Canbank Financial Services Ltd. vs Sfl Industries Ltd. & Anr
2016 Latest Caselaw 6860 Del

          *IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                    Date of decision: 9th November, 2016

+                         CS(OS) No.2557/2000

       CANBANK FINANCIAL SERVICES LTD.             ..... Plaintiff
                   Through: Mr. Ravi Krishan Chandna, Adv.
                                   Versus
    SFL INDUSTRIES LTD. & ANR                    ..... Defendants
                  Through: Mr. Jagjit Singh, Adv. for D-2.
CORAM:-
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

1.

The counsel for the plaintiff and the counsel for the defendant no.2

Shri Harbhajan Singh have been heard.

2. The plaintiff instituted this suit for recovery of Rs.1,20,49,597.24p

with interest, jointly and severally from the two defendants, pleading (i) that

the plaintiff, vide its letter dated 12th December, 1990 sanctioned and agreed

to provide the defendant no.1 lease finance to the extent of Rs.50,00,000/-

for installing the plant, machinery and equipment at Village & P.O. Rail

Majra, Tehsil Balachaur, District Nawanshahr, Punjab; (ii) on 12th

December, 1990 itself an agreement of lease of the said plant and machinery

was executed at New Delhi; (iii) as per the said lease agreement the lease

rentals were to be paid in eight years w.e.f. the handing over of the plant and

machinery; (iv) that on 21st August, 1991 a supplementary agreement was

entered into between the parties whereunder the equipment worth

Rs.29,64,018/- was leased to the defendant and lease rentals were to

commence w.e.f. 21st August, 1991, for a period of eight years i.e. up to 20 th

August, 1999; (v) the said plant and machinery were installed at the factory

aforesaid of the defendant no.1; (vi) the said lease expired on 20 th August,

1999 and the defendant became liable to pay the entire lease rentals along

with interest as per the terms of the agreement; (vii) that on 27 th September,

1991 another supplementary agreement was executed between the parties

whereunder equipment worth Rs.39,59,370/- was leased to the defendant

and the leased rentals were to commence from 27th September, 1991 and till

26th September, 1999; (viii) the plant and equipment under the said

agreement also was installed at the factory of the defendant no.1; (ix) the

said lease has also expired on 26th September, 1999 and the defendant

became liable to pay the entire lease rentals along with interest; (x) that both

the supplementary agreements dated 21st August, 1991 and 27th September,

1991 were to form part and parcel of the Agreement dated 12th December,

1990; (xi) that the defendant no.2 Shri Harbhajan Singh stood as guarantor,

to the said transaction, to secure the re-payment of the amounts and executed

Guarantee Deed dated 15th March, 1996 in favour of the plaintiff; (xii) that

the defendant no.2 is thus jointly and severally liable with the defendant no.1

to pay the outstanding amount; (xiii) that the defendants failed to maintain

financial discipline and were never regular in making payments of lease

rentals inspite of repeated requests and reminders of the plaintiff and

acknowledgment of the defendants; (xiv) on 6th December, 1996, the

defendants admitted and acknowledged liability of Rs.61,34,897.45p as on

31st August, 1996; (xv) however till the date of institution of the suit,

payment had not been made inspite of legal notice; (xvi) the defendant no.1

on 6th May, 1999 approached the Board for Industrial & Financial

Reconstruction (BIFR) under the provisions of Sick Industrial Companies

(Special Provisions) Act, 1985 (SICA) and the said reference was registered;

(xvii) the plaintiff approached BIFR for permission under Section 22 of the

SICA; (xviii) BIFR vide order dated 3rd January, 2000 rejected the

application of the plaintiff; (xix) the plaintiff filed an appeal to Appellate

Authority for Industrial and Financial Re-construction (AAIFR); (xx)

AAIFR vide order dated 12th September, 2000 allowed the application of the

plaintiff under Section 22 of SICA; (xxi) that as per the books of accounts of

the plaintiff maintained in the regular course of business, the defendants at

the time of institution of the suit were liable to pay a total sum of

Rs.1,20,49,597.24p to the plaintiff; and, (xxii) the defendants are also liable

to pay pendente lite and future interest as per the agreement at the rate of 2%

per month compounded with monthly rests till the date of realisation.

