# PUN.JAB NATIONAL BANK LIMITED v. BIKRAM COTTON MILLS & ANR

- **Citation:** [1970] 2 S.C.R. 462
- **Court:** Supreme Court of India
- **Decided:** 1969-09-17
- **Case number:** Civil Appeals Nos. 1957 and 1958 of 1966
- **Bench:** J. C. Shah, N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pun-jab-national-bank-limited-v-bikram-cotton-mills-anr-4844
- **Pages:** 9

## Headnote

Contract Act 1872, s. 126-Coinpany director executing bond to repay
'u'timate
balance'
found due frofn
co1npany to Bank on cash~credit
account--Sinn1ltaneously other docun1ents
executed by conzpany undertaking repayment-If bond inde11znity or co111rac/, of guarantee-Whether
suit by Bank prior to deterniination of ultinulfc balance was ·pre)nature.
Companies Act, 1956, s. 39!-Sclzeme of composition between con1pany and creditors-If binding on dissenting creditors.
The ti:rst respondent company openeQ a cash~credit account with
the
appellant bank and on June 7, 1953 to secure repayment of the balance
due at the foot df the account the first respondent company executed three
documents through its managing agents i.e. a promissory note, a deed of
hypothecation and a letter assuring the appellant bank that the CO!Qpany
would remain solely responsible for all loss, damage O( deter\crration of the
stocks hypothecated with the bank. On the same clay R a Director of the
managing agents executed a bond called "agreement of guarantee" agreeing to pay on demand all monies which may be due as the "ultimate
balance" from the company to the bank. Jn December, 1953 the company closed its business. The stocks pl- dged were disposed of by the
bank anct the amount realised was credited in the company's account. A
balance of approximately R•. 2.56 lakhs remained due at the 'foot of the
account.
Some creditors of the company in the meantime filed a petition for
winding up the company.
On February 22, 1956 a scheme of composition was settled among the creditors and was later sanctioned by the High
CGurt on May 21, 1956 under section 391 of the Companies Act, 1956
after rejecting the opposition of the appellant bank. The bank then filed
a suit against the company and R for a declaration that on the date of the
suit a sum df over Rs. 2.56 lakhs was due against the company and for a
decree for payment of the amount against R.
The trial court dismissed
the suit and on appeals filed by both the parties the High Court held that
the scheme having been cqnfirmed ·by the court, had statutory operation
and was binding on all creditors including the bank; the bank ha,t become
an unsecured credito·r for the amount remaining due after sale of the pledged ~oods and it \Vas for the board of trustees under the scheme to determine the amount for apyment to the bank. The co11rt also held that the
suit against the company withour obtaining leave Clf the court was
not
majntainable. It further held that R had executed an
inden1nitv
bond
and that even assumin~ he was a suretv under the terms of the bond he
was only responsible for ensuring payment of the "ultimate balance" which
still had to be determined.
The Hi_gh Court accordingly confirmed thl'
decree of the trial court and held that the suir against R was premature.
On appeal to this Court,
HELD: (i) The suit must be remanded to the trial court to detern1ine
4'the ultimate balance" and for disposal according to la\\·.
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- P. ~'. BANK v. BIKRAM COTTON MILLS (Shah, J.)
463
The appellant b•nk was entitled to claim at any time the money due
{rom the company as well as from R under the promissory note and the
bond.
The suit could not therefore be said w be premature. The High
Court instead of dismissing the suit should have stayed it till ''the ultimate
balance" due to the bank from the company was determined. [471 E-F]
(ii) The binding obligation created under a composition under s. 391
of the Companies Act, 1956, between the company and its creditors does
not affect the liability of the surety unless the contract of suretyship otherwise provides. [471 F-G]
Ha/sbury's Lall's of England, Vol. 63 rd. Edn., Art. 1555 at p.
771;
Re. Garner's Motors Ltd. [1937] Ch. 594~ referred to.
(iii) The bond executed by R was one ot the four documents executed
on the same day and was part of the schen1e to ensure payn1ent of the
amount found due to the Bank.
Although the bond was not also executed by the

## Text

462
PUN.JAB NATIONAL BANK LIMITED
v.
BIKRAM COTTON MILLS & ANR.
