(Prayer: This writ petition is filed under Articles 226 and 227 of the Constitution of India, praying to set aside the order dated 09.05.2025 passed by the debt recovery appellate tribunal, Chennai in R.A. no.110/2017 (Annexure-a) and the order dated 27.01.2016 passed by the presiding officer, DRT, Bangalore in o.a.no.1458/2013 (annexure-b) as against the petitioners.)

Oral Order:

D K Singh, J.

1. The present writ petition has been filed impugning the order dated 09.05.2025 passed by the Debts Recovery Appellate Tribunal, Chennai (DRAT) in Regular Appeal No.110/2017 and the order dated 27.01.2016 passed by the Debts Recovery Tribunal, Bengaluru (DRT) in the Original Application No.1458/2013.

2. The petitioners were the partners of M/s. Srishti Components, a partnership firm registered under the provisions of the Indian Partnership Act, 1932. Initially, the respondent No.2-partnership firm was constituted with the petitioners and the respondent No.3-Smt. Preetha Menon as its partners. The firm was constituted with the object of setting up a small scale industrial unit for manufacturing of Metal Press Components used in mechanical, electrical and automobile industries. The partnership firm applied for a loan of Rs.35,00,000/- from the respondent No.1-Canara Bank for the purchase of machinery and an additional amount of Rs. 15,00,000/- as working capital for the firm. The Bank, vide Sanction Letter dated 23.06.2008, sanctioned a term loan for Rs. 35,00,000/- for the purchase of machinery and an overdraft facility upto a limit of Rs. 5,00,000/- was given in favour of the firm.

3. The term loan of Rs. 35,00,000/- was repayable with an interest @14.75% per annum in 55 equated monthly instalments of Rs.92,792.50 each commencing from 30.04.2009. The last instalment was to be paid on or before 31.12.2013. The overdraft facility was initially valid upto 30.06.2009 as per the Sanction Letter dated 23.06.2008. The petitioner No.1 and the respondent No.2-firm stood as guarantors and by a Composite Hypothecation Agreement dated 04.07.2008, the newly purchased machinery as well as the raw materials, stock in process, finished goods, stores and spares of the firm were pledged as security for the loan advanced to the partnership firm by the Canara Bank. The petitioner No.1 and the respondent No.3 also executed Guarantee Agreements dated 04.07.2008 in favour of the Bank.

4. In 2009, the petitioner No.1 retired from the firm for health reasons. The firm was reconstituted, whereby two new partners viz., Sri Naresh Babu-respondent No.4 and Sri T. Janeeth Kumar-respondent No.5 were inducted as new partners to the firm. It appears that the petitioner No.2 also retired from the firm. The Reconstitution Deed dated 18.02.2009 was executed wherein it was acknowledged in the recitals that the retiring partners would be relieved from their commitments towards the partnership firm. After reconstitution of the partnership firm on 18.02.2009, the new partners, along with the respondent No.3-Smt. Preetha Menon, were responsible for operation and management of the firm without any involvement of the petitioners.

5. As mentioned above, the first instalment for repayment of the term loan of Rs. 35,00,000/- advanced by the Canara Bank to the firm was due on 29.04.2009 and before the said date, the petitioners had retired from the firm on 18.02.2009.

6. The retirement of the petitioners from the firm and the reconstitution of the partnership firm were brought to the notice of the respondent No.1-Bank vide letter dated 30.11.2009 issued by the petitioner No.1. After receipt of the said letter, the Bank asked the partnership firm and its new partners to execute a fresh Composite Hypothecation Agreement and Guarantee Agreements. Accordingly, the fresh Composite Hypothecation Agreement including the Guarantee Agreements were executed on 16.04.2009 by the new partners with the respondent No.1-Bank for the sanctioned loan amount.

7. It was also brought to the notice of the Bank by the petitioners that the partnership firm was reconstituted after their resignation on 18.02.2009 and the new Deed of Partnership was with the Bank. All pending or arising claims from the date of incorporation i.e., 18.02.2009 would be now the responsibility of the new partners.

8. The new Composite Hypothecation Agreement and the Guarantee Agreements have been placed on record of the writ petition.

9. As the partnership firm failed to discharge its liability under the loan agreement, the Bank filed Original Application No.1458/2013. The DRT, vide order dated 27.01.2016, rejected the contention of the petitioners that they were not liable for payment of the loan amount and held that the petitioners and the newly inducted partners along with the firm were jointly and severally liable for payment of the loan amount. The DRT further held that the total sum of Rs.41,32,064.05 (principal sum of Rs.24,96,059.69 together with interest @18.25% per annum compounded monthly and OD amount of Rs.16,36,004.36 together with interest at @ 16.25% per annum compounded monthly) would be payable with effect from the date of filing of the Original Application i.e., 28.02.2013 till realisation.

