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PETITIONER: INDIAN BANK

       Vs.

RESPONDENT: K. NATARAJA PILLAI AND ANR.

DATE OF JUDGMENT22/10/1992

BENCH: [KULDIP SINGH AND N.M. KASLIWAL, JJ.]

ACT: Constitution of  India 1950-Article  136-Appeal-Execution of promissory note, equitable mortgage etc. for loans for bank- Proof-Statutory presumption  u/s. 118-Negotiable Instruments Act, 1881-Liability  of defendants to pay the amount claimed by bank. Negotiable  Instruments   Act,  1881-Section  118-Promissory note-Consideration-Presumption  of-Proof   of  execution  of pronote, equitable mortgage etc. for bank loans-Liability of defendant to pay the amount claimed by bank.

HEADNOTE: The appellant-Bank  filed a suit for the recovery of an amount of Rs.1,21,006.98 due under an equitable mortgage and pronote against  the defendant  No. 1, his wife and his son, the defendant Nos. 2 and 3 respectively. Accordingly to  the Bank,  the defendant  Nos. 1  to  3 executed a  promissory note for Rs. 1,00,000 on 26.8.1971 in favour of the Bank and two hypothecation deeds in respect of ‘A’ schedule  properties. They  also executed  and equitable mortgage on 28.8.1971 for ‘B’ schedule properties. The consideration  for the transaction also included an amount of  Rs. 71,000  granted by  the Bank  in favour of 37 persons by  way of  short term loans. The defendant No.1 has executed a guarantee agreement on 14.6.1971 in favour of the Bank in  respect of  the short  term loan  in favour  of  37 persons. The defendant  No.1 denied  the execution  of guarantee agreement as well as the promissory note. He also denied the furnishing of  any guarantee with regard to the repayment of loans amounting  to Rs.71,000  to 37  persons. He  contended that the  agent of  the bank  in order  to ward  off his own prosecution and  arrest for having advanced large amounts as loans to  landless persons  in an irregular manner, obtained the signatures of the defendant on a printed promissory note without the  details having  been filled  up; and  that  the documents were  got executed  by exercise  of  fraud,  undue influence, coercion and misrepresentation. The defendant  Nos. 2  and 3  in their separate written statements took  the same  stand as  taken by  the defendant No.1. The defendant  No. 3  also filed  a separate additional written statement  taking the  ground that as he was born on 12.11.1953, he  being minor  on  the  date  of  the  alleged execution of  the promissory  note, the  same  was  void  as against him. The trial  Court decreed the suit in favour of the Bank

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and against  the defendant  Nos.1 and  2. The  suit  against defendant No.3  was dismissed  as he was found to be a minor on 26.8.1971,  i.e, on  the date  of the  execution  of  the promissory note. The defendant  Nos. 1 and 2 filed an appeal in the High Court. The High  Court though  upheld the finding of the trial court, that  the promissory  note was executed with the full knowledge that  it was  a promissory  note for Rs. 1,00,000, but the  same was  void for  want of  consideration  to  the extent of the loan advanced to 37 borrowers. It further held that the  loans amounting  to Rs.  71,000 to 37 persons were advanced from  17.12.1970 to  4.5.1971 and as such there was no consideration  for executing  the guarantee agreement nor for executing  the promissory  note. It  also held  that the promissory note  could be  taken to  have been  supported by consideration only  to the  extent of  Rs.  21,616.25  which represented the  amount due against defendant Nos.1 and 2 on account of their personal borrowings from the Bank. The High  Court allowed the appeal in part and passed a decree in  favour of the Bank for an amount of Rs. 21,616.25 only with  interest at  the rate of 10-1/2 percent per annum from the  date of  the plaint till the date of the decree of the trial court and at the rate of 6 per cent per annum from the date  of the decree till the date of the recovery of the amount. Against the  judgment and decree of the High Court, the Bank moved  this Court,  in the  persent appeal  by  special leave. Allowed the appeal filed by the Bank, this Court, HELD :  1.01. All  the three defendants had taken loans from the bank and those were outstanding against them at the time of execution of the pronote.[115-B] 1.02. The  defendants has executed the pronote and also created equitable  mortgage in  favour of  the Bank  and the pronote  itself  contained  an  endorsement  of  "for  value received".[117-F] 1.03. Section  118 of  the Negotiable  Instruments Act, 1881 provides  for a  statutory presumption of consideration of every  negotiable instrument, which includes a promissory note.[115-B] 1.04. The  pronote, Exhibit  A.1. dated  26.8.1971  was executed with  full consideration.  The defendants knowingly and with  full knowledge  had executed  the pronote  Exhibit A.1. In  the facts  and circumstances of the case, there was no necessity  of going  into the  question  of  novation  of contract as  contemplated under  Section 62  of  the  Indian Contract Act. [117-E]. 1.05   The High  Court was  wrong in  arriving  at  the conclusion that Exhibit A.1 failed for want of consideration to the  extent of  Rs.74,190.56  and  also  for  the  amount advanced to the third defendant, the liability in respect of which came to Rs. 4,193.19. [117-D] 1.06 The  High Court  has taken a wrong approach of the entire case  and has ignored the important relevant document which prove  beyond any  manner of doubt that the promissory note, Exhibit  A.1, the  basis of the suit was executed with consideration and  the defendant Nos. 1 and 2 were liable to pay the entire amount claimed by the Bank. [114-H, 115-A]

