Punjab National Bank vs Bank Of India And Ors

This appeal is against the order dated 10.12.2017 passed by the Tribunal below(DRT) whereby Securitisation Application(S.A.) filed by respondent no.1 Bank herein under Section 17(1) of SARFESI Act against its borrower, respondent no.2 herein, and the appellant bank was disposed of.

The facts leading to the filing of the S.A. by one Bank against another Bank may be noticed in brief:-

(a) Respondent no.1 Bank had extended loan facilities of crores of rupees to respondent no.2('the borrower') during 2003-2014. This borrower defaulted in repayment of loan which was secured by way of mortgage of borrower's godowns as well as hypothecation/pledge of stocks of rice/paddy stored in the mortgaged godowns and plant and machinery installed in the factory of the borrower in somewhere in the State of Punjab.

(b) Because of the default committed bytheborrower in repaymentof loan its account was declared as NPA in September, 2016. Since the borrower did not clear the outstanding dues of over sixty crores despite service of demand notice under Section 13(2) of SARFAESI Act the respondent Bank in exercise of its rights as a secured creditor took symbolic possession of the mortgaged/hypothecated properties and sealed the same. It also approached District Magistrate under Section 14 of SARFAESI Act for permission to take possession with police aid and to sell the hypothecated stocks of rice/paddy/wheat.

(c) It appears that at thatstage Punjab National Bank(PNB) also entered the scene and claimed that it had also advanced crores of rupees as loan to respondent no.2 herein in the year 2013 and as security for repayment the borrower had pledged stocks of rice/paddy etc. lying stored in the godowns of the borrower taken on rent by respondent no.3 herein from the borrower who had been appointed as Collateral Manager which used to release pledged stocks against payment of the vale thereof to PNB.

(d) The District Magistrate disposed of the application of Bank of India under Section14 of SARFAESI Act vide order dated 12.10.2016 and allowed the applicant Bank to take possession of mortgaged/hypothecated properties but at the same time Bank of India was also directed not to touch the stocks of rice etc. PNB lying in the godowns.

(e) Feeling aggrieved by the order of District Magistrate asking Bank of India not to touch the stocks which PNB was claiming to be pledged in its favour by the borrower filed S.A. under Section 17(1) of SARFAESI Act impleading its borrower as well as PNB and respondent no.3 herein as respondents.

(f) During the pendency of the S.A. Bank of India had sought interim relief also restraining PNB from interfering with the sale of stocks of rice/paddy etc. The PNB had contested the S.A. inter alia in the grounds that S.A was not maintainable since PNB had not initiated any measures under SARFAESI Act and was only seeking to enforce its rights as a pledge of stocks of rice etc. against its borrower which happened to be the borrower of Bank of India also. It was also pleaded that the S.A. was liable to be dismissed since Bank of India had concealed the fact in its S.A. that it had already filed a civil suit also against PNB for restraining it from selling the stocks of rice etc. claiming itself to be a pledgee thereof and in that suit no interim stay was granted to it. The S.A. was filed. DRT permitted PNB, Bank of India and respondent n.3 herein to sell the stocks of rice etc. jointly. PNB then approached this Tribunal by way of an appeal. That appeal no. 298/2017 was disposed of by a consent order dated 01.09.2017 directing the DRT to pass a fresh order on interim relief prayer of Bank of India taking into consideration the pleas of PNB including the plea that S.A. was not maintainable.

(g) The DRT on remand of the matter passed the impugned order disposing of the main S.A. itself. Against that order this appeal came to be filed by PNB. The PNB, however, has not raised a grievance that the DRT ought not to have decided the main S.A. since the direction of this Tribunal was to decide afresh the interim relief application of Bank of India.

The relevant portions of the impugned order dated 10.11.2017 -of DRT are reproduced below:-

"The applicant has filed this application under Section 17 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (The SARFAESI Act, 2002) challenging the action taken by the Respondent Bank under The SARFAESI Act.

