Holding

A surety is discharged to the extent of the security lost due to the creditor's negligence, and the guarantee clauses do not defeat the operation of section 141 of the Indian Contract Act.

Summary

The State Bank of Saurashtra extended a cash‑credit facility to Harilal Adatia on two securities: a pledge of 5,000 tins of groundnut oil and a personal guarantee by Chitranjan Rangnath Raja. The bank negligently lost the pledged oil tins while they were in its custody. After the principal debtor’s death, the bank sued the surety for the outstanding amount; the surety paid and appealed, arguing discharge under sections 139 and 141 of the Indian Contract Act. The High Court held the surety was discharged because the loss of one security due to the bank’s negligence invoked section 141, despite the guarantee’s clauses 5, 7 and 13. The Supreme Court affirmed that section 141 applies, the guarantee clauses cannot override the statutory right, and the surety is fully discharged; the bank’s appeal was dismissed. The Court also clarified that restitution under CPC 144 must be sought from the court of first instance, not the Supreme Court.

Issues considered

The effect of the bank's negligence leading to loss of pledged security on the discharge of the surety under s.141 of the Indian Contract Act.
Whether clauses 5, 7 and 13 of the letter of guarantee can exclude the operation of s.141.
Whether the Supreme Court can entertain a restitution application under CPC 144 after the appellate reversal.

Legislation cited

Code of Civil Procedure, 1908s. 144
Indian Contract Acts. 139, s. 141

Subjects

suretyshipdischarge of suretysection 141negligence of creditorpledged securitycomposite transactionguarantee clausesrestitutionCPC 144

Judgment

915

STATE BANK OF SAURASHTRA
v.
..~/ CHITRANJAN RANGNATH RAJA AND ANR.
April 30, 1980
[A. C. GUPTA, D. A. DESAI AND E. S. VENKATARAMIAH, JJ.] B·

Indian Contract Act, Section 141, scope of-Discharge of surety-Conditions
under which surety can be discharged under sections 139-141 of the Act,-Secu-
1 rity of pledged goods was lost on account of the negligence of the Creditor-
Wheiher "the Surety would not be discharged in the instant case on ti proper con-
, - _ struction of clauses 5, 7 and 13 of, the letter of guarantee. c·
Civil Procedure Code, 1908-Sect~on 144 as amended by Amendment Act of
1976, scope o/-Re.stitution-Dir'ections by the SUpreme Courl) in the instant
case, whether could be made-"Court of first instance", meaning of.

· The appellant bank allowed a cash credit facility limited to Rs. 75,000/- to
the principal debtor Harilal Parmananddas Adatia on his pledging 5,000 tins of
groundnut oil under the lock and key of the Bank and on personal guarantee of D'
the surety, respondent No. ·2. The principal debtor executed a demand promis-
sory note Ext. 81 in fayour of the Bank on Sept'ernber 16, 1957, and on the same
day the principal debtor also executed a. demand promissory note, Ext. 30, in
favour of the surety which the surety endorsed in favour of the Bank. Along
with the rwo demand promissory notes, simultan'eously the surety executed a letter
of guar.:intee F...xt. 31 in favour of the Bank and the principal debtor executed· a
--.J.. bond Ext. 83 in favour of the Bank. The principal debtor also passed letter of E
continuity of the bond and the promissory note Ext. 82. Thereafter the principal
debtor enjoyed the cash credit facility by borrowing various amounts. By the
end of February 1959 the principal debtor owed Rs. 76,368.04 P in this account
to the Bank. Principal debtor died in November 1959. The Bank wrofe to the
surety letter Ext. 32 dated December 24, 1959, calling upon him to pay the
outstanding balance of Rs. 70,879/- in cash credit account of principal debtor as
in the circumsta.nces mentioned in the letter the balance was required to be r'e- F
~vered from the surety. Some correspondence ensued thereafter between the
· Bank and the surety and ultimately the Bank filed the suit for recovery of
ii \ Rs. 76,368.04 P . .;;:.gainst defendant 1, the legal representative of princi:Pal debtor
and defendant. 2, the surety.

The trial· court found tb2.t there was negligence on the part of th'e Bank with
regard to the safe custody of the pledged oil tins but as the contract of guarantee
G
enfered into by the surety with the Bank was independent of the pledge of
goods given by the principal debtor, the sur'ety is not discharged from his
liability under the guarantee. So oOOerving the trial court decreed the suit.
The .surety pai<l the entire amount demanded and appealed to t'he High Court.

