Himachal Pradesh Financial Corporation Vs. Man Mohan Kaur Anand and anr. - Court Judgment

D.P. Sood, J.

1. The Himachal Pradesh Financial Corporation, a body corporate established under the State Financial Corporations Act, 1951 (shortly 'the Act'), is the plaintiff in this suit. The Corporation provides loans to intending transporters in the State of Himachal Pradesh with a view to promote and expand the transport industry in the State.

2. On an application of defendant No. 1 for the purchase of a truck, the plaintiff-Corporation advanced a loan of Rs. 2,10,000 against the execution of documents, i.e., irrevocable power of attorney, hypothecation deed and trust receipt, exhibits P-1 to P-3, respectively. Simultaneously, under the scheme, defendant No. 1 provided guarantee of defendant No. 2, who executed guarantee deed, exhibit P-4. The amount of loan was repayable in 18 quarterly instalments of Rs. 11,700 each with interest. The due dates of the first and the last instalment were November 25, 1981, and February 25, 1986, respectively. The agreed rate of interest was 2.5 per cent, above the bank rate as prevalent from time to time subject to a minimum of 12.5 per cent, per annum. The defendants did not pay even a single instalment as per the terms and conditions of the repayment schedule regularly and in place of regularising their account, they are alleged to have abandoned the vehicle with a repair shop at Manimajra after the accident and despite a letter dated August 14, 1984, written by the plaintiff-Corporation requiring the former to take possession of the truck after payment of repair charges of more than Rs. 35,000, the defendants failed to do so. The plaintiff is then stated to have taken possession of the said truck on September 3, 1984, on payment of the dues referred to above. It is then alleged that the truck was put to auction on May 27, 1985, after observing the codal formalities and, ultimately, it was disposed of at the highest bid of Rs. 1,20,000 as per the terms of the irrevocable power of attorney and hypothecation deed, exhibits P-1 and P-2, respectively. The amount so realised was adjusted towards the liquidation of the defendants' debt. The plaintiff-Corporation also alleged to have issued a legal notice, exhibit P-6 on December 10, 1985, to the defendants requiring them to repay the outstanding dues but to no avail. Thus, the plaintiff-Corporation filed the instant suit on November 3, 1986, for the recovery of Rs. 2,92,998.60 including the interest up to and as on September 30, 1986.

3. Defendant No. 1, in his written statement, pleaded discharge of his liability because of novation of contract with defendant No. 2 by alleging that the plaintiff-Corporation allowed the security to be impaired to their knowledge inasmuch as the truck was impounded and then handed over to defendant No. 2 without his consent who (defendant No. 2) continued to ply the same till it met with an accident. Defendant No. 1 also raised the plea of estoppel, maintainability of the suit no bar of limitation (sic). On merits, the advancement of the loan, execution of the documents and providing of defendant No. 2 as guarantor were categorically admitted but, vide para 8 of his written statement, he pleaded that documents were blank at the time he signed the same. Apart from it, the rate of interest as also the correctness of the amounts due have also been disputed.

4. Defendant No. 2 admitted the advancement of the loan against execution of the loan documents and having stood as a guarantor for repayment thereof. However, he also disputed the rate of interest and the correctness of the amount due. It has been pleaded that compound rate of interest instead of simple interest and certain items beyond the terms and conditions of the agreement like credit guarantee fee have been charged by the plaintiff-Corporation to which they are not entitled. It is then contended that the plaintiff-Corporation preferred the action for recovery of the amount and seizure of the security and disposal thereof on the first default committed by defendant No. 1 when the plaintiff was entitled to recover the entire outstanding amount forthwith. In addition, the said defendant has also raised the plea of limitation.

