1. Briefly the facts are that petitioners No. 1, the Industrial Finance Corporation of India, advances medium and long term loans to industrial concerns in India. Petitioners No. 2 is an Assistant General Manager of Petitioners No.1, and has been authorised by the Board of Directors to file the application. Respondent No.1 is a Public Limited company and is engaged in the business of manufacturing and processing of paper, pulp, etc. and is an industrial Finance corporation Act ( hereinafter referred to as Corporation Act). Respondent Nos. 2 to 4 are the other Financial Institutions and Respondent Nos. 5 and 6 the Banks, which along with petitioners NO. 1 advanced loans to respondent No. 1 for its project at Daruhera, district Mohindergarh (Haryana).
2. Petitioners No. 1 vide loan agreement dated 7th November, 1978 (hereinafter referred to as the first loan agreement), agreed to advance to respondent No. 1 a loan of Rs. 300 lacs. By another agreement dated 27th January, 1979 (hereinafter referred to as the subsidy loan agreement), it agreed to advance an additional advance of Rs. 15,00,000/-against subsidy to be given by the Central government under the 10-15% Central Subsidy Scheme, 1971 which respondent No. 1 was eligible to get from the government. By an agreement dated 28th May, 1980 (hereinafter referred to as the second loan agreement ) petitioners No. 1 agreed to advance to respondent No. 1 further loan of Rs. 110 lacs.
3. Pending execution of the first loan agreement petitioner No. 1 at the request of respondent No. 1, advanced various sums aggregating to Rs. 140 lacs by way of bridge loans on various dates as detailed below:
Date of Disbursement Amount24-5-1977 Rs. 25 lacs27-2-1978 Rs. 100 lacs19-4-1978 Rs. 15 lacs
4. After the execution of the first loan agreement and creation of substantive securities the above creation of substantive securities the above said amount of 140 lacs was treated and formed part of the disbursement of the loan of Rs. 300 lacs under the first loans agreement. The balance amount of Rs. 160 lacs was disbursed to respondent No. 1 on the following dates:
Date of Disbursement Amount23-3-1979 Rs. 140 lacs19-10-1979 Rs. 20 lacs
In terms of the subsidy agreement dated 27th January, 1979, petitioners No. 1 duly lent and advanced to respondent No. 1 the sum of Rs. 15 lacs on 27 the January, 1979. Pending execution of the second loan agreement dated 28th May, 1980, Petitioners No. 1 advanced a sum of Rs. 82.50 lacs by way of bridge loan on 20th December, 1979 under separate bridge loan agreement. Upon execution of the second loan agreement between petitioners No. 1 and respondent No. 1 and creation of substantive security the amount of Rs. 82.50 lacs was treated and formed part of disbursement of the amount of Rs. 110 lacs under the second loan agreement. A further sum of Rs. 16.50 lacs was advanced on 19th August, 1980; thus making the total sum advanced Rs. 99 lacs under the second loan agreement. It is alleged that the substantive amount of Rs. 11 lacs have not been advanced to respondent No. 1 on terms and conditions of the second loan agreement.
5. As a security for due payment of the loans of Rs. 300 lacs, 15 lacs, 15 lacs 110 lacs advanced by petitioners No. 1 together with interest, commitment charge, and other moneys, that might become payable by respondent No. 1 under the abovesaid agreements, respondent No. 1 executed in favour of petitioners No. 1 three deeds of hypothecation dated 24th February, 1979, 23rd March, 1979 and 23rd December, 1980 respectively hypothecating by way of first charge all its plaint, machinery and equipment and all other movable properties and assets including stocks, raw materials, stock -in-trade, finished and semi-finished products, etc., etc. subject to the prior charge created or to be created by respondent No. 1 in favour of its bankers on the stocks, raw materials, finished goods, semi-finished goods etc., etc. As further security in respect of the said loans with interest, etc. respondent No. 1 further created an equitable mortgage by deposit of title deeds in favour of petitioners No. 1 jointly with respondent Nos. 2 to 6 in respect of its land situated at village Dharuhera, District Mohindergarh together with all buildings, structures erected thereon, plant and machinery installed or to be installed thereon.
