Veerabhadrappa B. v. Karnataka State Financial Corporation

to the first respondent?

What order?

After hearing both side, the trial Court by its judgment dated 06.02.2014, while answering point No.1 in the affirmative, proceeded to allow the petition with interest holding that petitioner-Corporation was entitled to enforce the liability of respondent Nos.1 and 2 as - 7 - MFA No. 2032 OF 2014 guarantors to the loan advanced by it to respondent No.1. It was also held that the petitioner-Corporation was entitled to recover an amount of `1,39,22,721/- with agreed interest thereupon from the date of petition till the amount is recovered by selling the personal properties of respondent Nos.1 and 2. Aggrieved by the same, the respondent No.1 in the trial Court has preferred this appeal.

The respondent No.1 herein is represented by its learned counsel. The service of notice to respondent No.2, since dead, represented by his legal representatives, through paper publication is accepted vide order dated

06.04.2023.

Records from the trial Court pertaining to the matter were called for and the same are placed before the Court.

For the sake of convenience, the parties would be henceforth referred to as per their rankings before the trial Court. - 8 - MFA No. 2032 OF 2014

Heard the arguments of learned counsel for the appellant and learned counsel for respondent No.1, perused the materials placed before this Court, including memorandum of appeal, impugned order and also the records of the Court.

Learned counsel for the appellant in her brief argument contended right of State Financial Corporation against the property is only with respect to industrial property under Section 29 of SFC Act. As such, the petitioner-Corporation cannot file a petition recovery against respondents since they are individuals. In her support, she relied upon a judgment of Co-ordinate Division Bench this Court N.Narasimhaiah -vs- Karnataka State Financial Corporation, Bengaluru and others, reported in 2003 (5) Kar.L.J. 164 (DB).

She further contended that the petition filed by the petitioner-Corporation in the trial Court is barred by limitation. In her support, she relied upon a judgment of Co-ordinate Division Bench of this Court in R.N.Shetty and - 9 - MFA No. 2032 OF 2014 another -vs- Karnataka Industrial Investment and Development Corporation Limited, Bengaluru, reported in 2005 (3) Kar.L.J. 177 (DB). With this she prayed to allow the appeal.

Per contra, learned counsel for respondent No.1- Corporation in his argument submitted that the judgment in N.Narasimhaiah's case (supra) is with respect to Section 29 of SFC Act, whereas, the petition filed against the respondents in the trial Court was under Section 31(1)(aa) of SFC Act, as such, they are the petitions of different nature. He further contended that the period of limitation against the guarantors commences from the date the sale proceeds are found insufficient, but, not from the date of recalling of the loan. Thus, in the instant case, the petition is filed within three years from the date of issuance of notice to the guarantors calling upon them to pay the balance due to the petitioner-Corporation. Therefore, the same is within the period of limitation.

In his support, he relied upon a judgment of Hon'ble Apex Court Deepak Bhandari -vs- H.P.State - 10 - MFA No. 2032 OF 2014 Industrial Development Corporation Ltd., reported in AIR 2014 SC 961.

After hearing learned counsels from both side, the points that arise for our consideration are : (i) Whether the petition filed by the petitioner- Corporation before trial Court was not maintainable? (ii) Whether the petition before the trial Court was barred by the Law of Limitation? (iii) Whether the impugned order warrants any interference at the hands of this Court?

PW-1 G.Manja Naik, who is said to be the Deputy Manager of the petitioner-Corporation, in his examination- in-chief filed in the form of affidavit evidence has reiterated the contents of the petition filed by the petitioner-Corporation in the trial Court. He contended that at the request of respondent No.1, the petitioner- Corporation had sanctioned a term loan of `13,85,000/- and a soft seed capital loan of `1 lakh, in all `14,85,000/- for the purpose of establishing an industry engaged in Jigs, Fixtures and Tools Manufacturing machines under the - 11 - MFA No. 2032 OF 2014 name and style of `M/s.Palthur Industrial Enterprises', situated at Industrial Estate, Yanthrapura, Harihara, as per the sanction letter dated 15.09.1992. The said industrial unit was hypothecated to the petitioner-Corporation. The respondent Nos.1 and 2 had also offered their personal guarantee to the said loan raised by respondent No.1. The respondent No.1 had also mortgaged the petition schedule property as collateral security for the repayment of the loan due to the Corporation. The respondent Nos.1 and 2 at the time of borrowing the loan, had executed several of the documents in favour of the petitioner-Corporation, including Hypothecation Deed dated 20.10.1992 and Deed of Guarantee dated 20.10.1992. The contractual right of interest agreed to was at 19.5% p.a. along with penal interest at 2.5% on compounding rests basis.

