Ran Banda and others v The People’s Bank
RAN BANDA AND OTHERSvTHE PEOPLE’S BANKCOURT OF APPEALAMARATUNGA, J. ANDABEYRATNE, J.
CALA NO. 160/2P03
D.C. POLONNARUWA 327/2/DR
SEPTEMBER 17, 2003
Debt Recovery (Special Provisioners) Act, No. 2 of 1990 – Conditional leaveto appear and defend granted – Rescheduling of the loan – Is it a novation ofthe contract? – Was the former debt extinguished and a new debt created? -Is the former contract unenforceable?
The 1st defendant-petitioner obtained a loan of Rs.20 Million from the People’sBank. As the payments were not regular, the loan was rescheduled and the 1stdefendant-petitionef acceped the rescheduled programme. When the 1stdefendant-petitioner failed to settle the loan in term's of the rescheduledarrangement, the Bank filed action under and in terms of the provisions of the
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Debt Recovery (Special Provisions) Act. It was contended that the Bank hadno right to seek to recover any sum of money upon the rescheduled agreementand the guarantors (2nd and 3rd defendants) were not liable, as the originalcontract had become invalid.
The District Court granted the defendant-petitioners leave to defend on thepetitioners depositing Rs. 10 Million as security.
On leave being sought-
Novation proper takes place if a new contract to take the place of theold is established between the same parties without the intervention ofa third party; when this happens the latter obligation extinguishes theformer.
The rescheduled arrangement was made at the request of the debtor,the 1 st defendant-petitioner, it merely gives him extended time for pay-ment and a concessionary rate of interest in respect of the balance ofthe loan remaining unpaid.
Per Ameratunga, J.,
‘This did not bring into existence anything unfavourable to the guaran-tors, in fact concessions granted to the debtor were beneficial to thegaurantors as well.”
Condition No.4 in the rescheduled agreement preserved the Bank’srights to have recourse to the conditions of the original agreement inthe event of the failure of the debtor to act in accordance with the con-ditions of the rescheduled agreement.
This is not a new obligation extinguishing the existing contract.
APPLICATION for leave to appeal from the order of the District Court ofPolonnaruwa.
Jacob Joseph for defendant-petitioners.
Gamini Marapana, PC., with Navin Marapana for respondent bank
GAMINI AMARATUNGA, J.This is an application for leave to appeal against an order madeby the learned District Judge of Polonnaruwa directing that in orderto grant leave to the petitioners to defend the action filed against
Ran Banda and others v The People’s Bank
them by the respondent Bank, (the Bank) the petitioners shoulddeposit a sum of Rs.10 lakhs in cash and provide certified securityfor another sum of Rs.10 lakhs.
The 1st defendant-petitioner has obtained a loan of Rs. 20 mil-lion from the Bank. The loan application is the document markedP2 along with the plaint. The 1st defendant has' also signed apromissory note in favour of the Bank for the said sum of Rs. 20million. The 2nd and 3rd defendant-petitioners were the personswho stood as guarantors for the amount obtained by the 1st defen-dant. It is not disputed that the 1st defendant has paid a part of theloan. This is reflected in the ledger sheet marked P5. By18/10/2000, a sum of Rs. 59 lakhs was remaining as the sum dueto the Bank. By document marked V2A, dated 17/10/2000, theBank submitted a proposal to re-schedule this amount of the loanand the terms of document V2A indicate that this proposal wasoffered at the request of the 1st defendant. The 1st defendantaccepted this re-scheduled arrangement. When the 1st defendantfailed to settle the loan within the period of eighteen months interms of the re-scheduled arrangement, the Bank, filed this actionunder and in terms of the provisions of the Debt Recovery Act. Thetotal amount claimed was a sum of Rs. 2,395,640/- together withthe legal interest until the said sum was paid.
The defendant-petitioners in their joint application and in theiraffidavits took up the position that the Bank had no right to seek torecover any sum of money upon the agreement P2 and that the2nd and 3rd defendants were not liable to pay anything to the Bankas the said document P2 had become invalid. The basis uponwhich the defendants claimed that the original written contract P2had become invalid was that when the Bank re-scheduled the loanthe former debt was extinguished and a new debt created by the re-scheduled agreement V2A has come into existence and that thisnew contract made the former written contract unenforceable. Inshort the contention of the defendants was that the new arrange-ment brought into existence by the re-scheduled arrangementamounted to what is known to the law of contract as ‘novation’.This concept of novation, which is a part of the modern law of con-tract, both English and the Roman Dutch, had its origins in theRoman Law. To put it in the simplest possible way, in the modern
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law, ‘novation occures whenever an existing obligation is dis-charged in such a manner that another obligation is substituted inits place.’ Wessels-Law of Contract Vol 2, 2nd Ed., 1951, page 658para.2369. Novation proper takes place if a new contract to takethe place of the old is established between the same parties with-out the intervention of a third party. When this happens, the laterobligation extinguishes the former.
The law presumes that once a contract is established, it retainsits binding force and that a creditor does not intend to renounce 50rights which he has acquired. Hence where two parties to a con-tract make a later agreement, the law will presume rather, that theyintended both agreements to have equal force than that the lattershould supersede the former. A mere change in the method ofpayment does not affect the substance of the contract, though itmay affect the manner of its execution. Mere extension of time tothe debtor does not affect the substance of the obligation and willtherefore not be construed to be a novation having the effect ofreleasing the sureties. Wessels-paragraphs 2396, 2411 and 2415.
Document V2A clearly indicates that the re-scheduled arrange- 60ment was made at the request of the debtor, the 1st defendant. Itmerely gave him extended time for payment and a concessionaryrate of interest in respect of the balance of the loan remainingunpaid as at the date of the re-schedule agreement. It did not bringinto existence anything unfavourable to the guarantors. In fact theconcessions granted to the debtor were beneficial to the guarantorsas well. Condition No 4 in the re-scheduled agreement preservesthe Bank’s rights to have recourse to the conditions of the originalagreement in the event of the failure of the debtor to act in accor-dance with the conditions of the re-scheduled arrangement, and 70this in my opinion completely negatives any intention on the part ofthe Bank to make the re-scheduled arrangement to take the placeof a new contract – a new obligation extinguishing the existing con-tract. Further the absence of the participation of the guarantors forthe re-scheduled agreement is significant. It is clear evidence thatthe Bank considered that the re-scheduled arrangement was anarrangement within the framework of the existing contract and notin substitution therefor.
Gunaselvam v Commissioner of Labour and others
For the reasons stated above, I hold that the defendants-peti-tioners’ argument that this is a case where there is novation is mis-conceived in law. The 1st defendant-petitioner has not stated thatthe sum claimed from him was not due from him; nor has he plead-ed any substantial defence to the action. Accordingly I uphold thelearned District Judge’s order and refuse leave to appeal and dis-miss the application with penal costs in a sum of Rs. 15000/-.
ABEYRATNA, J. – I agree.
RAN BANDA AND OTHERS v. THE PEOPLES BANK