1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION SUIT NO. 4212 of 1996 1.M/s. Kanade Electronics, a registered partnership firm, duly registered under Indian Partnership Act, 1932 , having its office at 121/3972, Nehru Nagar, Kuarla, (East) Mumbai 400 024. 2.Shri Suresh Kande, (since deceased) through : A) Mr. Raviraj Suresh Kande, aged about 28 years, B) Mr. Pranay Suresh Kande, aged about 20 years, being the heirs and legal representatives of the deceased plaintiffs no.3, above named , residing at 121/3972, Nehru Nagar, Kurla (East), Mumbai 400 024. ... Plaintiffs vs. 1.Maharashtra State Financial Corporation, a statutory Corporation, established under the provisions of State Financial Corporation Act, 1951, having its office at New Excelsior Building, A. K. Nayak Marg, Fort, Mumbai 400 001. 2.Tube Glass Containers, having their office at Gupta Compound, Off. Dr. C. Gidwani Marg, Chembur, Mumbai 400 074. . . ... Defendants Mr. S. K. Mali for plaintiffs Dr. Barthakur for defendants CORAM: A. S. AGUIAR J. Date: 17/3/2005 2 ORAL JUDGMENT: 1.The plaintiffs have filed this suit for a declaration that the plaintiffs are entitled to redeem mortgage dated 13.5.1986 in respect of the suit property , for restoration of the plaintiffs' possession of the said unit , for damages to the tune of Rs.33 lacs being loss of income, recurring interest liability on various loans and for damages caused to the plaintiffs by the wrongful action of defendant no.1. There is also a prayer that the in the event of the court confirming the sale defendant no.1 be directed to pay a sum of rs.15,45,000/- plus interest at the rate of 18% per annum from the date of the filing of the suit till realization. Although there are prayers for like appointment of Court Receiver and payment of maintenance charges, no proceedings were taken out for obtaining interim reliefs. 2.Briefly the case of the plaintiffs is that on the application of the plaintiffs MIDC allotted an industrial plot at Turbe, New Bombay to the plaintiffs on 15.9.1983 and on the plaintiffs' paying Rs.80,000/- towards the total consideration of Rs.1,20,000/- a lease agreement was executed on 27.11.1984 by MIDC in favour of the plaintiffs 3 no.1. After acquiring the plot the plaintiffs started their business of manufacturing electronic products .... in the name of the partnership firm M/s. Kanade Electronics, on small scale basis. 3.On 18.2.1989 the plaintiffs made an application to defendant no.1 for grant of term loan of Rs.9 lacs towards land, building and purchase of plant and machinery. The copy of the said application was forwarded to the State Bank of India, Vashi Turbe branch for grant of working capital loan. The Regional Manager of defendant no.1, by letter dated 13.7.1984 informed the plaintiffs that he had sanctioned a term loan of Rs.9 lacs. Thereafter the plaintiffs submitted plans to MIDC for approval and sanction through their architect. The plans were duly sanctioned on 12.4.1985 and approved by MIDC . In May 1985, the construction of the factory building commenced by obtaining bridge loan of Rs.3,50,000/- from Saraswat Cooperative Bank, Chembur Branch. 4.In the meanwhile the legal formalities for loan from MSFC were completed and accordingly on 13.5.1986 on executing the mortgage deed the 1st installment of Rs.2,37,000/- was made directly to the Saraswat Cooperative Bank, Chembur Branch. 4 5.It is the case of the plaintiffs that prior to the disbursement of the said installments plaintiffs by letter dated 2nd July 1986 applied to defendant no.1 for reallocation of the term loan already sanctioned but the defendant no.1 delayed taking any decision for reallocation of the loan. By letter dated 29.10.1986 defendant nos.1 informed the plaintiffs that they had considered their application for reallocation but insisted on the plaintiffs furnishing personal guarantee of one V.R. Rane who was the key technical adviser as guarantor for repayment of the loan with interest. The defendant no.1 further insisted on getting the mortgage modified by adding the name of said Rane as guarantor. Compliance of these formalities resulted in delay in disbursement of further loan installments. It is the case of the plaintiffs that the insistence of the defendant no.1, obtaining guarantee from said Rane who was in no way concerned with the firm, gave a handle to the said Rane to exploit his position in the day to day affairs of the firm, especially in the matter of purchase of machinery and materials from the dealers of his choice. He also started interfering with the staff, workers and insisted on appointment of partners of his choice and since the plaintiffs 5 did not comply with his illegal demands the said Rane started writing to defendant no.1, asking