He further contended that though the loan was dispersed, the respondent No.1 did not keep their promise in repayment of the legitimately due to the Corporation in spite of repeated requests and demands made by the corporation. As such, the petitioner- - 12 - MFA No. 2032 OF 2014 Corporation was constrained to seize the said unit i.e., the plant and machineries on 20.03.1995 by exercising its right under Section 29 of SFC Act and thereafter, the plant and machineries of the said unit were sold for a sum of `5,66,000/- on 20.10.2004. At every stage, the petitioner-Corporation was issuing notices respondents, but however, the respondents did not comply the terms of such notices nor replied to them. Thus, the petitioner-Corporation issued a notice on 24.08.2006 under section 31(1)(aa) of SFC Act, by invoking personal guaratees offered by respondent Nos.1 and 2. In spite of receipt of the notice, the respondents did not clear the loan liability, but, sent an untenable reply.

PW-1 has further stated that the petitioner- Corporation was constrained to seize the collateral security on the date 10.07.2001 mentioned in the schedule to the petition by exercising its right under Section 29 of SFC Act. Several attempts to sell the property could not yield any result as there were no bidders. However, it was in the year 2007, the said property was sold for a sum of - 13 - MFA No. 2032 OF 2014 `17 lakhs and the Sale Deed was executed on 02.04.2007 registered on 03.04.2007 favour of one Sri Choudhary, the purchaser from Bengaluru. The sale proceeds was appropriated towards the due of the unit and the respondents were aware of this fact since they filed a suit in O.S.No.181/2007, in the Court of learned Addl. Civil Judge (Jr.Dn.), Davanagere, challenging the recovery of dues by the Corporation.

PW-1 has further stated that in spite of selling the schedule property and appropriating the sale proceeds, the respondents are still liable to pay a sum of `2,76,01,585/- as on 10.06.2010 as can be seen in the statement of accounts. Hence, the petitioner-Corporation took a decision to invoke the personal guarantee of respondents who owns sufficient personal assets at various places. Thus, he contended that the respondents are liable to pay a sum of `2,76,01,585/- to the petitioner- Corporation. - 14 - MFA No. 2032 OF 2014

In support of his evidence, he got produced documents from Exs.P-1 to P-46, which inter alia includes, sanction letter, Deed of Guarantee, Hypothecation Deed, office copy of the notice, postal acknowledgements, reply to the notices, statement of accounts, take over orders, loan release proposal forms, the original Agreement, original letter of Undertaking, copy of the Sale Deed, copy of the notice sent to the guarantors and their reply.

In the cross-examination of PW-1 respondent No.1 side, though several of the statements regarding procedural aspect required to be followed while granting the loan were elicited, however, it was also elicited that the borrower had mortgaged the property while availing the loan. By making a suggestion to PW-1 in his cross-examination dated 26.06.2013 suggesting that the second installment of the loan was released to the borrower six months after the release of the first instalment, the respondents admitted the loan transaction and that the petitioner-Corporation had granted the loan to M/s.Palthur Industrial Enterprises. It was also - 15 - MFA No. 2032 OF 2014 suggested to PW-1 that it did not timely release the loan amount and caused inconvenience to the borrower- industry.

Further, by suggesting that the petition schedule properties were given by respondent No.1 only as an alternate security, but, not as a collateral security, the respondents admitted the loan transaction with the petitioner-Corporation, wherein they did stood as guarantors. The loan documents produced by the petitioner-Corporation in the evidence of PW-1, more particularly, loan sanctioned letter at Ex.P-1, Guarantee Deed at Ex.P-2, Hypothecation Deed at Ex.P-3, Sanction letter at Ex.P-13, Acceptance letter at Ex.P-14, the original Agreement at Ex.P-21, copy of the Sale Deed at Ex.P-24, were all remained undenied from the respondents' side. Thus, proving the alleged transaction between the petitioner-Corporation and the respondents, wherein, in the loan given by the petitioner- Corporation to M/s.Palthur Industrial Enterprises, the - 16 - MFA No. 2032 OF 2014 respondents in the petition have stood as personal guarantors.

