Karnataka High Court
Canara Bank vs M/S Muraj Enterprises on 30 August, 2018
Bench: Chief Justice, Krishna S Dixit
W.P.No.3045/2006
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 30TH DAY OF AUGUST, 2018
PRESENT
HON'BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE
AND
HON'BLE MR.JUSTICE KRISHNA S. DIXIT
WRIT PETITION NO. 3045/2006 (GM-DRT)
BETWEEN:
1. CANARA BANK
A BODY CORPORATE CONSTITUTED
UNDER THE BANKING COMPANIES
(ACQUISITIONN AND TRANSER OF
UNDERTAKINGS)ACT, 1970
HAVING ITS HEAD OFFICE AT J.C.ROAD,
BENGALURU CITY, AND ONE OF ITS
BRANCH OFFICE AT BENSON TOWN,
BENGALURU 560 046, REP.BY ITS
MANAGER MR .VIJAY KUMAR B PATIL
2. CORPORATION BANK
A BODY CORPORATE CONSTITUTED
UNDER THE BANKING COMPANIES
(ACQUISITIONN AND TRANSER OF
UNDERTAKINGS)ACT, 1970
HAVING ITS HEAD OFFICER AT MANGALORE,
D.K. DISTRICT, AND ONE OF ITS BRANCH
OFFICE AT K.KAMARAJ ROAD,
BENGALURU 46, REP. BY ITS MANAGER,
MR NARASIMHAMURTHY.
... PETITIONERS
(BY SRI. D L N RAO SENIOR COUNSEL FOR
SRI. R V NAIK, ADVOCATES)
W.P.No.3045/2006
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AND:
1. M/S MURAJ ENTERPRISES
A PARTNERSHIP FIRM,
NO.8, CARLESTON ROAD,
BENGALURU 5.
REPRESENTED BY PARTNER
JERARD DEVADAS
2. MR JERARD DEVADAS
S/O MR R DEVADAS,
R/AT NO.8, CARLESTON ROAD,
BENGALURU 56 0005.
3. MR JUDE DEVADAS
S/O MR R DEVADAS,
R/AT NO.8, CARLESTON ROAD,
BENGALURU 56 0005.
4. MRS M DOROTHY
W/O MR R DEVADAS,
SINCE DECEASED BY LRS
4A) MRS. ANUSUYA DEVDAS ALIAS JOHN
AGED ABOUT 49 YEARS,
W/O JOHN BOSCO
4B) MRS MEERA KUMAR
AGED ABOUT 48 YEARS,
W/O S.KUMAR
4C) MRS URMILA MICHAEL
AGED ABOUT 41 YEARS,
W/O MICHAEL BENJAMIN
ALL R/AT NO.213, 7TH A MAIN,
HRBR, I BLOCK,
KALYAN NAGAR,
BENGALURU 560 043
(AMENDED AS PER ORDER
DATED 06.04.2011)
W.P.No.3045/2006
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5. DEV FISHERIES PVT LTD
REGD. OFFICE AT NO. 108,
CARLESTON ROAD,
BENGALURU 56 0005,
BY OFFICIAL LIQUIDATOR,
HIGH COURT OF KARNATAKA,
KENDRIYA SADAN,
KORAMANGALA
BENGALURU .
... RESPONDENTS
(BY SRI. SRIVATSA SENIOR COUNSEL ALONG WITH
SMT. PRIYANKA RAO, ADVOCATE FOR R1-4)
---
THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF
THE CONSTITUTION OF INDIA, PRAYING TO QUASH AND SET
ASIDE THE SAME AND FURTHER RESTORE THE JUDGMENT
AND DECREE DATED 18.8.2003 IN OA.NO.609/95 BY THE
DEBTS RECOVERY TRIBUNAL AT BENGALURU .