The High Court held that the two promissory notes, on'e executed by the
principal debtor in favour of the Bank Ext. 81, and another by the principal
debtor in favour of the surety· and· endorsed by the surety to the Bank, Ext. 30, H
and the letter of guarantee Ext. 31 executed by the surety in favour of the Bank
as also the bond executed by the principal debtor in favoor Qf the Bank Ext. 83

•
916 SUPREME COURT REPORTS [1980] 3 S.C.R,

A and the letter of conlinuity Ext. 82 executed by the principal debtor in favour of
the Bank, all on September 16, 1957, constituted one composite transaction and
they evidenced that the principal debtor bad offered two securities, one the
pledge of oil !ins and another personal guarantee of the surety. The High Court J.._
further held th~t the Bank was utterly negligent and had not exercised. such care
as a prudent man would in the circumstances of th'e case which resulted in the
loss of security, namely, pledged oil tins and, therefore, in view of combined
B operation of sections 139' and 141 of the Indian Contract Act, the surety is d.i£..
charged. Accordingly, the appeal of th'e surety was allowed and the suit against
him wlis dismissed. Hence this appeal by plaintiff Bank.
Dismissing the appeal by certificate, the Court,
HELD : 1. In order to attract section 141 of the Contract Act, it must be
shown that the creditor had' ta.ken more than one security from the principal
c debtor at the time when the contract of guarantee was enfered into and irrespec- -~
tive of the fact whether the sur'ety 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 16 th:e extent of theo value
of the security. In the instant case as found by the High Court and not contro-
verted, the principal debtor had offered two securities, (i) the pledge of goods,
(ii) personal guarantee of the surety. Verily, the General Manager of the Bank
D accepted tire proposal for cash credit facility on the specific condition that the
principal debtor s.hall offer two securities, one the pledge of goods to be kept
under the lock and key of the Bank to be supervised by the Bank's 'employee, and
secondly, the personal guarantee of the surety. The surety himself agreed to give
p'ersonal guarant4ee on the specific understanding a.nd with the full knowledge of
the Bank that the principal debtor was offering another security, namely, pledge
of goods. The' surety contracted on the good faith Of the principal contract when
entering into contract of guarantee in which case h'e is d'eemed so to contract that
both the securities would be available to the creditor. If the two promisoory
notes Exts. 81 and 30 coupled with the letter of guarantee Ext. 31 executed by
the sufety and the bond Ext. 83 executed by the principal debtor at one sitting
on September 16, 1957, evidence one composite tr,ansaction, it is an inescapable .
concluSion that the principal debtor offered two securities, one the pledge of goods
and the other the- personal guarantee of th'e surety. The surety in good faith
F contracted to offer personal guarantee on the dear understanding that the princi-
pal debtor has offered security by way of pledge of goods and the goods were ~ -
be· in the custody of the creditor Bank. On this conclusions. 141 of the Act Wl11 )
be indubitably attracted. [922 A-Fl
Sanderson v. Aston, [1873] L. R. 8 Exch. 73 at 76, quoted wit.h npproval.
2. ,&ction 141 comprehends a situation where the debtor has offered more
G than one security one of which is the personal guarantee of the surety. Even if
the surety of personal guarante'e is not aware of any other security offered by the
principal debtor yet once the right of the surety against the principal debtor is
impaired by any action or inaction, which implies negligence appearing from lack
of supervision undertaken in the contract, the surety would be disCharged under
the combined operation of sections. 139 and 141 of the Act. In any event, if the
creditor loses or without the consent of the surety parts with the security, the
H surety is discbarged to the extent of tire security lost as provided by s. 141. [922
F-HJ
State of Madhya Pradesh v. Kaluram, [1967] 1 SCR 266. followed .

•
STATE BANK V. C. R. RAJA 91 7

. Wulff and Billing v. Jay, (1872) 7 QB 756, quoted with approval. A.·
3. Jn the instant case, clauses 5, 7 and 13 of the letter of guarantee, Ext. 31
would'be of no assistance to the Bank. [926 B, G, HJ
(a) Clause 5 confers right upon the creditor Bank to gra.nt any time or
indulgence in payment of the deht or to determine, enlarge or vary its credit and
to vary, exchange or take other securities or relea~e any other securities held by
the Bank but such an act on the part of the Bank would not have the effect of B
disi:Qarging the surety or in any manner affecting his liability under the letter of
guarantee. It is not a case of granting time or indulgence to the principal debtor
or variation of the credit or taking one set of security in substitution of some
other security or release of any s'ecurity. Release of security implies a volitional
act on the part of the Bank. Loss on· account of negligence cannot be e<luated
r with release. [925 G-H. 926 A-Bl
I
c
(b) Clause 7 provides for non-Oischarge of surety even if the creditor Bank
enter~ into a composition with the principal debtor and that the surety would
nonetheless be liable even if the Bank has other guarantee, security or reniedy
guarantees, securities or remedies from the principal debtor. UpOn a true cons-
truction of clause 7, the expression 'any other guarantee, s'ecurity or remedy'
therein mentioned must be security other than the pledged goods. [926 B-C]
Amrit Lal Goverdhan Lal and Ors. v. State Bank of Travancore and Ors.,
[19681 3 S.C.R. 724 @ 731, followed.
(c) aause 13 provides for continuing the guarantee where the principal
debtor is an association of persons and for continuance of the guaralitee in the
event of death, retirement, etc. of one of such association of persons or the
guarantee remaining intact and effective and legally enforceable in'Cspective of
some defect arising from the internal management of such association of persons. E
First security, namely, the pledged goods are lost to the Bank and the concurrent
finding again incontrovertible is that the pledged goods were lost on account of
the negligence of the creditor Bank. Whole of the security was lost and, there-
fore, the surety would be discharged in entirety because it is crystal clear that
the principal debtor had agreed and had in fact pledged 5,000 tins of oil which
even if sold at the then current market price would have satisfied the Bank's
,_.entire claim. Accordingly, the surety would be discharged in entirety. ['>26 G-H, F
\ 927 A-Bl
4. Accepting a contention that section 141 would not be attracted· and the
surety would not be discharged even if it is found that a creditor has taken more

