ASIM HAFEEZ, J.:- The appellant bank has assailed judgment and decree dated 02.05.2015 by learned Judge Banking Court No.II, Lahore, whereby respondent No.1 (who was impleaded as defendant No.4 in the suit) was discharged / exonerated from the obligation of repayment of alleged amounts claimed in the suit. The suit was, however , decreed against respondents No.2, 3 to 9 - being the legal heirs of Sheikh Allah Ditta Sethi - and respondent No.10. Respondents No.13 & 14 negotiated settlement and claim was withdrawn to their extent.
Brief Facts:
2. The facts, necessary for adjudication of the lis at hand are that, the appellant bank allowed financing facilities in shape of Cash Credits (Hypothecation / Pledge) and demand loan, having limit of Rs.7.200 Million, to respondent No.2 Company. The facilities were inter-alia secured through mortgage, pledge and hypothecation charges and the personal guarantees of the directors. Record showed that in March 1986, the then directors of the respondent No.2 company transferred shareholding and assets of the company to Sheikh Allah Ditta Sethi - impleaded through legal heirs, i.e. respondents No.3 to 9 - and respondent No.10, which was intimated to the appellant bank vide letter dated 25.03.1986, the date on which vending agreement was executed. The factum of transfer of assets and assumption of liabilities was intimated to the appellant bank by in-coming directors through letter dated 30.03.1986.
Contemporaneously, in-coming directors provided and facilitated mortgage charge over personal properties - the core question is that whether the securities provided were in addition to or in substitution to the already available securities, including the personal guarantees of the out-gong directors. In the year 1987, upon default, appellant bank filed suit for recovery of Rs.7,835,307/-, wherein out-going as well as in-coming directors were arrayed as borrowers. Respondent No.1 filed PLA No.2-B/88, while others filed separate applications seeking leave to appear and defend, which applications were accepted and leave was allowed vide order dated 16.11.1999. Issues were framed and parties were asked to adduce evidence. Out of the 7 issues framed, issues No. 1 to 3 are most relevant and crucial for the purposes of present controversy, which issues are reproduced hereunder; Issue No.1 . Whether the Plaintiff 's suit is not maintainable against the defendants No.2 and 3 after acceptance of transfer of management and shareholding in pursuance of agreement dated 25.03.1986? OPD Issue No.2 . Whether the securities furnished by Sh. Allah Ditta Sethi and Mr. Armghan Waheed were additional securities? OPP Issue No.3 . Whether the securities furnished by defendants No.2 & 3 were subrogated and Plaintiff 's illegally refused to release the same? OPD
3. The appellant bank produced evidence, oral - two witnesses appeared and cross-examined - and documentary .
No evidence was produced by respond ent No.1. After hearing the parties, the learned judge Banking Court decreed the suit for Rs. 2,473,596.18 along with costs and Cost of Funds against respondents No. 2 to 10 and discharged / absolved the respondent No.1 (Defendant No.4) of any obligation to pay. The question involved is whether the order of release / discharge of the respondent No.1, who is represente d and contesting this appeal, is against the law and facts.
Core Issue:
4. The heart of the controversy is that whether respondent No.1 stood discharged / absolved of its contractual obligations - under personal guarantee executed - as a consequence of transfer of shareholding and acquisition of assets and liabilities of Kaghan Food Products Limited by the purchasers / in-coming directors in terms of vending agreement dated 25.03.1986 and letter dated 30.03.1986 (Ex.P-35).
5. Learned counsel, appearing for the appellant bank, submits that respondent No.1 was not entitled to claim discharge / release qua its obligation under the instrument of personal guarantee, merely for the reason of change of management and provisioning of additional securities, which arrangement was otherwise without the approval of the appellant bank. It is contended that personal guarantee executed by respondent No.1, would continue to constitute a binding and enforceable obligation, in the absence of cancellation or return of instrument of guarantee. Per learned counsel, no evidence was produced by respondent No.1 in support of its contentions, which failure alone deflate the argument regarding discharge / release. Added that evidence led was misread and ignored and learned Judge Banking Court misapplied the law. Reliance was placed of following judgments, reported as "Messrs HUFFAZ SEAMLEN PIPE INDUSTRIES LTD. and 2 others v. Messrs SECURITY LEASING CORPORATION LTD." (2002 SCMR 1419), "Messrs STATE ENGINEERING CORPORATION LTD. v. NATIONAL DEVELOPMENT FINANCE CORPORATION and others" and (2006 SCMR 619), "SHIPYARD K. DAMEN INTERNATIONAL v. KARACHI SHIPYARD AND ENGINEERING WORKS LTD." (PLD 2003 SC 191).
