State Bank of India vs Trade Aid Paper and Allied Products (India) Pvt. Ltd. , and others

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1995 Supreme(Bom) 237

IN THE HIGH COURT OF BOMBAY
(FULL BENCH)
M.L. PENDSE C. J. A.V. SAVANT S.H. KAPADIA, JJ.
State Bank of India.... Appellants.
Versus
Trade Aid Paper and Allied Products (India) Pvt. Ltd., and others.... Respondents.
Appeal No. 290 of 1995 in Notice of Motion No. 924 of 1995 in Suit No. 532 of 1995, decided on 25-4-1995.
Advocates appeared :
N.G. Thakkar with P.K. Samdhani and Ajay Choksi instructed by M/s. Little and Company, for the appellants.
Shekhar Shetye with Ms. Snehal Shah instructed by Rajesh Kothari Company, for the respondents.

Headnote:Order 40, Rule 1-Banks and Financial Institutions-Suit by-Loan recovery-Court needed to appoint Receiver.
       Order 40, Rule 1-Receiver-Appointment of-To be done only in extreme case of peril to creditors interest-Mischief not can be done after grant of injunction erroneous.
       It is the duty and function of the Court entertaining the suits instituted by Banks and financial institutions to ensure that efforts are made to dispose of the suits as early as possible and even during the tendency of the suits insure that not only the properties are protected but the defendant is made to repay the amount, if desirous of enjoying the benefits secured by obtaining the loan. The powers of the Court under Order 43, Rule 1 of the Code of Civil Procedure are to be exercised to advance cause of justice and what is just and convenient depends upon the nature of the claim and the surrounding circumstances. The Court should not chose eyes to the realities and blindly follow the principles laid down 50 years before when the suits by Banks and financial institutions were a novelty. The economic liberalisation and the policy of the Government to grant loans for various activities have increased the number of suits by Banks and Financial Institutions and in this Court every year more than 2,000 suits are instituted. It would not be difficult to imagine how much public money is involved in these suits and how long the Nationalized Banks and Financial Institutions are deprived of their dues. The Court should be conscious of these facts and should be more pragmatic in exercising powers under Order 40, Rule 1 of the Code of Civil Procedure.
       The Courts while appointing Receiver under Order 40, Rule 1 of the Code of Civil Procedure may not deprive the defendant of possession, in case of immovable properties provided that the defendant is ready and willing to continue in possession as agent of thee receiver on the terms and conditions to be settled. In case, the defendant is ready and willing to accept the agency, then the defendant will continue to hold de facto possession. In case the defendant is not ready and willing to accept the agency and commits default in compliance with the terms of the agency, then it is open for the Court to invite bids from outsiders for use and enjoyment of immovable property. While inviting bids, the Court should ensure that reserve price is fixed after ascertaining the valuation from valuation expert. In no case, immovable property should he sold by the receiver before passing of the decree in favour of the Bank or the Financial Institution. In case of movable property and which is bypothecated with the Bank or the financial institution, receiver should be normally appointed. In the documents executed by the defendant while securing loans from the Banks, the defendant often agrees that receiver can be appointed, in respect of bypothecated goods, if defaults are committed. The appointment of the Court receiver is dehors the agreement but to refuse to appoint the receiver in respect of bypothecated goods virtually amounts to denial of relief in respect of bypothecated goods. The bypothecated goods either will not be available on the date of the judgment or would lose its value and, therefore, appointment of receiver is necessary in respect of moveable properties. In case, the defendant is willing to work as agent of the Court receiver, then movables can be handed over to the defendant on such terms and conditions as the receiver can settle of case where vehicles or air-crafts are bypothecated, the defendants should be permitted to use it as agent of the receiver on terms and conditions to be settled. In respect of book debts, the receiver should be directed to recover the same. There is one more category, when the appointment of receiver is necessary and that is in respect of property which belongs to Banks or Financial Institutions and which is leased out to the defendants for use and occupation. The refusal to return the properties results in institution of suits and in such cases also receiver should normally be appointed and the defendant can be permitted to use the leased property either movable or immovable on terms and conditions to be settled.