• than one security on the basis of whiph ad'vance was mad'e and the surety gave
pelllonal guaranteei on the good faith of other security being offered by the prlnci-
plli debtor which itself may be a consideration for th'e surety offering his personal
guarantee and the creditor by its own negligence lost one of the securities, would
tantamount to putting a premium on the negligence of the creditor to the detri-
ment of the surety who is usually described as a 'preferred debtor'. A Q>urt
shonld not by its construction of such letter of guarantee enabre the creditor to ·
act negligently and yet be not in any manner accountable. [927 B-E]

5. By section 144 of Civil PrO\Xl<lure Code 1908, as amended by the Amend·
IOllD!. Act, 1976, the jurisdiction to grant restitution is conferred upon "the Court
wl!i~h p~ed the decree or order". By an explanation added to section 144 by
the Amendment Act of 1976, the expression "Court which passed the decree or

•
918 SUPREME COURT REPORTS [1980] 3 s.c.R.

order" shall be deemed to include where the decree or order has been varied or
reversed in exercise of appellate or revisional jurisdiction, the Court of first
instance. [927 G-H, 928 Al

In the illstant case (i) the appellant was the plcintiff and its suit was decreed
by the trial Court, i.e. the Court of Civil Judge, Senior Division, Gonda!, on
November 18, 1960. The present appellant by its letter dated February 14, 1961,
demanded from the surety a sum of Rs. 84,828.07 P. inclusive of costs and in·
terests on the principal amount decreed. The surety respondent 1 in this Court
paid the appellant Rs. 84,828.07 P. on April 3, 1961. In the appeal by the
surety the High Court reversed the decre'e and dismissed the suit against the
surety. Accordingly, the surety .is entitled to restitution; and (ii) the present
one is th'e simplest case where the suit in f.avour of the appellant and against the
surety was decreed by the trial court, i.e. the Court of first instance, and this ·-~
c decree has been reversed by the High Court in 'exercise of its a.ppellate jurisdic~
tion. In such a situation clause (a) of the explanation w6uld be attract.ed and
an application for restitution will have to be mad'e to the Court of first instance,
i.e. the Court of Civil Judge, Senior Division, Gonda!. It is nowhere suggested
that such a Court does not exist. Therefore, it would not be prop'er for this
Court to direct restitution. However, there will be no justification for the appel-
lant Bank to withhold the amount which was collecfed from the surety on a
mere demand. Therefore, an application for restitution, made by the surety
would not lie to this Court [928 B-D, F-H].

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1058 of 1970.
From the Judgment and Decree dated 25-4-1969 of the Gujarat
'"~h Court in Appeal No. 22/61.
E S. N. Kackar, K. J. John and Sri Narain for the Appellant.
S. T. Desai, H. S. Parihar and I. N. Shroff for the Respondents.
The Judgment of the Court was delivered by
DESAI, J.~· This appeal by certificate under Article 133(1) (a) of
F the Constitutionlis by;the'original plaintiff-StateflBank of Saurashtra
('the Bank',for]short)-w,hose suit for recovery.of Rs.' 76,368 ·04SP.~
from the legal representative of the deceased principal debtor Harilal
Parmanaddas Adatia and his surety original defendant 2 Chitranjan
Rangnath Raja. ('Surety' Jor short) was decreed by the trial court I
both against the legal representative of the principal debtor and the
G surety but on appeal by the surety, was dismissed by the High Court
.·only against the surety .
•
Harilal Parmananddas Adatia, hereinafter referred to as 'principal
- debtor', approached the ·Mmager of the Bagasra Branch of State
.-Bank ofSaurashtra seeking facilityl for cash credit1 upto' Rs. 75,000/·.
H "'i'k"Silbmitted proposal form Ext." 66 on September 10, 1957, offering
to give security for the cash credit by pledge of groundnut oil tins as
also a personal guarantee of defendant 2 Chitranjan Rangnath Raja ..

