FIRST APPEAL No. 42 OF 2002 Against the judgment and decree dated 20.10.2001 passed by Sri Nakul Chand Gupta, 9th Subordinate Judge, Patna in Money Suit No. 18 of 1998. STATE BANK OF INDIA & ORS. ………. Defendants-Appellants Versus M/S SINGHANIA ROLLER FLOUR MILS & ORS. ……… Plaintiffs-Respondents ******** For the Appellant : Mr. Sidheshwari Prasad Singh, Sr. Advocate Mr. Kaushlendra Kumar Sinha, Advocate Mr. Abhay Kumar, Advocate Mr. Sunil Kumar Singh, Advocate For the Respondent : None Dated : 20th day of April, 2011 P R E S E N T THE HON'BLE MR. JUSTICE MUNGESHWAR SAHOO J U D G M E N T The defendants have filed this First Appeal against the impugned judgment and decree dated 20th October, 2001 passed by Sri Nakul Chand Gupta, the learned 9th Subordinate Judge, Patna in Money Suit No.18 of 1998 decreeing the plaintiff-respondent no. 1’s Money Suit for a sum of Rs.2,06,63,600/-. (2) The plaintiffs filed the aforesaid Money Suit alleging that the appellant was in legal obligation to provide working capital to the plaintiff and for non-providing the same, the appellant is liable to pay damages suffered by plaintiff to the extent of Rs.2,06,63,600/-. Mungeshwar Sahoo, J. 2 (3) The plaintiff’s case in short is that M/S Singhania Roller Flour Mills Pvt. Ltd. is a company registered under Indian Companies Act. For financial assistance, the plaintiff approached Bihar State Financial Corporation after being registered as small scale industries. Bihar State Financial Corporation (hereinafter referred to as B.S.F.C.) sanctioned Rs.38 lacs on 21.05.1988 with condition that working capital finance should be assured by banking institutions on need based basis. Therefore, the plaintiff approached the appellant, State Bank of India for financing of working capital. The State Bank of India issued an assurance letter dated 16.05.1989 promising to grant working capital finance on need based basis. Thereafter, B.S.F.C. started disbursing the term loan amount of Rs.38 lacs after execution of necessary documents and disbursed Rs.23,04,000/- upto 31.03.1991 in installment. The plaintiff utilized the same in construction of the building and machinery etc. The plaintiff was informing about the progress to the Bank and when B.S.F.C. asked the defendant to procure sanction letter from the Bank, the plaintiff approached Bank for sanction of working capital. On 28.03.1992, the Bank issued a letter stating that because of subsequent event, the industries for which the plaintiff set off the flour Mills is not viable and the working capital in favour of plaintiff became obsolete. The Bank issued this letter because plaintiff has not fulfilled illegal demand of gratification of Bank Authorities. Because of this act of Bank, B.S.F.C. stopped disbursement of further installment. Thereafter, B.S.F.C. wrote letter to the Bank and requested to fulfill the commitment. The plaintiff also asked the Bank to reconsider the matter. Ultimately, the matter was referred to Bihar Industrial Technical Consultancy Organization, Patna and thereafter, the Bank sanctioned Rs.17 lacs as cash credit 3 facility on 01.03.1993 against the security and hypothecation of the raw materials and demanded collateral security etc. Because of this delayed action of the Bank, the plaintiff was compelled to revise his project raising the term loan amount of Rs.38 lacs to Rs.60 lacs and presented before B.S.F.C. Sanction letter of term loan was issued on 24.03.1995 mentioning that Rs.23.4 lacs was outstanding of the previous loan Account No.1, Rs.20.23 lacs was in Account No.2 and Rs.16.73 lacs was adjusted towards interest accrued upto 28.02.1995. If the defendant, first party, appellant had sanctioned working capital as agreed upon project would have been completed within the period and there would have no increase in project cost and unnecessary burden of heavy interest upon the plaintiff. In 1995, the project was completed and came in trial production. Thereafter, the defendant Bank was asked to provide working capital as promised and agreed earlier but the defendant, first party, appellant Bank asked the plaintiff to regularize other loan account of Director, Managing Director of the company before providing working capital to the company. The plaintiff has separate legal identity and is not liable for the individual act of the Director and Managing Director. The further case is that the State Bank of India with intention to get illegal gratification did not provide working capital on illegal grounds and also wrote letters to other Nationalized Bank for not to provide any loan to the plaintiff, company. Due to this act of the State Bank of India, the plaintiff suffered heavy loss. If plaintiff, company was not assured for providing working capital, the plaintiff would not have approached B.S.F.C. for loan. The plaintiff detailed the amount of claim and damages in the plaint total