Instead of touching the heart of the problem, the appellants have just skirted it. Their argument does seem attractive at first sight but loses its sheen the moment examined on the touchstone of Hon'ble Supreme Court's authority in the case Himachal Pradesh Financial Corporation v. Smt. Pawna and Ors. Civil Appeal No. 1971/1998, decided on 18.12.2003, a true copy of the said order has been placed with the written arguments filed by the Counsel for the respondent No. 1, Himachal Pradesh Financial Corporation. In both the cases, Clause 7 of the mortgage deed runs as follows:
(7) Without prejudice to the above rights and powers conferred on the HPFC by these presents and by Sections 29 and 30 of the State. Financial Corporation Act, 1951 (as amended in from time-to-time) and the special remedies available to the HPFC under the said Act, it is hereby further agreed and declared that if the sole proprietor of the industrial concern fails to pay the said principal sum with interest and other moneys from him, under these presents, to the HPFC in the manner agreed, the HPFC shall be entitled to realize its dues by sale of the mortgaged properties, the said fixtures and fittings and other assets, and if the sale proceeds thereof are insufficient to satisfy the dues of the HPFC to recover the balance from the sole proprietor and the other properties owned by him though not included in this security.
14. The facts of the case before the Hon'ble Supreme Court were these: The principal debtor committed defaults in repayment. Therefore, on 4th January, 1977, a notice was issued to them. Thereafter, a publication declaring intention to take over the assets was made on 25th July, 1981. On 25th October, 1982 in exercise of powers under Section 29 of the Financial Corporations Act, possession was taken over. The Corporation sold the assets on 28th March, 1984 and 14th March, 1985. From such sale, they recovered a sum of Rs. 2,90,000/-. The Corporation then issued a notice dated 27th May, 1985 to the respondents who had executed the indemnity. As the balance was not paid up, a civil suit for recovery of the balance amount was filed on 15th September, 1985. In the said case, the Hon'ble Supreme Court was pleased to hold as under:
Whilst considering the question of limitation the Division Bench has given a very lengthy judgment running into approximately 50 pages. However, they appear to have not noticed the fact that under Clause 7 an indemnity had been given. Therefore, the premise on which the judgment proceeds i.e. that the loan transaction and the mortgage deed, are one composite transaction which was inseparable is entirely erroneous. It is settled law that a contract of indemnity and/or guarantee is an independent and separate contract from the main contract. Thus the question which they required to address themselves, which unfortunately they did not, was when does the right to sue on the indemnity arose. In our view, there can be only one answer to this question. The right to sue on the contract of indemnity arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the Financial Corporation Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. It may be that on the Corporation taking action under Section 29 and in their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient.
In this case, it is an admitted position that the sale took place on 28th March, 1984 and 14th March, 1985. It is only after this date that the question of right to sue on the indemnity (contained in Clause 7) arose. The suit having been filed on 15th September, 1985 was well within limitation. Therefore, it was erroneous to hold that the suit was barred by the law of limitation.Even otherwise, it must be mentioned that the Division Bench was in error in stating that the right to personally recover the balance terminates after the expiry of three years. It must be remembered that the question of recovery of balance will only arise after the remedy in respect of the mortgage deed has first been exhaustive. If a mortgage suit was to be filed, the period of limitation would be 12 years. Of course, in such a suit, a prayer can also he made for a personal decree on the sale proceeds being insufficient. Even though such prayer may be made, the suit remains a mortgage suit. Therefore, the period of limitation in such cases will remain 12 years.
Equivalent Citation: II(2010)BC79
DEBTS RECOVERY APPELLATE TRIBUNAL
DELHI
DELHI
Decided On: 06.01.2010
Shri Krishan Kumar Khemka Vs. Himachal Pradesh Financial Corporation and Ors.
Hon'ble Judges/Coram:
J.M. Malik, J. (Chairperson)
J.M. Malik, J. (Chairperson)
1. The facts emanating from the record are these: The Presiding Officer DRT, Jaipur vide his order dated 7.9.1998 issued a Recovery Certificate in the sum of Rs. 61,27,634.20 along with costs of the suit and future interest at the simple rate of 15% p.a. from the date of filing of the suit on 7.3.1995 till realization from the defendant Nos. 1 to 4 jointly and severally. The present appeal was filed by Mr. Krishna Kumar Khemka (defendant No. 2) along with Mr. Sunil Kumar Khemka (defendant No. 3). The remaining two defendants/judgment-debtors were arrayed as respondents 2 and 3 in this case, besides the applicant/decree-holder, respondent No. 1 and defendant No. 5 Himachal Pradesh State Industrial Development Corporation Ltd. as respondent No. 4. Both the parties have submitted written synopses. It was submitted that no oral arguments were to be advanced.