September 17, 1969
[J. C. SHAH AND A, N. GROVER, JJ.]
Contract Act 1872, s. 126-Coinpany director executing bond to repay
'u'timate
balance'
found due frofn
co1npany to Bank on cash~credit
account--Sinn1ltaneously other docun1ents
executed by conzpany undertaking repayment-If bond inde11znity or co111rac/, of guarantee-Whether
suit by Bank prior to deterniination of ultinulfc balance was ·pre)nature.
Companies Act, 1956, s. 39!-Sclzeme of composition between con1pany and creditors-If binding on dissenting creditors.
The ti:rst respondent company openeQ a cash~credit account with
the
appellant bank and on June 7, 1953 to secure repayment of the balance
due at the foot df the account the first respondent company executed three
documents through its managing agents i.e. a promissory note, a deed of
hypothecation and a letter assuring the appellant bank that the CO!Qpany
would remain solely responsible for all loss, damage O( deter\crration of the
stocks hypothecated with the bank. On the same clay R a Director of the
managing agents executed a bond called "agreement of guarantee" agreeing to pay on demand all monies which may be due as the "ultimate
balance" from the company to the bank. Jn December, 1953 the company closed its business. The stocks pl- dged were disposed of by the
bank anct the amount realised was credited in the company's account. A
balance of approximately R•. 2.56 lakhs remained due at the 'foot of the
account.
Some creditors of the company in the meantime filed a petition for
winding up the company.
On February 22, 1956 a scheme of composition was settled among the creditors and was later sanctioned by the High
CGurt on May 21, 1956 under section 391 of the Companies Act, 1956
after rejecting the opposition of the appellant bank. The bank then filed
a suit against the company and R for a declaration that on the date of the
suit a sum df over Rs. 2.56 lakhs was due against the company and for a
decree for payment of the amount against R.
The trial court dismissed
the suit and on appeals filed by both the parties the High Court held that
the scheme having been cqnfirmed ·by the court, had statutory operation
and was binding on all creditors including the bank; the bank ha,t become
an unsecured credito·r for the amount remaining due after sale of the pledged ~oods and it \Vas for the board of trustees under the scheme to determine the amount for apyment to the bank. The co11rt also held that the
suit against the company withour obtaining leave Clf the court was
not
majntainable. It further held that R had executed an
inden1nitv
bond
and that even assumin~ he was a suretv under the terms of the bond he
was only responsible for ensuring payment of the "ultimate balance" which
still had to be determined.
The Hi_gh Court accordingly confirmed thl'
decree of the trial court and held that the suir against R was premature.
On appeal to this Court,
HELD: (i) The suit must be remanded to the trial court to detern1ine
4'the ultimate balance" and for disposal according to la\\·.
A
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- P. ~'. BANK v. BIKRAM COTTON MILLS (Shah, J.)
463
The appellant b•nk was entitled to claim at any time the money due
{rom the company as well as from R under the promissory note and the
bond.
The suit could not therefore be said w be premature. The High
Court instead of dismissing the suit should have stayed it till ''the ultimate
balance" due to the bank from the company was determined. [471 E-F]
(ii) The binding obligation created under a composition under s. 391
of the Companies Act, 1956, between the company and its creditors does
not affect the liability of the surety unless the contract of suretyship otherwise provides. [471 F-G]
Ha/sbury's Lall's of England, Vol. 63 rd. Edn., Art. 1555 at p.
771;
Re. Garner's Motors Ltd. [1937] Ch. 594~ referred to.
(iii) The bond executed by R was one ot the four documents executed
on the same day and was part of the schen1e to ensure payn1ent of the
amount found due to the Bank.
Although the bond was not also executed by the company, the 'fact that it was executed simultaneously with the
other documents and the conduct of R as \Vell as the company indicated
that R agreed to guarantee payment of the debt due by the company. It
must be held, therefore that the Bank, the company and R were parties
to the agreement under which for the dues of the company, R became a
surety. [470 A-C]
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1957
and 1958 of 1966.
Appeal by special leave from the judgment and order dated
September 6, 1965 of the Allahabad High Court, Lucknow Bench
in First Civil Appeals Nos. 62 a:nd 71 of 1957.
