IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA Civil Suit No.30 of 2002. Date of decision: 01.12.2009 The Himachal Pradesh State Industrial Development Corporation Limited. …….Plaintiff Versus M/s.Him Air Products (P) Ltd. & Others ……Defendants Coram The Hon’ble Mr.Justice Dev Darshan Sud,J. Whether approved for reporting ?1 Yes. For the Plaintiff: Mr.Balwant Kukreja, Advocate. For Defendants 1 to 3: Mr.K.D. Sood, Advocate. For Defendant No.4: Mr.Harsh Khanna, Advocate. Dev Darshan Sud,J. This suit has been instituted by the plaintiff, Himachal Pradesh State Industrial Development Corporation Limited, a Government Company within the meaning of Section 617 of the Companies Act, 1956 against the defendants claiming a decree for a sum of Rs.1,32,34,231/-. Defendant No.1 is a private limited Company and defendants No.2 and 3 are its Directors. The plaintiff pleads that defendant No.1 applied for and was sanctioned a term loan of Rs.83.26 lacs for the construction of building, purchase of land, 1 Whether the reporters of Local Papers may be allowed to see the judgement? Yes. 2 Plant and Machinery for setting up an industrial unit for manufacture of Industrial Oxygen at Village Kamli in Parwanoo, District Solan in the State of Himachal Pradesh. A sum of Rs.42.31 lacs was sanctioned on 20.4.1988 and Rs.40.95 lacs on 29.4.1993. The plaintiff claims interest on the decretal amount at the rate of 19% per annum. It is pleaded that to secure the repayment of the loan, the defendants executed documents in the nature of hypothecation, mortgage etc. The defendants defaulted in repayment of the loan and the plaintiffs were therefore constrained to file this suit after serving a notice on the defendants stating that the entire loan outstanding had been recalled. Defendants No.1 to 3 filed a joint written statement resisting the claim of the plaintiff. It was pleaded that only a sum of Rs.80.25 lacs was disbursed and the defendants have paid a sum of Rs.1.05 crores towards the principal amount. The defendants claimed that the payment has been wrongly appropriated towards interest and other expenses which were not payable and the amount so paid was to be appropriated towards the principal sum. The rate of interest is disputed. Other objections with respect to the maintainability of the suit, non-joinder of necessary parties etc. have been taken. On the pleadings of the parties, the following issues were framed on 17.4.2003:- 3 “1. Whether the suit is within limitation? OPP. 2. Whether the suit has been filed by a competent person? OPP. 3. Whether the suit is bad for misjoinder of parties, as alleged? OPD. 4. Whether the payments made by the defendants have not been properly adjusted? OPD. 5. Whether the plaint lacks material particulars. If so, its effect? OPD. 6. Whether the plaintiff is entitled to interest, if so, at what rate? OPP. 7. Whetehr defendants 1 to 3 are liable to pay the suit amount or any other amount to the plaintiff? OPP. 8. Relief.” Issue No.1. Learned counsel appearing for the plaintiff submits that this matter is no longer res integra and that the suit is within limitation. Learned counsel places reliance on Ex.PW-2/L i.e. notice, dated 17th January, 2002, issued by the plaintiff to the Managing Director of defendant No.1-Company, stating that a term loan of Rs.83.26 lacs for setting up an industrial unit was granted to the defendants and that a sum of Rs.66,71,701/- was due and outstanding from the defendants which has not been paid. Despite one time settlement arrived at between the parties on 4.9.2001 duly approved and accepted vide Ex.PW-2/44, the defendants did not honour it. Learned counsel also referred to Ex.PW-2/45, letter addressed by the 4 defendants accepting the one time settlement, but the account was not settled. Learned counsel submits that by agreements Ex.PW-2/J and Ex.PW-2/K, limitation would start from the date when the entire loan amount is recalled. He places reliance on the decision of this Court in H.P.State Industrial Development Corporation vs. M/s.Form Techniks (India) Pvt.Ltd. and Others, 2001(3) Shim.L.C.204, dealing with a similar plea by the defendants therein. This Court on the issue of limitation held:- “31. The two loans granted to defendant No. 1 vide agreements Ext.PW2/4 and /Ext. PW2/5 were repayable alongwith interest in half yearly instalments as per “repayment schedule” annexed to each of the two agreements as under:- (i) Term Loan of Rs. 37,02,000. First instalment was payable on 10.1.1989 and the last instalment was to be paid by 10.7.1993. (ii) Soft loan of Rs. 4,00,00. First instalment was payable on 1.12.1988 and the last instalment was payable by 10.6.1994. 