6. The first and second loan agreements dated 7-11-1978 and 28-5-1980 provide that petitioners No. 1 has a right to require respondent No. 1 forthwith to discharge in full its liabilities on any of the following grounds and in such cases the whole of the amount payable then to petitioners No. 1 will become due as if the time for repayment has expired:--
(a) If default occurs in the payment of principal of the loans as and when the same become due and payable.
(b) If default is committed by the borrower in the payment of any instalment of interest on loans and such a default continues for a period of 30 days.
(c) If interest amounting to at least Rs. 500/-is in arrears and remains unpaid for 30 days after becoming due.
(d) If default occurs in the performance of any other covenants, conditions or agreements on the part of the borrower under the loan agreements, or any other agreement between the borrower and petitioner No. 1, or the agreements entered into by the borrower with any other financial institution and such default continues for a period of 30 days after notice thereof has been given to the borrower.
(e) If there is reasonable apprehension that the borrower is unable to pay its debts; or proceedings for taking it into liquidation either voluntarily or compulsorily may be or have been commenced in respect thereof.
(f) If the other financial institutions/ banks with whom the borrower had entered into agreements for financial assistance refuse to disburse the loans for any part thereof or recall the same under their respective loan agreements with the borrower.
(g) If the borrower is unable or has admitted in writing its inability to pay its debts as they mature.
7. The subsidy agreement dated 27-1-1979 also provides that if respondent No. 1 commits breach of any of its terms or conditions the whole amount advanced by the petitioners to respondent No. 1 towards subsidy would become due and repayable immediately together with interest thereon at such rates as may be fixed from time to time subject to a minimum of 12% P.A from the date of demand till repayment along with other miscellaneous expenses and incidental charges to petitioners No. 1.
8. It is averred that respondent No. 1 failed to pay to the petitioners No. 1 the undermentioned instalments of principal sum,. interest and other moneys due and payable under the first and second loan agreements and subsidy agreement and the deeds of hypothecation dated 24-2-1979, 23-3-1979 and 23-12-1980:--
A/c I-Loan of Rs. 300 Lacs (a) Principal (b) Interest (c) Outstanding interest on Rs. 300 lacs up to 20th March, 1980, aggregating to Rs.35.60 lacs, funded agreed to be recovered in four half yearly instalments (d) Interest on the said amount of Rs. 35.60 lacs. A/c II-Loan of Rs. 99 lacs (out of Rs. 110 lacs) (a) Interest (b) Commitment charge in respect of undrawn amount Interest on Central Subsidy loan Due dates 20-11-80 20-5-81 20-9-80 20-3-81 20-9-80 20-3-81 20-3-80 20-9-80 20-3-81 20-3-81 20-3-81 20-3-80 20-9-80 20-3-81 Amount of default Rs. 6,25,000.00 Rs. 6,25,000.00 Rs. 12,50,000.00 Rs. 11,31,668.00 Rs. 16,66,120.00 Rs. 27,97,788.00 Rs. 8,90,000.00 Rs. 8,90,000.00 Rs. 17,80,000.00 Rs. 11,31,668.00 Rs. 82,022.00 Rs. 1,75,134.00 Rs. 2,19,596.00 Rs. 4,76,752.00 Rs. 2,59,570.00 Rs. 5,455.00 Rs. 2,65,025.00 Rs. 72,461.00 (Balance amount) Rs. 95,123.00 Rs. 99,233.00 Rs. 2,66,817.00
9. Respondent No. 1 also failed in spite of repeated demands to pay interest in respect of bridging loan of Rs. 99 lacs (since converted into regular loan as stated above) as per the particular given below:--
Due date 20-3-1980 20-3-1980 (from 20-9-80 to 23-12-80 20-3-81 Amount in default (Rs.) 2,46,822,00 5,48,615.00 3,53,946.00 24,363.00 11,73,746.00
10. It is also averred that respondent No. 1 suspended its production from 8-12-80 and since then its factory is lying closed. It has also committed various other breaches and defaults in the performance and observance of other terms/conditions and covenants in that behalf contained in the above three agreements and three hypothecation deeds. The creditors of respondent No. 1 have filed an application for its winding up (C.P. No. 64 of 1981 M/s. Frontier Pulp & Paper Mills v. M/s. Sehgal Papers Ltd.). in the High court., Industrial Credit and Investment corporation of India, respondent No. 3 (hereinafter referred to as 'ICICI') which granted loans to respondent No. 1 has recalled the same under loan agreement entered into by it with respondent No. 1 Respondent No. 1 has also failed to pay the statutory dues to the Government like sales-tax, electricity dues, income-tax aggregating to about Rs. 12 lacs and also the wages and salaries amounting to Rs. 6 lacs as on 30-6-1981.
