Kerala High Court
State Bank Of India vs Kerala Financial Corporation on 17 November, 1982
Equivalent citations: AIR 1983 KERALA 38, ILR (1983) 1 KER 552, (1983) ILR(KER) 1 KER 552, (1982) KER LJ 624
JUDGMENT Bhaskaran, J.
1. The State Bank of india, Cochin, the plaintiff in O. S. No. 4 of, 1976 on the file of the III Additional District Judge, Ernakulam, hereinafter referred to as the 'Bank', is the appellant. The suit is one for recovery of a sum of Rs. 12,22,848.13 with interest and costs from defendants 1 to 8 and the plaint schedule properties. The 1st defendant is a partnership firm M/s. Faiz Fisheries, hereinafter referred to as the 'Firm', represented by its partners, defendants 2 and 3. Defendants 4 to 8 are guarantors who had executed mortgages in favour of the Bank in respect of the properties mentioned in the C and D schedules to the plaint. The 9th defendant is the Kerala Financial Corporation, hereinafter referred to as the 'Corporation', claiming charge over item No. 1 in the B Schedule to the plaint.
2. The contest in the Court below was solely between the Bank and the Corporation and the main point for decision was whether Section 78 of the T. P. Act would have application for resolving the conflict of priority of charge between the Bank and the Corporation over Item 1 in the B schedule to the plaint.
3. The plaint proceeded on the footing that the firm having, on 12-3-1969, deposited with it the title deeds of Item I in the B schedule to the plaint with intent to create security by way of mortgage for the advance under "Overdraft Packing Credit Account", with a drawing limit of Rs. Five Lakhs, granted by the Bank in favour of the Firm, it was entitled to a first charge over that property. The Corporation, on the other hand, in its written statement stated that through the gross neglect on the part of the Bank it was induced to lend a sum of Rs. Ten Lakhs on the security of properties included in the very same properties mortgaged to the Bank, under a registered mortgage deed executed in its favour by the firm on 12-1-1971, and, therefore, by the operation of Section 78 of the T. P. Act, the Corporation was entitled to priority in the matter of charge in preference to the Bank. The trial Court decreed the suit as against defendants 1 to 3 and the plaint schedule properties with costs from defendants 1 to 8, in the decree it was also stated that with respect to the plaint B schedule property the Corporation was entitled to get prior charge; and the Bank was also directed to pay the costs of the Corporation. It is aggrieved by that part of the judgment of the trial Court which adversely affected the interest of the Bank that this appeal has been preferred by the Bank against the Corporation,
4. According to the plaintiff, apart from the advances given under the 'Overdraft Packing Credit Account' for which the Firm had furnished security by the deposit of title deeds etc., which included the 75 cents of land in Kumalangi village, described as Item 1 in the B schedule to the plaint, it had also granted a Medium Term Loan to the firm on the security of machinery and also of 16.94 cents of land belonging to defendants 2 and 3 by their executing a deed of mortgage in favour of the Bank on 12-8-1969. The liability under that loan was, however, discharged on 21-1-1971 when the firm paid to the Bank a sum of Rs. 13,952.71 in cash, and the Corporation handed over to the Bank on behalf of the Firm a cheque for Rs. 3.5 lakhs, and thereupon the Bank executed Ext. B-l release deed on 12-1-1971. The Bank by its letter dated 13-12-1971, a true copy of which is Ext. B-3 had, however, requested the Corporation to examine and advice whether it would be willing to allow a second charge to be created in its favour on the properties, buildings and machineries charged to the Corporation, as the firm owed to the Bank large sums borrowed from it under the Overdraft Packing Credit Account, and to this request the Corporation had respondent favourably. Ext. B-6 is the true copy of the application dated 12-11-1970 submitted by the Firm to the Corporation for a loan of Rs. 10 lakhs in Col. 12 (a) of Ext. B-6 application, giving the details of mortgage charges, the applicant had stated as follows:--
"Mortgage charge in favour of the State Bank of india for Medium Terra Loan of Rs. 3,50,000/- Mortgage Deed No, 1758/69 of Cochin Sub Registry", The column 'Equitable Mortgages' was left blank. When the Corporation received Exhibit B-6 application, by its letter dated 18-11-1970. a true copy of which is Ext. A-20, the Corporation sought a confidential report from the Bank about the credit worthiness, business antecedents and respectability of the partners of the firm. As this letter from the Corporation to the Bank and the Bank's reply Ext. A-21 dated 8-12-1970 to the Corporation are of quite significant in this case, we would extract the material portion of those letters.