JUDGMENT: CIVIL APPELLATE  JURISDICTION :  Civil Appeal  No.  2945  of 1981.

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    From the  Judgment and  Order dated  25.11.1980 of  the Madras High court in Appeal No.699 of 1976.      S.K. Sastri and S. Srinivasan for the Appellant.      A.T.M.  Sampath   and  Ms.   Pushpa   Rajan   for   the Respondents.      The Judgment of the Court was delivered by      KASLIWAL, J.  This appeal  by grant of special leave is directed against  the judgment  of Madras  High Court  dated 25.11.1980.      The appellant - Indian Bank (in short ‘the Bank’) filed a suit  for the  recovery of an amount of Rs.1,21,006.98 due under  a   equitable  mortgage  and  pronote  against  three defendants namely,  K. Nataraja Pillai (defendant No.1), his wife N.  Pappathi Ammal  (defendant No.2)  and  his  son  N. Narayanan (defendant  No.3).  According  to  the  Bank,  the defendant Nos.1  to 3  executed a  promissory note  for  Rs. 1,00,000 on  26.8.1971 in  favour of  the  Bank.  They  also executed two  hypothecation deeds in respect of ‘A’ schedule properties and  executed and equitable mortgage on 28.8.1971 for ‘B’  schedule  properties.  The  consideration  for  the aforesaid transaction  also included an amount of Rs. 71,000 granted by  the Bank in favour of 37 persons by way of short term loans.  The defendant  No.1 had  executed  a  guarantee agreement on  14.6.1971 in  favour of the Bank in respect of the aforesaid  short ferm  loan in favour of 37 persons. The Bank  has  thus  based  its  claim  in  the  plaint  on  the promissory note  and guarantee  agreement for Rs.1,00,000 as principal and Rs. 21,006.98 as interest.      The first  defendant filed  a written statement denying the  execution   of  guarantee  agreement  as  well  as  the promissory note.  He pleaded  inter alia  that the defendant has not  furnished any guarantee on 14.6.1971 with regard to the repayment  of  loans  amounting  to  Rs.  71,000  to  37 persons. The defendants has not executed any promissory note in favour  of the Bank for a lakh of rupees nor has executed any equitable  mortgage nor deposited any documents of title towards any  loan of  Rs.1,00,000. The  defendant No.1  also pleaded that  the agent  to the Bank Shri Krishnamurthy lyer in order  to ward  of his  own prosecution  and  arrest  for having advanced  large amounts as loans to landless persons, in  an  irregular  manner  obtained  the  signature  of  the defendants on  a printed promissory note without the details having been  filled up.  The documents  were got executed by exercise   of   fraud,   undue   influence,   coercion   and misrepresentation. The  defendant  Nos.  2  and  3  filed  a separate written  statement and took the same stand as taken by the  defendant No.1.  The  third  defendant  subsequently filed a  separate additional  written statement  taking  the ground that  he was  born on  12.11.1953 and  as such  being minor on the date of the alleged execution of the promissory note, the  same was  void as  against. The  trial  court  by judgement dated  29.4.1975 decreed the suit in favour of the Bank and  against the  defendant  Nos.  1  and  2  only  and dismissed the suit against defendant No.3 as he was found to be minor on 26.8.1971.      The defendant  Nos. 1 and 2 filed an appeal in the High Court. The  High Court  though; upheld  the finding  of  the trial court  that the  promissory  note  Exhibit  A.1  dated 26.8.1971 was executed with the full knowledge that it was a promissory note  to Rs.1,00,000,  but the  same was void for want consideration  to the extent of the loan advanced to 37 borrowers. The  High Court  held that the loans amounting to Rs. 71,000  to 37  persons were  advanced from 17.12.1970 to 4.5.1971  and   as  such  there  was  no  consideration  for executing the  guarantee agreement  dated 14.6.1971  nor for

