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Issues: (i) whether the defendants who executed the partnership letter were in fact partners in the business and were liable as debtors in relation to the guaranteed transaction; (ii) whether the suit by the surety was maintainable and within limitation; and (iii) whether a surety who has discharged the debt guaranteed by him is entitled to a proportionate share in the mortgage security held by the creditor, notwithstanding that another distinct debt secured by the same mortgage remains unpaid and has been assigned.
Issue (i): whether the defendants who executed the partnership letter were in fact partners in the business and were liable as debtors in relation to the guaranteed transaction.
Analysis: The documentary entries in the firm's books and the admissions in the partnership letter showed that the defendants had become partners in 1928. The attempt to characterise them merely as financiers or capitalists was rejected because the oral explanation was inconsistent with the records, the partnership deed had been suppressed, and the business accounts described them as partners. The true contract and intention of the parties were established from the surrounding evidence.
Conclusion: The finding of the court below was set aside, and the defendants were held to be partners and therefore liable as debtors in relation to the transactions.
Issue (ii): whether the suit by the surety was maintainable and within limitation.
Analysis: The objection based on non-joinder of the plaintiff's brothers had been excluded earlier and could not properly be revived. The plaintiff was the surety who paid the decree debt and was entitled to sue in his own name. The limitation objection also failed because the payments relied upon were all made within the statutory period before the suit.
Conclusion: The suit was maintainable and was not barred by time.
Issue (iii): whether a surety who has discharged the debt guaranteed by him is entitled to a proportionate share in the mortgage security held by the creditor, notwithstanding that another distinct debt secured by the same mortgage remains unpaid and has been assigned.
Analysis: Sections 140 and 141 of the Contract Act, 1872 were applied on the footing that the surety's right accrues on payment of all that he is liable for. The Court distinguished between a surety for the whole debt with limited liability and a surety for a defined part of a debt. It held that the present case fell in the latter class, because the appellant had guaranteed and paid one distinct debt only. The mortgage had been taken as additional security for separate debts, and no consolidation of those debts was proved. Section 92 of the Transfer of Property Act was held inapplicable because the case did not concern redemption of a mortgage within that provision.
Conclusion: The appellant was entitled pro tanto to the benefit of the mortgage security, in the proportion of the debt discharged by him, even though the other secured debts had not all been fully satisfied.
Final Conclusion: The appeal succeeded, the appellant's right to share in the mortgage security was affirmed, and the matter was sent back for passing the preliminary mortgage decree and deciding the remaining reliefs in accordance with the findings.
Ratio Decidendi: A surety for a distinct part of a debt, on paying that part in full, is immediately subrogated under Section 140 of the Contract Act, 1872 to a proportionate share in the creditor's security for that debt, and that right is not postponed until other distinct debts secured by the same mortgage are also paid off.
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