being Rs.2,06,63,600/-. The detail of the same is re- produced herein-below: 4 SCHEDULE OF CLAIM 1. Outstanding term loan amount towards Bihar State Financial Corporation being Rs.40,65,465.00 plus Rs. 38,70,771.00 interest component as on 31.3.96 Rs.79,36,236.00 2. Margin Money/Capital investment drawn from own or creditors sources as on 31.3.96. Rs.16,00,000.00 3. Interest on above investment from 1.4.92(when State Bank of India first backed out, to again turn around) to 31.3.96 @ 18% p.a. Rs. 11,52,000.00 Total: Rs. 1,06,88,236.00 4. Interest on the above amount from 1.4.96 to 30.7.98 @ 18% p.a. Rs.48,35,364.000 5. Projected profit/gains @ 6,000/- per Day from 1.8.96 till 30.7.98 left un- Recovered/unavailed on account of Defendant 1st party(Total 730 days) Rs.43,80,000.00 6. Mental agony from 1.4.92 to 30.7.98 @ Rs.10,000.00 per month (Total 76 months) Rs.7,60,000.00 Total: Rs.2,06,63,600.00 (Rupees Two crores six lacs sixty three thousand six hundred only). (4) The defendant, second party i.e. B.S.F.C. appeared and filed written statement alleging that the plaintiff approached for term loan for establishment of Roller Flour Mills and after verification, B.S.F.C. sanctioned Rs.38 lacs as term loan. There was a pre requisite that the plaintiff has to procure assurance letter from nationalized Bank for working capital. If assurance letter for working capital was not obtained, the term loan would not have been sanctioned or disbursed to the plaintiff. The plaintiff obtained the assurance letter and then the loan 5 was sanctioned to the plaintiff and disbursed. In the meantime, the State Bank of India informed B.S.F.C. in the year 1992 that project of Roller Flour Mills in Bihar are not feasible and viable. Therefore, working capital will not be provided to the plaintiff. Due to this letter, B.S.F.C. stopped the release of further installment of loan. Subsequently, the project came to trial production but no working capital was provided by the Bank. (5) The defendant, first party, appellant, State Bank of India filed a contesting written statement. The appellant’s case in short is that the plaintiff has got no cause of action and the suit has been filed with a view to have illegal gain. The Bank being the financial institution always ready and willing to advance money to the company if they come with clean hands. The Banks are custodian of public money and therefore, they have to maintain financial discipline and norms of the Bank specially the guidelines of the Reserve Bank of India. In the year 1988-89, there was good relation of creditor and debtor with the plaintiff and Bank but due to callous attitude of the Directors of the company, the Bank was compelled to drop the idea to advance loan. Moreover, the assurance does not give any authority or legal right to claim release of fund. There was no contract nor any paper has been executed by the plaintiff nor any documentation was there entitling plaintiff to claim financial help. The Directors of the plaintiff, company are enjoying the loan from this Bank in relation to M/S Anupam Udyog, M/S Swastic Engineering and M/S Shree Medicals. These firms are not running smoothly and for recovery of the loan amount of Rs.65 lacs, the appellant, Bank has already filed cases before Debt Recovery Tribunal, Patna. At paragraph 18 of the written statement, the details about the case and amount involved has 6 been mentioned. According to the circular of the Bank, if an account becomes N.P.A.(Non Performing Account), the other account automatically becomes bad and no further advancement can be made. When this fact came to the notice, the Bank restrained itself to grant fresh loan and the plaintiff cannot compel the Bank to grant loan. In spite of repeated request, the Directors of the plaintiff, company who were the proprietors of other units did not take any steps to regularize the account and, therefore, the appellant was compelled to reconsider the proposal for sanctioning loan to the plaintiff. The Punjab National Bank requested the State Bank of India, Bhagalpur branch to inform about the integrity of the Directors of the plaintiff, company and, therefore, the branch of the State Bank replied by letter dated 24.05.1996 and also issued letter to the several branches and Bank which clearly shows that the appellant was not at all willing to extend any financial assistance to the plaintiff. The Bank is custodian of public money which can be utilized only after due enquiry and consolidation in order to protect the interest of Bank and the plaintiff cannot as a matter of right claim financial assistance. The Central Bank of India has also filed a case for recovery of Rs.8 lacs against Anand Singhania and Vishwanath Singhania who are related with the Directors of the plaintiff. (6) On the basis of the above pleadings of the parties, the following issues were framed by the learned Court below: I. Is the suit maintainable as framed? II. Has the plaintiff got cause of action for the suit? III. Is the suit time barred? IV. Has Court jurisdiction to entertain the suit? V. Whether defendant 2nd party sanctioned term loan to plaintiff on the basis of assurance letter of defendant 1st party? 