1. This appeal under Section 96 of the C.P.C has been filed by the appellant against the judgment and decree passed by Civil Judge, Nainital on 15-5-1995 in Original Suit No. 40 of 1992, whereby the suit was dismissed with costs and all securities/equitable mortgages of immovable properties were released from encumbrances. The Truck No. UGP/4671 was also released to stand as security.
2. Brief facts of the case are that the appellant/plaintiff is a body corporate constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act No. 5 of 1970. Its Head Office is situated at Mandvi, Baroda in the State of Gujarat and a Branch Office at Kashipur, District Nainital. Respondent No. 1-M/s. Nainital Seeds Corporation is a partnership firm doing in production and marketing of certified quality of seeds after purchasing raw seeds from the seed growers approved by respondent No. 1. Respondent No. 1 through respondents/defendants No. 2 and 3 approached to the appellant/plaintiff-Bank at Branch, Kashipur, District Nainital for grant of the financial assistance of Rs. 32,00,000/- by way of a cash credit (hypothecation) limit and Rs. 8,50,000/- as term loan for purchase of machinery and other movables. The appellant/plaintiff-bank sanctioned the aforesaid loan on certain terms and conditions. The respondents No. 2 and 3 for and on behalf of respondent No. 1 and respondent No. 4 and father of respondents No. 7 and 8, Sri Raja Ram were the grantors of respondent No. 1 which was executed and delivered in favour of the appellant/plaintiff-Bank on 6-4-1989 at Branch Kashipur, District Nainital.
3. The following security documents in consideration of the aforesaid credit facilities were extended to respondent No. 1:
a) One Promissory note worth Rs. 32,00,000/- and one promissory note worth Rs. 8,50,000/- dated 6-4-1989 carrying minimum interest @ 15.50% and 12.50% respectively.
b) Two letters of partnership dated 6-4-1989.
c) Letter of continuing security dated 6-4-1989.
d) Two-draft letter of undertaking dated 6-4-1989.
e) Undertaking dated 6-4-1989.
f) Instrument of Hypothecation of goods dated 6-4-1989.
g) Two agreements of Hypothecation of moveable machinery dated 6-4-1989.
h) Letters of instalment with acceleration clause dated 6-4-1989.
i) Refinance Agreement 'A' dated 6-4-1989.
j) Two general form of Guarantee dated 6-4-1989 for Rs. 32,00,000/- and Rs. 8,50,000/- executed by respondent/defendant No. 4 and Late Sri Raja Ram.
4. A cash credit (Hypothecation) account and term loan account were opened in the name of respondent/defendant No. 1 in the ordinary books of accounts of the appellant/plaintiff. Cash credit facility was increased to Rs. 40,00,000/- by the appellant on the request made by respondents No. 1 to 3. In consideration of the aforesaid credit facility defendants No. 1 to 4 and late Raja Ram executed and delivered to the appellant on 2-8-1989 the security documents. Term Loan of Rs. 8,50,000/- was to be repaid by respondents No. 1 to 3 in quarterly installments of Rs. 42,500/- in favour of the appellant. In this connection, respondents No. 2 and 5 mortgaged a residential house known as 'Ambika Bhawan' on 17-1-1990 in favour of the Bank as additional security by depositing its title deed i.e. a sale-deed dated 26-9-1987. On 14-6-1990, respondent No. 4 sold the property to respondent No. 7 without prior permission and knowledge of the appellant/bank. The guarantor-Raja Ram has expired and the respondents No. 3, 7 and 8 are sons, heirs and legal representatives of the deceased. Therefore, the respondents No. 3, 7 and 8 are bound by the personal guarantee given by Late Sri Raja Ram to the appellant/Bank on 6-4-1989. The respondents No. 1 to 3 closed their business without paying the dues of the appellant/bank. Hence, the appellant/bank gave a final notice of demand to all the respondents on 14-3-1992. Thereafter, the appellant/bank had initiated recovery against the respondents of Rs. 55,95,270.54 along with pendente lite and future interest. The appellant/bank also filed additional claim for declaration to this effect that sale deed dated 14-6-1990 executed by respondent No. 4 in favour of respondent No. 7 is void, illegal and not binding upon the appellant/plaintiff, done with an intent to fraud the creditors.