5. In replication filed to the reply of defendant No. 1, the plaintiff-Corporation reiterated the allegations made in the plaint and refuted the entire contentions raised by defendant No. 1 in the written statement. According to the plaintiff, the truck in question continued to be in the name of defendant No. 1 till it was taken into possession by them. Its transfer to defendant No. 2 has specifically been denied inasmuch as the plaintiff neither consented nor allowed defendant No. 2 to enter into any contract in between themselves inter se qua its transfer. Further, the plaintiff-Corporation alleged that after the seizure of the truck, it was released and handed over to defendant No. 2, duly authorised as representative of defendant No. 1 pursuant to the receipt of letter dated September 15, 1983. The plaintiff-Corporation has countered the allegations that it was ever guilty of negligence, misconduct or collusion as contended by defendant No. 1. Rather, according to the plaintiff, the liability of defendant No. 2 was co-extensive and both the defendants are liable to pay the outstanding amount.

6. On the pleadings of the parties, the following issues were framed on November 16, 1987 :

1. Whether the suit is within limitation ?

2. Whether the plaintiff is estopped from filing the present suit against defendant No. 1 on account of its own acts, conduct and acquiescence ?

3. Whether there has been novation of contract between the plaintiff and defendant No. 1 thereby discharging defendant No. 1 from his liability?

4. To what rate of interest is the plaintiff entitled to recover ?

5. Whether there has been delay in putting the truck to sale and the liability of defendant No. 2, has, therefore, come to an end ?

6. Whether the plaintiff is entitled to recover guarantee fee ?

7. Whether the plaintiff is entitled to recover Rs. 2,92,998.60 or any other amount from the defendants ?

8. Relief.

7. Issue No. 1.--Under this issue, the main point involved for determination of this court is whether the suit is within time. It is common ground between the parties that the defendants were to repay the loan of Rs. 2,10,000 in 18 instalments of Rs. 11,700 each with interest as per the repayment schedule. As stated earlier, the first instalment was due on November 25, 1981, and the last one was to be paid on or before February 25, 1986. It is also not in dispute that the defendants did not repay the dues regularly as per the agreed instalments and thus committed default in payment of the very first instalment and continued to commit default till the last one. The deposit whatsoever made by the defendants were adjusted towards the liquidation of liability as is apparent in the statement of account, exhibit P-7. The factum of the truck meeting with an accident and, thereafter, it having been handed over to a mechanic for repairs at Manimajra and the defendants neither taking its possession nor paying the repair charges is also not disputed. On the contrary, the plaintiff-Corporation brought it back by taking possession after paying the repair charges on September 3, 1984. The parties are also not at controversy that the truck was put to public auction on May 27, 1985, and the highest bid at the auction was of Rs. 1,20,000 which was accepted and ultimately the sale proceeds thereof were adjusted towards the liquidation of the defendants liability.

8. Learned counsel for the plaintiff-Corporation has submitted before me that despite default(s) committed in repayment of outstanding dues by the defendants, the suit could not be filed without complying with the mandatory provision of Section 30 of the Act and in the instant case, it having been served on December 10, 1985, forms the basis for extending limitation from this date. In the alternative, it has been urged that the statement of account dated September 9, 1983, exhibit P-7, and the sale of the truck in question for consideration of Rs. 1,20,000 was conducted by the plaintiff-Corporation and adjusted towards the liquidation of the defendants' liability in accordance with the terms and conditions contained in irrevocable power of attorney, exhibit P-l, as such limitation stands extended from the said date. Even otherwise, the plaintiff's case is that the defendants having made default in payment of the instalments, the entire outstanding amount lastly fell due on February 25. 1986, and the suit has been filed within three years of the default of the last instalment claiming the entire amount of the loan agreement with interest, as such Article 36 of the Limitation Act, 1963, and not Article 37 thereof is applicable. Reliance has been placed on the observations made in V. Narayanaswami v. Sri Mohan Prasad Singh Deo, Zemindar of Bodogode Estate, AIR 1959 Mad 82, Pandarinath v. Yeshoda, AIR 1957 Hyd 18 and Bhagwati Prasad v. Chatrapal, AIR 1947 All 38.

9. On the other hand, learned counsel for the defendants, contended that Article 37 of the Limitation Act, 1963, is clearly applicable to the suit and the plaintiff has no right to claim the entire amount earlier than November 4, 1983, and that in the instant case the provision 'default in payment of all instalments' was fully covered by the expression 'default of one or more instalments' used in Article 37 of the Limitation Act, which applied to the peculiar facts and circumstances of the instant case.