7 VI. Whether there was valid contract between plaintiff and defendant 1st party for providing working capital? VII. Whether the plaintiff under took liabilities from B.S.F.C. on the promise given by defendant 1st party? VIII. Whether the defendant 1st party malafidly and illegally back out by using false pretext from its commitment? IX. Whether the plaintiff sustained loss, damages and injury occasioned by breach of promised by defendant 1st party? X. Is the plaintiff entitled for the relief as claimed? (7) After trial, the learned Court below came to the conclusion that the plaintiff, company would not have entered into an agreement for any term loan if there was no promise by the defendant first party, appellant. The burden is upon the appellant to prove that refusal of working capital to the plaintiff was legal and justified. The learned Court below also found that refusal of working capital by the defendant Bank to plaintiff is illegal. The learned Court below also found that issuance of assurance letter by the defendant first party to the plaintiff is a contract and if commitment is not fulfilled without any valid reason, the plaintiff is entitled for damages and loss suffered by it. While deciding issue no.9, the learned Court below found that the plaintiff is not entitled for mental agony because the plaintiff is a juristic person vide paragraph 35. At paragraph 36, the learned Court below held that the damages as projected profit of Rs.43,80,000 claimed by the plaintiff is imaginary and unfounded. At paragraph 37, the learned Court below held that the plaintiff is entitled for damages mentioned in item nos.1 to 4 of the Schedule of the Plaint in part. At paragraph 38, the learned Court below held that plaintiff is not entitled to realize the amount of marginal money and its interest and the plaintiff is entitled to realize damages @ Rs.200 per day and accordingly, the suit was decreed in part with cost. 8 (8) The learned senior counsel Mr. Siddheshwari Prasad Singh appearing on behalf of the appellant submitted that the learned Court below has not properly appreciated the facts of the case and has wrongly held that there was a concluded contract between the parties. The learned counsel further submitted that the learned Court below has mis- understood the contents of the letter dated 16.05.1989 and held that it is a promise to advance working capital to the plaintiff. The learned counsel further submitted that although the letters dated 16.05.1989 and the sanction letter dated 02.03.1993 are subjects to compliance of the terms and conditions incorporated therein, the learned Court below mis- construed the said letters and held that there was a valid contract. By the said letter dated 16.05.1989(Ext. 3/G), the Bank has simply intimated to the plaintiff that the Bank shall be able to grant the working capital within the framework of working norms of Bank and not otherwise and, therefore, the said letter was not absolute assurance letter in favour of the plaintiff. The learned counsel further submitted that on the basis of said letter, the plaintiff is not entitled to compel the Bank to sanction loan unless the necessary requirement is fulfilled by the plaintiff. There were sufficient materials produced before the Court below which were subsequent to the letter dated 16.05.1989 which are sufficient evidence to doubt the credibility, honesty, integrity of the proprietor and Managing Director of the plaintiff, company which are sufficient to refuse advancement of working capital. The learned counsel further submitted that the learned Court below has misconstrued the letter dated 02.03.1993(Ext. 3/J) issued by the Bank to the plaintiff sanctioning Rs.17 lacs to be the valid contract. The learned counsel further submitted that the plaintiff was specifically required to execute the 9 necessary security documents along with guarantors and also to sign the duplicate copy of the agreement and returned the same to the Bank but till 15.11.1996, the plaintiff neither returned the duplicate copy of the agreement and letter to the Bank agreeing inter alia to comply the terms and conditions of the sanction letter dated 02.03.1993 nor did he approached the Bank and offered to execute necessary loan documents. In the meantime, the validity of the sanction letter expired after expiry of one year. The appellant was justified in refusing to advance working capital when the Bank was satisfied that providing the financial accommodation to the plaintiff’s firm was not going to serve any useful purpose. The learned Court below could