Respondent No.1 - Veerabhadrappa B., in his evidence as RW-1 has reiterated the summary of his statement of objections. He admitted that he is the Promoter/Executor of the industrial concern and running the business in the name and style of M/s.Palthur Industrial Enterprises, at KSSIDC Industrial Estate, Harihara. He also admitted that he had approached the petitioner-Corporation seeking a facility of expansion of his project to a tune of `20 lakhs. He himself has stated that petitioner-Corporation agreed to lend a sum of `14,85,000/-, which included a soft seed loan of `1 lakh. Thus, in his evidence also, RW-1 admitted about the loan transaction. However, he contended that the securities executed by him were only as alternate security, but, not as a collateral security. RW-1 contended that several of the documents were fabricated by the petitioner-Corporation. - 17 - MFA No. 2032 OF 2014

In his support, he got marked documents from Exs.R-1 to R-45, which inter alia includes copy of his deposition in O.S.No.180/1992, letter addressed Karnataka Bank dated 13.10.1992, communication between petitioner-Corporation and respondent No.1, the notice received by him and the reply notice, postal acknowledgements etc., However, the fact remains that RW-1 did not deny the availment of loan by M/s.Palthur Industrial Enterprises, of which, he was Promoter/Executor and also himself along with respondent No.2 were the guarantors.

In his cross-examination, he admitted of applying for loan and that he had agreed to mortgage the property by deposit of title deeds. He admitted his signature in Ex.P-2, which was marked as Ex.P-2(a). Thus, he has admitted the execution of Guarantee Deed, which is at Ex.P-2.

The said evidence of PW-1 and RW-1 would go to establish that the petitioner-Corporation had granted a - 18 - MFA No. 2032 OF 2014 loan of `14,85,000/- to M/s.Palthur Industrial Enterprises, of which, the respondent No.1/RW-1 Veerabhadrappa was the Promotor/Executor and guarantor. The respondent No.2 was also a guarantor to the said loan. The respondents have not denied the petitioner- Corporation by exercising its power under Section 29 of SFC Act, seized the said unit i.e., the plant and machineries on 20.03.1995 and sold the plant and machineries of the said unit at `5,66,000/- on 20.10.2004. It is only thereafter, after appropriating the sale proceeds towards the loan of M/s.Palthur Industrial Enterprises, the petitioner-Corporation decided to proceed against the guarantors i.e., respondent Nos.1 and 2, who had extended their personal guarantee towards the loan as per Ex.P-2 and in that regard, issued notices to them on

24.08.2006 under Section 31(1)(aa) of SFC Act, as per Ex.P-4.

Learned counsel for the appellant in her argument relying upon N.Narasimhaiah's case (supra), contended that the petitioner-Corporation can go only - 19 - MFA No. 2032 OF 2014 against the industrial concern and not against the surety or guarantors.

In N.Narasimhaiah's case (supra), a Division Bench of this Court while dealing with Section 29 (1) of SFC Act and the right of Corporation to take direct auction without Court's intervention against the defaulting industrial concern, was pleased to observe that, right to take over management or possession or both of industrial concern, as well as right to transfer by way of lease or sale realise property pledged, mortgaged, hypothecated or assigned, is conferred only against industrial concern and not against the surety. Any attempt by Corporation to take possession of surety's property, even if mortgaged, will amount to depriving a person of his property without authority of law. Against surety, Corporation can seek remedy only through Court and not by resorting to direct action.

In the instant case, it is not in dispute that the petitioner-Corporation seized industrial unit of - 20 - MFA No. 2032 OF 2014 M/s.Palthur Industrial Enterprises on 20.03.1995 by exercising its right vested under Section 29 of SFC Act and thereafter, it sold the plant and machineries of the said unit. It is after appropriating the sale proceeds towards the loan due towards it, the petitioner-Corporation noticing that the outstanding liability is too high, has decided to proceed against the personal guarantors i.e., respondent Nos.1 and 2 and initiated the proceedings by issuing legal notice dated 24.08.2006 to them as per Ex.P-4 under Section 31(1)(aa) of SFC Act and after receiving a reply, which according to it, was untenable, proceeded to file a petition against them in Civil Misc. No.33/2006 in the year 2006 under Section 31(1)(aa) of SFC Act.

Thus, even as per N.Narasimhaiah's case (supra), the petitioner-Corporation has invoked its power in seizing the property of the industrial unit without the intervention of the Court under Section 29 (1) of SFC Act. By invoking the said power, the petitioner-Corporation has proceeded only as against the industrial concern by seizing the plaint and machineries hypothecated to it, but, did not - 21 - MFA No. 2032 OF 2014 invoke its power under Section 29 of SFC Act to proceed against the respondent Nos.1 and 2, who were the personal guarantors to the loan transaction. As held in N.Narasimhaiah's (supra), petitioner- Corporation has resorted to seek remedy against personal guarantors only through Court by filing a petition under Section 31(1)(aa) read with Section 32 of SFC Act and not by resorting directly under Section 29 of SFC Act. Therefore, judgment in N.Narasimhaiah's case (supra) would not enure to the benefit of the appellant in this case.