32. The agreements provde that the borrower shall repay the amount of loan in accordance with the 5 repayment schedule and subject to other terms and conditions contained in the agreement. 33. Clause (5) of Part VIII of the agreement further provides:- “If a default shall have occurred in the payment of principal or interest on any other payment required under this agreement or in any of the events mentioned in sub- clause 2 hereof HPMIDC may at its option, by notice in writing to the company, declare the principal of the loan amount then outstanding to be due and payable immediately and upon any such declaration the security referred to in Schedule III hereto shall become enforceable and such principal, interest and all other monies payable under this agreement shall become due and payable immediately, notwithstanding anything in this agreement and/or in any other document(s). The HPMIDC will be entitled to take any action as is available to it under the agreement and the provisions of the Company’s Act, 1955 as amended from time to time.” 6 34. Thus, under the above clause a discretion has been given to the plaintiff either to enforce the payment of the amount in respect of which the default has been committed or by a notice in writing recall the entire amount of loan and enforce its immediate payment. 35. Notice Ext.PW1/J was given by the plaintiff in the present case recalling the loans and calling upon the defendants to repay the outstanding amounts of loans alongwith interest. 36. The present suit filed on 10.5.1996 within three years of such recall notice as also within three years from the date when the last instalment became payable is within time. The issue is decided in favour of the plaintiff- Corporation.” The clause reproduced above is the same as has been incorporated in the loan agreement Ex.PW-2/K. This case subsequently followed in The H.P. State Industrial Development Corporation Ltd. vs. M/s.Gobind Pharm Chem Pvt.Ltd. and Others, 2006(2) Shim.L.C.300, where again on the question of limitation, this Court held:- 7 “24. Clause 5 of Part-VIII of the loan agreements Ext.PW3/A and PW3/B says that if a default occurs in the payment of principal or interest or any other payment, required under this agreement, the plaintiff may at its option by notice in writing declare the principal of the loan amount, then outstanding, to be due and payable immediately and upon such declaration the principal and interest and other amounts due, shall become payable immediately. 25. As stated here-in-above, the ‘period of default’ in respect of the very first instalment was continuing, when the re-call notice dated 23.1.1999 was issued. 26. Clause 5 of Part-VIII of the agreements Exts. PW3/A and PW3/B has been the subject of consideration by two different Single Benches of this Court in two separate cases, instituted by the plaintiff. The first such case is H.P. State Industrial Development Corporation v. M/s Form Techniks (India) Pvt. Ltd. and others, (2001(3) Shim. L.C. 204). I this case the Court observed that the clause gives a discretion to the plaintiff either to enforce the payment of the amount in respect of which default has been committed or by a notice 8 in writing re-call the entire amount of loan and enforce its immediate payment and that if a notice of re-call is given, suit can be filed within three years of the date of the re-call notice. 27. The second case is H.P. State Industrial Development Corporation Ltd. v. Kesri Roller Flour Mills and others, (AIR 2002 H.P. 34). In this case it has been held that under this clause the plaintiff has the option to declare the principal, due at the time of default, to be payable immediately by serving a notice in writing and on such declaration, the principal amount then payable, the interest and all other moneys payable under the agreement, would become due and payable immediately and that the cause of action accrues to the plaintiff to institute the suit on the date of the notice. 28. These two precedents negate the submissions made by the learned Counsel for the defendants. Consequently the issue is found against the defendants.” This issue is, therefore, decided in favour of the plaintiff and against the defendants. I hold that the suit is within time. 9 Issue No.2: The defendants plead that the suit has not been filed by a competent person. PW-2, Shri Pawan Kumar Bali, who was the Manager(Projects), H.P. State Industrial Development Corporation, Shimla, has proved on record Ex.PW-2/A, Resolution, and Ex.PW-2/B, Authorization letter, by which he has been authorized to institute the suit. There is no evidence on the record to prove that the suit has not been filed by a competent person. This issue is also decided in favour of the plaintiff and against