Punjab-Haryana High Court
Suchcha Zinc Sulphate Fertilizer ... vs Punjab National Bank on 21 September, 1999
Equivalent citations: [2001]106COMPCAS44(P&H), (2000)124PLR598
Author: R.L. Anand
Bench: R.L. Anand
JUDGMENT R.L. Anand, J.
1. What are the duties of a hypothecate in a case of pledge ?, will be the point for determination in the present second appeal which has been filed by the defendants against the judgment and decree dated 3-3-1998 passed by the Court of Additional District Judge, Patiala, who dismissed the appeal of the defendants and affirmed the judgment and decree dated 29-4-1995 passed by the Court of Additional District Judge, Samana, who passed a composite decree for recovery of Rs. 93,597 by sale of Zinc Sulphate and raw material etc. hypothecated with the Punjab National Bank (hereinafter called 'the Bank') and by sale of the land along with superstructures as mentioned in the head note of the plaint as mortgaged with the Bank by the defendants for the realisation of the said amount along with interest and the decree was also passed jointly and severally against the parties of the defendant-firm.
2. The brief facts of the case can be noticed in the following manner :
3. The Bank filed a suit against the defendants-firm Suchcha Zinc Sulphate Fertilizer Factory, and its four partners alleging that the defendants No. 2 to 4 are partners of defendant No. 1. The defendants applied to the Bank for the grant of Rs. 1 lacs towards cash credit pledge limit on 26-11-1988. The Bank sanctioned the prayer for a sum of Rs. 75,000 on 22-12-1988. The defendants executed the relevant documents on 24-12-1988 pertaining to the land including the agreement of hypothecation. Defendant No. 3 also created an equitable mortgage of her immovable property by depositing title deed of the property situated at Samana along with super-structures, etc. Defendant No. 5 also stood as guarantor and executed the guarantee deed dated 24-12-1988 in favour of the Bank agreement to be liable jointly and severally. The defendants availed of this facility of loan and subsequently they started committing breach of the terms and conditions of the agreement. They were not routing the sale proceeds from the cash credit account and also not following the financial discipline of the Bank. They did not submit the stock statements to the Bank. The loan was not paid as a result of which the bank had to file a suit for recovery of Rs. 95,597 against the defendants besides the agreed rate of interest. The Bank also alleged in the plaint that the defendants are in possession of the hypothecated goods and the mortgaged property.
4. A written statement was filed by the defendants on 20-3-1991 and they raised a preliminary objection that the suit is not maintainable, that it is barred by time; the suit is not properly valued for the purposes of Court fee and jurisdiction and that the Bank has not filed the suit through a proper person. The execution of the loan documents was admitted by the defendants. However, they took the stand that the Punjab Financial Corporation (hereinafter referred to as 'the PFC') took possession of the movable and immovable properties of the defendant-firm, including raw material, finished and unfinished goods, if any, pledged with the Bank on 28-9-1989. The Bank kept this material under their lock and key and got the relevant and necessary documents signed from the defendants. Rather, the raw material worth Rs. 2,12,650 was still lying in the custody of the Bank. The defendants requested the Bank to sell the raw material in the shape of Zinc Sulphate Sulphuric Add and Empty Polythene Bags (Bardana). The bank has not complied with the request of the defendant and, as such the defendants are not liable to pay the amount including interest. When the possession of the raw material was taken by the Bank, the Bank could realise the outstanding amount by sale of the raw material because the Bank had the necessary authority to realise the amount by way of sale.
5. The Bank admitted that the stocks of Zinc Sulphate, etc. were phypothecated with the Bank. The Bank had no objection, if the stock are sole under the orders of the Court and the sale proceeds are deposited in the loan account of the defendants. The stocks be got sold by appointing a Receiver. According to the Bank, the possession of the hypothecated goods always remained with the defendants. The Bank denied that it got the signature from the defendants, purporting to be the document with the Bank for sale of the hypothecated stock, etc.
6. From the pleadings of the parties, the following issues were framed by the trial Court :
"(1) Whether suit has been filed by competent person ? OPP (2) Whether plaintiff is entitled to recover an amount of Rs. 93,597 ? OPP (3) To what amount plaintiff is entitled by way of interest ? OPP (4) Whether the suit is not maintainable in the present from ? OPP (5) Whether the suit is barred by limitation ? OPD (6) Whether proper court-fee has not been affixed on the plaint and the smae is liable to be rejected ? OPD (7) Whether the plaintiff has got no cause of action ? OPD (8) Whether plaintiff has concealed material facts, if so, its effect ? OPD (9) Relief."
7. The parties led oral and documentary evidence and on the conclusion of the trial, the suit of the plaintiff was decreed. Aggrieved by the judgment and decree of the trial Court the defendants filed the appeal before the first appellate Court, which was dismissed and aggrieved by the judgment and decree of the Courts below, the present appeal.