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executing the  promissory note  on 26.8.1971. The High Court further held  that the  promissory note  Exhibit A.1  can be taken to  have been  supported by  consideration only to the extent of  Rs. 21,616.25  which represented  the amount  due against defendant  Nos. 1 and 2 on account of their personal borrowings from  the Bank. The High Court also held that the trial  court  itself  has  found  it  established  that  the defendant No.3  was a  minor on 26.81971 and the Bank having not filed  any appeal,  no decree  would  have  been  passed against defendant Nos. 1 and 2 for an amount of Rs.4,193.19, the amount  advanced to  the third defendant. The High Court as a result of the above findings allowed the appeal in part and passed  a decree  in favour of the Bank for an amount of Rs.21,616.25 only  with interest  at the  rate of 10-1/2 per cent per  annum from the date of the plaint till the date of the decree  of the trial court and at the rate of 6 per cent per annum  from the date of the decree till the dated of the recovery of  the amount.  Aggrieved against the judgment and decree of  the High Court the Bank has come in appeal before this Court.      We have  heard learned counsel for both the parties and having  thoroughly   perused  the  record.  So  far  as  the execution  of  the  promissory  note  Exhibit  A.1  and  the execution of  guarantee agreement  Exhibit A.8 is concerned, both the trial court as well as the High court have found in favour of  the Bank  and the same being a finding of fact is not under  challenge. The  only  question  which  calls  for consideration before  us is  whether the  view taken  by the High Court  that the  promissory note  was void  for want of consideration to  the extent  of loans of Rs.71,000 advanced to 37  persons is  correct or  not. The High Court has taken the view  that so far as the guarantee agreement Exhibit A.8 is concerned,  the same was executed on 14.6.1971 long after the loans amounting to Rs. 71,000 advance from 17.12.1970 to 4.5.1971. None  of the 37 borrowers were granted any loan on or  after   the  execution  of  Exhibit  A.8  by  the  first defendant. The  High Court  took the  view  that  where  the surety  bond   comes  into   existence  after  the  original borrowing by  the principal debtor, the creditor must prove, if he  wants to  proceed against  the  surety  that  he  did something or refrained from doing something in order to be a valid consideration  of the contract of surety or guarantee. The High  Court in   the facts and circumstances of the case observed that neither the amounts advanced to 37 persons has become due  for payment  on the date of execution of Exhibit A.8 on 14.6.1971 nor the Bank had come forward with the case that the  37 persons were threatened with suits for recovery of the  amounts borrowed  by them  nor the  first  defendant intervened and  stood  as  a  guarantee  so  as  to  prevent impending legal  proceedings as  against 37 borrowers. Thus, the Bank  cannot be  taken  to  have  refrained  from  doing anything in  respect of  the said loan of Rs. 71,000 to form the same  as consideration  for the guarantee agreement. The High Court  in this  regard placed  reliance on Nanak Ram v. Mehin Lal,  I.L.R. 1  Allahabad 487,  Muthukaruppa Mudali v. Kathappudayan 27  M.L.J. 249  and on  Bank of India v. Matha Gounder, 1980 T.N.L.J. 117.      The High  Court  then  examined  the  question  of  the liability of  the defendant Nos. 1 and 2 on the basis of the pronote Exhibit  A.1 in  respect of  the  sum  of  Rs.71,000 borrowed by  37 persons  on the  principle  of  novation  of contract  as  contained  under  Section  62  of  the  Indian Contract Act.  The  High  Court  observed  that  section  62 contemplates a  new contract  superseding or  rescinding  or altering the  original contract.  The  new  contract  should