JUDGMENT - M.L. PENDSE, C.J.:---The State Bank of India is a Banking Company incorporated under the State Bank of India Act, 1955 and carries on business all over the country through its various branches. The respondent No. 1 is a Private Limited Company and is owner of Industrial gala bearing No. 116, Shiv Shakti Industrial Estate, Ghatkopar, Bombay. The respondent No. 1 sought diverse credit facilities from the appellant Bank and the facilities were granted on November 18, 1991. The facilities granted were :

(a) Demand cash credit against hypothecation of stocks for Rs. 50 Lakhs,

(b) Demand cash credit against hypothecation of book debts for Rs. 55 Lakhs,

(d) Import and Inland Letters of credit for Rs. 75/- Lakhs.

(e) Bank Guarantee Limit for Rs. 10 Lakhs.

The respondents Nos. 2 to 9 stood as guarantors for repayment of loan amounts by respondent No. 1. The respondents Nos. 2, 3 and 4 are individuals, while respondents Nos. 5 to 8 are companies and respondent No. 9 is a sole proprietory concern. The respondent No. 4 is owner of Industrial Gala bearing No. 112 in Shiv Shakti Industrial Estate, Ghatkopar, Bombay and also of a residential flat in Jai Jatin Co-operative Housing Society at Ghatkopar. The respondent No. 4 also owns factory land at Patalganga in Raigad District of this State.

2. In consideration of the Bank granting credit facilities to respondent No. 1, the respondents executed various documents including (a) a General Agreement for grant of Small Industrial Advances and hypothecation of moveables, book debts and other assets, and (b) a common letter of guarantee by defendants Nos. 2 to 9 guaranting repayment of amounts due and payable in respect of facilities granted by the Bank. The respondent No. 2 on March 9, 1992 created an equitable mortgage in respect of Gala Bearing No. 116 on behalf of respondent No. 1 by deposit of title deeds. The equitable mortgage was also in respect of including the plant and machinery affixed in the Gala. The Bank prepared a Memorandum of Deposit of Title Deeds duly stamped as required by law. On March 10, 1992, the respondent No. 1 confirmed by letter of the fact of deposit of title deeds. The respondent No. 2 created legal mortgage and an Indenture of Mortgage dated March 9, 1992 in respect of property situated at Patalganga. The respondents by another Indenture of mortgage dated March 19, 1992 created a legal mortgage in respect of other immoveable properties.

3. The respondent No. 1 utilised various credit facilities and by confirmation letter dated April 12, 1994 confirmed that a sum of Rs. 1,59,65,363.42 was due and payable to the Bank as on March 31, 1992. The respondent No. 1 was irregular in maintaining the accounts and committed defaults in repayment. The Bank thereupon by letter dated January 25, 1995 called upon respondent No. 1 to pay the outstanding amounts within 4 days from the receipt of the letter. The respondents sent reply on January 28, 1995 merely demanding inspection of documents and claiming that negotiations for revival of respondent No. 1 Company were pending. The Bank thereafter called upon respondents Nos. 2 to 9-the guarantors to pay a sum of Rs. 1,89,50,616.05 along with future interest thereon at the rate of 17.75% per annum with quarterly rests. The respondents failed to re-pay any amount and that gave rise to filing of Suit No. 532 of 1995 on the Original Side of this Court on March 15, 1995.

On institution of the suit, the Bank took out Notice of Motion No. 924 of 1995 seeking interim relief pending the disposal of the suit. The interim relief sought has appointment of Court receiver under Order 40, Rule 1 of the Code of Civil Procedure, in respect of properties described in Exhs. A to D to the plaint, and stocks, book debts, plant and machinery described in Exh. R to the plaint. The Bank claimed that the receiver should be directed to sell and realise the same and pay over the net sale proceeds towards the sa

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