H. R. Goklwle, M, M. Kshatriya and G. S. Chatterjee, for the
appellant (in both the appeals).
M. C, Chagla, A. K. Verma, B. Datta and J, B. Dadachanji,
for the resPondents (in both the appeals),
The Judgment of the Court was delivered by
Shah, J. Ranjit Singh was a director of Ranjit Singh & Sons
Ltd.-which acted as a Managing Agent of Shri Vikram Cotton
Mills Ltd. Shri Vikram Cotton Mills Ltd.-hereinafter called the
Company, opened a cash-credit account with the Punjab National
Bank, and to secure repayment of the balance due at the foot o(
the account on June 27, 1953 four documents were executedthree by the Managing Agents on behalf of the Company and one
by Ranjit Singh.
The three documenis executed by the Managing Agents were (i) promissory note for Rs. 13,00,000/-
paya\:ll.e with interest at the rate of 2t% over the Reserve Bank of
India rate with a minimum rate of 6% per annum until payment: (ii) a deed of hypcthecation of goods described in the
Schedule annexed to the document; (iii) a letter to the Bank
agreeing that during the continuance of the
agreemenf evidenced by the letter of hypothecation. the Company will remain
:!Olely r.esponsible for all loss,
damage or deterioration of
the
securities delivered to the Bank caused by theft, fire, rain, robbery,
-464
SUPREME COURT REPORTS
(1970] 2 S.C.R.
dacoity or by any other cause whatsoever, Ranjit Singh executed
a deed called an "agreement of guarantee" agreeing to pay ol)
demand all monies which may be due as "ultimate balance" fr:im
the Company to the Bank.
In December 1953 the Company closed its
business.
The
stocks pledged were disposed of by the Bank and the amol'nt
realised was credited in the account of the Company.
The Bank
claimed that an amount of Rs. 2,56,877/12/6 remained due at
the foot of the account.
Some creditors of the Company had in the meantime filed a
petition in the High Court of Allahabad for an order winding up
the Company. On February 22, 1956, a scheme of composition
was settled among the creditors that the total liability of tl1e
Company was Rs. 34,45,197-11-2 and the total assets of the
Company were Rs. 5,00,000, that the Company was desirous of
·confirming "a lease agreement" and that in order to safeguard
the rights and interests of the Company and its
unsecured creditors the Company had entered into an
agreement with
the
lessee.
The scheme was sanctioned by order. of the High Court
of Allahabad dated May 21, 1956 under s. 391 of the Indian
Companies Act, 1956 after rejecting the opposition of the Bank.
The Bank then filed a suit in the Court of the Civil
Jud~e.
Malihabad, Lucknow, again;t the Company and Ranjit Singh for
a declaration that on the date of the suit a sum of
Rs. 2,56,877-12-6 was due against the Company and for a decree
for payment of that amount against Ranjit Singh with osts and
interest pendente lite.
Jn a joint writt~n statem~nt it was con ..
tended, inter alia, that Ranjit Singh was "only a guarantor and
not a co-debtor" and that he could be made liable only in case of
default by the Company, and since the Company had made no
default-the _suit against Ranjit Singh was not maintainable.
Certain preliminary issues were raised by the Trial Judge at
the hearing of the suit out of which the following are relevant :
" ( 1) Whether the plaintiff (Bank) is not entitled to
file this suit as
against the
defendant No. 1
(the Company) without obtaining the ]eave of
the Company Judge as alleged? If so, its effect?
( 2) Whether the Court has no jurisdiction to decide
on the merits of the plaintiff's claim in view of
the facts as alleged in para 12 (A) of the written
statement 9 If so, its effect ?
( 3) Whether the suit
against
defendant
No. 2
(Ranjit Singh) is not maintainable as pleaded
under Paras 7, 13 and 14 of the writte'1 state111ent ?"
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P. N. BANK V. BIKRAM COTTON MILLS (Shah, J.)
465
The Trial Court held that the suit was not maintainable against
the Company without obtaining leave of the Company Judge,
anct also that the Court l!fld no jurisdiction to adjudicate upon the
merits of the Bank's claim, for under the scheme the Board of
Trustees were to scrutinise the claim and their decision was final.
