HON’BLE SRI JUSTICE A. GOPAL REDDY AND HON’BLE SRI JUSTICE K.S. APPA RAO A.S.No.137 of 1994 Date: -10-2011 Between: Indian Overseas Bank, Branch at Chikkadapally, Hyderabad. ……. Appellant And M/s. Sri Ramachandra Tools Public Limited and others ……. Respondents HON’BLE SRI JUSTICE A. GOPAL REDDY AND HON’BLE SRI JUSTICE K.S. APPA RAO A.S.No.137 of 1994 JUDGMENT: (Per Hon’ble Sri Justice K.S.Appa Rao) Aggrieved by the judgment and decree, dated 26-04-1993 passed in O.S.No.4 of 1989 on the file of the Subordinate Judge at Sangareddy, the plaintiff filed this appeal. For convenience sake, the parties hereinafter will be referred to as they are arrayed before the lower Court. 2. The brief facts of the case are as follows: The plaintiff is the Indian Overseas Bank, Chikkadapally Branch, Hyderabad. The first defendant is a public limited company established under the Companies Act, 1956, and Defendant Nos.2 to 4 are the Directors of the first defendant-company and defendant Nos.6 and 7 are the interested parties in respect of the properties of the first defendant-bank under Pareipassu agreement. The first defendant- company is engaged in the activity of manufacture of cutting tools etc. and is a joint venture of Andhra Pradesh Industrial Development Corporation promoted by the second defendant. At the request of the first defendant-company, the plaintiff-bank had provided various loan facilities to the first defendant-company under (a) Cash Credit Hypothecation, (b) Term loan, (c) Bill purchase and (d) letter of credit including sub-limit of guarantee. The defendant Nos.2 to 4 stood as guarantors and undertook joint and several liability in respect of the loans provided under the said loan facilities to the first defendant- company and executed necessary documents in favour of the plaintiff- bank agreeing the terms and conditions. The defendants also hypothecated the stock in trade, machinery and equipment etc. as security towards the above loan facilities. The defendant Nos.2 and 3 mortgaged immoveable properties as securities in respect of the suit schedule II and III of the properties. The plaintiff, defendant Nos.1, 6 and 7 have entered into an interse parripassu agreement charge, dated 04-08-1981 in respect of the immoveable property i.e., plant and machinery and other articles, land and buildings which are described in schedule IV. Cash Credit Hypothecation: 3. The plaintiff-bank has provided cash credit hypothecation facility to the first defendant-company to the tune of Rs.6,00,000/- and the defendant Nos.1 and 3 had executed the demand promissory note, dated 30-11-1982 for the said amount agreeing to repay the same with interest @ 9.5% per annum and the defendants also executed letter of hypothecation on the same day by hypothecating the stocks of high speed steels rounds etc. and the above securities are registered with the register of Companies. The defendants availed the loan, but failed to repay the same. The first defendant-company executed a revival letter dated 26-10-1985 by acknowledging the liability under the demand promissory note dated 30-11-1982 under the cash credit hypothecation facility and also executed a letter by confirming the balance of Rs.10,51,566/- under the cash credit hypothecation facility as on 30-06-1986. Inspite of repeated requests and reminders, the defendants failed to repay the loan amount. Therefore, they are liable to pay a sum of Rs.16,03,871-41 ps to the plaintiff-bank under cash credit hypothecation. Term loan: 4. The plaintiff-bank had provided term loan to the first defendant-company to the tune of Rs.6,75,000/- and the defendant Nos.1 to 3 had executed the term loan agreement dated 04-08-1981 agreeing the terms and conditions stipulated therein and also agreed to repay the said loan in half yearly instalments @ Rs.40,000/- commencing from 04-08-1983 with interest @ 13.5 % per annum with quarterly rests. The defendants furnished the security in respect o the properties of assets, land, buildings etc. and executed necessary documents. They also executed the letter of hypothecation dated 04- 08-1981 hypothecating the land admeasuring Ac.1.00 and buildings therein. The defendants also executed revival letter dated 10-07-1986 confirming the balance under the term loan facility. The defendants availed the term loan, but failed to repay the same. Therefore, they are liable to pay an amount of Rs.12,47,161-35 ps to the plaintiff-bank under term loan facility. Bill purchase facility: 5. The plaintiff-bank provided bill purchase facility to the first defendant-company to the tune of Rs.9,00,000/- and the defendant Nos.1 to 3 have executed a demand promissory note dated 30-11- 1982 agreeing to repay the same with interest @ 9.5% per annum. The defendants executed a letter of hypothecation dated 30-11-1982 agreeing the terms and conditions stipulated therein. The