INDIAN BANKversusK. NATARAJA PILLAI AND ANR.

                               INDIAN BANK                                          A
                                     v.
                        K. NATARAJA PILLAI AND ANR.

                                OCTOBER 22, 1992

                  [KULDIP SINGH AND N.M. KASLIWAL, JJ.]                             B

            Constitution of India, 195()-Article 136-Appea/-Execution ofpromis-
      sory note, equitable mortgage etc. for loans from bank-Proof-Statutory
      presumption u/s. 118-Negotiable Instrnments Act, 1881-Liability of defen-
      dants to pay the amount claimed by bank.                                      c
            Negotiable lnstrnments Act, 1881-Section 118-Promissory note-
      Consideration-Presumption of-Proof of execution of pronote, equitable
      mortgage etc. for bank loans-Liability of defendants to pay the amount
      claimed by bank.
                                                                                    D
              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. I, his wife and his son, the defendant Nos. 2 and 3 respec·
      lively.
                                                                                    E
            According to the Bank, the defendant Nos. 1 to 3 executed a promis-
      sory 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 ex-
      ecuted an equitable mortgage on 28.8.1971 for 'B' schedule properties.

             The consideration for the transaction also included an amount of       F
      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 short term loan in favour
      of 37 persons.

            The defendant No.1 denied the execution of guarantee agreement as       G
      well as the promissory note. He also denied the furnishing of any guaran-
      tee 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    H
                                         109
    110                 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A defendants 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. l.
B
          The defendant No. 3 also filed a separate additional written staje-
    ment 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.
c         The trial court decreed the suit in favour of the Bank and against
    the defendant Nos. 1 and 2. The suit against defendant No. 3 was dis-
    missed as he was found to be a minor on 26.8.1971, i.e., on the date of the
    execution of the promissory note.

D         The defendant Nos. 1 and 2 liled 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 promis-
    sory 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
E   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 execut-
    ing the guarantee agreement nor for executing the promissory note. It
    also held that the promissory note c.ould 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
F
    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 per cent per annum from the date of the plaint till the date
G   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.

H         Allowing the appeal filed by the Bank, this Court,
          INDIAN BANK 1·. K. Nt\TARAJA Pll.1.1\I [KASLIWAL. l.[         111

      HELD : 1.01. All the three defendants had taken loans from the A
bank and those were outstanding against them at the time of execution of
the pronote. (115-B)

      1.02. The defendants had 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]                                B
      1.03. Section 118 or the Negotiable Instruments Act, 1881 provides
for a statutory presumption of consideration of every negotiable instru-
ment, which includes a promissory note. [115-B)

      1.04. The pronote, Exhibit A.1. dated 26.8.1971 was executed with full   C
consideration. The defendants knowingly and with full knowledge had ex-
ecuted 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        D
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      E
and has ignored the important relevant document which prove beyond any
manner of doubt that the promissory note, Exhibit A.l, 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)

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

     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.                       G
        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 H
    112                SUPREME COURT REPORTS [1992) SUPP. 2 S.C.R.

A 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 an 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.
B   Narayanan (defendant No.3). According to the Bank, the defendant Nos.l
    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 an equitable mortgage on 28.8.1971 for
    'B' schedule properties. The consideration for the aforesaid transaction
c   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 had thus
    based its claim in the plaint on the promissory note and guarantee agree-
D   ment 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 inlrfr
  alia that the defendants had not furnished any guarantee on 14.6.1971 with
  regard to the repayment of loans amounting to Rs.71,000 to 37 persons.
E The defendants had not executed any promissory note in favour of the
  Bank for a lakh of rupees nor had 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 of the Bank Shri Krishnamurthy
  Iyer in order to ward of his own prosecution and arrest for having advanced
F 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 exer-
  cise of fraud, undue influence, coercion and misrepresentation. The defen-
  dant 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
G 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 him. The
  trial court by judgment dated 29.4.1975 decreed the suit in favour of the
  Bank and against the defendant Nos. l and 2 only and dismissed the suit
H against defendant No. 3 as he was found to be minor on 26.8.1971.
       INDIAN BANK v. K. NATARAJA PILLAI [KASLIWAL, .!.[             113

       The defendant Nos. 1 and 2 filed an appeal in the High Court. The A
High Court though; upheld the finding of the trial court that the promissory
note Exhibit A.l dated 26.8.1971 was executed with the full knowledge that
it was a promissory note to Rs.l,00,000, but the same was void for want of
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 considera-
                                                                             B
tion for executing the guarantee agreement dated 14.6.1971 nor for execut-
ing 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     c
borrowings from the Bank. The High Court .also held that the trial court
itself had found it established that the defendant No. 3 was a minor on
26.8.1971 and the Bank having not filed any appeal, no decree could have
been passed against defendant Nos. 1 and 2 for an amount of Rs.4,193.19,
the amount advanced lo the third defendant. The High Court as a result
                                                                             D
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 date of the recovery of the amount.
Aggrieved against the judgment and decree of the High Court the Bank E
has come in appeal before this Court.