2. Both the appellants are the guarantors, as well, for the loans advanced to M/s. Nav Durga Paper & Board Mills (P) Ltd. (defendant No. 1/respondent No. 2 herein) by the Himachal Pradesh Financial Corporation (applicant in O.A./respondent No. 1 herein). Their principal plea is that they are not liable for the loans advanced by the Financial Corporation to the respondent No. 2 herein. Mr. Krishna Kumar Khemka and Mr. Sunil Kumar Khemka (the appellants) and Mr. Laxmi Niwas Choudhary (respondent No. 3 herein) formed a company in the corporate name of M/s. Nav Durga Paper & Board (P) Ltd. for the manufacture of paper. The appellants are stated to be promoters/directors of the said Company. They approached the Financial Corporation for a loan for acquiring land, constructing factory building and purchasing plant and machinery. The term loan was sanctioned in the sum of Rs. 30 lakh on 11.2.1983 which was duly availed of during the years 1984-85 on different dates. The respondent No. 4 also disbursed the loan to respondent No. 2 and it was holding pari passu charge on the asset of respondent No. 2. Loan documents were executed on 3.1.1984 and fresh agreement was executed revising repayment schedule on 11.5.1987.
3. In the year 1987 respondent No. 2 faced difficulties and it was decided to hand over the company to a new management. The respondent No. 1 consented to it. The entire company along with its assets and liabilities were handed over to Sarv Shri Gurbhaj Singh, Kirpal Singh, Trilochan Singh, Pritpal Singh and Devinder Singh to be referred as "Singhs" now thereafter. Mr. Devinder Singh wrote a letter to the Financial Corporation regarding change of management of the Company to the Singhs. On 28.4.1989, the Financial Corporation approved the proposal for change of management in principle. The Singhs thereupon took steps by (a) initiating repairs and maintenance, (b) paying old power dues, (c) trying for reconnection of power. All shares in the Company were transferred by the appellants and other shareholders of the Company to the Singhs, their relatives, friends and associates. The original share certificates were handed over by the appellants to the Singhs and most importantly fresh guarantees "were agreed to be obtained from the Singhs."
4. Before Singhs could furnish their guarantees, the respondent No. 4 took over the possession of the mortgaged/hypothecated assets under Section 29 of the State Financial Corporations Act, 1951 on 13.7.1992 with prior intimation to the appellants and respondent Nos. 2 and 3. The assets were sold by the respondent No. 4 on 26.11.1993 for Rs. 50 lakh and after adjustment of proportionate sale proceeds, a sum of Rs. 16,24,485/- was adjusted in the loan account of the appellants and respondent Nos. 2 and 3.
5. A sum of Rs. 1,03,13,824/- including interest up to 9.1.1994 was due from the appellants and respondent Nos. 2 and 3. Vide notice dated 9.8.1984 the respondent No. 1 called upon the appellants and others to pay a sum of Rs. 59,20,049.20 only after working out simple interest up to 31.7.1994. On failure by appellants and respondent Nos. 2 and 3 to pay off the loan, the instant suit/application was moved firstly before the Hon'ble High Court of Himachal Pradesh and the on transfer before DRT, Jaipur, holding the local jurisdiction at that time.
6. The appellants argued with vehemence that on the point of limitation the judgment of the learned DRT is perfunctory. The learned DRT held that the case filed by the Corporation was within the limitation because the Financial Corporation had received some amount on 26.11.1993. The said debt was realized by taking recourse to Section 29 of the State Financial Corporations Act and the excess money realized from the sale of the Company's assets was made over to the Financial Corporation. The grievance of the appellants is that the learned DRT did not deal with the points as to (a) when the cause of action against each of the categories of defendants arose, (b) when the limitation commenced, (c) which Article of the Schedule to the Limitation Act applied to the facts of the case, (d) what was the period or limitation, and (e) when it would have expired. Again, the learned DRT did not explain as to how the making over the excess by the Financial Corporation could have extended the period of limitation against the principal debtor as well as against the sureties.
7. It was also explained that as per the deed of guarantee and another agreement dated 3.1.1984 the loan was to be repaid in instalments. The first and last instalments fell due on 10.1.1986 and 10.1.1990 respectively. The principal debtor committed default and the scheme of repayment was revised vide agreement dated 11.5.1987 between the Financial Corporation and the Company, according to which, the debt was to be discharged in instalments, the first and the last of which were to be paid on 10.1.1989 and 10.1.1993. The appellants/sureties were not parties to that agreement.
8. Again, as per the agreement, the Financial Corporation had the option to declare the outstanding dues payable immediately in case of default of payment by the Company. The default occurred and notice dated 19.3.1990 was given to clear the total dues amounting to Rs. 60,05,013.27 immediately. The limitation started on 19.3.1990 and expired on 18.3.1993. So far as the sureties are concerned, they are governed by Article 56 of the schedule of the Limitation Act which provides a period of limitation of three years from the date of default of each instalment and the cause of action in respect of the last instalment arose on 10.1.1990. The suit was filed by February 1995 which was hopelessly barred by limitation.