Ext. A-20:--
"Dear Sirs, Furnishing of Confidential report about an applicant for financial assistance from this Corporation.
M/s. Faiz Fisheries, Karuvelipady, Cochin-5 has approached this Corporation for financial assistance. It is staled that the applicant has banking transactions with you. We request you to be good enough to favour us with a detailed report about the credit worthiness, business antecedents and respectability of the Partners of the Firm. The nature and extent of the transactions of the applicant with you, the nature of accounts maintained with you, limits sanctioned and availed of and balance outstanding in different accounts may also be indicated. Details of secured loans and unsecured loans may be given separately.
The details of security accepted by you fop secured loans and security, if any, taken for other types of advances may also be intimated.
We shall also be obliged if you could forward to us for reference certified copies o the Mortgage Deeds/Hypothecation Bonds/ Memorandum of Deposit of Title deeds deposited with you for advances granted by you along with the list of properties charged and the original documents or title deeds deposited with you. We shall hold these documents and title deeds in trust for you and return the same to you after our scrutiny."
Ext. A-21 :--
"Dear Sirs, Messrs. Faiz Fisheries, Karuvelipady, Cochin-5.
With reference to your letter No. B-l (370)/ 9660 dated the 18th Nov., 1970, we have to advise as under:--
2. M/s. Faiz Fisheries, with Sarvashri N.M. Kassam Sail, A. Oosman Sait, s. T. R. Bava and T. V. Mohammed, as partners opened their account with us on 25-1-1968 and made exports to the extent of Rs. 34 lacs. The firm was reconstituted with effect from 20th August, 1968 on two of the partners retiring from the partnership, and the business is being continued by the remaining partners, viz. Sarvashri N.M. Kassam Sait and A. Oosman Sait. The reconstituted firm made exports to the extent of Rs. 53 lacs till the end of Oct., 1969, after which the business of the Srm was suspended. The firm owes to the Bank an amount of Rs. 8,60,737.17, as on 1-12-1969 in their Packing Credit Account together with accrued interest thereon till the date of repayment.
3. The firm were also sanctioned a Medium Term Loan of Rs. 3.50 lacs, out of which they have already drawn Rs. 2,25,000/- for buildings and a sum of Rs. 1,02,330.27 has been incurred by us towards the cost and expenses in taking delivery of the imported plate freezer.
4. For the Packing Credit facilities enjoyed by the firm, they had deposited with us some title deeds as collateral in addition to the following security documents executed by them :
(i) Demand Promissory Note dated 12th March, 1969 for Rs. 5,00,000/- executed by the firm in favour of the Bank;
(ii) D. P. Note delivery letter.
(iii) Letter of Hypothecation dated 12th March, 1969 for Rs. 5,00,000/-,
(iv) Shipping Lien for Rs. 5,00,000/- dated 12th March, 1969.
5. The collateral security offered by the unit consist of the following:
(i) 75 certs of land situated at Kum-balangy Village (ii) 3 1/4 cents of land at Rameswaram Muri.
6. in addition to the above, the following title deeds as collateral security were also obtained :
(i) 13 1/4 cents of land and building -- Title deed deposited by Smt. Naseema Kassam and Smt. Mariam Oosman (who have a limited share in the property).
(ii) 6 cents of land and building and 2 acres 9 cents of land -- Title deeds deposited by Sarvashri Archibald Robert, Abel Antony Robert and Sebastian Robert.