6. Learned counsel for respondent No.1, conversely , contended that the appellant bank failed to prove case in terms of issue No.2, noted above. Acceptance of the properties as securities by the appellant bank, offered by the purchasers, created binding and enforceable promise on the part of the appellant bank. Respondent No.1 was entitled to discharge / release from alleged obligation under personal guarantee, legal position correctly appreciated by the learned Judge Banking Court. Learned counsel relied upon the principle of novation to support contentions. Reliance is placed on judgments reported as "S. SIBT AIN FAZLI v. (1) STAR FILM DISTRIBUT ORS AND (2) MUHAMMAD ALI KHAN" (PLD 1964 Supreme Court 337), "HABIB BANK LIMITED v. HUSSAIN CORPORA TION LTD." (1994 MLD 2276 ) and "NATIONAL BANK OF PAKIST AN v. SHOGAN INT (PVT) LTD. and other" (2005 CLC 1207 ).
7. When confronted, the learned counsel for respondent No.1 referred to vending agreement dated 25.03.1986, letters dated 30.03.1986 and 04.06.1986 to claim release / discharge of respondent No.1 of its alleged obligation / liability under the instrument of personal guarantee. We have examined the referred documents. In order to appreciate the submissions made it is expedient to reproduce relevant portions thereof. Reference is made to clause 7 (e) of vending agreement dated 25.03.1986, which is reproduced hereunder as; 7 (e) As per the books of KFP Ltd., certain amounts are owed to the National Development Finance Corporation, Industrial Development Bank of Pakistan and National Bank of Pakistan by KFP Ltd. These loans have been secured by personal guarantees of some of the Sellers who are directors of the Company under the normal banking rules and regulations. It is hereby agreed that before taking over the project the PURCHASERS shall arrange to have all such personal guarantees released to the entire satisfaction of the aforementioned banks and institutions individually.
[Emphasis underlined]
8. In view of said clause, the purchasers were required to arrange release of personal guarantees of the sellers - including respondent No.1, before taking over the project. The Management stood transferred before seeking release of guarantees, which was not agitated by respondent No.1 and no indemnification was sought from purchaser under indemnity clause, i.e. clause 18(a) of the vending agreement - indemnity clause. The case of respondent No.1 before us was that purchasers addressed letter dated 30.03.1986 (Ex.P-35) to the appellant bank, accepting / acknowledging transfer of assets and assumption of liabilities and submitted properties for creation of mortgage charge which was accepted by the bank, as mentioned in the plaint, and such acknowledgment and acceptance entitled respondent No.1 to claim discharge / release under the law .
9. The crucial questions would be that whether mere agreement- bilateral and not tripartite arrangement - between the buyer and seller would be binding upon the creditor bank which was not a party to such bilateral arrangement?
Whether simplicitor issuance of letter to intimate transfer of shares, acquisition of assets and assumption of liabilities would entitle respondent No.1 to claim discharge from its obligation, in the absence of cancellation of personal guarantee? Whether request on the part of respondent No.1 through letters dated 25.03.1986 and 04.06.1986, on the part of ex-directors for the release of personal guarantee, would obligate the appellant bank to discharge / release respondent No.1 from its obligations in terms of guarantee? Whether any discharge / release can be claimed in terms of principle of novation? Before dilating upon the noted questions, it is expedient to reproduce contents of the letters, which read as; Letter dated March 25, 1986 The Executive Vice President, National Bank of Pakistan, Principal Office, Al-Falah Building, The Mall, Lahore.
Dear Sir, We have sold the total shareholding of M/s. Kaghan Food Products Ltd. to M/s. Seven Brothers (Regd.) through their Managing Partner , Sheikh Allah Ditta Sethi. The new owners wish to substitute their property documents in place of the property documents pertaining to 15/D-1, Gulberg III, Lahore, belonging to Mrs. MahJabeen Noon who is one of the Directors of M/s. Kaghan Food Products Ltd. You are requested to kindly accept their documents and return the documents of 15- D/I, Gulberg III, Lahore, to us.