9. It was also pointed out that the following relevant principles also revealed that the instant case was barred by time:
(a) Acknowledgement of liability by the principal debtor does not save limitation against the surety, AIR 1956 Punjab 21, AIR 1939 Nagpur 31;
(b) Likewise, an acknowledgement by the surety does not save the limitation against the principal debtor, AIR 1 962 Punjab 495, AIR 1918 Cal 707;
(c) Where a person executes an instalment bond in favour of another and a third person stands as surety, a waiver of default by the debtor paying the instalments will save limitation against the principal debtor but not against the surety, Gopichand v. Mohammad Umar Khan AIR 1935 Peshawar 179;
(d) If remedy against the principal debtor is barred by limitation, the surety is not discharged, Mahant Singh v. UBYI MANU/PR/0008/1939 : AIR 1939 PC 110. This means that the question of limitation as against the principal debtor and the surety has to be decided independently on the basis of the terms of contract, their subsequent conduct and the provisions of law.
10. It was also argued that in the present case the properties mortgaged by the principal debtor had already been sold in auction by the Financial Corporation under Section 29 of the State Financial Corporations Act and it, therefore, ceased to exist. Consequently, it was a simple suit for the recovery of money and Article 62 is not attracted as per MANU/AP/0152/1960 : AIR 1960 AP 210.
11. The Counsel for the appellants also referred to Mitra on Limitation Act, 11th Edition (2000) Volume II page 1483 wherein the following authorities were discussed:
1. Muthu Chettiar v. Rangappa Naidu MANU/TN/0108/1927 : AIR 1927 Mad. 945.
2. Mohd. Sultanuddin v. Mohd. Destagir MANU/AP/0152/1960 : AIR 1960 A.P. 210.
In these cases the main stress was that the liabilities of principal and surety are distinguishable and their liabilities are governed by different Articles.
12. It was also argued that there is no authority or justification for the contention that in a case like this the limitation for an application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act (for short 'the RDDBFI Act') would start running only from the date on which the proceedings under Section 29 of the State Financial Corporations Act came to an end. There is no provision in any of the aforesaid statute which may lay down that resort to any one of the above remedies debars the Financial Corporation from taking recourse to the other remedies of recovery. The Financial Corporation can adopt more than one remedy simultaneously. Section 29 of the State Financial Corporations Act does not provide for any limitation of period within which the action taken thereunder should be concluded and having taken over the management and/or possession of the industrial unit, the Financial Corporation may hold the industrial unit for any length of time according to its choice, convenience and whims to the detriment of the borrower and sureties. Section 29 of the State Financial Corporations Act has no application in case of surety. Again, action under Section 29 of the said Act is against the industrial concern. It, therefore, cannot in any manner enlarge the period of limitation for an application under Section 19 of the Act against sureties. Consequently, the application under Section 19 of the RDDBFI Act was barred by limitation against the appellants/sureties.
13. Instead of touching the heart of the problem, the appellants have just skirted it. Their argument does seem attractive at first sight but loses its sheen the moment examined on the touchstone of Hon'ble Supreme Court's authority in the case Himachal Pradesh Financial Corporation v. Smt. Pawna and Ors. Civil Appeal No. 1971/1998, decided on 18.12.2003, a true copy of the said order has been placed with the written arguments filed by the Counsel for the respondent No. 1, Himachal Pradesh Financial Corporation. In both the cases, Clause 7 of the mortgage deed runs as follows:
(7) Without prejudice to the above rights and powers conferred on the HPFC by these presents and by Sections 29 and 30 of the State. Financial Corporation Act, 1951 (as amended in from time-to-time) and the special remedies available to the HPFC under the said Act, it is hereby further agreed and declared that if the sole proprietor of the industrial concern fails to pay the said principal sum with interest and other moneys from him, under these presents, to the HPFC in the manner agreed, the HPFC shall be entitled to realize its dues by sale of the mortgaged properties, the said fixtures and fittings and other assets, and if the sale proceeds thereof are insufficient to satisfy the dues of the HPFC to recover the balance from the sole proprietor and the other properties owned by him though not included in this security.
14. The facts of the case before the Hon'ble Supreme Court were these: The principal debtor committed defaults in repayment. Therefore, on 4th January, 1977, a notice was issued to them. Thereafter, a publication declaring intention to take over the assets was made on 25th July, 1981. On 25th October, 1982 in exercise of powers under Section 29 of the Financial Corporations Act, possession was taken over. The Corporation sold the assets on 28th March, 1984 and 14th March, 1985. From such sale, they recovered a sum of Rs. 2,90,000/-. The Corporation then issued a notice dated 27th May, 1985 to the respondents who had executed the indemnity. As the balance was not paid up, a civil suit for recovery of the balance amount was filed on 15th September, 1985. In the said case, the Hon'ble Supreme Court was pleased to hold as under:
Whilst considering the question of limitation the Division Bench has given a very lengthy judgment running into approximately 50 pages. However, they appear to have not noticed the fact that under Clause 7 an indemnity had been given. Therefore, the premise on which the judgment proceeds i.e. that the loan transaction and the mortgage deed, are one composite transaction which was inseparable is entirely erroneous. It is settled law that a contract of indemnity and/or guarantee is an independent and separate contract from the main contract. Thus the question which they required to address themselves, which unfortunately they did not, was when does the right to sue on the indemnity arose. In our view, there can be only one answer to this question. The right to sue on the contract of indemnity arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the Financial Corporation Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. It may be that on the Corporation taking action under Section 29 and in their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient.
