Gurbachan Singh Saluja vs Hong Kong And Shanghai Banking Corpn. Ltd. And Ors.

J.M. Malik, J

In both the above mentioned appeals, the order under challenge is the same, the one dated 31.8.2010 passed by the learned trial Court. The first appeal, Miscellaneous Appeal No. 366/2010, has been filed by Mr. Gurbachan Singh who is defendant No. 1 in the O.A. No. 97/2009 filed by the Hong Kong and Shanghai Banking Corporation Ltd., against dismissal of his application moved under Order 7 Rule 11, CPC seeking rejection of the original application filed by the Bank.

Vide the impugned order, the learned trial Court also held that after having examined the documentary evidence and looking into the counter claim filed by the defendants M/s. New India Assurance Company Ltd., with whom the impugned transaction was got insured should be impleaded as defendant in the array of parties to reach at an effective and final conclusion. The Bank is in appeal against this observation and order made by the Tribunal below, which is the second appeal herein, Miscellaneous Appeal No. 365/2010.

The learned Counsel for Mr. Gurbachan Singh Saluja, appellant in miscellaneous Appeal No. 366/2010, listed the following submissions. The O.A. filed by the Hong Kong and Shanghai Banking Corporation Ltd. is premature as no cause of action had arisen in favour of the Bank. There is difference between 'Factoring' and 'Bill discounting'. According to him, factoring is a financial transaction whereby a business/exporter sells its receivables, i.e., invoices, at a discount to the factoring Bank. Factoring differs from a usual Bank loan in three aspects. Firstly, the emphasis is on value of receivables and not the seller's creditworthiness. Secondly, factoring is not a loan, but is a purchase of a financial asset. Thirdly, a usual Bank loan involves two parties, whereas factoring essentially involves three parties, i.e., the factoring Bank, the seller/exporter and the buyer, Moreover, factoring is also different from bill discounting in as far as factoring is sale of receivable debt whereas in bill discounting receivable is used as a collateral. Factoring is a method of financing which is given along with full sales ledger service management and debt collection service and credit protection from bad debts. Factoring is always based on the strength of the foreign buyers goodwill and fair international dealing by factoring Bank/company. Factoring is done only after assignment of debts/receivable is done in favour of the Bank, by the seller. The Bank takes a letter which is called Notice of Assignment from the exporter, which is assented and accepted to by the foreign buyer. On the execution of the Notice of Assignment, the foreign buyer is to pay to the Banks/factoring service provider. The debt is towards the Bank/factoring service provider and the same is required to be collected by the said Bank directly from the foreign buyer. Since the debt has been assigned to the Bank, it is the responsibility of the Bank to recover the said debt from the foreign buyer and the factoring debt collection/receivable management/ bill realization is the responsibility of factoring Bank. The exporter is protected through a credit protection cover given by the factoring Bank. It was also argued that in factoring the debts are assigned and thereafter owned by the factoring Bank and unless the overseas buyer claims that there is default by the exporter, the factoring Bank is obliged to take care of the debts and protect the exporter. In factoring, credit protection assumes a critical importance, since it guarantees the exporters that the credit would come. The business is conducted by the exporter, keeping in mind the flow of credit, for which the factoring Bank has executed specific clauses in its agreement with the exporter.

Turning to the instant case, Mr. Bhandari, the Counsel for Mr. Gurbachan Singh Saluja, argued that the reading of sanction letter as well as factoring agreement dated 5.9.2007 between the parties showed that no debt existed between Mr. Gurbachan Singh Saluja and the Bank. He invited my attention to the following terms under 'General terms and conditions for Credit Protection' of the agreement:

I. Scope of Protection:

Losses associated with factored debts (financed or non-financed) in respect of goods sold and delivered and/or services rendered due to non-payment by the customer, subject to the following exclusions.

II. Maximum Protection:

90% of outstanding unpaid receivable amount owing to your Company by your customer less any specified deductions (upto 90% of approved credit cover limit). Subject to deduction of USD 5,000 for every claim lodged in the event of debtor insolvency/protracted default.

Mr. Bhandari argued that it was absolutely clear that the Bank had assured and guaranteed that 90% of outstanding unpaid receivable amount, owing to the Company by his customers, subject to specified deduction, would be protected by the respondent Bank herein. It also specifically provided as regards credit protection that the scope of the protection was, losses associated with factored debts in respect of goods sold or delivered and/or services rendered due to non-payment by the customers. Again, in view of the credit protection clause as well as in view of the fact that a claim under credit protection clause had been lodged by the Bank with insurance company, no cause of action had arisen in the instant case inasmuch as in the event of indemnification of the respondent Bank by the insurance company, there will be no surviving debt or claim. In terms of the factoring agreement, the debts were purchased by the Bank and the Bank was to recover the said debt directly from the foreign buyer.

