IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA. Civil Suit No. 26 of 2002. Judgment reserved on 12.10.2007. Date of Decision: 1st January,2008. The Himachal Pradesh State Industrial Development Corporation Limited ……Plaintiff. Versus. M/s Sunrise Malt (P) Ltd. and others …. Defendants Coram The Hon’ble Mr. Justice Dev Darshan Sud,Judge. Whether approved for reporting?1 For the Petitioner: Mr. Ajay Kumar, Advocate. For the Respondents: Mr. K.D. Sood, Advocate, for defendant Nos. 1 to 5. Dev Darshan Sud, Judge. The plaintiff has instituted this suit for recovery of a sum of Rs. 55,55,706.00 along with cost and interest @ 20% per annum from the date of suit till its realization with half yearly rests. The allegations in the plaint are that two term loans of Rs. 17 lacs and Rs. 11.54 lacs (totaling Rs. 28.54 lacs) were sanctioned in favour of defendant No. 1, which is a private limited Company, incorporated under the Companies Act, 1956, for the purposes of purchase of land, construction of factory building and purchase of 1 Whether Reporters of Local Papers may be allowed to see the judgment? - 2 - machinery etc. The plaintiff pleads that for securing the loans, defendant Nos. 2 to 4, who are its Directors, executed promissory notes, loan agreements and hypothecation deed(s) for land, building plant and machinery etc. The plaintiff avers that in addition to this security, an equitable mortgage was created by defendant No. 1 by deposit of title deed(s) of the properties of defendant No. 1. Defendant Nos. 2 to 5 executed guarantee deed(s) on 26.5.1992, 29.5.1992 and 29.10.1992 guaranteeing the repayment of the loans. According to the plaintiff, defendants failed to comply with the terms and conditions of the loan agreements despite the fact that on 26.10.1995 defendant No. 1 had applied for permission for change in management which was allowed by the plaintiff on 23.5.1996 on certain terms and conditions. One of the concession sought was permission for the reschedulement of the repayment of the loan amount. The defendants failed to execute revised loan documents within the stipulated period as asked for and conveyed to them by the plaintiff. The plaintiff alleges that proforma defendant No. 6, (H.P. State Financial Corporation) took over the assets of defendant No. 1 on 16.5.1997 exercising its statutory right under Section 29 of the State Financial Corporations Act 1951. These assets were sold for a sum of Rs. 24 lacs and Rs. 7,49,273/- was paid to the plaintiff after proforma defendant No. 6 had adjusted a part of the sale consideration for discharge of the loans of defendant No. 1. The plaintiff claims a sum of Rs.1,28,83,574/- ( one crore twenty eight lacs eighty three thousand five hundred and seventy four only) and - 3 - pleads that a sum of Rs. 73, 27,868/- is not being claimed by it and has been waived. The suit of the plaintiff has been resisted by the defendants on a number of grounds. The primary defence is that defendant Nos. 3, 4 and 5 are absolved of their liability as the management of defendant No. 1 has been transferred to Vijay Kumar Kaplesh, John Nycil Mendez, Suresh Chauhan and Raj Kumar Sharma with the consent of the plaintiff on the specific understanding that the liability of the defendants would be discharged. The defendants plead novation of contract as discharging their liability. According to them, the management changed on 24.11.1995 when, according to defendant No. 3 a sum of 16 lacs was paid to proforma defendant No. 6 who also got fresh documents executed from them. The defendants pleaded that there is novation of contract and that they are discharged from their liability. Another plea taken by the defendants is that when the Industrial Unit of defendant No. 1 was taken over by proforma defendant No. 6 and advertised for sale, defendant Nos. 1 and 2 gave their assent for the finalization of the sale subject to the condition that the entire loan outstanding both with the plaintiff and proforma defendant would be settled and cleared for the amount so received. A number of other objections have been taken but which will be considered under various issues where they arise for determination. The following issues were framed by this court on 29.5.2003:- 1. Whether the plaintiff is duly incorporated company under the Companies Act and Sh. Pawan Kumar Bali - 4 - is authorized to file the present suit? ….. OPP 2. Whether the plaintiff is entitled to the suit amount and interest, if so, of what amount and rate? …. OPP 3. Whether the suit of the plaintiff is within the period of limitation? …..OPP 4. Whether the suit is bad for mis-joinder and non- joinder of necessary parties, as alleged. If so, its effect? … OPD 5. Whether there was