In dealing with the claim against Ranjit Singh the Court held
that he had not made any default in payment of the dnes and
under the terms of guarantee the suit was premature against him
as well.
The Court accordingly dismissed the suit.
Two appeals were preferred to the High Court of Allahabad
against the judgments in the suit.
The High COQrt held that a
scheme of composition between the Company and its creditors
confirmed by the Court had statutory operation and was binding
on all creditors regardless of the fact whether any of them agreed
or ,not; that according to the scheme the Bank became an unseclired creditor for the amount remaining due after sale of the
pledged goods, that under cl. 12 of the Scheme the amount pay·
able to the unsecured creditors shall be ihe principal amount due
to them determined by the Board of Trustees, that it was for the
Board of Trustees to determine the amount that remained pay-
'
able to the Bank, that though under cl. 16 of the scheme a creditor may file suits and take appropriate steps, for the limited
purpose of establishing their claims the suit had to be filed with
the leave of the Court,, and that the suit of the Company without
obtaining leave of the Court was not maintainable.
The High
Court further held that Ranjit Singh had executed an indemnity
bond, and that even assuming that Ranjit Singh was a surety it
was expressly provided by the terms of the bond executed by
him that the guarantee was only for ensuring payment ·of the
"ultimate balance" remaining due to the Bank on such cash·
credit account upto the specified limit, and therefore Ranjit Singh
was only to pay "the ultimate balance" which might be found due
against the Company after "taking into account all dividends,
comp<)sitions and payments etc. as payments in gross towards the
debt", that the Bank's dues could be recovered from Ranjii Singh
upon default in payment by the Company of the ultimate balance
after,scrutiny by the Board of Trustees, and that the "proper ~tage
for commencing a suit against Ranjit Singh was after the ultimate
liability of the Company was determined by the Board of Trustees
and the Company committed default in payment».
The High
Court accordingly confirmed the decree of the Trial Court even
in favour of Ranjit Singh. With special leave granted by this
Court, these two appeals have been preferred by the Bank. .
The Bunk claimed a mere declaration against the Company
and not a decree for payment of the amount due. Section 391
of the tompanies Act, 1956, insofar as it is material provides :
" ( 1) Where a compromise or arrangement is proposed--
466
SUPREME COURT REPORTS
[1970) 2 S.C.R.
(a) between a company and its· creditors or any
A
class of them; or
(b) between a company and its members or any
class of them;
the Court may, on the application of the Company or
of any creditor or member of the Company, or, in the
ca&~ of a company which is being wound up, of the
liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the
case may be, to be called, held and conducted in such
manner as the Court dLrects.
. (2) If a majority in number representing threetourths in value of the creditors, or class of creditors,
or members, or class of members, as the case may be,
present and voting either in person or, where proxies
are allowed by proxy, at the meeting, agree to any comB
c
promise or arrangement, the compromise or arrangeD
men! shall, if sanctioned by the Court, be binding on all
the creditors, all the creditors of the class, as the case
may be, and also on the. company, or, in the case of a
company which is being wound up, ·On the liquidator
and contributories of the company :
"
Section 392( 1) provides :
"Where a High Court makes an order under section 391 sanctioning a compromirn or an arrangement
in respect of a company, itE
( a) shall have power to supervise the carrying out
F
of the compromise or arrangement; and
(b) may, at the time of making such order or at
any time thereafter, give such directions in regard to any matter or make such modifications
in the compromise or arrangement as it may
consider necessary for the proper working of
G
the compromise or arrangement."
In the present case a meeting of creditors of the Company was
held in which a majority in number representing three-fourths in
value. of the creditors aμreed to the scheme of composition and
the court rejected objection raised by the Bank tind sanctioned
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the scheme.
The scheme was binding upon the Bank afid the
rights and obligations of the Bank had to be worked out under
the scheme.
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P. N. BANK V. BIKRAM COTTON MILLS (Shah, J.)
467
In reaching its conclusion that the bond executed by Ranjit
Singh in favour of the Bank was of the nature of a contract of
indemnity and not a coniract of guarantee, the High Court was
impressed by the circumstance that the Company was not a party
to the bond, and that the bond was only a bjlateral agreement
between the Bank and Ranjit Singh.
S-..ction 124 of the Indian Contract Act define~ a "contract
of indemnity''. A contract by which one party promises to save
the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called
a "contract of indemnity".
