STATE BANK OF INDIA vs M/s TARGET OVERSEAS EXPORTS PVT. LTD. on 25 July 2017

FINAL ORDER

This Original Application has been filed under Section 19(1) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 for recovery of a sum of Rs.1,45,49,882/- under the packing credit (cash credit) account with interest @15% per annum with quarterly rests from the defendants jointly and severally and by sale of ‘A’ and ‘B’ schedule properties; and the sum of Rs.1,52,117/- under the current account (overdraft) with interest @18.25% per annum with quarterly rests from the defendants jointly and severally and by sale of ‘A’ and ‘B’ schedule properties. BRIEF FACTS OF THE CASE

1. The applicant is the State Bank of Travancore, a body corporate constituted under the State Bank of India (Subsidiary Banks) Act 38 of 1959 and the OA is filed on behalf of the applicant bank by the Branch Manager of its Kaduthuruthy Branch. The application is continued by State Bank of India, a body corporate constituted under the State Bank of India Act, 1955 which, in terms of Acquisition of State Bank of Travancore Order, 2017 published in the Gazette of India dated 22.02.2017, is entitled to continue and enforce the claim from 01.04.2017.

2. The 1st defendant, a company incorporated under the Companies Act, approached the applicant bank for various credit facilities for its business. Accordingly, the applicant bank sanctioned a packing credit (cash credit) limit of Rs.100 lakhs towards working capital and a FDBP/FBEP limit of Rs.100 lakhs on 29.12.1999 as per sanction letter dated 29.12.1999 which was availed by the 1st defendant on and from 31.12.1999. The aforesaid credit facilities were granted in continuation/enhancement of the various credit facilities enjoyed by the 1st defendant since June, 1998. There is no dues under the FDBP/FBEP limit availed by the 1st defendant.

3. As security for repayment of the balance in the packing credit (cash credit limit) of Rs.100 lakhs, the 1st defendant executed demand promissory notice dated 31.12.1999 in favour of defendants 2 to 5, who in turn endorsed the same in favour of the applicant bank. On 31.12.1999, the defendants executed letter of continuity and the 1st defendant executed agreement for cash credit (hypothecation of goods), agreement for cash credit (hypothecation of debts and assets) and letter of hypothecation in favour of the applicant bank. The 1st defendant also executed trust letter and shipping lien letter on 31.12.1999. In consideration of the packing credit (cash credit) limit of Rs.100 lakhs granted to the 1st defendant, defendants 2 to 5 executed agreement on 31.12.1999 guaranteeing due observance of the terms and conditions of the aforesaid agreements.

4. As collateral security for repayment of the amount, on 29.12.1999 the 5th defendant created equitable mortgage of his properties described in ‘A’ and ‘B’ schedules to the OA by deposit of title deeds with the applicant bank. The 5th defendant also executed memorandum of deposit of title deeds on 31.12.1999 evidencing the intention and deposit of title deeds. The 4th defendant as Director of the 1st defendant confirmed the balance in the respective accounts as on 31.03.2001 and executed balance confirmation letters in favour of the applicant bank on 03.08.2001.

5. Despite repeated requests and demands made to the defendants to pay the amounts outstanding in the loan account, they did not evoke any response. Hence the applicant caused to issue lawyer notice dated 12.04.2002 calling upon the defendants to pay the amounts due to the bank. The defendants 4 and 5 accepted the notice and the notices sent to defendants 1 to 3 were caused to be returned as unclaimed. The 1st defendant caused to issue a reply through its lawyer enclosing copy of a letter dated 28.03.2002 sent by the 1st defendant to the applicant bank raising untenable claims/contentions and the applicant on 12.04.2002 issued a reply to the 1st defendant’s letter dated 28.03.2002. Even after the reply, the defendants did not cared to repay the amount. Interest/compound interest has been charged at the rates applicable to such loans from time to time and capitalized at quarterly rests as permitted by and do not run counter to the directives of RBI.