10. Having heard the arguments advanced by learned counsel for the parties, the submissions made by learned counsel for the plaintiff appear to be devoid of merit.

11. Article 37 reads as follows :

'Description of suit

Period of limitation

Time from which period

begins to run

On a promissory note or bond payable by instalments, whichprovides that, if default be made in payment of one ormore instalments, the whole shall be due.

Three years

When the default is made unless where the payee or obligeewaives the benefit of the provision and then when fresh default is made inrespect of which there is no such waiver.

12. The applicability of Article 36 or 37 of the Limitation Act depends upon the terms of the contract and the nature of the claim or the character of the suit brought in terms thereof. The mere fact that a contractual document contains a default clause will not in all cases attract the provisions of Article 37. It applies only to those cases where the provision relating to the default clause lays down that on default being made in payment of one or more instalments the whole amount is to fall due. It would not apply in cases where a default clause may exist in a different form, e.g., where the right of bringing the suit is confined to recovering the amount of each instalment in respect of which default may have been committed. In fact, Article 36 applies to those cases where the suit is for the recovery of the instalment as such and not for the recovery of the whole amount on the basis that it had fallen due because of some default. On the other hand, where the whole amount falls due on one or more defaults being committed and the whole amount is claimed in the suit, the proper Article applicable is Article 37.

13. In such a case it remains open to the creditor to waive his right to recover the entire amount on the commission of any particular default in which case he can again bring a suit for the whole of the amount due on the contractual agreement on the commission of a fresh default. In all such cases the period of limitation would be a period of three years with effect from the particular default on the basis of which the creditor claims to recover the entire amount due under the agreement.

14. To claim the benefit of waiver which is a mixed question of law and fact, the plaintiff must allege and prove it. Waiver being an abandonment of a right, it must be intentional, the intention being either express or implied or inferable from the conduct. The plaintiff's intention to waive his right must be manifest by his pleadings ; abstinence from suing alone cannot be considered to be an act of waiver.

15. At this juncture, it may be advantageous to consider the pleadings. In paragraph 9 of the plaint, it is stated that the default was committed on and from the beginning of the first quarterly instalment due on November 25, 1981, till the last instalment due on February 25, 1986, and in paragraph 12 it is stated that after disposing of the vehicle for Rs. 1,20,000 and adjusting the sale proceeds, the plaintiff-Corporation issued a notice on December 10, 1985, to the defendants asking them to repay the entire loan amount in instalments. Also in para 13, the plaintiff-Corporation averred that the cause of action arose on February 25, 1982 (which should be November 25, 1981). The commission of the first default and on each subsequent default, then on September 3, 1984, and May 27, 1985, when the vehicle was seized and ultimately sold and on December 10, 1985, when a notice was issued, the cause of action could arise on each of the said dates. If it is considered that the cause of action arose on either of the dates of default prior to November 4, 1983, the claim is barred by limitation. On these facts, it is to be seen whether Article 37 of the Limitation Act, 1963, would apply to the instant case.

16. The deed of hypothecation, exhibit P-2, contains the following default clause :

'IV. ... (5) That if default shall be made in payment of all or any part of the said principal sum or interest or in the performance or observance of any other covenants, conditions or provisions contained in these presents and on the part of the borrower/s to be observed and performed then it shall be lawful for the Corporation or any person authorised by it to take over the possession of the vehicle and after due notice sell the vehicle for the realisation of the debt, without intervention of the court.

V. ... (4)(g) The Corporation shall have the right by notice in writing to require the borrower(s) forthwith to discharge the full liabilities of the Corporation hereunder in the following cases and in any such case the whole of the amount then remaining payable to the Corporation shall at the option of the Corporation become payable to the Corporation as if the time for the payment thereof had expired and the Corporation shall be entitled to exercise all the rights and remedies hereunder : (i) If default shall be committed by the borrower(s) for a period exceeding one month in the payment of any instalment of the said principal sum ; or . . .'

