Kandhari Rubber Ltd. And Ors. vs State Bank Of India And Ors.

Ranjit Singh, J

The O.A. filed by the Bank stands allowed holding the Bank entitled to recover a sum of Rs. 4,55,54,868/- with simple interest @15% p.a. from 20.12.2006 onwards until recovery. The appellants (defendants 1, 2 and 4) and one Mr. Jagdish Kandhari (respondent No. 2) has been held jointly and severally liable for the payment of this amount to the Bank. The Bank has been further held entitled to due share on sale of the property owned by appellant No. 1, on which the Bank has second charge, after satisfaction of claim of IDBI, IFCI and ICICI (defendants 5, 6 and 7). Aggrieved against this order, the three appellants have filed this appeal where one of the CDs has been impleaded as respondent apart from State Bank of India and three others FI who had first charge over the property of appellant No. 1. The respondent State Bank of India had granted overall limit of Rs. 292 lac to appellant No. 1 on execution of necessary documents on 28.7.1995. Appellant No. 2 and respondent No. 2 executed deed of guarantee. Appellant No. 1 company availed the credit facilities and acknowledged their liability through confirmation letter dated 12.4.1996 confirming a balance of Rs. 52 lacs and 97,03,715.68 as on 30.3.1996 in the Cash Credit account. Defendant also confirmed the balance of Rs. 99,94,000/- approx on 31.3.1998. The overall limit of Rs. 292 lac was enhanced to Rs. 400 lacs and security documents in this regard were executed on 21.5.1997. Appellant No. 2 and respondent No. 2 executed guarantee deeds. The overall limit was subsequently reduced to Rs. 300 lac. Thus, the fund based Cash Credit limit was Rs. 150 lac and Ad-hoc Cash Credit (Hypothecation) limit was Rs. 25 lac with EPC of Rs. 50 lac. Non-fund based Letter of Credit limit was Rs. 50 lac and Bank Guarantee limit was of Rs. 25 lac. For these limits, the borrower, as well as appellant No. 2 and respondent No. 2 as guarantors, executed various documents on 31.8.2001. The appellant company had agreed to the interest @ 3.50% above SBAR with minimum of 15% p.a. with monthly rests. Appellant No. 3 deposited title deed of their property C-155, Mewar Industrial Area, Udaipur (Rajasthan) on 21.8.2011 to secure the repayment of outstanding amount granted to appellant No. 1 company. Respondent IFCI had confirmed the second charge of the respondent State Bank of India on 25.3.1996 over land measuring 6 bighas 12 biswas in Khasra No. 398 and 399 at Sukher Industrial Area, Udaipur, Rajasthan.

The appellants became irregular in the repayment. The respondent State Bank of India issued a demand notice on 10.6.2002 to all the three appellants and respondent No. 2 for paying the outstanding amounts. The appellants failed to liquidate the dues. The company otherwise had acknowledged the liability in a duly audited balance sheet as on 31.3.2005, 29.3.2005, 8 4.2005, 22.11.2005, 9.2.2006, 20.2.2006, 31.3.2006, 17.7.2006, 22.8.2006. A sum of Rs. 2,47,17,617.54 was due besides interest from 1.11.2002 in the Cash Credit (Hypothecation) as per the books of account maintained by the Bank. A sum of Rs. 2,18,005/- was deposited by the company on 31.3.2006 leaving a balance of Rs. 2,44,99,612.59. The appellants being liable to pay this amount with interest @ 15% p.a. from 1.11.2002 with monthly rests, a sum of Rs. 2,10,55,256/- had accrued as interest and in this manner a total sum of Rs. 4,55,54,868.54 was claimed.

Appellant No. 1 company had made a reference to BIFR under Section 15(1) of Sick Industrial Companies (Special Provisions) Act, 1985 (for short, SIC A) and this reference was registered on 15.1.2002. The reference was rejected on 10.10.2006. Claiming that period from 31.3.2001 to 10.10.2006 was required to be excluded while computing limitation in terms of Section 22(5) of SICA, the Bank had filed the O.A. in the year 2006.