6. As per the account maintained by the applicant bank, an amount of Rs.1,45,49,882/- is due under the packing credit (cash credit) account as on 27.06.2002. As per law/practice/procedure of the bank, the cost and interest accrued under various limits availed by the 1st defendant are debited in the current account of the borrower and due to lack of sufficient credit balance in the current account of the 1st defendant, the same is overdrawn and amounts are due to the applicant bank in the current account (overdraft account) also. As per the account kept by the applicant bank, an amount of Rs.1,52,117/- is due under the current account (overdraft account) of the 1st defendant and the defendants are jointly and severally liable to pay the said amount @18.25% per annum with quarterly rests.

7. The defendants and filed written statement contending inter alia that the OA is not maintainable in law. It is true that in connection with the packing credit limit, the 2nd defendant had subscribed his signature to the documents, but document No.2 is seen to be a demand promissory notice allegedly executed by the 1st defendant and that the 1st defendant has in fact not executed the said demand promissory notice. In this context, the fallacy of such contention can be exposed by the mere fact that such demand promissory notice may tantamount to a ludicrous document. The documents which purport to create personal liability on the part of the 2nd defendant are false documents and the 2nd defendant is not a party to the said document. The document Nos.3 and 4 are pre- printed and subsequently filled up and majority of the signatures contained in the documents do not belong to the 2nd defendant. The applicant had released valuable property which was offered by the defendants in the first instance. Even in the application, fraud has been played by putting a forged signature of the 2nd defendant.

8. It is the contention of the 2nd defendant that he has not availed or appropriated even a single paise and the entire transaction was done only by the person who has taken over the management of the company. Viewed from any angle, these defendants are not at all responsible for the amount due under the transaction. A perusal of the whole case will reveal that this transaction at least immediately after sanction was accorded had been actively manipulated by officers of the bank along with certain interested persons. In any view of the matter, these defendants are not at all responsible for the amounts due under the transaction. Since fraud vitiates the transaction, the transaction in question cannot be enforced in a court of law. Hence the present application is liable to be dismissed with costs.

9. The respondents 3 to 5 filed reply statement contending inter alia that the facilities extended to the 1st defendant were in the nature of packing credit loan of Rs.100 lakhs and bill discounting facility to the tune of Rs.100 lakhs. Having not complied with the bank’s obligation in extending the facilities already sanctioned, the applicant bank is precluded from making allegations and claims that the 1st defendant company failed to comply with their export and repayment obligations. It is correct to state that there is no outstanding due under the bill discounting facility, but the same is due to the fact that the applicant bank did not allow the facility to be operated and enjoyed by the 1st defendant company. It is contended that the reason for the accumulation in PCL overdrawing was directly linked to the applicant bank’s failure in their commitments and hence the applicant bank is estopped from making any claim for recovery of any amount either in PCL account or from the current account. On account of the non-permission to operate the bill discounting facility, the outstanding in the packing credit account grew.

10. It is contended by defendants 3 to 5 that execution of the documents averred in paragraphs 3 to 7 of the OA is to be proved by the applicant bank itself. The 4th defendant had not executed balance confirmation letters on 03.08.2001, but the said documents which were kept blank were got signed by him by the bank at the time of availing the loan facilities and hence it is incorrect to state that the 4th defendant executed the balance confirmation letter on 03.08.2001. It is incorrect to say that the 1st defendant company made vague and untenable contentions. As a matter of fact, the bank was all along asking for more collateral securities to allow the 1st defendant to avail bill discounting facility when adequate security was already given while the facilities were sanctioned. Neither these defendants nor the other defendants are liable to pay any amount to the applicant bank on account of their failure to comply with their banking obligations. The applicant is not entitled for capitalization of penal interest and further quarterly compounding of interest as claimed by them. The interest charged is highly excessive and is made contrary to the agreement and guidelines issued by RBI. The property of the 5th defendant be released and may not be proceeded against in the interest of justice and equity.