•
STATE llANK v. c. R. RAJA (Desai, J.) 919

After obtaining !be approval of tbe ©eneral Manager of the Bank cash A
credit facility to the extent of Rs. 75,000/- was sanctioned against the
pledge of approved goods nnder the lock and key of the Bank and on
personal guarantee of the surety. The principal debtor executed a
~emand promissory note, Ext. 81 in favour of the Bank on September
16, 1957, and on the same day the principal debtor also executed a
B
demand promissory note, Ext. 30, in favour of the surety which the
surety endorsed in favour of the Bank. •Along with the two
demand promissory notes, simultaneously the surety execufed a
l letterof guarantee Ext. 31 in favourofthe Bankand' the principal
debtor executed a bond Ext. 83 in favour of the Bank. The principal
r· debtor also passed letter of continuity of the bond and the promissiory
note Ext. 82. Thereafter the principal debtor enjoyed the cash
c
~redit facility by borrowing various amounts. By the end of February
1959 the principal debtor owed Rs. 76,368 ·04 P. in this account to
the Bank. Principal debtor .died in November 1957. The Bank
wrote to the surety letter Ext. 32dated December 24, 1957, calling upon
him to pay the outstanding balance of Rs. 70,879/- in cash credit D
account of principal debtor as in the circumstances mentioned in the
letter the balance was required to be recovered from the surety. Some
~orrespondence ensued thereafter between the Bank and the surety
and ultimately the Bank filed the suit for recovery of Rs. 76,368 ·04 P.
against defendant 1, the legal representative of principal debtor and
defendant 2, the surety. E

Defendant 1 contested the suit, inter alia, conten,ding that the
court had no jurisdiction to hear the suit and he had no knowledge
about the suit transaction. The allegation of fraud made against him
in the plaint was denied. He also denied his liability for the claim
F
of the Bank as heir and legal representative of deceased principal
~
( debtor. Defendant 2, the surety, contested the suit as per written
statement Ext. 7, inter alia, contending that the Bank had agreed to
grant cash credit facility to deceased principal debtor on the security
.of goads by way of pledge and that though the goods were to be kept
in the godown in the compound of Vijay Oil Mills Pvt. Ltd., but the G
godown was to be kept under the lock and key of the Bank. It was also
contended that the principal debtor would provide such quantity of
goods as would provide full cover to the outstanding balance in the
cash credit account and the Bank was to be responsible for the safe
. custody and keeping of the pledged goods. It was also contended that .
the principal debtor had all throughout pledged sufficient quantity of H
goods to provide full cover for the Bank's claim but the Bank either
wrongfully lost the goods or was negligent in retaining the goods within
920 SUPREME COURT REPOIITS [1980) 3 S.C.R.

A its custody or the Bank wrongfully parted with the goods without the
co'lsent of the surety and, therefore, the surety was discharged.

The trial Court found that there was negligence on the part of the
Bank with regard to the safe custody of the pledged oil tin.s but as the
contract of guarantee entered [into by the surety with the· Bank was
B independent o"f the pledge of goods given by the principal debtor, the
surety is not discharged from his liability under the guarantee. So
observing the trial court decreed the suit.

On appeal by the surety, the High Court held that the two promis-
sory notes,'one executed by the principal:debtor in favour of the Bank,
c Ext. 81, and another by the principal debtor in favour of the surety
and endorsed by the surety to the Bank, Ext. 30, and the letter of guaran-
tee Ext. 31 executed by the surety in favour of the Bank as also the bond
executed by the principal debtor in favour of the Bank Ext. 83 and the
letter of continuity Ext. 82 executed by the principal debtor in favour of
the Bank, all on September 16, 1957, constituted one composite tran-
D saction and they evidence that the principal debtor had offered two
securities, one the pledge of oil tins and another personal guarantee of
the surety. The High Court further held that the Bank was ·utterly
negligent and had not exercised such care as a prudent man would in
the circumstances of the case which resulted in the loss of security,
namely, pledged oil tins and,)herefore, in view of combined operation
E of sections 139 and 141 of the Indian Contract Act, ('Act' for short),
. the surety is discharged. Accordingly, the appeal of the surety was
allowed and the suit against him was dismissed. Hence this appeal
by the plaintiff Bank.
Uncontroverted facts concurrently found and not sought to be
F reviewed in this appeal are that the principal debtor as per his application "!!!'ii
Ext. 65 sought cash credit facility to the extent of Rs. 75,00-0/- pur- - )
suant to which the Bagasra Branch of the Bank submitted a proposal ~
Ext. 66 seeking permission of the General .Manager of the Bank to
extend the facility. The General Manager of the Bank sanctioned 4
advance, inter a/ia, on the following terms:
"A cash credit limit of Rs. 75,000/- (Rupees Seventyfivethousand
only) is hereby sanctioned against pledge of approved ·
goods under Bank's lock and key and on the personal guarantee
of Shri C. R. Raia, Junagadh.