5. In support of their case Respondents No. 1, 2, 5 and 6 filed their joint written statement. It is alleged by answering respondents that respondent No. 2 in order to secure the stocks, requested the appellant/bank to convert the cash credit (Hypothecation) limit into cash credit pledge limit so that the stock could be kept under the lock and key of the appellant/bank. But the appellant/bank, instead of converting the hypothecation limit into pledge limit, locked up and sealed the entire factory premises along with the goods lying therein on 16-6-1990. Bank did hot make any inventory of the goods and machinery lying in the premises. Prior notice/intimation was not given. The bank without prior publication and information to the answering respondents, started selling of goods, the proceeds of which have not been credited in the loan accounts. The plaintiff bank has disposed of all the seeds stock worth more than Rs. 45 lacs lying in the premises. The Bank has not credited the amount of sale of seed stock sold by it in the account of the loan during the period from 16-6-90 to 30-8-90, as such no dues are recoverable by the Bank as the loan amount has been adjusted by the Bank. It has also been alleged that the plaintiff did not take steps for restraining the defendant No. 4 from disposing of the mortgaged property even after getting the previous information given by answering defendants. Thus the plaintiff has lost a valuable security due to its negligence and inaction.
6. The plaintiff Bank has charged excessive-interest in the loan accounts which are against the direction of Reserve Bank of India. It was also pleaded that the equitable mortgage is permissible within the specified area. Any document of mortgage is necessary to be registered under the provisions of Transfer of Property Act and Indian Registration Act. In the present case the document has not alleged to have been registered as such in view of Section 49 of the Registration Act and other provisions of the T.P. Act. The plea of Mortgage is not tenable and it will not effect the properties comprised therein. The defendants also alleged that the Bank granted the defendant Rs. 32 lacs instead of Rs. 40 lacks in cash credit (hypothecation) limit and Rs. 8.50 Lacs instead of Rs. 10 Lacs in term loan even after much objections and protest by the defendants. However, the limit was increased after a lapse of considerable period. The defendants were therefore in short of funds and could not conduct their business properly and the plaintiff is solely responsible for not fulfilling its promises and objections thereby causing loss to the defendants. Plea of limitation has also been taken by the defendants.
7. The defendant Nos. 3 and 4 also filed their joint written statement. They had alleged that plaintiff Bank had taken over the possession of the unit in collusion with defendant No. 2 and had caused great loss to them. The answering defendants also lodged a F.I.R. on 28/31-7-90 at P.S. Kashipur. The partnership firm had been dissolved on 30-8-90. They claimed exemption from liability on the ground that plaintiff had sold the stock goods and sale proceeds should be adjusted and credited in their loan accounts.
8. The defendant Nos. 7 and 8 filed joint W.S. They denied the fact of guarantee given by their father late Raja Ram to plaintiff Bank.
9. On the basis of the pleadings of the parties, the Court below framed following issues:
1. Whether Sri Vijai Kumar Gupta has a right to sue, to appoint lawyer and to verify the pleading on behalf of plaintiff? If so its effect?
2. Whether defendant/respondents fall within the definition of 'Agriculturist' and entitled to concession provided to them as alleged in para No. 3, 25 and 26 of written statement filed by defendants No. 2, 3 and 6?
3. Whether documents, detailed in para No. 4 and 8 and also in other paras of the plaint, had been executed without the consent of defendants as alleged by defendants No. 2, 5 and 6 in their written statements para No. 5 and 9?
4. Whether the plaintiff had charges excessive rate of interest against the directions of R.B.I. as alleged by defendants No. 2, 5 and 6 in their written statement para No. 5, 18, 19, 27 and 35?
5. Whether defendants are liable to pay interest on incidental charges and surcharges?
6. Whether equitable mortgage, as de tailed in para No. 6 of the plaint, had not been executed? Whether equitable mortgage (para No. 6 of the plaint) does not fulfill the legal requirements as alleged by defendants No. 2, 5 and 6 in their written statement Para No. 7, 31?
