Karnataka High Court
Karnataka State Financial Corporation vs M/S Pavithra Industries on 1 April, 2024
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M.F.A.No.6654/2015
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 1ST DAY OF APRIL, 2024
PRESENT
THE HON'BLE MRS. JUSTICE K.S.MUDAGAL
AND
THE HON'BLE MRS. JUSTICE K.S. HEMALEKHA
MISCELLANEOUS FIRST APPEAL NO.6654/2015 (SFC)
BETWEEN:
KARNATAKA STATE FINANCIAL CORPORATION,
HAVING ITS REGISTERED OFFICE AT:
NO.1/1, THIMMAIAH ROAD,
BANGALORE - 560 052.
REP: BY ITS BRANCH MANAGER. ... APPELLANT
(BY SRI VINAYA KUMAR G.S., ADVOCATE)
AND:
1. M/S. PAVITHRA INDUSTRIES,
SY.NO.184/2, K.NO.152,
NANNIVALA VILLAGE, A.G.ROAD,
CHALLAKERE TALUK,
CHITRADURGA DISTRICT - 577 522,
REP: BY ITS PARTNERS.
2. SRI J. GURUSIDDAPPA, AGED MAJOR,
S/O. THIPPESWAMY,
M/S. BADRINATH INDUSTRIES,
PAVAGADA ROAD, CHALLAKERE,
CHITRADURGA DISTRICT - 577 522.
3. SMT. SARVAMMA, AGED MAJOR,
W/O. SRI GURUSIDDAPPA,
M/S. BADRINATH INDUSTRIES,
PAVAGADA ROAD, CHALLAKERE,
CHITRADURGA DISTRICT - 577 522.
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M.F.A.No.6654/2015
4. SRI J. MANJUNATH
S/O. J. GURUSIDDAPPA,
M/S. BADRINATH INDUSTRIES,
PAVAGADA ROAD, CHALLAKERE,
CHITRADURGA DISTRICT - 577 522. ... RESPONDENTS
(V/O. DATED 17/04/2023 SERVICE OF NOTICE TO R-1 TO R-4 IS
PRESUMED TO BE DULY SERVED)
THIS MFA IS FILED UNDER SECTION 32(9) OF STATE FINANCIAL
CORPORATION'S ACT, AGAINST THE ORDER DATED 18.03.2015
PASSED IN CIVIL MISC.NO.50/2010 ON THE FILE OF THE ADDITIONAL
DISTRICT & SESSIONS JUDGE, CHITRADURGA, ALLOWING THE
APPLICATION FILED U/SEC 31(1)(aa) AND 32 OF SFC ACT.
THIS MISCELLANEOUS FIRST APPEAL HAVING BEEN HEARD AND
RESERVED ON 29/02/2024, COMING ON FOR PRONOUNCEMENT OF
JUDGMENT THIS DAY, K.S.HEMALEKHA J., DELIVERED THE
FOLLOWING:
JUDGMENT
The appellant - Karnataka State Financial Corporation
(hereinafter referred to as "the Corporation" for the sake of
convenience) had sanctioned a term loan of Rs.25,00,000/- and
an additional Bridge loan of Rs.6,00,000/- on 30.11.1989 and
08.10.1990 in favour of respondent No.1-M/s.Pavithra
Industries, respondent Nos.2 to 4 are the directors of
respondent No.1 who stood as surety to the loan and executed
guarantee deeds dated 29.12.1989 and 02.11.1990. The
guarantee given by respondent Nos.2 to 4 was in the capacity
of personal guarantors to pay all the money dues in the event
the company fails to repay the loan amount. The partners
executed a mortgage deed 29.12.1989 and also a
hypothecation deed 02.11.1990 hypothecating land, building,
and plant machineries. The company was unable to repay the
loan amount, hence, notices of demand were issued calling
upon the borrower to repay the entire amount. As on
10.12.2005, the amount due was Rs.2,64,99,927/- with future
interest.
2. The Corporation took legal action calling upon the
guarantors to pay the said amount as they had invoked
personal guarantees to the Corporation. The company and the
guarantors having failed to repay the amount, the Corporation
moved an application under Section 31(1)(aa) and (32) of the
State Financial Corporations Act, 1951 ("SFC Act" for short)
before the Additional District & Sessions Judge, Chitradurga, in
Civil Misc.No.50/2010, wherein the Corporation sought direction
to respondent Nos.2 to 4 jointly and severally to pay
Rs.2,64,99,997/- with interest from 10.12.2005.
3. The respondents filed objections that the claim
made by the Corporation is highly illegal and unlawful.