H Noted that the Bank's godown keeper already posted at
Amrali would look after the goods pledged by the above
party also.
••
I
I
STATE BANK v. c. R. RAJA (Desai, !.) 921

All other terms as proposed." {underlining ours). Accordingly, on
tile strength of two pronotes Exts. 30 and 81 and on the strength of
Jdtter of guarantee Ext. 31 and the bond Ext. 83 cash credit facility
.was extended to the principal debtor. The pledged goods were kept
in the godown in the compound of Vijay Oil Mills under the lock and
key of the Bank and the Bank had appointed a Godown keeper to look
B
after the goods pledged by the principal debtor. Two promissory
n!)tes Exts. 30 and 81 and letter of guarantee Ext. 31 and the bond
executed by the principal debtor Ext. 83 all of September 16, 1957,
constituted one transaction. The High Court held that the surety
had agreed to become surety, on the principal debtor pledging oil
, .r. tins as and by way of security for the advance and, therefore, two secu-
rities were offered, namely, pledge of goods and the Personal guarantee
c
of the surety. The High Court also found that 5,000 tins of oil had
eome to be transferred by Vijay Oil Mills in the name of the deceased
principal debtor and they were treated as pledged with the Bank as
security for cash credit facility. It is concurrently found thatthe
Bank was utterly negligent with regard to the safe keeping and handl- D
ing of pledged oil tins and the security of pledged oil tins waspostfon
account of the negligence of the Bank. Disagreeing with the trial
court the High Court held that the pledge and the personal guarantee
were not two independent transactions but they formed part and parcel
of one composite tranasaction. The High Court, therefore, held that
the creditor having lost one security, namely, the pledg¢ goods, the E
s111ety was discharged to the extent of the value of secluity and that as
in this case the entire security ~was lost, the surety was wholly
diseharged.

Only contention canYassed in this appeal is that in view of elauses
. 5, 7 and 13 of letter of guarantee Ext. 31, even if it is found as a fact that . F
V-· negligence of the creditor Bank was responsible for the loss of security
;; ~ of pledged oil tins, Yet the surety would not be discharged. Before we
refer to clauses 5, 7 and 13, it is necessary to notice section 141 of the
Indian Contract Act under which the surety claims the relief of dis-]
charge. Section 141 reads as under:
G
"141. A surety is entitled to the benefit of every security which
the creditor has against the principal debtor at the time when
the contract of suretyship is entered into, whether the surety
knows of the existence of such security or riot; and if the
creditor loses, or, without the consent of the surety, parts If
with such security, the surety is discharged to the extent of
the value of the security."
W--463 SCI/80 .

(
922 SUPREME COURT REPORTS [1980] 3 S.C.R.

A In order to attract s. 141 it must be shown that the creditor had
taken more than one security from the principal debtor at the time wlien
the conn:act 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
B the value of the security. In the instant case as found by th~ High
· Court and not controverted, the fprincipal debtor had offered two
securities, (i) the pledge of goods, (ii) personal guarantee of the surety.
Verily, the General Manager of the Bank accepted the proposal for
cash credit facility on the specific condition that the principal debtor
shall offer two securities, one the pledge of goods to be kept under the
c lock and key of the Bank to be supervised by the Bank's employee, and
secondly, the 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 offer-,
ing another security, namely, pledge of goods. · The surety contracted
D on the good faith of the principal contract when entering into contract
of guarantee in which case he is deemed so to contract that both the
securities would be availabe to the creditor (see Sanderson v. Aston)(!)

