IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) THURSDAY, THE FOURTEENTH DAY OF AUGUST TWO THOUSAND AND EIGHT PRESENT THE HON'BLE MR JUSTICE B.SESHASAYANA REDDY WRIT PETITION NO : 26980 of 2006 Between: M/s. Sri Vasavi Agencies, Door No.45-58-18/1/A, Narasimhanagar, Akkayyapalem, Visakhapatnam, represented by its Partner Smt.G.Suguna W/o.G.Ch.Sanyasiraju. ..... PETITIONER AND 1. M/s. State Bank of India, Main Branch, Near R.T.C. Complex, Visakhapatnam, rep. by its Assistant General Manager. 2. The Foroun Enterprises, Seizers and Recoveries, Regd. No.85/2006, Visakhapatnam. .....RESPONDENTS Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court may be pleased to issue an order or a direction or writ more particularly a writ of ;mandamus declaring the action of the respondent in sealing the business premises of the petitioner’s firm as arbitrary, illegal and unauthorized and violative of Articles 14, 19(1)(g) and Article 300(A) of the Constitution of India and pass such other order or orders as this Hon’ble Court deems fit in the interest of justice. Counsel for the Petitioner:M/s. C.Kodanda Ram and Challa Gunaranjan Counsel for the Respondent Nos.1&2: MR.PRABHAKAR SRIPADA The Court made the following : O R D E R: 1. This Writ Petition has been filed by M/s Sri Vasavi Agencies assailing the action of the respondents in sealing its business premises at Rajam, Vishakhapatnam and Vijayawada. 2. Grandhi Bhaskara Rao, a power of attorney holder of Smt.G.Suguna, who is a partner in the petitioner firm, has sworn to the affidavit in support of the writ petition. The writ affidavit averments, in brief, are: The petitioner is a partnership firm and it is registered with Registrar of Companies bearing No.16 of 1997. The petitioner firm applied for working capital loan with 1st respondent-Bank. Initially OCC facility to the tune of Rs.28.00 lakhs was sanctioned. The limit was enhanced to Rs.40.00 lakhs in November, 1998. The loan was secured by the deposit of title deeds of agricultural lands owned by ryots who had deposed faith and trust on the petitioner-firm. There are stocks worth Rs.35.00 lakhs in the premises of the petitioner firm at Rajam, Vishakhapatnam and Vijayawada. The last loan revival documents were executed in the month of September, 2006. The Chief Manager of 1st respondent-Bank called on the power of attorney holder of the petitioner firm and informed him to provide urban property as security by replacing the earlier security. The partners of the petitioner-firm expressed their inability to provide any urban property as security. Thereupon, 1st respondent bank served legal notices on the petitioner firm and the guarantors. A suitable reply was given to 1st respondent-Bank. The 1st respondent-Bank never issued any notice or communication to the petitioner-firm with respect to any omissions and commissions in connection with its loan account. The only notice which the petitioner-firm received was the legal notice dated 11.12.2006 which was replied vide reply notice dated 23.12.2006. While so, the 1st respondent-bank sealed the petitioners godowns at Rajam, Visakhapatnam and Vijayawada through 2nd respondent-a private recovery agency. The action of the respondents is solely arbitrary and illegal. 3. Rule nisi came to be issued on 5.1.2007. An interim order came to be passed on the said date, which reads as under: “ Admittedly the licence premises was sealed on 23.12.2006. Whereas the petitioner claims that a sum of about Rs.73,000/- is due under the loan account. According to the respondents, a sum of Rs.40,73,000/- is outstanding. It is also contended by the learned counsel for the respondents that the entire stock in trade has been hypothecated in favour of the bank and since the petitioner committed default, the business premises was rightly sealed in terms and conditions of the loan. Having regard to the fact that the matter involves several disputed questions which require consideration in detail, there cannot be any direction at this stage to remove the seals. The learned counsel for the respondent undertakes to file counter within two weeks. Post on 19.1.2007. However, it is made clear that pending further orders the respondents shall not take any steps for sale of stock in trade seized by the Bank.” 4. Respondents 1 and 2 entered appearance through a counsel and filed vacate stay petition with a prayer to vacate the interim order granted on 5.1.2007. The counter affidavit of 1st respondent, in brief, is : The writ petitioner firm approached this respondent in 1999 and requested to grant financial assistance. This respondent sanctioned a cash credit limit of Rs.40.00 lakhs. The loan was secured by personal guarantees of the partners petitioner firm and also by mortgage of properties apart from hypothecation of stocks in trade under a hypothecation agreement dated 19.3.1999. The writ petitioner firm executed revival letters confirming the debt. The account of the petitioner-firm became irregular since March, 2006. The petitioner has not