4. Learned Additional District & Sessions Judge, by the
impugned order dated 18.03.2015, allowed the application and
held that the Corporation is entitled to recover
Rs.2,64,99,997/- with current and future interest at the rate of
10% p.a. from respondent Nos.2 to 4 jointly and severally in
terms of the guarantee deeds marked at Ex.P-3.
5. Heard Sri Vijaya Kumar G. S., learned counsel for
the appellant. Though notice has been served upon the
respondents, they have chosen to remain absent.
6. With the consent of learned counsel appearing for
the appellant, the matter is heard finally though listed for
admission.
7. The arguments advanced by the learned counsel for
the appellant is that the application under Section 31(1)(aa)
and (32) of the SFC Act is in the nature of execution
proceedings. The learned District Judge ignoring that the
agreed rate of interest between the parties was at the rate of
16.50% p.a. and in default, the respondents had to pay the
overdue interest at 19% p.a., has erroneously awarded interest
at 10% p.a. without according any reasons. Learned counsel,
in support of his arguments, placed reliance on the following
judgments of the Apex Court:
(i) Everest Industrial Corporation and others vs.
Gujarat State Financial Corporation1 (Everest Industrial
Corporation).
(ii) Deepak Bhandari vs. Himachal Pradesh State
Industrial Development Corporation Ltd.2 (Deepak
Bhandari).
8. Having heard the learned counsel appearing for the
appellant, the point that arises for consideration is, "whether
the Court below was justified in awarding interest at the rate of
10% p.a. in terms of the guarantee deeds marked at Exs.P-3
and P-4?"
AIR 1987 SC 1950
AIR 2014 SC 961
9. Section 31 of the Act contains special provisions for
the enforcement of claims by State Financial Corporation.
Section 31(aa) was inserted by an amendment with effect from
21.08.1985 enabling the State Financial Corporation to enforce
the liability of any surety. The Apex Court, in the case of
Everest Industrial Corporation, stated supra, held that the
proceedings instituted under Section 31(1) of the Act are
something akin to an application for attachment of property in
execution of a decree at a stage posterior to the passing of the
decree no question of passing any order under Section 34 of
the Code would arise since Section 34 of the Civil Procedure
Code would be applicable only at the stage of passing a decree
and not any stage posterior to the decree. The Apex Court in
the case of Everest Industrial Corporation stated supra
placed reliance upon the judgment of the Apex Court, in the
case of Gujarat State Financial Corporation vs. M/s.
Natson Mfg. Co. (P) Ltd.3 (M/s. Natson Mfg. Co.) has held at
paragraph No.5 as under:
AIR 1978 SC 1765
"5. In Gujarat State Financial Corporation v. Natson
Mfg. Co. (P) Ltd. (supra) no doubt the question
involved was whether court-fee was payable on an
application made under Sec. 31 of the Act on an ad
valorem basis as if the proceeding was a suit or not.
But this Court after analysing the provisions of the Act
held that an application for any of the reliefs that can
be granted under the Act was not certainly a plaint in
a suit for recovery of mortgage loan and that it was
not even something akin to a suit by a mortgagee to
recover mortgage money by sale of the mortgage
property. The court held that the applicant in such a
case could not pray for a preliminary decree for sale of
the property or a final decree for the payment of the
money nor it could seek to enforce any personal
liability even if such a liability had been incurred under
the contract of mortgage as the law stood then. This
Court held that the form of the relief to be granted
under the Act did not attract Art. 1 or Art. 7 of Sch. 1
of the Bombay Court-fees Act, 1959 which required
payment of court-fee on ad valorem basis on any
plaint or application in the nature of a plaint instituted
for recovery of mortgage amount. Accordingly it held
that the demand for payment of ad valorem court-fee
was unsustainable. In the course of its judgment the
court rejected the contention based on sub-sec. (6) of
Sec. 32 of the Act which required a District Judge to
apply the procedure of the Code to applications made
under Sec. 31 of the Act and ultimately held that the
substantive relief in any claim under Sec. 31(1) of
the Act was something akin to the relief that
could be granted on an application for
attachment of property for execution of a decree
at a stage posterior to the passing of the decree.
The court further observed that "We are unable to
appreciate the view taken by the High Court that the
proceeding is not in the nature of execution of a
decree because the question of enforcement of the
order of attachment or sale would only arise after the
same is made absolute under sub-sec. (7)." Even
though in the above decision the question which arose
for consideration was whether ad valorem court-fee
was payable on an application under Sec. 31 of the Act
as if it was a suit, the court has decided the said
question after determining the true nature of a
proceeding instituted under Sec. 31(1) of the Act on a
detailed analysis of the provisions of the Act."