defendants also executed a document of power of attorney for supply bills dated 30-11-1982 appointing the plaintiff-bank as their lawful attorney by expressly authorising to perform all the acts and deeds mentioned in the document. The defendants also executed a letter of indemnity dated 30-11-1982 by undertaking to indemnify the plaintiff-bank for the bills, exchange drawn by the plaintiff-bank on behalf of the first defendant-company. The defendants executed revival letters in favour of the plaintiff-bank by confirming the balance as on 30-06-1988. The defendants availed the loan under bill purchase facility, but failed to repay the same. Therefore, a sum of Rs.16,74,307-38 ps is due and payable by the defendants to the plaintiff-bank under bill purchase facility. Letter of Credit: 6. The plaintiff-bank has provided letter of credit facility to the first defendant-company to the tune of Rs.6,00,000/- and for this facility, the first defendant-company executed demand promissory note dated 30-11-1982 agreeing to repay the same with interest @ 19.5% per annum. The plaintiff-bank provided a sub-limit guarantee to the tune of Rs.1,50,000/- to the first defendant-company and the defendants have executed an application for documentary credit dated 25-02-1983 in respect of the consignment from Swedon as described in the documents. The defendants also executed necessary other documents in favour of the plaintiff-bank. The defendants availed the loan under the letter of credit, but failed to repay the same. Therefore, a sum of Rs.5,21,536-93 ps is due and payable by the defendants to the plaintiff-bank under the letter of credit facility. 7. The plaintiff-bank further pleaded that the defendants have entered into an inter se agreement viz., Parripassu charge dated 04- 08-1981 between the plaintiff-bank and defendant Nos.6 and 7. The defendants have also created charge of mortgage in respect of the plot bearing No.7 admeasuring Ac.1-00 situated at I.D.A. Patancheru, Medak District with structures existing therein, plant, machinery and equipment installed thereon. The defendant Nos.2 and 5 have also created equitable mortgage and deposited the title deeds in respect of their properties bearing Sy.No.168/2 of Kumedavalli village and an extent of Ac.2-26 guntas in Sy.No.311 of Bhimavaram village, West Godavari District belonging to defendant No.2. The defendant No.5 has also deposited title deeds in respect of the property bearing Sy.No.145 admeasuring 7.5 acres situated at Loseriguttalapadu of Bhimavaram Taluq as collateral securities for the repayment of the loan facilities due to the plaintiff-bank. The plaintiff-bank further stated that defendant Nos.2 to 4 executed a letter of guarantee dated 30-11-1982 to the tune of Rs.21 lakhs and the defendant Nos.2 to 4 stood as guarantors and made themselves personally liable in respect to the above facilities provided to the first defendant-company. Inspite of repeated demands, the defendants failed to repay the amounts due to the plaintiff-bank. Therefore, the plaintiff-bank had constrained to issue legal notice dated 16-08-1988 to defendant Nos.1 to 5. The defendants received legal notice, but they have neither replied to the same nor paid any amount to the plaintiff-bank. The defendants, in all, are due and payable an amount of Rs.50,46,877-07 ps to the plaintiff-bank under various loan facilities with interest thereon as on the date of filing of the suit. Therefore, the plaintiff-bank filed the suit for passing of the decree for Rs.50,46,877-07 ps with interest @ 16.5% per annum from the date of suit till the date of realisation. 8. The defendant Nos.1 and 2 filed written statement admitting the suit claim and stated that the project was to produce metal cutting tools with a capital outlay of Rs.143.75 lakhs and that considerable time was taken to secure the financial tie-ups with the institutions and due to the subsequent negative attitude of the concerned officers in A.P.I.D.C. the implementation of the project was delayed and consequently, the cost of the project had gone up and the production started from 01-07-1982 only. The instalments of the term loans and interest thereon started becoming due even before they could make any substantial progress in production and when they were not in a position to pay the same, A.P.I.D.C. took steps to change the management instead of extending a helping hand to them. The A.P.I.D.C. had advertised in the new papers calling for offers to take over the management of the unit and finalised to give it to a Bangalore party and the unit remained closed from October, 1985 till February, 1987. It is further stated that under Sick Industrial Companies Act, 1985, case No.37 of 1988 was registered and much before the case had come up for hearing, the plaintiff-bank had filed this suit and as such, the suit is not maintainable