the defendants. I hold that the suit has been instituted by duly authorized person. Issue No.3:- There is no evidence on the record on this issue which is decided against the defendants. I hold that the suit has been properly instituted. Issue No.5:- There is no evidence that the suit lacks material particulars. This issue is also decided against the defendants. Issue Nos.4, 6 and 7:- These are the crucial issues and are taken up together for decision. On the question whether payments made by the defendants have not been properly adjusted, I find that defendant No.1 which is a Private Limited Company has not produced its books of accounts or any voucher etc. evidencing payments of money. Learned 10 counsel appearing for the defendants submits that it was the bounden duty of the plaintiffs to have proved on record the adjustment of payments made by the defendants. This submission cannot be accepted on the facts of this case. Defendant No.1 is admittedly a private limited Company and is statutorily required to maintain its account in accordance with the provisions of The Companies Act, 1956. No attempt or effort has been made by the defendants to produce their books of accounts, income tax returns, or any other document(s) maintained in the records of the Company which may go to show the dates on which the payments were made and the method of appropriation indicated subject to which the payment has been made. The balance sheets, profit and loss accounts etc. have not been brought on the record of the case. In these circumstances an adverse inference is, therefore, required to be drawn against the defendants. The Supreme Court in Gopal Krishnaji Ketkar vs. Mohamed Haji Latif and others, AIR 1968 SC 1413 has held:- “5. … … … … …. But the appellant has not produced either his own accounts or the account of the Dargah to show as to how the income from plot No.134 was dealt with. Mr. Gokhale, however, argued that it was no part of the appellant’s duty to produce the accounts unless he was called upon to do so and the onus was upon the respondents to prove the case and to show that the Dargah was the 11 owner of plot No. 134. We are unable to accept this argument as correct. Even if the burden of proof does not lie on a party the Court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts at issue. It is not, in our opinion, a sound practice for those desiring to rely upon a certain state of facts to withhold from the Court the best evidence which is in their possession which could throw light upon the issues in controversy and to rely upon the abstract doctrine of onus of proof. In Murugesam Pillai v. Gnaa Sambandha Pandara Sannadhi, 44 Ind App 98 at p. 103= (AIR 1917 PC 6 at p.8) Lord Shaw observed as follows: “A. A practice has grown up in Indian procedure of those in possession of important documents or information lying by, trusting to the abstract doctrine of the onus of proof, and failing, accordingly, to furnish to the Courts the best material for its decision. With regard to third parties, this may be right enough-they have no responsibility for the 12 conduct of the suit; but with regard to the parties to the suit it is, in their Lordships’ opinion, an inversion of sound practice for those desiring to rely upon a certain state of facts to withhold from the Court the written evidence in their possession which would throw light upon the proposition.” This passage was cited with approval by this Court in a recent decision-Biltu Ram v. Jainandan Prasad, Civil Appeal No. 941 of 1965, D/- 15.5.1968 (SC). In that case, reliance was placed on behalf of the defendants upon the following passage from the decision of the Judicial Committee in Mt. Bilas Kunwar v. Desraj Ranjit Singh, 42 Ind. App 202 at p. 206= (AIR 1915 PC 96 at p. 98): “But it is open to a litigant to refrain from producing any documents that he considers irrelevant; if the other litigant is dissatisfied it is for him to apply for an affidavit of documents and he can obtain inspection and production of all that appears to him in such affidavit to be relevant and proper. If he fails so to do, neither he nor the Court at his suggestion is 13 entitled to draw any inference as to the contents of any such documents” 6. But Shah, J., speaking for the Court, stated: “The observations of the Judicial Committee do not support the proposition that unless a party is called upon expressly to make an affidavit of documents and inspection and production of documents is demanded, the Court cannot raise an adverse inference against a party withholding evidence in his possession. Such a rule is inconsistent with illustration (g) of S. 114 of the Evidence Act, and also an impressive body of authority.” Shri Pawan