(Emphasis Supplied)
10. Later, the Apex Court in the case of Maharashtra
State Financial Corporation vs. Ashok K.Agarwal &
others4 (Ashok K.Agarwal) at para No.5 has held as under:
AIR 2006 SC 1584
"5. Sections 31 of the Act contains special provisions
for enforcement of claims by State Financial
Corporations. It is by way of a legal fiction that the
procedure akin to execution of decrees under the Code
of Civil Procedure has been permitted to be invoked.
But one cannot lose sight of the fact that there is no
decree or order of a civil court when we are dealing
with applications under Section 31 of the Act. The legal
fiction at best refers to a procedure to be followed. It
does not mean that a decree or order of a civil court is
being executed, which is a sine qua non for invoking
Article 136. The proposition set out in the case of
Gujarat State Financial Corporation (supra)
found support in M/s. Everest Industrial
Corporation and Others v. Gujarat State Financial
Corporation 1987 (3) SCC 597. Again in Maganlal
etc. vs. Jaiswal Industries Neemach & Ors. 1989
(3) SCR 696, this court noticed that an order
under Section 32 is not a decree stricto sensu as
defined in Section 2(2) of the Code of Civil
Procedure, the financial Corporation could not be
said to be a decree holder. This makes it clear
that while dealing with an application under
Sections 31 and 32 of the Act there is no decree
or order of a civil court being executed. It was
only on the basis of a legal fiction that the
proceedings under Section 31 are treated as akin
to execution proceedings. In fact this Court has
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observed that there is no decree to be executed
nor there is any decree holder or judgment-
debtor and, therefore, in a strict sense it cannot
be said to be a case of execution of a decree.
Article 136 of the Limitation Act has no
application in the facts of the present case.
Article 136 specifically uses the words "decree or
order of any civil court". The application under
Sections 31 and 32 of the State Financial
Corporation Act is not by way of execution of a
decree or order of any civil court."
(Emphasis supplied)
11. The Apex Court in Ashok K. Agarwal's case
considering the proposition laid down in M/s. Natson Mfg. Co.
and Everest Industrial Corporation and Maganlal etc. vs.
Jaiswal Industries, Neemach and Others5 held that an
order under Section 32 is not a decree stricto sensu as defined
in Section 2(2) of the Code of Civil Procedure, the financial
Corporation could not be said to be a decree-holder and further
in Ashok K. Agarwal's case held that while dealing with an
application under Sections 31 and 32 of the Act, there is no
decree or order of a Civil Court being executed. It was only on
1989 (3) SCR 696
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the basis of a legal fiction that the proceedings under Section
31 are treated as akin to execution proceedings and in a stricto
sensu, it cannot be said to be a case of execution of a decree in
light of the law laid down by the Apex Court in Ashok K.
Agarwal's case, the Court below was justified in awarding
10% interest. Even otherwise, the pleadings of the Corporation
are not specific for grant of further interest at any agreed rate
and the prayer sought in the petition is as under:
(a) To pass an order directing the respondents 2
to 4 jointly and severely to pay a sum of
Rs.2,64,99,927/- due as on 10.12.2005 with
further interest on default amounts of
Rs.2,64,99,927/- on the footing of compound
interest at quarterly rest basis from
10.12.2005 till realization.
(b) To direct the respondents to pay the cost of
the proceedings.
(c) To grant such other relief or reliefs, in the
interest of justice and equity.
12. The guarantee deeds executed by the guarantors-
respondent Nos.2 to 4 indicate the interest payable on future
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on the amount borrowed. The Apex Court, in the case of
Deepak Bhandari stated supra, has held that the contract of
indemnity is an independent and separate contract from the
main contract and at para No.20 held as under:
"20. x x x
"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
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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 on
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.
x x x"
(Emphasis supplied)
13. The Corporation has not pleaded about the rate of
interest payable by respondent Nos.2 to 4 as surety towards
the loan borrowed by respondent No.1. The guarantee deeds
executed by respondent Nos.2 to 4 are silent about the rate of
interest payable by the guarantors on the loan amount secured.
Though the learned District Judge has not assigned any reason
for imposing interest at the rate of 10% with current and future
interest towards the term loan, in the absence of any
agreement/guarantee deed between the parties to pay the
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further future interest, the District Judge in equity was justified
in exercising discretion awarding interest at the rate of 10%
p.a. with current and future interest for the guarantee under
Exs.P-3 and P-4. The point raised for consideration is answered
accordingly against the Corporation. Hence, the following:
ORDER
(i) Appeal is hereby dismissed.
(ii) The impugned order passed by the District Judge, stands
confirmed.
Sd/-
JUDGE
Sd/-
JUDGE
S*