17. As observed above, one of the Clauses in the loan documents is that the Financial Corporation shall have the right by notice in writing to require the borrower(s), i.e., the defendants, to discharge the full liability of the plaintiff-Corporation in the circumstances referred to above and in any such case the whole of the amount then remaining payable shall at the option of the plaintiff-Corporation become payable to it as if the time for the payment thereof has expired and the plaintiff-Corporation then shall be entitled to exercise all the rights and remedies available to recover the same. In other words, there is a provision relating to the default clause in certain circumstances whereby the whole amount is to fall due at the option of the plaintiff-Corporation. Thus, Article 37 of the Limitation Act, 1963, is attracted and not Article 36 as argued by learned counsel for the defendants.

18. Now, the ancillary question is whether the aforesaid clause or Section 30 of the Act extends the limitation. The answer is in the negative, firstly, because its compliance gives an option to the plaintiff-Corporation to have a separate remedy under Section 31 of the Act by applying to the District Judge to grant relief in the manner detailed therein and, secondly, service of such notice in writing to the industrial concern/borrower requires the borrower to discharge forthwith in full his liability to the financial Corporation concerned, i.e., the creditor. That appears to be the only object of this Section and the Section has no direct nexus with the provision of the Limitation Act. However, as the clause of default in terms of Section 30 has been incorporated in the deed of hypothecation, exhibit P-2, in the instant case it is relevant to consider its effect qua the limitation for the purposes of this suit. Admittedly, on service of notice in pursuance of this clause, the entire subsequent outstanding dues became payable to the financial Corporation. Thus, in view of this default clause in the agreement, as observed above, Article 37 becomes applicable. In the instant case, a perusal of exhibit D-2, dated September 15, 1983, does indicate that defendant No. 1 had admitted her liability to the extent of Rs. 2,27,523.30 including the interest up to August 25, 1983, but it could only be recovered within three years from the date of acknowledging the liability, that is to say, till September 14, 1986. The instant suit has admittedly been filed on November 3, 1986. Thus, prima facie, the suit qua recovery of this amount is time barred.

19. Viewed in the light of the above, the question arises whether the plaintiff-Corporation has waived the default clauses relating to the instalments falling due prior to November 4, 1986. In this case, there is no such pleading of waiver in the plaint nor has an iota of evidence been adduced by the plaintiff-Corporation nor has any such issue been claimed. On the other hand, the plaintiff-Corporation despite the entire subsequent outstanding dues having fallen due after service of notice, has chosen to claim the entire 18 instalments which it could not have done without pleading waiver in terms of Article 37. Thus, in that view of the matter, the suit is patently time barred qua the dues falling prior to November 4, 1983. In my view, I find support from Nathulal v. Mangoo, AIR 1976 Raj 208, Krishnan Madhavan v. Narayanan Jayadevan, AIR 1975 Ker 18, Arjun Sahai v. Pitamber Das, AIR 1963 All 278, M. Thirumalachariar v. S.P. Varadappa Chettiar, AIR 1962 Mad 210, Devidas Dhaniram v. Parma Gokalia, AIR 1959 MP 413, L. Gaya Prasad v. Ahamad Husain, AIR 1941 Oudh 485, Gokul Mahton v. Sheoprasad Lal Seth, AIR 1939 Pat 433 and Jawahar Lal v. Mathura Prasad, AIR 1934 All 661.

20. The view expressed by the Madras High Court in V. Narayanaswami, AIR 1959 Mad 82, so relied upon by the plaintiff-Corporation, does not appear to lay down any different principle of law. In that case, there was no provision for the entire amount falling due on default of one or more instalments. The only provision which was contained in the bond was that the creditor could sue only for the instalments which had fallen due whether it was one or more instalments. The right to sue was for the recovery of those instalments only in respect of which default had been committed. The creditor was also given the option to sue for those very instalments which had fallen due earlier at the time when all the instalments had also fallen into arrears. In that case, the creditor was not given the right to recover the entire amount of the bond as one single sum due under the bond on the basis that even after the defaults were committed, the integrity of the bond had remained unaffected. The learned judge took notice of the fact that under Clause (f) the only right conferred on the creditor was to recover the unpaid instalments as such and not the entire debt. The entire debt under that clause never fell due on the commission of any default. Each time, on the commission of a default, the amount due for each instalment fell due and the suit had to be brought for the amounts of the instalments and not the entire debt. It was in these circumstances that the learned judge held that the further condition that a suit in respect of earlier instalments, which had fallen due on commission of earlier defaults, could be brought within a period of three years computed from a later default in respect of a later instalment amount to granting an extension for the period of limitation prescribed by the Limitation Act which was not permissible.