them to stop disbursement of any further loan amount and to relieve him as guarantor for repayment of the loan. It is the plaintiff's submission that the loans were sanctioned on the understanding that the said Rane would be rendering technical help. It is the case of the plaintiffs s that the loan was sanctioned on 13.7.1984 but there was a huge delay on the part of the defendants in disbursement of the loan amount due to interference from Mr. Rane. Though the said loan amount was sanctioned on 13.7.1984 the plaintiffs could not avail of the said loan facility during the moratorium period of 2 years and in these circumstances, it is contented, that the plaintiffs were entitled to extension of the moratorium period for a further period of one year but no such extension was granted by the defendants. 6.It is the case of the plaintiffs that on 16.6.1987 after completion of the factory building CIDCO issued occupation certificate, after which the machinery was installed in the factory premises and electric connection was obtained. Thereupon the plaintiffs by their letter dated 10th October 1987 informed the Regional Manager of defendant 6 no.1 of the progress made and requested them to disburse the remaining amounts to enable them to start production at the earliest. It is pointed out that immediately after completion of the factory building, plaintiffs started production in March 1988. During the period of first 6 months production was good. However, thereafter the production came to a stand still for reasons beyond the control of the plaintiffs. 7.On 27.3.1980 The plaintiffs applied for a working capital loan of Rs.12 lacs from the SBI Vashi Turbe Branch. The Bank on satisfying itself that the factory was running fairly well sanctioned the working capital of Rs.5 lacs. However, on account of some internal problems in the bank the loan amount towards working capital was not disbursed, and the factory of the plaintiffs came to a stand still, resulting in heavy loss to the plaintiffs. 8.On pursuing the matter with the Bank, the Bank agreed to disburse the working capital on condition of the plaintiffs creating a second charge on its assets in favour of defendant no.1 and also obtaining NOC from defendant no.1. However, despite getting the said guarantee the loan was not 7 disbursed. Subsequently by letter dated 7th March 1989 the Branch Manager of SBI informed the plaintiffs that cash credit facility to the extent of Rs.5 lacs has been sanctioned to the plaintiffs against hypothecation of stock in trade as primary security and creation of second charge over the assets financed by MSFC as collateral security. It is pointed out that SBI informed defendant no.1 that they may create a 2nd charge on the assets of the plaintiffs which had already been mortgaged to them. Although tripartite agreement between defendant no.1, SBI and MSFC was prepared the same was not executed as necessary formalities by way of NOC from MSFC was not granted and hence 2nd charge sought to be created on the assets did not become effective, and in view thereof, the credit facility of Rs.5 lacs promised by the SBI was not forthcoming. It is the case of the plaintiffs that non availability of this credit facility compounded the difficulties of the plaintiffs. On account of several other problems such as breakdown of power supply , repeated stoppage of work and due to financial strain the question of rehabilitation of the plaintiffs factory was under consideration. According to the plaintiffs, during the period August / October 1990 the unit was under observation for rehabilitation and this 8 was within the knowledge of the defendant no.1. The plaintiffs also informed defendant no.1 about the rehabilitation proposal. However, instead of granting the loan facility the corporation initiated steps issued notice under section 29 of the SFC Act recalling the entire loan amount. The plaintiffs by their letter dated 31st December 1990 requested the defendant no.1 to differ taking any action as threatened by the defendants. However, on 23rd January 1991 staff members of the recovery branch of Thane Region of defendant no.1 came and took over the factory premises pursuant to action under section 29 of SFC Act, despite the requests to defendant no.1 to reconsider their action. 9.It is the case of the plaintiffs that the action of the Corporation is arbitrary and mala fide and defendant no.1 was responsible for causing inordinate delay in disbursement of the term loan. There was considerable delay in disbursement of the 1st installment which was received two years later, depriving the plaintiffs the benefit of the moratorium period which would have been available to the plaintiffs. Defendant no.1 despite requests of the plaintiffs did not extent the moratorium , although there was delay on the part of the Corporation. 