In this case, it is an admitted position that the sale took place on 28th March, 1984 and 14th March, 1985. It is only after this date that the question of right to sue on the indemnity (contained in Clause 7) arose. The suit having been filed on 15th September, 1985 was well within limitation. Therefore, it was erroneous to hold that the suit was barred by the law of limitation.
Even otherwise, it must be mentioned that the Division Bench was in error in stating that the right to personally recover the balance terminates after the expiry of three years. It must be remembered that the question of recovery of balance will only arise after the remedy in respect of the mortgage deed has first been exhaustive. If a mortgage suit was to be filed, the period of limitation would be 12 years. Of course, in such a suit, a prayer can also he made for a personal decree on the sale proceeds being insufficient. Even though such prayer may be made, the suit remains a mortgage suit. Therefore, the period of limitation in such cases will remain 12 years.
15. I was able to locate two other authorities. In Wandoor Jupiter Chits (P) Ltd. (in Liquidation) Claimants v. K.P. Mathew and Anr. AIR 1980 Kerala 180, it was held:
acknowledgement of the debt under Section 18, Limitation Act which provides for a fresh period of limitation would itself be sufficient, in the context of a contract of guarantee, to keep the surety's liability alive. Surety's contract being separate and collateral could not be equated to that of co-debtor or joint contractor within the meaning of Section 20(2), Limitation Act so that the surety could not plead that the written acknowledgement by the debtor could not keep his (surety's) liability alive. The surety could not also plead discharge under Section 133, Contract Act since the debtor's acknowledgement would not create a contract different from the one the performance of which the surety had guaranteed. The acknowledgement does not involve the making of another contract under Sections 134 and 135 (Contract Act) whereby the creditor discharges the debtor or makes a composition with him. Nor is Section 137 (Contract Act) attracted because mere forbearance to sue even for a time beyond the period of limitation does not operate to discharge the surety. An acknowledgement does not also impair the remedy of the surety against the debtor, under Section 139.
16. In Mrs. Margaret Lalita Samuel v. Indo Commercial Bank Ltd. MANU/SC/0292/1978 : AIR 1979 SC 102, it was held:
In case of a continuing guarantee and an undertaking by the defendant to pay any amount that may be due by a company to a Bank on the general balance of its account or any other account, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation for a suit to enforce the bond could not be said to have commenced running. Limitation would only run from the date of breach under Article 115.
Consequently, the argument advanced by the appellants in this context has to be eschewed out of consideration.
17. The second main argument advanced in the written submissions is that the appellants/guarantors are discharged from their liability because of novatio (i.e. novation) due to the following reasons:
(a) Transfer of management of the Company from appellants to Gurbhaj Singh, Devindcr Singh, their relatives, friends and associates (hereinafter called "Singhs").
(b) Handing over Memorandum and Articles of Association by the appellants to the Singhs together with the original files relating to water pollution, boiler, electricity sanction, correspondence with Financial Corporation and correspondence with HPSIDC.
(c) Handing over of all shares certificates by the appellants to the Singhs, for transfer of all shares in the Company by the appellants to Singhs.
(d) The understanding between the Singhs and the Financial Corporation that fresh guarantees would be executed by the Singhs in favour of the Financial Corporation.
(e) The letter Annexure R/6 dated 27.5.1999 from the Financial Corporation to Devinder Singh on page 84 of the paper book, particularly the stipulation of the Financial Corporation to the Singhs in para (1) thereof to dissociate the appellants from the business of the Company. The Singhs paid Rs. 4.50 and 1.50 lakh pursuant to the novatio and the Financial Corporation and HPSIDC accepted the payment vide Annexure R/5 dated 22.5.1989 from Devinder Singh to the Financial Corporation at page 83 par (a) and Annexure R/6 dated 27.5.1989 from the Financial Corporation to Devinder Singh page 85 last para, which contains an acknowledgement in the following words:
we hereby acknowledge the receipt of Rs. 1.50 lacs through demand draft date 17th May, 1989 drawn on Canara Bank.
