State Bank of Saurashtra vs. Chitranjan Rangnath Raja and Anr.
Citation(s): 1980 AIR 1528, 1980 SCR (3) 915
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The appellant-bank allowed a cash credit facility limited to Rs. 75,000/- to the Principal Debtor (PD) on his pledging 5,000 tins of groundnut oil under the lock and key of the Bank and on personal guarantee of the Respondent-Surety. However, afterwards when the Bank lost the pledged tins and sued the legal representative of PD (after the death of PD) and the Surety to repay the debt, Surety contested discharge of his liability.
BANK- By Cl.5 of guarantee, surety could not claim discharge from the guarantee contract even when the Bank had released any other security; such that in instant case, surety remains liable. Moreover, under Cl.7, Surety cannot claim discharge even if the creditor Bank has any other guarantee, security or remedy from the principal debtor.
SURETY- The Bank was negligent in parting away with the security such that the Surety was discharged to the extent of the value of tins of oil.
Trial Court- The trial court held that there was negligence on the part of the Bank with regard to the safe custody of the pledged oil tins but as the contract of guarantee entered into by the surety with the Bank was independent of the pledge of goods given by the principal debtor, the surety is not discharged from his liability under the guarantee.
High Court- On account of the conduct of the parties, the pledge of the goods and subsequent contract of guarantee (entered into within the same time frame) were part of the one composite transaction and they evidenced that the principal debtor had offered two securities, one the pledge of oil tins and another personal guarantee of the surety: since the bank was utterly negligent in dealing with the pledged goods leading to their loss, therefore, surety is discharged under Section 139 and 141 of the Indian Contract Act.
- Whether the pledge of the goods and the guarantee contract amounted to one single transaction.
- Whether S.141 is applicable here. If yes, to what extent is the Surety discharged?
In order to attract section 141 of the Contract Act, it must be shown that the creditor had taken more than one security from the principal debtor at the time when the contract of guarantee was entered into and irrespective of the fact whether the surety knew of such other security offered by the principal debtor, if the creditor loses or without the consent of the surety parts with the other security, the surety would be discharged to the extent of the value of the security. The letter of guarantee executed by the Surety and the pledging of the goods evidenced one composite transaction; such that, as found by the High Court, the principal debtor had offered two securities, (i) the pledge of goods, (ii) personal guarantee of the Surety. The Surety himself agreed to give personal guarantee on the specific understanding and with the full knowledge of the Bank that the principal debtor was offering another security, namely, pledge of goods. First security, namely, the pledged goods are lost to the Bank on account of its negligence. As the current market price of 5000 oil tins would have satisfied the Bank’s entire claim, the Surety would be released to the whole extent.
With regard to contention upon Cl.5, release of security implies a volitional act on the part of the Bank. In the present case, the bank had lost the security on account of negligence which cannot be equated with release. Further, w.r.t Cl.7, the expression ‘any other guarantee, security or remedy’ therein mentioned must be security other than the pledged goods (Amrit Lal Goverdhan Case).
Author: Vishrut Kansal