The appellants and respondent No. 2 had filed a joint written statement. As per the appellants, the setting up of the project was started in 1988 and completed in 1991. The cost of the project was advanced by respondents 3 to 5 Banks/financial institutions. The financial institution had further purchased shares of the appellant company for Rs. 100 lac. The respondent State Bank of India was to provide Working Capital. Till March 1990, the financial institution disbursed Rs. 305 lac for which the company purchased plant and machinery. The company started operation and the balance amount of Rs. 95 lac out of the committed amount was with respondent State Bank of India by way of FDR. It is stated that the Income Tax Department illegally, by mistake, impounded the FDR which got released only in the year 1994. Due to this reason, the financial institutions refused to grant further disbursement till the release of this amount by the Income Tax Department. The project thus could not be completed due to paucity of funds. The cost of the project overran for no fault of the appellants. It was alleged that the financial institutions unilaterally and arbitrarily adjusted the amount of Rs. 133 lacs towards the interest at a high rate of 19% p.a. while the previously agreed rate of interest was only @ 13.25% p.a. The appellants were left with no option but to accept the illegal and arbitrary demand of financial institutions as they had already invested Rs. 305 lac from their own sources. Promoters had also got additional Rs. 55 lacs over and above Rs. 135 lac and went for public issue. In this manner, the project could be completed only in the year 1995.

The appellants have claimed that they had earned profit and repaid the respondent Bank and other financial institutions. It is stated that the appellant company was adjudged second Best Tax-payer. Unfortunately, they faced violent labour unrest in 1996-97 and profit margin got reduced due to competition in the market. Chinese and Korean companies entered the international market. The respondent State Bank of India did not grant adequate working capital and reduced it from Rs. 400 lac to Rs. 300 lac unilaterally and arbitrarily. The Bank also forced the appellants to arrange additional collateral security. Because of the reduced working capital, the company had to request for ad hoc limit. When the ad hoc facilities were not made available, the sale diminished. Because of inordinate delay by the Bank in releasing the funds and not allowing the appellant company to avail the ad hoc limit, the company suffered. As per the RBI guidelines, the working capital limit should be as per the need and requirement of the borrower. It is accordingly pleaded that the respondent Bank is not entitled to recover anything from the defendants since the Bank had committed breach of contract. Rather, the appellants would plead that the Bank is liable to compensate the loss suffered by the company which is calculated to be Rs. 10 crore.

The appellants had also made some other grievance like the action of the Bank in demanding additional collateral security. It was also pleaded that if the appellants had been allowed to execute the order received from M/s. Mahindra & Mahindra and M/s. Telco, they would have been able to wipe out the losses substantially. Once the net-worth of the appellants company had eroded, it had to file reference before BIFR which, however, was dismissed on 10.10.2006. Even their appeal against this order was dismissed by AAIFR. Thereafter, the appellants approached the Hon'ble Rajasthan High Court. The writ petition was disposed of leaving the matter to be decided by the DRT in the Securitisation appeal.

The appellants had also approached the respondent Bank for amicable settlement and the Bank had agreed for one-time settlement (OTS) for Rs. 44 lac. At the same time, however, IDBI took illegal action by issuing notice under Section 13(4) of the SARFAESI Act because of which payment could not be made to the respondent Bank.

The appellants would also plead that the Bank had got documents signed by the appellants without filing any particulars therein and thus had taken advantage of its dominant position. The appellants would dispute the fact that they had admitted any liability in the balance sheet. It is urged that the said balance sheet was always subject to claim and counter-claim and it on its own cannot be treated as an admission of any liability.

The Tribunal, after considering the rival pleas, had allowed the O.A. and hence, the present appeal.

Counsel for the appellants has advanced a three-fold submission before me to challenge the impugned order. The Counsel would first submit that the account was declared NPA in the year 2000 and the loan was recalled in 2002. The O.A. was filed in December, 2006 and, hence, the same would be barred by limitation. The second grievance is that the Bank did not file statement of accounts despite repeated orders passed by the Tribunal in this regard and thus the recovery of the amount claimed in the O.A. and allowed by the Tribunal below is based on incorrect statement of accounts. It is then submitted that the action of the Bank in refusing to grant extension of time to make payment of OTS entered in the year 2006 would be in violation of the law laid down by the Hon'ble Supreme Court in Sardar Associates & Ors. v. Punjab & Sind Bank & Ors., VI (2009) SLT 473 : 111 (2009) BC 705 (SC) : 111 (2009) CLT 186 (SC) : (2009) 8 SCC 257.

