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PETITIONER: M..C. CHACKO

       Vs.

RESPONDENT: STATE BANK OF TRAVANCORE, TRIVANDRUM

DATE OF JUDGMENT: 23/07/1969

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) MITTER, G.K.

CITATION:  1970 AIR  500            1970 SCR  (1) 658  1969 SCC  (2) 343

ACT: Charge--Guarantee--Father guaranteeing payment of  overdraft account  of  Bank of which son was manager--Deed  by  lather giving his properties to son and family members--Recital  in deed  that father’s liability if any to be satisfied by  the son  and  the properties allotted to him--If  sufficient  to create    charge--Right if can be   enforced by  person  not party to contract.

HEADNOTE:      A bank, of which the appellant was the Manager, had  an overdraft -account with another bank which later merged with the  respondent.  The appellant’s father had  executed  from time to time letters of guarantee holding himself liable for the amount under the overdraft arrangements. The appellant’s father  executed  a deed giving away his properties  to  the appellant,  and  other  members of the  family.   The   deed recited   that he had executed the letters of  guarantee  at the request of the appellant, and that the amount due to the Bank was to be paid by the appellant; but if any amount  had to be, paid by him (father) as per the letter of  guarantee, the appellant and the properties allotted to him were to  be answerable for that amount.  The creditor bank filed a  suit against  the debtor bank and also against the appellant  and his  father’s other heirs and legal representatives for  the amount due under the overdraft arrangement; and claimed that a  charge  was created on the properties to which  the  deed executed by the father of the appellant related.  The  trial court  decreed  the suit against the debtor  bank  and  also ’against  the appellant limited to the property received  by him fro.m his father under the deed but held that the  claim to enforce the personal liability of the father against  his legal  representatives was barred by the law of  limitation. The  High Court confirmed the decree.  On the questions  (i) whether under the deed a charge was created in favour of the creditor  bank to satisfy the debt arising under the  letter of  guarantee, and (ii) whether the charge, assuming that  a charge arose, was enforceable by the creditor bank when,  it was not a party to the deed,     HELD:  (i) In order that a charge may be created,  there must  be evidence of intention disclosed by the deed that  a

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specified   property   or  fund belonging to  a  person  was intended to be made liable to satisfy the deed,     In  the  present ease the recitals in the deed  did  not evidence  any intention of the donor to create a  charge  in favour  of  the  creditor  bank;  they  merely  set  out  an arrangement between the donor and the members of his  family that the liability under the letter of guarantee if and when it  arose,  will be satisfied by the appellant  out  of  the property  allotted  to him under the deed.   The  letter  of guarantee  Created  merely  a  personal  obligation  and  an intention tO convert a personal debt into a secured debt  in favour  of the Bank, a third person, could not  be  inferred from the recitals in the deed.     Akalla Suryanarayana Rao & Ors. v. Dwarapudi Basivireddi JUDGMENT: 659     (ii)  Even if it be granted that there was an  intention to  create a charge the creditor-bank, not being a party  to the deed could not enforce its covenants.  It must be  taken as  well  settled that except in the case of  a  beneficiary under  a  trust created by a contract or in the  case  of  a family arrangement to right may be enforced by a person  who is not a party to a contract. [662 H]     Krishna  Lal  Sadhu v. Pramila  Bain  Dasi,  I.L.R.   55 Cal.  1315, referred to.