7. For the Medium Term Loan sanctioned to the unit, a registered mortgage of 16.94 cents of land situated at Kumbalangy village, Andikadavu Muri, (where the cold storage is constructed) has been obtained, along with an Articles of Agreement covering the pledge of movable assets."
4. P. W. 1 at the time of his examination in Court was the Manager, S. I. B. Division of the bank in his deposition he had stated inter alia that Ext. A-10 was the title deed deposited with the Bank, relating to Item 1 in the B schedule to the plaint which was offered as collateral security for the Packing Credit Account the 1st defendant Firm had with the Bank from 1969. By the second half of 1969 the Firm had suspended its business. The Firm had a Medium Term Loan Account also with the Bank with Rs. 3,50,000/- limit on the security of 16.94 cents of land with building and machinery thereon, under a registered mortgage deed. That account did not subsist at the time when he was examined in Court. That mortgage was released on the Corporation issuing a cheque for Rs. 3.5 lakhs in favour of the Bank on behalf of the Firm, and the Firm paying a sum of Rs. 13,952.71 towards the interest accrued. The Medium Term Loan was thus closed. He also proved the receipt of Ext. A-20 letter from the Corporation and spoke to the contents of Ext. A-21 reply sent to Ext. A-20. The second charge solicited by the Bank on the properties over which the Corporation had a charge was to serve as further collateral security to the advances made by the Bank to the firm under the Overdraft Packing Credit Account. Regarding the 75 cents (item 1 in the B Schedule to the plaint), the Bank had made it clear that it had a charge over it under an equitable mortgage, the Firm having deposited its title deeds with it with intent to create such a charge in Ext. A-20 the Corporation also wanted to know the list of properties charged and the original documents -of title deeds deposited with the Bank. They had also wanted certified copies of mortgage deeds, hypothecation bonds and memorandum of deposit of title deeds deposited with the Bank to secure the advances made. According to him, it was not the practice of the Bank to send the original title deeds in response to such enquiries made, and there was no offer by the Corporation to pay for the copying charges. The Corporation's Legal Officer used to go there and verify the documents. The Bank had written to the Corporation that the documents could be examined from the office either of the Bank or of the Branch of State Bank of india, Trivandrum in connection with the loan application Sri Subramonia Pillai, the Legal Officer of the Corporation, had gone to the Bank several times; and at that time the Bank officials had explained to him that the Bank was precluded from handing over the title deeds, documents etc. to third parties, and that they could be examined from the Bank or Trivandrum office of the State Bank of india in between the receipt of Ext. A-20 and the sending of Ext. A-21, Sri Subramonia Pillai had gone to the office of the Bank; and he was informed of the fact stated earlier by the Bank. Paragraph 6 of the plaint refers to the title deeds given to the Bank by way of collateral security with respect to the properties mortgaged to the Bank.
5. Sri V. Parameswara Menon, the counsel for the respondent-Corporation, submitted that by declining to send the title deeds and to furnish all the details called for in Ext. A-20 letter, the Bank, which otherwise would have been legitimately entitled to claim a prior charge, should be deemed to have forfeited that right, as the conduct of the Bank constituted an act of gross neglect, through which the Corporation was induced to lend large sums of money to the Firm on the security of the properties which included item 1 in the B Schedule to the plaint which was already mortgaged to the Bank.
6. D. W. 1, who described himself as a Court Officer of the Corporation during the material time, has admitted that the mortgage evidenced by Document No. 1758 was the mortgage mentioned in para 7 of Exhibit A-21. He would say that nobody from the Corporation went to the office of the Bank to scrutinise the title deeds deposited with the Bank. He has also admitted that the Corporation had known from Ext. A-21 letter that over the property consisting of 75 cents in extent there was a collateral security in favour of the Bank. He would only add that the Corporation did not know which that property was.