The Counsel for the respondent Bank, on the other hand, would rely upon the provisions of Section 22(5) of SICA to urge that the right of the Bank to seek recovery of its dues could not be initiated while the appellant company before the BIFR and as soon as the reference was finally rejected in October 2006, the O.A. was filed by the Bank in December 2006. It is accordingly pleaded that the O.A. was well within the limitation and the period during which the reference was pending before the BIFR the Bank was under a legal bar to seek recovery of this amount and thus for counting the period of limitation the period during which the proceedings were pending before BIFR is to be excluded per Section 22(5) of SICA.

The Counsel for the Bank would also refer to the balance sheet of the appellant, which is on record, to point out that the appellants had admitted the liability of Rs. 248.33 lac in the balance sheet made on 17.6.2005 and in this background, the statement of accounts and other connected issues in this regard would have no relevance on the face of this admission. As per the Counsel, the appellants cannot take the benefit of the OTS which failed and, hence, now cannot rake up the said issue at this belated stage.

I have considered the submissions made before me. I find that the Tribunal below had formulated following four points for determination:

"1. Whether the defendants had not validly executed the documents?

Whether there was any breach of contract or negligence in disbursing the sanctioned credit facilities in time to D-1?

Whether the applicant is not entitled to recover the amount claimed?

Relief."

It is thus seen that the Tribunal below had not framed any issue regarding the plea of limitation. In the written statement filed by the appellant, as many as 20 preliminary objections have been taken but the plea of O.A. being barred by limitation had not been taken. No such issue was, therefore, framed by the Tribunal below. Apparently, there would be more than one reason why the appellants perhaps did not raise this plea, of limitation. Along with the record is the balance sheet of the appellant company, the liability towards the Bank is even acknowledged on 17.6.2005. Whether in this background the appellants can now be permitted to raise this plea is the first question which would require attention.

Once the plea of limitation has not been raised before the Tribunal below, the appellants cannot be permitted to urge the same for the first time in the appeal. Even if this aspect is kept aside, the O.A. filed by the Bank would not be barred by limitation in view of the provisions of Section 22 of SICA. This section talks of suspension of legal proceedings, contracts, etc. As per this section, where in respect of any industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then notwithstanding anything contained in the Companies Act, or any other law, etc., no proceeding for winding of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or Appellate Authority. Section 22(5) of SICA provides that in computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section is to be excluded. The Counsel for the Bank is justified in relying on this provision to urge that the right of the Bank to file a suit for the recovery of the money or for enforcement of security against the appellant accompany and guarantee in respect of the loan advanced was under eclipse during the period when reference was pending before the BIFR. That being the position, the provisions of Section 22(5) of SICA would come to the rescue of the Bank as the period during which the reference had remained pending before the BIFR is required to be excluded while computing the period of limitation for initiating action for the enforcement of security interest or to take action to recover the money. It is accordingly stated that the period from 2002, when the reference was made, till October 2006, when it was disposed of, is required to be excluded for calculating the limitation and hence, the O.A. which was filed in 2006 cannot be said to have been filed beyond the period of limitation.

The Counsel for the appellants still would press his submission in this regard and in support would refer to the judgment of the Madras High Court in the case of M/s. Salem Textiles Limited v. The Authorized Officer & Ors., AIR 2013 Mad. 229. The Division Bench of the High Court had referred three questions for consideration by Full Bench and these were:

(i) Whether an action initiated in terms of Section 13(4) of the Securitisation Act, by the secured creditors, representing three-fourths in value of the total amount outstanding, would result in the automatic abatement of the proceedings before BIFR, in view of the third proviso to Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, inserted by way of amendment under Act 54 of 2002?

(ii) Whether the secured creditors are obliged to seek permission of BIFR, for taking action under Section 13(4), for bringing to an end the proceedings before BIFR, when the matter is pending at the stage of Section 15 of Sick Industrial Companies (Special Provisions) Act, 1985?

(iii) Whether the ratio decidendi in Triveni Alloys Limited requires reconsideration or represents the correct view?