THIS WRIT PETITION COMING ON FOR
PRONOUNCEMENT THIS DAY, KRISHNA S.DIXIT.J., MADE THE
FOLLOWING:
ORDER
This writ petition by the creditor Banks is directed against the judgment and order dated 13.01.2006 made by the Debt Recovery Appellate Tribunal at Chennai (hereafter W.P.No.3045/2006 -4- referred to as 'DRAT') in respondent-debtors' appeal in R.A.No.27/2004 at Annexure-H to the writ petition, whereby the judgment and order dated 18.08.2003 made by the Debt Recovery Tribunal, Bengaluru (hereafter referred to as 'DRT') in writ petitioners' O.A.No.609/1995 are set aside.
2. The brief facts of the case are:
(a) The petitioners which are nationalised banks had advanced to the fifth respondent company credit facilities by way of term loan, working capital credit and discounting of bills for buying a deep sea fishing vessel from Japan. The first petitioner bank had advanced 75% of the said term loan and the second petitioner bank had advanced the remaining 25%. This loan transaction took place in the year 1984. The borrower company had agreed to hypothecate the vessel in favour of the petitioner banks.
b) The first respondent being the partnership firm and other respondent nos. 2 to 4 being its partners, had executed an equitable mortgage of immovable property belonging to the first respondent firm and further all these partners had also secured the repayment of the loan by way of personal W.P.No.3045/2006 -5- guarantee. Incidentally, these partners were also the Directors of borrower company. Accordingly, a Japanese ship was bought by the fifth respondent company and it sailed through the seas, although for a short period.
(c) The fifth respondent borrower company had become commercially insolvent resulting into petitioner banks filing Company Petition No.113/1989 which came to be allowed by this Court vide Order dated 08.07.1993, whereby the said company was directed to be wound up. The petitioner banks had filed a Civil Suit in O.S.No.1111/1991 against the surety-respondents in the City Civil Court at Bengaluru seeking a judgment and decree for a sum of Rs.42,50,000/- although the outstanding liability was to the tune of Rs.2,58,84,770/-.
(d) The aforesaid Civil Suit came to be transferred to the DRT at Bengaluru in view of the enactment of the Recovery of Dues of Banks and Financial Institutions Act,1993 and the same was numbered as O.A.No.609/1995.
This O.A. was resisted by respondents nos. 1 to 4 by filing W.P.No.3045/2006 -6- written statement. The DRT had framed as many as 13 issues, of which issue Nos.2 and 3 being relevant are reproduced below:
"(ii) Whether the guarantee executed by defendant No.1 stood discharged by virtue of certain acts of the applicants chiefly the wasting of the security in this case the fishing vessel by allowing its maintain the vessel in good working condition and whether the pendency of a suit by defendant No.8 on the ground of negligence against applicants has any impact on the above plea?
(iii) Whether the argument of the applicants that the Defendants and waived all its rights under the provisions of Section 133, 135, 136, 139 and 141 of the contract act is tenable?"
(e) Both the sides led evidence oral and documentary. The DRT vide its judgment and order dated 18.08.2003 allowed the claim by granting a decree for a sum of Rs.42,50,000/- with interest at the rate of 15% p.a. compounded half yearly from the date of suit till realization less Rs.12.50 lakhs with counter interest at the same rate W.P.No.3045/2006 -7- from the date of sale of fishing vessel till realization. The DRT also granted a decree for the sale of mortgaged properties.
(f) The judgment and order of the DRT were carried in appeal in R.A.No.27/2004 and that the same came to be allowed by the DRAT vide judgment and order dated 13.01.2006 which is the subject matter of challenge in this writ petition at Annexure-H. After notice the respondents have entered appearance through their counsel.