and it is barred by limitation and this Court has no jurisdiction to try the suit. The plaintiff bank was also responsible for the sickness of the unit, which lead to the ultimate closure, and there are some omissions and commissions on the part of the plaintiff-bank. The plaintiff-bank, being a Parripassu partner of the other financial institutions along with A.P.I.D.C., is also responsible for the actions of A.P.I.D.C. which contributed to the failure of the project. The consortium of the financial institutions, which met on 10-11-1986, assured to allow them all the necessary concessions and assistance to revive the unit after its reopen and run it for six months and inspite of the sincere efforts on the part of the promoters, the concerned officer in A.P.I.D.C. did not encourage, guide or help them to fully implement the project and on the other hand, several hurdles were created, and ultimately they had faced several difficulties and no scope was given to them to mobilise or secure necessary additional finance to meet the over run in the cost of the project. It is further stated that being fed up with the prolonged hostility on the part of A.P.I.D.C. officer, they decided to step out and negotiated with a party who was ready to purchase their share holding at face value, but they were dissuaded by the A.P.I.D.C. officer at the last minute by convincing them that they would get the unit at much cheaper price if they wait for a while as the advertisement for the change of the management was being released shortly and the concerned officer has managed to see that the consortium of the financial institutions to select the Bangalore party and they were forced to sign the memorandum of agreement with that party and that the party has to take possession of the unit before 30-06- 1986, but after keeping all the concerned in suspense for about six months and after the Bangalore party backed out, they were called and asked to give proposals to reopen the unit. The defendant Nos.2 and 5 have not created any equitable mortgage by deposit of the title deeds in respect of the properties mentioned in schedule II and III and getting signatures on the printed forms with blanks and filling up the blanks later cannot create a mortgage and the Xerox copies of the title deeds without the originals are not sufficient to create an equitable mortgage and the amounts claimed and rates of interest charged are not correct. They, they pray to dismiss the suit with costs. 9. The defendant No.3 was set ex parte. 10. Defendant No.4 filed written statement stating that the first defendant-company was registered under the Companies Act and it should produce metal cutting tools with the capital outlay of Rs.143.75 lakhs and the second defendant was one of the promoter directors and Managing Director from 01-01-1980 to 19-12-1986 and defendant No.4 was one of the Directors till 31-03-1984 and thereafter, this defendant had no say in the management of the company affairs and denied his personal liability and stated that defendant Nos.2 and 3 signed the documents with the plaintiff-bank as Directors of the company, but not in their personal capacity. The suit against this defendant is mischievously brought knowing pretty well that he ceased to be the Director from 01- 04-1984 and from the date onwards he has no concern with the affairs and management of the first defendant-company. The contention of the plaintiff-bank that the defendants executed revival letter on 20-02- 1984 and another revival letter on 26-10-1985 by the defendant No.4 does not arise. The defendant No.4 denied the execution of any documents with the plaintiff-bank after he ceased to be the Director of the company. It is further stated that all the averments made in the plaint unequivocally suggest that the Directors of the company signed the documents with the plaintiff-bank on behalf of the company without undertaking their personal liability and independent to that of the company and in fact, defendant No.4 was not called upon to execute any document much less the revival letter or confirmation letter, and that the suit is bad for misjoinder of parties and the claim of the plaintiff- bank as against defendant No.4 is barred by limitation. Therefore, he prays to dismiss the suit with costs. 