9 10. It is the contention of the plaintiffs that there was no delay on their part and no serious default has been committed by them in making the repayment of the outstanding dues and even though the plaintiffs were not making any profits they had made some payments. It is the plaintiffs' contention that defendant no.1 took possession of the plaintiffs unit on 23rd January 1991, even though the plaintiffs informed the defendants that they had various orders from their customers and work could not be carried out as the unit has been closed. The plaintiffs requested the defendants to withdraw the action taken and restore the possession of the unit to the plaintiffs. However, despite this defendant no.1 took further action in the matter and inserted advertisements in the local newspapers calling for tenders for purchase of the assets of the plaintiffs factory. It is further pointed out that on 11.3.1991 the plaintiffs gave a detailed programme for repayment of the outstanding loan amount to defendant no.1 and requested defendant no.1 to reconsider the action but the defendant no.1 paid no heed to the requests made by the plaintiffs. 11.The sum and substance of the plaintiffs case is 10 that the failure on the part of defendant no.1 in releasing the loan sanctioned and working capital in time to the plaintiffs so to keep the factory premises in operation , and to maintain the brake down tempo, the production came to a stand still. Further, that the abrupt action taken by the defendant no.1 to enforce the mortgage by issue of notice under section 29 of the Act and subsequent coercive measures by way of advertisement for sale of the property has resulted in the plaintiffs suffering damages for which they are required to be reimbursed and compensated. 12. Defendant no.1 has filed its written statement taking up several contentions, inter alia, that the suit is misconceived and not maintainable; that there is no cause of action against defendant no.s1, and that the reliefs claimed by the plaintiffs have become infructous. It is further pointed out by the defendants that the plaintiffs had filed four writ petitions challenging the action of the defendant no.1 in advertising and selling the property of the plaintiffs. All the writ petitions were dismissed in limine by this court with the observation to wit the plaintiffs were contumacious defaulters. 11 13.According to the defendants the plaintiffs were granted loan of Rs.9 lacs which was secured by the indenture of mortgage dated 30.5.1986. The loan was repayable by half yearly installment in 8 years along with interest, at the rate of 13.5% per annum. That out of the sanctioned loan the plaintiffs availed 7.68 lacs. The balance amount of Rs.1.32 lacs was not availed of by the plaintiffs and was therefore cancelled by the defendants. 14. It is the case of the defendants that since the plaintiffs committed default in repayment of the principal and interest and had closed down the production activities, the entire outstanding loan was recalled by the defendants and Notice under section 29 of the SFC Act was issued calling upon the plaintiffs to pay Rs.11,23,911/- which was due on 15.11.1990, together with interest and expenses. This action on the part of the defendants was challenged by the plaintiffs by filing writ petition No.1317 of 1991 which came to be dismissed on 18.3.1991. Another writ petition No. 2932 of 1993 was filed after the mortgage property was advertised for sale. The said writ petition also came to be rejected by order dated 17th September 1993. In response to the advertisement the unit came to be soled to defendant no.2 for 12 Rs.18.25 lacs on differed payment basis. The formalities of the same were completed on execution of the sale agreement dated 17.1.1992 by defendant no.1 in favour of purchaser defendant no.2. The 1st defendant received a sum of Rs. 18.25 lacs from the sale of the said assets to defendant no.2. The amount due from the plaintiffs was Rs.11,92,289/- as on 23.1.1991 and further interest from 16.11.1991 till payment and / or realization, totalling to Rs.15,23,063.60 which was appropriated by the defendants towards their dues, leaving a surplus of Rs.3,01,939.40. The defendant no.1 state they have not paid this surplus amount to the plaintiffs and the same is lying in escrow with them for being paid to the MIDC as per the tripartite agreement. 