TMI Blog2009 (10) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... ing its liability? HELD THAT:- If we acknowledge the fact that banks might be in a dominant position, there was absolutely no evidence to show that the Bank had in fact exercised its dominant power to force the surety into entering the contract that he ultimately did. If the appellant had been interested in insisting upon this matter then the least he could have done was to have entered the witness box and facilitated a method of clearing the air about it. Nor was there any explanation adduced at a later stage explaining the reason for the surety not entering evidence on his behalf. In the absence of any conclusive evidence to point to the entering of dates at a later stage, we cannot find any difficulty in rejecting the aforesaid contentions of the appellants. Thus, the appellant guarantor cannot be held liable for the loan. But the learned counsel for the appellants had failed to produce any evidence on behalf of the appellant to satisfy the Court in support of his argument. Instead they contended that the Bank was in possession of such documents and was suppressing it. It is highly unimaginable that when parties are entering into contracts for the purpose of seriously conducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he intervening period of time including actions by the State would also be unenforceable against it. However, the High Court failed to consider that LST was liable to repay the loan on the principle of Section 70 of the Contract Act inasmuch as it was LST who had been benefited from the loan, which JKNP had secured. We, therefore, agree with the views expressed by the trial court and disapprove the finding of the High Court on this count. The Board of Trustees was competent to take any loan, which would be considered to be loan taken by the Trust. In such a case, any loan taken by the Administrator appointed by the State shall also be deemed as loan taken by the Trust and, hence, the Trust would be liable to repay the loan. Bank has granted the loan for proper functioning of the Trust and on hypothecation of the properties of the Trust itself. From the very beginning, all the transactions which had been entered into had clearly been for the sake of the running of the publications of Samyukta Karnataka and other periodicals like Kasturi. In fact, first KPP and then JKNP, both private limited companies were formed for the sole purpose of the management of the running of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which was granted on an on-demand promissory note with an interest of 15% p.a compounded quarterly. This loan was secured by book-debts and Appellant 1, Basavaraj (since deceased) along with the Executive Director of JKNP also executed a hypothecation agreement to provide collateral security to the Bank. Subsequently, JKNP and its Executive Director executed a pronote for a term loan of ₹ 2,86,000 at the same interest rate as before. The appellants herein also executed an agreement of guarantee to the tune of ₹ 13 lakhs with a maximum of ₹ 30 lakhs as seen from Ext. P-16. JKNP became a public limited company on 28-9-1978. 5. The respondent Bank filed a suit being OS No. 119 of 1984 against the appellants for recovery of the loan amount. The appellants contested the suit and denied material allegations. OS No. 119 of 1984 was decreed by the Principal Civil Judge, Hubli at the trial court level on 1-8-1994 directing the appellant to pay ₹ 19,97,839.51 with future interest at 17% p.a and other reliefs and costs. 6. Meanwhile, an interim order was passed in OS No. 4 of 1997 appointing JKNP as the Receiver of the properties in its possession subject to the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als on record. The issues which we have framed to deal with while disposing of this appeal are listed as follows: (i) Whether the deceased surety and his legal representatives are liable to repay the disputed loan amount? (ii) Whether the conduct of parties amounts to novation of the contract between the parties? (iii) Whether the Lokashikshana Trust alone is responsible to repay the disputed loan amount being the beneficiary of the same? (iv) Whether LST having benefited from the loan transaction disputed herein can be estopped from denying its liability? 10. As regards the first issue that is with respect to the liability of the appellant guarantors, Basavaraj (since deceased) and his legal heirs, the argument made on behalf of the appellants was that the original surety, Basavaraj did not have the chance to verify the documents he had signed at the time of his entering into an agreement to become a surety. It was submitted that the dates mentioned in Exts. P-19 and P-20 were in fact inserted at a later date after the forms were signed by the surety. The arguments regarding the practice of the banks to make persons sign blank acknowledgments from beforehand in order to extend the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper opportunity. 13. An examination of the agreement executed between the appellant Basavaraj (since deceased) and the Bank would clearly show it to be one of a continuing guarantee. Section 129 of the Contract Act, 1872 (hereinafter referred to as the Act ) defines a continuing guarantee as: 129. Continuing guarantee .-A guarantee which extends to a series of transactions is called a continuing guarantee . Section 130 of the Act says that: 130. Revocation of continuing guarantee.