7. Whether plaintiff had not maintained the accounts of defendants firm in normal course of banking business?
8. Whether defendants had suffered loss due to non-fulfilling of promises and obligations by plaintiff as alleged by defendants No. 2, 5 and 6 in their written statement para No. 9?
9. Whether defendant No. 2 had not taken part in execution of mortgage of property as alleged in para No. 11 of the plaint?
10. Whether notice of demand dated 14-3-1992 (alleged in Para No. 15 of the plaint) had not been served upon defendants?
11. Whether defendants are liable to pay penal interest, due charge, interest tax and compound interest with quarterly rest as alleged in Para No. 17 of the plaint?
12. Whether plaintiff has no cause of action and suit is beyond limitation and pre mature as alleged in para No. 22 of written statement filed by defendants No. 2, 5 and 6?
13. Whether the suit is barred by limitation?
14. Whether the maximum court fee payable as per Court Fees Act by the plaintiff was Rs. 12,500/- only and whether Court fee paid by plaintiff is in excess?
15. Whether plaintiff has to pay court fee for relief claimed in para No. 23 (7) separately? If so, its effects?
16. Whether the suit is barred by provision of Order XXXIV Rule 2 CPC as alleged by defendants No. 2, 5 and 6 in their written statement Para No. 24?
17. Whether plaintiff is not entitled to claim pendente lite and future interest more than 6% p.a. simple as alleged in para No. 24 of written statement filed by defendants No. 2, 5 and 6?
18. Whether plaintiff had taken over the possession of defendants entire factory, its machinery, building, stock, paddy, foundation seed etc. and two thousand quintal wheat on 16-6-1990 illegally as alleged in para No. 34 of written statement by defendants No. 1, 2, 5 and 6? If so, its effect?
19. What was the value of the factory, its machinery and goods taken over possession by plaintiff and sealed illegally by plaintiff on 16-6-1990?
20. Whether plaintiff had sold the goods illegally worth more than Rs. 45 lacs and had not credited the sale proceeds in the account of two loan?
21. Whether defendants could not do any business and were deprived to conduct their business in the factory premises due to the illegal action taken by plaintiff on 16-6-1990 and whether plaintiff is not entitled to claim interest from 16-6-1990 onwards due to said count as alleged by defendants No. 2, 5 and 6 in their written statement para No. 39 and 42?
22. Whether defendants are not liable to pay the dues outstanding on defendant No. 1?
23. Whether plaintiff is entitled to claim more than 12.5% p.a. interest with quarterly rest on principal amount?
24. Whether the personal guarantee given by Late Raja Ram to the plaintiff is not binding upon defendants No. 7 and 8?
25. Whether defendants are entitled to pay the amount of debt in instalments?
26. To what relief, if any, is the plaintiff entitled?
27. Whether defendants No. 2 and 3 had closed their partnership business on 30-8-1990 and it had taken place within the consent and knowledge of plaintiff? If so, its effect?
28. Whether defendant No. 4 had mortgaged her property to the plaintiff to secure the loan granted to defendant No. 3 for purchase of a truck and extended it to also secure financial assistance provided by plaintiff to the defendants No. 1 to 3?
29. Whether defendant No. 4 was competent to execute the sale deed in favour of defendant No. 7 as alleged in para No. 12 of written statement filed by defendants No. 3 and 4? If not so, its effect?
10. Parties led documentary as well as oral evidence in support of their claim.
11. The Court below after hearing learned Counsel for the parties and considering the entire material available on record dismissed the suit with costs and all securities/equitable mortgages of immovable properties were released from encumbrances. The Court below also released the truck No. UGP 4671 to stand as security. It was also directed that the defendants may recover damages for wrongful entry, loss caused to stock, plant, machinery, building etc. from the lending bank's officials vide judgment and decree dated 15-5-1995.