11. The evidence on the side of the applicant bank consists of the proof affidavit and additional proof affidavits of AWs 1 to 3 and Exts.A1 to A26(a). The evidence on the side of the defendants consists of the counter proof affidavit of the 3rd defendant, DW1 and Exts.B3(a) to B3(e).

12. Heard arguments that came to be advanced by either side and perused the records of the case. The following points arise for my consideration:

(i) Whether the applicant is entitled to get the reliefs prayed for in the OA?

(ii) What order?

Findings:

Point No.1: In affirmative Point No.2: As per order

Reasons:

13. The defendants 1 and 2 in their written statement admitted that the 1st defendant has approached the applicant bank seeking a packing credit limit and that in connection with the said packing credit facility, they had subscribed their signature in the documents. However, they denied the execution of Ext.A2 demand promissory notice dated 31.12.1999 by the 1st defendant. On perusal of Ext.A2 demand promissory notice, it could be seen that 1st defendant company had executed the said document in favour of defendants 2 to 5 who in turn endorsed the same in favour of the applicant bank and that all the defendants including the 1st defendant had subscribed their signatures in Ext.A1 demand promissory notice for Rs.100 lakhs. The aforesaid contention of defendants 1 and 2 is answered in negative.

14. As far as the contention of the 2nd defendant as to the falsity of document which purports to create personal liability on the

2nd defendant is concerned, documents available on record would go to show that the 2nd defendant along with defendants 3 to 5 had executed Ext.A9 guarantee agreement on 31.12.1999 guaranteeing to pay to the applicant bank on demand all the principal, interest and all costs, charges and expenses due and which may at any time become due from the 1st defendant/borrower and they subscribed their signatures in the said document by accepting the terms and conditions therein i.e., all the 19 clauses in Ext.A9 guarantee agreement. Now the defendants 1 and 2 are taking a dishonest stand to evade their liability to make payment to the applicant bank. The aforesaid contention of the 2nd defendant is also answered against him.

15. It is the further contention of the 2nd defendant that Ext.A3 letter of continuity and Ext.A4 cash credit (hypothecation of goods) are pre-printed and subsequently filled up and majority of the signatures contained in the documents do not belong to him. It is submitted by defendants 1 and 2 that since various signatures in the documents itself vary substantially, they are ready and willing to deposit necessary fees for sending their signatures to Forensic Science Laboratory for expert opinion. Except saying so, defendants 1 and 2 have not taken any steps so far to send their signatures for expert opinion and the mere allegation of defendants 1 and 2 does not merit any consideration of the Tribunal. A perusal of the aforesaid documents would reveal that Ext.A3 letter of continuity was executed by defendants 1 to 5 agreeing and undertaking that Ext.A2 demand promissory notice for Rs.100 lakhs is to stand and be regarded as a continuing security and to be enforceable for all monies which may at any time become due by the 1st defendant or defendants 2 to 5 to the applicant bank. Ext.A4 agreement for cash credit (hypothecation of goods) was executed by the 1st defendant through its Managing Director (2nd defendant) and Directors (defendants 3 and 4). While these defendants are admitting the basic case of the applicant as to the availing of a packing credit (cash credit) limit of Rs.100 lakhs by the 1st defendant, it can be held that their present attempt is only to evade their liability by taking inconsistent and evasive stand and that falsity of their case can be seen from the documents on record.

16. Insofar as the contention of defendants 1 and 2 with regard to release of security is concerned, the applicant bank has come out with an additional proof affidavit of its Chief Manager stating that release of property belonging to one Remadevi from the mortgage relates to a transaction prior to the one forming subject matter of this OA. It is also submitted that the said release had been made on the basis of resolution of the board of directors of the 1st defendant company and upon the consent of the sureties and that there was no manipulation of any sort on the part of the officials of the applicant bank either in the matter of execution of security documents or in relation to the loan transaction. Pursuant to the aforesaid additional proof affidavit dated 21.07.2014 filed by the applicant bank, the defendants have not chosen to contradict the submissions of the applicant bank by coming out with any documentary evidence to substantiate that release of security was against the decision of the board of directors of the 1st defendant company or other parties to the loan transaction. Therefore, the aforesaid contention of defendants 1 and 2 also cannot be appreciated.