not have compelled the Bank to provide financial assistance. On these grounds, the learned counsel submitted that the impugned judgment and decree are liable to be set aside and the plaintiff’s suit be dismissed with cost. At the time of hearing of this First Appeal, nobody appears on behalf of the respondents. (9) In view of the above submission of the learned counsel for the appellant and in view of the impugned judgment and decree and the materials available on record, the points arise for consideration is as to “whether the plaintiff is entitled for the reliefs claimed in the plaint” and “whether the State Bank of India, appellant is liable to pay the damages claimed by the plaintiff” and “whether the impugned judgment and decree are sustainable in the eye of law?” (10) In this case, although, the B.S.F.C. is party defendant, the plaintiff has not claimed any relief against B.S.F.C. The claim of the plaintiff against State Bank of India i.e. the appellant is that when the 10 plaintiff approached B.S.F.C. for financial assistance for establishment of industries as Roller Flour Mills for manufacturing Atta, Maida, Sujji, Bran, the B.S.F.C. sanctioned Rs.38 lacs on condition that working capital finance be assured by banking institution on need based basis. Thereafter, the plaintiff approached the State Bank of India, the appellant and the appellant issued letter dated 16.05.1989 promising to grant capital finance on need based basis. Therefore, the main claim of the plaintiff is that by this letter dated 16.05.1989, the State Bank of India assured the plaintiff to advance working capital. From perusal of the impugned judgment, it appears that the learned Court below also relied upon the other letter i.e. letter dated 02.03.1993 by which Rs.17 lacs was sanctioned in favour of the plaintiff. On the basis of these two letters i.e. dated 16.05.1989(Ext. 3/G) and dated 02.03.1993(Ext. 3/J), the learned Court below came to the conclusion that there was a valid contract between the plaintiff and the appellant. (11) From perusal of Ext. 3/G, the letter dated 16.05.1989, it appears that the letter was issued by the State Bank of India in favour of the plaintiff in the following term: “Dear Sir, With reference to your letter dated 11.05.1989, we have to advise that as per your application for working capital loan, the Bank shall be able to grant the same to meet your need based requirement within the framework of banking norms and not otherwise subject to the disbursement of term loan from the B.S.F.C.” (12) From the above letter, it appears that application was filed by the plaintiff before the Bank and the Bank has written this letter giving assurance that the Bank will be able to advance loan within the framework of banking norms and not otherwise. Therefore, unless the 11 banking norms are fulfilled which was condition precedent for advancement of loan, the Bank could not have advance the loan to the plaintiff. Therefore, it is the duty of the plaintiff to have fulfilled the norms of the Bank prior to obtaining the loan. On the basis of this letter (Ext. 3/G), it cannot be said that there had been a concluded contract between the Bank and the plaintiff. Some conditions have been mentioned in this letter i.e. the norms of the Bank. Everybody knows that Banks are financial institution and they always remained ready and willing to advance loan to the company but for that purpose, the loanee must fulfill the terms and conditions of the Bank and entered into an agreement. The Bankers are custodian of public money and, therefore, prior to disbursing loan, the Bank must satisfy that the loanee is capable of returning the public money to the Bank. Therefore, in matters regarding the advancement of loan, the Bank is the best institution to safeguard its interest and the Court should not interfere and substitute its own judgment. The Court should restrain themselves from compelling the financial institutions to advance loan to anyone particularly when after considering the facts and materials, the Bank has already refused to advance loan. In the present case, in no stretch of imagination it can be said that on the basis of this letter (Ext. 3/G), the plaintiff got a right to compel the Bank to sanction loan. It is not at all a concluded contract between the plaintiff and the Bank. (13) P.W.6, the Director of the plaintiff, company has stated that the Bank has illegally refused to provide working capital to the plaintiff, company. The officers of the Bank were demanding illegal gratification and when they refused to their illegal demand, the Bank officers obstructed the company in its business and denied working 12 capital on baseless ground. The plaintiff, company is not connected with the other units Shree Medical, Anupam Udyog and Swastic Engineering. From perusal of the impugned judgment, it appears that at paragraph 27, the