12. We have heard the learned Counsel for the parties and perused the entire record]
13. Firstly the learned Counsel for the appellant has submitted that there was a hypothecation agreement between the plaintiff and the defendants and the goods/stocks have to be in the custody/possession of the defendant firm and the firm was under an obligation to deposit the sale proceeds to the accounts of the firm maintained with the Bank. He also argued that the hypothecation agreement was not converted into pledge and the trial Court has altogether failed to appreciate the facts of the case and has given a contrary finding of fact and the findings of the trial Court are liable to be set aside.
14. In reply the learned Counsel for the respondents have contended that although initially the loan and cash credit limit (hypothecation) were sanctioned by the appellant but on 16-6-90 the Bank converted the hypothecation of goods into pledged of goods; that the Bank had taken over the unit of the defendants thereby deprived them to do their business; that the Bank did not take care of the stocks and the machinery; that the insects caused damage to the stored wheat and paddy seeds; that the Bank sold the stock items but it did not credit the sale proceeds in the loan account; that the Bank was not in a position to redeliver the pledged goods to defendants and that in these circumstances plaintiff Bank has no cause of action to institute the suit against the defendants.
15. Perusal of record reveals that the plaintiff had admitted in the F.I.R. (Ext. 124) sent to I/C Inspector, P.S. Kashipur, that the Bank authorities had converted the hypothecation of goods into pledge of goods and had taken over the possession of defendants unit, put its lock and sealed it in presence of witnesses. Hence the provisions of Sections 172 to 176 of the Indian Contract Act will come into play in order to adjudicate the controversy between the parties and it will be relevant to quote the provisions of Sections 172 to 176 of the Indian Contract Act, 1872, which run as below:
172. 'Pledge', 'pawnor' and 'pawnee' defined -- The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor is in this case called the 'pawnor'. The bailee is called 'pawnee'.
173. Pawnee's right of retainer -- The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interests of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.
174. Pawnee not to retain for debt or promise other than that for which goods pledged -- Presumption in case of subsequent advances -- The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.
175. Pawnee's right as to extraordinary expenses Incurred -- The Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.
176. Pawnee's right where pawnor makes default -- If the pawnor makes default in payment of the debt, or performance at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security, or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
16. From the above provisions it reveals that under Section 172 a pledge is a bailment of the goods as security for payment of a debt or performance of a promise. Section 173 entitles a pawnee to retain the goods pledged as security for payment of a debt and under Section 175 he is entitled to receive from the pawner any extraordinary expenses he incurs for the preservation of the goods pledged with him. Section 176 deals with the rights of a Pawnee and provides that in case of default by the pawner the Pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security and (2) to sell the goods after reasonable notice of the intended sale to the pawner.
17. In the instant case, the plaintiff after taking over the unit of the defendants had not taken care to protect the pledged goods, i.e. wheat seeds, paddy seeds etc. Insects caused great loss to stored seeds and grains. Certified seeds had lost its value. The Pawnee also sold the stock items without prior information to the Pawners. D.W. 1, Narendra Singh Verma, D.W. 2 Udai Pal, D.W. 5 B.N. Khanna have made on oath statements corroborating the above loss to the pledged goods. The plaintiff Bank was not in a position to re-deliver the pledged goods to the defendants. Further P.W. 1, V.K. Gupta, Senior Branch Manager of the Bank had admitted in his cross-examination that the plaintiff Bank was in possession over the unit since 16-6-90. No inventory had been prepared either on 16-6-90 or subsequently. He also deposed that when the Factory was sealed then the plaintiff had knowledge that there were perishable goods in the Factory premises. The plaintiff had not credited the sale proceeds in loan accounts of defendant's firm. It has also come on record that the value of the stock was more than Rs. 45 lacs. P.W. 4, D.C. Pandey had admitted in his statement that defendant No. 2 B.N. Khanna had mentioned in paper No. 81-Kha that stock value must be round about Rs. 49 to 50 lacs. The plaintiff neither controverted the assessment nor made any plausible and reasonable valuation.