&     CIVIL  APPELLATE JURISDICTION:  Civil Appeal No. 652  of 1966.     Appeal  by  special leave from the  judgment  and  order dated November 23, 1964 of the Kerala High Court in A.S. No. 502 of 1961.     S.V. Gupte, Anantha Krishna lyer,  S.  Balakrishnan  and R. Thiagarajan, for the appellant.     H.R. Gokhale, J.S. Arora and K. Baldev Mehta,   for  the    respondent.     The Judgment of the Court was delivered by     Shah,  Ag.  C.J.  The High Land Bank Kottayam  of  which the.  appellant  M.C.  Chacko  was  the  Manager,   had   an overdraft  account  with  the Kottayam  Bank.  K.C.  Chacko, father  of  the appellant, had executed from  time  to  time letters of guarantee in favour of the Kottayam Bank agreeing to  pay  the  amounts due by the High Land  Bank  under  the overdraft arrangement. By the last letter of guarantee dated 22nd January 1953 K.C.  Chacko agreed to hold himself liable for  the amounts due by the High Land Bank to  the  Kottayam Bank on the overdraft arrangement subject to a limit of  Rs. 20,000.     The Kottayam Bank Ltd. filed a suit in the court of  the Subordinate Judge of Kottayam against the High Land Bank for a  decree  for the amount due in the account. To  this  suit were  also impleaded K.C. Chacko the guarantor, M.C.  Chacko Manager  of the High Land Bank, and M.C.  Joseph,  Kuriakose Annamma  and  Chinnamma,  the  last  three  being  the  son, daughter  and wife respectively of K.C. Chacko. Against  the High  Land  Bank the claim was made on the  footing  of  the overdraft  account:   against K.C. Chacko on the  letter  of guarantee and against M.  C. Chacko, his brother, his sister and his mother as universal donees of the property of  K..C. Chacko under a deed dated June 21, 1951 under which, it  was claimed,  a charge was created on  the properties  to  which the deed related and against M.C. Chacko, also on the  claim that  he had personally agreed to pay the amount due by  the

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High Land Bank. During the pendency of the suit, K.C. Chacko died and the suit was prosecuted against his widow,. 660 daughter  and  sons  who were described also  as  his  legal representatives.     The  trial court decreed the suit against the High  Land Bank  and also against M.C. Chacko, limited to the  property received  by him from his father under the deed  dated  June 21,  1951.  The claim of the Kottayam Bank  to  enforce  the liability  under the letter of guarantee personally  against K.C.   Chacko  was held barred by the law of limitation  and on that account not enforceable against his heirs and  legal representatives.  The   Court also rejected the  claim  that M.C.  Chacko  had personally agreed to pay  the  amount  due under the overdraft arrangement.     In appeal to the High Court by M.C.  Chacko  the  decree C  passed  by the trial court was confirmed and  the  cross- objections filed by the State Bank of Travancore with  which the Kottayam Bank was merged claiming that M.C. Chacko   was personally  liable were dismissed. This appeal with  special leave is preferred by M.C. Chacko against the decree of  the High Court.    Two  questions ’arise in this appeal: (1)  whether  under Ex.  D-1 a charge is created in favour of the Kottayam  Bank to  satisfy the debt arising under the letter  of  guarantee and (2) whether the charge assuming that a charge  arises-is enfforceable by the Bank when it was not a party to the deed Ex.D-1.     Ex.D-1 is called a deed of partition: in truth it is   a deed.  whereby K.C. Chacko gave the properties described  in the Schedule A to M.C. Chacko and other properties described in  Schs. B to F to M.  C.  Chacko:  M.C.  Joseph,   Annamma and Chinnamma. In paragraph 17 it is recited:                     "I  have  no  debts  whatsoever.  If  in               pursuance  of the’ letter given by me  to  the               Kottayam Bank at the request of my eldest son,               Chacko, for the purpose of the High Land  Bank               Ltd.,  Kottayam, of which he is  the  Managing               Director, any amount is due and payable to the               Kottayam Bank, that amount is to be paid  from               the  High Land Bank by my son, Chacko. If  the               same  is  not so done and any  amount  becomes               payable (by me) as per my letter, for that  my               eldest  son,  Chacko  and  the  properties  in               Schedule  A alone will be answerable for  that               amount." The  other  paragraphs  which deal with  the  properties  in Schedule A may also be referred to. Paragraph 10 of the deed recited:                 "The donees of the properties included in A,               B and  C schedules are, as from this. date, to               be   in   possession   of   their   respective               properties and to get mutation  of 661               registry in their names, pay land revenue  and               enjoy  the  income  save  that  from  cocoanut               trees." By  paragraph  12 it was declared that  notwithstanding  the deed of partition, K.C. Chacko will take the income from the cocoanut  trees  standing  on  the  properties  included  in Schedules  A, B, C and F till his death and that the  donees of  the properties will take and enjoy the income  from  the cocoanut  trees  in their respective  properties  after  his death. In paragraph 13 it was recited that:                   "As  it is decided  that  Chinnamma.......