3. Learned Senior Counsel Sri D.L.N.Rao, appearing with the advocate on record for the petitioners pointed out that the reasoning part of the DRAT for setting aside the judgment and order of the DRT is found at para 17 of its judgment which reads as under:
"17. In the case on hand, the Vessel in question, by orders of the Court was handed over to the Official Liquidator. From then onwards, the Appellants did not exercise any possession of the Vessel and even when the Receiver was discharged, the parties were directed to take possession and the Respondent Banks have not come forward to do so. It is a fact that the Appellants were not in a position to invest any money on the Ships, as they were all brought from pound to penny and the Respondent Banks could have taken care of the Ship and could have W.P.No.3045/2006 -8- sold in the year 1991 itself, which they have not done. The delay in selling the ship is made out and it diminished the value of the ship, which brought enormous loss to the Appellants, and the negligence on the part of the Respondent Banks in not having taken possession of the ship, and not having arranged for the sale had definitely negate the claim of the Respondents as such, the observation of the DRT otherwise, cannot be sustained. It is also seen the Port authorities have sold the ship for a price of Rs.25 lakhs and even in and out of the said amount, they have set off Rs.12.5 lakhs towards their dues and the Bank has not chosen to receive even the balance amount in the year 1993 itself, and the amount was remitted to the Bank only in the year 1998, after a period of 5 years, which would clearly indicate further negligence on the part of the Respondent Banks and, therefore, the right against the Appellants is impaired and they are not liable as provided under Section 139 of the Contract Act, 1872".
4. Learned counsel Sri Rao submitted that the repayment of the loan in question was secured by the Contract of Guarantee dated 31.08.1984 which was a part of the record in the DRT proceedings and that the guarantors had agreed/undertaken by way of stipulated condition that they "shall not be entitled to any of the rights conferred as surety by Sections 133, 134, 135, 139 and 141 or any other relevant provision of the Contract Act". That being W.P.No.3045/2006 -9- so, he submitted, it was not open to the DRAT to discharge the sureties on the alleged ground that the petitioner banks were negligent in not taking possession of the vessel and in not having arranged for the sale of the vessel and further that the petitioner banks have not chosen to receive even the sale proceeds of the vessel till 1998.
5. Learned counsel Mr. Rao submitted that the rights of the sureties arising under the provisions of Sections 133, 134, 135, 139 and 141 or any other relevant provision of the Contract Act can be contracted out by an arrangement between the parties and banks upon the judgment of the Apex Court in the case of HOUSING DEVELOPMENT AND FINANCE CORPORATION vs. GAUTAM KUMAR NAG AND OTHERS [2012 (5) SCC 604], in support of his proposition. Paras 12 and 13 of the said judgment read as under:
"12. The two respondents executed identical deeds of guarantee of which Clauses (2) and (3) read as follows:
"(2) I hereby accord my consent to the terms of the said loan agreement and/or any instrument or instruments that may hereafter be W.P.No.3045/2006
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executed by the borrower(s) in your favour as aforesaid, being by mutual consent between you and him/them in any respect varied or modified without requiring my consent or approval thereto and I agree that my liability under this guarantee shall in no manner be affected by such variations and modifications and I expressly give up all my rights as surety under the provisions of the Contract Act, 1872 in that behalf.
(3).......
13. In light of the expressed stipulations, in the guarantee, any reliance on Section 139 of the Contract Act is evidently futile and of no avail. In our view, therefore, the impugned judgment of the High Court is unsustainable and is fit to be set aside. We, accordingly, set aside the impugned judgment of the High Court and restore the order and decree passed by the trial Court."
In this decision, the Apex Court has held that it is open to the parties to stipulate in the contract that the rights guaranteed to the sureties under the provisions of the Contract Act, 1872 can be varied or waived. The counsel submitted that this aspect of the matter has not been adverted to by the DRAT at all and thus, the impugned judgment and order are fraught with legal lacunae apparent on the fact of the record warranting interference of this court in its writ jurisdiction.