18. Learned Counsel for the respondents also invited our attention towards the citation of Hon'ble Apex Court in Lallan Prasad v. Rahmat Ali reported in MANU/SC/0070/1966 : [1967]2SCR233 wherein the Hon'ble Apex Court has held as under.:
There is no difference between the common law of England and the law with regard to pledge as codified in Sections 172 to 176 of the Contract Act. Under Section 172 a pledge is a bailment of the goods as security for payment of a debt or performance of a promise. Section 173 entitles a pawnee to retain the goods pledged as security for payment of a debt and under Section 175 he is entitled to receive from the pawner any extraordinary expenses he incurs for the preservation of the goods pledged with him. Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security and (2) to sell the goods after reasonable notice of the intended sale to the pawner. Once the pawnee by virtue of his right under Section 176 sells the goods the right of the pawner to redeem them is of course extinguished.
19. But as aforesaid the Pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long, however, as the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. It follows therefore that where a Pawnee files a suit for recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt. The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and therefore if he has put himself in a position when he is not able to redeliver the goods he cannot obtain a decree. If it were otherwise, the result would be that he would recover the debt and also retain the goods pledged and the pawner in such a case would be placed in a position where he incurs a greater liability than he bargained for under the contract of pledge. The Pawnee therefore can sue on the debt retaining the pledged goods as collateral security. If the debt is ordered to be paid he has to return the goods or if the goods are sold with or without the assistance of the Court appropriate the sale proceeds towards the debt. But if he sues on the debt denying the pledge, and it is found that he was given possession of the goods pledged and had retained the same, the pawner has the right to redeem the goods so pledged by payment of the debt. If the Pawnee is not in a position to redeliver the goods he cannot have both the payment of the debt and also the goods. Where the value of the pledged property is less than the debt and in a suit for recovery of debt by the pledgee, the pledgee denied the pledge or is otherwise not in a position to return the pledged goods he has to give credit for the value of the goods and would be entitled then to recover only the balance. That being the position the appellant would not be entitled to a decree against the said promissory note and also retain the said goods found to have been delivered to him and therefore in his custody. For, if it were otherwise the first respondent as the pawner would be compelled not only to pay the amount due under the promissory note but lose the pledged goods as well. That certainly is not the effect of Section 176. The contentions urged by Mr. Rana therefore must be rejected.
20. In view of the judgment of the Hon'ble 'Apex Court, we are of the view that the plaintiff cannot obtain a decree for recovery of debt because the bank is not able to redeliver the pledged goods to debtors. The Court below found that the plaintiff Bank sold the stock items worth more than Rs. 45 Lacs and the perishable items in the stocks were damaged due to the negligence of the Bank. Therefore, the total value of the sold and damaged stock items was more than the sum given in loan to the respondents by the plaintiff Bank. The plaintiff Bank also did not credit the sale proceeds of the goods/stock in their loan account. Thus, we are of the view that the trial Court has rightly recorded its finding on the aforesaid issue and the same does not require any interference of this Court.
21. Learned Counsel for the appellant also argued that the respondents did not put cross-claim before the trial Court for the release of securities and the moveable and immoveable and the Court below has passed the release order at its own whim and committed patent error in the judgment.
22. We see no force in the above submission raised on behalf of the appellant. The Court below has found that the appellant had converted the hypothecation of goods into pledge of goods and taken over the possession of the unit and sold the stock items worth more than Rs. 45 Lacs and due to the negligence of the Bank stock of certified wheat and paddy seeds were damaged and the plant, machinery and building also suffered damage. It was also held by the trial Court that when the Bank by its illegal inaction, took the unit in its possession on 16-6-1990, it deprived the respondent factory from doing its business and therefore the Bank was not found entitled for any interest on the loan amount onwards. The purpose of the respondent unit had failed due to the illegal inactions and negligence of the Bank and the unit could not survive. In the peculiar circumstances of the case the trial Court was justified in releasing the securities and the moveable and immoveable pledged to the Bank and there was no need to file separate litigation so as to get released the pledged goods.
23. We have also perused the findings of the Court below recorded on other points framed in the suit and we do not find any error of law and fact. On overall assessment of the findings of the Court below, we are satisfied that the findings are based on facts and law and do not require interference by this Court.
24. For the above reasons the appeal lacks merit and is liable to be dismissed.
25. The appeal is dismissed. The impugned judgment and decree passed by the trial Court is upheld.
26. No order as to costs