18. It was argued that the in the circumstances the Singhs stepped into the shoes of the appellants for all purposes. It was further explained that the defendants 2 to 4 have nothing to do whatsoever with the defendant No. 1. Defendants 2 to 4 had set up defendant No. 1 Company. After 1987 the said Company ran into financial difficulties and with the approval of the plaintiff and Himachal Pradesh State Industrial Development Corporation a scheme was proposed for taking over the defendant No. 1 Company. The entire proposal had been effected with the explicit and implicit approval of the plaintiff and Himachal Pradesh State Industrial Development Corporation and Sardar Gurbhaj Singh was appointed as Managing Director of the Company and Mr. Devinder Singh was appointed as additional director of the said Company. The plaintiff Corporation also agreed to the proposal and Mr. Devinder Singh paid a sum of Rs. 4.50 lakh to Himachal Pradesh State Industrial Development Corporation and a sum of Rs. 1.50 lakh to the plaintiff Corporation. The said payments were made on 22.5.1989. The plaintiff Corporation accepted the proposal for change of management and also for release of guarantees given by the defendants 2 to 4. Thereafter, further amounts were also paid by Sarvashri Devinder Singh, Pritpal Singh and Gurbhaj Singh. Defendants 2 to 4 also handed over the share certificates along with requisite transfer deeds to the aforesaid three promoters in the presence of Mr. K.K. Singhal who was the Financial Adviser to Himachal Pradesh State Industrial Development Corporation. The plaintiff Corporation also started dealing with Sarvashri Devinder Singh, Pritpal Singh, Gurbhaj Singh and also Sardar Kirpal Singh, Trilochan Singh the other new directors of the Company. Mr. Gurbhaj Singh also made payment of another sum of Rs. 14 lakh in March-April 1990 to the Himachal Pradesh State Industrial Development Corporation. However, those cheques bounced and criminal proceedings are pending. All these facts are clear pointers to the novation of the contract.
19. It was also argued that this fact also found mention in the affidavit of Mr. Krishan Kumar Khemka while stating grounds for waiver of deposit of amount. It was clearly explained that the appellants and respondents 2 and 3 had agreed with the proposal of the respondents 1 and 4 to hand over the management of the respondent No. 2 subject to the condition that thereafter the appellants shall have no liability in respect of the respondents 1 and 4. The entire control of the business was handed over to the Singhs and the Singhs had furnished full security to the satisfaction of the Financial Corporation. Again, when the respondent No. 2 Company was under the control of new management a recall notice was issued in 1990 after the above said change. It is well-settled that the principal debtor is always responsible for the repayment. Again, after exhausting all remedies against the principal debtor, action can be taken against any other person. Attention of the Court was invited towards letter written by Himachal Pradesh Financial Corporation dated nil, wherein it was mentioned, "Shri Devendra Singh and his associates would buy the entire shareholding of the existing management and the old promoters shall not be associated with the Company in any manner. The new management shall also pledge shares worth Rs. 19.00 lakh with the financial institutions as additional security."
20. It is explained that the Financial Corporation cannot, therefore, in equity, enforce the guarantee against the appellants. The attention of the Court was also invited towards Section 62 of the Contract Act. In the said letter it was also mentioned that the guarantee executed by the existing promoters shall be released only after the new promoters execute the guarantee deeds. It was further stipulated that the approval for the change in management would be conveyed only in case the proposal is approved by the Board of directors.
21. It was argued that the Financial Corporation may argue that the appellants have not been released from their guarantees in the eyes of law because the Singhs did not execute guarantee deeds and consequently the proposal of the Singhs was not approved by the Board of Directors of the Financial Corporation. To answer this knotty question, it is submitted that the appellant did everything within their power to bring about the change of management from them to the Singhs. The execution of the above said acts were beyond the control of the appellants. Those were only procedural and ministerial acts. The appellants cannot be blamed for their non-performance by the Singhs and the Financial Corporation. The Singhs treated themselves as the new management and the Financial Corporation accepted that change as is clear from the above correspondence.
22. I am unable to cotton with these arguments for the following reasons. There was no concluded contract. Those were only proposals. Some action was also taken in this regard. The management was in the process of being changed. The final seal of approval was yet to be affixed. The appellants were aware of all these facts. Their own written submissions as already discussed above in the preceding paragraph make this point crystal clear. They were handing over the management of the Company to Singhs at their own peril. The furnishing or exchanging of guarantee deeds was the backbone, the heart, the most important and single determinant of this knotty problem. In the absence of the guarantee deeds, which were to be executed by the Singhs, the appellants are still liable. No action can be taken against non-existent guarantors. The Board of Directors of the Financial Corporation was to approve the said proposal after the completion of all. formalities. It is difficult to fathom as to how the directors of the Financial Corporation could have approved the proposal when the execution of guarantee deeds by Singhs was pending. Again and most importantly the above said change between the two groups could not be possible in absence of any consideration.
23. In the letter dated 27.5.1989 it was specifically mentioned:
(vi)that the approval for change of management shall be issued by the financial institutions and Bank after satisfying itself with regard to the credit worthiness and financial soundness of the new management on the basis of documentary evidence to be produced by the new management/promoters. You are, therefore, advised to furnish us the documentary evidence like audit balance sheets, profit and loss accounts in respect of associates concerns of the new promoters for ascertaining the creditworthiness of the new promoters. You are also advised to send us names of any two Banks, so that we could make a reference to verify about the creditworthiness of the new promoters.