7. Section 78 of the T. P. Act reads as follows:--
"78. Postponement of prior mortgagee --Where, through the fraud, misrepresentation or gross neglect of a prior mortgagee, an-other person has been induced to advance money on the security of the mortgaged property, the prior mortgagee shall be postponed to the subsequent mortgagee."
It was not, nor could it be, the case of the respondent-Corporation that it was entitled to priority of charge on the ground that the mortgage in favour of the Corporation was under a registered document, whereas what the Bank was having was an equitable mortgage. It is well settled that in india, where, except as provided by statute, no distinction exists in the status of mortgages; priority of mortgages depends upon the respective dates of their creation, irrespective whether they are registered mortgages or equitable mortgages, the earlier in date having precedence. in this regard there is marked difference between the rules regulating the priority of charges in india, and the practice under which legal estate assumes priority over equitable estate in England.
8. The provision in Section 78 of the T. P. Act is in the nature of an exception to the general rule in Section 48 of the Act which provides that prior mortgagee takes precedence over subsequent mortgagee in the present case for the subsequent mortgagee to invoke Section 78 of the T. P. Act, he must plead and prove that through the gross neglect on the part of the prior mortgagee (there being no case here that there was fraud or misrepresentation on the part of the prior mortgagee) he was induced to advance money on the security of the mortgaged property. Being an exception, the onus of proof is on the person who sets up the plea based on Section 78. The legislature has guardedly used the expression "gross neglect" in order to eschew the possibility of slight neglect or carelessness on the part of the prior mortgagee being set up as a ground for invoking S. 78 of the Act. To succeed in the plea based on S. 78 of the Act, it is necessary that it is proved and| found that the subsequent mortgagee was directly, not remotely, induced by reason of gross neglect on the part of the prior mortgagee to advance money on the security of the mortgaged property. Negligence would consist of omitting to do something which a reasonable man would do, or the doing of something which a reasonable man would not do, in either case causing unintentionally some mischief to a third party. "Gross neglect" in Section 78 means and involves the absence of care that was requisite under the circumstances on the part of the prior mortgagee; and it being a relative term it might depend upon the facts of each case.
9. We have to consider whether there was any substance in the accusation by the Corporation that the Bank was guilty of gross negligence so as to compel it to forgo its claim for priority or charge based on the equitable mortgage in its favour which was admittedly earlier in point of time than that of the Corporation in para 4 to Ext. A-21 reply to Ext. A-20 letter to the Corporation, the Bank had categorically stated that for the Packing Credit Facilities enjoyed by the Firm it had deposited with the Bank title deeds as collateral security which included that of 75 cents of land situated in Kumba-langy village. All that D. W. 1 would say is that though from Ext. A-21 letter the Corporation had understood that there was a charge in favour of the Bank in respect of 75 cents of land in Kumbalangy village belonging to the Firm, it had not known the identity of that land. According to him nobody from his office went to the office of the Bank to find out which exactly was that 75 cents of land over which the Bank had charge created by the deposit of title deeds, before accepting an extent of 75 cents of land in Kumbalangy village belonging to the Firm as one of the items of security for the advance proposed to be made to the First in sanctioning the loan, the Corporation appears to have acted in undue haste and with an element of callousness. It did not insist on the production of the original title deed of the property before accepting that property as one of the items of security. Though the draft of Ext. B-l release deed was sent to the Bank for approval, the draft of the mortgage deed which created charge in favour of the Corporation over item 1 in the B Schedule to the plaint, among other properties, for the advance of Rs. 10,00,000/-, was not sent to the Bank. D. W. 1 has also admitted that the Corporation did not make any further enquiries about the deposit of title deeds mentioned in para 4 of Ext. A-2I. No letter also was sent to ascertain whether the Firm had further liabilities to the Bank.