The second argument contended by the appellant is that the petition was barred by limitation. She contended that even according to petitioner-Corporation, it took over the industrial concern on the date 20.03.1995, whereas, Civil Misc. No.33/2006 was filed on 27.09.2006, which is beyond three years prescribed under Article 137 of Limitation Act, thus, the petition is barred by limitation. In support of her argument, she relied upon a judgment of - 22 - MFA No. 2032 OF 2014 Co-ordinate Bench of this Court in R.N.Shetty's case (supra).

Per contra, learned counsel for respondent No.1- Corporation in his argument submitted that notice of recalling issued to the borrower and dated 07.06.1994 and taking over the industrial concern by SFC are different from the notice issued to the appellant and respondent No.2 herein invoking their personal guarantee. The limitation commences from the date of sale proceeds when found insufficient, but, not from the date of seizure of the industrial concern by the Corporation. In his support, he relied upon a judgment of Hon'ble Apex Court in Deepak Bhandari's case (supra).

In the instant case, the petition averments, as well the evidence of PW-1 would go to show that the petitioner-Corporation seized the plant and machineries of the unit on the date 20.03.1995 by exercising its right under Section 29 of SFC Act. Prior to the seizure of the unit, the petitioner-Corporation had issued a notice to the industrial concern recalling loan on the date - 23 - MFA No. 2032 OF 2014

07.06.1994. According to PW-1, after seizure of the plant and machineries of the industrial unit, though they attempted to sell the seized items, however, they could not get the bidders. The plant and machineries of the unit were sold for a sum of `5,66,000/- only on 20.10.2004. According to PW-1, the petitioner-Corporation seized the collateral security on 10.07.2001 once again exercising their right under Section 29 of SFC Act. Though they made several efforts to sell the seized property on many occasions for the best price, however, for want of bidders, they could not sell the property until the year 2007. It was only in the year 2007, the seized properties of the guarantors were sold for a sum of `17 lakhs. It is after appropriating the sale proceeds, since the industrial concern and the personal guarantors were still due in a sum of `2,76,01,585/-. Notice was sent to personal guarantors as per Ex.P-4 on 24.08.2006, calling upon them to pay the amount due to the petitioner-Corporation. The respondent No.1 sent an untenable reply as per Ex.P-6 on 11.09.2006. Without wasting much time, the - 24 - MFA No. 2032 OF 2014 petitioner-Corporation initiated proceedings against the guarantors under Section 31(1)(aa) of SFC Act by filing Civil Misc. No.33/2006 on 27.09.2006. The above chronology of events is not denied or disputed from the appellant's side.

In R.N.Shetty's case (supra), with respect to Section 31 (1)(aa) of SFC Act, a Co-ordinate Bench of this Court in the case before it has observed that a reduced loan amount of `30 lakhs was sanctioned to the industrial unit M/s.Electro Mobile (India) Limited, on 02.12.1977. The Promoters/Directors of the Company, who were the appellants, had provided security for the repayment of the loan by executing personal Deed of Guarantee on

29.11.1976 in favour of the Corporation. One more personal Deed of Guarantee was also came to be executed on 22.06.1977. The company committed default in the repayment of the loan amount, keeping a due for a sum of `18,40,000/- and it went into liquidation under the orders of Hon'ble High Court of Karnataka. Demanding the said - 25 - MFA No. 2032 OF 2014 amount of `18,40,000/- and interest thereupon, a legal notice dated 22.07.1992 was issued by the Corporation to the personal guarantors. Since the personal guarantors did not pay the amount demanded in the notice, the Corporation filed an application under Section 31(1)(aa) of SFC Act. When the personal guarantors as appellants raised the contention that the application was barred by limitation, a Co-ordinate Bench of this Court in its judgment held that Article 137 of Limitation Act applies to an application made under Section 31 of SFC Act. The accrual of right to sue in the case relatable to and dependent upon default committed by the principal borrower in discharging his liability. The petition ought to have been filed within three years from the date on or before 14.01.1990, but, the petition was filed in the year

1994. As such, the proceedings initiated by the Corporation for issue of Recovery Certificate was barred by Article 137 of Limitation Act. With the above observation along with others, the appeal came to be allowed. - 26 - MFA No. 2032 OF 2014

In Deepak Bhandari's case (supra), the relevant dates of the loan transaction between H.P. State Industrial Development Corporation Ltd., and the borrower was as below : "Date Event

21.5.1990

10.7.1992

31.3.1994

21.5.1994 notice Recall Corporation, outstanding amount. recalling Mortgage/hypothecated assets of the Company Corporation. over by The Mortgage/hypothecated assets the Company sold by Corporation. issued to all Notice Directors of the Company payment of outstanding amount.