24. It is also noteworthy that the finally the Financial Corporation disapproved the proposal of the Company vide notice dated 19.3.1990, thereby recalling the entire outstanding loan amount. The appellants were called upon to pay a sum of Rs. 60,06,027.37 including interest up to 9.1.1990. Thereafter, Himachal Pradesh State Industrial Development Corporation, respondent No. 4, took over the possession of mortgaged/hypothecated assets of the industrial concern of the Company, respondent No. 2, under Section 29 of the State Financial Corporations Act, 1951 on 13.7.1992 with prior intimation to the appellants on 20.6.1992 and sold the industrial concern for Rs. 50 lakh to M/s. Oriental Remedies and Herbal Ltd., Calcutta as their offer was found to be the highest. A sum of Rs. 1,03,13,824.27 including interest up to 9.1.1994 was still outstanding in the loan account of the appellants. The respondent No. 1 served a legal notice requiring them to pay a sum of Rs. 59,20,049.20 worked out after charging simple interest upto 31.7.1994. The Corporation had no role during the settlement between old and new promoters. The proposal of change of management was never implemented. There was no novation of contract. To my mind, this argument, too, does not enure in favour of the appellants.
25. The next submission made on behalf of the appellants was that Article 14 of the Constitution of India stands violated. It was argued that the Financial Corporation is not a private money-lender whose sole concern is maximum return on loans advanced by it, irrespective of propriety, reasonableness and equity of the methods and public interest. It was argued that the Financial Corporation is an agency and instrumentality of the State created for fostering and nourishing industrialization, producing goods and services, in public interest, providing employment and creating healthy industrial culture. Its acts are supposed to be reasonable, and not arbitrary.
26. The appellants have referred to the authorities reported in Ramana Dayaram Shetty v. International Airports Authority of India MANU/SC/0048/1979 : AIR 1979 SC 1628, Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir MANU/SC/0079/1980 : (1980) 4 SCC 1, L. Hirday Narain v. I.T.O. Bareilly MANU/SC/0268/1970 : AIR 1971 SC 33, Sardar Govindrao v. State of Madhya Pradesh MANU/SC/0014/1964 : AIR 1965 SC 1222, which lay down that the Financial Corporation is not supposed to act unfairly and unreasonably under Section 29 of the State Financial Corporations Act.
27. The appellants have also referred to authorities reported in Karnataka State Financial Corporation v. Micro Cast Rubber and Allied Products Ltd. III (1996) CLT 89 (SC) : II (1996) BC 346 (SC) : MANU/SC/1221/1996 : (1996) 5 SCC 65, Haryana Financial Corporation v. Jagdamba Oil Mills 1 (2002) BC 568 (SC) : MANU/SC/0056/2002 : (2002) 3 SCC 496, Maharashtra State Financial Corporation v. Suvarna Board Mills MANU/SC/0527/1994 : (1994) 5 SCC 566, Swastik Automobiles v. Bihar State Financial Corporation (1989) Supp (2) SCC 223, Haji T.M. Hassan Rawther v. Kerala Financial Corporation MANU/SC/0516/1987 : (1988) 1 SCC 166 and A.P. State Financial Corporation v. Gar Re-Rolling Mills MANU/SC/0454/1994 : (1994) 2 SCC 647. It was argued that it was not reasonable or proper for the State Financial Corporation to await the outcome of steps taken by it under Section 29 of the State Financial Corporations Act and then sue sureties for recovering balance outstanding including fresh interest which piled up in the meantime. It was pointed out that the conduct of the Financial Corporation has been arbitrary and unreasonable due to the following reasons:
(i) The Financial Corporation did not act upon the letter Annexure R/5 dated 22.5.1989 page 82 from the Singhs to the Financial Corporation for the change of management, in spite of receipt of money from the Singhs;
(ii) The Financial Corporation did not obtain substitute guarantees from the Singhs despite their offer in para (ii) on page 83 Annexure R/5 dated 22.5.1989;
(iii) The Financial Corporation took over the undertaking on 13.7.1992 but took one year four months and thirteen days for selling the undertaking on 26.11.1993;
(iv) The appellants were deprived of any access to the undertaking by virtue of the 'stipulation' contained in the letter Annexure R/6 dated 5.1989 from the Financial Corporation to the Singhs on page 84 para (i) and yet the Financial Corporation is claiming interest from the appellant even in respect of the period during the appellants were not in use and enjoyment of the undertaking;
(v) The Financial Corporation allowed interest to pile up and is now claiming it from the appellant;
(vi) The appellants were not involved in the process of sale of the undertaking. The appellants were never kept informed about the steps taken by the Financial Corporation to sell the undertaking for the best available price, the precautions that the Financial Corporation was taking for advertising the sale, the bids offered, whether better price was possible and whether the appellants were in a position to procure a better buyer. Appellants were not involved in the sale and were not taken in confidence about price at which the undertaking would be sold. Undertaking worth over Rs. 1.50 crores was sold at the throwaway price of Rs. 50 lacs.