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extinguish the  earlier contract and the liability under the earlier  contract  should  come  to  an  end  otherwise  the novation will fall for want of consideration. The High Court held that in this case there was subsisting debt between the Bank and  the 37  debtors and  as such the liability arising out of  the debt  could only  be transferred  to  the  first defendant, a third party to the original agreement only by a tripartite contract  which will  amount to novation. In this case, it has neither been alleged nor proved that all the 37 borrowers from  the Bank  were parties  to  the  arrangement under which  the first  defendant is said to have taken over their liability.  Even after the execution of the promissory not Exhibit A.1 the existing debt due by the 37 borrowers to the Bank  was not  extinguished and the Bank was entitled to claim the  amount from  the 37  borrowers in  spite  of  the pronote having been executed by the defendants.      The High  Court in  our view has taken a wrong approach of the  entire case  and has  ignored the important relevant documents which  prove beyond  any manner  of doubt that the promissory note  Exhibit A.1,  the basis  of  the  suit  was executed with  consideration and  the defendant Nos. 1 and 2 were liable  to pay  the entire  amount claimed by the Bank. Exhibit A.1  dated 26.8.1971 is the promissory note executed by the defendants in favour of the Bank for a sum of Rs. one lakh which  itself recites  that it  was executed  for value received. Section  118 of  the Negotiable  Instruments  Act, 1881 provides  for a  statutory presumption of consideration of every  negotiable Instrument  which includes a promissory note. It  has been  established on record that all the three defendant had  taken loans  from the  Bank  and  those  were outstanding against  them at  the time  of execution  of the pronote. The  Bank had  come forward  with the  case in  the plaint that  the first  defendant had obtained a medium term loan of Rs.10,000 on 11.9.1970 for the purpose of installing a pump set and an engine and digging a well and for which an equitable mortgage in respect of 7.86 acres of land was made in favour  of the Bank. The defendant No.1 further secured a short term loan of Rs.2,000 on 18.12.1970 on the security of the crops  raised in his lands. The second defendant who was wife of  the first  defendant had obtained a short term loan of Rs.  2000 on  26.3.1970. The  third defendant who was the son of  the first  defendant had  also obtained a short term production loan  of Rs. 2,000 on 25.5.1971 and a further sum of Rs.  2,000 on  15.12.1971. The  defendant No.  1 has also executed a  guarantee agreement  on 14.6.1971  in respect of short term  production loan  granted to 37 persons amounting to Rs.71,000.  The total  of the  above outstandings came to Rs.93,239.03. The  defendants sought  a sanction of loan for Rs.1,00,000 and  the head  office of the Bank sanctioned the said loan  to the  defendants on 18.8.1971 in order to cover up the  earlier loans.  A sum of Rs.6,760.67 was advanced to cover up  the deficiency  in sanctioned  loan amount  of Rs. 1,00,000.  On   26.8.1971  the   defendants   executed   the promissory  note   for  the   sanctioned  loan   amount   of Rs.1,00,000  and  to  repay  the  amount  with  interest  as mentioned in  the pronote.  On the  same day  the defendants executed a  hypothecation of  their movable  properties viz, pump set  and engine,  set out in schedule ‘A’ to the plaint by way  of security  for repayment  of the  loan. They  also executed another  hypothecation bond  in respect of the crop on the  same day.  On the same day, the defendants agreed to execute an equitable mortgage deed in respect of 27.02 acres of land  set out  in schedule  ‘B’ of the plaint towards the loan of  Rs.1,00,000 and  deposited the title deeds relating to the  properties with the branch of the Bank at Madurai on