11. In view of the above defaults in payment of the principal, interest and other sums and also on account of various breaches of conditions and covenants on the part of respondent No. 1, petitioners No. 1 has in terms of the loans agreements and hypothecation deeds served notice dated 12-6-1981 on it recalling the entire principal sums of loans and other amounts due from it aggregating to Rs. 5,10,52,249.00 with further interest, compound interest and other monies that may become due up to the date of payment. consequent to the issue of notice a further sum of Rs. 25,01,786.49 has fallen due on account of interest, insurance premia and other charges recoverable from respondent No. 1 in terms of the loan agreements and the hypothecation deeds. Thus, a total sum of Rs. 5,35,54,035.49 has become due and repayable on 20-10-1981 by respondent No. 1 to petitioners No. 1. The details of the amount are as follows:--
Account No. 1 (Loan of Rs. 300 lacs)(a) Principal (b) Outstanding interest on Rs. 300 lacs up to 20th March, 1980 agreed to be funded. (c) Interest from 20th March, 1980 to 20th October, 1981 (d) Interest on (b) above Account No.ll (Loan of Rs. 110 lacs) (Amount disbursed Rs. 99 lacs) (a) Principal (b) Interest (c) Commitment charge in respect of the undrawn amount (d) Interest on commitment charge (e) Intt. on bridging loan Account No. III (Central Subsidy (a) Principal (b) Interest Insurance premium paid by petitioners No.1 Interest on above insurance premium Other debits(Trunk call charges) Rs. 3,00,00,000.00 35,60,000.00 49,29,097.00 7,69,134.00 ------------------- 99,00,000.009,27,161.00 8,950.00 486.00 12,63,419.00 ----------------- 15,00,000.00 3,92,795.00 Rs. 3,92,58,231.00 1,21,00,016.00 18,92,795.00 2,92,767.00 10,056.00 170.00 --------------------- 5,35,54,035.49 -----------------------
12. Respondent No. 1 has also failed and neglected to pay the principal, interest and other monies amounting to about Rs. 15 crores due to respondent Nos. 2 to 6 in spite of demands made by then in this behalf. It has also overdrawn the cash credit account to the tune of Rs. 75 lacs from its bankers. It has other liabilities of about Rs. 2 crores. Therefore, it is stated that the assets mortgaged to petitioners No. 1 by respondent No. 1 are in jeopardy.
13 Respondent Nos. 2 to 6 have been impleaded as parties as the properties mentioned in the application also stand mortgaged in their favour as security for various loans granted by them to respondent No. 1 along with the petitioners No. 1 on paripassu basis. The petitioners consequently filed the present petitioners under S. 30 of the IFC Act for sale of the properties of respondent No. 1 subject-matter of the deeds of hypothecation dated 24-2-1979, 23-3-1979, 23-12-80 and the mortgage by deposit of title deeds created by respondent No. 1 on 23-12-80 with some other reliefs. The petition has been contested by respondent No. 1, whereas it has been supported by the other respondents.