15. Thereafter, another writ petition was filed by plaintiffs being writ petition no. 556 of 1995 by which the plaintiffs called upon the defendant no.1 render proper accounts of the sale proceeds and statement of appropriation on the outstanding liability. However, the said writ petition was withdrawn and the plaintiffs filed another writ petition no. 3737 of 1996 for the same reliefs which also came to be dismissed by this court on 2nd August 1996. It is pointed out by defendant 13 no.1 that the State Bank of India has filed a suit being suit no. 236 of 1991 for recovery of the sum of Rs.2 crore from the plaintiffs on 11.4.1991 in respect of which the SBI claims having a second charge on the mortgaged assets of the plaintiffs. The State Bank of India is also aware that the surplus amount of Rs.3 lacs and odd has to be utilized for repayment to MIDC for the differential payment and SBI would be entitled for the balance sale proceeds in view of the second charge on the property. 16.It is the contention of the defendants that the sale by the defendant in favour of defendant no.2 was on differed payment basis and that the last installment was paid on 30th March 1989. The defendants state that they are ready and willing to give inspection of all the documents called for by the plaintiffs but the question of Court Receiver being appointed in respect of the unit does not arise and the plaintiffs' prayer for restraining the defendants from parting with possession of the said unit to third party, including defendant no.2, has become infractous since possession has already been given to defendant no.2 as far back as on 3rd February 1992. 14 17.The defendants deny that the action on their part under section 29 of the SFC Act is arbitrary or unwarranted as the action of taking over possession and selling the unit to defendant no.2 was after following due procedure and that at the time when the loan was recalled and notice under section 29 was issued the unit of the plaintiffs was closed. Hence the statement in para 19 of the plaint that on 23.1.1991 a team of staff members of the Regional Office of the defendants closed down the running unit of the plaintiffs arbitrarily, is false. 18. In the light of the pleadings the following issues were framed on 22nd April 2003: 1. Whether the suit as filed by the plaintiffs is maintainable? 2. Do defendants prove that the mortgaged property is sold by defendant no.1 to defendant no.2? 3. Do defendants further prove that in view of the sale of mortgaged property under section 29 of the State Financial Corporation Act the suit has become infructous? 4. Do plaintiffs prove that they are entitled to damages of rS.33 lacs or any 15 other amount as prayed for? 5. Do plaintiffs further prove that they are entitled to a sum of Rs.15.45 lacs., plus interest thereon from defendant no.1.? 6. Do plaintiffs prove that they are entitled to get Rs.3000/- per month from defendant no.2 and 3 by way of maintenance? 7. Are plaintiffs entitled for accounts? 8. What order and decree? 19.In support of its case the plaintiffs have examined plaintiffs no.2, partner of plaintiffs no.1 , while defendant no.1 has examined one Mr. B. Rao, the Deputy Manager of the 1st defendant Corporation. Defendant no.2 the auction purchasers are not before the court, though served, nor have they filed any written statement. 20.The suit as filed is basically for redemption of the mortgage dated 13/5/1986 on the basis of which the plaintiffs had obtained loan from the defendant no.1 Corporation. The other prayers are consequential to the main prayer. It is the case of the plaintiffs that the defendant no. 1 by invoking section 29 of the State Financial Corporation Act 16 1951 and taking steps pursuant thereto has effectively deprived the plaintiffs of their right to redeem the mortgage. The question that arises for consideration is whether the defendant no. 1 Corporation has acted illegally by resorting to the provisions of the said Act for recovery of the loans taken by the plaintiffs. It is an admitted position that the defendant no.1 had sanctioned a loan of Rs.9 lacs pursuant to the application made by the plaintiffs dated 18.2.1984 for the purpose of constructing the factory building and purchase of plant and machinery. It is also admitted position that the defendant no.1 disbursed a total amount of Rs.7.68 lacs out of the sanctioned loan of Rs.9 lacs. It is also admitted that the 1st installment of Rs.2.57 lacs was disbursed by defendant no.1 to the plaintiffs on 13.5.1986. According to the plaintiffs the factory commenced production in March 1988 and on the plaintiffs own showing the plaintiffs received Rs.7,68,000/- in five installments prior to the commencement of the production. 