The new owners are willing to give personal guarantees for the loans advanced by the Bank to Kaghan Food Products Ltd. The necessary documentation for this may be done immediately .
Yours faithfully , For & on behalf of M/s. Kaghan Food Products Ltd.
Letter dated 30.03.1986 To, The Manager, National Bank of Pakistan, ACP Model Br . Lahore.
D/Sir, We would like to inform you that we have purchased M/s Kaghan Food Products Ltd. alongwith all its assets & Liabilities as on 31-3 1986.
The name of Director 's of our firm showing their assets are enclosed herewith.
We also confirm that the name of the said company i.e. Kaghan Food Products Ltd shall continue as it is our Head office.
It is further confirmed that there is no other liability outstanding against Director assets.
Thanking you.
Yours faithfully, Sheikh Allah Ditta Sethi [Emphasis underlined] Letter dated 04.06.1986 The Senior V ice President, National Bank of Pakistan, Principal Office Al-Falah Building, The Mall, Lahore.
Dear Sir, As you are aware Kaghan Food Products Limited has been sold to Haji Allah Ditta Sethi and his partners and the management of the company is now with them. Therefore, the following have ceased to be the Directors of the Company and their personal guarantees have been released; 1) Mr . Azhar Hayat Noon 2) Mr . Zia-ul-Haq Noon 3) Mrs. Mahjabeen Noon In confirmation of this photo copy of letter from IDBP dated 03.06.86 reference No.UD/14242 is enclosed. It is now requested that house documents of 15/D -I, Gulberg-III, Lahore belonging to Mrs. Mahjabeen Noon may kindly be returned and the personal guarantees of three ex-Directors mentioned above be released. It may be noted that suitable alternate property documents have already been submitted by Mr. Haji Allah Ditta Sethi and been checked by your Legal Advisor Mr. Yaqoob Khan and found to be in order . Order for immediate release of the house documents may kindly be given.
Thanking you. Yours faithfully , (AZHAR HAYAT NOON).
10. It is evident from the perusal of the letter dated 30.03.1986 (Ex.P-35) - underlin ed portion - that the purchasers had only intimated factum of assumption of assets and liabilities, while, confirming no-liability status of directors of their firm. The letter under reference - alleged to have supported the claim of respondent No.1 - does not indicate any resolve for seeking release of personal guarantee of respondent No.1 against provisioning of immovable properties by the purchasers. The letter made no reference to any alleged approval or permission of appellant bank. Purchasers were impleaded as defendants No.5 & 6, who had filed PLA No.5-B/88. We have examined application seeking leave to defend, wherein nothing was indicated regarding alleged discharge / release of respondent No.1. It was alleged that purchase of shares of ex-directors was done with the permission and approval of appellant bank but no evidence led to substantiate contentions regarding permission and approval of the bank.
The application does not support the contentions raised by respondent No.1.
11. Likewise, letters dated 25.03.1986 and 04.06.1986 were, at best, in the form of a request and does not show any binding obligation or commitment on the part of the appellant bank to establish any agreement for the discharge / release of respondent No.1. It is for the respondent No.1 to prove that any binding and enforceable obligation of the appellant bank reached qua release / cancellation of guarantee, in the absence of any evidence by the respondent No.1, alleged claim of discharge/release carries no credence.
12. The crux of the submissions on behal f of respondent No.1 was that the intimati on given by the purchaser to the appellant bank and subsequent creation of mortgage charge over the properties of the purchasers, which securities were accepted by the bank and requisite documentation was done, creates binding promise on the part of the bank. In essence, it is pleaded, the conduct of the appellant, consequent to the letters referred, has to be construed as an acceptance. To appreciate the submissions, it is expedient to reproduce section 7 of the Contract Act, 1872, which reads as; "7. Acceptance must be absolute; - In order to convert a proposal into a promise, the acceptance must--
(1) be absolute and unqualified;
(2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so he accepts the acceptance"
13. In view of section 7-ibid, proposal would become a binding contract if acceptance of proposal is absolute and unqualified. In this case nothing was shown that appellant bank ever conveye d an absolute and unqualified acceptance qua the letters addressed and proposals made therein. Doctrine of acceptance by silence - merely for the reason that additional properties were provided and accepted by the appellant bank - is not applicable in view of the failure of respondent No.1 to prove it. Respondent No.1 failed to establish absolute and unqualified acceptance and even acceptance by way of conduct. Even otherwise, the facts regarding acceptance on the part of the appellant bank and entitlement to discharge / release in lieu of any obligatio n, are relevant facts, which are required to be proved by respondent No.1, in terms of Article 119 of Qanun-e-Shahadat Order , 1984. In the circumstances, no case of acceptance on the part of the appellant bank is established.