If the two promissory notes Exts. 81 and 30 coupled with the lettei:
of guarantee Ext. 31 .executed by the surety and the bond Ext. 83

• executed by the principal debtor at one sitting on September 16, 1957,
evidence one composite transaction, it is an inescapable conclusion that
the principal debtor offered two securities, one the pledge of goods and
~

the other the personal guarantee of the surety. The surety in good
faith contracted to offer personal guarantee on the clear understanding
that the principal debtor has offered security by. way of pledge
:r of goods and the goods were to be in the custody of the"creditor. Bank. ..
On this conclusion s. · 141 of the Act will be indubitably attracted. ·1
Section 141 comprehends a situation where the debtor ha& offered .1
more than one security one of which is the personal guarantee of the \
surety. Even if the surety of personal guarantee is not aware of any j. , /. ~
other securitY offered by the principal debtor yet once the right of the
G surety against the principal debtor is impairedi\ly any,action or inaction, .'
which implies riegligence appearing from lack. of supervision undertaken
in the contract, the surety would be discharged under the combined ·v-
operation of sections 139 and 141 of the Act. In any event, if the 1
creditor loses or without the consent of the surety parts with the
security, the surety is discha1ged to the extent of the security lost as]
H
provided by s. 141.
- (!) [1873] LR 8 Exch. 73 at 76.
' STATE BANK V. c. R. RAJA (Desai, !.) 923

In Halsbury's Laws of England, 4th Edn., Vol. 20, para 280, p. A
152, the statement oflaw bearing on this point reads as under:
''280. Effect of loss of securities.-On paying the guaranteed debt
the surety is entitled to have all securities held by the creditor
for the debt handed over to him by the creditor in exactly
the same state and condition in which they were originally
B
provided whether they were in existence at the date of the
contract of suretyship or came into existence subsequently.
ConseqUently, any act of the creditor interfering with or
impairing that right will, to the extent, at all events, of any
loss inflicted, relieve the surety from liability, and, if it has the
effect of altering or purporting to alter the contract of suretY· c
ship, discharge him altogether. Thus, where there is a
mortgage security given in respect of a debt which is subse-
quently guaranteed, the creditor must hold the security for
the benefit of surety, so that, on paying the debt, the surety
may obtain a transfer of mortgage in its original unimpaired
.condition. If the creditor does not fulfil his duty in this '' I'
respect the surety is discharged."

Thi• statement oflaw is reflected in ss. 140 and 141 of the Act.
In State of Madhya Pradesh v. Ka'uram(I) the facts were that one
J(aluram had executed a surety bond undertaking to discharge the E
liability arising out of any act or omission or negligence or default of a
forest contractor whose bid was accepted at an auction held for sale of
felled trees and who was required to pay the bid amount in four instal-
ments. The forest contract rules provided for preventing the contrac·
tor from removing the forest goods in case he mage default in payment
valJ.f the instalments due. The authorities responsible for supervising F
\-We contract allowed the contractor to remove the felled trees without
· making the subsequent payments. Subsequently the State of Madhya
Pradesh initiated proceedings to recover the balance of the amount
throuj!h surety Kaluram. The slirety Kaluram contended before this
Court that because the State had lost or parted witj) the security, name-
ly, forest produce, he stood discharged. Upholding this 'contention G
this Court quoted Wu ff and Bi!iing v. Jay, (2) wherein Hannen,
J., stated the law as under:

''. ... I take it to be established that the defendant became
surety upon the faith of there being some real and substantial H
-----
{I) [19671 I S.C.R. 266.
{2) LR [18721 7 QB 156.
924 SUPREME COURT REPORT! [1~0] 3 s.c.R.

security pledged, as well as his own credit, to the plaintiff,
and he was entitled, therefore, to the benefit of that rea;I
and substantial security in the event of his being ~.
called on to fulfil his duty as a surety, and to pay the
debt for which he had so become surety. He will,
however, be discharged from his liability as surety if the
R creditors have put itout of their power to band over to the ~
'surety the means of recouping himself by the security given
by the principal. That doctrine is very clearly expressed in
the notes in Kees v. Bqrrington-2 White & Tudor's L.C. J
4th Edn. at p. 1002-As a surety, on payment of the debt,
is entitled to all the securities of the creditor, whether he is. ~
c aware of their existence or not, even though they were given
after the contract of suretyship, if the creditor who has had,
or ought to have had, them in his full possession or power,
loses them or Permits them to get into the possession of t)le
debtor, or does not make them effectual by giving proper
notice, the surety to the extent of such security will be dis-
D
charged. A surety, moreover, will be released if the
creditor, by reason of what he has done, cannot, on payment
by the surety, give him the securities in exactly the same
condition as they formerly stood in his hands."

This Court concluded that subject to certain variations s. 141 of the
E Indian Contract Act incorporates the English law relating to discharge
from liability of a surety where the creditor parts with or losses t
security held by it.