14. Respondent No. 1 in reply to the petition pleaded that the breach of agreement by the respondent had been procured by petitioners No. 1 by its own refusal to advance funds and to carry out other commitments to scuttle the respondent. As a result of petitioners No. 1's breach in the matter of grant of loans, the effect was that setting up of the project was delayed and in the meantime the prices went up. Thus, the original estimate was increased to such larger amount. This was done with a design to sell out the respondent to other big houses in whose influence some of the officers of petitioners No. 1 were working. It is further stated that it is not respondent No. 1 which is guilty of violation of any of the terms of the loans agreement but it is petitioners No. 1 itself, It is further averred that the notice under S. 29 of the IFC Act is illegal and that S. 30 of the said Act is ultra vires Arts. 14 and 19 of the constitution. The respondent further pleaded that the petition had been made male fide. some other pleas have also been taken which are reflected in the issues.
15 The other respondent in their written statements supported the petitioners and stated that they had no objection if the petition was allowed but their interests on pari passu basis be safeguarded. They also mentioned the amounts which were due to them from respondent No. 1.
16 Two replications were filed on behalf of petitioners No. 1 in the form of affidavits, one signed by Mr. K. C. Hukmani and the other by Mr. K. R. Kalra dated 23rd January, 1982 and 7th April, 1982 wherein the allegations of respondent No. 1 were controverted and it was further pleaded that the said respondent could not take the pleas of subject-matter of issues Nos. 6 to 9 in view of provision of S. 30 of the IFC Act.
17. On the pleadings of the parties the following issues were framed;
1. Whether respondent NO, 1 made defaults in repayment of the instalments of the various loans and/or committed breaches of terms and conditions of the loan agreements? OPP.
2. Whether respondent No. 1 failed to make immediate payment of the loans and/or amounts due to the petitioners after the same were recalled by petitioners No. 1? OPP
3. Whether legal Notices under S. 29 of the Industrial Finance Corporation Act, has been served upon respondent No. 1. If not, what is its effect? OPP.
4. whether S. 30 of the Industrial Finance Corporation Act, is ultra vires Arts. 14 and 19 of the constitution. If so, its effect? OPD.
5. Whether issues NO. 4 can be decided by the court while dealing with the petitioners under Section 30 of the Industrial Finance Corporation Act? OPP.
6. Whether the present petition is male fide for reasons mentioned in paras 2(m) and 2 (t) of the written statement. If so, its effect? OPD.
7. Whether the default in the matter of advances of finances to respondent No. 1 in respondent of agreement dated 7-11-1978 and 28-5-1980 was committed by petitioners No. 1. If so, its effect? OPD.
8. Whether the petitioners Corporation wrongly calculated the requirement of funds for respondent No. 1 while entering into second loan agreement dated 28-5-1980 resulting in shortfall of funds to the tune of Rs. 1.4 crores? If so, its effect OPD
9. Whether the contracts entered into between respondent No. 1 and petitioners No. 1 in respect of payment of loans and interest thereon, stand rescinded and frustrated on account of the acts, and conduct of petitioners No. 1. If so, its effect? OPD.
10 whether issues Nos. 6 to 9 do not arise, in view of S. 30 of the Industrial Finance Corporation Act? OPP.
18. Issues Nos. 1 and 2.
I propose to deal with issues Nos. 1 and 2 together as these are inter-connected. It is not disputed that two agreements of loan dated 7th November, 1978 and 28th May, 1980 were entered into between petitioner No. 1 and respondent No. 1. The first loan agreement related to a loan of Rs. 300 lacs and the second loan agreement to a loan of Rs. 110 lacs. there were conditions of payment of interest and conditions of disbursement in clauses 3.3. and 6.2 of the first agreement, clause 10.1 deals with the situation as to what would happen if respondent No. 1 committed default enumerated thereunder. The relevant portions of the said clauses read as follows:
The Borrower shall pay to the Lenders interest on the principal amount of the Normal Loan outstanding from time to time at the lending rate of the Lenders in force on normal loans on the date of execution of the loan Agreement subject to a minimum rate of 11% per annum (hereinafter referred to as 'the normal rate of interest') half yearly in each year on 20th March and 20th September and shall also pay interest on the principal amount of the Concessional Loan outstanding from time to time at the lending rate of the lenders in force on concessional loans applicable to projection in a notified less developed area on the date of execution of the Loan Agreement subject to a minimum rate of 9.5% per annum (hereinafter referred to as 'he concessional rate of interest') half-yearly in each year on 20th March and 20the September.