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28.8.1971. The  defendants has come forward with a plea that they did not execute the aforesaid documents Exhibit A.1 and A.8 and  Shri Krishnamurthy  Iyer, agent  of  the  Bank  had perpetrated a fraud and that the transaction was vitiated on the  ground   of  fraud,   undue  influence,   coercion  and misrepresentation. Both  the trial court as well as the High Court found  it established  as a  fact that  the  aforesaid documents were executed by the defendants knowing fully well the details  of the  transaction regarding  the liability of Rs. 1,00,000.  The present  suit is  based on the promissory note Exhibit  A.1 and  the equitable mortgage deeds Exhibits A.4  and   A.37.  Thus,  so  far  as  the  question  of  any consideration of  the guarantee  agreement  Exhibit  A.8  is concerned, the  same is  of no  consequence in  view of  the subsequent execution of the promissory note Exhibit A.1. The law enunciated  in the  ruling referred to above in order to hole that the guarantee agreement Exhibit A.8 dated 14.6.171 was without consideration as the loan to 37 persons has been advanced much  earlier to the execution of Exhibit A.8, will not render  the promissory note to be without consideration. Now, so  far as  the consideration  of the  promissory  note Exhibit A.1  is concerned,  the defendants  has applied  for sanctioning a  loan of  Rs.1,00,000 from  the Bank. The head office of  the Indian  Bank at  Madras  vide  Exhibit  A.127 issued a  sanction order to the Indian Bank Sivaganga Branch granting a  medium term  loan of  Rs. 1,00,000  to the first defendant on  18.8.1971. The  loan  was  sanctioned  on  the condition of  obtaining joint  and several demand promissory notes and  an equitable  mortgage deed  in respect  of 27.02 acres of land and hypothecation bond of 2 electric pump sets from the defendants. It further stated that the liability of a sum  of Rs.  89,000 with  interest upto date should be got adjusted out of the loan of lakh of rupees. The agent of the Indian Bank  Sivaganga Branch  sent a  communication to  the first defendant  on 21.8.1971 informing  him of the sanction of the  loan. Exhibit A.36 was the office copy of the letter whereby  the  first  defendant  had  been  informed  of  the sanction of  the medium term loan of Rs. 1,00,000 subject to the  execution   promissory  note  and  other  documents  as directed by  the head  office. Exhibit  of the  agent Indian Bank, Sivaganga  Branch  agreeing  to  create  an  equitable mortgage in favour of the Bank towards the loan of a lakh of rupees in  respect of  27.02 acres  of land. Exhibit A.38 is the registered  letter sent  by the  first defendant  to the custodian of the Indian Bank, head office, Madras intimating that the  balance amount  that will  be paid  to  him  after adjustment of all his liabilities, as disclosed by him under the letter marked Exhibit A.37 may not be sufficient for him to  carry   on  his  agricultural  operations  and  as  such requesting to  sanction a medium short term loan of not less than Rs.20,000 and also requested to direct the agent Indian Bank, Sivaganga  Branch to  return the  promissory notes and other connected  documents to  enable  him  to  collect  the amounts from the concerned parties. Apart from the aforesaid documents, Exhibits  A.39 is  the office  copy of the letter sent by the agent Indian Bank, Sivaganga Branch to the first defendant asking  him to  take delivery  of  the  promissory notes relating to 37 persons after passing a receipt for the same on  13.9.1971.  It may be further noted that out of the amount  of   Rs.  6,760.97   credited  in   the  account  of defendants, a  sum of  Rs.6,200 was  withdrawn by  the first defendant on  7.10.1971 through Exhibit A.52, a cheque drawn in favour  of self.  This proved  beyond any manner of doubt that the  defendants has accepted the sanctioning of loan of Rs.1,00,000 on  the terms  and conditions  laid down  by the

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head office  of the  Bank and  as such  sanctioning of  loan clearly contained  the adjustment of the liability of the 37 persons. Exhibit  A.126 is a true copy of the loan amount of the defendants as per ledger folio 4/168 of the Indian Bank, Sivaganga Branch, which view a liability of Rs. 1,21,006.98. The trial  court had  relied on  all the aforesaid documents and had recorded a finding that the suit promissory note was fully supported  by consideration and the equitable mortgage deed created  by the  defendants were  also true  and  valid documents. The High Court, in our view was wrong in arriving at the  conclusion that  Exhibit  A.1  failed  for  want  of consideration to the extent of Rs.74,190.56 and also for the amount advanced  to the  third defendant,  the liability  in respect of which came to Rs.4,193.19.      We agree  with the  finding of the trial court that the pronote Exhibit  A.1 dated  26.8.1971 was executed with full consideration.  The   defendants  knowingly   ad  with  full knowledge had executed the pronote Exhibit A.1. In the facts and circumstances  of the  case, there  was no  necessity of going  into   the  question   of  novation  of  contract  as contemplated under  Section 62  of the  Indian Contract Act. The defendants  has executed  the pronote  and also  created equitable mortgage  in favour  of the  Bank and  the pronote itself contained  an endorsement of "for value received". As already  mentioned   above,  there   is  also   a  statutory presumption of  consideration in  respect of  the promissory note under  Section 118  of the  Negotiable Instruments Act, 1881. In these circumstance, we allow this appeal, set aside the judgment and decree passed by the High Court and restore the judgment and decree of the trial court with cost. Appeal allowed.