Section 126 defines a "contract of
gu2rantee". It states :
"A 'confract of guarantee' is a contract to perform
the promise, or discharge the liability,
of a third
person in case of his defualt.
The person who gives
the guarantee is called the 'surety' : the person in respect of whose default the guarantee is given is called the
'principal debtor', and the person to whom the guarantee is given is calli'.d the 'creditor'. A guarantee
may be either oral or written".
A promise to be primarily and independently liable for another person's conduct ,may amount to a contract of indeinniiy.
A contract of guarantee requires concurrence of three persons--
the principal debtor, the surety and the creditor-the surety
undertaking an obligation at the request express or implied of the
principal ,debtor.
The obligation of the surety depends
subsiantially on the principal debtor's default; under a contract of
indemnity liability arises from loss caused to the promisee by the
conduct of the promisor himself or by the conduct of another
person.
In the present case the Company did not execute the bond.
But the bond executed by Ranjit Singh was one of four documents exec~ted on June 27, 1953. It was part of the scheme to
ensure payment of the amount due at the foot of the cash-credit
account in favour of the Bank. The Company executed by its
managing agents-(i) a promissory note; (ii) a deed of hypoth~
cation; an~ (iii) a letter ~suring the Bank that the Company
shall remam solely responsible for all loss, damage or deterioration to the stocks hypothecated with the Bank. The Bank also
insisted upon a promise by some other person to pay the debt,
and as a part of the same arrangement Ranjit Singh executed
the ·bond on which the 8uit is field.
The bond was expressly
called an "agreement of guarantee" : it was also recited therein
that Ranjit Singh guaranteed to the Bank, payment on demand
of all monies which may at any time be due to the Bank from the
Company on the general balance of that account with the Bank,
468
SUPREME COURT REP~RTS
[1970] 2 S.C.ll.
that the guarantee was to be a continuing guarantee for the ulti'
mate balance which shall remain due to the Bank on such cashcredit account.
In the written statement· it was admitted that
Ranjit Singh was a guarantor. The bond, it is true, did not expressly recite that the Company was the principal debtor; it is
also true and the Company did not execute the bond.
But a
contract of guarantee may be wholly written, may be wholly oral,
or may be partly written and partly oral. The documents which
secured repayment of the Bank's claim ai the foot of the cashcredit account were executed simultaneously : the bond executed
by Ranjit Singh was one of them and the. conduct of Ranjit Singh
and the Company indicates that Ranjit Singh agreed to guarantee
payment of the debt due by the Company.
We hold, therefore,
that the Bank, the Company and Ranjit Singh were parties to the
agreement under which for. th.e dues
of the Company,
Ranjit
Singh became a surety.
The extent of the liability of Ranjit Singh under the temis of
the bond must, therefore, be determined.
Section 128 of
the
Indian Contract Act provides that the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise
provided by the contract.
It is necessary, therefore, to consider
whether in the tem1s of the bond there is anything which shows
thllt the liability of the surety is not co-extensive with that of the
principal debtor.
Certain clauses of the "bend are relevant :
" ( 1) In consideration of your Bank at my request
allowing an accommodation
by way of cash
credit and D/D limits to
M/s. S. V. Cotton
Mills Ltd., at Lucknow Branch, I; in my personal
capacity hereby guarantee to you the payment
on demand of all monies which may at any time
be due to you from M/s. S. V.
Cotton Mil!s
Ltd., on the general balance of that account with
your Bank.
(2) I declare that this guarantee shall be continuing
guarantee and shall. not be considered as cancelled or in any way affected by the fact that at any
time the said cash-credit and D /D account may
show no liability against the borrower, or may
even show a credit in favour of the borrower,
but shall continue in operation in respeet of subsequent transactions".
" ( 4) I further declare that all dividends, compositions,
payments received by yoil from the said
borrower or any other person or persons liable
or his or their representatives shall be taken and
applied as payment in gross without any right
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P. N. BANK v. BIKRAM COTTON MILLS (Shah, J.)
