1967 (11) TMI 115 - HC - Indian Laws

Promissory notes as collateral securities held valid despite fraud claims, debt acknowledgment extends limitation period

The AP HC upheld a decree against the first defendant for joint liability on a current and overdraft account. The court found that promissory notes ... Suit for the recovery - Joint liability to pay the amount due on the current and overdraft account - admission of the debt in writing - fraudulent signatures of the defendants - principles of contract - contract to indemnify - Consideration between the creditor and the principal debtor - suit barred by limitation - Scope of Art. 85 of the Limitation Act - collateral securities - HELD THAT:- In the instant case, the 1st defendant admitted the execution of the promissory notes. No dispute was raised before us that they were not executed as collateral securities regarding the current and overdraft account opened by the 1st defendant and his brother. The 1st defendant in fact led evidencing regard to his contention that he put his signature on the promissory notes at the request of his brother and Prof. Kishen Chand. It could not therefore, be validly taken by surprise when the plaintiff's suit was decreed by the Court below on the alternative claim. Nor he would be taken by surprise if we uphold the decree of the Court below on this alternative claim. The learned Advocate for the 1st defendant could not point out as to in what respect the 1st defendant, in the presence of his version relating to the promissory notes, would have further said any thing or adduced any further evidence. We do not therefore, think that any injustice would be caused to the 1st defendant if we uphold the decree passed against him on this alternative basis. The lower court, in our view was right firstly holding the 1st defendant responsible as a joint holder of the current account and alternatively although the lower Court has not stated so in so many words is liable as surety. As we are of the opinion that both the collateral securities were executed for consideration, it was either simultaneous or was executory in its character, and secondly, since the Bank was not willing to advance any more money by way of overdraft to the brother of the 1st defendant unless the collateral securities were given, the securities were supported by consideration. There is no other explanation as to why the second promissory note was executed. In the face of these entries, it could not seriously be contended that the promissory note was executed for any past consideration. It has a simultaneous consideration, and in any case, the security was executed for the purpose of allowing the same day on overdraft of about ₹ 50,000. In these circumstances we do not find any difficulty in rejecting the contention of the learned Advocate for the 1st defendant that the two promissory notes executed as collateral securities were void because they were executed for past consideration. The suit, in our opinion, is within time for two reasons. Firstly because of Exhibit P-2, an acknowledgment executed by the 1st defendant and his brother on 9-9-1947. The suit was instituted on 9-9-1950. It is not disputed that if Exhibit P-2 is found to be genuine, true and valid, then no question of limitation could arise. We have already dealt with the questions relating to Exhibit P-2 raised by the 1st defendant and held that Exhibit P-2 had been executed by the 1st defendant and his brother on 9-9-1947. We also found that the 1st defendant was not justified in going back upon his admission made in reference to his document in his written statement. His contention that the last words `confirm the balance of S. S. 53341-9-6 as on 1-7-1947' were added subsequent to his signature or that they were forgery is not proved. They were there when the 1st defendant and his brother signed as is clear from the evidence of P. W. 1. On a perusal of that document we are satisfied that they are not written in different inks. They were in fact written by the same person. P. W. 1 says that the whole endorsement is in his handwriting. When once it is found, and we so hold, that Exhibit P-2 is true valid and genuine, no question of limitation can arise in this case. On examining the accounts, we are of the opinion that the account between the parties is such as to consist in reciprocity of dealings between them and that it does not consist merely of items on one side made up of debits and credits. We have no hesitation, therefore, in holding that it is a mutual, open and current account within the meaning of Art. 85 of the Limitation Act. Article 85 of the Limitation Act having been held applicable, the limitation would be three years to be reckoned from the close of the year in which the last item admitted or proved is entered in the account. Such year of course has to be computed as in the account. It is already held that the last entry under Exhibit P-2 appears on 9-9-1947. There is no dispute that the Bank Accounts run from 1st January to 31st December each year. Reckoned from that point of view, the suit would obviously be within time. Appeal dismissed. Issues: (i) Whether the defendant who signed the account entries and promissory notes is liable for the debt as a joint current and overdraft account-holder or alternatively as a surety by virtue of collateral promissory notes; (ii) Whether the promissory notes executed as collateral securities are supported by valid consideration; (iii) Whether the suit is barred by limitation or is saved by an acknowledgment and/or by Article 85 of the Limitation Act.Issue (i): Liability of the defendant as joint account-holder or alternatively as surety for the bank's claimed overdraft balance.Analysis: Evidence of jointly kept account books and joint signatures on relevant documents establishes a joint current and overdraft account relationship giving rise to reciprocal obligations. Promissory notes executed by the defendant were admitted in evidence and were relied upon throughout trial; the promissory notes were therefore in issue at trial and formed the basis for an alternative finding of liability. The legal framework for an alternative finding of liability permits decree where the defendant admitted execution and there is no prejudice from deciding on the alternative ground.Conclusion: Defendant is liable to the bank both as a joint holder of the current and overdraft account and, alternatively, as surety by virtue of the admitted collateral promissory notes. Conclusion is against the defendant.Issue (ii): Validity of the promissory notes as collateral securities whether supported by consideration.Analysis: Under Sections 126 and 127 of the Indian Contract Act a contract of guarantee requires consideration, which may be simultaneous, executory or arise from benefit to the principal debtor. Account entries show that advances and overdrafts coincided with execution of the promissory notes and that funds were advanced contemporaneously with execution, supporting an inference of simultaneous/executory consideration rather than mere past consideration.Conclusion: The promissory notes executed as collateral securities are supported by valid consideration and are enforceable. Conclusion is against the defendant.Issue (iii): Whether the suit is barred by limitation or is within time by reason of an acknowledgment and/or Article 85.Analysis: An admitted written acknowledgment dated 9-9-1947 constituted an acknowledgement of the debt thereby extending limitation; alternatively, the account qualifies as a mutual, open and current account attracting Article 85 of the Limitation Act, making the three-year limitation period run from the end of the year in which the last admitted entry occurred (1947). The suit instituted in 1950 therefore falls within the period prescribed.Conclusion: The suit is not barred by limitation; it is timely both because of the admitted acknowledgment and because Article 85 applies. Conclusion is in favour of the plaintiff (respondent).Final Conclusion: The defendant's appeal is without merit and the decree in favour of the bank is sustained; the defendant is liable on the joint current/overdraft account and alternatively on the collateral promissory notes, and the suit is within limitation.Ratio Decidendi: Where account books and joint signatures establish a mutual, open and current overdraft account, Article 85 of the Limitation Act applies to run limitation from the last admitted entry; promissory notes executed contemporaneously with advances constitute valid collateral securities supported by simultaneous or executory consideration and may render the signer liable as surety.