21. For the same reasons, the other cases relied on by the learned counsel for the plaintiff do not apply to the peculiar facts and circumstances of the instant case.

22. Thus, the cumulative effect of the entire discussion made above is that the suit pertaining to the instalments prior to November 4, 1983, is time barred but the suit pertaining to the remaining amount qua the instalments commencing from November 25, 1983, onwards is within time. The issue is decided accordingly.

23. Issue No. 2.--The onus to prove this issue was on defendant No. 1 who did not step into the witness box to support the claim made before this court. Even the husband of defendant No. 1 who appeared as DW-1 has not stated as to in what manner the acts, conduct and acquiescence of the plaintiff-Corporation amount to estoppel in the way of the plaintiff to file the present suit. Thus, this issue is decided against defendant No. 1 and in favour of the plaintiff-Corporation.

24. Issue No. 3.-As observed above. Smt. Man Mohan Kaur, defendant No. 1, has not appeared as her own witness, Rather, the documentary evidence consisting of the letter dated September 15, 1983, written by her to the managing director of the plaintiff-Corporation discloses that she had requested for the release of the vehicle in favour of defendant No. 2 as a guarantor cum her authorised representative. This fact by itself belies the claim of defendant No. 1 that there had been any novation of contract in between her and the plaintiff-Corporation. The issue is decided accordingly.

25. Issue No. 4--The loan documents clearly show that the agreed rate of interest was 2.5 per cent, above the bank rate as prevalent from time to time subject to a minimum of 12.5 per cent. per annum. This has been admitted by defendant No. 2 in his statement. Defendant No. 1 has adduced no evidence in this behalf nor stepped into the witness box in support of her claim. Clause (i) of the deed of hypothecation, exhibit P-2, shows that the defendants had agreed to pay interest at the rate of 2.5 per cent. per annum above the bank rate subject to a minimum of 12.5 per cent per annum only but along with three per cent. per annum as penal interest on the entire outstanding balance in case of default. As per the statement of Mr. B.S. Negi, PW-3, an official of the plaintiff-Corporation, the plaintiff has charged interest at the rate of 12.5 per cent. with quarterly rests besides penal interest at the rate of three per cent. for not having repaid the loan as per the repayment schedule. Regarding the penal interest, it would be important to note Section 74 of the Indian Contract Act, 1872, which lays down as under :

'74, Compensation for breach of contract where penalty stipulated for-- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty.'

26. Obviously, the relationship between the parties to the instant lis is that of a creditor and a debtor and the latter is given a concessional facility of effecting repayment in instalments, subject to further payment of three per cent, interest in the event of default being committed by the debtor in the payment of any instalment. To put it differently, the debt payable by the debtor is one in praesenti and he is allowed to pay it in instalments, which facility would be available only so long as the instalments are regularly paid.

27. Viewed in the light of the legal position as reflected by Section 74 of the Contract Act, the plaintiff-Corporation is entitled to receive from the debtor reasonable compensation not exceeding the penalty stipulated irrespective of the fact whether or not actual damage or loss is proved to have been caused thereby. In fact, the plaintiff-Corporation has already agreed to receive interest at a particular rate on the loan so advanced. In other words, the creditor, i.e., the plaintiff-Corporation has at the time of entering into the contract safeguarded its own interest in many modes and one of them is charging of interest at the agreed rate which, in fact, appears to be reasonable for the commission of the default or defaults by the debtor. In view of these facts and circumstances, to my mind, the plaintiff-Corporation is not at all entitled to any penal interest and thus, the only reasonable inference which can be drawn from the discussion made above is that the plaintiff-Corporation is entitled to simple interest at the rate of 12.5 per cent. per annum from the date of the advancement of the loan.