14. The success of alleged claim of respo ndent No.1 is dependent upon proving issues No.1 & 3. The respondent No.1 failed to lead any evidence to estab lish alleged discharge / release from obligations / liability under personal guarantee, merely upon placement of fresh properties as security . The witnesses produced by the appellant bank consistently affirmed that mortgage created against fresh properties were in additi on to the existing securities and not to replace / substitute those. No case of extinguishment of liability of the respondent No.1 is made out.
Respondents No.13 & 14 negotiated an independent settlement with the bank to seek their release, which was independent of the vending agreement. This fact further negates the claim of the respondent No.1.
15. Learned counsel for respondent No.1 claimed discharge / release under the principle of novation, as enunciated in section 62 of the Contract Act 1872. This argument is misconceived. A bilateral arrangement between in-coming and out-going directors - even showing an enforceable understanding -, in the absence of creditor , would not be binding upon the said creditor . It is expedient to reproduce section 62, ibid, and illustration thereof to displace the argument. Section 62 reads as; Effect of novation, rescission and alteration of contract
62. If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
Illustrations
(a) A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor , instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
16. Since, respondent No.1 had alleged that original contract stood substituted with a new contract - vending agreement - and therefore original contra ct need not to be performed, therefore, it is for respondent No.1 to prove and establish it, which it failed. Mere allegation would not absolve respondent No.1 from the obligations under the guarantee. The letters addressed neither substitute original contract nor create any enforceable binding for the appellant bank to allow discharge / release of respondent No.1. We are fortified in our view upon perusal of the ratio of the judgment by August Supreme Court of Pakistan, reported as Mrs. MUSSARA T SHAUKA T ALI v. Mrs. SAFIA KHA TOON and others ( 1994 SCMR 2189 ). Relevant portion is reproduced hereunder: "Section 62 of the Contract Act which deals with the effect of novation, rescission and alteration of contract, reads as follows:- "62. Effect of novation, rescission and alteration of contract. --If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."
The above provisions make it clear that if the parties to the contract agree to substitute a new contract in place of the original one, then the original contract need not be performed. Therefore, performance of original agreement between the parties is dispensed with only where the parties to the contract agree to substitute the original contract by a new contract. However, where only one of the parties to the contract alleges novation or alteration in the original contract but fails to establish the same, then mere allegation of novation in the original contract by one of the parties to the contract does not absolve the parties to the original contract from obligation to perform the original contract. The parties can only be relieved from performance of the original contract if they have by mutual consent substituted a new contract in place of the original one."
17. There is no cogent evidence / proof available on record or any indication in the documents available that arrangement of sale of assets, transfer of management and assumption of liability - entered into and consummated without the consent, express or implied, of the appellant bank - would ipso-facto release / discharge respondent No.1.
18. The case laws referred by and relied upon by the parties may constitute authorities in their own facts and circumstances, which are not applicable qua the facts of this case, hence, distinguishable. The controversy at hand was not subject matter of the judgments referred by respondent No.1. Likewise, the judgments relied upon by the appellant bank discussed dif ferent propositions of law .
19. We have examined the judgment passed by learned Judge Banking Court, which manifested mis-reading and non-reading of crucial evidence available on record and mis-application of law. The learned judge banking court erred in law while rendering the judgment whereby it discharged / released respondent No.1 of its obligations. Failure of respondent No.1 to prove its alleged release / discharge from the obligation / liability, by way of producing evidence, was grossly overlooked by the learned judge banking court. The judgment dated 02.05.2015 suffers from legal defect, material irregularities and misapplication of law.
20. In the circumstances, we accept this appeal, set aside the impugned judgment and decree dated 02.05.2015 to the extent of respondent No.1 and decree the suit to its extent for Rs.2,473,596.18 /- along with the costs and Cost of Funds, jointly and severally alongwith others. The judgment and decree dated 02.05.2015 against respondent No.2, respondents No.3 to 9 - being the legal heirs of deceased Sheikh Allah Ditta Sethi - and respondent No.10 shall remain intact.
21. No orders as to the costs.