Legal Issues Relevant for Bankers – Important Acts Pertaining to Banking Objectivesto list out few important Acts in the context of banking.Need to know about the ActsIt is necessary for bankers to be aware of legal aspects pertaining to various activities undertaken by them.Over a period of time various legal issues pertaining to above Acts have been settled in the court of law.Relevant ActsSome of the important Acts which are relevant for day to day functioning of Banks are:The Indian Contract Act, 1872The Negotiable Instruments Act, 1881The Transfer of Property Act, 1882The Indian Stamp Act, 1899The Evidence Act, 1872The Indian Registration Act, 1908The Sale of Goods Act, 1930The Companies Act, 1956The Limitation Act, 1963Few Relevant 19th Century ActsHere are few acts passed between 1872 and 1899 that hold relevance for the bankers. Indian Contract Act: This Act defines as to what a contract is and the conditions it must satisfy to qualify as a contract.A contract is an agreement enforceable by law. Two important aspects for the formation of a contract are:1. An agreement2. The agreement should be enforceable by lawNegotiable Instruments Act: This Act defines the law relating to promissory notes, bills ofexchange and cheques and it also deals with ‘negotiation, noting and protesting’ etc.Transfer of Property Act: This Act defines the law relating to the transfer of property by act of parties, sale, mortgage and lease of immovable property.Indian Stamp Act: This Act relates to stamping of documents. It defines documents chargeable with stamp duty and deals with mode of payment of stamp duty etc.Indian Evidence Act: This act is concerned with evidence – oral/ documentary and their admission/ rejection, relevancy of facts, witnesses etc.Few Relevant 20th century ActsHere are few Acts passed between 1908 and 1963 that hold relevance for the bankers. Registration Act, 1908: This Act takes care of issues related to ‘registrable documents, place and time of registration, effects of registration and non-registration, duties and powers of registering officers etc.Sale of Goods Act, 1930: This Act deals with contract of sale, contract transfer of property, performance of sale contract, rights of unpaid seller and suits for breach of security etc.Companies Act, 1956: This Act deals with all issues pertaining to companies. Limitation Act, 1963: This Act pertains to limitation of suits, appeals & applications, computation of period of limitation etc.

Legal Issues Relevant for Bankers – Legal Issues Pertaining to Guarantees ObjectivesTo:· Understand finer legal points related to Bank Guarantee· Understand finer legal points related to Personal Guarantee

Bank Guarantee – Liability When AbsoluteLet us start with Texmaco Limited vs. State Bank of India & Others, a case where the bank had to make payment on demand. The bank guarantee, in this case, was for performance of the contractual obligations of the party, for which the bank could not oblige as the plaintiff filed a suit for injunction restraining the Bank from making any payment pursuant to the bank guarantee.But since the bank had undertaken to pay on demand and without contestation, demur or protest, and without reference to such party, it was finally required to pay on demand.

The Case: The Bank issued a guarantee whereby it irrevocably and unconditionally guaranteed due performance in an orderly manner of the contractual obligations of the plaintiff and declared that in the event of default, the Bank would pay, on first demand, the guaranteed amount without any contestation, demur or protest and/or without reference to the plaintiff and/or without questioning the legal relationship subsisting between the plaintiff and the beneficiary. The beneficiary having invoked the bank guarantee, the plaintiff filed a suit for injunction restraining the Bank from making any payment pursuant to the bank guarantee.

The Verdict:The High Court held that the plaintiff was not entitled to an injunction. During the course of the judgment, the High Court observed: "In the absence of such special equities and in the absence of any clear fraud, the Bank must pay on demand, if so stipulated, and whether the terms are such must have to be found out from the performance guarantees as such. . . Here though the guarantee was given for the performance by Texmaco in an orderly manner, the obligation was taken by the Bank to repay the amount on 'first demand' and 'without contestation, demur or protest and without reference to Texmaco and without questioning the legal relationship subsisting between STC and Texmaco. It further stipulated, as mentioned before, that the decision of STC as to the liability of the Bank under the guarantee and the amounts payable thereunder shall be final and binding on the Bank. It further stipulated that the Bank should forthwith pay the amount due ‘notwithstanding any dispute between STC and Texmaco'. In that context, the moment a demand is made without protest and contestation, the Bank is obliged to pay irrespective of any dispute as to whether there has been performance in an orderly manner of the contractual obligation by the party."

Elaboration of the Issue Involved

The law, at present, seems to be that an injunction restraining the bank from making payment under a bank guarantee or letter of credit, cannot be issued if, under the terms of the bank guarantee or the letter of credit, the bank has undertaken to make payment on default and without proof or conditions, unless there is clear fraud of which the bank has notice. Where the performance guarantee of the bank stipulated that the payment would be made by the bank on demand and without proof, the performance guarantee would be virtually a promissory note payable on demand. This was also brought out in the following three cases.Edward Owen Engineering Limited vs. Barclays Bank International Limited: Lord Denning,Master of Roils, in the case of Edward Owen Engineering Limited vs. Barclays Bank InternationalLimited 1977 (3), Weekly Law Reports 764, observed:“All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice."Minerals and Metals Trading Corporation of India vs. Suryaballau Sheth: Where in a bank guarantee there was no stipulation that irrespective of the dispute between the parties, the bank would be obliged to pay, the Division Bench of the Calcutta High Court, in the case of Minerals and Metals Trading Corporation of India vs. Suryaballau Sheth (1970), 74 Calcutta Weekly Notes 991, upheld the order of injunction granted by the trial Court.SBI vs. Economic Trading Corporation Ltd.: The High Court distinguished the decision of the Division Bench in the case of State Bank of India vs. Economic Trading Corporation Limited, AIR 1975, Calcutta 145. In that case, the Division Bench had upheld the order of injunction made by the trial Court restraining the State Bank from making payment under the bank guarantee. Observing that the facts of the said case were peculiar, the High Court pointed out that in that case there was already an order of injunction against the foreign buyer and foreign banker and, therefore, that order should not be allowed to be circumvented by allowing the State Bank to make payment.

Bank Guarantee – Liability to Pay on Demand -- Fraud has to be Pleaded and ProvedPresented is a case where there is a Liability to pay on Demand. The case of M/s.. EscortsLimited (Plaintiff) vs. Modern Insulators and Another (Defendants) also held that Fraud has to be pleaded and proved. Thus, where the Bank has agreed to pay on demand for any shortfall in guaranteed performance of working of machinery and equipment, the Bank is bound to pay and cannot be restrained by injunction on ground of fraud which has not been pleaded and/or proved.

The Case

M/s. Escorts Limited (Plaintiff) agreed to supply a 1000 KVA Generating Set to the M/s. Modern Insulators. For satisfactory performance of the Generating Set, the Plaintiff was obliged to furnish a bank guarantee. Bank furnished the guarantee containing following two material clauses:(1) “We agree to indemnify and keep indemnified the purchaser against any loss or damage caused to or suffered or would be caused or suffered by the purchaser to the maximum extent of Rs. 2,24,700/- (Rupees two lacs twenty four thousand seven hundred only) by reason of any shortfall in guaranteed performance of working of machinery and equipment being supplied under the said contract.”(2) “We undertake to pay the amount due and payable under guarantee without any demur, on demand from purchaser stating that the amount claimed as due by way of loss or damage caused to or would be caused to or suffered by purchaser by reason of any shortfall in guaranteed performance, engineering and supply of machinery and equipment in the said contract."

The Issue InvolvedOn 29th December 1988, the Generating Set was installed. Following its unsatisfactoryperformance, the Defendant's Counsel wrote on 14th April 1987 to the Bank stating that the Plaintiff had not carried out all the work and had not commissioned the Generating Set successfully and that the Plaintiff had suffered heavy losses and demanded payment of the guaranteed sum. The Bank did not make payment. In a suit filed by the Plaintiff for issue of permanent injunction restraining the Defendant from recovering and the Bank from making payment of the guaranteed sum, the Court, while granting adinterim injunction, observed that the demand under the bank guarantee was not strictly in accordance with the terms of the bank guarantee. Thereupon, the Defendant issued another notice on 22nd June 1987 to the Bank demanding payment of the guaranteed sum "towards the losses and damages already caused by reason of shortfall in the guaranteed performance, engineering and supply of machinery and equipment.The Bank still did not make payment.

The SuitCounsel for the Plaintiff submitted that the Defendant had played fraud on the Bank because: (a) the reasons given in the letter of demand dated 14th April 1987 was different from the one pleaded in the subsequent notice dated 22nd June 1987(b) the Defendant's own representative had signed the report about the satisfactory installation and performance of the Generating Set and (c) the Defendant had concealed from the Court the minutes of the discussions that took place between the representatives of the Plaintiff and the Defendant on 21st February 1987, which recorded that the defects, if any, were removed.

Observations by the CourtThe Delhi High Court observed that the position in law with regard to the enforcement of the bank guarantees and letters of credit is well settled. Referring to the latest decision of the Supreme Court in U.P. Co-operative Federation Limited versus Singh Consultants & Engineers (P) Ltd., (1987) 5 JT 406, the Court observed that the bank must pay according to the guarantee except in case of fraud or irretrievable justice. The Supreme Court had

approved of the observations of Lord Diplock in the case of UCM (Investments) Ltd. versus Royal Bank of Canada (1982) 2 All ER 720. Lord Diplock’s Observation: "…to this general statement of principle as to the contractual obligation of the confirming bank to the seller, there is one established exception, that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication material representation of fact that to his knowledge are untrue... The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim-ex turpi causa non oriture actio' or if plain English is to be preferred, 'fraud unravels all', the Courts will not allow their process to be used by a dishonest person to carry out a fraud."

Question of FraudThe Court observed that firstly there were no clear averments of fraud in the pleading and secondly, the fraud has to be pleaded and proved, which was not so in the present case.Rejecting the contentions that the Defendant had deliberately and knowingly made false averments to the bank, the Court held that the inconsistent statements in the letters dated 14th April 1987 and22nd June 1987 would not amount to fraud.Nor would it lead to the conclusion that the Defendant was seeking to play a fraud upon the Court.The Court felt that the Bank was perhaps right in not taking cognisance of the letter dated 14th April1987 since the demand was not from the beneficiary himself and was not in terms of the bankguarantee. Furthermore, there was nothing to indicate that the statements made in the letter dated22nd June 1987 were knowingly false and were fraudulently made.Screen title - The VerdictThe Court was of the view that merely because a certificate of satisfactory installation was issuedon 28th December 1986 by the Defendant would not mean that after installation there would be nocomplaints. The Court observed that as the bank guarantee was a performance guarantee, thebank was under an obligation to indemnify for any loss or damage suffered by reason of shortfall inthe guaranteed performance.Screen title - Further ClarificationDuring the case, the Court in passing remarked that the bank should have approached the Court for appropriate directions if it had any doubts. Merely because an application for injunction was made would not be a ground for the bank not to honour its commitment under the bank guarantee.Hence it stands that, having undertaken absolute liability under the guarantee, the bank, in case of doubts, should approach the Court for suitable directions.Screen title - Personal Guarantee