W.P.No.3045/2006
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6. Mr. D.L.N.Rao, the learned Senior Counsel further submitted that there is absolutely no justification whatsoever for the DRAT to record a finding that there was negligence attributable to the petitioner banks that eventually resulted into impairment of the rights of the sureties conferred by Section 139 of the Contract Act, 1872. He would argue the circumstances stated by the DRAT ie., the petitioner banks did not take possession of the vessel in question, the petitioner banks brooked delay in selling the vessel which caused diminution of its value resulting into enormous loss to the sureties and the banks had not chosen to receive sale proceeds of the vessel, do not per se constitute impairment of rights of the sureties, even if those circumstances are assumed to be existing. In support of the submission, he has relied upon a judgment of a learned single Judge of this Court in the case of Ibrahim Abdul Latif Shaik Vs. Corporation bank, Karwar and Others (AIR 2003 KARNATAKA 98), para 8 of which reads as under:
"No doubt, under the Contract Act, it is within the domain of the parties to stipulate the logistic details W.P.No.3045/2006
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of the performance and execution of the contract agreed upon. In the normal course, it is in the discretion of the creditor to choose the time and situation to proceed against the securities. However, by a contract, it is permissible for the parties to stipulate the contingencies and situation as to when the creditor shall proceed against the securities and if there is any such clear stipulation with regard to the contingencies under which the creditor has to proceed and if there is a failure, it would necessarily be assumed to result in impinging the rights of surety. In the present case, it is the contention of the appellant, that despite the insistence and notice under Ex.D.1, the plaintiff bank did not proceed against the security. As a result value diminished otherwise the loan would have been fully satisfied with the securities available. In the light of the ratio laid down by the Division Bench of this court referred to above, it is not within the right of the appellant Guarantor to insist to proceed against the security at the time pointed out by him in the absence of specific contract to that effect. There is nothing to show that under the contract, the plaintiff bank had conceded to act against the security at the insistence of the guarantor. In the absence of such contractual obligation, it is impermissible for the appellant to contend that there is failure on the part of the bank in not proceeding against the security at the appropriate time pointed by him."
7. Learned Sr. Counsel Mr. Srivatsa appearing for the respondents, per contra, submitted that a term stipulated in the loan agreement / contract of surety whereby sureties' rights arising under Sections 139 and 141 have been waived W.P.No.3045/2006
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is an unconscionable, unfair and unreasonable, which the court should not take cognizance of or enforce. He further submitted that the contract of guarantee is in the nature of printed terms contract/standard form contract which the respondents have signed with their due attention having not been drawn thereto and therefore, the same cannot be treated as the bargain between the parties having justiciability.
8. In support of his above submission, the learned Senior Counsel pressed into service the decision of the Apex Court in the case of Central Inland Water Transport Corporation Limited Vs. Brojo Nath Ganguly (1986) 3 SCC
156. The relevant portion in paragraph No.18 of the said judgment reads as under:
"....This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list all bargains of this type. No court W.P.No.3045/2006
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can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be.....
9. Learned Senior Counsel Mr. Srivatsa submitted that the circumstances mentioned by the DRAT at Para 17 of its impugned judgment and order too constitute a sufficient impairment of rights of the respondent sureties and therefore, the provisions of Section 139 and 141 readily become invokable and consequently, the said sureties are discharged W.P.No.3045/2006
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from their liability under the loan agreement in question which embodies the contract of guarantee.
10. We have extensively heard the Senior Counsel appearing for parties. We have also adverted to the terms of the loan agreement and perused the judgments cited at the Bar.
11. The provisions of Sections 133, 134, 135, 139 and 141 of the Indian Contract Act, 1872 give discharge to the sureties in certain circumstances that impair their rights.
The Apex Court in its judgment in the case of HOUSING DEVELOPMENT AND FINANCE CORPORATION vs. GAUTAM KUMAR NAG AND OTHERS [2012 (5) SCC 604], has held that these rights can be contracted away or waived by the parties to the contract. Mr. D.L.N.Rao is justified in his submission that there is a term in the loan agreement/contract of guarantee which reads as under:
"... the Guarantor agrees that as between the Bank and the Guarantor, the Guarantor is the principal debtor, jointly with the Borrower and W.P.No.3045/2006
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accordingly the Gurarantor shall not be entitled to any of the rights conferred as surety by section 133, 134, 135, 139 and 14i or any other relevant provision of the Contract Act.
Thus, assuming that the circumstances mentioned by the DRAT at para 17 of its impugned judgment are true, still the respondent sureties having waived their rights under Sections 133, 134, 135, 139 and 141 of the Indian Contract Act or any other law could not have pleaded their discharge altogether from suretiship/guarantee.