Briefly stated facts are that Respondent no. 2, i.e. M/s Nangal Rice Mills Pvt. Ltd, which was established in the year 2002 for setting up modern rice mill for manufacturing rice and other related products, was initially sanctioned working capital, i.e., CC limit of Rs. 1.35 crore and term loan of Rs. 1.99 crore by the Applicant Bank in July 2003 against hypothecation of tangible assets of company including all the stocks of raw material such as paddy and finished goods such as rice stocks in process, movable machinery, stones, spare parts, chemicals, furniture etc. wherever situated and in transit. The Respondent no. 2 in his minutes of meeting of board of directors held on 31.07.2003 has mentioned credit facilities having been sanctioned by respondent Bank (Exh. A1). The applicant bank has stated that vide hypothecation of agreement executed by Respondent No. 2 at the time of availing of credit facilities, the Applicant Bank has been given exclusive right to realise its dues, in case default by Respondent No. 2, from the secured/hypothecated assets/goods in the manner as prescribed in the agreement. It also mentions that the hypothecated goods are absolute and unencumbered property with full power of disposition there over and as to future goods shall be the absolute unencumbered property of the borrower with full power of disposition there over and as future goods shall be the absolute unencumbered property of the borrower with full power of disposition (Exh.A2). To avail renewed enhanced facility Respondent No. 2 also executed agreement of hypothecation of plant and machinery, stocks and books debt on 23.09.2006 in favour of the Applicant Bank clearly stating that the borrower will not create any mortgage, charge, pledge, lien or encumbrance of any nature on the hypothecated stock already hypothecated with the Applicant Bank (Exh.A4). The credit facilities of Respondent No. 2 were enhanced by the Applicant Bank from time to time. It has been further stated that charge of the Applicant Bank is duly registered with the Registrar of Companies (Exh. A7).

Since the Respondent No. did not maintain financial discipline the account was declared NPA on 30.09.2015 and proceedings under the SARFAESI Act was initiated with the issuance of Demand Notice Dt. 17.10.2015 under Section 13(2) and thereafter Notice under Section 13(4) dt. 28.12.2015 was issued which was duly received by respondent no. 2 and symbolic possession of factory premises, plant and machinery and other stocks was taken on 30.12.2015. The said possession notice was also affixed on the premises and hypothecated stocks and was duly published too (Exh.A8 and Exh. A9). It has been further stated that Respondent No. 1 is wrongly claiming their right over stocks hypothecated with the Applicant Bank on the basis of false, fabricated and frivolous documents in connivance of Respondent No. 2 just to delay recovery process initiated by the Applicant. It has been stated that Respondent No. has wrongly and illegally sanctioned credit facilities in favour of Resp. No. 2 and in order to hide their wrong doings, they are claiming right on the stocks which are hypothecated to the Applicant Bank. It has also been stated that vide letter dt. 23.05.2015, the Applicant Bank clarified the position and its first charge to the Resp. Bank (Exh. A10) which was replied by Resp. No. 1 on 04.06.2015 again on the wrong claim. In their letter, Resp. No. 1 has admitted their finance is of the year 2013 whereas the Applicant Bank had financed in the year 2003 (Exh.A11). It is further averred that the Resp. No. 1 has failed to prove that their charge is prior to that of Applicant Bank Moreover, till date Resp. No. 1 has not issued any recall notice which is one of the mandatory conditions of section 176 of Indian Contract Act 1872 before proceeding for sale of stocks.

The applicant Bank has further alleged that DM has wrongly passed an order dt. 12.10.2016 giving liberty to Respondent No. 1 has no right over the said stocks (Exh. A13). It has been further stated that SBOP has also claimed their right over the stocks hypothecated with the Applicant Bank and has filed S.A. 207 of 2016 with Hon'ble DRT-II who has directed the SBOP to conduct public auction mentioning the charge of the Applicant Bank also in the notice and that sale proceeds should be kept in no lien account. Hence, the Applicant has prayed that the order of DM dt. 12.10.2016 and letter issued by Respondent No. 1 dt. 21.12.2016 is contrary to the law, therefore, be set aside and SA be allowed.

The Respondent Bank in its reply has stated that the SA is barred by limitation and should be dismissed since the Applicant has filed the same on 29.05.2017 praying for setting aside DM's order dt. 12.10.2016 and the letter of answering respondent dt. 21.12.2016. It has been further stated that the applicant had filed Civil Suit for permanent injunction restraining the Respondent No. 1(PNB) and SBOP from selling the stocks of paddy/rice lying at godowns of M/s Sh. Nangli Rice Mills Pvt. Ltd. (Exh.R/1) which is still pending in civil court and no stay has been granted. The Respondent No. 1 has not initiated action under the SARFAESI Act. since the same is not application to pledge of movable within the meaning of Section 172 of Indian Contract Act, 1872 in terms of Sec. 31(b). Therefore, the SA against the action initiated by answering Respondent for disposal of stocks as stated in impugned letter dt. 21.12.2016 (Exh.A12) cannot be filed. Since the issue relates to enforcement of right of a Pawnee under Section 172 and 176 of the Contract Act, 1872, there is no action being taken under Section 13(4) of the SARFAESI Act.

