Sthithi Insurance Services Pvt. Ltd. v. Industrial Finance Corporation of India Ltd.

2registered under the Companies Act, has invoked Order XIV Rule 8r/w Order XXXIX Rules 1 & 2 of the Code of Civil Procedure, withprayer for grant of interim injunction, restraining the 1stdefendant from taking any steps or resorting to any coercivemeasures, including the institution of any proceedings torecover any amount alleged to be due on account of recall of theloan.2.The plaintiff / applicant filed a suit for declarationto challenge the notice No.IFCI/CHERO/Legal/2012-10533 dated29.11.2012, in recalling the entire outstanding principal amountof Rupee Loan Rs.50 Crores (Rupees Fifty Crores only) andCorporate Loan of Rs.30 Crores (Rupees Thirty Crores only).3.The impugned part of the notice challenged by theplaintiff reads as under:"5. As the company has failed to provide the cashmargin, as covenanted within the stipulated time, anEvent of default has occurred in terms of the RupeeLoan Agreement and the Corporate Loan Agreement.Despite repeated requests through our variouscorrespondence to the company, the company has notprovided the cash margin and has thus committed defaultin terms of the Rupee Loan Agreement and Corporate LoanAgreement. In view of the above, IFCI has becomeentitled to recall the entire outstanding principalamount of the aforesaid Rupee Loan and Corporate Loan,together with interest and all other amounts due inrespect thereof." 4.Prayer is also made for restraining defendant fromtaking steps or resorting to any coercive measures, includingthe institution of any proceedings to recover any amount allegedto be due on account of purported recall of the loan videimpugned notice https://hcservices.ecourts.gov.in/hcservices/

35.It is pleaded, that the plaintiff / applicant, in orderto expand its business and strengthen its association withZylog, approached the respondent no.1 for grant of loan. Therequest of plaintiff / applicant was accepted and respondentno.1 entered into two loan agreements, i.e. one dated 11.03.2011and the second dated 28.09.2011.6.As per the terms of these two loan agreements, theplaintiff / applicant was advanced Rupee Loan of Rs.50 Crores(Rupees Fifty Crores only) and Corporate Loan of Rs.30 Crores(Rupees Thirty Crores only). The loan was advanced for investingin Zylog and to discharge the existing debts etc. The loan wasto carry interest @ 14% p.a. on Rupee Loan and 15.75% p.a. onCorporate Loan. The default in timely repayment was to carrypenal interest @ 18.50% p.a. plus liquidated damages of 2%.7.The loan was secured by,i)personal guarantees of Mr.Sudarshan Venkataraman andMr.Ramanujam Sesharathnam;ii)Post-dated cheques for interest and principal repayments;iii)Pledge of the plaintiff's shares in Zylog so that themarket value of the shares pledged is not less than 2.25times the outstanding amount on the relevant draw downdate.In order to pledge the shares, the plaintiff / applicant enteredinto a Pledge Agreement and also executed a Deed of Guarantee8.It is submitted, that the plaintiff / applicantpromptly paid installments to the 1st defendant and that the https://hcservices.ecourts.gov.in/hcservices/ 4plantiff has always been willing to pay whatever amount accruesunder the Loan Agreement. According to the plaintiff /applicant, as on date, no amount is outstanding under both theagreements, rather more than Rs.4 Crores (Rupees Four Croresonly) is lying in excess with the 1st respondent / defendant.9.It is further submitted, that in spite of the fact thatno amount is outstanding, as per the terms of the loanagreements either towards principal or interest, the impugnednotice has been issued to recall the loan merely because cashmargin, regarding pledged shares has fallen down and thatinspite of notice, the plaintiff / applicant has failed toprovide additional cash margin, which amounts to default interms of Rupee Loan and Corporate Loan agreements.10.The action of the 1st defendant in recalling the loanis challenged;i)to be violative of Article VII (c) of the Loan Agreements,which provide for issuance of 30 days notice beforerecalling the loan;ii)that the defendant has no power to recall the loan grantedbecause margin has become inadequate, as the remedy withthe defendant is only to ask the plaintiff/applicant toprovide alternative security, which the plaintiff/applicanthas been willing to provide;iii)that the margin shortfall is solely a result of the 1stdefendant's own wrongful acts, as the defendant betweenOctober and November, 2012 unlawfully sold 14 lakh shares https://hcservices.ecourts.gov.in/hcservices/ 5held by the plaintiff in Zylog, which caused dramatic fallin the share price and panic in the stock market. The shareof Zylog, which was Rs.299/- on 18.10.2012 fell to Rs.71.70per share.11.Along with the suit, the plaintiff /applicant has filedapplication for injunction. Though the prayer is wrongly worded,in fact, the prayer is to restrain the respondents from givingeffect to the notice, recalling the loan in violation of theloan agreements, executed between the parties, and therebyproceeding to recover the whole amount outstanding.12.This application is opposed by the defendant no.1, byraising preliminary objection, that the defendant / nonapplicant had filed a Caveat Petition No.3100 of 2012 dated29.11.2012, but inspite of this, the plaintiff/applicant, bysuppressing the above fact, made endorsement, that no caveat isentered and got an exparte interim order. Therefore, failure toserve notice in advance to the respondent itself is a ground tovacate the interim exparte injunction dated 30.11.2011, passedin C.S.No.771 of 2012, restraining respondent from selling thepledged shares.13.On merit, it is submitted, that the plaintiff /applicant had agreed to pledge of equity shares of 2nd respondentin demat form, so that the market value of such share on therelevant draw down date is not less than 2.25 times securitycover of the outstanding amount. https://hcservices.ecourts.gov.in/hcservices/