Kumar Bali, Project Manager of the plaintiff has appeared as PW-2 and has proved on record Ex.PW-2/C and Ex.PW-2/D, which are the loan applications accepted by the plaintiff. Loan agreements, dated 8th September, 1988, Ex.PW-2/J, sanctioning a term loan of Rs.42.31 lacs and Ex.PW-2/K, dated 7th September, 1993 sanctioning a further loan of Rs.40.95 lacs have been executed between the parties, which have been signed for and on behalf of the defendants by defendants No.2 and 3. Two deeds of hypothecation Ex.PW-2/L and Ex.PW-2/M and 14 deeds of guarantee Ex.PW-2/N and Ex.PW-2/O were also executed by the defendants. The witness states that out of the sanctioned amount of the two loan agreements, a sum of Rs.80.15 lacs was availed of by the defendants. The request of re-schedulement of repayment was accepted vide Ex.PW-2/S and inter-parties agreement Ex.PW-2/T, fixing 10th July, 1999 as the first date of payment, was executed. Even after this facility having been granted the defendants did not adhere to the terms of the schedule. The defendants made a request for one time settlement vide Ex.PW-2/41 on 5.2.2001, Ex.PW-2/42 on 21.6.2001 and Ex.PW-2/43, on 30.7.2001. This request was acceded to and accepted by the plaintiff on 17.10.2001 vide Ex.PW-2/44, which terms were accepted by the defendants vide Ex.PW-2/45 and Ex.PW-2/46. It has been proved on record that the plaintiff accepted the one time settlement at Rs.80 lacs as on 30.9.2001 vide Ex.PW-2/47, dated 31.12.2001. The letter reads:- “HPSIDC/PAC-269/6890, Dated: 31 Dec 2001 REGISTERED The Managing Director M/s Him Air Products (P) Ltd Him Nagar (Village Kamli) Parwanoo-173 220. Subject:YOUR ONE TIME SETTLEMENT PROPOSAL Dear Sir, This has reference to our letter No.HPSIDC/PAC-269(IV)/5512 dated 15 17 Oct 2001 vide which it has been conveyed that the proposal of the Company for OTS has been considered by the Corporation and the Corporation was prepared to settle the dues at Rs.80.00 lacs (as on 30.9.2001) on the terms and conditions enumerated therein. 2. Subsequently, the Company had sent its acceptance by the Board Resolution passed by their Board of Directors on 25.10.2001 accepting the terms and conditions of our above referred letter. 3. As per Clause-(a) of the letter ibid, the Company was required to remit the 25% payment of Rs.80.00 lacs on or before 15.12.2001. It was clearly mentioned in Clause- (c) of the above referred letter that in case the Company fails to remit the down payment of 25% within the stipulated period or the Company commits 2 consecutive defaults in making the balance payment, the settlement shall be considered as null and void and the Company shall be liable to pay the entire amount as per books of account of the Corporation. 4. We regret to inform you that inspite of various reminders/ communications, the Company has failed to remit a sum of Rs.20.00 lacs being the 25% of OTS amount within the stipulated period i.e. 15.12.2001. Hence, on failure of 16 the Company to adhere to the terms and conditions of the approved OTS proposal, the OTS be considered as null and void and now the Company is liable to pay the entire outstanding dues as per books of accounts of the Corporation. 5. The Company has been in persistant default and it is, therefore, advised through this Registered letter that a sum of Rs.41,95,217/- being the amount in default towards the Principal and Interest instalments fallen due on 10.10.2001, be remitted within seven days from the date of the issuance of this letter; failing which the Corporation shall be constrained to initiate recovery proceedings under Section-29 of the State Financial Corporations’ Act-1951. Thanking you, Yours faithfully, For HP SIDC Ltd. Sd/- Sr.Manager Projects” Since the defendants failed to adhere to the time schedule, recall notice Ex.PW-2/L was issued. The plaintiff has placed on record extracts of the ledger account of the defendants Ex.PW-1/A, which shows the disbursement made and the amounts received by the plaintiff. The interest charged has not been 17 indicated, but top of the ledger sheets shows that the interest has been deducted at varying rates namely; 12.5%, 19% and 16.5% with half yearly rests. This is the entire evidence produced on the record. Learned counsel for the defendants submits that the accounts have not been properly maintained on three counts; (a) no adjustment has been given to the defendants of the payments made by it which according to the defendants should have been first made towards the principal and then towards interest. There is no evidence on the record to substantiate this plea that the payments made were to be appropriated first towards the principal and then towards the interest to establish this plea. It