28. There was delay on the part of the appellants. So, the interest kept on increasing by leaps and bounds.
29. It is explained that the loan advanced by the Financial Corporation was about Rs. 30 lakh. The property in dispute was sold at Rs. 60 lakh. The appellants have also paid some amount to the Corporation. Notice was issued by the Financial Corporation on 9.8.1994 for Rs. 50,20,049.20. The suit was filed in February, 1995. The amount claimed was Rs. 61,27,634.20. The amount claimed now exceeds Rs. 1 crore. The said enormous increase in the amount demanded by the Financial Corporation from the appellants as sureties was entirely on account of the Financial Corporation postponing the suit until completion of all action under Section 29 of the State Financial Corporations Act. Moreover, due to this delay, the plant and machinery deteriorated rapidly and reduced to scrap. The longer the delay, the greater is the price depression. Again, taking steps under Section 29 of the State Financial Corporations Act did not result in extension of limitation until the property was sold.
30. I find force in these arguments in a measure. Undoubtedly delay was caused but who is responsible for this delay. Singhs were brought into picture by whom? The Government/Financial Corporation has to take some time in analyzing the antecedents of a new person/transferee. How the respondent No. 1 can be blamed for the delay when the transferees are not coming forward to furnish the requisite guarantees and the cheques furnished by them got bounced. Respondent No. 1 could not force the Singhs to furnish the guarantees. The verification regarding soundness of the transferees entails some time. The respondent No. 1 is not supposed to grant the permission in a jiffy. Financial Corporation is neither a private money-lender nor a source of charity. Its main function is to deal with the public money properly. It cannot squander the public money. In a recent authority reported in Elizabeth Jacob v. District Collector MANU/SC/3889/2008 : IV (2008) BC 350 (SC) : 2008 (2) D.R.T.C. 537 (SC), the Hon'ble Apex Court was pleased to hold that "all departments should function in public interest for public good."
31. Public servants, how much authority they may enjoy are supposed to decide such like problems within reasonable time. Delays do cause hardship to the public and the nation. This may also serve as a big impediment to the progress of the country. However, some time to grant sanction in such like serious matters is required. There was no inordinate delay.
32. Lastly, no action can be taken against the Singhs as guarantors. Other appropriate action has been initiated against them. Who will account for Rs. 30 lakh, the public money? The agreement or proposal does not discharge the appellants completely. The liability of a guarantor is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract, as per Section 128 of the Indian Contract Act. Consequently, this argument, too, deserves no consideration.
33. It was also argued that the case property was sold for a song. The property was worth Rs. 1.50 crores, but it was sold at a throwaway price of Rs. 50 lakh only. The said auction was conducted without the knowledge of the appellants. The appellants did not get chance to procure a better buyer. The appellants were never taken into confidence about the price at which the undertaking was sold.
34. This argument, too, is lame of strength. The appellants should have taken objection at the appropriate time. The appellants should have deposited the amount of Rs. 50 lakh within one month from the date of the sale as required under Rule 60 of the 2nd Schedule to the Income Tax Act. Even before the Court no better buyer was ever produced or no such proposal was made. The argument that the appellants were not aware of these proceedings does not carry much weight. The appellants were aware of each and every proceeding in this case. The appellants are the guarantors for the loans availed of from the Financial Institution till the eleventh hour and till the announcement of the judgment.
35. Lastly, it was submitted that the suit was not validly suited as the plaint was not signed and verified by a legally authorized person. The Financial Corporation is stated to have authorized the Manager (Legal) of the Corporation to file the suit and Mr. B.S. Thakur, who has signed and verified the plaint has filed an affidavit to this effect. No copy of the resolution was produced. Thus, the authorization is not legally proved. Again, according to Section 3(42) of the General Clauses Act, "person" shall include any company or association or body of individuals, whether incorporated or not. Thus a person can also be a corporation aggregate like an incorporated company or a "corporation sole" like the King. Manger (Legal) is not a legal person as it is merely the name of an office which has not been statutorily under the State Financial Corporations Act, 1951 or any other law. The Financial Corporation did not authorize a natural human being viz. B.S. Thakur to institute the suit and sign and verify the plaint. Consequently, the suit has not been validly instituted.
36. To my mind this argument lacks conviction. In an authority by the Hon'ble Apex Court reported in United Bank of India v. Sh. Naresh Kumar and Ors. IV (1996) CLT 51 (SC) : MANU/SC/0002/1997 : II (1996) BC 550 (SC) : AIR 1997 SC 3, it was held:
In cases like the present where suits were instituted or defended on behalf of a public corporation, public interest should not be permitted to be defeated on a mere technicality. Procedural defects which do not go to the root of the matter should not be permitted to defeat a just cause. There is sufficient power in the Courts, under the Code of Civil Procedure, to ensure that injustice is not done to any party who has a just case. As far as possible a substantive right should not be allowed to be defeated on account of a procedural irregularity which is curable.