3. The suit was entertained and summons thereof issued.

4. None appeared for the defendant no.1 which was vide order dated 11 th

December, 2002 proceeded against ex parte. The defendant no.2 filed an

application under Section 8 of the Arbitration and Conciliation Act, 1996

and which application was allowed and vide order dated 12 th May, 2004 the

parties were referred to arbitration.

5. The plaintiff filed FAO(OS) No.156/2004. The counsel for the

defendant no.2, on 9th April, 2012, withdrew the application aforesaid under

Section 8 and as a result whereof the order dated 12th May, 2004 of disposal

of the suit was set aside and the suit restored to its original position.

6. On 8th May, 2012 it was informed that the defendant no.1 had been

wound up pursuant to the order of Punjab & Haryana High Court. The

plaintiff was accordingly directed to take steps to bring the Official

Liquidator (OL) on record.

7. Notice thereof was issued to the OL who appeared through counsel

before this court on 23rd April, 2013 and for few dates thereafter but then

stopped appearing.

8. The defendant no.2 filed a written statement pleading (i) that the suit

against the defendant no.2 as guarantor is not maintainable since the

defendant no.1 as principal borrower had died a legal death and ordered to

be wound up pursuant to the recommendations of the BIFR; (ii) that the OL

attached to the High Court of Punjab & Haryana had sold all assets

comprising of land, building, plant, machinery and equipment of the

defendant no.1 for a sum of Rs.4.91 crores and the sale stood confirmed; that

the defendant no.2 even otherwise stood discharged as a guarantor because

(a) the plaintiff had given up its right to enforce its charge as against all the

securities - plant and machinery - equipment financed under the alleged

Lease Agreement; (b) of the conduct of the plaintiff in not taking appropriate

steps for preservation of securities/plant/machinery/leased equipment

governed by the contract inspite of the defendant no.1 failing to adhere to

financial discipline; and, (c) the plaintiff having not taken any remedial or

legal steps against the securities and the same amounting to

novation/modification of the terms of contract; (iii) that the liability of a

guarantor is subject to existing securities of the principal borrower and

which securities are to be made available to the guarantor when the

guarantee is put to enforcement; (iv) the plaintiff has not pleaded the details

of securities or nature of securities; (v) the plaintiff has therefore failed to

enforce its rights as against securities of principal borrower and resultantly

the defendant no.2 stood discharged; (vi) that the OL attached to Punjab &

Haryana High Court had invited claims from all class of creditors of the

defendant no.1 and till such time as the said claims are investigated and

adjudicated upon, no recovery from the defendant no.2 can be made; and,

(vii) the plaintiff should have taken steps to save and protect its

securities/leased equipment in its capacity as a secured creditor or having

charge over the equipment/machinery; (viii) generally denying the contents

of the plaint.

9. The suit though pending for the last sixteen years, has stood so.

10. On 26th October, 2016, the counsel for the defendant no.2 though

initially stated that no issue of fact arises but subsequently, when the order

was being dictated, stated that an issue may arise with respect to the plea of

Section 141 of the Indian Contract Act, 1872 and also whether the suit could

be proceeded with as the plaintiff was required to take permission under

Section 446 of the Companies Act, 1956.

11. On 26th October, 2016 I prima facie observed that once permission

under Section 22(1) of SICA had been granted and the order of winding up

is in pursuance to the orders of BIFR, SICA being a special statute would

prevail and need may not arise for permission under Section 446 of the Act.

On perusal of file on that date it was also found that the OL had appeared

not only in the suit as aforesaid recorded but also in FAO(OS) No.156/2004

supra. On 26th October, 2016 it was further enquired from the counsel for the

plaintiff whether a plea under Section 141 of the Contract Act was to be

taken in execution or in suit. On a perusal of the Deed of Guarantee

admittedly executed by the defendant no.2 in favour of the plaintiff it was

found that the defendant no.2 had agreed that his liability would be joint and

several with the defendant no.1 and it was thus enquired from the counsel

for the defendant no.2 on 26th October, 2016 as to how defendant no.2 could

oppose the claim in the suit.