17. Yet another contention put forth by defendants 1 and 2 is that since fraud vitiates the entire transaction, the transaction in question cannot be enforced in a court of law. Except making vague allegations as against the applicant bank, no material of any kind has been adduced by defendants 1 and 2 to show that the applicant has not come up with clean hands nor any particulars have been furnished showing the fraud or falsehood perpetrated by the bank. In the light of the above, it can be held that none of the contentions raised by defendants 1 and 2 merits any consideration of the Tribunal.

18. The defendants 3 to 5 are admitting the credit facilities extended to the 1st defendant company including the packing credit loan of Rs.100 lakhs by the applicant bank. The main grievance of defendants 3 to 5 is that the applicant bank did not allow any discounting of export bills by the 1st defendant company in spite of their repeated requests and having not complied with its obligation in extending the facilities already sanctioned, the applicant is precluded from making allegations and claims that the 1st defendant company failed to comply with their export and repayment obligations. Per contra, it is the case of the applicant bank that the applicant has not committed breach of any obligations on its part and that no bills except one, as evidenced by entry dated 04.02.2000 in Ext.A25 statement of account, against confirmed order acceptable to the bank had been presented to the applicant for discounting. It is submitted that only genuine transactions under the packing credit limit will enable reinstatement of the drawing power in the packing credit limit to that extent. It is also submitted by the applicant that the export packing credit limit had been fully drawn disabling the applicant from further negotiating the bills thereunder in the absence of further security. As the security thereafter offered was found to be not acceptable by the bank, the defendants cannot have any grievance in the bank having not permitted further transaction.

19. Concededly, there is no amount outstanding under the bill discounting facility. While the defendants 3 to 5 are admitting the availing of the packing credit of limit of Rs.100 lakhs by the 1st defendant company, they being the guarantors to the said loan transaction are legally bound to meet their repayment obligations and they cannot evade their liability by alleging that the applicant bank has violated their commitments in discounting of bills. On a conspectus of the materials available on record, the Tribunal finds no reason to hold that the applicant bank had not complied with its obligations in extending the facilities granted by them and that they are entitled to recover the outstanding amount due under the packing credit limit as well as the current account as claimed in Exts.A25 and Ext.A26 statements of accounts.

20. It is the contention of the 4th defendant that he had not executed Exts.A14 and A15 balance confirmation letters on 03.08.2001, but the said documents which were kept blank were got signed by him by the bank at the time of availing the loan facilities and hence it is incorrect to state that the 4th defendant executed the balance confirmation letter on 03.08.2001. It is pertinent to mention here that no prudent man will sign and issue blank papers to anyone. The 4th defendant’s case regarding non-execution of Exts.A14 and A15 balance confirmation letters on 03.08.2001 is not supported by any material evidence. On perusal of Exts.A14 and A15, it could be seen that the 4th defendant has executed the said documents on 03.08.2001 by putting his signatures on the balance confirmation letters confirming the balance due under the packing credit account and current account as on 31.03.2001 and that falsity of the 4th defendant’s case is seen from the materials available on record.

21. It is the further contention of defendants 3 to 5 that interest charged is highly excessive and is made contrary to the agreement and guidelines issued by RBI and that the applicant is not entitled for capitalization of penal interest and further quarterly compounding of interest as claimed by them. According to the applicant bank, interest has been charged in the loan account in accordance with the directives of RBI and in terms of the loan agreement. It is also submitted that penal interest has not been charged in the loan account.