The facts germane to the present cases are these. The original sanction letter as well factoring agreement was executed between Mr.Gurbachan Singh Saluja and the Bank on 5.9.2007. The renewed sanction letter was issued by the respondent Bank on 30.9.2008 to Mr. Gurbachan Singh Saluja, The said sanction letter and those documents executed thereafter by the borrowers were never acted upon as no transaction took place between the parties after September 2008. An O.A. was filed on 26.3.2009 against Mr. Gurbachan Singh Saluja and Mrs. Ravinder Saluja seeking recovery of Rs. 5,95,99,955.62. Both the defendants filed their written statement along with their counter-claim for Rs. 7,90,74,445/-. Thereafter, the defendants filed an application under Order 7 Rule 11, CPC, the rejection of which by the Tribunal below has resulted in the filing the above mentioned first appeal.

The learned Counsel for Mr. Gurbachan Singh Saluja argued that no cause of action had arisen in favour of the Bank to file O.A. The learned trial Court passed the impugned order on 31.8.2010 on the oral arguments. The last portion of para 8 of the said order runs as follows:

8.... Referring the various paras of the sanction letter and the loan agreement, Mr. Sanjeev Bhandari, learned Advocate contended that the Tribunal should dismiss the OA at this stage only. In the alternative, it was also prayed that the foreign buyers to whom the exports were made and from whom the amount is recoverable may also be impleaded in this OA as defendants in the arrays of the parties and the Bank may recover the amount from them only.

Mr. Bhandari contended that the learned trial Court should not have passed this order because it closed its doors for moving an application to the effect that the foreign buyers should be made parties in this case.

I am unable to locate substance in all these arguments. The appellant Mr. Gurbachan Singh Saluja himself approached the Bank for obtaining 'Export factoring facility with recourse' for receivable financing of the Bank. Pursuant to the said request and representation, the Bank sanctioned the credit facility with funding limit of Rs. 5 crores vide their sanction letter dated 5.9.2007, after execution of requisite documents such as demand promissory note, personal guarantee agreement and factoring agreement. The credit facility was renewed vide sanction letter dated 30.9.2008, Mrs. Ravinder Saluja also executed a personal guarantee for securing the repayment of financial credit facility granted to defendant No. 1 to the extent of Rs. 5 crores. The defendants also executed undertaking dated 23.10.2008 wherein they declared and confirmed that (i) debtors approved for factoring shall be excluded from the Book Debt Statement provided to the working capital Bankers (ii) all sales and payments of the approved debtors will be routed through HSBC only, along with other terms as mentioned in the said letter. The defendants availed of the above said credit facility but started committing defaults in the repayment of the same. The Bank has no privity of contract with the foreign buyers. The foreign buyers are not signatory to the agreement between the Bank and the defendants. The learned Counsel for the defendants raised an argument before the learned trial Court, which was answered by the learned trial Court correctly. The question of impleadment of foreign buyers did not arise at all because no privity of contract existed between them and the Bank, but nothing will debar any of the parties to the case to produce evidence concerning them.

For all these reasons, I find no infirmity or illegality in the order passed by the learned trial Court so far as the appeal filed by Mr. Gurbachan Singh Saluja is concerned. The appeal filed by him is without any merit and, therefore, the same is dismissed with costs. Counsel's fee as per Bank's norms.

Now, I turn to the appeal filed by the Bank. Mr. Rajeeve Mehra, learned Senior Advocate for the appellant made a statement before this Tribunal on 12.5.2011, which is reproduced as hereunder:-

The appellant Bank has received a lump sum amount of Rs. 5,40,54,000/-from the insurance company which had tie-up with New India Assurance Company Ltd. This lump sum amount was received in relation to a set of cases. Out of the said amount of Rs. 1,51,02,628.75 has been apportioned towards respondent No. 1. The manner of appropriation/adjustment may be left to the adjudication of the Tribunal below at the time of passing the final order.

I find considerable force in the argument advanced by on behalf of the Bank. There is no need to implead New India Assurance Company Ltd. as a party in the O.A. The Bank is dominus litis. However, it is made clear that none of the parties will be debarred from producing evidence or producing any affidavit from the concerned officials from New India Assurance Company Ltd., but it need not be arrayed as a party in the O.A. Accordingly, the appeal filed by the Bank is accepted to this extent.

Both the appeals stand disposed of. Parties are directed to appear before the learned trial Court on the date already fixed.

Copies of this order be furnished to the parties as per law and another copy be sent to the learned DRT forthwith.