Mr. Kackar, however, contended that in view of clauses 5, 7 and 1J
of the letter'ofguarantee, Ext. 31, even ifit is held proved that security
F of pledged goods was lost on account of the negligence ofthe creditor~
Bank, yet the surety would not be discharged from the obligation !
undertaken under the letter of. guarantee. Clauses 5, 7 and 13 \
may be extracted:
"5. You shall in any case, be· at liberty and without my/our
G further assent or knowledge, at any .time, to grant to the
customer or any person liable with or for him, whether as
guarantor or otherwise, any time or indulgence and to deter-
mine, enlarge or vary its credit and t<J vary exchange or take
other securities or release any other securities held or to be
held by you for or on account of the moBeys intended to be
H hereby secured or any part thereof or to renew any bills,
notes or other negotiable s.ecurity and to compound or
make any· other arrangements with the customer or any
. ,,
t
UA['E BANI:: v. c. R. RAJA (Desai, J.) 92 5

Person so liable with or for the customer as you may think fit A
without dischar_ging or in any manner affecting my/our
liability under this guarantee."

"7. To tho.extent that you may obtain satisfaction of the whole
of your claim ll8ainatthe customer, I/we agree that you may
enforce and recover upon this guarantee the full amount II
hereby guaranteed and interest thereon notwithstanding
any such proof or composition as aforesaid, and notwith·
standing any other guarantee, security or remedy, guarantees,
securities or remedies which. you may hold or be entitled to
in respect of the sum i~nded to be hereby secured or any
r part thereof, and notwithstanding any charges or interest
c
which may be debited in your account current with the custo-
mer, or in any other accouµt upon which the customer may
be liable."

"13. Should the customer be a limited company, corporate or D
anincorporate body, committee, firm, partnership, trustees
or debtors on a joint account, the provisions hereinbefore
contained shall be construed and take effect where nece~sary
as if the words importing the singular number included also
the plural number. This my/our guarantee shall then
remain effective notwithstanding any death, retirement, E
change, accession o.r addition as fully as if the person or
persons constituting or trading or acting as, such body,
committee, firm, partnership, trustees, or debtors on joint
account, at the date of the customer's default or at and time
previously, was or were the same as the date hereof. And
further you may recover against me/us to the extent here in F
before mentioned notwithstanding that any security given or
to be given to you may be void, defeetive, or informal, or
. notwithstanding that the customer being a limitedJcompany,
corporate or unincorporate body or committee, may exceed
its borrowing powers or that the borrowing from you may
have been ultra vires." G

Clause 5 confers right upon the creditor Bank to grant any time or
ii:idu!gence in payment of the debt or to determine, enlarge or vary its
credit and to vary, exchange or take other securities or release any
other securities held by the Bank but such an act on the part of the Bank
H
·would not have thedJ:ect of discharging the surety or in any manner
;affecting his liability under the letter of guarantee. We fail to see how

'.,,.
926 SUPREME COURT REPORTS [1980] 3 S.C.I!~

A clause 5 can help the creditor Bank in any manner. It is not a case of
granting time or indulgence to the principal debtor or variation of the
credit or taking one set of security in substitution of some other security
. or release of any security. Release of security implies a volitional act
on the part of the Bank. ·Loss on account of negligence cannot be
equated with release. Therefore, clause 5 would.not assist the Bank J.
8 in this case.

Clause 7 provides"for non-discharge of surety even if the creditor
Bank enters into a composition with the principal debtor and that the (.
-c surety would nonetheless be liable even if the Bank has guarantee,
security or remedy, guarantees, securities or remedies from the principal ~
debtor. Upon a true construction of clause 7, theeXPression 'any other
guarantee, Security or remedy' therein mentioned must be security other
than the pledged goods. · In an almost iilentical situation with regard
to an identical clauses in Amrit Lal Goverdhan La/an v. State Bank of
Travancore and Ors,(1) this Court after referring to clause 5 in the
D letter of guarantee which is in pari materia with clause 7' of the letter
of guarantee under discussion, held as under:

"On behalf of the respondent Bank reference was made to cl.
5 of Ex. P-4 which has already been quoted. It was contend-
ed that on acccount of this clause in Ex. P-4 the apPel-
E !ant has opted out of the benefit of s. 141 of the Indian >.-
Contract Act. We are unable to aceept the argument put
forward by the Attorney General on behalf of the reSpon-
dent Bank. In our opinion, the expression "any security,.
in cl. 5 of Ex. P-4 should be prowly construed as "any
security other than the pledge of goods mentioned in the
F
primary agreement, Ex. P-1 between the Bank and the .
firm''. We consider that there is nothing in cl. 5 ofEx.P-4-e(
to indicate that the appellant is not entitled to invoke the J \
provisions of s. 141 of the Indian Contract Act."
.).
Therefore, cl. 7 is of no assistance to the Bank.
G
A bare perusal of clause 13 would show that it provides for continu-
ing the guarantee where the principal debtor is an association of persons.
and for continuance of the guarantee in the event of death, retirement,
etc. of one of such association of persons or the guarantee remaining
intact and effective and legally enforceable irrespectiv~ of some defect
II arising from the internal .management of such association of persons.
We faitto see how it can render any·assistance to the Bank.
- (I) [i968J 3 SCR724_at 731.
STATE BANK v. C. R. RA.TA (Desai, J.) 927

First•security, namely, the pledged goods are lost to the Bank an~. A
the concurrent finding again incontrovertible is that the pledged goods
were lost on account of the negligence of the creditor Bank. WhoTe'
of the security was lost and, therefore the surety would be discharged
in entirety .because it is crystal clear that the principal debtor had
agreed and had in fact pledged 5,000 tins of oil which even if sold at the
then current market price would have satisfied the Bank's entire B
claim. Accordingly, the surety would be discharged in entirety.