novation of contract, as a result of which, defendants 3 to 5 stood absolved their liabilities? …. OPD. 6. Whether the defendants have discharged the entire loan liability by paying Rs. 24 lacs by Sh. Dinesh Kumar, as alleged? … OPD 7. Whether the plaintiff has not come to the court with clean hands. If so, its effect? …OPD 8. Whether the plaintiff is estopped from filing the suit on account of its own acts, deeds, conduct and acquiescence, as alleged? …..OPD. 9. Whether the defendants suffered loss on account of alleged acts of negligence on the part of the plaintiff. If so, its extent and defect? ….. OPD 10. Whether the plaintiff has unauthorizedly debited, the account of the defendants to several charges including expenses and interest. If so, its effect? …..OPD - 5 - 11. Relief. ISSUE NO. 1. Whether the plaintiff is duly incorporated company under the Companies Act and Sh. Pawan Kumar Bali is authorized to file the present suit? ….. OPP There is no evidence on the record to show that the suit has not been instituted by a duly authorized person. PW-2 Pawan Kumar Bali was the Manager Project (Legal) of the plaintiff who proved Ext. PW-2/A which is the certificate of incorporation of the plaintiff and Ext. PW-2/B, a copy of Resolution No. 12 authorizing the Manager to file suits on behalf of the plaintiff in any court of law. He also proved Ext. PW-2/B/1 and Ext. PW-2/B/2 and Ext. PW-2/C being annexures to the Resolution of the Board of Directors and the authority granted to this witness to institute the suit. There is nothing in the cross-examination of this witness to show that he has no authority to file the suit on behalf of the plaintiff. This issue is therefore, decided in favour of the plaintiff and against the defendants. ISSUE NO. 3. Whether the suit of the plaintiff is within the period of limitation? …..OPP The Hon’ble Supreme Court in H.P. Financial Corporation vs. Smt. Pawna and others Civil Appeal No. 1971 of 1998 along with other Special Leave Petitions decided on 18.12.2003, held that the cause of action to claim the balance loan amount would arise to the Corporation after the assets of Industrial concern/party have been - 6 - disposed of pursuant to proceedings under Section 29 of the State Financial Corporation Act. There is no dispute before me that the Industrial assets of defendant No. 1 was taken over on 23.5.1997 and that the Industrial Unit was auctioned by proforma defendant No. 6 on 21st July, 2001 when it was purchased by one Mr. Dinesh Kumar for a sum of Rs. 24 lacs. The suit having been instituted on 9.4.2002 is within time. This issue is, therefore, decided against the defendants and in favour of the plaintiff. ISSUE NO. 5. Whether there was novation of contract, as a result of which, defendants 3 to 5 stood absolved their liabilities? …. OPD. This is the primary defence which has been taken by the defendants. DW-3 Shri Amar Nath has appeared as a witness and stated that agreement Ext. DW-3/A was executed between him and the new Management. After this, Shri Raj Kumar used to deal with the plaintiff. All previous Directors of the Company, according to him, were exonerated of their liability and it was only the “New Management” which was dealing with the plaintiff and the world at large. As such the defendants are not liable to pay any amount. He deposes that he had consented for the sale of the unit to his son Dinesh Kumar for a sum of Rs. 24 lacs and vide Ext. DW-3/B he had conveyed his consent. The confirmation of the sale was subject to the condition that the entire loan amount was liquidated. He admits that proforma defendant No. 6 had filed a suit for recovery against him and the other Directors including the “New Management” before the Debt Recovery Tribunal at Chandigarh. - 7 - DW-4 Shri Shanti Swarup Kaplish testified that the Industrial Unit of defendant No. 1 was taken over by Shri Vijay Kumar Kaplish, John Nycil Mendez, Suresh Chand Chauhan and Raj Kumar Sharma all of whom are Non Resident Indians and they use to deal with the Financial Corporation directly. He states that he resigned from the Company on 24.11.1995 and has proved on record Ext. DW-4/A which is his resignation letter. He further testifies that he wrote to the plaintiff that his Guarantee Deed(s) may be released. This was contained in letters addressed by him Ext. DW-4/B, Ext. DW-4/D and Ext. DW-4/F. DW-2 is the Senior Assistant (Legal) of proforma defendant No. 6. He testifies that Rs. 59 lacs were advanced by the H.P. Financial Corporation proforma defendant No. 6 to the plaintiff vide agreement Ext. DW-2/A. Revised schedule of payment between the loanees and proforma defendant No. 6 is Ext. DW-2/C. He states that “New Management” of the Company executed Deed(s) of Guarantee Ext. DW-2/4. Other loan documents being Ext. DW-2/A and Ext. DW-2/C were also proved by him on the record. He admits that a suit has been filed by defendant No. 6 against other defendants in the Debt Recovery Tribunal, Chandigarh. Section 62 of the Indian Contract Act, 1872 deals with the novation of contracts. It provides: “62. Effect of novation, rescission, and alteration of contract.