-A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. 14. A reading of the agreement clearly shows that the guarantee was to continue to all future transactions except when the guarantor disclaimed from his liability through a written statement. The deed also clearly mentions that while between the guarantor and borrower, the guarantor is only a surety; yet between the Bank and the guarantor, the surety is the principal debtor and his liability would be coextensive to that of the borrower. Accordingly, the guarantor himself waived off his rights under Chapter 8 of the Act which is conferred on a surety. 15. This Court is in respectful agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the court in OS No. 4 of 1977 for liquidation of outstanding amounts of money indeed gives rise to substitution by a new contract. The respondents on the other hand contended that substitution of an old contract by a new one under Section 62 of the Act would require the express consent on behalf of both the parties. 18. Now let us examine Section 62 of the Act which reads as follows: 62. Effect of novation, rescission and alteration of contract.-If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. This section gives statutory form to the common law principle of novation. The basic principle behind the concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the same. Such consent may be expressed as in written agreements or implied through their actions or conduct. It was defined thus by the House of Lords in Scarf v. Jardine 1882 7 AC 345: (AC p. 351) that there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be) or between different parties; the consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indeed secured a loan towards the facilitation of running of the publications but had not created any new charge on the property. 22. The learned counsel for the appellants also sought to argue that the machinery hypothecated to the Bank on account of the agreement between JKNP and the Bank as security for repayment of the loan was not identifiable specifically on account of lack of evidence. By this, the learned counsel meant that the list of annexures produced or proved at the trial stage did not mention the list of any specified machinery hypothecated to the Bank. The exhibited document marked Ext. P-14 clearly shows that there is a list of machinery which stood hypothecated to the Bank not only against the initial sum of ₹ 2,86,000 forwarded to the borrower but also towards any other sum which might have been borrowed by JKNP subject to a limit of ₹ 75,00,000. 23. As rightly held by the High Court at present, there is no need to look into the question as to which of the machineries were specifically hypothecated to the Bank. But the facts in this case are enough to show that a charge was in fact created on the said machinery by JKNP and which had reverted back to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall also be deemed as loan taken by the Trust and, hence, the Trust would be liable to repay the loan. 28. At this juncture, it would be pertinent to observe that we find no rationale applicable to this case in the cases referred to us by the learned counsel for the appellant at the Bar, namely, Satyabrata Ghose v. Mugneeram Bangur Co. 1954 SCR 310 which deals with the doctrine of frustration and the scope of Section 56 of the Act as well as impossible contracts and also in Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. and Wvg. Mills Ltd. 2002 5 SCC 54 at p. 71 (paras 28 and 29) which talk about the meaning of a written covenant to be drawn from the exact words used and where such promises undertaken are found to be impossible to perform at a subsequent period of time. This Court finds no applicability of the rationale of abovementioned cases to the present facts at hand. 29. The fourth and final issue that needs to be decided is the question as to whether LST having benefited from the loan transactions and being the ultimate beneficiary can be estopped from denying its liability. This question, of course, is intricately linked to the previous. But first, we have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the appointment of Receivers and the subsequent transactions entered into by the Administrators appointed under the LST Act had been for the purpose of furthering the business concerns of LST itself. It would be useful to refer in this connection to Depuru Veeraraghava Reddi v. Depuru Kamalamma AIR 1951 Mad 403 where Vishwanatha Sastri, J. (as His Lordship then was) observed: (AIR p. 405, para 7) 7. Estoppel though a branch of the law of evidence is also capable of being viewed as a substantive rule of law insofar as it helps to create or defeat rights which would not exist or be taken away but for that doctrine . 33. In S. Shanmugam Pillai v. K. Shanmugam Pillai AIR 1972 SC 2069 it was observed that there are three classes of estoppels that may arise for consideration; being: (SCC p. 320, para 16) (1) that which is embodied in Section 115 of the Evidence Act, (2) election in the strict sense of the term whereby the person electing takes a benefit under the transaction, and (3) ratification i.e agreeing to abide by the transaction. It might be said that the action of the Trust falls under the third category whereby it ratified all actions taken by others and benefiting from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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