It is difficult to entertain a contention that s. 141 would
,_
I not. be attracted and the surety would not be discharged even if it is
found that a creditor has taken more than one Security on the basis c
'
of which advanee was made and the surety gave personal guarantee on
the good faith of other security being offered by the principal debtor
which itself may be a consideratfon for the surety offering his personal
guarantee and the creditor by its own negligence lost lone of the
SeCUrities. Aceeptance of such a contention would tantainount to
putting a premium on the negligence of the creditor to the detriment D
of the surety who is usually described as a preferred debtor. Should a
Court by its construction of such letter of guarantee~enable'the'crditor
to act negligently and yet be not in any manner accountable ? Was
the guarantee a guarantee against proper performance of the contract
evidencing advance of loan and methods of its repayment, or a
guarantee covering Bank's utter disregard of its responsibility or to E
use the words of the High Court, the Bank's utter negligence in failing
to eXercise the care;ora prudent man which one would expect in manage-
ment of one's own affairs ?

The appeal accordingly fails and is dismissed with costs.
~ The respondent surety has made an application that in comp 1tanct>
11
I._ with the decree made by the trial court he had paid the entire amount
and he should not be exposed to second round of litigation for resti-
1 tution of the amount and that this Court should give aldirection to the
Bank as part of this judgment that the amount be returned with
interest at current rate to the respondent surety. G

Bys.144 of the Code of Civil Proeedure,il90S as it stooa prior to
amendment by the Code of Civil Procedure (Amendment) Act, 1976,
the jurisdiction to grant reStitution was conferred upon the 'Court
of first instance'. Since the amendment the expressioni'the Court of ·H
first instance' has been substituted by 'the Court which passed the
decree or order'. An explanation has been added to s. 144 by the
928 SUPREME COURT REPORTS fl980] l S.t.R.
A Amendment Act of 1976, the relevant portion of which reads as
under:
"Explanation-For the purpoSes of sub-section (I) the exprcliion
"Court which pasSed the decree or order" shall be deellled to
include-
B (a) where the decree or order has been varied or rcvoned
in exerciSe of apJleUate or revisional jurisdictioa, the
Court of first instance.''
In the instant caSe the apjlellant was the plaintiff and its suit was
decreed by the trial court, i.e. the Court of Civil Judge, Senior Dfvi.
c sion, Gonda!, on November 18, 1960. The present apjlellant by its
letter dated February 14, 196t,.demanded from the surety a sum of
Its. 84,828 ·07P. inclusive of costs and interest on the principal amo11nt
decreed. The surety respondent I in this Court paid the apPcllant
Rs. 84,828 ·07P. on April 3, 1961. In the apJleal by the ~ty the
High Court reVersed the deeree and dismisSed the suit against the
D surety. Accordingly, the surety is entitled to restitution.
The limited question is whether this Court can grant restimtion.
Prior .to Amendment Act, 1976, an application for re&titution Wider
s.144 in all caSes had to be made to the Court of first instanee. EYer
since the amendment the substituted eXPreSSion 'the Court which pa8Scd
E the decree or order' would as Jler clauSe(a) of the explanation, mean the
Court of first instance becauSe the expression 'the Court which palled
the decree or order' has ·been deemed to include where the decree or
order has been varied or reverSed in eXerCiSe of appellate or revisional
jurisdiction, the Court of first instance. The present one is the sim-
plest case where the suit in favour of the appellant and against the
surety was decreed by the trial court, i.e. the Court of first instance,
and this decree has been reverSed by the High Court in e:tercise
· of its apJlellatc jurisdiction. In such a situation clause (a) of the
explanation would be attracted and an application for re&titution will
have to be made to the Court of first instance, i.e. the Court of CiYil
Judge, Senior Division, Gonda!. It is nowhere suggested that au..m a
G Court does not exist. Therefore, it would not be proJler for this Court
t~ direct restitution. However, there will 6e no justification for the
apjlellant Bank to withhold the amount which was collected from the
surety on a mere demand. Therefore, an applicat_ion for re&titu&ion
made by the surety would not lie to this Court and it would stand dis-
posed of accordingly.
e l ., -.\

S.R. Appeal dismissed.