12. The contention of Mr. Srivatsa, learned Senior Counsel that the said term in the loan agreement/contract of guarantee being unconscionable, unfair and unreasonable cannot be taken cognizance of or enforced by court of law, in the light of the ratio of the decision of the Apex Court in the case of Central Inland Water Transport Corporation Limited Vs. Brojo Nath Ganguly (1986) 3 SCC 156, does not impress us in as much as there appears to be no pleading or proof as to unequal bargaining power of the contracting parties. Further, in the very same judgment and in the very same W.P.No.3045/2006
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paragraph, the Apex Court has held that the principle of unconscionable bargain does not avail where the contracting parties are businessmen and the contract involves a commercial transaction. The Hon'ble Supreme Court in Para 89 of its aforementioned judgment has observed: " this principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power.... This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction..."
13. There is some force in the submission of Mr.D.L.N.Rao, learned Senior Counsel that the circumstances mentioned by the DRAT at Para 17 of its impugned judgment do not constitute impairment of rights of the sureties, even if it is assumed that there is no waiver clause in the loan agreement or the contract of guarantee. Therefore, the ground of unconscionability contended by Mr. Srivatsa, W.P.No.3045/2006
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learned Senior Counsel on behalf of the respondent sureties appears to be untenable. However, it is again a matter to be looked into by the DRAT.
14. A perusal of the provisions of Sections 139 and 141 of the Indian Contract Act shows that the surety is discharged only when the creditor does any act which is inconsistent with the right of the surety or the creditor omits to do any act which under law or the contract of guarantee he is obliged to do. In the totality of the circumstances of the case, it is too much to expect the petitioner banks to have taken the possession of the vessel in question for the purpose of preserving its value when such preservation would have cost them very high and that the game would not have been worth the candle. The banks appear to have done what a prudent person would have done in the given circumstances. However, this again is a matter to be considered by the DRAT itself after hearing the parties.
15. The contention of Mr. D.L.N.Rao that the alleged negligence on the part of petitioner banks qua the vessel in W.P.No.3045/2006
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any circumstance would not have discharged the sureties beyond the worth of the loss the sureties are put to by such negligence also appears to have some force. In other words, the equitable mortgage furnished by the guarantors by way of security for repayment of the loan would still be available to the petitioner banks for the realization of their debts, is his contention. It is a settled legal principle that Section 141 of the Contract Act is invokable for the discharge of the surety only to the extent of the value of the security which the creditor loses or parts with the same without the consent of the surety. Such a question may not arise in the case of hypothecation of goods i.e., the vessel for the reason that when the goods are not in the possession of the hypothecatee, there is no question of his losing or parting with the same. Here too, we are not expressing final conclusion since the matter is being remanded to the DRAT for fresh consideration.
16. Viewed from any angle, the DRAT has not approached the matter in its right perspective. It has not W.P.No.3045/2006
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adverted to and dealt with various issues which are directly involved and which have been addressed before us. These contentions are essentially within the realm of facts which the DRAT ought to consider as a court of first appeal. This court exercising its supervisory jurisdiction vested under Article 227 of the Constitution may not pronounce its opinion on the merits of the aforesaid contentions.
17. Wherefore, this writ petition is allowed in part; A Writ of Certiorari issues quashing the impugned judgment and order dated 13.01.2006 at Annexure-H to the writ petition, made by the Debt Recovery Appellate Tribunal, at Chennai in R.A.No.27/2004;
The matter is remanded to the DRAT, at Chennai for consideration afresh, all the contentions of the parties having been kept open. The DRAT shall hear and dispose of the appeal expeditiously, preferably within three months of the appearance of parties.
W.P.No.3045/2006
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18. The parties through their respective counsel shall stand at notice to appear before the DRAT, at Chennai on 19.09.2018.
No costs.
Sd/-
CHIEF JUSTICE Sd/-
JUDGE Snb/bsv