10. Against the said order passed by the DRT, the petitioners filed the regular appeal before the DRAT in Regular Appeal No.110/2017. The DRAT, vide order dated 09.05.2025, has noted that the Letter dated 30.11.2009 was addressed by the petitioners to the Bank informing that the reconstituted firm was in operation and all assets and liabilities were transferred to the new partners, and therefore, all pending or claims arising from the date of incorporation would be the sole liability of the new partners. The petitioners requested the Bank to acknowledge the letter confirming the change in the records. The said letter was addressed after more than 9 months from the date of reconstitution of the firm on 18.02.2009. In the meantime, two reconstitutions had taken place; one on 18.02.2009 and the second on 28.07.2009. The Bank had not responded to the said letter though the retirement of the petitioners and induction of new partners in their place was pleaded in Original Application. However, the Bank had also not released the petitioners from their liability. It was also noted that the Partnership Deeds reconstituted on 18.02.2009 and 28.07.2009 would suggest that the Bank was not a party. Once the Bank had not exonerated the petitioners from their liability after the reconstitution of the partnership firm and when there was no express release of the petitioners from their liability by the Bank, the petitioners would be liable to pay the debt due when the reconstituted partnership firm and its partners failed to pay the debt due to the Bank. The DRAT, therefore, has dismissed the appeal, however, held that the petitioners would be liable to repay the amount due for the term loan of Rs.35,00,000/- and the overdraft facility of Rs.5,00,000/- along with interest, and they would not be liable for the enhanced overdraft facility of Rs.9,00,000/-, which was given to the firm after the petitioners retired from the partnership firm.

11. Before adverting to the impugned orders, it would be apt to take notice of the pleadings in the Original Application filed by the Bank. Paragraphs 5.2, 5.3 and 5.4 of the Original Application read as under:

                  "5.2 The applicant submits that the defendant No. 1 represented by its managing partner the defendant No. 2 once again approached the applicant Bank during April 2009 mentioning about the change in the Constitution of the Partnership firm to the effect that the defendants No 5 and 6 have replaced defendant No. 3 and 4 and the firm has been re-constituted by executing a fresh partnership deed dated 18-02-2009 and offered to execute a fresh set of documents in respect of the financial facility availed by the 1 defendant earlier on 4-7-2008. Accordingly the defendant No.1 represented by defendant No. 2, 5 and 6 herein executed a new Composite Hypothecation agreement dated 16-04-2009 in favour of the applicant Bank. The defendants No 2, 5 and 6 also executed fresh Guarantee Agreements on the same day and stood surety for the amount borrowed by the 1 defendant. Copies of the Composite Hypothecation Agreement and the three Guarantee Agreements all dated 16-04-2009 are produced herewith and marked as ANNEXURES - 9, 10, 11 & 12 respectively.

                  5.3 The applicant submits that the defendant No.1 represented by its partner, 5th defendant again approached the applicant on 04-10-2009 seeking enhancement of overdraft facility towards working capital requirement upto a limit of Rs. 14,00,000/-. The defendant No.1 again claimed that there is a further re-constitution of the partnership whereunder the 2nd defendant herein is stated to have retired from the earlier partnership and defendants 5 and 6 only continued the partnership business. Considering the said request, the applicant bank enhanced the Overdraft limit to Rs.14,00,000/- which was valid upto 31-12-2010 under its Letter of Sanction dated 18-12-2009. As per the terms of sanction. the defendant No.1 represented by its partners, the defendants 5 and 6 herein executed fresh Composite Hypothecation Agreement in favour of the applicant bank on 23-12-2009. The defendants No. 5 and 6 also jointly executed additional Guarantee Agreement dated 23-12-2009 in respect of the amount of Rs.14,00,000/-. Copies of the Composite Hypothecation Agreement and the Guarantee Agreement both dated 23-12-2009 are produced herewith and marked as ANNEXURES -13 and 14 respectively.

                  5.4 The 1st defendant represented by its partners viz the defendants 5 and 7 once again approached the applicant Bank by filing application dated 11-03-2011 for renewal/ enhancement of working capital facility upto a limit of Rs. 14,00,000/- for a further period of 1 year. By then, the defendants 5 and 7 claimed that the 1st defendant partnership firm has been further re-constituted whereby the defendant No.6 has retired from the partnership firm. Considering the said request, the applicant Bank renewed the overdraft facility upto a limit of Rs. 14,00,000/- for a further period of 1 year upto 31-03-2012 under its Letter of Sanction dated 22-03-2011. The said overdraft amount was repayable with interest @ 16.25% p.a which again is variable depending upon the Base Rate of the Bank. As per the terms of sanction, the 1st defendant represented by its partner, the 5th defendant, issued a Letter of Renewal dated 25-03-2011 in favour of the applicant Bank regarding continuation of the credit limits and acknowledging the liability under the overdraft account for a sum of Rs.8,97,552.11 as on 24-03-2011. Copy of the Renewal Letter for all facilities dated 25-03-2011 is produced herewith and marked as ANNEXURE-15. Though the defendants No.5 & 7 only claim to be the partners of the 1st defendant, the defendants No.2 to 4 and 6 continue to be liable for the dues of the 1st defendant in view of the documents executed by them in favour of the applicant bank and the applicant bank has not discharged them from their liabilities."