'6.2 Other conditions for Disbursement. The obligations of the lenders to make any disbursement out of the Loan shall also be subject to the following conditions:
(a) Non-Existence of Event of Default No event of default as defined in Art. X hereof and no event which, with the lapse of time or notice and lapse of time as specified in the said Article would become an even of default, shall have happened and be continuing.
(b) Evidence for Utilisation of Disbursement. such disbursement shall, at the time of request therefor, be needed by the Borrower as per the draw-down schedule referred to in S. 3.7 hereof for the purposes of the Project and the Borrower shall produce such evidence of prior and proposed utilization of the proceeds of the disbursement as may be required by the Lenders....................
10. 1 Events of Default
if one or more of the events specified in this section (hereinafter called 'event of default') shall have happened, then the Lenders by a notice in writing to the Borrower, may declare the principal of and all accrued interest on the Loan to be due and upon such declaration the same shall thereupon become due payable forth with and the security created in terms of Art IV. hereof shall become enforceable (anything in this Agreement to the contrary notwithstanding):--
(a) Default in Payment of Principal sum of loan.
Default shall have occurred in the payment of principal of the Loans, as and when the same shall have become due and payable.
(b) Default in payment of Interest.
Default shall have been committed by the Borrower in the payment of any instalment of interest on the Loan and such default shall have continued for a period of thirty days.
(c) Arrears of Interest.
Interest amounting to at least Rs. 500/-shall have been in arrears and unpaid for thirty days after becoming due.
(d) Default in performance of Covenants and conditions.
Default shall have occurred in the performance of any other covenants, conditions of agreements on the part of the Borrower under this Agreement or any other agreement between the Borrower and the Lenders or the agreement entered into with any other financial institutions and such default shall have continued for a period of thirty days after notice thereof shall have been given to the Borrower by the Lenders.
. . . . . . . . . . . . (f) Inability to Pay Debts.
There is reasonable apprehension that the Borrower is unable to pay its debts or proceedings for taking it into liquidation either voluntarily or compulsorily may be or have been commenced in respect thereof.
(g) Inadequate Insurance.
The properties and assets offered as security to the Lenders for the Loan are not insured and kept insured by the Borrower or depreciate in value to such an extent that in the opinion of the Lenders further security to the satisfaction of the Lenders should be given and such security is not given.
. . . . . . . . . . . . (I) Refusal to Disburse Loans by Other Financial Institutions.
The other financial institution (s)/bank(s) with whom the Borrower has entered into agreements for financial assistance refuse to disburse the loans or any part thereof or recall the same under the respective loan agreements with the Borrower.
(j) Proceedings Against Borrower.
The Borrwer shall have voluntarily or involuntarily become the subject of proceeding under any Bankruptcy or insolvency Law.
(k) Inability to pay Debts on Maturity.
The Borrower is unable or has admitted in writing its inability to pay its debts as they mature.'
The Third Schedule of the agreements relates to the repayment of the principal amount to petitioner No.1. The payments of the installments were to be made by respondent No. 1 on 20th November and 20th May each year starting with 20th November, 1980. The last instalment was payable on 20th May, 1992. The amount of each instalment is mentioned in the said Schedule.