      We have heard lear~ed counsel for both the parties and have
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 F
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 G
so far as the 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
advanced 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 fir.st
defendant. The High Court took the view that where the surety bond H
    114                 SUPREME COURT REPORTS j1992J SUPP. 2 S.C.R.

A 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 had become due for payment on the date of
B
    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
c   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, l.L.R. I Allahabad 487,
    Mutlmkarnppa Mudali v. Kathappudayan 27 M.L.J. 249 and on Bank of
    India v. Matha Gounder, 1980 T.N.L.J. 117.

D
          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
E rescinding or altering the original contract. The new contract should extin-
    guish 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 a subsisting debt between the
    Bank and the 37 debtors and as such the liability arising out of the debt could
F   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 arrangeinent under which the first defendant is said
    to have taken over their liability. Even after the execution of the promissory
    note Exhibit A.1, the existing debt due by the 37 borrowers to the Bank was
G   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
H   any manner of doubt that the promissory note Exhibit A.1, the basis of the
         INDIAN BANK, .. K. NATARAJA PILLAI [KASUWAL, J.]                  115

 suit \Vas executed \\'ith consideration and the defendant Nos. 1 and 2 were      A
  liable to pay the entire amount claimed hy the Bank. Exhibit A.l 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       B
  Instrument which includes a promissory note. It has been established on
  record that all the three defendants had taken loans from ihe 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      C
  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. 2,000 on 26.3.1970. The third defendant who was the son of the first     D
  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
  had also executed a guarantee agreement on 14.6.1971 in respect of short
  term production loan granted to 37 persons amounting to B.s.71,000. The
  total of the above outstandings came to Rs.93,239.03. The defendants sought     E
  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. 6,760.97 was advanced to cover up the deficiency in the
  sanctioned loan amount of Rs.1,00,000. On 26.8.1971 the defendants ex·
  ccuted the promissory note for the sanctioned loan amount of Rs.1,00,000
 and to repay the amount with interest as rntntioned in the pronote. On the       F
 same day the defendants executed a hypothecation of their movable proper-
 ties 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 hyothecation
 bond in respect of the crops on the same day. On the same day, the
 defendants agreed to execute an equitable mortgage deed in respect of27.02 G
 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 28.8.1971. The defendants had 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 H
    116                  SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A . a fraud and that the transaction was vitiated on the ground of fraud, undue
    influi:ncc, coercion and misrepre~cntation. Both the trial court as \Vell as the
    High Court found it established as a fact that the aforesaid documents were
    executed by the defendants knowing fully well tbe 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
B
    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 rulings referred to above in order to hold that the guarantee
    agreement Exhibit A.8 dated 14.6.1971 was without consideration as the
c   loans to 37 persons had 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 had applied for sanctioning a loan of Rs.1,00,000
    from the Bank. The head office of t~e Indian Bank at Madras vide Exhibit
D A.127 issued a sanction order to the Indian Bank Sivaganga Branch granthing
    a medium term loan of Rs.1,00,000 to the first defendant on 18.8.1971. The
     loan wa~ 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 hypothccation bond of 2 electric pump sets from the defendants. It
     further stated that the liability of a sum of Rs. 89,900 with interest upto date
E    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 of
F    promissory note and other documents as directed by the head office. Exhibit
     A.37 dated 26.8.1971 is the agreement executed by the defendants in favour
     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
G    defendant to the custodian of the lndi•n Bank, head office, Madras intimat-
     ing 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
H    and also requested to direct the agent Indian Bank, Sivaganga Branch to
         INDIAN BANK 1·. K. N;\TARAIA PILLAJ [KASIJWAL, .I.[               117

return the promissory notes and other connected documents to enable him to        A
collect the amounts from the concerned parties. Apart from the aforesaid
documents, Exhibit A.39 is the office copy of the lcller 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 13.9.1972. 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 B
withdrawn by the first defendant on 7.10.1971 through Exhibit A.52, a cheque
drawn in favour of self. This proves beyond any manner of doubt that the
defendants had accepted the sanctioning of loan of Rs.1,00,000 on the terms
and conditions laid down by the head office of the· Bank and as such sanction-
ing of loan clearly contained the adjustment of the liability of the 37 persons.  c
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 views 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 D
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        E
A.1 dated 26.8.1971 was executed with full consideration. The defendants
knowingly and with full knowJ,ege had executed the pronote Exhibit A.L
In t~e 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 had executed the pronote and
also created equitable mortgage in favour of the Bank and the pronote             F
itself contained an endorsement of 11 for value received 1'. As already men~
tioned above, there is also a statutory presumption of consideration in
respect of the promissory note under Section 118 of the Negotiable Instru-
ments Act, 1881. In these circumstances, we allow this appeal, set aside
the judgment and decree passed by the High Court and restore the                  G
judgment and decree of the trial courl with costs.

V.P.R.                                                       Appeal allowed.