The Respondent No. 1 has further stated that respondent No. 2 had approached them for sanction of credit facilities and the Respondent No. 1 on 22.11.2013 had sanctioned cash credit (pledge) (pledge of warehouse receipts) limit of Rs. 15 crore in favour of Respondent No. 2 again approached the Respondent No. 1 Bank for additional financial requirements, the same were sanctioned in the shape of Cash Credit Pledge to the tune of Rs. 20 crore against warehousing receipts on 27.09.2014 (Exh.R4 and Exh.R5). In pursuant to sanction of aforesaid cash credit ( pledge) (Pledge of Warehouse Receipts) facility, the Respondent No. 2 availed the facility and pledged with the respondent no. 1 Punjab National Bank from time to time ware house receipts. The Bank had entered into a collateral management agreement with M/s National Bulk Handling Corp. Ltd. on 21.01.2009. As per the agreement National Bulk Handling Corp. Ltd. was appointed as Collateral Manager in respect of facilities sanctioned by Respondent No. 1 to secure the loan by pledge of goods or warehouse receipts. The Respondent No. 2 gave on rent his godowns No. 1,3,6 and 11 to National Bank Handling Corp. Ltd vide agreement dt. 04.11.2014 and 04.06.2014 executed between the National Bulk Handling Corp. Ltd. and respondent No. 2 (Exh. R7 and Exh. R8). Accordingly, the borrower who deposits stocks with warehouse of National Bulk Handling Corp. Ltd., the National Bulk Handling Corp. Ltd., issued warehouse/storage receipts and against that warehouse receipt, the Bank has advanced the loan,. It is pertinent to mention that the stocks are in possession of National Bulk Handling Corp. Ltd. The detail of warehouse receipts against which the bank has allowed loan to respondent No. 2 is given in (Exh.R9 and Exh. R10). As per terms of sanction, the Bank used to issue release orders on deposit of value of the stocks to Respondent No.2. Since the Respondent failed to fulfil their commitment in keeping account regular, the same was declared NPA on 31.12.2016. Since the stocks are lying in National Bulk Handling Corp. Ltd. and are pledged with the Respondent No. 1 through warehouse receipts, the Civil Court had rightly stayed the proceedings of the Applicant Bank against them since the same are not hypothecated to the Applicant Bank as is being claimed. The Respondent No. 1 initiated proceedings against Respondent No. 2 but since Respondent No. 2 requested the Respondent No. 1 to wait for some and promised to bring some investor to repay the loan. It is also stated that the Respondent No. 1 Bank has sold some of the stocks of Respondent No. 1 on 02.11.2015. Since the Respondent No. 2 requested the Bank that they will pay value of the stocks and interest for release of some stocks, the same was released which were lying in the factory premises of Respondent No. 2. Finding no progress, the Respondent No. 1 called for bid in December, 2015. However, when the stocks were to be delivered, the Applicant Bank illegally and without any permission from the DM put locks on the main gate of the factory premises on 20.12.2015.

In fact after going through the pleadings and the documents/evidence produced by the parties, we have diagnosed the epicentre that both financial institutions are claiming their right of hypothecation/pledgeon the moveable stocks of rice, paddy which are lying in the premises of Resp. No.2. So far as mortgage of immoveable property is concerned, there is no controversy but the stocks which are perishable in nature and moveable are under the controversy of charge being hypothecated and pledge.

Now, so far as the first issue of limitation is concerned, being not an ordinary litigation as recovery of almost Rs. 70 cr. is due on the one hand and Rs. 20 cr. at stake on the other hand for which both the FIs are claiming their right on the stocks which are perishable in nature, does not allow us to let the matter go unresolved in midway once the applicant has knocked the door of justice for their claim of not ordinary articles but the food grains which is not the property of anyone but the product of nature for the human consumption and could not be allowed to spoil in this dirty litigation, hence the delay if any in filing the application, is condoned.

The second issue is whether the property which is duly mortgaged/hypothecated have better charge over pledge with the Resp. Bank or otherwise. In fact the real issue is, who has prior charge over the properties/goods, whether it is the Applicant Bank or Resp. No. 1 bank and the issue of pledge/hypothecate only comes thereafter.

Further, it seems that Resp. No. 2 and 3 using their good office has managed and manipulated by getting the stocks pledged with Resp. No. 1 which were duly hypothecated with the Applicant Bank. The involvement of officers ofboth the Banks along with handiwork of NBHC and Resp. No. 2 cannot be ruled out. The Scheme under which the Resp. No. 1 Bank has financed has been found to be defective and there is nothing on record produced by the Resp. Bank that they had verified the encumbrance/charge upon the stocks and the properties where these stocks were kept.

It could not be feasible to determine the same through summary procedure as both the Banks have put their claims on stocks with tags and without tags which the applicant bank righty pointed out being tagged thereafter whereas the Resp. Bank alleged that officers of the Applicant Bank removed the tags having name of their bank.