12. Thus, the retirement of the petitioners from the firm and induction of new partners and reconstitution of the firm vide fresh Partnership Deed dated 18.02.2009 was in the knowledge of the Bank. Not only it was in the knowledge of the Bank, but the partnership firm and the new partners had executed new Composite Hypothecation Agreement dated 16.04.2009 in favour of the Bank and they had also executed fresh Guarantee Agreements on the same day and the partners of the newly constituted firm stood surety for the amount borrowed by the firm. The newly constituted firm approached the Bank for enhancement of the overdraft limit upto Rs.14,00,000/- and the said limit was enhanced. In the meantime, the partnership firm was again reconstituted.

13. The question which requires consideration in this writ petition is whether the Composite Hypothecation Agreement and the Guarantee Agreements dated 16.04.2009 executed by the partners of the reconstituted firm would amount to novation of the contract?

14. Once the Bank had entered into a new Composite Hypothecation Agreement dated 16.04.2009, by its conduct, the earlier agreement stood superseded by the new agreement and by the fresh Guarantee Agreements. Thus, the earlier partners who had retired on 18.02.2009 were not the signatories to the new Hypothecation Agreement and the Guarantee Agreements. A fresh loan agreement with the reconstituted firm would amount to a novation if the creditor had agreed expressly or by clear conduct to accept the reconstituted firm and its partners as its debtors.

15. In view of the new Composite Hypothecation Agreement dated 16.04.2009, the Bank/creditor had notice of the retirement of the petitioners, and the right of the Bank against the petitioners got extinguished by the new Guarantee Agreements executed by the partners of the reconstituted firm. The Bank would not have the rights alive against the outgoing partners.

16. It is a novation of the contract of loan with the new partners by virtue of the new Composite Hypothecation Agreement dated 16.04.2009 by the partners of the reconstituted firm in favour of the Bank and the Guarantee Agreements executed by them which are of the same date. The bank has accepted the partners of the reconstituted firm as its debtors inasmuch as the new partners had not only executed the new Composite Hypothecation Agreement, but also executed fresh Guarantee Agreements which would mean that the Bank has accepted to substitute the partners of the reconstituted firm as its debtors in place of the petitioners.

17. We are, therefore, of the considered view that the Bank had the notice of the reconstitution of the firm, the retirement of the petitioners from the firm on 18.02.2009 and the acceptance of the partners of the reconstituted firm as its debtors in terms of the fresh Composite Hypothecation Agreement dated 16.04.2009 and the fresh Guarantee Agreements executed by the partners of the reconstituted firm of the same date. This impliedly would mean discharge of the petitioners from the liability. It is not a case where the firm was reconstituted without the knowledge of the Bank. While the firm has been reconstituted, the petitioners have retired from the firm and therefore, the Bank entered into a new Composite Hypothecation Agreement with fresh Guarantee Agreements on 16.04.2009 thereby discharging, by its conduct, the petitioners/outgoing partners from their liability for payment of the loan amount under the terms of the loan agreement.

18. Under Section 32(2) to (4) of the Indian Partnership Act, 1932, a retiring partner may be discharged by an agreement with the creditor and partners of the reconstituted firm. Once the agreements for repayment of the loan are entered into between the creditor and the partners of the reconstituted firm, the outgoing partners would be impliedly discharged. In the present case, the Bank had the knowledge of retirement of the petitioners from the partnership firm, and it had executed the fresh Composite Hypothecation Agreement and the Guarantee Agreements with the partners of the reconstituted firm, therefore, by its clear conduct, the Bank has discharged the petitioners from the liability of repayment of the loan.

19. After execution of the fresh Composite Hypothecation Agreement and fresh Guarantee Agreements dated 16.04.2009 between the Bank and the partners of the reconstituted firm, the rights of the Bank under the old contract would not remain alive. As the fresh agreements would amount to substitution of the old agreements, it was a novation of the contract earlier executed on 04.07.2008.

20. Section 62 of the Indian Contract Act, 1872 requires the consent of the parties for substitution of the old contract with the new contract. If the rights under the old contract are kept alive, there cannot be any novation. However, in the present case, after reconstitution of the firm, a new contract for Hypothecation and fresh Guarantee Agreements were executed on 16.04.2009. Therefore, it would amount to novation under Section 62 and the rights under the original contract got extinguished by the subsequent conduct of the parties. Once the Bank has accepted the new Guarantee Agreements from the partners of the reconstituted firm, the liability of the partners in terms of the earlier Guarantee Agreements got extinguished. The new Guarantee Agreements by the partners of the reconstituted firm on 16.04.2009 were not additional guarantees, but they were in substitution of the guarantees executed by the petitioners for the payment of the loan after the firm was reconstituted on 18.02.2009.

21. We are, therefore, of the considered view that after the firm was reconstituted on 16.04.2009 and the petitioners got retired from the firm, the execution of new Composite Hypothecation Agreement dated 16.04.2009 and the fresh Guarantee Agreements on the same date by the partners of the reconstituted firm would amount to novation of the contract absolving the petitioners/outgoing partners from their liability in terms of the Hypothecation Agreement and the Guarantee Agreements dated 04.07.2008.

22. We, therefore, set aside the impugned orders passed by the DRT and DRAT and allow this writ petition.