19. Clause 3.3 of second agreement dated 28th May, 1980, Exhibit P. 33 is similar to that of the first agreement. Sub-cls. (a) and (b) of cl 6.2 was of the said agreement are also similar to those of first agreement. Sub-clause (h of the cl 6.2 was added in the second agreement providing that respondent No. 1 shall being in unsecured loans/deposits in addition to the loans of the institutions to the extent of Rs. 66 lacs from internal generations. In case it fails to produces Rs. 60 lacs internal generations, it shall bring in short falls from its own resources. The said clause reads as follows:
'The promoters of the Borrower shall bring in unsecured loans/deposits subordinate to the loans of the Institutions to the extent of Rs. 66.00 lacs on terms and conditions satisfactory to the Lenders for meeting a party of the Overrun in the cost of the overrun in the cost of the project. In the event of the internal generations of the Borrower falling short of Rs. 60.00 lacs by the end of June, 1980 or there being shortfall in resources otherwise to complete the project the promoters shall make arrangements on their own, without looking to the institution for further financial assistance on terms as may be approved by the Lenders.'
The terms contained in clause 10.1 of the agreement are the same as those in clause 10.1 of the first agreement. The repayment schedule is annexed with the agreement as Sch.III according to which payments of the loans are to be made on 20th May and 20th November of each year starting with 20th May, 1982. The last instalment is payable on 20th November, 1981. The amount of each instalment is Rs. 5.50 lacs.
20 In subsidy agreement dated 27th January, 1979, Exhibit P. 34, it has been provided in clause 4 that the beneficiary shall not go out of production within 5 years from the date of commencement of production.
21. Now it is to be seen whether petitioners No. 1 in terms of the agreement advanced the loans. In the written statement the receipt of Rs. 300 lacs on the first loans, Rs. 99 lacs on the second loan and an amount of Rs. 15 lacs on the subsidy loan has not been specifically denied. The details of the payment of the aforesaid loans are given at pages 3 and 4 of the judgment. The aforesaid payments are also proved from the statement of Mr. K.R. Rajora, Accounts Officer of petitioners No. 1. He has produced the copies of the accounts and inter alia stated that an amount of Rs. 300 lacs as principal is due from respondent No. 1 on account of first loan, Rs. 99 lacs as principal on account of second loan and Rs. 15 lacs as central subsidy. The copies of the accounts produced by him are Exhibits P. 8 to P. 22. From the aforesaid evidence the payment of the amounts of Rs. 300 lacs of the first loan, Rs. 99 lacs out of the second loan and Rs. 15 lacs of the subsidy loan are established. whether the act of petitioners No. 1 in not advancing the full amount of Rs. 110 lacs out of the second loan but advancing an amount of Rs. 99 lacs only constitutes a breach of agreement or not shall be discussed by me at a later stage.
22. It is to be seen next whether respondent No. 1 committed defaults in making payment of the instalments of the principal and interest. First I shall deal with the matter of payment of the interest and thereafter regarding payment of the principal. The loan agreements provided that instalments of loan would become payable twice a year i.e. on 20th November and 20th May, after 2 years of the execution of the loan agreement. Out of the 1st loan, respondent No. 1 in the first instance made request for bridging loan as the agreement of loan was not executed till 7th November, 1978. Consequently bridging loan of Rs. 25 lacs, Rs. 100 lacs and Rs. 15 lacs were given on 24th May, 1977, 27th February 1978 and 19th April, 1978 which were late adjusted towards the term loan. The remaining amount of Rs. 160 lacs was advanced in two instalments of Rs. 140 lacs and Rs. 20 lacs as term loan on 23rd March, 1979 and 19th October, 1979. Regarding the interest the agreement provided that it would become payable by respondent No. 1 immediately on 20th March and 20th September each year. Respondent No.1 could not pay the interest on the loan of Rs. 300 lacs from March, 1979 to March, 1980. Therefore, respondent N.1 requested petitioners No. 1 that it be funded and be recovered in 4 halfyearly instalments vide letter dated 9th October, 1979, Exhibit P. 106 (Page 234 Vol. 1). petitioners No.1 agreed to the proposal. Thereafter the interest on the amount of Rs. 300 lacs became due on 20th September. 1980 and 20 the March, 1981. The said amounts were not paid by respondent No. 1 the interest on the second loan of Rs. 110 lacs out of which Rs. 99 lacs were advanced, became due on 20th March, 1981. The interest on subsidy loan became due on 20th March, 1980, 20th September, 1980 and 20th March, 1981. The details of the amounts have been given at page 6 of the judgment. These amounts were also not paid by respondent No. 1 Regarding the interest prior to March, 1980, Mr. N.K. Khushu (P.W. 2), in this statement makes it clear that it had been included in the project cost. According to him, respondent No.1 was required to pay the instalments of interest when they became due.