Section 127 of the Indian Contract Act, 1872 provides that anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. By virtue of this section it is felt that guarantees obtained by banks as security long after the loans was sanctioned and disbursed are treated as without consideration and hence not valid.The available case laws on the point do not make us any wiser. Therefore, banks take additional care while taking guarantees long after they sanctioned loan and suitably word the guarantee document to avoid enforceability problems. In that context the case of 270 Union Bank of India Vs Monin Enterprises decided by Karnataka High Court would be useful to banks in designing their guarantee documents.Screen title - The FactsUnion Bank of India (UBI) granted a Cash Credit Limit to one M/s Monin Enterprises in the year 1981 and enhanced the limit from time to time, lastly to Rs. 45,000 on 8.12.1983. Further on 14.5.1984, a guarantee was obtained from a third party for the cash credit granted to the borrower. The loans went bad and UBI sued the borrower and the guarantor. The guarantor contended that the guarantee document was obtained long after the loan was sanctioned and hence the requirement of Section 127 of the Indian Contract Act, 1872 is not satisfied. Therefore, it is invalid for lack of consideration and thus he is not liable. UBI refuted the said contention.Screen title - Decision of the CourtAfter hearing the contentions of both the parties, the court held Per K.L.Manjunath that; "When we look at Exhibit P.3 (deed of guarantee) the 2nd defendant (guarantor) has not executed the deed of guarantee admitting the past consideration passed on to the 1st defendant. Ex. P.3 is printed form.Except filling the name of the 1st defendant and the amount, the rest of the document is in printed form. Therefore, the plaintiff bank has made use of the printed form in its usual course. Generally, such documents will be obtained along with the other loan forms to be executed by the principal borrower. In the same fashion, Ex. P3 has come into existence" It is not the case of the bank that defendant no. 1 (borrower) had undertaken to furnish a guarantee or surety at a later date. Even according to P.W.I (bank's witness), the borrower had not been called upon to furnish the guarantee. In the absence of proper pleadings (and evidence to show the guarantee was for past consideration and pursuant to an undertaking given by the borrower) I have to hold that Ex.P.3 has not been executed by the guarantor acknowledging the past consideration passed on to the borrower. So, in the circumstances, I find no merits in the case of the bank.Screen title – NotesWithout going into, correctness or otherwise of the judgment, one can say that Union Bank of India could not produce enough evidence to prove the case and thus lost the case against the guarantor.The judgment is a pointer to the perils of taking printed forms without considering its suitability to the circumstances of the case. In the case UBI could have succeeded, if it had obtained the printed form with suitable changes to prevent guarantor from raising contentions of lack of consideration.Screen title - Personal GuaranteeIn the case of The Bank of Bihar Limited: (Appellant) vs. Damodar Prasad and Another (Respondents)

AIR 1969 Supreme Court 297, the question whether a creditor is bound to exhaust his remedy against the principal debtor before he can sue the surety, was settled.Screen title - The FactsThe bank lent monies to respondent No.1 Damodar Prasad on the guarantee of respondent No.2 Paras Nath Sinha. In terms of the guarantee bond executed by respondent No.2 on 15th June 1951, respondent No.2 agreed to pay and satisfy the liabilities' of respondent No.1 up to Rs.12,000/ - and interest thereon, two days after demand. The bond further provided that the bank would be at liberty to enforce and to recover upon, the guarantee, notwithstanding any other guarantee security or remedy which the bank might hold or be entitled to in respect of the amount secured. In spite of demands, the respondents did not pay to the bank the sum of Rs.11,723.56 on account of principal and Rs.2,769.37 on account of interest.The bank filed a suit in the Court of the Subordinate Judge, 1st Court, Patna, which was decreed in favour of the bank. The trial Court, however, directed that the "bank shall be at liberty to enforce its dues in question against respondent No.2, only after having exhausted its remedies against respondent No.1."An appeal filed by the bank challenging the legality and propriety of the aforesaid direction was dismissed by the High Court.Screen title - Supreme Court’s StanceThe bank went in appeal to the Supreme Court. For the following reasons, the Supreme Court allowed the appeal and directed the deletion of the trial Court's direction that the bank should exhaust its remedies against respondent No.1, before it could proceed against respondent No.2:i. Under section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is co-extensive with that of the principal debtor. His liability is immediate and cannot be deferred until the creditor has exhausted his remedies against the principal debtor.ii. A surety has no right, before making payment, to dictate terms to the creditor, and ask him to pursue his remedies against the principal debtor in the first instance.iii. A surety has no right, in the absence of some special equity, to restrain an action against him by the creditor, on the ground that the principal debtor is solvent or that the creditor may have relief against the principal debtor in some other proceedings. Likewise where the creditor has obtained a decree against the surety and the principal debtor, the surety has no right to restrain execution against himself until the creditor has exhausted his remedies against the principal debtor.iv. A guarantee taken by a bank is usually taken by it as collateral security. It will becomeuseless if the bank's right against the surety can be so easily cut down. It is the duty of thesurety to pay the decretal amount.

3. Legal Issues Relevant for Bankers – Secured CreditScreen title – ObjectivesOn completion of this module, you will be able to:Understand various cases related to MortgagesUnderstand various cases related to HypothecationUnderstand finer points relating to Secured CreditorsScreen title - Registration of Charge

Presented is a case involving the issue of secured creditor. The case under consideration isM/s. Reshma Estate Private limited Advance Commercial Company limited {Petitioner} 78Bombay Law' Reporter 654.It is obligatory upon a secured creditor to make diligent enquiries to ascertain whether thecharge created by a limited company in his favour has been registered with the Registrar ofCompanies in time, and if has not been so registered to obtain permission for condonation ofdelay.Screen title - Facts of the CaseThe petitioner granted a loan to the company, which was secured by an indenture of mortgage,duly executed and registered with the Registrar of Assurances, Bombay. The company filedwith the Registrar of Companies an application in Form No.8, to have the said chargeregistered in the records of the Registrar. The company did not file a copy of the said indentureof mortgage, even though the Registrar called upon the company to do so. After considerabledelay, the company filed the copy of the indenture, whereupon the Registrar wrote to thecompany requiring it to obtain an order from the competent Court for condonation of the delay.A copy of the letter of the Registrar was sent to the petitioner. All that the petitioner did was towrite two letters to the company, requiring it to obtain an appropriate order from the Court andto file a certified copy thereof with the Registrar of Companies. Nothing further was done by thepetitioner, for getting the charge registered with the Registrar of Companies.What Ensued …The petitioner, in exercise of the powers as mortgagee, sought to put the mortgaged propertyfor sale. A day prior to the date fixed for sale of the mortgaged property, an unsecured creditorof the company filed a petition for winding up the company and applied for appointment of aprovisional liquidator. The present petition was filed by the petitioner seeking condonation ofdelay in filing the particulars of charge created by the company. Roughly, the delay in seekingfrom the Court the condonation of delay was about three years from the date of execution ofthe said indenture of mortgage. It was contended on behalf of the petitioner that the petitionerbelieved that the company would take appropriate action to have the said mortgage registered.After writing two letters, the company did not make any enquiries either from the company orthe Registrar of Companies, with regard to the registration of the mortgage, and that the

omission to register the charge was accidental or due to the inadvertence, and, in any event,was due to sufficient cause.Observations by the High CourtThe High Court rejected all these contentions and observed as follows:(i) It is inconceivable that after having known the fact that the company was negligentin not complying with the requisitions, so as to have the charge registered with theRegistrar of Companies within time, a diligent secured creditor would have restedon his oars, in the so-called belief that the company would take steps to obtain therequisite order from the Court.(ii) The plea appears to be a clumsy attempt to camouflage utter negligence on thepart of the petitioner, in not making any enquiry as to whether any order forcondonation was obtained to have the charge registered.(iii) While it is true that the expression "sufficient cause" must be construed in favour ofa person who invokes exemption from the rigours of law, a person who, on his ownshowing, is unable to say as to what prevented him from adopting proceedings forregistration of the charge, is not entitled to get any relief.(iv) The Courts do not lean to protect the negligent or those who lack bonafides.(v) The winding up petition is for the benefit of all unsecured creditors and createscontingent rights and legitimate expectation, in favour of all unsecured creditors,which cannot be defeated at the hands of a negligent secured creditor.Screen Title – The VerdictWhile normally the Court would accede to an application to register a mortgage or charge out oftime, provided the application is made bonafide and in good faith, an application of a negligentcreditor cannot be said to be one made in good faith.In the result the petition was dismissed with costs.Screen title - Secured credit – MortgagesThe next case that concerns the issue of Mortgage By Joint Owner Rights Of Mortgagee.This is with regard to Debi Singh (Appellant) 1'5 Shim Singh and Others (Respondents)AIR 1971 Delhi 316.Two questions came up for consideration in this appeal as to whether:i. A joint owner could mortgage 'his share in the property”ii. The other joint owner could defeat the rights of the mortgagee.Screen title - The FactsThe facts, briefly stated, were that the appellant (Debi Singh) and his father, Khem Ram, werethe joint owners of a land situated in village Ladpur, Delhi. Khem Ram obtained an advance ofRs. 2,OOO from the respondents, executed a mortgage agreement, claiming himself to be thesole owner of the land, and delivered possession of the land to the respondents. The mortgageagreement was not registered. The appellant (Debi Singh) alleged that the respondents weretrespassers and filed a suit for possession of the land.Screen title - Decree by the Trial CourtThe trial Court decreed the suit on the ground that the respondents were in possession of the

land as trespassers since the mortgage agreement was unregistered, and as Khem Ram wasonly a co-owner, he was not entitled to mortgage the whole land without the consent of theappellant.On appeal, the Senior Sub-Judge held that the appellant (Debi Singh) could not be permitted toevict the respondents without the settlement of the dispute between Khem Ram and therespondents. The Senior Sub-Judge felt that the appellant had been put up merely to dislodgethe respondents from the possession of the land, and since the appellant was not in actualpossession, before the respondents were put in possession, he was not entitled to a decree forpossession.Screen title - The High Court’s StanceBeing aggrieved by, and dissatisfied with, the decision of the Senior Sub-Judge, the appellantpreferred an appeal to the High Court.The High Court dismissed the appeal and observed as follows:A co-owner was entitled to mortgage his share in the property (Refer Gulab Singh us.L. Him Lal, AIR 1954 All 314, Mt. Zura us. Mohd. Ayub, AIR 1943, page 17).The definition of the mortgage given in section 58 of the Transfer of Property Act showsthat a mortgage is “a transfer of an interest in specific immovable property for thepurpose of securing the payment of money advanced or to be advanced by way ofloan." Therefore, it is clear that Khem Ram had mortgaged his interest in the land to therespondents, and since he had put the respondents in possession of the 'and, in viewof the provisions of section 53A of the Transfer of Property Act, he was debarred fromenforcing his right to possession.The appellant was also not entitled to get possession from the respondents on thefooting that they were trespassers since as against Khem Ram they could not beconsidered "trespassers”.The suit was merely an attempt to avoid the mortgage through the instrumentality of theappellant. In order to succeed, the appellant had to show that he was the personentitled to get possession before the alleged trespassers got possession. Inasmuch asthe appellant had not been dispossessed by the respondents, who were put intopossession by Khem Ram, the appellant had no better claim against the respondentsthan he had against Khem Ram. The appellant could not have got possession from hisfather because they were the joint owners and, therefore, the appellant could notdispossess the respondents who had the same rights as Khem Ram.Screen title - Secured Credit – MortgagesHere is another case under Mortgages, which concerned the issue of Equitable Mortgages. Thecase here is C. Assiamma (Appellant) Vs.State Bank of Mysore and Others (Respondents).AIR 1990 Kerala 157Important questions relating to validity of equitable mortgage, retirement of partner andacknowledgement of liability arose for consideration in this appeal.