12. Faced therewith, the counsel for the defendant no.2 on 26th October,

2016 had stated that the plaintiff had already recovered part of its claim. He

was however unable to show any document to the said effect. The counsel

for the plaintiff, on that day stated that no amount had been recovered and it

was so evident from the report filed by the OL also.

13. The counsel for the defendant no.2 had then sought adjournment to

place on record the latest report of the OL.

14. The defendant no.2 has filed an affidavit dated 3rd November, 2016 to

the effect (i) that the OL in his report filed in these proceedings had

disclosed as many as five secured creditors of the defendant no.1 Company;

(ii) that in the said report the plaintiff was shown as debenture holder

secured by floating charge of Rs.10,00,000/-; (iii) that no charge had

however been registered over plant, machinery and equipment in favour of

the plaintiff in terms of Sections 125/126 of the Companies Act; (iv) that the

amount of Rs.4.91 crores realised by the OL from sale of assets of defendant

no.1 was payable first to the secured creditors and thereafter to the

unsecured creditors; (v) that the plaintiff is an unsecured creditor; (vi) that

the plaintiff consented to the sale by the OL without securing its rights; and,

(vii) that the said action of the plaintiff is detrimental to the interest of the

defendant no.2 warranting discharge of the defendant no.2 from liabilities.

15. It would thus be seen that the only defence of the defendant no.2 to

the claim of the plaintiff is that though the plaintiff, on default by the

defendant no.1, was entitled to possess the leased plant, machinery and

equipment and to sell the same to realize its dues from the defendant no.1

but did not do so and such failure of the plaintiff discharges the defendant

no.2 as guarantor.

16. The counsel for the defendant No.2 has during the hearing handed

over copies of (i) State of Madhya Pradesh Vs. Kaluram 1967 (1) SCR 266

- in this case Kaluram stood surety for Jagatram whose bid for purchase of

felled trees had been accepted; the State of Madhya Pradesh had a right to

stop removal of felled trees exceeding the amount paid by Jagatram; the

State was found to have a first charge over the felled trees; the claim of the

State against Kaluram on the basis of surety was defeated holding that the

State having allowed Jagatram to remove the felled trees in excess of the

price paid, Kaluram stood discharged to the extent of the value of the excess

felled trees permitted to be taken; (ii) Amrit Lal Goverdhan Lalan Vs. State

Bank of Travancore 1968 (3) SCR 724; (iii) The State Bank of Saurashtra

Vs. Chitranjan Rangnath Raja AIR 1980 SC 1528; and, (iv) Morgan

Signatures Towers Private Limited Vs. M.P. Nagar (2015) 12 SCC 519 -

but which are not found to be of any relevance.

17. I have perused the documents about which there is no dispute.

18. As per the Agreement of Lease dated 12th December, 1990 between

the plaintiff and the defendant no.1 (i) though the defendant no.1 as lessee

had a right to have and retain possession and use of the equipment for the

full term of the lease, the equipment was to remain the property of the

plaintiff; (ii) the defendant no.1 agreed not to sell, sublet, pledge or

hypothecate or otherwise encumber or create any rights with respect to the

said equipment; (iii) defendant no.1 agreed to provide "Collateral Security"

to the plaintiff for full lease rental; (iv) the plaintiff was allowed, on

occurrence of a default, to demand the entire amount due and to terminate

the agreement and to demand return of the equipment and to take possession

thereof at the cost and risk of the defendant no.1 and to sell the same and to

demand the balance of its dues from the defendant no.1 or to avail any other

remedy which may be available to it in law with neither of the two remedies

being exclusive; and, (v) as per the Deed of Guarantee executed by the

defendant no.2, the defendant no.2, in consideration of the plaintiff having

agreed to grant lease to the defendant no.1, had agreed (a) to indemnify the

plaintiff against all losses and to pay to the plaintiff on demand the balance

due to the plaintiff not exceeding a sum of Rs.109.75 lacs; (b) that his

liability to the plaintiff shall be construed as joint and several with the

plaintiff; (c) that he as guarantor shall not be discharged from his liability by

the plaintiff releasing the defendant No.1 or by any act or omission of the

plaintiff; (d) that if the defendant no.1 became insolvent, his liability shall

continue; and, (e) that his guarantee shall be in addition to and shall not in

any manner be prejudiced or affected by any collateral or other security or

guarantee which the plaintiff may have.