26.12.1994 Suit for recovery of the balance outstanding Corporation. " The question before their Lordships was as to when does the right to sue on the indemnity arose. In Paragraph-20 of its judgment, the Hon'ble Apex Court observed that, a contract of indemnity and/or guarantee is an independent and separate contract from the main contract. The right to sue on the contract of indemnity - 27 - MFA No. 2032 OF 2014 arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the Financial Corporation Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not.

The right to claim for the balance arose under the contract of indemnity only when the sale proceeds were found to be insufficient. With the above observation, in Paragraphs-21, 22 and 23 of its judgment, the Hon'ble Apex Court held as below : " 21. We, thus, hold that when Corporation takes steps for recovery of the amount by resorting to the provisions of Section 29 of the Act, the limitation period for recovery of the balance amount would start only after adjusting the - 28 - MFA No. 2032 OF 2014 proceeds from the sale of assets of the industrial concern. As the Corporation would be in a position to know as to whether there is a shortfall or there is excess amount realised, only after the sale of the mortgage/hypothecated assets. This is clear from the language of sub-section (1) of Section 29 which makes the position abundantly clear and is quoted below : " Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concern, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. "

22. It is thus clear that merely because the Corporation acted under Section 29 of the State Financial Corporations Act did not mean that the - 29 - MFA No. 2032 OF 2014 contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. It may be that only the Corporation taking action under Section 29 and on their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient. The right to sue on the contract of indemnity arose after the assets were sold. The present case would fall under Article 55 of the Limitation Act, 1963 which corresponds to old Articles 115 and 116 of the old Limitation Act,

1908. The right to sue on a contract of indemnity/guarantee would arise when the contract is broken.

23. Therefore, the period of limitation is to be counted from the date when the assets of the Company were sold and not when the recall notice was given. "

In the light of the above, it is the principle laid down by the Hon'ble Apex Court in Deepak Bhandari's case (supra), is applicable in the instant case. In the present case also, even though the plant and machineries - 30 - MFA No. 2032 OF 2014 of the unit were seized on 20.03.1995, but, they were sold only on 20.10.2004. The notice to personal guarantors i.e., the appellant and respondent No.2 herein was given vide Ex.P-4 on 24.08.2006. The Civil Miscellaneous Petition under Section 31(1)(aa) of SFC Act was filed on 27.09.2006. Thus, within three years from the date of sale of seized property i.e., 20.10.2004, the Civil Miscellaneous Petition came to be filed, as such, the petition is filed within the period of limitation. Thus, the only other argument of learned counsel for the appellant that Civil Miscellaneous Petition was barred by limitation is also not acceptable.

Barring the above, the learned counsel for the appellant has not raised any other points of argument in support of the appeal. Still, as observed above, the respondents in the cross-examination of PW-1 have admitted the loan transaction. Except general denial that respondent No.1 was not liable to the petitioner- Corporation, no specific contention denying his liability was taken up by respondent No.1/appellant in the trial - 31 - MFA No. 2032 OF 2014 Court. On the other hand, the evidence of PW-1, corroborated by the loan sanction letter at Ex.P-1, Guarantee Deed at Ex.P-2, Hypothecation Deed at Ex.P-3, one more sanction letter at Ex.P-13, Acceptance letter at Ex.P-14, original Agreement at Ex.P-21, establishes the loan transaction between the petitioner-Corporation as loaner and M/s.Palthur Industrial Enterprises as a lonee. The evidence of PW-1 corroborated by the legal notice at Ex.P-4 and statement of accounts at Ex.P-11 proves the due amount payable by the respondents to the petitioner- Corporation. Thus, it stands established petitioner-Corporation is entitled to invoke the guarantee executed in its favour by the present appellant and respondent No.2 herein and to enforce their liability to pay the amount that is due to the Corporation.

Hence, it is considering the materials placed before it, since the trial Court has arrived at a finding holding the respondent Nos.1 and 2 before it as guarantors to the loan advanced by the petitioner- Corporation to M/s.Palthur Industrial Enterprises, are - 32 - MFA No. 2032 OF 2014 liable to pay a sum of `1,39,22,721/- with agreed interest thereon, from the date of petition till the amount is paid, we do not find any illegality, perversity or error warranting any interference in the said finding leading to impugned judgment and decree passed by the trial Court.

Accordingly, we proceed to pass the following : ORDER The Appeal filed by the appellant is dismissed as devoid of merits. Registry to transmit a copy of this judgment along with its records to the concerned trial Court without delay. Sd/- JUDGE Sd/- JUDGE bk/