improved its operations. The petitioner firm did not rout its sales through the 1st respondent-bank. This is in violation of the terms and conditions of the loan agreement. The petitioner firm is arranging the payment of interest only and that too belatedly. The petitioner firm made no efforts to maintain activity at the projected levels. It incurred operational loss since the collateral security given by the petitioner firm became inadequate in value vis a vis the outstanding of the account. The sales projected by the petitioner firm have not been achieved and they are showing a down ward trend. Therefore, this respondent has taken possession of the primary security of the stocks available in the retail outlets of the petitioner firm, which were hypothecated by the Bank as per the agreement of hypothecation. As per clause 7 of the hypothecation agreement, this respondent has got the right to enter any place where the hypothecation goods are stored and to make an inventory of the same. The total outstanding due under OCC account of the petitioner is Rs.40,81,271-32 paise. Even if the seized stocks are sold, it will not fetch more than Rs.12.00 lakhs. Thus, there will be still an outstanding of Rs.28,81,271.32. 5. A reply affidavit has been filed by the petitioner. It is asserted in the reply affidavit that the petitioner’s bank account with respondent-Bank was regular upto May 2006 and the outstanding amount of Rs.73,000/- towards interest till date on the sanctioned limit was only payable to the respondent-bank. It is also asserted in the reply affidavit that there are no violation of terms and conditions of the loan agreement with regard to not routing of sales. The petitioner has been regularly paying the interest through its main account at Visakhapatnam branch. Para 6 of the reply affidavit needs to be noted and it is thus: “ 6. It is submitted by the time of availing loan with the respondent bank during the year 1997 the petitioner firm has offered adequately third party collateral securities to the said loan to the satisfaction of the bank. As of now due to escalation of the prices, the property given under security values have been increased in the market five times more higher than the sanctioned limits, which does not call for the respondent herein to take present action in presumption of inadequate collateral security values vis a vis the outstanding account. Apart form that the petitioner firm periodically submitting it’s the stock statements to the respondent bank, and the bank officials upon checking statements, confirming the drawing power on the petitioner in the account. It is submitted that the latest statement of account, which prepared based on the submission of the stock statements by the petitioner clearly goes to show that the drawing power is in accordance with sanctioned limit. Even, if it is presumed that the stock statement and bills receivables statements given by the petitioner is not upto the level of encouragement and satisfaction, the respondent-bank would have reduced the limit and drawing power of the petitioner in that account. Therefore, the allegation with regard to the stock statements and bills receivables given by the petitioner is not satisfactory is false and baseless.” 6. Heard Sri.C.Kodanda Ram, learned counsel appearing for the petitioner and learned Standing Counsel appearing for the 1st respondent-bank. 7. Learned counsel appearing for the petitioner submits that the method adopted by 1st respondent-bank by engaging the services of 2nd respondent for seizure of stocks in trade is illegal and irregular. A further submission has been made that the seizure of stocks without issuing notice to the petitioner is irregular and therefore the action of 1st respondent in sealing the premises is to be declared as illegal and arbitrary. He would also contend that for getting possession of the hypothecated stocks, the 1st respondent-Bank has to approach the Court and without intervention of the Court, seizure of the hypothecated stocks is impermissible. Learned counsel with his erudite arguments tried to convince me that the hypothecatee has no right to take possession of the hypothecated property without the intervention of the Court. He even argued that the proposition of law laid down in a Division Bench of this court in STATE BANK OF INDIA V. S.B.SHAH ALI (DIED) AND OTHERS needs reconsideration. In support of his submissions, reliance has been placed on the decisions of the Supreme Court in ICICI BANK LTD. V. PRAKASH KAUR, CBI v. DUNCANS AGRO INDUSTRIES LTD, the decisions of our High Court in STATE OF A.P. V. ANDHRA BANK LTD, the decision of Delhi High Court in M/S GOPAL SINGH V. PUNJAB NATIONAL BANK, MUTHOOT LEASING AND FINANCE LTD. V. M/S VASUDEVA PUBLICITY SERVICE and the decision of Punjab and Haryana High Court in TARUN HARGAVA V. STATE OF HARYANA. 