8. I have heard Mr. Kanwaljit Singh, counsel for the appellants and Mr. H. R. Bansal, counsel for respondent No. 1, and with their assistance have gone through the record of this case.
9. The learned Counsel for the appellant submitted that in this case the physical possession of the hypothecated goods had been delivered to the Bank who had achieved the position of a Bailee and the Bank was supposed to perform such acts which are best suited to the interest of the borrower who could not sell the hypothecated goods without the prior permission of the Bank. The Bank has not discharged its obligations as a reasonable and prudent person, therefore, the Bank is not entitled to the recovery of the amount from the defendants. The learned Counsel further submitted that the legal possession of the hypothecated goods was with the Bank who had been informed by the Corporation-authorities, which took the possession of the premises in which the business was going on and inspite of the authority given to the Bank to sell the hypothecated goods, the Bank has not adopted a reasonable approach to avoid loss to the defendants, as a result of which, the defendants stood discharged from their liability. The counsel further submitted that a receive was appointed in this case who prepared the inventory of the hypothecated goods and those goods were in the custody of the Bank and the Bank did not take proper care for the disposal of the goods and, in this manner, a loss has been caused to the defendants, exonerating them from the liability.
10 On the contrary, the learned Counsel for the respondent submitted that the Bank was never given the actual custody of the hypothecated goods. It was not a case of pledge. Though there may be a constructive or legal control of the Bank over the hypothecated goods, but physical possession was never parted to the Bank because it was not a pledge and, therefore, there was no obligation on the part of the Bank to sell the property. The defendants could, with the permission of the court or with the permission of the Bank, sell the hypothecated goods in the open market and from the sale proceeds so collected, the defendants could discharge the liability.
11. Learned counsel for the appellants tried to meet the argument of his adversary by referring to some clauses of the Hypothecation Deed and especially my attention has been invited to Clause 2 which lays down that : "the Borrowers shall not except with the previous written consent of the Bank sell or dispose of in any manner the hypothecated goods or any part thereof. They shall pay the value in advance of such goods into the said account or substitute the same by other approved goods of at least equal value for the goods so sold or disposed of."
12. After considering the rival contentions of the parties, I am of the opinion that the contentions of the counsel for the appellants are in air and devoid of merit. It was a case of open credit system loan. It was not a case of key loan system. A cash credit facility was advanced by the Bank to the defendants so as to run the business. In State Bank of India v. Quality Bread Factory, Batala and others (AIR 1983 P&H 244), it was held as follows :
"The loans are advanced by the Bank to its customers either on key loan system or on open credit system. In the key loan system, the goods pledged are under the lock of the pledgee and the pledgor has no excess (access ?) to them whereas in the open credit system the goods pledged are in actual possession of the pledgor and the pledgee has constructive possession over them. In the former system, the pledgor cannot deal with the goods unless the pledgee gives their possession to him, whereas in the latter system, he has freedom to deal with them. In the open credit system, however, the formal character of pledge is maintained. The loan advanced on the basis of key loan system is also called loan by pledge of goods and the loan advanced on open credit system is also called factory type loan or loans on the basis of hypothecation.
In law, however, there is no difference with regard to the legal possession of the Bank. In both the cases, the goods are under the constructive possession of the Bank while in the case of pledge they are also in the actual physical possession of the Bank but in the case of hypothecated goods, they are in the actual physical possession of the borrower but as an agent of the Bank and in that limited sense the hypothecated goods are also not only constructively but actually in the possession of the Bank."
13. In the present case, the actual possession of the goods always remained with the borrower, i.e., the defendants. In legal sense, there was a floating charge of the Bank. It may be further stretched by saying that the Bank had legal and constructive possession over those goods. Further, it may be stretched that the Bank has the right to recover the amount and also to seize the goods but the physical possession of such hypothecated goods shall always remain with the debtor. If this is the position of law, how the debtor can call upon the Bank to exercise the duties of a pledgee ? In the present case, the Punjab Financial Corporation took possession of the premises because the land and machinery must have been pledged with the Corporation. If the Corporation has even written a letter at one point of time to the Bank to lift the goods, there is no evidence on the record that the Bank ever took the possession of those goods in exercise of the powers under the contract or on behalf of the defendants. If the defendants were eager to discharge their obligation, they could apply to the Bank complying with the clauses of the agreement, especially, Clause 2, and seek the permission of the Bank for the sale of the hypothecated goods under the control or supervision of the Bank so as to discharge the liability. It has not been done. According to Clause 2, the borrower in such eventuality was supposed to pay the value in advance of such goods in their account or substitute the same by other approved goods at least of equal value for the goods to be sold or disposed of. There is not an iota of evidence that the defendants even offered to the bank the value of the goods lying in the factory or equivalent thereto.