22. Records indicate that the rate of interest prevalent at the time of availing the packing credit facility was 10% per annum with quarterly rests. It could be seen from clause 2 of Ext.A5 agreement executed by the defendants that the interest shall be calculated at 2% below SBTPLR subject to a minimum of 10% raising and falling therewith on the daily balance of such account or accounts and that the bank shall be entitled to charge at its own discretion such enhanced rates of interest on such account or accounts either on the entire outstanding or on a portion thereof as it may fix for any irregularity continued for such time as the bank deem it necessary regard being had to nature of the irregularity and the charging of such enhanced rate of interest shall be without prejudice to the bank’s other rights and remedies. Without making vague allegations as to the charging of interest as highly excessive and is made contrary to the agreement and guidelines issued by RBI, the defendants could not adduce any evidence to substantiate their case and therefore, mere allegation of the defendants cannot be appreciated even for a moment. Evidently, penal interest has not been charged as is evident in Exts.A25 and 25 statements of accounts relating to the packing credit (cash credit) limit and current account (overdraft account) respectively.

23. In the light of the above, the Tribunal could come to a conclusion that all the loan documents are valid and duly executed by the defendants and their defense that the signatures were obtained on blank documents is nothing but a feeble attempt to escape the liability. The factum of availing the loan coupled with the execution of documents and balance confirmation letters would go to show that the applicant bank has a valid cause of action against the defendants to institute this OA.

24. The Tribunal during the pendency of the OA had passed an order of attachment on 03.09.2014 against the property scheduled to IA No.3423/2013 and the said attachment has been made absolute on 15.07.2017. Therefore, the applicant bank is entitled to realise the

amount due under the loan accounts by sale of the attached property also.

25. Having regard to the amount advanced, the interest applied and the chronic default committed, I am of the view that the applicant bank is entitled to get interest pendente-lite and post- decree interest @15% per annum with quarterly rests on the packing credit (cash credit) account and @18.25% per annum with quarterly rests on the current account (overdraft).

ORDER

26. The OA is allowed with costs. The applicant bank is allowed to recover:

(i) the sum of Rs.1,45,49,882/- (Rupees one crore forty five lakhs forty nine thousand eight hundred and eighty two only) due under the packing credit (cash credit) account with further interest thereon @15% per annum with quarterly rests from 28.06.2002 till realization from the defendants jointly and severally and by sale of ‘A’ and ‘B’ schedule properties;

(ii) the sum of Rs.1,52,117/- (Rupees one lakh fifty two thousand one hundred and seventeen only) due under the current account (overdraft) with further interest thereon @18.25% per annum with quarterly rests from 28.06.2002 till realization from the defendants jointly and severally and by sale of ‘A’ and ‘B’ schedule properties; and

(iii) also its costs from the defendants jointly and severally and by sale of A’ and ‘B’ schedule properties.

(iv) If the sale proceeds of ‘A’ and ‘B’ schedule properties to the OA are not sufficient to wipe off the entire liability due to the applicant bank from the defendants, the applicant bank is entitled to proceed against the property attached under IA No.3423/2013 as well.

27. A’ and ‘B’ schedules shown in the OA and the attachment schedule shown in IA No.3423/2013 shall become part and parcel of the final order and Recovery Certificate of present OA

28. The applicant bank shall file memo of costs within seven days from the date of this final order.

29. Recovery Certificate shall be drawn up and issued to the Recovery Officer in terms of the final order.

30. The Registry is directed to communicate copy of the order to the parties concerned by speed post or registered post with AD. [Dictated to the PS, transcribed by her, corrected by me and then pronounced in the open court on this the 25th day of July, 2017]

(S.V.GOWRAMMA)

Presiding Officer

A P P E N D I X

Witness for Applicant: AW1: R.Vinod, Branch Manager of the applicant bank. AW2: Rajendra Kumar.K, Branch Manager of the applicant bank. AW3: M.S.Suresh Babu, Chief Manager of the applicant bank Witness for Defendant(s):