It cannot be disputed that a company like the appellant can sue and be sued in its own name. Under Order 6 Rule 14 of the Code of Civil Procedure a pleading is required to be signed by the party and its pleader, if any. As a company is a juristic entity it is obvious that some person has to sign the pleadings on behalf of the company. Order 29 Rule 1 of the Code of Civil Procedure, therefore, provides that in a suit by against a corporation the Secretary or any Director or other Principal officer of the corporation who is able to depose to the facts of the case might sign and verify on behalf of the company. Reading Order 6 Rule 14 together with Order 29 Rule 1 of the Code of Civil Procedure it would appear that even in the absence of any formal letter of authority or power of attorney having been executed a person referred to in Rule 1 of Order 29 can, by virtue of the office which he holds, sign and verify the pleadings on behalf of the corporation. In addition thereto and de hors Order 29 Rule 1 of the Code of Civil Procedure, as a company is a juristic entity, it can duly authorize any person to sign the plaint or the written statement on its behalf and provisions of Order 6 Rule 14 of the Code of Civil Procedure. A person may be expressly authorized to sign the pleadings on behalf of the company, for example by the Board of Directors passing a resolution to that effect or by a power of attorney being executed in favour of any individual. In absence thereof and in cases where pleadings have been signed by one of its officers a Corporation can ratify the said action of its officer in signing the pleadings. Such ratification can be express or implied. The Court can, on the basis of the evidence on record, and after taking all the circumstances of the case, specially with regard to the conduct of the trial, come to the conclusion that the corporation had ratified the act of signing of the pleading by its officer.
37. However, keeping in view the facts and circumstances of this case, I am of the considered view that pendente lite and future interest should be reduced to some extent. A recent authority of the Hon'ble Supreme Court reported in C.K. Sasankan v. Dhanalakshmi Bank Ltd. I (2009) CLT 368 (SC) : 2009 (2) D.R.T.C. 320 (SC), may be of some help. In the said case it was held:
8. The quantum and rate of interest which the appellant in the present case is entitled to would be in accordance with the provisions of Section 34 of the CPC. According to the provisions of Section 34 of the CPC interest is to be awarded at a reasonable rate and on the principal amount.
It is needless to point out that although the amount of interest from the date of filing of the suit till the date of the decree and thereafter till realization is in the discretion of the Court as is confirmed by the use of the word 'may' but such discretion has to be exercised by the Court properly, reasonably and on sound legal principles and not arbitrarily and while doing so the Court is also to consider the parameter, scope and ambit of Section 34 of CPC.
9. The aforesaid scope and ambit of Section 34 of the CPC has been the subject of discussion in many case of this Court. We are inclined to refer to the decision in Clariant International Ltd. v. Securities and Exchange Board of India MANU/SC/0694/2004 : (2004) 8 S.C.C. 524, where it was held by this Court that the interest can be awarded in terms of an agreement or statutory provisions and it can also be awarded by reason of usage or trade having the force of law or on equitable considerations but the same cannot be awarded by way of damages except in cases where money due is wrongfully withheld and there are equitable grounds therefore, for which a written demand is mandatory. It was further held that in absence of any agreement or statutory provision or a mercantile usage, interest payable can be only at the market rate and such interest is payable upon establishment of totality of circumstances justifying exercise of such equitable jurisdiction. It was also held that in ascertaining the rate of interest the Courts of Law can take judicial notice of both inflation as also fall in Bank rate of interest. The Bank rate of interest both for commercial purposes and other purposes has been the subject-matter of statutory provisions as also the Judge-made laws. In the said case reference was made to the decisions in Kaushnuma Begum v. New India Assurance Co. Ltd. MANU/SC/0002/2001 : (2001-1) 128 P.L.R. 334 (S.C.) : (2001) 2 S.C.C. 9, H.S. Ahammed Hussain v. Irfan Ahammed MANU/SC/0568/2002 : (2002-3) 132 P.L.R. 297 (S.C.) : (2002) 6 S.C.C. 52 and United India Insurance Co. Ltd. v. Patricia Jean Mahajan MANU/SC/0563/2002 : (2002-3) 132 P.L.R. 281 (S.C.) : (2002) 6 S.C.C. 281, and it was observed that even in cases of victims of motor vehicle accidents, the Courts have upon taking note of the fall in the rate of interest held 9% interest to be reasonable. Discretion to pay such rate of interest is also found to be reasonable and fair as the plaintiff was deprive to utilize and roll its money in commercial transaction and kept out of. it due to wrongful withholding of the same by the defendant.
10. Considering the facts and circumstances of the present case, we find that the rate of interest as awarded for pendente lite and future interest is exorbitant and thus we direct that pendente lite and future interest at the rate of 9% shall be paid which is found to be just, proper and reasonable.
In view of this discussion, I reduce the rate of interest to simple interest at the rate of 6% per annum. The appellants are granted time to deposit the remaining decretal amount within 45 days from the date of announcement of this order, failing which respondent No. 1 Himachal Pradesh Financial Corporation shall be entitled to execute the decree as per law. The present appeal is dismissed except to the extent mentioned above. No order as to costs of this appeal only.
Copies of this order be supplied to the parties as per law and another copy be sent to the DRT concerned.
No comments:
Post a Comment