Screen title - Facts of the CaseThe Bank had granted certain credit facilities to the partnership firm. The business of the firmwas being carried by the Manager by virtue of a power of attorney executed by the partners ofthe firm.One of the partners, Ms. A, deposited a registration copy of the Deed of Gift executed in favourof herself and other donees, with the Bank, with intent to create mortgage of her share in theimmovable property gifted to her. The original Deed of Gift was with one other donee, and,therefore, was not available for deposit.Another partner, Ms. B, deposited title deeds of her properties in favour of the Bank. She alsoexecuted a power of attorney in favour of the Bank authorising the Bank to sell the mortgagedproperties and to reimburse themselves out of sale proceeds.Following default in payment, the Bank filed the suit against the firm, Ms. A and Ms. B, aspartners, the Manager, and the purchasers of the properties mortgaged to the Bank.The suit was contested by the Defendants. Ms. A contended that she had retired as a partnerand an agreement of dissolution was entered into by the partners. She had given public noticeof retirement in the newspaper. After dissolution, the Manager had no authority, as the power ofattorney had come to an end. She had not created any equitable mortgage. In any case,another partner, Ms. B, had undertaken to discharge the liabilities of the firm.Ms. B contended that with the retirement of Ms. A the firm had ceased to exist, that power ofattorney in favour of the Manager had come to an end and that no equitable mortgage wascreated by her. The other defendants adopted identical defenses.The Trial Court rejected all the contentions and decreed the suit. However, it found thepurchasers of the mortgaged properties, bonafide purchasers for value and directed that themortgaged properties be sold only in the last instant.An appeal to the High Court was preferred by Ms. A.Screen title - The High Court’s StanceDealing with the question of creation of equitable mortgage, the High Court referred to section58 (f) of the Transfer of Property Act and observed that the original documents of title arerequired to be deposited for creation of equitable mortgage. Relying on the decision of theDivision Bench in Syndicate Bank versus Modem Tile and Clay Works 1980 Ker. L.T. 550, theHigh Court observed that title deeds would include registration copy of the document where theoriginal is lost and the deposit of registration copy would create an equitable mortgage. While a

revenue receipt or copy of the Transfer Deed will not be documents of title, where the original islost and there are no chances of that document being made use of for any purpose, a certifiedcopy, with safeguards, can be received as a document of title.Screen title - Other Observations of the High CourtThe High Court referred to the decision of the Full Bench of the Rangoon High Court in K.LC.T.Chidambaram Chettiyar vs. Aziz Meah, AIR 1938 Rang. 149 and the Division Bench decision ofthe Madras High Court in Angu Pillai vs. M.S.M. Kasivisnanathan Chettiar, AIR 1974 Mad. 16,in which it was held that it was not necessary that the whole or even the most material of thedocuments of title to the property should be deposited, or that the documents deposited shouldshow a complete or good title in the depositor and it is sufficient if the deeds depositedbonafide relate to the properties or are material evidence of title or are shown to have beendeposited with the intention of creating a security thereon.In this case, the original Deed of Gift was not available with the depositor as it is impossible forall donees to possess the original deed. The certified copy was deposited with the Bank. Merelybecause the Bank later on insisted on registered mortgage does not nullify the deposit alreadymade with intent to create a mortgage.As regards the question of retirement of Ms. A from partnership, the High Court, on scrutiny ofevidence on record, found that there was no intimation given to the Bank of retirement ordissolution of partnership. Referring to Section 32(3) of the Partnership Act, the High Court heldthat the retiring partner will continue to be liable until public notice of retirement was given. Thepublic notice is required to be given as per the provisions of Section 72 of the Partnership Act.Intimation has to be given to the Registrar of Firm. A notice is required to be given in OfficialGazette and in at least one vernacular newspaper circulating in the district where the firm hasits place of business. Mere giving of notice in vernacular" newspaper will not be sufficientcompliance of Section 72 of the Partnership Act. Publication in Official Gazette or proof ofnotice to Registrar of Firms is necessary. It was, therefore, held by the High Court that noproper notice of retirement was given by Ms. A.The High Court rejected the contention that the power of attorney stood revoked with theretirement of the partner on the ground that under Section 208 of the Contract Act, thetermination of authority of an agent does not take place so far as regards third persons before it

becomes known to them.The High Court, therefore, held that the termination of authority of the manager would not takeeffect as against the Bank and all acts by the manager done on behalf of the firm will be bindingon the firm and its partners.As regards acknowledgement of liability signed by the manager, the High Court held that inview of very wide power given by the partners, which continued to remain operative underSection 208 of the Contract Act and the rights of the Bank were not affected by the allegedretirement or dissolution of the firm, the acknowledgement made by the manager was bindingon the firm and the partners, and the suit was not barred by limitation. In any case, since anequitable mortgage was created by Ms. A, the period of limitation of 12 years had not expiredand the suit cannot be considered as barred by limitation.In the result the appeal was dismissed.Screen title - Secured Credit – HypothecationPresented is the case of hypothecation under secured credit. The case, Canara Bank(Petitioner) vs. Asst. Commissioner, (C. r.) Zone III Madras and Others (Respondents)AIR 1989 Madras 17 sought to resolve the issue of hypothecation of goods.The question for consideration was whether debt secured by hypothecation of goods can beconsidered secured debt and would have priority over the sales tax dues of the Government.Screen title – The Facts and The OutcomeBriefly the facts were that the Bank had granted certain facilities in July 1974 to the Borrowerfirm on hypothecation of the stock-in-trade etc. The borrower firm was in arrears of payment ofsales tax for the assessment year 1978-79 to 1980-81. The Assistant Commissioner, therefore,issued a restraint order demanding payment and on nonpayment attached the movableproperties of the Borrower firm, which were already hypothecated in favour of the Bank. Bankrequested for release of the hypothecated goods claiming first charge. Instead of sending anyreply, the Assistant Commissioner issued notice of sale of hypothecated goods.The High Court held that the hypothecation in favour of the Bank is not a secured debt, whichcould be treated in preference to the Government dues.In the circumstances, the Petition filed by the Bank was dismissed.Screen title - Points for ConsiderationNo reasons have been given as to why hypothecation of goods cannot be considered ascreating a secured debt. In numerous decisions, it has been held that hypothecation is only anextended idea of a pledge, the creditor permitting the debtor to retain possession either on

behalf or in trust for himself. The creditor was, therefore, entitled to retain possession and alsoto exercise right of private sale, which is permitted by the terms of hypothecation of Agreement.(See also AIR 1988 Andhra Pradesh 18). The decision requires consideration.Screen title - Secured Debt – HypothecationThe case of State Bank of India vs. M/ s. Victory Export Import Syndicate & Others, AIR1978 Jammu & Kashmir 76 dealt with the deed of hypothecation.The stamp duty on a deed-of hypothecation containing a power of attorney clause will be as onan agreement and a power of attorney.Screen title - Facts of the CaseAs security for advances granted by the Bank, an agreement of hypothecation was executed bythe borrower in favour of the Bank. Stamps of the value of Rs.11.50 (that is Rs.1.50 foragreement and Rs.10 for power of attorney) were affixed to this agreement. An objection wastaken that the agreement was not duly stamped and was therefore, inadmissible in evidence.Screen title - The High Court’s StanceThe High Court held that the agreement was sufficiently stamped. As delivery of possession ofthe goods was not given by the borrower to the Bank, it would be covered by Article 5(C) andnot by Article 6(2) of the First Schedule to the Stamp Act. In the course of his judgment, LK.Kotwal, J., said:"A deed of an agreement not falling within the definition of a pawn or pledge would not becovered by Article 6(2) of Schedule 1 to the Stamp Act and consequently the stamp payable onsuch a document would not be governed by the schedule provided therein. The crucial questionwhich, therefore, falls for the determination is whether or not in the instant case, delivery ofpossession of the goods hypothecated had also passed on the Bank at the time the agreementdated the 18th March 1970 came to be executed. In this score, there is no dispute between theparties, and rightly so, because even on a plain reading of clause 6 of the agreement, ittranspires that the possession of the goods hypothecated was to remain with the debtor itself.That being so, this deed cannot be held-to be a deed of pawn or pledge so as to attract themischief of Article 6(2) of Schedule 1 to the Stamp Act. A transaction of hypothecation and atransaction of pledge do have a common ingredient in as much as both of them create asecurity in the goods hypothecated or pledged for the repayment of the loan, the ownership inthe goods remaining with the person hypothecating or pledging the same. Nevertheless, there

is a distinction between these two transactions because unlike a pledge where the possessionof the goods pledged must pass on to the pawnee, no such possession passes on to thecreditor in the case of hypothecation."Screen title - Other IssuesArticle 5 of Schedule 1 of the Stamp Act prescribes stamp duty payable on an agreement ormemorandum of agreement (a) if relating to sale of a bill of exchange; or (b) sale ofGovernment security or a share in an incorporated company, or other body corporate; or (c) ifnot otherwise provided for Article 6 prescribes stamp duty, inter alia, on an agreement relatingto deposit of title deeds, pawn or pledge of movable property. If the agreement is not pawn orpledge, undoubtedly it will not fall under-Article 6. Section 172 of the Contract Act definespledge to mean bailment of goods as security for payment of-debtor performance of a promise,Section 148 of the Contract Act defines bailment to mean delivery of goods by one person toanother for some purpose upon a contract that they shall, when the purpose is accomplished,be returned or otherwise disposed of according to the directions of the person delivering them.Thus, one of the ingredients of a valid pledge is delivery of goods by the pawnor to the pawnee.On perusal of the agreement in question, the High Court found that it is specifically statedtherein that the possession of the goods hypothecated was to remain with the borrower. Theagreement was, therefore, rightly held to fall under Article 5 and not under Article 6 of Schedule1 to the Stamp Act.Screen title - Hypothecating Bank - Whether Liable For AccidentIn the area of hypothecation, here is another case -- Bank of Baroda (Appellant) vs. RabarJBachubhai Hirabhai and Others (Respondents) AIR 1987 -Gujarat 1.The question in this appeal was whether the Bank is vicariously liable for damages as a resultof negligent driving of the motor truck hypothecated by the owner to the Bank.The Motor Accident Claims Tribunal held that the hypothecating Bank steps into the shoes ofthe owner and is, therefore, vicariously liable. "Being aggrieved, the Bank appealed to the High Court. Criticizing vehemently the one-linejudgment of the Tribunal, the High Court said that the Tribunal has completely ignored the juralrelationship between the owner of the motor truck and the hypothecating Bank.Screen title - Facts of the CaseThe motor truck met with an accident with a passenger bus due to collision causing injuries tosome of the passengers of the bus. The Tribunal held both the drivers guilty of care and caution

and apportioned the liability at 25 per cent for the bus driver and 75 per cent for the truck driver.The Tribunal held the owners of both the vehicles vicariously liable and also held thehypothecating Bank vicariously liable.Screen title - The High Court’s Stance"When a property is hypothecated with the creditor, it is pledged (charged) as security orcollateral for a debt without physical transfer thereof to the creditor. The title to the propertydoes not pass to the creditor but the creditor has merely the right to sell the pawn (security)upon default. In other words, the hypothecation is a transaction where goods are madeavailable as security for a debt without actual transfer of either the property or the possessionthereof to the creditor. The owners are under an obligation to discharge the debt within thestipulated time and if they fail to do so, the creditor has the right of re-entry for the limitedpurpose of repayment of the loan. The title in the goods remains with the pledger, the de jureand de facto possession continues to remain with him and the pledgee/ creditor has merely theright to recover his dues, if need be by sale of the security. The owners have absolute control ofthe vehicle and at the relevant point of time when the accident occurred, the vehicle was drivenby the driver employed by him. The hypothecating Bank, a creditor, had merely advanced, aloan against the security of that vehicle and had a specific right to recover its dues in the eventof default by, if need be, the sale of the vehicle. It was not even in constructive possession ofthe vehicle."Screen title – HeldIn the circumstances, the High Court held that the Tribunal committed a gross error in law inholding that the hypothecating Bank had stepped into the shoes of the owner for havingadvanced a loan against the security of the vehicle.DecisionThe appeal was, therefore, allowed.Screen title - Hypothecation - Can The Banker take possession of Hypothecated Goodswithout Court’s interventionThe State Bank Of India, Hyderbad Main Branch, Appellant Vs. S.B.Shah Ali brought tofore the issue as to whether the Banker can take possession of hypothecated goods withoutCourt’s intervention.Screen title - Facts of the CaseThis Appeal has been preferred by the appellant Bank against the judgement of a LearnedSingle Judge in C.C.C.A. No: 98 of 1980 dated 26.08.1987. The appellant Bank filed a