10. On these facts we are not prepared to old that the Bank had a duty to Corporation to give guidance and advice so as to void the chance of the Corporation being deceived by the Firm by creating subsequent encumbrances without disclosing the prior mortgage in favour of the Bank. Once the Corporation knew from Ext. A-21 letter that here was a charge created in favour of the Bank by the Firm, depositing the title deed in respect of 75 cents in Kumbalangy village, prudence ought to have dictated the Corporation to ascertain whether the 75 cents in Kumbalangy village offered as security was an item of property different from what lad already been charged to the Bank. There is no warrant for the stand taken by he Corporation that the Bank in favour of which an equitable mortgage was created was bound not only to give that information to the Corporation, but also to send the original title deed or copies thereof and furnish such other details as were called for in Ext. A-20 letter, and that too in the absence of A case of the Corporation that the necessary charges had been remitted to the Bank, n our view, the Corporation had run a calculated risk in advancing a fat sum of Rs. 10,00,000/- accepting the 75 cents of and in Kumbalangy village belonging to the Firm as one of the items of security after laving known from Ext. A-2i letter that 75 cents of land belonging to the Firm in Kambalangy village bad been mortgaged to the Bank by the deposit of title deed. We are clear in our minds that this is not a case where by the application of the provisions contained in Section 78 of the Transfer of Property Act the prior mortgagee, the Bank, was to be postponed to the subsequent mortgagee, the Corporation.
11. Sri Parameswara Menon cited two decisions of the Calcutta High Court in support of his contention that the respondent-Bank was guilty of gross negligence and therefore the Corporation was entitled to priority of charge as held by the trial Court. The first of these decisions is Lloyds Bank v. P. E. Guzdar & Co. (AIR 1930 Cal 22). That was a case where Guzdar & Co., the defendant, had deposited certain title deeds of immovable properties with the National Bank of india to secure an overdraft. Subsequent to this deposit, representing that the title deeds were required to be shown to an intending purchaser, one of the partners of Guzdar & Company obtained possession of the same and mortgaged them to the Lloyds Bank, the plaintiff, giving them to understand that the properly was free from any encumbrance. The fact of the prior mortgage having been discovered, the Lloyds Bank applied for a decree on the mortgage and for prior charge. Page J, before whom the matter came up for hearing held that His Lloyds Bank, the plaintiff, bad the priority of charge over the National Bank and that priority was to the extent of the amount advanced by the Lloyds Bank. The other decision was that of a Division Bench in Dharani Mohan v. Pramatha Nath (AIR 1936 Cal 283). This was again a case where the title deeds reached the hands of the mortgagor who made use of them for creating a subsequent encumbrance over the property, inducing the puisne mortgagee to believe that there was no subsisting encumbrance over the property. in both the cases, inasmuch as the prior mortgagee was found guilty of gross neglect in not having taken care to keep the title deed deposited with it in its custody, but allowed it to pass into the hands of the mortgagors to enable them to deceive the puisne mortgages who had no notice of the prior mortgages, the Court held that Section 78 would apply and prior mortgagee would be postponed to the subsequent mortgagee. The rulings given in these decisions on these facts have no relevance to the present case.
12. It was pointed out by the counsel for the Bank that though the respondent-Corporation had claimed charge over item No. 1 in the B Schedule to the plaint only, in the decree a charge over the entire B Schedule properties was given in favour of the respondent-Corporation. This appears to be a mistake due to oversight.
For the foregoing reasons while we uphold the decree of the trial Court as against defendants 1 to 8 and the plaint schedule properties with costs from defendants 1 to 8, we hold that the 9th defendant-Corporation, would not be entitled to a prior charge over item No. 1 in the B Schedule to the plaint. The appellant-Bank (plaintiff) shall have first charge over the plaint B Schedule properties. We set aside the direction in the judgment and decree of the trial Court that the plaintiff-Bank was to pay the costs of the 9th defendant-Corporation. The appeal is allowed to the extent indicated above and the judgment and decree of the trial Court shall stand modified accordingly. The Bank (appellant-plaintiff) shall be entitled to its costs against the Corporation (respondent-9th defendant).