19. It would thus be seen that the entire argument made by the counsel for

the defendant no.2 is de hors the facts. For this reason only perhaps, the

counsel for the defendant no.2 instead of referring to the documents chose to

refer to the judgments and argue therefrom. The question of the proposition

of law emerging from the said judgments applying would depend upon the

facts of the case and the judgments cited are not relevant at all to the present

case. Here, not only is the guarantee furnished by the defendant no.2 the

only security under the Lease Agreement dated 12th December, 1990

available to the plaintiff but the counsel for the defendant no.2 himself as

aforesaid agrees that no charge in favour of the plaintiff was recorded. In the

absence thereof, invocation by the counsel for the defendant no.2 of Section

141 of the Contract Act is meaningless as without such charge being

recorded with the Registrar of Companies there can be no security.

Moreover no clause from the Lease Agreement has been shown to canvass

that the leased equipment was security. A creditor is not bound to insist

upon any particular kind of security from the principal debtor and it is only

when the creditor takes security from the principal debtor that the surety can

claim a right to the benefit of that security. In the present case no security

came in existence owing to non-registration of charge with the Registrar of

Companies.

20. Though undoubtedly the leased equipment continued to be in the

ownership of the plaintiff but it cannot be lost sight of that the defendant

no.1 was in use such leased equipment which is embedded in the factory and

incorporated in the plant and which independently is of no value and in most

cases the cost of removal thereof is more than the value thereof. The

defendant no.2 has also not pleaded any specific value of the same. It thus

cannot be said that the plaintiff, by not asserting its rights to take back

possession of the leased equipment has lost a chance to recover any part of

its dues from the defendant no.1 or has acted detrimentally to the defendant

no.2.

21. Moreover, under the Lease Agreement as aforesaid, the plaintiff was

not even obliged, in the event of default by the defendant no.1 to take

possession of the leased equipment and had a choice either to take

possession thereof or to take any other remedies against the defendant no.1.

Similarly the defendant no.2 had in the Deed of Guarantee agreed that he

shall not stand discharged by any such thing. The defendant no.2 is now

estopped from raising pleas as have been raised.

22. Section 141 of the Contract Act as under:

"141. Surety's right to benefit of creditor's securities--A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security."

is to be read along with Section 137 thereof which is as under:

"137. Creditor's forbearance to sue does not discharge surety--Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him

does not, in the absence of any provision in the guarantee to the contrary, discharge the surety."

23. The plaintiff, for removing the leased equipment incorporated in the

plant and machinery at the factory of the defendant No.1, would have been

required to take legal proceedings. The question which arises is, whether the

choice exercised by the plaintiff of not taking such action would be "mere

forbearance" within the meaning of Section 137 or an act on the part of the

plaintiff of "losing or parting with such security" within the meaning of

Section 141.

24. In my view, considering the facts and circumstances of the present

case i.e. the agreement between the parties, the practicality of removing the

leased equipment from the factory premises of the defendant No.1 and the

value of such leased equipment even if had been taken into custody /

possession, the same would fall within the meaning of "mere forbearance" in

Section 137 and not of "losing or parting with the security" within the

meaning of Section 141.

25. A Division Bench of the High Court of Karnataka in Karnataka Bank

Ltd. Vs. Gajanan Shankararao Kulkarni AIR 1977 Kant 14 held that mere

passive inactivity or passive negligence on the part of the creditor by failing

to realise the debt from the collateral security is not sufficient in itself to

discharge the surety, because the surety can himself avoid consequences of

such passivity by himself paying the debt and becoming subrogated to the

rights of the creditor and because in the absence of a contract to the contrary,

the creditor is under no obligation of active diligence for the protection of

the security, so long as the surety himself remains inactive. The said view

was agreed to by a Division Bench of the High Court of Orissa in Babani

Shankar Patra Vs. State Bank of India AIR 1986 Ori 247 and followed in

Ibrahim Abdul Latif Shaikh Vs. Corporation Bank AIR 2003 Kant 98. I

respectfully concur therewith.