mortgage suit O.S.No. 530 of 1973 for recovery of Rs. 46,987.62. The defendant disputed thenature of the loan advanced to him and mainly raised the contention that the appellant Bankhas high-handedly seized his lorry bearing registration No. ADT 1520 which was hypothecatedto the appellant Bank and thus caused damage and loss to him and for that purpose he made acounter claim for damages in the suit. The defendant filed a suit earlier to the suit filed by theappellant Bank seeking relief of declaration that the seizure of lorry is illegal and for aninjunction restraining the appellant Bank from selling the lorry. Both these suits were clubbedand tried together. The main controversy is whether the seizure of lorry by the appellant Bank islegal and, if not, whether the appellant Bank is liable to pay compensation for the illegal seizureand for the damage caused to the defendant.Screen title - Civil Court and High Court’s StanceThe Civil Court held that the appellant Bank’s seizure as clandestine and clause 10 of thehypothecation agreement as invalid and thereby the appellant Bank is liable to paycompensation. Assailing the correctness of the said finding of the Learned Judge, the appellantBank filed C.C.C.A No. 98 of 1980 in the Andhra Pradesh High Court. The learned SingleJudge of the High Court with regard to the question whether the right of seizure and sale of thevehicle can be exercised without intervention of the Court has observed that:“When the hypothecation creates only a charge, it is only a right in respect of the property andsuch a covenant in the contract can only be enforced through Court. The reason being that inthe absence of d ejure or d efacto possession or transfer of title, a person cannot take the lawinto his own hands and take possession of the goods forcibly when the debtor obstructs takingof possession. The clause in the deed providing seizure and sale only enables the creditor toenforce through a Court of Law as it operates an equitable charge in favour of the creditor.”Applying this test to the case in question the learned Single Judge held that the appellant Bankdoes not have a right to seize the hypothecated goods forcibly, without intervention of theCourt.Screen title - Observations of Division Bench of High Court -- Pledge vs. HypothecationBank filed appeal against above decision before the Division Bench of Andhra Pradesh HighCourt.One important question that was considered here was whether the hypothecatee Bank has got

a right to take possession of the hypothecated goods and sell the same without intervention ofthe Court.The concept of hypothecation is not provided under the Indian Contract Act. Hypothecation isnot a statutory creation but it is in usage in mercantile field since times immemorial. Thehypothecation is neither governed by any statute nor is there any law governing the samedirectly or indirectly. Therefore, Courts have to consider the cases involving hypothecationcases purely on general conditions of the contract as per the terms of the hypothecationagreement. The Bench has considered decisions of various High Courts in India and the rulingsand Judgments of the foreign Courts.Screen title - Observations of Division Bench of High Court Pledge vs. HypothecationWhile drawing distinction between “pledge” and “hypothecation” the Division Bench observedthat:“In case of hypothecation, the hypothecator can be in possession of the goods hypothecatedand enjoy the same without causing any damage to the rights of the hypothecatee, whereas incase of pledge the possession of movables will be transferred to the pawnee and he will be inpossession and the pawnor will not be able to enjoy the same as the possession has alreadybeen parted with.”Further, the Division Bench observed that in the case of movables actually covered by thehypothecation deeds, there can be no doubt that the Bank is entitled to retain possession andalso to exercise the right of private sale as hypothecation is only extended idea of a pledge, thecreditor permitting the debtor to retain possession either on behalf of or in trust for himself (thecreditor). In the case of pledge, the special feature of property is to keep possession of thepledged goods with the pledgee and to dispose of them for the realisation of the debt for whichthey are held as security. In case of hypothecation, possession remains with the hypothecatorbut the hypothecatee has the right to take possession of the hypothecated property and to sellit for the realization of the debt secured by hypothecation. It is open to the Bank to takepossession of the hypothecated property on its own or through Court as per the terms ofhypothecation.Screen title - The DecisionThe Division Bench has allowed the appeal by setting aside the order of the learned Single

Judge and the Trial Court. Upholding that “when there is any specific clause in hypothecationagreement empowering the hypothecatee to take possession of the goods and sell the same, inthe event of default in payment, as per the said terms the hypothecatee can proceed aheadwithout intervention of the Court.”Screen title - Machinery Installed on Land or Building Whether Movable or ImmovablePropertyCase: Bamodev Panisrald VB. Smt. Monorama RajAIR 1974 Andhra Pradesh 226,where above issue was dealt with..In this appeal, the question which arose for consideration was whether machinery embeddedand installed in the earth, by constructing foundations for the purpose, was movable orimmovable property. The question was relevant for determining the period of limitation for a suitfor declaration of title to, or for recovery of possession of an item of machinery. If the machinerywas movable property, then such a suit was required to be filed within three years from the dateof denial of the right to it, but if it was immovable property, then the suit could be filed within aperiod of twelve years from the date of denial of the right.Screen title - Main Points for Considerations in the CaseThe High Court, after considering the statutory definitions of the terms "movable property" and"immovable property", stated that movable property would become immovable property if it wasattached' to the earth or permanently fastened to anything attached to the earth. The enquiryshould be not whether the attachment was director indirect, but what the nature and characterof the attachments, and the intention and object of such attachment, are.After considering several English as well as Indian decided cases-on the subject, the HighCourt felt that the tests enunciated by these cases to determine the-character and nature of theproperty are:What is the intendment, object and purpose of installing the machinery - Whether it isfor the beneficial enjoyment of the building, land or structure, or the enjoyment of thevery machinery?The degree and manner of attachment or annexation of the machinery to the earth.Screen title - The High Court’s StanceAs for determining the intendment, object and purpose of installing the machinery, the HighCourt observed: "Where the machinery and the building or land on which it is installed, areowned by one and the same person, normally it should be inferred, unless the contrary isproved, that the object and purpose of installing the machinery is to have beneficial enjoyment

of the entire building or land, but not the sole enjoyment of the very machinery itself. However,where the machinery imbedded or installed and the building or land belong to two differentpersons, the intendment and object of the person, who is in possession and enjoyment of theproperty, in installing or annexing. The machinery, must normally be presumed, until thecontrary is proved, to be to exploit the benefit of the machinery alone, as he is not interested inthe building or the land."Screen title – VerdictIt has to be held that the object and purpose of installation of the machinery by a lessee or atenant in possession of a building, factory or land was for the beneficial enjoyment of the verymachinery, during the period of lease or tenancy, and not for making any permanentimprovement of the building, factory or land, as the case may be. Again, where the building inwhich machinery has been installed was not a pucca and permanent one, but was only atemporary shed or tent, the" intention and purpose of the owner could only be the beneficialenjoyment of the very machinery, but not of the building.Applying the above principles to the facts of the case, the High Court was of the firm view that"the intendment, object and purpose of installing the machinery (in this case, cinema equipmentand diesel oil engine and their accessories) was only to have the beneficial enjoyment of thevery machinery during the period of the lease and, therefore, the machinery was movableproperty.HeldIn the result, it was held by the High Court that the suit for recovery of possession of themachinery filed after a period of three years from the date of denial of the right was barred bylimitation.

4.Legal Issues Relevant for Bankers – InterestScreen title – ObjectivesOn completion of this module, you will be able to:· Understand some finer points related to Bank Interest, including Interest on AgriculturalLoansScreen title - Loading of Interest with Tax Liability and Rounding OffThe first case pertaining to interest rates relates to Indian Banks' Association vs. DevkalaConsultancy (2004) 120 Compo Case 613 (SC).The issue involved in this case was the Banking Regulation Act, 1949 - Section 35 as towhether the loading of interest with tax liability and rounding off to next higher 0.25% is valid.

Screen title - Principle Issue involvedIt is not lawful for the credit institutions to load the interest payable by borrowers with interesttax of 3 per cent and then round off to the next higher 0.25 per cent (on account of grossing upinvolved in calculating the incidence of tax or otherwise). The purported demand of Banks andcredit institutions from the borrowers for a higher amount of tax and consequently a higheramount of interest by way of rounding off is wholly illegal and without jurisdiction.Screen title- Facts of the CaseIn this Appeal against the judgment of the Karnataka High Court in a petition filed byAssociation of Borrowers of Karnataka, the Supreme Court considered the question of authorityof Bankers to round up the existing interest rates to 0.25% pursuant to section 26 C of theInterest - Tax Act, 1974. The Interest-tax Act was enacted by Parliament with effect fromAugust 1, 1974, with the object of imposing tax on the total amount of interest received byscheduled Banks/credit institutions on loans and advances. The Act was withdrawn in 1978, butre-introduced in 1980. Thereafter it was again withdrawn in 1985 and re-introduced with effectfrom October 1, 1991, by the Finance (No.2) Act, 1991. The Reserve Bank of India by itscircular letter dated September 2, 1991, advised all the scheduled commercial Banks that theincidence of interest tax should pro rata be passed on to the borrowers where for a uniformpractice should be followed in consultation with the Indian Banks' Association (IBA), the firstappellant.In view of the foregoing IBA, with a view to formulating a structure of uniform interest rate,chargeable after including the interest tax payable, which was passed on to the borrower by theconcerned Banks, advised them that the rate of interest be loaded with interest tax of 3 per centand rounded off to the next higher 0.25 per cent. This rounding off was considered necessaryon account of grossing up involved in calculating the incidence of tax and had purportedly theapproval of the Reserve Bank of India in terms of its letter dated April 22, 1993. Otherappellants herein followed the said purported policy. This action of the appellants wasquestioned by the respondents in a public interest litigation filed before the Karnataka HighCourt, inter alia, on the ground that such rounding off is illegal and without jurisdiction as

thereby the tax element came to be increased and as a result thereof, the Banks collected anadditional sum of Rs. 723.79 crores annually.Screen title - Observations of the CourtThe Court observed that Section 26C of the Interest Tax Act, 1974, providing that "it shall belawful" for credit institutions to increase the agreed rate of interest from borrowers to the extentof their interest-tax liability, is an enabling provision. This has to be understood having regard tothe term "lawful" used therein. The section prevails over the agreement under which any termloan has been sanctioned by the credit institution to vary the agreement as regards rate ofinterest for the purpose of recovering the amount of interest-tax payable by the creditinstitution, but nothing over and above the same. The increase in the rate of interest envisagedis to the extent to which such institution is liable to pay the interest-tax in relation to the amountof interest on the term loan and, which is due to the credit institution.Under Article 265 of the Constitution, read with Article 366 (28), nothing is realisable as a tax orby way of recovery of tax or any action akin thereto, which is not permitted by law. This impliesthat no amount can be realised by way of tax or a similar duty, which has not been authorisedby Parliament. The increase in the rate of interest in terms of section 26C has a direct nexuswith the statutory impost of interest-tax. But, the executive cannot levy tax or for that purpose,take recourse to the process of interpretation.Screen Title –VerdictThe Court observed that although in the case of ambiguous statutory provisions,contemporaneous construction placed thereon by the officers charged with its enforcement andadministration of that statute might be required to be considered and given due weight, theReserve Bank of India or the appellants, Indian Banks' Association who are not charged withadministration or enforcement of Interest tax Act, are not competent to interpret the provisionsof the Interest tax Act.DecisionThe appeal was dismissed accordingly.Screen title - Creation of a Fund Pursuant to Court ordersThe Supreme Court had found that the Banks had by misinterpretation of the statute unjustly