was incumbent upon the defendants to prove this by clear and cogent evidence that there were clear instructions issued by the defendants which had been accepted by the plaintiff that the amount paid would be first adjusted towards the principal and then towards the interest. There is no evidence on the point that each payment was accompanied with instructions for appropriation towards principal first. As I have already held, defendant No.1 is a Private Limited Company and bound to maintain its account within the parameters of inter alia Sections 210 and 211 of The Companies Act, 1956. Accounts books have not been produced nor has any document or writing proved to corroborate this plea of the defendants. No attempt has 18 been made by the defendants to substantiate the plea taken by them in defence. DW-1, Shri Yagya Dutt, appeared and states that the amount was first to be adjusted towards interest and then towards the principal. His oral testimony that the amount was to be adjusted first towards the principal and then towards interest, cannot be accepted. In Punjab National Bank vs. Surinder Singh Mandyal and Others, AIR 1996 HP 1, this Court, while dealing with the question of appropriation of the payment, held:- “19. From the evidence on record, there is nothing to suggest that while making payment, during pendency of the suit, defendant No. 2 imparted any instructions to the plaintiff about the manner of appropriation of the amounts. 20. Sections 59, 60 and 61 of the Contract Act, 1872 embody the general rules as regards the appropriation of payments in cases where a debtor owes several distinct debts to one person and voluntarily makes payment to him. The said provisions, however, do not deal with those cases in which principal and interest are due on a single debt for which as regards appropriation, ordinary rules as have been noticed in number of judgments will have to be applied. 19 21. The Judicial Committee of Privy Council in Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233 referring to the rule enunciated by the Lord Justice Rigby in the case of Parr's Banking Company v. Yates (1898) 2 QBD 460 that money is first to be applied in payment of interest and on its satisfaction the balance to be applied in payment of the capital. This will be where a debt is due which carries interst and there are moneys that are received without definite instructions as regards appropriation. 22. THE rule in Parr's Banking Company's case (supra) as regards appropriation was followed by the Division Bench of Allahabad High Court in Banarsi Das v. Collector of Saharanpur, AIR 1936 All 712. Question had arisen as regards appropriation where the debt carried compound interest. The distinction between simple interest and compound interest was drawn and the rule was applied holding that in ordinary cases the money received is first applied in payment of interest and when that is satisfied the remaining in payment of the capital. It will be 20 in the absence of the specific instructions from the debtor. 23. A Full Bench of Lahore High Court in Jai Ram v. Sulakhan Mal, AIR 1941 Lahore 386 dealing with the scope of Ss. 59 to 61 of the contract Act held that they do not deal with the cases in which principal and interest are due on single debt, to which only general rule of appropriation of payments towards a debt will apply, namely, in the absence of a specific indication to the contrary by the debtor, the money is first applied in payment of interest and then when interest is satisfied towards the payment of the principal. 24. This normal rule of appropriation of applying the payment made by the debtor in the first instance towards the satisfaction of interest and thereafter towards principal, in the absence of specific directions from the debtor has been approved by the Supreme Court in Meghraj v. Mst. Bayabai, AIR 1970 SC 161. 25. Division Bench of Orissa High Court in a case pertaining to the loan transaction between the Orissa State Financial Corporation and its debtor, which was governed by the provisions of the State 21 financial Corporation Act also applied this rule by following the ratio of the judgment in Meghraj's case (supra). 26. In view of the above, it being a case where the debtor, namely, defendant No. 2 at the time of making payment did not leave any instructions with the creditor- plaintiff, the ordinary rule of appropriation will apply and thus the plaintiff will be entitled to adjust the amount of Rs.1,28,000/- received during the pendency of the suit, first towards the satisfaction of interest and then towards the discharge of principal.” On the question of interest, the loan documents executed by the parties determine the rate of interest. The