- If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.” - 8 - The provision clearly recognizes the principle that a new contract should rescind, alter or extinguishes the original contract and this is to be done by a specific agreement amongst the parties to the original contract. The evidence on the record does not show or indicate that such rescission has in fact been made or that there has been an agreement inter se between the parties to the suit rescinding, altering and amending the original agreements in the nature of loan documents or guarantees deed(s) executed by the defendants. It is undisputed before me that permission to change the management was granted to the defendants by the plaintiff on certain terms and conditions which were required to be fulfilled by the defendants as conditions precedent for acceptance of charge/substitution of the liabilities and absolving the defendants of their liabilities. Ext. PW- 2/V is a communication dated 26.10.1995 addressed by the Managing Director of defendant No. 1 to the Managing Director, H.P. State Financial Corporation stating therein that they have been able to identify S/Sh. Vijay Kumar Kaplesh J.P. Sharma and Raj Kumar Sharma who would take over the new management. Copy of this communication has been endorsed to the plaintiff. It refers to an earlier communication having been addressed to the plaintiff on the subject and than proceeds to state that these four persons named in the letter are willing to take over the company on the conditions: “1. That they shall pay an amount of Rs. 25.00 lacs immediately on down payment as token of interest for effecting the said change of management. 2. The balance outstanding amount of HPFC & HPSIDC Ltd. after adjustment of above Rs. - 9 - 25.00 lacs shall be repaid within the existing schedule as conveyed while approving our earlier rehabilitation plan-cum- change of management proposal with minor adjustment on account of payment being made by us. 3. We shall be sending details of bio-data, assets and liabilities position and proposal of the new management alongwith payment of Rs. 25.00 lacs within a period of 15 days.” Vide Ext. PW-2/X, proforma defendant No. 6 has granted its approval conveying that at the meeting of the Executive Committee of the defendant held on 29.11.1995, the proposal has been approved promising certain incentives etc. Vide Ext. PW-2/Y, which is a communication dated 29.1.1996 addressed to the Managing Director of the plaintiff, the defendants ask for time to submit a detailed proposal including change of management along with complete bio data of the proposed Directors . Ext. PW-2/W is an important document which may be noticed in detail. It recites:- “Managing Director, M/s Sunrise Malt (P) Ltd., Plot No.. 11, Industrial Area, BILASPUR (H.P)-174001. Subject: Changement of management & Rehabilitation Dear Sir, This has reference to your proposal dated 29th January, 1996 for the rehabilitation of the Unit and change of management submitted to HPSIDC &HDFC. We are pleased to inform you that the proposal for change of management and rehabilitation of the Unit has been considered and approved on the following terms and conditions:- - 10 - 1. S/Shri Vijay Kumar Kaplesh, John Nycil Mendez, Raj Kumar Sharma and Suresh Chand Chauhan shall be inducted as Directors replacing Smt. Manorma Devi and Shri Shanti Swaroop. 2. The new Directors shall guarantee and shall also executed the legal documents for securing the outstanding loan of the Corporation. 3. Funding of our due interest: The interest in default amounting to Rs. 12,21,000/-, after the waiver of penal interest charged upto 10.1.1996 amounting Rs. 92,000/- approximately (subject to audit) has been kept in a separate account and shall be repaid back along with interest & 16% p.a. with half yearly rests in the following manner:- 10.7.1996 3.06 10.1.1997 3.05 10.7.1997 3.05 10.1.1998 3.05. Total: Rs. 12.21 lacs. 4. Reschedulement of repayment of term loan: The repayment of term loan of Rs. 25.59 lacs is rescheduled, which shall be repayable as under:- (Rs. in lacs) 10.7.1998 2.84 10.1.1999 2.84 10.7.1999 2.84 10.1.2000 2.84 10.7.2000 2.84 10.1.2001 2.84 10.7.2001 2.84. 