26. Inkling can also be had from the "illustrations" to the two sections.

The illustration to Section 137 is as under:

"Illustration: B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship."

and the illustrations to Section 141 are as under:

"Illustrations: (a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B's furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his guarantee.

A is discharged from liability to the amount of the value of the furniture.

(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged.

(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged."

27. The matter is put beyond any pale of controversy by the Supreme

Court in Industrial Finance Corporation of India Ltd. Vs. Cannanore

Spinning and Weaving Mills Ltd. (2002) 5 SCC 54. It was held that the

intent of the law makers is apparent from use in Section 141 of the words "or

without the consent of the surety" and "parts with such security" and that a

definite violation is required to come within the ambit of Section 141.

28. No merit is thus found in the plea of the defendant No.2 on the basis

of Section 141 of the Contract Act. The action / inaction of the plaintiff on

account of which the defendant No.2 claims to have been discharged do not

fall within the ambit of Section 141 of the Contract Act and are within the

ambit of Section 137 of the Contract Act.

29. As far as the contention of the counsel for the defendant No.2, of

Section 446 of the Companies Act is concerned, I have on 26 th October,

2016 already prima facie observed that once permission under Section 22(1)

of SICA has been granted and the order of winding up is in pursuance to the

order of BIFR, Section 446 of the Companies Act would not be applicable. I

find support for the said view from the dicta of Justice R.M. Lodha, as a

Judge of the Bombay High Court in Industrial Development Bank of India

Vs. Moradabad Syntex Ltd. AIR 1997 Bom 306. It was held that the

condition precedent to the applicability of Section 446 is the passing of the

winding up order and/or appointment of official liquidator as provisional

liquidator by the Court; any recommendation of winding up made by BIFR

under SICA is not covered under the expression "winding up order has been

made" by the Court and Section 446 is thus not applicable. Moreover, it is

the case of the defendant No.2 itself that the winding up process is over.

Once it is so the question of applicability of Section 446 does not arise.

There is thus no merit in the said plea either.

30. The counsel for the defendant no.2, faced therewith has argued that

the claim of the plaintiff in the plaint verified on 28th September, 2000 for

Rs.1,20,49,597.24p is unbelievable in the light of the said claim as on 28th

February, 1998 being pleaded to be Rs.66,97,514.51p.

31. I have enquired from the counsel for the defendant no.2 whether he

has computed the amounts as per the rates of interest stipulated in the

agreements.

32. The counsel states that he has not.

33. The same again demonstrates the arbitrary manner in which the

argument is being raised.

34. I thus do not find any plea in the written statement of the defendant

no.2 to be raising an issue of fact or law requiring determination. There is no

need for the plaintiff to lead ex parte evidence against the defendant no.1

which has chosen not to contest inspite of service of notice including on the

OL.

35. The plaintiff is thus entitled to a decree against the defendants as

sought. However, having found the Deed of Guarantee executed by the

defendant no.2 to be limiting the amount to be recovered thereunder to

Rs.109.75 lacs, the decree insofar as against the defendant no.2 has to be

limited to the said amount.

36. Accordingly, a decree is passed in favour of the plaintiff and against

the defendant no.1 for recovery of Rs.1,20,49,597.24p with pendente lite and

future interest at the rate of 2% per annum compounded with monthly rests.

37. A decree is also passed in favour of the plaintiff and against the

defendant No.2 for recovery of Rs.109.75 lacs.

38. The plaintiff shall also be entitled to costs of the suit jointly and

severally from the defendants.

Decree sheet be prepared.

RAJIV SAHAI ENDLAW, J.

NOVEMBER 9, 2016 „pp/bs‟ (corrected & released on 6th December, 2016)