469
on the part of myself or my representative to
stand in your place in respect of or to claim the
benefit of any such dividends, compositions or
payments until full amount of all your claims
against the said borrower or his/their representatives which are covered by this guarantee shall
have been paid and that this guarantee shall
apply to and secure ultimate balance which shall
remain due to you on such cash-credit account
upto the extent of Rs. 13,00,000.
"
" ( 8) I also agree that the Bank shall be entitled to
c
recover its entire dues under the said cash-credit
account from my person or property upon default in payment by the said borrower".
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By clause 4 it is expressly stipulated that the bond secured "the
ultimate balance" remaining due to the Bank. Therefore, unless
and until the ultimate balance is determined no liability on Ranjit
Singh to pay the amount arises, and it is common ground that
the ultimate balance due is not determined.
The suit was for a
decree for Rs. 2,56,877 /12/6, but the claim against Ranjit Singh
could be decreed only for the amount remaining due as the ulti·
mate balance under els. 4 a;nd 5 of the bond.
We are, however, unable to agree with the High Court that the
suit filed was premature.
The Bank was under the terms of the
bond executed by Ranjit Singh entitled to claim at any time the
money due from the Company as well as Ranjit Singh under the
promissory note and the bond.
The suit could not, therefore, be
said to be premature.
The High Court instead of dismissing the
suit should have stayed it till "the ultimate balance" due to the
Bank from the Company was deiermined.
We deem it necessary
to observe that a binding obligation created under a composition
under s. 391 of the Companies Act, 1956, between the Company
and its creditors does not affect the liability of the surety unless
the contract of suretyship otherwise provides.
As observed in
Halsbury's Laws of England, Vol. 6, 3rd Edn., Art.
1555 at
p. 771 :
"A scheme need not expressly reserve the rights of
;ia,-
any creditors against sureties for debts of the company;
as such rights are •maffected by a- scheme".
It w'as held in Re. Garner's Motors Ltd.(') that the scheme when
sanctioned by the Court has a statutory operation and the scheme
H
does not release other persons not parties to the scheme from their
obligations.
ll) [1937] Ch. 594.
L2Sup.Cl/70-18
470
SUPREME COURT REPORTS
(1970] 2 S.C.R.
The High Court, in our judgmeni, should have stayed the suit
and after "the ultimate balance" due by the Company was determined the· Court should have proceeded to decree the claim according to the provisions of cl. 4 of the bond:
We accordingly modify the decree passed by the Trial Court
and declare that the rights of the Bank against the Company afe
governed by the scheme sanctioned by the High. Court of Allahabad in Company Case No. 16 of 1956 by their .judgment dated
May 21, 1956.
Liabiliiy of 1.anjit Singh being only for payment
of. 'the ultimate balance' which remains due on the cash-credit
account .with the Bank in favour of tile Company.
The Court
will, when such ultimate balance is determined, proceed to pass a
decree in favour of the Bank.
Ranjit Singh has filed an affidavii in this Court that in accordance with the scheme the total amount due to the Bank was
determined at Rs. 41,536/7 /3 as th eultimate balance and a
cheque for Rs. 35,721 was sent to the Bank on October 6, 1956
being 25 % plus the other pro rate payments allowed by the
Trustees to creditors, but the Bank did not cash the cheque.
Thereafter by letter dated October 28, 1966, the Bank requested
that a fresh cheque be issued to them.
Accordingly 'a fresh
cheque for Rs. 38,047-461 was issued to the Bank on November
5, 1966, comprising Rs. 35, 721 qn the basis of the old cheque
plus Rs. 2,326-46 sanctioned for pro rate payment to the Bank
·by the Trustees on November
3,
1966 at
~he rate of
50% of the then balance due.
Thereafter another cheq:ie for
Rs. 1,744.50 being 50% of the amount· then due to the
Bank was also forwarded to tbe Bank on January 29, 1968, in
pursuance of another pro rate payment resolution passed by the
Trustees and the balance now due to the Bank out of the original
amount is Rs. 1,744.09 only.
We are unable to investigate the
correctness of these averments.
The decree passed by the High Court is set aside and the suit
be remanded to the Trial Coun; to be disposed of in the light of
the observations made in this judgment.
There :will be no order
as to costs in the High Court and in this Court.
Costs iii the
.. Trial Court will be costs in the suit.
R.K.P.S.
Suit remanded.
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