enriched themselves. As it was not practicable to return the excess interest-tax recovered fromthe borrowers, the Court gave directions for the formation of a fund for the benefit of disabledpersons covered by the Persons with Disabilities (Equal Opportunities, Protection of Rights andFull Participation) Act, 1995 with the excess tax recovered, irrespective of whether it isdeposited with the Union of India or lying with the concerned Banks.Screen title - Interest – Compounding of Interest on Agricultural LoansPresented is a case regarding Interests where the issue was that of Compounding of interestpayable on agricultural loans at quarterly intervals and Charging of penal interest (BankingRegulation Act, 1949 - Section 21A).The case being referred to is Punjab National Bank vs. Narain DassAIR 2003 HP 69Screen title - Principle Issue InvolvedIt is not permissible for a Bank to charge compounding of interest with quarterly rests onagricultural loans. However, Bank would be entitled to charge compounding of interest withannual rests if the loanee fails to pay the interest. Bank is also entitled to charge penal intereston default in payment of installments.Screen title - Facts of the CaseThe plaintiff Bank had granted a term loan of Rs.1, 64,000 for the purchase of a vehicle. Ondefault in repayment of the loan by the borrower, a suit was filed by the Bank for recovery of themoney with interest @ 17% per annum with quarterly rests from the date of the suit till the dateof realisation of the amount. The case of the Bank was that the borrower had agreed to payinterest of 2.5% over and above the Reserve Bank of India rate with a minimum of 12.5 % perannum with quarterly rests and interest was liable to be charged at the rate as may beapplicable from time to time. There was also a provision in the agreement for the payment ofpenal interest in the case of default in payment of instalments @ 2% over and above theagreed rate.Screen title - The CaseAccordingly, the plaintiff contended that the borrower and the guarantor had defaulted in thepayment of instalments and the plaintiff was entitled to penal interest. The District Judge foundthat the plaintiff was entitled to an amount of Rs. 88,500/- as principal amount on the date of

the decision and decreed the suit accordingly with simple interest @12.5% p.a. Aggrieved bythe judgement, the plaintiff Bank filed this appeal contending that it was not permissible for theTrial Court to have reopened the question of interest.Screen title - Observations of The CourtThe Court observed that the loan in question was clearly an agricultural loan and not acommercial loan. Accordingly, there cannot be any dispute that the Bank was entitled to asimple interest @ 12.5 % p.a. and not compound interest. The Court referred to and relied onthe decision of the Supreme Court in Corporation Bank vs. D.S. Gowda (1994) 5 SCC 213wherein after referring to the provisions of Section 21A of the Banking Regulation Act and thevarious circulars and instructions issued by the Reserve Bank, the Court had taken the viewthat in the case of agricultural loan/ advances, the circulars of the Reserve Bank of India do notpermit Banks to charge compound interest with quarterly rests and as such loans cannot betreated on par with the commercial loans insofar as the rate of interest was confirmed. At best,interest could be fixed with annual rests coinciding with the time that the farmer is fluid and ifthereafter the farmer fails to pay the interest, it would be open to compound the interest on theloan on the term loan becoming due. However, the Bank would be entitled to compound theinterest with annual rests if the loanee failed to pay the interest.So far as the question of penal interest is concerned, the Court referred to the decision of theConstitution Bench of the Supreme Court in Central Bank of India vs. Ravindra AIR 2001 SC3095 wherein it was held that penal interest is an extraordinary liability incurred by a debtor fornot making the payment when it ought to have been made to the person who advanced theloan. Therefore, it was not limited to the damages suffered. Penal interest can be charged onlyonce for one period and therefore, it cannot be permitted to be capitalised. The Courtaccordingly came to the conclusion that the loan in question being an agricultural loan, interestwas payable only @ 12.5 % p.a. and the Bank was entitled to capitalisation of penal interest.The Bank was not entitled to charge interest with quarterly rests and when default of interest

was made in terms of the loan agreement, interest could only be capitalised annually.DecisionThe Court accordingly allowed the appeal partly.Screen title - ConclusionIn the case of agricultural loans, Banks have to charge interest only at the permissible rates asobserved by the Court and the rate of interest is not at the discretion of the Bank. Thecompounding of interest can be done only on annual rests and penal interest cannot becapitalised. If the Banks follow this established law as laid down by the Supreme Court,unnecessary litigation can be avoided.Screen title - AP Agricultural Relief Act–Whether debtor entitled for scaling down ofinterest on agricultural loansThis case deals with the issue if the borrower is entitled to scaling down of interest onagricultural loans under AP Agricultural Relief Act, 1938 – Sections 4 & 7.The case involved Andhra Bank and Chittabathuni Sree Ramulu AIR 1999 AP 52.Screen title - Principle Issue InvolvedIn case the Bank loan is obtained for agricultural purposes, then under AP Agricultural ReliefAct, 1938 debtor is not entitled to any relief by way of scaling down of interest on account ofthe provisions of Section 21A of the Banking Regulation Act. However, interest can be chargedonly on basis of yearly rests.Screen title - Facts of the CaseAndhra Bank had given certain loans for agricultural purposes. As the loan was not repaid infull, the Bank filed a suit for recovery. In defence, it was contended that the debtors beingagriculturists, and the debt having been incurred for agricultural purposes, they were entitled tobenefit on the AP Agriculturist's Relief Act, 1938, and the interest is to be scaled downaccordingly. It was claimed that the interest charged was exorbitant, excessive, usurious andthat the claim of penal interest was arbitrary and opposed to law. The Bank relied on theprovisions of Section 21A of the B.R Act to claim that scaling down was not permissible. Bankfurther submitted that the A.P. Agriculturist's Relief Act was not applicable to this case. Thelower Court having decided the case in favour of the defendants, the plaintiff Bank filed thisAppeal before the High Court.Screen title – High Court’s StanceThe High Court observed that the decision of the lower Court was based on earlier decisions ofthe High Court which were overruled by either the Division Bench of the High Court or by the

Supreme Court. The decision in M. Satyanarana Vs. Andhra Bank Ltd., 1984(2) APLJ (SH) (21)relied on by the Court was overruled by the Full Bench of the Court in State Bank of HyderabadVs. Advath Sakru (FB), AIR 1994 AP 170 (FE). The decision in Indian Bank Vs. MuddanaKrishna Murthy, AIR 1983 AP 347 relied on by the Court was overruled by the Supreme Courtin Bank of India Vs. M/s. Vijay Transport, AIR 1998, SC 151. Accordingly, although the A.P. Actprovides for scaling down of interest on agricultural debts, this provision does not apply to anydebt due to a Corporation formed pursuant to any special Indian Law or Royal Charter orLetters Patent. This covers the law made by the Indian Legislature and also Corporationsconstituted in pursuance of such law. Hence, a debtor would not be entitled for any scalingdown in terms of the Debt Relief Act in view of Section 21A of the Banking Regulation Act evenif the loan is for agricultural purposes.The Court observed that according to the Supreme Court decision in Corporation Bank Vs. G.S. Gowda, AIR 1994, SCW 2721, it is clear that as far as the agricultural loan is concerned,Bank would not be justified in charging interest either on quarterly rest or on half yearly rest,since normally, farmers would be fluid only after they harvest the crops and thus, they getincome only once in a year. Hence, on Agricultural Loans, interest has to be charged only onyearly rests and on that basis, interest may be compounded if loan/installment becomesoverdue. Accordingly, the Court found it proper to modify the order of the lower Court byawarding interest at the rate of 14% on the basis of annual rests from the date of the loan tillthe date of realisation.DecisionThe appeal was partly allowed accordingly.

5.Legal Issues Relevant for Bankers – DebtScreen title – ObjectivesOn completion of this module, you will be able to:Understand the various issues relating to Debt Recovery TribunalsScreen title - Jurisdiction of DRT/ Civil court in respect of Proceedings for recovery of debtThe case C. J. Glenny VS. Catholic Syrian Bank (2003) 117 Comp Cas 227 brought out theissue of jurisdiction of DRT/ Civil court in respect of proceedings for recovery of Debt. This is

related to Recovery of Debt Due to Banks and Financial Institutions Act, 1993- Sections 17-19,22, 31 and 34- Civil Procedure 1908, Order 9, Rule 13. .Screen title - Principle Issue involvedAn application for setting aside an ex parte decree relating to recovery of debt by a bankconstitutes 'proceedings' in relation to recovery of debt and when the amount in dispute is inexcess of Rs. 10 lakhs, the Civil Court has no jurisdiction to deal with the matter as theseproceedings lie within the' exclusive jurisdiction of the Tribunal. It is mandatory for the Civil Courtto transfer the application to the Tribunal for lack of jurisdiction to decide the matter and the civilcourt is precluded from dealing with the application.Screen title- Facts of the CaseThe appellant, C. J. Glenny had taken a loan from the respondent bank which he failed to repay.The Bank thereupon filed a suit for recovery of Rs. 8, 61, 530 with interest. On 16th June, 2000,the Civil Court passed an ex parte decree for Rs. 11 lakhs allowing the claim of the bank withinterest @ 18% from the date of the suit till realisation of the same. Later, the bank filed anapplication before the Debt Recovery Tribunal for recovering the amount under a decree of theCivil Court. After about six months, on 23rd March, 2001, the appellant filed an application beforethe Civil Court for setting aside the ex parte decree which the Trial Court dismissed on the basisthat the Court had no jurisdiction in view of the provisions of Section 18, 22(g) and 31 of theRecovery of Debt Due to Banks and Financial Institutions Act, 1993. Against these orders of theTrial Court, the appellant approached the High Court with this appeal.Screen title - Observations of the High CourtThe High Court observed, referring to the decision of the Patna High Court in Ram Laxman Glass(P) Ltd. vs. State of Bihar AIR 2000 Patna 210, that even an application for setting aside an exparte decree constitutes proceedings in relation to recovery of debt by the bank and theseproceedings lie within the exclusive jurisdiction of the Tribunal and not the Civil Court. Further,considering the fact that the amount in dispute was in excess of Rs. 10 lakhs the Civil Court hadno jurisdiction to deal with the matter as already recorded by the Civil Court. Thus, it wasmandatory for the Civil Court to transfer the matter also precluded the Civil Court from dealingwith the application. The Court was, therefore, not correct in dismissing the application.Screen Title – Jurisdiction of Civil CourtWhen the Civil suit was filed in 1998, the suit was for recovery of Rs. 8, 61, 530/- with interest and