The Counsel for the appellants would refer to the answer given by the Full Bench to question No. 1 by holding that once the action is initiated in terms of Section 13(4) of the Securitisation Act, 2002, by the secured creditors representing three-fourths in value of the total amount outstanding, the proceedings before BIFR would automatically abate in view of the third proviso inserted by Act 54 of 2002 under Section 15(1) of SICA 1985. While answering question No. 2, the Full Bench has held that if an action is initiated by secured creditors not representing three-fourths in value of the total amount outstanding, then they are obliged to seek permission of BIFR under Section 22(1) of SICA. But if secured creditors, representing at least three-fourths in value of the total amount outstanding want to initiate action under Section 13(4), they are well entitled to do so without seeking the permission of the BIFR. The Court has further held that this is in view of the fact that once the secured creditors representing three-fourths in value of the total amount outstanding decide to take action in terms of Section 13(4) of the Securitisation Act, all the proceedings before BIFR would automatically abate.

The Counsel for the appellants on the basis of above observations would attempt to urge that once the proceeding before BIFR was to automatically abate upon initiation of an action under Section 13(4) of SARFAESI Act, the respondent Bank cannot seek exclusion of the period during which the reference had remained pending before the BIFR to come out of the rigour of limitation.

I am unable to accept the line of submission pursued by the Counsel for the appellants. The abatement of proceedings before BIFR would be in cases where action under the SARFAESI Act is initiated. The Banks or FIs may be entitled to pursue their action under the SARFAESI Act irrespective of the proceeding under SICA in view of amendment to the SICA, but this still may not entitle the Banks/FIs to seek recovery of the amount by filing O.A. under the RDDBFI Act. This aspect may have also to be seen in the light of the law laid down by the Hon'ble Supreme Court in the case of KSL & Industries Ltd. v. M/s. Arihant Threads Ltd. & Ors., IX (2014) SLT 229 : 1 V (2014) BC 596 (SC) : Civil Appeal No. 5225/2008, decided on 27.10.2014, where it is held that the provisions of SICA, in particular Section 22, shall prevail over the provisions of the RDDBFI Act. That being the position, the Bank, in my view, would be entitled to take the benefit of the provisions of Section 22(5) of SICA while filing this O.A. The observations of the Hon'ble Madras High Court relating to abatement of proceedings under SICA on account of initiation of measures under Section 13(4) of the SARFAESI Act would not come into play and cannot be read to mean that the Bank was still entitled and eligible to file O.A. under the RDDBFI Act. That is more so in view of the judgment in KSL & Industries Ltd. (supra) that the provisions Section 22 of SICA will have precedence over the provisions of the RDDBFI Act. I would, therefore, hold that the O.A. was not filed beyond the period of limitation. Even otherwise also, no such plea was ever raised by the appellants and this plea now raised for the first time deserves to be rejected on this ground alone.

The submission that statement of account was not filed and thus the finding returned on the basis of incorrect statement is to be noticed and rejected. The Counsel for the Bank was justified in pointing out that the liability of the Bank was admitted in the balance sheet of the company on various dates. In view of this admitted liability, there was hardly any need for adjudication to determine the amount which would be due towards this liability. I am, therefore, not inclined to accept the plea of the appellants that the finding of the Tribunal below was based on an incorrect statement of account.

The next submission by the Counsel for the appellants is that the Bank ought to have allowed extension of time for the payment of OTS amount in terms of the law laid down in Sardar Associates' case (supra). Though the settlement was reached between the Bank and appellants for payment of Rs. 44 lac, the appellants statedly had deposited only Rs. 2.25 lac. No reasons are forthcoming as to why and under what circumstances the appellants could not adhere to the time-schedule for payment of the OTS amount. It is also noticed by the Tribunal below that the amount deposited of Rs. 2.25 lac was in no-lien account and not towards OTS. In fact, the appellants even have not raised this plea before the Tribunal below and apparently have raked up this issue for the first time in this appeal. During this period only, the property of the appellants was sold and in the written submissions handed over by the Counsel for the appellants the issue of sale of the property for lesser amount has been raised but no such submission was advanced during the course of hearing. In the background that the security interest in the property has already been sold and nothing much would be left for the appellants to urge, except for praying some concession in the rate of interest. Indeed, the Counsel for the appellants would submit that interest @ 15% per month computed by the Bank from 2000 onwards in the case where the company was before BIFR is not only illegal, excessive, but against the principles of natural justice. The rate of interest agreed between the appellants and the Bank was @ 3.50% above SBAR with minimum of 15% p.a. with monthly rests. The Tribunal below, however, has allowed interest @ 15% p.a. simple which would lead to a substantial concession otherwise. I am, therefore, not inclined to grant any further concession in the rate of interest. The appeal accordingly is dismissed, there being no merit.