10.1.2002 2.84 10.7.2002 2.87 Total: 25.59 lacs The above amount shall carry interest @ 19% p.a. and in case of default on timely payment, the - 11 - penal interest @ 4% shall be extra on the defaulted amount for the defaulted period. You are requested to send us your acceptance and execute the revised loan documents within one month. Thanking you, Yours faithfully, For HPSIDC Ltd. Manager (R&M) CC: Managing Director, HPFC, Shimla, for information. CC: Manager (Project).” This is followed by a telegram Ext. PW-2/Z stating that no acceptance has been conveyed by the defendants of the terms and conditions as conveyed vide Ext. PW-2/W. The telegram asks/requires the defendants to immediately send their acceptance and execute the documents by June, 23, failing which, concessions offered may be withdrawn. Defendants responded vide Ext. PW- 2/B-B stating that time limit for complying with the conditions may be extended as their Directors are abroad and will be coming to India in the month of July. This is followed by another telegram Ext. Pw- 2/AA acknowledging telegram dated 18th June asking the defendants to execute the documents asked for by June 30. Defendants were asked to send their response by 30th June, failing which, concession offered would be withdrawn. On 12th August, 1996, vide Ext. PW- 2/CC another request is made by the defendants for extension of - 12 - time till November, 1996 for executing the documents and complying with the conditions imposed by the plaintiff. This is the entire evidence on the record. The documents and the evidence on the record do not establish any novation of contract. The acceptance of the proposal which was given by the plaintiff was subject to fulfillment of certain conditions as clearly contained and stipulated in Ext. PW-2/W which have not been complied with. There is no explanation on the record as to why such compliance was not made or that there was any impossibility or reason for non compliance performance of these conditions. There is no evidence that performance of these conditions was dispensed with by the plaintiff. The provisions of Section 62 have already been noticed above. In Lata Construction and others vs. Dr. Rameshchanandra Ramniklal Shah and another AIR 2000 SC 380 it has been held:- “11. One of the essential requirements of ‘Novation’; as contemplated by Section 62, is that there should be complete substitution of a new contract in place of the old. It is in that situation that the original contract need not be performed. Substitution of a new contract in place of the old contract which would have the effect of rescinding or completely altering the terms of the original contract, has to be by agreement between the parties. A substituted contract should be rescind or alter or extinguish the previous contract. But if the terms of the two contracts are inconsistent and they cannot stand together, the subsequent contract cannot be said to be in substitution of the earlier contract.” Learned counsel for the plaintiff referred to some other decisions which are being noticed but are not being considered in - 13 - detail as the law has been settled by the Hon’ble Supreme Court. He referred to the decision of the Nagpur High Court in Ganpat vs. Mahadeo and others AIR 1925 Nagpur 26 holding that a fresh contract must be proved to be in existence which, in fact wipes out all the obligations under the old contract . To similar effect is the judgment of the Lahore High Court in Guranditta Mal-Sant Ram and another vs Labhu Ram-Lachman Das AIR 1936 Lahore 476 reaffirming that there must be a clear and present substitution of another contract for the original and not a mere agreement to substitute one in future. At the cost of repetition it may be added that there is no fresh agreement(s) between the parties substituting, altering, amending or changing the original loan agreement(s) and guarantee deed(s). This issue is, therefore, decided against the defendants. ISUE NO. 4. Whether the suit is bad for mis-joinder and non-joinder of necessary parties, as alleged. If so, its effect? … OPD Learned counsel for the defendants has urged that the suit is bad for mis-joinder of parties and non-joinder of necessary parties. The contention raised is that the plaintiff having accepted the arrangement allowing a new set of Directors to take over the management, they were necessary parties and that defendants have been unnecessarily impleaded in the suit. The submission is that defendant Nos. 3, 4 and 5 have been absolved of their liability and the guarantee deed(s) executed by them are no longer enforceable. This submission of the defendants cannot be accepted. I have already held that there has been no substitution of the contract - 14 - between the parties. It has also not been proved by the defendants that they had complied with the