28. Issue No. 5.--The onus of this issue was on defendant No. 2, who has appeared as DW-2. In his statement he has not divulged anything from which it can be inferred that there had been delay in putting the truck to sale and as such he has been discharged from the liability in question. On the other hand, Satish Sharma, PW-2, has categorically stated that the truck in question belonging to defendant No. 1 was seized in September, 1984, and after observing codal formalities put to auction on October 10, 1984, and October 31, 1984, but no bidder came forward for the purchase thereof. During the auction conducted on February 4, 1985, the highest bid was that of Rs. 65,000 which was declined by the plaintiff-Corporation. Again, tenders were floated on March 25, 1985, but none was received by the plaintiff-Corporation. Ultimately, the truck was put to auction again on July 25, 1985, and the highest bid therein was for Rs. 83,000. A notice was issued to the defendants that if they had any objection to the aforesaid sale then they were at liberty to bring forward a better buyer. Defendant No. 2 provided a better buyer who offered Rs. 90,000 but he was not in a position to pay the sale price in a lump sum. Later on defendant No. 2 again came with another buyer who offered and paid Rs. 1,20,000. Thus, in the circumstances, it cannot be said that there had been any delay in the auction of the aforesaid seized truck by the plaintiff-Corporation. Issue No. 5 is decided accordingly.

29. Issue No. 6--This issue relates to the right of the plaintiff-Corporation to claim guarantee fee. A critical perusal of exhibit P-2, the deed of hypothecation, shows that the plaintiff-Corporation was entitled to recover all the expenses including the guarantee fee which was incurred by the plaintiff-Corporation. In the circumstances, the plaintiff having proved the said document as observed above, is also entitled to recover the said amount. This issue is decided accordingly.

30. Issue No. 7.--While discussing Issue No. 1, I have already observed that the instalments prior to November 4, 1983, i.e., 8 in number are time barred and I have further held while discussing issue No. 4 that the plaintiff-Corporation is entitled to simple interest at the rate of 12.5 per cent. per annum from the date of advancement of the loan. Accordingly, the next instalment was to fall due on November 25, 1983, and computing the remaining instalments until November 25, 1986, the plaintiff-Corporation was entitled to recover the principal amount of 10 instalments that is to say Rs. 1,17,000 only. Computing the interest up to date of suit thereupon at the aforesaid rate, the total amount comes to Rs. 1,60,875 which is recoverable by the plaintiff-Corporation from the defendants. However, in between the aforesaid period, the truck belonging to defendant No. 1 was put to auction apd its sale price amounting to Rs. 1,20,000 had also been received and adjusted by the plaintiff-Corporation on October 25, 1985. Thus, calculating the interest thereupon from that date till the filing of the suit, the amount adjustable towards the total amount recoverable by the plaintiff-Corporation comes to Rs. 1,35,375. After adjusting the amount so recovered by the plaintiff-Corporation, the defendants were liable to pay a sum of Rs. 25,000 towards the principal amount on the date of filing of the suit. Apart from it, as per the statement of account, the plaintiff-Corporation is also entitled to other charges like guarantee-fee, etc., which comes to Rs. 4,650.40. Thus, computing the entire amount which was recoverable by the plaintiff-Corporation from the defendants, the entire amount comes to Rs. 30,150 on the date of the filing of the suit. In view of the aforesaid discussion, the plaintiff-Corporation is only entitled to recover the aforesaid amount on the date of the filing of the suit from the defendants jointly and severally and I hold so. Issue No. 7 is decided accordingly.

31. Issue No. 8.--In view of the discussion made above, a decree in the sum of Rs. 30,150.18 with proportionate costs is passed in favour of the plaintiff and against the defendants jointly and severally. The plaintiff-Corporation is further held entitled to simple interest at the rate of 12.5 per cent. per annum on the aforesaid amount from the date of the suit till its realisation. The decree sheet be prepared and the file after completion be consigned to the record room.