the Civil Court was entitled to entertain. After the establishment of the Tribunal for the State, theCivil Court is not entitled to entertain a suit or any other proceeding relating to recovery of debt ofRs. 10 lakhs or more by a bank. By virtue of Section 18, the jurisdiction of Civil Court has beenousted and the provisions of the Debt Recovery Act being a special statute override theprovisions of the general law. The application filed by the appellant under Order 9 Rule 13 shouldhave been returned to the applicant for presentation to the competent forum, which is theTribunal. As the Civil Court had no jurisdiction, its order dismissing the application is also liable tobe set aside and the application shall be returned to the appellant for presentation to the Tribunal.A decree passed by the Civil Court can be challenged by the aggrieved party before the AppellateTribunal when the amount is Rs. 10 lakhs or more.Screen title - VerdictIn view of the foregoing, the order passed by the Civil Court was set aside with direction to returnthe petition to the appellant for presentation to the Tribunal.CommentsThis judgment affirms the exclusive jurisdiction the Debt Recovery Tribunal in debt recoveryproceeding of banks and financial institutions for amounts exceeding Rs. 10 lakhs, which extendseven to setting aside an ex parte decree passed by a civil court.Screen title - Debt Recovery Tribunal –Recovery of money owed under a decree of foreigncourtWe now move on to a case where it was held that the Debt Recovery Tribunal (DRT) canentertain an application for recovery of money owed under a decree of foreign court. The caseunder reference is AIR 2002 Born. 449 S.A. Bobde J Bank of India vs. Harshadrai Odhavji.Screen title - Facts of the CaseOn 16th October, 1996 Bank of India obtained a decree before the High Court of Justice, Queen'sBench Division at England for a sum of Rs. 2,47,82,743.40. The Bank then put the said decree inexecution before the High Court of Mumbai. On establishment of Debt Recovery Tribunal,Mumbai, when, the execution petition was being transferred, the defendant/ judgement debtormoved the court by way of chamber summons requesting that the case should not be transferredto DRT, since the DRT will not have jurisdiction to decide the matter arising in the case. The maincontention raised in support of the same was that money owed arises out of a decree of foreigncourt and therefore is not debt capable of being recovered through DRT. Further it was

contended that execution petition was filed under Section 44-A of the Code of Civil Procedure,1908 and therefore can be executed only under the said provisions and not under the provisionsof Recovery of Debts due to Banks and Financial Institutions Act, 1993 (ROB Act). The saidcontention was negatived by the Court.Screen title - Decision of the CourtHon'ble Justice Shri S.A. Bobde speaking for the court held "Section 44A of C.P.C., makes itclear that foreign decree may be executed in India if it has been passed by the District Court.Thus, original character of a foreign decree is not of any consequence and the amount 'payable'under a decree or order of civil court may be treated as debt payable within the meaning ofSection 2(g) of ROB Act". "The plea by the Judgement debtor that Section 44A of CPC is speciallaw which governs the execution of a foreign decree and not the RDB Act of 1993 which is ageneral law would not be tenable as the RDB Act is indeed a special law enacted under Entry 45of List I of Schedule 7 to the constitution of India for the purpose of enabling only the banks andfinancial institutions to recover debts due to them. Since both laws must be deemed to be speciallaws, the principle that the later must prevail should be applied as laid down by the SupremeCourt on several occasions. Thus, Section 44A cannot in the circumstances be allowed to prevailover and in derogation of Section 17 and other related provisions of the RDB Act. The harmonycould be best achieved by taking a view that an execution of foreign decree, where the decreeholder is a bank or financial institution, must be entertained by the Tribunal under the RDB Actand while doing so the tribunal would be entitled to exercise all the powers which the DistrictCourt would have exercised under the Code of Civil Procedure, 1908."Screen title - Significance of the JudgementThe judgement is very important from the' point of view of directly filing execution applications forrecovery of monies owed under a foreign decree before the DRT under Section 31 A of the RDBAct. The reasoning of the court is very innovative. The court says relying on the judgement of aprivy council in the case of East and Dwellings Co. Ltd. Vs. Finsbury Borough Council,-(1952) PC109 that since CPC directs that a decree of foreign court in the reciprocating territory should betreated as decree of District Court in India, it is legally permissible to assume that decree offoreign court is decree of civil court in India for bringing the same within the ambit of the definition

of 'Debt" under Section 2(g) of RDB Act The judgement helps in avoiding the rigmarole of filing afresh application in the DRT under Section 19 of the RDB Act and on that count, the banks shouldreceive the judgement with cheers.Screen title - DRT – Powers to Pass an Ex-Parte Interim OrderThe next case concerns the Recovery of Debts Due to Banks and Financial Institutions Act, 1993- Sections 19 (6) and 22 (1) and (2)And deals with the issue of the Authority of Debt Recovery Tribunal to pass ex-parte InterimOrder.This is the case involving ICICI Ltd. and. Grapco Industries Ltd (1999) 4 Scc 710.Screen title - The PrincipleThe power of the Debt Recovery Tribunal under section 19 (6) of the Act to grant interim orderinfers the power to grant ex-parte interim order. Such order should be a reasoned order puttingthe applicant on terms and must be for a short period. High Court can go into merits of such orderand correct it if made without justification.Screen title - Facts of the CaseICICI had filed an application under Section 19 of the Recovery of Debts Due to Banks andFinancial Institutions Act claiming an amount of over Rupees 36.5 crores against Respondents 1and 2 jointly and severally. The Tribunal granted an order of injunction and restrained therespondents from transferring or alienating the properties hypothecated to ICICI and furtherappointing a Special Officer for making an inventory of the assets and properties hypothecatedand mortgaged by the respondents in favour of ICICI. A show-cause notice was also issued bythe Tribunal to the respondents calling upon them to show-cause within 15 days as to whytemporary injunction should not be granted. The respondents then moved the Calcutta High Courtunder Article 227 of the Constitution praying for setting aside the ex-parte order of the Tribunal.The High Court holding that the Tribunal had no jurisdiction to grant ex-parte orders under theAct, set aside the order of the Tribunal. The High Court also held that on merit, the grant of exparteorder of injunction was wrong. Further, according to the High Court, the order was notproper as, the Tribunal did not give any reasons, and it was an omnibus order and that there wasno reference even to prayers in the application and that the prayers stood allowed "in terms ofentire hog". On appeal by IClCI, the matter came up before the Supreme Court.Screen title - Supreme Court’s ObservationsThe tribunal constituted under the Act, has jurisdiction to grant an ad interim ex-parte order of

injunction or stay against the defendant on an application filed by a bank or financial institution forrecovery of debt as defined under clause (g) of Section 2 of the Act. When Section 22 of the Actsays that the Tribunal shall not be bound by the procedure laid down by the Code of CivilProcedure, it does not mean that it will not have jurisdiction to exercise powers of a court ascontained in the Code of Civil Procedure. Rather, the TribunaI can travel beyond the Code of CivilProcedure and the only fetter that is put on its powers is to observe the principles of naturaljustice. This meaning has to give to Section 22 of the Act, as here the Tribunal is exercisingpowers of a civil court while trying a money suit. Further, when power is given to the Tribunal tomake an interim order by way of an injunction or a stay, it inheres in it the power to grant thatorder even ex-parte, if it is so in the interest of justice and as per the requirements as spelt out inthe judgement of the Supreme Court in Morgan Stanley Mutual Fund v. Kartick Das (1994) 4 SCC225.Although an ex-parte order is only for short duration and is granted to safeguard the interest ofthe applicant, it cannot be granted as a matter of course. A court or tribunal should also considerthe consequences of such an order if ultimately the order is to be revoked after hearing thedefendant. In such circumstances, the Tribunal must put the applicant on terms while granting anex-parte order and compensate the defendant in case the ex-parte order was obtained withoutany justification and harm has been caused to the defendant. An ex-parte order can also affectthe reputation of the person against whom it is issued and sometimes it may be difficult to undothe damage caused by an interim order. A Tribunal while granting an ex-parte order of stay orinjunction must record reasons, at least briefly and not pass a stereotyped order in terms of theprayer made. An ex-parte order cannot be allowed to continue indefinitely and the continuance ofan interim order has to be decided without undue delay when the defendant puts in hisappearance. Sub section (8) of Section 19 of the Act lays stress if an interim order of injunction orstay granted ex-parte is to be continued or not. The High Court was not correct in holding that aTribunal under the Act has no power to grant an ex-parte order of injunction of stay.Screen title – VerdictThe High Court can examine the merits and even interfere with the interim orders of the courtsand tribunals under Article 227 if the order is made without jurisdiction, but a highly technical

approach should be avoided. When the facts of the case brought before the High Court are suchthat the High Court can itself correct the error, then it should pass appropriate orders instead ofmerely setting aside the impugned order of the Tribunal and leaving everything in a vacuum.The Court observed that the object with which the Tribunal passed the ex-parte order appeared tohave been lost and therefore, the Court would not interfere with the impugned judgement of theHigh Court setting aside the order of the Tribunal. But that was only because of passage of timeand because the stage of proceedings before the Tribunal on the application filed by ICICI underSection 19 (1) of the Act was not known. It was however, be open to the Tribunal to pass aninterim order on the plea of ICICI if the matter was still pending before it.DecisionIn the circumstances, the Court did not interfere with the judgement of the High Court.Screen title - Applicability of Debt Recovery legislation to Co-operative banksIn Shamrao Vithal Co-operative Bank Ltd. Vs Star Glass Works AIR 2003 BOM 205, thequestion that arose was whether Debt Recovery legislation applies to Co-operative banks interms of the provisions contained in Recovery of Debts due to Banks and Financial InstitutionsAct, 1993 and Banking Regulation Act, 1949Screen title - The PrincipleThe expression "banking company" in Section 2(e) of the Recovery of Debt Due to Banks andFinancial Institutions Act, 1993 has to be given the meaning assigned to it under the BankingRegulation Act, 1949 and includes a co-operative bank. In view of the provisions containedtherein the Debt Recovery Legislation is applicable to the debts due to Cooperative banks also.Screen title - Facts of the CaseThe Shamrao Vithal Co-operative Bank Ltd. had provided loan facility to M/s. Star Glass Works, apartnership firm, on the terms and conditions agreed upon vide the loan agreement dated 17thJanuary, 1998. On the firm and its partners failing to pay the installment under the agreement anda sum exceeding Rs. 29 lakhs being outstanding which remained to be paid by the respondent, inApril 2001, the bank filed an application before the Debt Recovery Tribunal at Mumbai forrecovery of the outstanding amount from the respondents. The Tribunal, vide its order dated 29thNovember, 2001, held that the Debt Recovery Tribunal has no subject-wise jurisdiction for thematter as the petitioner bank is a co-operative bank and not a company under the Companies