614.The reference has been made to Clause 2.3 of theagreement executed between the parties, which reads as under:"a. The Borrower / Pledgors shall provide top-upof shares of ZSL in demat form within 3 working days,if the market value of the stipulated security coverfalls by 10%, so that total security cover ismaintained at least 2.25 times of the outstanding loanamount at all times during the currency of loan.b. The Borrower shall provide cash margin within5 working days, if the market value of the securitycover falls by 20%, so that the security cover ismaintained at least 2.25 times of the outstanding loanamount at all times during the currency of the loan."15.That as per the terms of the agreement, the defendant /non applicant has the right to sell the pledged shares in themarket without specific notice in this regard and without anyintervention of Court.16.The reliance is also placed on the Pledge Agreementdated 12.03.2011, wherein, the plaintiff / applicant had agreedto maintain the margin of at least 2.25 times of the outstandingloan amount at all times during the currency of loan agreement,as also additional Corporate Loan.17.It is the case of the defendant / non applicant, thaton 07.08.2012, the applicant was called upon to pay a sum ofRs.2.67 Crores within three working days, because this amountwas outstanding. Prior to that on 27.03.2012 also, the applicantwas called upon to clear dues outstanding as on 15.03.2012. On04.05.2012, the applicant was called upon to clear dues as on15.04.2012. Similarly, the outstanding dues from and out of thedividend amount was also asked to be cleared. https://hcservices.ecourts.gov.in/hcservices/

718.It is admitted, that on 18.09.2012, the applicantrequested the respondent to release 7,50,000 shares to clear theinterest due after adjusting the dividend received from the 2ndrespondent. This request was accepted and shares were releasedon 26.09.2012. It is also the case of the defendant / nonapplicant, that in order to recover the outstanding amount,respondent sold the shares of the plaintiff / applicant on18.10.2012 at the share price of Rs.225.80 (Rupees Two HundredTwenty Five and Paise Eighty only).19.The details of sale of shares have also been mentionedin the counter. In sum and substance, it is not disputed by thedefendant / non applicant, that as on date, an amount of Rs.4Crores (Rupees Four Crores only) is available with the defendant/ non applicant over and above the due installments. The onlyjustification to recall the loan and to say, that theplaintiff / applicant is in default, is want of cash margin. Thewhole amount outstanding has been recalled for want of securitymargin, thereby treating the plaintiff / applicant as defaulterto proceed to recover the amount in terms of the agreementsexecuted between the parties. https://hcservices.ecourts.gov.in/hcservices/