8. Learned counsel appearing for the 1st respondent-bank submits that 1st respondent-bank has every right to seize the hypothecated goods in terms of the hypothecation agreement. He refers the revival letters executed by the partners of the petitioner firm on various dates acknowledging the debt for the purpose of Sec.18 of the Limitation Act to speak of the liability of the petitioner firm. The latest revival letter placed on record is dated 10.6.2006. In support of his submissions, reliance has been placed on a Division Bench decision of this Court 1st cited decision. 9. In response, learned counsel appearing for the petitioner submits that the proposition of law laid down in 1st cited decision needs reconsideration. 10. I do not want to burden the judgment by referring the definition of mortagage, pledge and the distinction between pledge and hypothecation. The issue involved in this writ petition is whether the respondent-Bank has a right to seize the stocks in trade of the petitioner firm and whether the method followed by the 1st respondent bank in seizing the stocks is legal and proper? 11. It is suffice to refer the relevant portion of clause 7 of the hypothecation agreement, which reads as under: “ 7. That the Bank, its Agents and Nominees shall be entitled, at all times without notice to the borrower but at the borrower’s risk and expense and if so required as Attorney for and in the name of the Borrower to enter any place where the said goods and assets may be and inspect, value, insure, superintend disposal and/or take particulars of all or any part of the said goods and assets and check any statements accounts reports information and for the purpose of such entry to do all acts, deeds and things deemed necessary by the bank including breaking open of any place where the hypothecated goods and the books of account or other documents relating to the hypothecated debts and assets may be lying or stored or kept and also on any default of the Borrower in payment of any money hereby secured or the performance of any obligation of the Borrower to the Bank or breach of any terms of the said Agreement of Loan or the occurrence of any circumstance ……… A plain reading of the above referred clause 7 of hypothecation agreement gives no room for doubt that the Bank has every right to seize the stocks in trade, either by itself or by its agent without notice to the borrower. 12. In the first cited decision, a Division Bench of this Court elaborately discussed the rights of hypothecatee to seize the hypothecated stocks. After considering the definition of hypothecation, mortgage and keeping in view of various decisions observed as hereunder: “ 34. From the aforesaid decisions it is clear that pledge and hypothecation are two different transactions – in the former possession of goods is parted with by the owner in favour of the creditor whereas in the latter possession of goods is retained by the borrower. The next point that can be deduced from the principle laid down by the aforesaid decisions is that where there is a mere charge in hypothecation agreement, the hypothecateee has to approach the court and seek intervention of the Court for obtaining money decree and for bringing the hypothecated goods for sale through the Court. Where there is any specific clause in the hypothecation agreement empowering the hypothecatee to take possession of the goods and sell the same, in the event of default in payment, as per the said terms the hypothecatee can proceed ahead without intervention of the Court.” 13. Clause 7 of the hypothecation agreement empowers 1st respondent-Bank to seize the stocks in trade by itself or through its agent or its nominee without putting on notice the petitioner-firm. The 1st respondent asserted in the counter affidavit that the petitioner firm has not routed its sales through its Bank. Lerned counsel tries to convince me by referring the entries in the statement of account that sales are being routed through the Bank. I have gone through the statement of account except paying interest portion from August 2005 there are no substantial payments indicating that sales were routed through the bank. Therefore, the contention of the learned counsel for the petitioner that sales were routed through the Bank has no substance. 14. It is also contended by learned counsel for the petitioner that engaging services of 2nd respondent for seizure of stocks in trade cannot be approved in view of the 2nd cited decision of Supreme Court. In the cited decision the hypothecated vehicle came to be seized by use of force. It is not the complaint of the petitioner firm that 2nd respondent used force in sealing the stocks. Therefore, the cited decision has no application to the facts of the case on hand. 15. For the foregoing reasons, I find that the writ petition is devoid of merits and the same is liable to be dismissed. Accordingly, the writ petition is hereby dismissed. No order as to costs. 14th August, 2008. (B.Seshasayana Reddy,J) tnb ASSISTANT REGISTRAR // TRUE COPY // SECTION OFFICER To 1.2CCs to 2.2CD copies Form-NIC-OGS/WP{KSRANI} THE HONOURABLE SRI JUSTICE B.SESHASAYANA REDDY WRIT PETITION NO.26980 OF 2006 14TH AUGUST 2008