learned Court below proceeded to decide the question as to whether the plaintiff was refused working capital on valid grounds. So far this question is concerned, it may be reiterated here that there are certain norms and rules which are to be observed prior to sanctioning loan by the Bank. For sanctioning loan, different factors are to be considered by the Bank and this satisfaction is the subjective satisfaction of the Bank. The Court cannot substitute its satisfaction. It further appears that the learned Court below assumed that the Bank assured the plaintiff to provide working capital by Exhibit-3/G and Exhibit-3/H. We have seen Exhibit-3/G and have found that it is not at all a contract between the parties and, therefore, it cannot be enforced against the Bank. It is only an information letter issued by the Bank intimating the plaintiff that loan can be advanced within the framework of banking norms and not otherwise. Therefore, the advancement of loan was conditional and not absolute. (14) Now let us see Exhibit-3H, the letter dated 22.09.1990. This letter reads as follows: “Dear Sir, Proposal for advance for working capital loan. With reference to your letter dated 17th September, 1990, your proposal for loan for working capital for your proposed unit is under active consideration and you will be advised at the appropriate time.” 13 (15) Therefore, by this letter also, it appears that the appellant informed the plaintiff that the application for loan of working capital is under active consideration. It is therefore, clear that till that date, there had been no contract between the parties. The application for loan was under active consideration with the Bank. Now, therefore, on the basis of Exhibit-3/H also, it cannot be said that the Bank was duty bound to advance working capital to the plaintiff. As has been informed to the plaintiff by Exhibit-3/G, the loan was to be advanced within the norms of the Bank. From perusal of Exhibit-3/I, it appears that the Bank informed the plaintiff after examining the application for loan that the performances of Roller Flour Mills in Bihar are not promising and, therefore, the financing of such activity is not viable. The commitment letter issued upto 2 ½ years back is now obsolete in view of the changed situation. This letter is dated 20.03.1992. It may be mentioned here that the Exhibit-3/G was issued on 16.05.1989. During this period, only there are communications by letters between the parties. However, it appears that subsequently the Controlling Office sanctioned a stock cash credit limit of Rs.17 lacs by terms of letter dated 02.03.1993(Exhibit- 3/J). From perusal of the said letter, it appears that the said Rs.17 lacs was sanctioned subject to completion of the terms and conditions mentioned in the said letter such as hypothecation of raw materials and finish goods, second charge over plant and machinery to be purchased out of B.S.F.C. finance mortgage of land measuring 9.74 katha with boundary valued at Rs.15.50 lacs by the branch which stands in the name of Sri Sitaram Singhania one of the Directors of the company and other conditions. At paragraph 14 of the said letter, the plaintiff was requested to sign on the duplicate copy of the letter having agreed upon 14 the aforesaid terms and conditions and returned to the Bank. Therefore, this letter was also not a letter for disbursement of loan. This letter only indicate that the Bank had sanctioned loan and the plaintiff was required to fulfill conditions and if he fulfills the said conditions and returned the duplicate letter signing thereon and also after entering into agreement as mentioned in detail in the said letter, the loan would have been disbursed in favour of the plaintiff. There is nothing on record to show that the plaintiff ever fulfilled the conditions or entered into an agreement hypothecating the stocks with the Bank or mortgaging the land as required by the said letter. The conditions mentioned therein are condition precedent for disbursement of the loan. The plaintiff has failed to produce any evidence on record to show that he ever complied the said terms and conditions. Therefore, on the basis of this letter also, it cannot be said that there was concluded contract between the parties. From perusal of Exhibit-3/A, 5/A, 5/B and 5/C, it appears that the different authorities of Industries Department of State Government of Bihar and also, B.S.F.C. wrote letter to the Bank for providing working capital. It appears that the learned Court below relied upon these documents and gave much emphasis that various authorities were also asking Bank to give working capital. In my opinion, on the basis of the letters of the authorities, the Bank could not have sanctioned loan. (16) From perusal of the said letter, Exhibit-3/A, it appears that this letter dated 09.09.1992 was sent by B.S.F.C. to State Bank of India