11. Defendant No.5 filed written statement stating that the he has not deposited any title deeds in respect of his property and that he was only an employee of the first defendant-company and when his father was the Managing Director, the second defendant took his signatures on some blank papers and that getting signatures on the blank forms cannot create a mortgage and without the deposit of original title deeds, an equitable mortgage cannot be created. As the additional loan facilities were never granted to defendant No.5, the plaintiff-bank cannot try to proceed against his property alleged to have been mortgaged in the year 1985 for the repayment of the loans advanced in 1982 and the suit is not maintainable against defendant No.5 as he never participated in the company’s affairs with the plaintiff- bank. It is further stated that defendant No.2, who is not in good terms with defendant No.5, seems to have got involved defendant No.5 in the loan affairs of the company with the plaintiff-bank. The allegation of creating equitable mortgage by defendant No.5 in respect of suit schedule III property is absolutely false. Therefore, he prays to dismiss the suit with costs. 12. Defendant No.7, A.P. State Finance Corporation, filed written statement stating that it gave financial assistance to the first defendant-company and that the term loans advanced by the institutions are secured by charges in favour of the respective institutions besides parripassu agreement interse to share the proceeds arising out of the sale/recovery from the assets thus financed. The plaintiff-bank along with defendant No.6 expressed their consent and willingness to the above sale and also participated in the negotiations. The possession has not yet been given to the auction purchaser nor the sale proceeds received and distributed yet between the parripassu charge holders and that the defendant No.7 has no objection if the decree is passed subject to the rights of the parripassu charge holders in terms of the agreement entered into between them. 13. Basing on the rival contentions, the following issues and additional issues have been framed before the trial Court for adjudication of the suit: Issues: 1. Whether the plaintiff is entitled to recover the suit amount as prayed for? 2. To what relief? Additional issues: 1. Whether the D-1 and D-4 acted as the directors of the company during any time? 2. Whether D-2 and D-4 are liable in their personal capacity? 3. Whether the plaintiff and D-6 and d-7 are responsible for the unit becoming sick, if so what it effects on the plaintiff’s claims? 4. Whether the D-4 is wrongly impleaded in this suit? 5. Whether the existing board of directory of the D-1 company are necessary parties to this suit? 6. Whether the suit is barred by limitation against D-2, D-4 and D- 5? 7. Whether the suit is maintainable when D-1 Company registered its claim before the competent (Special Providence Act, 1985)? 8. Whether the D-2 and D-5 created an equitable mortgage of land as alleged by the plaintiff, if so what is its effect? 9. To what relief? 14. The plaintiff-bank, in order to discharge its burden, examined PW-1, Sri A. Jaishanker Prasad, and got marked Exs.A-1 to A-48. On behalf of the defendants, the second defendant was examined as DW-1, however, no documents were marked. 15. The lower Court, after considering the entire oral and documentary evidence adduced on either side, passed the judgment, dated 26-04-1983 and the decree reads as under: 1. That the defendant No.1 to 5 as the Directors of the Defendant No.1 do pay the sum of Rs.50,46,877-07 ps. to the plaintiff bank together with interest thereon at the rate of 16.5% p.a. from the date of suit i.e., 14-10-1988 till its realisation. 2. The defendant Nos.2 to 5 are not personally liable to pay the suit amount. 3. That the defendant Nos.1 to 7 do pay a sum of Rs.1,94,663-00 to the plaintiff bank towards the costs of the suit. 4. The defendant Nos.6 and 7 are entitled to paripasu charges. If the defendant No.1 company sale proceeds are not sufficient, the plaintiff is at liberty to recover the amount from other defendants. 5. That the defendant Nos.1 to 7 do pay the decreetal amount into court within six months. 6. That on such payment and on payment thereafter before such date as the court may fix, of such amount as the court may adjudge due in respect of such costs of the suit and such costs, charges and expenses as may be payable under Rule 10 together with such subsequent interest as may be payable under rule 11 of Order XXXIV of the first schedule to the code of Civil Procedure, 1903, the plaintiff shall bring into Court all documents in his possession or power relating to the mortgaged property in the plaint mentioned and all such documents shall be delivered over to the defendants or to such person as he appoints and the plaintiff shall, if so requires, reconvey or re-transfer the said property free from the said mortgage and clear of and from all encumbrances queated by the plaintiff or any person claiming under him or any person under whom he claims and shall, if so required, deliver upto the defendant quite and peaceful possession of the said property. 7. And it is hereby further ordered and decreed, that in default of payment as aforesaid, the plaintiff may apply to the Court for a final decree for the sale of the mortgaged property and on such application being made, the mortgaged property or a sufficient part thereof shall be directed to be sold, and for the purpose of such sale the plaintiff shall produce before the Court or such office as it appoints all documents in his possession or power relating to the mortgaged property. 