19. According to the plaintiffs on 27.3.1988 the plaintiffs had applied for a working capital loan of Rs.12 lacs from the State Bank of India , Turbe Branch and on finding that the factory had started 17 production in full swing the Bank sanctioned the working capital of Rs.5 lacs in the first phase. However, no disbursements were made from the sanctioned loan on account of the State Bank of India insisting on creating a second charge over the assets, financed by defendant no.1 and also obtaining a no objection certificate from MSFC. It is the contention of the plaintiffs that on account of the non disbursement of the working capital by the State Bank of India the production in the factory was abruptly disturbed. It is case of the plaintiffs that a proposal for rehabilitation of the plaintiffs' factory was under consideration and defendant no.1 was well aware of this proposal for rehabilitation and had correspondence with the plaintiffs for obtaining the working capital. However, despite this the Corporation started initiated action by issuing Notice under section 29 of the SFC Act, recalling their loan amount and proceeding to seal the factory. According to the plaintiffs this action on the part of the defendant no.1 led to all its woes resulting in sale of the factory and assets in alleged exercise of powers under section 29 of the SFC Act. 20.It is the contention of the plaintiffs that the decision of the defendant no.1 Corporation was 18 hasty, pre-mature and without giving an opportunity to the plaintiffs to take steps to repay the loan and to rehabilitate its factory by raising loan from the State Bank of India. The action therefore on the part of the defendant no.1 Corporation was wrongful resulting in severe prejudice and damage being caused to the plaintiff. It is the contention of the plaintiffs that he was entitled to have redeemed the mortgage but no sufficient opportunity was given to the plaintiffs by the Corporation and this action was high handed and wrongful, resulting in damage and production being caused to the plaintiff. 21.On the other hand it is the contention of the defendant no.1 Corporation that although the Corporation had sanctioned the loan of Rs.9 lacs and had in fact disbursed a total amount of rs.7.68 lacs to the plaintiffs pursuant to which the plaintiffs was in a position to construct the factory and commence production, the plaintiffs failed and neglected to repay the loan amount as per the schedule of repayment set out in the deed of mortgage. The entire loan amount of rs.9 lacs was to be repaid within a period of 7to 8 years, by 13 half yearly installments of Rs.70,000/- each. 19 22. Under the said mortgage the plaintiffs was also required to pay interest on the loan amount of Rs.9 lacs at the rate of 13.5% per annum payable in quarterly rests on 15th February , 15th May, 16th August and 15th November each year. The first of such installment therefore was to be made on 15th May 1986. It is pointed out that that the plaintiffs did not pay any installment towards the repayment of loan as per the schedule. Under these circumstances defendant no.1 issued notice under section 29 of the SFC Act recalling the entire loan amount of Rs.111,23, 911/- consisting of Rs.7,60,000 and interest calculated up to 30th September 1990 amounting to Rs.3,33,071 and expenses of Rs.22,840/-. The defendant further threatened that in the event of the plaintiffs failing to pay the said amount , the defendant would take over possession of the assets mortgaged to the Corporation in pursuance of the powers vested under the SFC Act. It is the contention of the defendant no.1 that despite the said notice the plaintiffs failed to repay the said amounts demanded by the said notice and in fact filed Writ Petition in this Court challenging the said notice under section 29 , which as stated herein above, was dismissed by this court. It is the further contention of the defendant no.1 that in these 20 circumstances , pursuant to the powers vested it it, further steps were taken and the possession of the property was taken over on 23/1/1991 under panchanama. Subsequently, the mortgaged property was advertised and sold , which as pointed out herein above was again challenged by the plaintiffs by filing a writ petition , which also came to be dismissed. 23.On the other hand it is the contention of the plaintiffs that it is not correct to say that he had not paid any amount to defendant no.1. In fact he had made quarterly payment of interest as mentioned in the mortgage deed up to 30th March 1989 amounting to Rs.1,28,639/-. It is further contented by the plaintiffs that on receipt of Notice under section 29 he had sent a reply to defendant no.1 being Exhibit P20, requesting defendant no.1 not to take any further action as the plaintiffs had approached the State Bank of India for loan for the purpose of rehabilitation of the plaintiffs company and sought time. However, the plaintiffs made no further attempt to pay any of the installments under the mortgage deed and in fact approached the