DW1: P.N.Ajayakumar (3rd defendant)

Exhibits on the part of the applicant

Ext.No. Date Particulars of documents

A1 29.12.1999 Sanction letter issued by the applicant bank which was countersigned by the defendants in token of having accepted the terms and conditions thereof. A2 31.12.1999 Demand promissory notice for Rs.1 crore executed by the 1st defendant in favour of defendants 2 to 5, who in turn endorsed the same in favour of the applicant bank. A3 31.12.1999 Guarantee agreement executed by defendants 2 to 5 in favour of the applicant bank. A4 31.12.1999 Agreement for cash credit (hypothecation of goods) executed by the 1st defendant in favour of the applicant bank. A5 31.12.1999 Agreement for cash credit (hypothecation of debts and assets) executed by the 1st defendant in favour of the applicant bank. A6

31.12.1999 Letter of hypothecation executed by the 1st defendant in favour of the applicant bank. A7

31.12.1999 Trust letter executed by the 1st defendant in favour of the applicant bank. A8

31.12.1999 Shipping lien executed by the 1st defendant in favour of the applicant bank. A9

31.12.1999 Guarantee agreement executed by defendants 2 to 5 in favour of the applicant bank. A10 17.03.1973 Settlement deed No.1290/1973 of Thiruchirapalli SRO. A11 22.07.1959 Settlement deed No.3119/1959 of Thiruchirapalli SRO.

A12 03.07.1940 Sale deed No.1829/1940 of Joint III SRO, Thiruchirapalli. A13 31.12.1999 Memorandum of deposit of title deed executed by the 5th defendant confirming the deposit of title deed with the applicant bank. A14 03.08.2001 Balance confirmation letter executed by the 4th defendant confirming the balance under the cash credit account. A15 03.08.2001 Balance confirmation letter executed by the 4th defendant confirming the balance under the current account. A16 12.04.2002 Copy of lawyer notice issued to the defendants by the applicant bank calling upon them to pay the amount due. A17 13.04.2002 Acknowledgment signed by the 4th defendant evidencing the receipt of Ext.A16 lawyer notice. A18 18.04.2002 Acknowledgment signed by the 5th defendant evidencing the receipt of Ext.A16 lawyer notice. A19 … Returned postal cover addressed to the 1st defendant. A20 … Returned postal cover addressed to the 2nd defendant. A21 … Returned postal cover addressed to the 3rd defendant. A22 25.04.2002 Reply to Ext.A16 lawyer notice sent by the 1st defendant. A23 28.03.2002 Copy of letter sent by the 1st defendant to the applicant. A24 12.04.2002 Reply to Ext.A23 letter executed by the applicant bank. A25 … Certified copy of the statement of account relating to the cash credit limit. A26 … Certified copy of the statement of account relating to the current account (overdraft). A26(a) … Certified copy of the statement of account relating to the current account.

Exhibits on the part of the 3rd defendant B3(a) 16.08.2000 Copy of letter sent by the 1st defendant to the applicant. B3(b) 24.08.2000 Letter sent by the applicant to the 1st defendant.

B3(c) 07.06.2001 Copy of letter sent to the applicant bank by the applicant's counsel. B3(d) 18.10.2001 Letter sent to the 1st defendant by the applicant bank. B3(e) 03.12.2001 Copy of reply notice sent by the counsel for defendants to the applicant.

(PRESIDING OFFICER)

IN THE DEBTS RECOVERY TRIBUNAL-2, KERALA AT ERNAKULAM

Dated this the 25th day of July, 2017

Present: S.V.Gowramma, B.A., LL.B Presiding Officer

T.A No.1410/2016 (O.A No.242/2002) Between State Bank of India

…Applicant And M/s.Target Overseas Exports Pvt. Ltd. & 4 others. …Defendants

FINAL ORDER