sold under the hypothecation agreement. The 3rd defendant was also similarly called upon to adjust the amount failing which appropriate legal steps would be taken and a copy of the registered notice sent by the plaintiff s lawyer to the 1st defendant was enclosed for reference. That registered cover was returned unserved with the postal endorsement "refused". The plaintiff seized the Fiat car No. 5522, which was hypothecated to the bank and ultimately sold it for Rs. 9,500 and credited it on 16th February, 1972 to the account of the defendants. Thus as per the account, on the date of the plaint, the defendants had to pay a sum of Rs. 14,768-67 Ps. for which the present suit is filed. In the p
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