Act, 1956. Aggrieved by the said order, the petitioners preferred an appeal to the Debt RecoveryAppellate Tribunal which was also dismissed. Consequently, the petitioners approached the HighCourt challenging the said order.Screen title - Observations of the High CourtThe Court observed that under the Act of 1993, bank means "banking company" and bankingcompanies shall have the same meaning as assigned to it in clause (c) of Section 5 of theBanking Regulation Act, 1949. Under Section 5 of the BR Act, 1949, 'banking company' meansany company transacting the business of banking in India. Under Section 56(a) of the BankingRegulation Act, references to a 'banking company' or a 'company' or 'such company' in theBanking Regulation Act shall be construed as references to a co-operative bank unless thecontext otherwise requires. Hence, a banking company under section 5(c) without hesitationwould include a co-operative bank. The interest of the legislature can be discerned by the factthat Section 2(e) of the Act of 1993 has used the expression "meaning assigned to it in clause (c)of Section 5 of the Banking Regulation Act, 1949 "in contradistinction to the expression" asdefined in clause (e) of Section 5 of the Banking Regulation Act, 1949." By virtue of Section56(a)(1) of the Banking Regulation Act, the meaning assigned to the word "banking company" inclause (e) of Section 5 of the BR Act would include a cooperative bank. For the purposes of theAct of 1993, the expression "banking company" has to be given the meaning assigned to it in theBanking Regulation Act which includes co-operative bank. Once it is held that under section 7(e)of the Act of 1993, "banking company" includes co-operative bank, as a necessary corollary, cooperativebank shall be covered under Section 56(d) (i) as there under bank means a bankingcompany.Screen title - The VerdictA careful reading of the Banking Regulation Act and the Act of 1993 and respective preamble,objectives and reasons would make it clear that co-operative banks were not at all intended to beexcluded from the benefits of the machinery made available to the bank under the Act of 1999 forrecovery of outstanding loans. The Parliament does not intend to discriminate between cooperativebanks and banking companies for the purpose of the said Act. Even if the co-operativebanks have a separate machinery under the Maharashtra Cooperative Societies Act, there is noreason why the cooperative banks should be excluded from the purview of the 1993 Act. In the

circumstances, the 1993 Act is applicable to co-operative banks for adjudication of recovery ofdebts due to them and for matters connected therewith or incidental thereto. The impugnedorders passed by the Debt Recovery Tribunal and the Appellate Tribunal have to be set aside.DecisionAccordingly, the Court set aside the orders of the Debt Recovery Tribunal and the AppellateTribunal.Screen title - SARFAESI ActThis case pertains to Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act, 2002 The questions that came up were, whether:Whether provisions of the Act are legal and validWhether Safeguards provided to borrowers such as appeal on precondition of deposit of75% of sum determined by creditor is sustainableThe case was to do with Mardia Chemicals Ltd. and Ors. vs. Union of India and Ors.(2004)120 Camp Case 373 (SC)Screen title - The PrincipleThe condition of deposit of 75% of the amount in claim before approaching Debt RecoveryTribunal under section 17 (2) of the Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act (SARFAESI), 2002 is bad as it is imposed while approachingthe adjudicating authority of the first instance, not in appeal. Except for Section 17(2) of the Act,which is ultra vires of Article 14 of the Constitution, the rest of the Act is valid. In the absence ofany legislation on lender's liability, it is incumbent upon the financial institutions to act fairly and ingood faith complying with their part of obligations under the contract.Screen title - Facts of the CaseA bunch of cases came up for hearing before the Supreme Court including writ petitionstransferred from the High Courts challenging the validity of the SARFAESI, more particularly, theprovisions in Sections 13, 15, 17 and 34. In one of the cases relating to Mardia Chemicals Ltd.,notice had been issued to the company by the Industrial Development Bank of India (IDBI) underSection 13 (of the Ordinance, then in force), requiring it to pay the amount of arrears indicated inthe notice within 60 days, failing which the IDBI as a secured creditor would be entitled to enforcethe security interest without intervention of the court or tribunal, taking recourse to all or any of themeasures contained in sub-section (4) of Section 13 namely, by taking over possession and/ormanagement of the secured assets. Similar notices were issued by other financial institutions and

banks under the provisions of Section 13 of the Ordinance/Act to different parties who filedpetitions in different High Courts. The main contention was that the banks and the financialinstitutions had been vested with arbitrary powers, without any guidelines for its exercise and alsowithout providing any appropriate and adequate mechanism to decide the disputes relating to thecorrectness of the demand and the actual amount of dues, sought to be recovered from theborrowers. It was also alleged that the Act has been made a one sided affair, enforcing drasticmeasures of sale of the property or taking over the management or the possession of the securedassets without affording any opportunity to the borrower and further no provision has been madeto take into account the lenders liability.Screen title - Section 13: Observations of Supreme CourtThe court observed that the normal process of recovery of debts through courts is lengthy and thetime taken is not suited for recovery of such dues. Financial liquidity is essential for renderingfinancial assistance to the industries by the financial institutions arid a blockade of large amountscreates circumstances which retard the economic progress. The court further observed thatalthough, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993for improving recovery of debts, the figures show that it did not bring the desired results. Hence,the step taken towards securitisation of the debts and to evolve means for faster recovery of theNPAs was not uncalled for. As guidelines are given by the Reserve Bank of India laying down theterms and conditions and circumstances in which the debt is to be classified as non-performingasset as early as possible, the court found no substance in the submission made on behalf of thepetitioners that there are no guidelines for treating the debt as a non-performing asset.Section 13As regards recovery under the Act, Section 13 provides that when any borrower, who is under aliability to a secured creditor under a security agreement, makes any default in repayment ofsecured debt or any instalment thereof, and his account in respect of such debt is classified bythe secured creditor as non-performing asset, then, the secured creditor may require theborrower by notice in writing to discharge in full his liabilities to the secured creditor within sixtydays from the date of notice. If the borrower fails to discharge his liability in full within that period,the secured creditor may take recourse to any specified measures to recover his secured debt,

including taking possession of the secured assets of the borrower. Although there is no right ofhearing for the borrower at this stage, the court held that if after service of notice, the borrowerraises any objection or places facts for consideration of the secured creditor, such reply to thenotice must be considered with due application of mind and the reasons for not accepting theobjections, howsoever brief they may be, must be communicated to the borrower. The reasons socommunicated shall only be for the purposes of the information/knowledge of the borrowerwithout giving rise to any right to approach the Debt Recovery Tribunal under Section 17 of theAct, at that stage. On measures having been taken under sub-section (4) of Section 13 andbefore the date of sale/auction of the property it would be open for the borrower to file an appeal(petition) under Section 17 of the Act before the Debt Recovery Tribunal. That the Tribunal inexercise of its ancillary powers shall have jurisdiction to pass any stay interim order subject to thecondition as it may deem fit and proper to impose.Screen title - Observations of Supreme CourtAs regards appeal, the court observed that the right of appeal is a statutory right and it can becircumscribed by the conditions. However, there is a basic distinction between the right of suitand the right of appeal as there is an inherent right in every person to bring a suit of civil natureand unless one's choice. The condition of pre-deposit in the present case under section 17 (2) isbad rendering the remedy illusory on the grounds that (i) it is imposed while approaching theadjudicating authority of the first instance, not in appeal, (ii) there is no determination of theamount due as yet (iii) the secured assets or its management with transferable interest is alreadytaken over and under control of the secured creditor (iv) no special reason for double security inrespect of an amount yet to be determined and settled (v) 75% of the amount claimed by nomeans would be a meager amount (vi) it will leave the borrower in a position where it would notbe possible for him to raise any funds to make deposit of 75 % of the undetermined demand.Such conditions are onerous and oppressive. On these grounds, the court held that sub-section(2) of Section 17 of the Act is unreasonable and violative of Article 14 of the Constitution.The court observed that the object of the Act is to achieve speedier recovery of the dues declaredas NPAs and better availability of capital liquidity and resources to help in growth of economy and

welfare of the people and therefore, it would subserve the public interest. Accordingly, the wholeof the Act, excluding section 17(2) was upheld. As regards lender's liability, the court observedthat even in absence of any court decisions or legislation, it is incumbent upon such financialinstitutions to act fairly and in good faith complying with their part of obligations under thecontract.DecisionAccordingly, the Court partly allowed the petitions.This case brought forth few other noteworthy commentsCommentsAs the Act, excluding section 17(2), has been upheld, it would be open to the banks and financialinstitutions to proceed with recovery under the Act. Although the lenders will be free to makeappeals to the Debt Recovery Tribunal without making any pre -deposit, it will be in the discretionof the Tribunal whether to stay the proceedings or not depending on the facts of each case. Thecourt saw the requirement of depositing 75% of the claimed amount at the first stage ofapproaching the adjudicatory authority as onerous.To bring the provisions of the Act in conformity with the Judgement of the Hon'ble Supreme CourtOrder, to dissuade the borrower from indulging in dilatory tactics with a view to postpone therepayment of dues and to enable secured creditors to make speedy recovery by enforcement ofsecurities, the Securitisation and Reconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 has been amended. The salient amendments are as under:-(i) The Secured Creditor will be able to take possession of the secured assets only after reasonsfor not accepting the objections of the borrower have been communicated to him in writing. Afterpossession of the secured asset has been taken, the borrower can file an application before theDRT without any deposit. If the DRT does not dispose off the petition within 4 months, theborrower or the Secured Creditor can move the Debt Recovery Appellate Tribunal (DRAT) fordirecting the DRT for expeditious disposal of the application.(ii) After the disposal of the case by the DRT the borrower, if aggrieved, can appeal to the DRATwith a deposit of 50% of the decreed amount or as determined by the DRT but not lower than25%.Screen title - Role of Finance Corporations - Promoting Industries at Any Cost?“Promoting industries does not mean financial corporations should give loans, write themoff and go out of business themselves” --- Supreme CourtState Financial Corporation Vs. M/S. Jagadamba Oil Mills

Screen title - Facts of the CaseHaryana Financial Corporation (HFC) granted a loan of Rs. 7,48,000 to M/s. Jagadamba Oil Mills,the borrower against mortgage of properties. The loan was repayable in 15 half yearlyinstalments. The borrower committed default in payment of instalments although HFCrescheduled payment several times. Finally HFC revoked Section 29 of State FinancialCorporations Act, 1951 (SFC Act) and took possession of the unit of the borrower. The borrowersinstituted a suit for permanent injunction in the Court of Civil Judge at Ambala against HFC andsought to restrain the sale of the unit. Unhappy with the unfavourable verdict, HFC moved theSupreme Court. The Apex Court reversed the Judgement of the lower courts. The borrowerargued that HFC did not give a breathing time and initiated recovery proceedings within one yearfrom the date of last instalment. It was argued that HFC is established under SFC Act 1951 andin terms of the objects of the said statute (i) HFC and the borrower have a fiduciary relationshipand are really partners in a business enterprise, (ii) HFC stands in the position of a trustee and isnot expected to act like any other individual moneylender. Further, it was contended that actionof HFC is contrary to the directions of the Supreme Court in Mahesh Chandra’s Case.Screen title - Supreme Court Observations and VerdictRejecting the contentions of the borrower and overruling the Judgement in Mahesh Chandra’scase, the Supreme Court observed as follows:“As was observed by this Court in Gem Cap’s case, the legislative intent in enacting the statute(SFC Act) was to promote industrialization of States by encouraging small and medium industriesby giving financial assistance in the shape of loans and advances, repayable within a stipulatedperiod. Though the Corporation is not like a moneylender or a bank which lends money, there ispurpose in its lending i.e., to promote small and medium industries. The relationship between theCorporation and the borrower is that of Debtor and Creditor. That basic feature cannot be lostsight of. A Corporation is not supposed to give loan and then to write off as a bad debt andultimately to go out of business. As noted above, it has to recover the amounts due so that freshloans can be given. In that way industrialization, which is the intended object of the SFC Act, canbe promoted. It certainly is not and cannot be called upon to pump in more money to revive andresurrect each and every industrial unit irrespective of the cost involved. That would be throwinggood money after bad money.