conditions imposed by the plaintiff for accepting a new management who would take charge of the affairs of the Company- defendant No 1. In fact, the conditions imposed by the plaintiff vide Ext. PW-2/W calling upon them to have fresh documents executed, have not been complied with despite reminders vide Ext. PW-2/Z and Ext. PW-2/AA. In these circumstances, it cannot be said that so called Directors of the new management, contemplated in Ext. PW-2/W were necessary parties as they never executed any document(s) or guarantee deed(s) with the plaintiff. Learned counsel for the defendants has placed emphasis on Ext. DW-3/A which is an agreement executed on 21st November, 1995 between defendant Shri Amar Nath Vatsayayen, Smt. Manorama Devi, Shri Shanti Swaroop Kaplesh on the one part and Shri Vijay Kumar Kaplesh, John Nycil Mendz, Shri Raj Kumar Sharma and Sh. Devinder Chauhan on the second part whereby the entire management, assets etc. have been handed over by these parties to the defendants. The plaintiff is not a signatory to this agreement. Similarly in Ext. DW-2/A, which is an agreement-cum- undertaking executed on 24-11-1995 by S/Sh. Vijay Kumar Kaplesh, R.K. Sharma, Suresh Chand Chauhan, and A.N. Vatsayan in favour of H.P. Financial Corporation, there is no acceptance by the plaintiff or anything to indicate that plaintiff was also a party or privy to this agreement. Similarly, the trust letter Ext.PW-2/B and - 15 - Ext. PW-2/C ( the revised repayment schedule) have been executed by the defendants in favour of the H.P. Financial Corporation. These documents do not, in any manner alter the contract entered into by the defendants with the plaintiff. There is nothing on the record to indicate that the plaintiff had accepted/acquiesced in this arrangement entered into between the defendants and proforma defendant No. 6. The law which has been noticed on the point of novation is clear and unequivocal that new contract(s) is required to substitute the terms conditions and obligations of existing contract(s). Unilateral acts or any intention expressed by any party to enter in to an agreement in future or to substitute an agreement on certain conditions which, have not been proved to have satisfied on the record cannot constitute novation in any sense. There is nothing on the record to show or establish that plaintiff had, in any manner accepted the change in the management or agreed to grant any concession unilaterally to the defendants. Rather the change and the concessions were subject to fresh documentation. There being no fresh contract(s) on the record, the plea of novation as put forth by the defendants cannot be accepted. This issue is therefore, decided against the defendants and in favour of the plaintiff. ISSUE NO 6. Whether the defendants have discharged the entire loan liability by paying Rs. 24 lacs by Sh. Dinesh Kumar, as alleged? … OPD There is no evidence on the record to show that the plaintiff at any point of time accepted the discharge of the entire liability of the - 16 - defendants on payment of Rs. 24 lacs having been paid to them. Learned counsel for the defendants has referred to Ext. DW-3/B which is a communication addressed to the Managing Director of proforma defendant No. 6 in which he has written that:- “To The Managing Director, H.P. Financial Corporation, Shimla -1. Sub: Sale of assets of Sunrise Malt Pvt. Ltd. Bilaspur, Respected Madam, This has reference to your office letter No. 4338 dated 24.7.2001 vide which you have intimated that the Corporation has received highest offer of Rs. 24.00 lacs for the purchase of assets of our unit. You have advised to produce any better buyer than the offer of Rs. 24.00 lacs received by the Corporation. In this connection I would like to inform you that Dinesh Kumar is my son. I had prevailed upon him to make offer for the purchase of assets of above concern. Other directors of the unit have left the country and settled abroad and they have no interest to start the unit. I hereby give my consent for the sale of assets of the unit for total sale consideration of Rs. 24.00 lacs given by my son subject to the condition that the entire loan outstanding of both the Corporations i.e. HPFC & HPSIDC is settled and clearance certificate is issued in favour of the company. Thanking you, Yours faithfully, (Amar Nath Vatsyan) Director, - 17 - Sunrise Malt Pvt. Ltd. Dated:27.7.2001 Bilaspur (HP).” This communication is addressed by the defendants to proforma defendant No. 6. A substitution of contract between these two parties or condition imposed by the defendants that proforma defendant No. 6 should or should not act in a particular manner cannot be read as a condition imposed upon the plaintiff and to absolve