14. The learned Counsel for the respondent submitted that the citation which has been relied upon the counsel for the appellants, i.e., State bank of India's case (supra) was considered by a Division Bench and was overruled. I have gone through the D.B. Authority also. There is no denying the fact that it was observed by the Hon'ble D.B. that the judgment of the Single Judge stands over-ruled but in this case the Hon'ble D.B. was dealing with a case of surety and it was held that a surety in the case of hypothecation is not entitled to invoke the provisions of Section 141 of the Contract Act for his benefit, meaning thereby that the benefit of Section 141 of course can be availed by the original mortgagor. I am dealing with a case of a mortgagor and the point for determination would be whether at any material point, the possession of the hypothecated goods was ever delivered to the Bank and the answer of this Court is in the negative.
15. Counsel for the appellants, then relied upon a judgments of the Hon'ble Supreme Court in The State Bank of Saurashtra v. Chitranjan Rangnath and another (AIR 1980 SC 1528), and submitted that when a cash credit facility has been advanced by the Bank on pledged goods, and those goods had been lost due to the banker's negligence, in such a situation, the surety stands discharged to the extent of the security lost.
16. There is a fallacy in the argument of the counsel for the appellants because this judgment deals with a case of pledge and also that of a case of guarantor. The basic distinction between pledge and hypothecation is that in the case of pledge, the actual control of the goods remains with the bankers whereas in the case of hypothecation, the actual control remains with the loanee and the Bank has a floating charge over such goods. When the custody of the goods has never gone to the Bank, how it can be said that the Bank should either discharge the duties of a bailee or adopt a reasonable care for the protection of the goods.
17. The counsel for the appellants wanted to make a capital out of the observations made by the first appellate Court when it remarked that the Bank had not acted quickly to safeguard the interest of the plaintiff bank by taking into possession and selling the material found lying at the spot and that the bank officials simply contended (contented ?) themselves by filing the civil suit. Be that as it may, the Bank did not take control of those goods which they had the right to do so under the agreement. Still, the point for determination would be whether the debtor was preclude from making a request to the Bank of allow him to sell the goods after complying the other provisions of the agreement ? The answer is in the negative. The debtor could make a request to the Bank. The Bank could consider this request and permit the defendants to sell the hypothecated goods so that the defendants may be able to deposit the sale proceeds of the same. There is no such request. It was the legal duty of the defendants to take care of the goods and if the Bank had not taken the initiative to sell the goods, the defendants could have sold those goods and discharged their obligation.
18. Counsel for the appellants also relied upon Ganga Prasad Misra v. Central Bank of India and Brothers (1990 ISJ (Banking) 653), Central Bank of India v. Madan Lal and Brothers (1996 ISJ (Banking) 163), Shiv Machine v. Canara Bank (1996 ISJ (Banking 409), Central Bank of India v. Abdul Mazid (1996 ISJ (Banking 661), and M. R. Chakrapani Iyengar v. Canara Bank (1999 ISJ (Banking) 520), and his blanket contention was that when the Bank had not taken any steps to seize the hypothecated goods or when the Bank is not taking any steps to reduce the loss of the debtor, the debtor stands exonerated to the extent of that loss.
19. I am not convinced with this submission also as in the opinion of this Court, the learned Counsel for the appellants has not rightly appreciated the basic distinction between hypothecation and pledge. In M. R. Chakrapani Iyengar's case (supra), the judgment which has been relied upon by the counsel for the appellants, a contention was raised on behalf of the guarantor that the Bank did not take prompt measures to seize the hypothecated goods and hi liability stands discharged. This contention was repelled and it was held that hpothecated goods remain in the possession of the principal borrower therefore, it is not correct to say that the goods are in constructive possession of Bank and it has effective control over them. By hypothecation only an equitable charge is created and nothing more. In the absence of any evidence showing any act or omission on the part of the bank providing negligence and resultant loss, it was held that the creditor is not guilty of any lapse. In fact, in the present case, the defendants are to be blamed themselves. They never took reasonable steps for the disposal of the hypothecated goods for the apparent reasons that they knew that the goods lying in the premises of the factory have diminished so much in value that the sale proceeds of those goods could never meet the demand of the Bank. That was the reason they have gone for this defence. It is still open to the debtor to sell those hypothecated goods according to rules and law and they can pay the sale proceeds to the bank but it cannot be held in the present case that the hypothecatee, i.e., the bank, had committed such negligence or had not adopted due care as a result of which any loss has been caused to the defendants.
20. At the outset of this judgment, I have posed a question about the duty of a hypothecatee. The duty of a hypothecatee is not like a pledgee because a hypothecatee never gets the actual physical possession like that of a pledgee. The duties of a bailee are supposed to be performed by a pledgee but not by a hypothecatee who has only a floating charge over the hypothecated goods.
21. I have examined this appeal after going through the judgments of the Court below and I am of the considered opinion that this appeal is totally devoid of any merit. Affirming the judgment and decree of the first appellate Court, the present appeal is dismissed with no order as to costs.
22. Appeal dismissed.