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             should  receive and have for  her  maintenance               the  rent of the building in item 7 in  the  A               schedule, as well as the rent of the  building               in item 18 of the B schedule, she is  to be in               possession  of  these buildings as  from  this               date  and  is to let them out  and  enjoy  the               rent.    The   respective  donees  will   have               possession  and enjoyment  after   her  death.               Chinnamma  is to have full rights and  liberty               to reside in any of the houses included in  A,               B or C schedule and so long as she so  resides               in  any  of  the houses,  the  donees  of  the               respective houses is to meet all her expenses.               The  rent  collected  by  Chinnamma  from  the               buildings given possession of to her is to  be               utilised  by her for her private  expenses  as               she pleases." In  our  judgment the various covenants in  the  deed.  were intended  to incorporate an arrangement binding between  the members   of  the family for’ satisfaction of the  debt,  if any, arising  under the letter of guarantee.     We  are unable to agree with the High Court that by  cl. 17 of the deed it was intended to create a  charge in favour of   the  Kottayam Bank for the amount which  may  fall  due under  the  letter  of guarantee. The  letter  of  guarantee created  merely  a personal obligation. The deed Ex. D-1 was executed  before the last letter of guarantee dated  January 22,  1953.  By cl. 17  of Ex. D-1 it is merely directed that the   liability   if   any   arising  under  the  letter  of guarantee, shall be satisfied by M.C. Chacko and not by  the donor,  his  son M.  C.  Joseph, his  daughter  Annamma  and his wife Chinnamma. The reason for the provision in the deed is clear. M.C. Chacko was the Managing Director of the  High Land  Bank Ltd. and it was at the instance of M.  C.  Chacko that  the letters of guarantee were executed by  the  donor. For  creating a charge on immovable property  no  particular form of words is needed: by adequate words-intention may  be expressed  to make property or a fund belonging to a  person charged for payment of a debt mentioned in the deed. But  in order that  a charge may be created, there must be  evidence of  intention  disclosed  by  the  .deed  that  a  specified property or fund belonging to 662 a person was intended to be made liable to satisfy the  debt due  by  him.  The recitals in cl. 17 of  the  deed  do  not evidence  any intention of the donor to create a  charge  in favour  of  the  Kottayam  Bank:  they  merely  set  out  an arrangement between the donor and the members of his  family that  the  liability under the letter of guarantee,  if  and when it arises, will be satisfied by M.C. Chacko out of  the property allotted to him under the deed.     The debt which M.C. Chacko was directed by the  deed  to satisfy was not in any sense a "family debt". It was a  debt of  K.C.  Chacko; and K.C. Chacko was personally  liable  to pay  that debt. After his death his sons, his  daughter  and his   widow would be liable to satisfy the debt out  of  his estate in their hands. From the recitals in the deed Ext. D- 1  an intention to  convert a personal debt into  a  secured debt  in  favour of the Bank, a  third  person,   cannot  be inferred.  In Akalla Suryanarayana Rao & Others v. Dwarapudi Basivireddi & Others(1) the Madras High Court in  construing a  deed of partition of joint family property pursuant to  a compromise decree, held that properties allotted  to certain branches to which were also "allotted certain debts" with  a stipulation  that until the debts were fully discharged  the