The view in Mahesh Chandra’s case appears to have been too widely expressed without takingnote of ground realities and intended objects of the statute. If the guidelines as indicated in thesaid case were to be strictly followed, it would give premium to a dishonest borrower. It would notfurther the interest of any Corporation and consequently of Industries.” In our view, theobservations in the Mahesh Chandra’s case do not lay down correct law and the said decision isoverruled.”Screen title – CommentsThe decision in the case of Mahesh Chandra Vs. Regional Manager, U.P. Financial Corporation,in which the Supreme Court gave directions as to the procedure to be followed by the FinancialCorporations in their loan recovery efforts, dealt a body blow to the recovery initiatives of theFinancial Corporations. The defaulting borrower was given primacy in liquidation of the Unit.Nothing could be done without notice to and consent of the borrower. As rightly observed in theinstant case, the directions in Mahesh Chandra’s case resulted in putting premium on dishonestloan defaults. The reconsideration of the decision was long overdue and it is heartening thatfinally Mahesh Chandra’s Case has been overruled. The judgment has rightly set the pace for achange in the Judicial thinking on lending by state owned enterprises.Screen title - Primacy of Recovery of Debts Due to the Banks and Financial InstitutionsAct, 1993 or Companies Act, 1956Here is a case between ICICI Ltd.. and. Vanjinad Leathers Ltd. AIR 1997 Kerala 273 where theissue was regarding recovery of loans advanced by financial institutions.This is related to Recovery of Debts Due to the Banks and Financial Institutions Act, 1993 -Sections 2, 31 & 34 and Companies Act, 1956 - Section 446.Screen title - PrincipleWhere suits are filed for recovery of loan advanced by banks or financial institutions after theappointed day under the Recovery of Debts Due to Banks and Financial Institutions Act, andproceedings for winding up of the debtor company were started subsequently before theCompany Court, the Company Court will not have jurisdiction with regard to such suits orapplications. Hence, neither leave under Section 446 of the Companies Act is necessary tocontinue the suit nor the suit would be transferred by Company Court under Section 446 (2) ofthat Act.Screen title - Facts of the CaselCICI and IDBI had filed suits for recovery of loan advanced to the respondent company and had

filed these suits after the appointed day under the Recovery of Debts Due to the Banks andFinancial Institutions Act, 1993 (1993 Act). Subsequently, the company was taken into liquidationand winding up proceedings were initiated before the Company Court. The Companies Act, whichis a special law, provides for excluding all other laws with regard to pending suits in which thecompany in liquidation is a party. The 1993 Act also is a special law enacted by the Parliament todeal with the applications of banks and financial institutions for recovery of debts. Applicationswere filed before the Kerala High Court to decide whether suits filed by secured creditors beforethe Bombay High Court need be withdrawn to the Company Court and leave it necessary tocontinue the suits standing outside the winding up proceedings.Screen title - Issue involved, Kerala High Court’s observations and DecisionIssueThe issue was whether the Company Court will have jurisdiction under Section 446 of theCompanies Act with regard to suits or applications pending on or after the appointed day as perthe Act.Observations of the CourtThe Court observed that both the Companies Act and the 1993 Act being special laws enacted bythe Parliament. When the latter special law was enacted the Parliament would have certainly inmind the provisions in the earlier special law viz. the Companies Act, 1956. Hence, it wasnotwithstanding the special provisions contained in the Companies Act that Section 34 had beenenacted in the t 993 Act providing that the Act shall have effect notwithstanding anythinginconsistent therewith contained in any other law for the time being in force. Hence, the CompanyCourt's jurisdiction is excluded by Section 34 of the 1993 Act. The Company Court would notexercise jurisdiction as regards such suits and the leave of the Company Court is not necessaryto continue the suit.DecisionThe applications were disposed accordingly.

6. Legal Issues Relevant for Bankers – MiscellaneousScreen title – ObjectivesOn completion of this module, you will be able to:Have finer view point about a few miscellaneous legal aspects relevant to BankersScreen title - Consumer Protection Act - Deficiency in serviceIn a case Vimal Chandra Grover v Bank of India AIR 2000" SC 2181, the issue came up asto whether bank giving overdraft facility to its clients provides 'service' and client getting such

facility is 'consumer’.This was related to the Consumer Protection Act, 1986 – Section 2 (1) (0) and (d) and BankingRegulation Act, 1949 - Section 6 Deficiency in service.Screen title - PrincipleThe bank providing overdraft facility is rendering 'service' and the customer availing of suchfacility is a consumer. Hence, the failure of the bank to sell pledged shares within reasonable timecausing loss to the claimants might amount to deficiency in service.Screen title- The FactsThe Bank of India had given an overdraft facility to the appellant against the pledge of shares.The appellant requested the bank through letter dated 23rd April, 1992 to arrange for sale of 500shares of Castro I Limited at the price indicated by him to clear the overdraft account. The branchmaintaining the overdraft account sent a letter to the Head Office after 12 days of client's request,agreeing to the proposed sale. After 2 months however, the Head Office stating having notreceived the letter of the client and further that the shares were not in the Head Office. About amonth thereafter, the branch informed the appellant that the Head Office was not holding theshares. However, it was found later that the shares were lying with the branch itself. During thistime, the price of the share fell and the shares could not be sold at the price indicated by theappellant. Hence, he filed a claim for Rs. 29,56,264.76 towards loss, interest etc. with theNational. Commission on 'the ground of deficiency in service.Screen title - Bank’s ArgumentThe bank contested the claim stating that it was not obliged to sell the shares as under the lawthe bank is not bound to follow the instructions in view of the provisions regarding pledge underSections 172 to, 177 of the Contract Act and also alleging that it was the appellant who hadmisled the bank by stating that the shares were lying at the Head Office of the Bank. The NationalCommission held that there was no negligence on the part of the bank and also that the Bankwas not bound to dispose of the shares.This appeal arises from this judgement and order of the National Consumer Disputes RedressalCommission.Screen Title – Observations of the CourtThe Court observed that when the bank is engaged in different types of business as mentioned inSection 6 of the Banking Regulation Act, it is apparent that in granting overdraft facilities to itsclient which is a customer, it is providing service to him. The overdraft limit prescribed by the bank

is not without consideration. The bank is charging interest and other charges in providing theservice. Hence, provision of overdraft facility is certainly a part of banking and is service within themeaning of clause (0) of Section 2 of the Consumer Protection Act. In ordinary parlance bankingis a business transaction of a bank. As the Consumer Protection Act does not define the term'banking' as to what services a bank can provide, Section 6 of the BR Act can be usefully referredto. The client who hires such service of the bank for consideration by way of payment of interestis a consumer.Screen title - Observations of the Court – Bank’s Negligence and the VerdictThe Court observed that there was negligence on the part of the bank and the service renderedby the bank was deficient. That the bank has a right under the law to retain the pledged goods isnot in dispute. But, once the bank agreed to sell a part of the pledged goods; it could not fall backon those very provisions to raise 'a plea of its rights under the law to retain the pledged goods.The bank has agreed that the appellant has suffered a loss because of the delay in disposing ofthe shares as agreed to by the bank. The Court found fault with the bank in' merely going oncorresponding with its customer and its own Head Office in these days of revolution in informationtechnology. It is true that the bank is not expected to process the request of its customer at once,but it should do so within a reasonable time. Certainly, promptness and diligence is requiredwhich was lacking in this case. Any fault of the appellant like being not regular in his account withthe bank, are merely afterthoughts in order to hide its own default and inefficiency'.Once the bank agreed to sell a part of the shares at the appellant's request without any preconditions,it cannot fall back on other alleged defaults of the appellant in his dealings with thebank. The bank's plea that it could dispose of the shares only through its broker was not acceptedby the Court as it never apprised the appellant of this fact. Accordingly, the Court concluded thatthere was negligence on the part of the bank.The appellant had stated that he had suffered a loss of Rs. 5,09,037.47 after deducting the debitbalance, which he claimed with interest and other charges like damage for loss of long-standingbusiness due to non-renewal of letter of credit; for non-releasing of securities; undue and unjustharassment thus making the total of Rs. 29,56,264.76. The Court found that apart from the claimfor damages for loss in selling of shares, the other claims were too much overblown to beconsidered at all. The appellant was therefore found to be entitled to the award of Rs.

5,09,037.47 with interest at the rate of 11 % per annum from August 1992. The bank was grantedfour weeks' time to make payment and in case of default directed to pay interest at the rate of18% on the above amount from the date of judgement till payment.DecisionThe appeal was allowed accordingly.Screen title - Non-payment of Insurance Premium by Bank - Liability to Pay CompensationIn this case between Godavari Grammena Bank vs Teja Poultry Farm IV (2003) CPJ 675Andhra Pradesh State Consumer Disputes Redressal Commission, Hyderabad F.A. No.118, the issue pertained to Bank having debited loanee/borrower's account with premium amountdid not remit it to Insurance Co. by due date leading to loss to the borrower.This led to question regarding Liability to pay compensation under Consumer Protection Act,1986.Screen title - PrincipleRisk of insurance company commences only on receipt of premium by it and in case whereinsurance premium has been collected by Bank in time and Bank has not paid/credited same asagreed upon to Insurance Co. by due date, Bank is held liable to pay compensation.Screen title - Facts of the CaseBank sanctioned a loan of Rs. 11,30,000/- for running a poultry farm of 10,000 birds and amountof Rs. 6,00,648/50 was disbursed. A comprehensive insurance policy was taken to cover the riskof the sheds in which poultry farm is to be located and Bank undertook to pay premium towardslive stock and sheds. Bank deducted premium for live stock and paid to insurance company.Thereafter further amount was debited towards premium for sheds, on 16th October, and shedswere damaged during cyclone that occurred on the night of 6th/7th November, damaging livestock and sheds completely. Claim for damage of live stock was settled and paid away. Bankestimated the damages to the sheds at Rs. 3,10,000/-. Bank and Insurance Co. had entered intoGrameena Package Master Policy Agreement whereby upon disbursement of loan. Bank wasrequired to debit loanee/ borrower's account with the premium amount and send credit advice toits Head Office for crediting same on date appearing on credit advice in account of Insurance Co.to avoid violation of Section 64 VB of Insurance Act requiring that risk may be assumed notearlier than the date on which the premium has been paid in cash or by cheque to the insurer.Screen title - Other facts of the CaseIn this case, premium amount for sheds was debited 'to the account of borrower on 16/10; Bank

claims it sent on 4/11, while Insurance Co. says that it received it on 25/11 after the cyclone.Distt. Consumer Disputes Redressal Forum gave a finding that Bank interpolated entries toindicate that it sent on 4/11; and on appeal, State Commission agreed with the opinion of DistrictForum. On appreciation of evidence like copy of Bank's Dispatch Register (original not produced)and Statement of Account of Insurance Co. furnished by Bank, entire episode to show payment ofpremium on 4/11 before cyclone has been held to be suspicious by Consumer Forum. Premiumin respect of sheds received after cyclone was refunded by Insurance Co. to Bank.Screen title - Observations of State Consumer Disputes Redressal Commission andDecisionNational Consumer Disputes Redressal Commission in a case involving Citibank, where owner ofcar paid premium for insurance of car for two years and gave it in time to Bank for insuring the carand car having met with an accident became a total loss and occupants of car succumbed to theinjuries, had held Bank liable to pay compensation. In view of this decision it was held thatGrammena Bank committed deficiency in service in not remitting premium amount in terms ofMaster Policy Agreement and thus liable to pay compensation for sheds damaged during thecyclone.Decision:Payment of Rs. 3,85,015/- with interest at 12% p.a. and also compensation of Rs. 10,000/-together with subsequent interest at 12 % p.a. Also held there is no deficiency in service on thepart of Insurance Co. This order of District Forum confirmed by State Commission and appealdismissed with costs of Rs. 2,000/.Screen title - CommentsIn view of Sec. 64-VB of Insurance Act, 1938 the risk of the Insurance Company commences onlyon the payment of the premium either in cash or by cheque. In the present case, the amount ofpremium of Rs. 837/- for the sheds was debited to the account of borrower of Bank on 16/10;sheds were damaged during cyclone on 6/7 Nov. and it has been held by Consumer Forum thatInsurance Co. received the premium after the cyclone, and, therefore. Insurance Co. was foundnot bound to pay the amount. Borrower had paid the insurance premium and as such Bank heldliable to pay compensation. In such circumstances, Banks are bound to ensure that premia ispaid by due date to Insurance Companies to avoid stepping into shoes of insurance co. forindemnifying borrowers from the funds of Bank.