820.Learned counsel for the plaintiff / applicantvehemently contended, that action of the 1st respondent to recallthe amount, besides being arbitrary, is contrary to theprovisions of Section 74 of the Contract Act r/w Section 176 ofthe Contract Act. In support of this contention, learned counselfor the plaintiff / applicant referred to Clause 2.3 of theAgreement for Pledge of Shares, which reads as under:"2.3 Top up and cash margina. The Borrower/Pledgors shall provide top-up ofshares of ZSL in demat from within 3 working days, if themarket value of the stipulated security cover falls by10%, so that total security cover is maintained at atleast2.25 times of the outstanding loan amount at all timesduring the currency of loan.b. The Borrower shall provide cash margin within 5working days, if the market value of the security coverfalls by 20%, so that the security cover is maintained atatleast 2.25 times of the outstanding loan amount at alltimes during the currency of the loan."21.Reference was also made to the Loan Agreements, whichstipulate the events of default and remedy available to thedefendant / non applicant, which reads as under:I. Events of Default(a) Default in payment of principal sum of theloanDefault has occurred in the payment of principalsum of the loan on the due dates.b) Default in payment of interestDefault has been committed by the borrower inpayment of any installment of interest on the loan andsuch default has continued for a period of thirty days.c) Default in performance of covenants andconditionsDefault has occurred in the performance of anyother covenant, condition or agreement on the part ofthe borrower under this agreement and such default has https://hcservices.ecourts.gov.in/hcservices/ 9continued for a period of thirty days after notice inwriting thereof has been given to the borrower by thelender.d) Inability to pay debtsthe borrower is ujable to pay its debts orproceedings for taking it into liquidation, eithervoluntarily or compulsorily, may be or have beencommenced.e) Appointment of receiver or liquidatorReceiver or liquidator has been appointed orallowed to be appointed of all or any part of theundertaking of the borrower.7.I.2 Notice to the lender on the happening of anevent of defaultAny event of default of any event which, after thenotice, or lapse of time, or both, would constitute anevent of default has happened, the borrower shall,forthwith give notice thereof to the lender in writingspecifying the nature of such event of default, or ofsuch event. 7.I.3 Expenses of collectionAll expenses incurred by the lender after an eventof default has occurred in connection with collectionof amounts due under this agreement shall be payable bythe borrower.II. Remedy in case of default/non top-up of sharesThe lender shall have the right to sell thepledged shares in the market without any specificnotice in this regard and without any intervention ofcourt, in any of the following events of the default;a) Default in payment of interest or installmentsof principal b) Non-top up of shares within the stipulated timec) Other events of default as mentioned below"22.The contention of the learned counsel for the plaintiff/ applicant therefore was that as per the terms of theagreement, it was incumbent upon the defendant / non applicantto call upon the plaintiff / applicant to provide additionalsecurity to maintain at least 2.25 times of outstanding amount,but it cannot be the ground to recall the loan.23.Reference was also made to the loan agreements, which https://hcservices.ecourts.gov.in/hcservices/ 10provide that if default has occurred in the performance of anyother covenant, condition or agreement on the part of theborrower under this agreement and such default has continued fora period of thirty days after notice in writing, then nonapplicant could exercise the right to sell the pledged shares inthe market without any specific notice in this regard andwithout intervention of the Court.24.It was thus contended, that this clause wasinvoked by the defendant / non applicant on earlier occasion,when 18 lakhs shares were sold to recover the outstanding amountdue. That in view of sale of shares, as on date more than Rs.4Crores (Rupees Four Crores only) is excess over and above theinstallments, which were due, is lying with the defendant / nonapplicant. Therefore, the plaintiff / applicant has prima faciecase to seek injunction of this Court. It was also thecontention of learned counsel for the plaintiff / applicant,that action of the respondent is in violation of Section 74 and176 of the Contract Act, as it is mandatory for the defendant /non applicant to issue notice before sale of pledged shares.25.The application is opposed by the learned counsel forthe defendant / non applicant, by vehemently contending, thatnon furnishing of security margin on 2.25 times of theoutstanding loan amount is an event of default in terms of theagreements executed between the parties, which entitles thedefendant / non applicant to recall the loan.26.It is also contended, that once the loan amount has https://hcservices.ecourts.gov.in/hcservices/ 11been recalled, the plaintiff / applicant cannot take benefit ofthe fact, that a sum of Rs.4 Crores (Rupees Four Crores only) inexcess than the due the as per installments, is lying with thedefendant / non applicant, as after recall of loan, theplaintiff / applicant admittedly is in default, therefore,cannot seek injunction to restrain the defendant / non applicantfrom exercising its rights under the agreements executed betweenthe parties.27.On consideration, I find that the plaintiff / applicanthas successfully made out a prima facie case in its favour. Thereading of agreements clearly shows, that in the event ofdefault, the right of defendant / non applicant is to dispose ofthe pledged shares to recover the amount of default, which infact has been done in this case, when 18 Lakhs shares were sold.On the date, when the loan was recalled, there is admittedly nodefault, as an excess amount of Rs.4,00,00,000/- (Rupees FourCrores only), is lying with the defendant / non applicant.28.As regards lack of margin is concerned, the remedy withthe plaintiff / applicant is to call up the plaintiff /applicant to furnish security, but it has no right to act inarbitrary manner in recalling the loan to justify their actionof selling share over and above the defaulted amount, asadmittedly a sum of Rs.4 Crores in addition to the amount duehas been recovered from the plaintiff / applicant. The defendant/ non applicant being a State within the meaning of Article 12of Constitution, is expected to act fairly and reasonably, and https://hcservices.ecourts.gov.in/hcservices/ 12cannot recall the entire loan on extraneous considerations in anarbitrary manner.29.Balance of convenience is also in favour of theplaintiff / applicant. The plaintiff / applicant will alsosuffer irreparable loss and injury, if the defendant no.1 / nonapplicant is not restrained from giving effect to the notice,recalling the loan.30.Consequently, this application is allowed in thefollowing terms:i)defendant no.1 / non applicants is restrained from givingeffect to the recall notice and taking steps to recover thewhole of the loan amount;ii)that it shall be open to the defendant no.1 / nonapplicant to recover the outstanding principal and interestby sale of pledged shares, after notice to the plaintiff /applicant, which may be due and payable in terms of theagreements;iii) that the plaintiff / applicant shall offer additionalsecurity for the outstanding amount. The respondents aredirected to considered the request of the plaintiff /applicant and accept the security, which may be given asper the satisfaction of the defendants / non applicants, incase the security is not acceptable then give reasons forthe same so as to enable the plaintiff / applicant toovercome the objection or offer alternative security;iv) that the 1st defendant / non applicant is restrained from https://hcservices.ecourts.gov.in/hcservices/ 13taking any coercive steps to recover, except sale ofpledged shares to recover the defaulted installments ofterm loan or interest in terms of loan agreements. Nocosts. Sd/-V.K.S.J 19.12.2012 //Certified to be a true copy//Dated this the day of 2013. R.s/09.01.2013 COURT OFFICERFrom 25.09.2008 the Registry is issuing certified copies of theOrder/Judgment Decree in this format.