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properties allotted to the shares of the respective  persons shall be liable in the first instance, were not subject to a charge in favour of the creditors.  The Court held that  the covenant  in  the partition deed resulted in a  contract  of indemnity, and not a charge.   In the present case also  the covenant  that M.C. Chacko will either personally or out  of the properties given to him satisfy the debt is intended  to confer  a  right  of indemnity upon  other  members  of  the family, if the Kottayam Bank enforced the liability  against them.  and created no charge in favour of the Bank.  Clauses 12  ’and  13 of the deed support that view.  By el.  12  the right  to  the  coconut trees  standing  in  the  properties included in Schs. A, B, C and F is reserved to K.C.  Chacko. Similarly  Chinnamma,   wife  of K.C. Chacko,  is  permitted during her lifetime to  occupy  the houses in the properties described  in the three schedules and to recover the  income and to utilise the same for herself.  It is clear that  K.C. Chacko  had no intention to create a charge or  to  encumber any  of the properties for the debt which may become due  to the Bank.     The Kottayam Bank not being a party to the deal was  not bound  by the covenants in the deed, nor could   it  enforce the  covenants. It is settled law that a person not a  party to  a  contract cannot subject to  certain  well  recognised exceptions,   enforce  the  terms  of  the   contract:   the recognised  exceptions  are that   beneficiaries  under  the terms of the contract or where the contract is a part of the family arrangement  may enforce  the covenant.  In (1) I.L.R. 55 Med. 436. 663 Krishna  Lal  Sadhu v.  Primila Bala  Dasi(1)   Rankin,  C.J observed:                    "Clause (d) of section 2 of the  Contract               Act  widens the definition of  ’consideration’               so  as  to  enable a party to  a  contract  to               enforce the same in india in certain cases  in               which  the English Law would regard the  party               as  the  recipient  of  a  purely    voluntary               promise   and would refuse to him a  right  of               action  on  the ground of  nudum  pactum.  Not               only,  however,  is there nothing in s.  2  to               encourage  the  idea that  contracts   can  be               enforced by a person who is not a party to the               contract, but this notion is rightly  excluded               by   the   definition   of   ’promisor’    and               ’promisee’." Under the English Common Law only a person who is a party to a contract can sue on it and that the law knows nothing of a right  gained  by a third party arising out of  a  contract: Dunlop  Pneumatic  Tyre Co. v. Selfridge & Co. (2).  It  has however  been recognised that where a trust is created by  a contract,   a beneficiary "may enforce the rights which  the trust  so  created has given him The basis of that  rule  is that though he is not a party to the contract his rights are equitable  and  not  contractual.   The  Judicial  Committee applied that rule to an Indian case Khwaja Muhammad Khan  v. Husaini Begam(3).  In a later case Jaman Das v. Ram Autar(4) the  Judicial  Committee pointed out  that  the  purchaser’s contract to pay off a mortgage debt could not be enforced by the mortgagee who was not a party to the contract.  It  must therefore  be taken as well settled that except in the  case of  a beneficiary under a trust created by a contract or  in the  case of a family arrangement, no right may be  enforced by a person who is not a party to the contract.       Even  if it be granted that there was an intention  to

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create a charge, the Kottayam Bank not being a party to  the deed  could enforce the charge only if it was a  beneficiary under the terms of the contract, and it is not claimed  that the Bank was a beneficiary under the deed Ex. D-1. The  suit against M.C. Chacko must therefore be dismised.     The  decree passed by the High Court is modified and  it is  declared that M.C. Chacko is not personally  liable  for the debt due under the letter of guarantee executed by  K.C. Chacko,  nor  are the properties in schedule A  allotted  to M.C.  Chacko  under the deed dated June 21, 1951  liable  to satisfy  the debt due to the Kottayam Bank under the  letter of guarantee. (1) I.L.R. 55 Cal. 1315.     (2) [1915] A.C. 847. (3) (1910) 37 I.A. 152.      (4) [1911] 39 I.A. 7. 14 Sup CI/69--13 664     Having  regard  to  the circumstances of  the  case  and specially  that a concession that persons not parties  to  a contract may enforce the benefit reserved to them under  the contract  was   made before the High Court, we  direct  that the  parties  to  this  appeal will  bear  their  respective costs throughout. Y.P’                                        Decree modified. 665