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Karnataka High Court
Sri. Sreekumar vs Canara Bank on 16 February, 2026
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WP No. 22004 of 2025
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 16TH
DAY OF FEBRUARY, 2026
®
PRESENT
THE HON'BLE MR. JUSTICE D K SINGH
AND
THE HON'BLE MR. JUSTICE S RACHAIAH
WRIT PETITION NO. 22004 OF 2025 (GM-DRT)
BETWEEN:
1. SRI SREEKUMAR
S/O C G MENON
AGED ABOUT 75 YEARS
RESIDENT AT NO.5
SUNGRACE APARTMENTS
KARAKKAT ROAD
COCHIN-682016
2. MRS. SHALINI N MENON
W/O C R SREENIVASAN
Digitally WRONGLY MENTIONED AS
signed by
VASANTHA W/O G R SREENIVASAN
KUMARY B IN THE IMPUGNED ORDER
K AGED ABOUT 47 YEARS
Location:
HIGH RESIDING AT H.NO.6
COURT OF SUNGRACE, KARAKKAT ROAD
KARNATAKA
MG ROAD PO, ERNAKULAM
KERALA-682106
CURRENTLY RESIDING AT
AMEER BUKHAMSEEN TOWER
FLAT NO.1803, AL MAJAZ 3
SHARJAH, UAE
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REP. BY HER POWER OF
ATTORNEY HOLDER
SRI SREEKUMAR
...PETITIONERS
(BY SRI P N MANMOHAN, ADVOCATE FOR
SRI NISHAN G K, ADVOCATE)
AND:
1. CANARA BANK
(PREVIOUSLY KNOWN AS
SYNDICATE BANK)
GANDHINAGAR BRANCH
HAVING OFFICE AT GROUND FLOOR
2ND CROSS, GANDHINAGAR
BANGALORE-560009
REP. BY ITS
ASSISTANT GENERAL MANAGER
SRI K ANJANEYULU
2. M/S. SRISHTI COMPONENTS
A REGISTERED PARTNERSHIP FIRM
REGISTERED UNDER THE
INDIAN PARTNERSHIP ACT, 1932
HAVING ITS REGISTERED OFFICE
AT NO.13/F, KIADB INDUSTRIAL ESTATE
DODDABALLAPUR, BANGALORE-561203
REPRESENTED BY ITS PARTNERS
SRI C NARESH BABU AND
SRI C RAGHAVENDRA
3. SMT. PREETHA MENON
AGED ABOUT 56 YEARS
W/O ACHUTHAN K MENON
RESIDING AT NO.600
5TH CROSS, 16TH MAIN
IV BLOCK, KORAMANGALA
BANGALORE-560034
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4. SRI NARESH BABU
AGED ABOUT 41 YEARS
S/O SRI GIDDAIAH
C/O SRI LAKSHMINARAYANA
RESIDING AT LAKSHMI NIVAS
BUILDING, NEAR BHARATH GAS
H.O. ROJIPUR, DODDABALLAPUR
BANGALORE-561203
5. SRI T JANEETH KUMAR
AGED ABOUT 44 YEARS
S/O SRI H C THIMMAIAH
RESIDING AT NO.7
NEERUBHAVI MUNIYAPPA COMPOUND
ANJANAPPA LAYOUT
HEBBAL-KEMPAPURA
BANGALORE-560024
6. SRI C RAGHAVENDRA
AGED ABOUT 51 YEARS
S/O SRI SHIVAIAH
RESIDING AT SAIBABA MEDICAL
AND GENERAL STORES
OPPOSITE TO
GOVINDA RAO PETROL BUNK
RAICHUR-584101
...RESPONDENTS
(BY SRI VIGNESH SHETTY, ADVOCATE FOR R-1;
R-6 IS SERVED AND UNREPRESENTED)
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.
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THIS PETITION, COMING ON FOR ORDERS, THIS DAY,
ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR. JUSTICE D K SINGH
and
HON'BLE MR. JUSTICE S RACHAIAH
ORAL ORDER
(PER: HON'BLE MR. JUSTICE D K SINGH)
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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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.
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22. We, therefore, set aside the impugned orders passed by
the DRT and DRAT and allow this writ petition.
Sd/-
(D K SINGH)
JUDGE
Sd/-
(S RACHAIAH)
JUDGE
BKV
List No.: 1 Sl No.: 11