Therefore, a through probe is required for which this court is too small to place such orders to send this case to some Central Agency, like Central Bureau of Investigation. Therefore, at this stage, since the prayer of the Applicant Bank is for setting aside of orders of DM which is otherwise creating hindrance in the sale of perishable goods, is allowed and other dt. 12.10.2016 is set aside. The Bank is at liberty to sell the produce immediately by any means so that food grains, which is perishable item and national asset as each grain of crop is property of every human of this national, should not go waste in the hands of irresponsible officers of banks and delinquent defaulters who placed a fraud with banks.

Accordingly SA is allowed to that extent............."

Feeling aggrieved PNB has filed the present appeal. Counsel for the two banks besides making oral submissions have also filed written arguments.

Before proceeding further it may be noticed that during the pendency of this appeal efforts were made to see that the disputed socks of rice etc. over which both the banks were claiming charge, one as a hypothecate and the other as a pawnee, they were permitted to sell those stocks which they did and from the sale of stocks a sum of Rs.19,07,09,600/- was recovered which is lying with State Bank of India.

The main grievance of PNB raised by its learned counsel and also in his written submissions and which grievance, in my view, is well justified is that the learned DRT has not focussed himself on the objection raised by PNB whether respondent no.1 bank could invoke Section 17(1) of SARFAESI Act at all for claiming the reliefs sought for in the S.A. against another bank which was claiming itself to be a pledgee/pawnee of some of the rice/paddy/wheat stocks stored in some godowns which respondent no.3, PNB's collateral manager, had taken on lease from the bank's borrower. Learned counsel for PNB had submitted that Section 17(1) of SARFAESI Act can be invoked by a person including a borrower who is aggrieved by any of the measures taken by a secured creditor under Section 13 of SARFAESI Act which while in the present case the Bank of India had not even claimed in its S.A. that PNB had initiated any measures under SARFAESI Act in order to recover its dues from respondent no.2 herein and PNB was aggrieved with those measures. The S.A. was filed by Bank of India simply on the allegations that PNB was claiming itself to be having a charge over stocks of rice/wheat etc. kept in the godowns of respondent no.3 in respect of which Bank of India was also claiming its charge as a hypothecated and to have a declaration to that effect in its favour Bank of India had already filed a civil court which was pending and which fact had been concealed in the S.A. and for these reasons also the S.A. was liable to be rejected. The DRT has, however, not even examinedthese objections raised by PNBwhich ought to have been done. Similarly the DRT as not considered the objection that in the S.A.Bank of India had challenged the correctness of the order of the District Magistrate passed on the application moved by this Bank itself under Section 14 of SARFEASI Act whereby a direction was given that PNB's stocks will not be touched meaning thereby it was accepted and recognised that stocks pledged with PNB were also stored in the godowns as had been claimed by PNB before the District Magistrate. Against that direction of the District Magistrate, counsel for PNB submitted, no S.A. could be filed but even that aspect was not considered by the DRT.

Learned counsel for the respondent Bank of India as also State Bank of India which had also claimed is charge over some stocks of rice etc. had not seriously disputed that DRT ought to have dealt with te objections raised by PNB.

I am in full agreement with the aforesaid submissions raised on behalf of appellant Bank. The learned Presiding Officer has simply concentrated on the issue as to how the common borrower of the two banks, respondent no.2 herein, could get loans from two banks on the security of same stocks of rice/wheat etc. The learned DRT ought to have returned some finding on these points raised by PNB instead of disposing of the S.A.simply expressing its anguish over the manner in which two banks had lent crores of rupees to THE same borrower, respondent no.2 herein who had befooled different banks by showing them same stocks of rice/paddy etc. for being offered as security for the repayment of the loans.

This appeal, therefore, deserves to be allowed and matter needs to be sent back to DRT for fresh disposal in accordance with law and keeping in mind the observations made hereinabove.

This appeal is accordingly allowed and impugned order is set aside with a direction to the learned DRT-I, Chandigarh to pass a fresh order of disposal of the S.A. No.285/2017 of Bank of India keeping in mind the observations made in this order by this and giving fresh hearing to the parties and at the same time to pass fresh order uninfluenced by anything said in its impugned order which now stands set aside. The S.A. shall accordingly be now taken up for 'directions' by the DRT on 23.11.2019 at 2.p.m. and efforts should be made to pass the fresh order as far as possible within two months from the date of receipt of this order. While disposing of the S.A. afresh DRT also be at liberty to pass appropriate order concerning the appropriation/disbursement/utilisation of the sale proceeds of stocks of rice/paddy etc. which were sold during the pendency of the present appeal.