8. And it is hereby further ordered and decreed that the money realised by such sale shall be paid into Court and shall be duly applied (after deduction therefrom of the expenses of the sale) in payment of the amount payable to the plaintiff under the decree and under any further orders that may be passed in this court and in payment of any amounts which the court may adjudge due to the plaintiff in respect of such costs of the suit, and such costs charges and expenses as may be payable under rule 10, together with such subsequent interest as may be payable under rule 11 or Or.XXXIV of the First Schedule to the Code of Civil Procedure 1908, and that the balance, if any, shall be paid to the defendants or other persons entitled to receive the same, and 9. It is hereby further ordered and decreed that if the money realised by such sale shall not be sufficient for payment in full of the amount payable to the plaintiff as aforesaid, the plaintiff shall be at liberty (where such remedy is open to him under the terms of his mortgage and is not barred by any law for the time being in force) to apply for a personal decree, against the defendants for the amount of the balance; and that the parties are at liberty to apply to the court from time to time as they may have occasion, and no such application or otherwise the Court may give such directions as it think fit. 16. Being aggrieved, the plaintiff-bank preferred the present appeal mainly on the ground that the lower Court ought to have seen that the liability of the surety/guarantor is co-extensive with that of the principal debtor and ought to have held that acknowledging the liability of the principal debtor is binding on the surety and the sureties/guarantors are also liable till the repayment of the loan. It is further urged that the lower Court has not properly constructed Sections 126 and 128 of the Contract Act and Section 18 of the Limitation Act, 1963 with reference to the terms of the Contract agreed by the parties and failed to see that the guarantee executed by the sureties/respondents herein is a continuing guarantee as per the terms of the contract agreed by them and hence, the question of limitation does not arise. It is further urged that the lower Court ought to have followed the judgment reported in MARGARET LALITA SAMUEL v. INDO COMMERCIAL BANK LIMITED [1], wherein it was clearly held that there is no question of limitation in the case of continuing guarantee undertaken by the guarantors. It is further urged that the lower Court ought to have seen that Clause 9 of the Letter of guarantee stipulates that the guarantee shall be a continuing guarantee and shall remain in force until the repayment of the loan and ought to have seen that in view of the terms and conditions of the letter of guarantee, the respondents/sureties are jointly and severally liable to pay the suit claim. Therefore, the lower Court ought to have decreed the suit against respondent Nos.2 to 5 also as prayed for by granting mortgage decree of the Schedules II and III of the properties and also personal decree against defendant Nos.2 to 5 also. 17. The learned counsel appearing for the respondents- defendants, while supporting the judgment and decree of the lower Court, sought for dismissal of the appeal. 18. Now the point for consideration is whether the judgment and decree of the lower Court dated 26-04-1993 is sustainable? POINT: 19. PW-1, Sri A. Jaishanker Prasad, is a material witness examined on behalf of the plaintiff-bank. According to him, he worked as Branch Manager, Indian Overseas Bank, Chikkadapally Branch, during the period from December, 1981 to May, 1985. At that time, the first defendant-company approached him for the loan facility by producing Ex.A-1 memorandum of the Articles of Association of the company. Exs.A-2 to A-4 are the resolutions of the company. Accordingly, the first defendant- company was provided various loan facilities namely, cash credit hypothecation, term loan, bill purchase facility and letter of credit. 20. The cash credit hypothecation facility was provided to a tune of Rs.6,00,000/- @ 9.5% interest over the R.B.I. rate of interest with a minimum of 19.5% per annum or at such rate as revised by the bank from time to time as per the instructions of R.B.I. Accordingly, the defendants executed Ex.A-5, demand promissory note, dated 30-11- 1982, Ex.A-6, letter of cash credit loan, Ex.A-7, letter of hypothecation, Ex.A-8 letter of hypothecation for machinery, dated 30-11-1982, Ex.A-9 confirmation of balance dated 18-07-1986 and Ex.A-10, statement of account in respect of the cash credit loan. 21.