The balance-sheets have been produced by respondent No. 1 which are Exhibits R. 4 (ending 30th June, 1978), R. 5 (ending 30th June, 1979) R. 6 (ending 30th June, 1980) and R. 7 (ending 30th June, 1981). In all the aforesaid balance sheets amounts of interest are shown due from the Company to the Financial Institutions. It is not necessary to refer to the relevant entries as given in all the balance-sheets. However, I will refer to the entries in the last two balance-sheets, namely, Exhibits R. 6 and R. 7. In Exhibit R. 6, the interest due to the petitioners and other Financial Institutions on the terms loans has been shown to be Rs. 48 lacs and odd and in the balance-sheet, Exhibit R. 7, it is shown as Rs. 300 lacs and odd. The interest on bridging loan in the former balance-sheet has been shown as Rs. 11 lacs and odd and in the latter balance-sheet R. 13 lacs and odd. Thus even according to the balance sheets prepared by the respondent company, amount of interest is shown to be due to petitioners No. 1.
23. Mr. K.R. Rajora (P.W. 1) is an Accounts Officer of Petitioners No. 1. He deposed that the first instalment of interest became due in September, 1977. The Company paid interest-instalments up to September, 1979. thereafter, it did not pay the interest. In cross-examination this part of the statement has not been challenged. Mr. N.K. Khushu (P.W.2) was the general manager of petitioners No.1 when the petition was filed. he corroborated P.W. 1. he was also not cross-examined with regard to the said fact. Respondent No. 1 he further deposed, failed to pay the instalments of interest according to the agreement. This fact has also been admitted by Bhim Rao ( R. 1 W. 2). He stated that the amount of Rs. 16 lacs and odd on account of interest on the first loan was not paid on 20th March, 1981 the due date. Even Mr. Sehgal (R. 1 W.4) could not deny the said fact. He stated that the interest on the first loan was payable on 20th March and 20 the September every year. The interest on the first loan amounting to Rs. 16 lacs and odd due on 20th September, 1980 and the interest on the bridging loan of Rs. 99 lacs amounting to Rs. 5. 48 lacs and odd due on 20th due on 20th September, 1981 had not been paid by the company to petitioners No. 1. In view of the aforesaid evidence, I am of the opinion that respondent No. 1 committed default in payment of the instalments of the interest.
24. Now I advert to the question of default in making the repayments of the instalments of the principal amount of the 1st loan. The repayments of the instalments of the 1st loan were to be made on 20th November and 20th May each year starting with 20th November, 1980. The last instalment was payable on 20th May, 1992. The amount of each instalment has been mentioned in the Schedule. Similarly the repayments of the instalments of the second loan were to be made on 20th May and 20th November each year starting with 20th May 20th November, each year starting with 20th May, 1982. The last instalment was payable on 20th November, 1991. St. III of the said agreement contains the details of the amounts of instalments and the dates when the amounts were payable. The amounts of the above said instalments were also not paid by respondent No. 1, which is clear from the letters dated 10th June, 1981 and 20th June, 1981, Exs. P. 53 and P. 41 respectively, sent by Mr. Sehgal and respondent No. 1 in reply to the notice of petitioners No. 1 dated 12th June, 1981, Ex P. 58. In Ex p. 58 the amount of principal which became due has been mentioned in para 9. Respondent No. 1 in reply to the notice does not challenge the amounts claimed by petitioners No. 1 Mr. Sehgal, in his letter (Ex. P. 53) inter alia said that it was impossible for the Company to comply with the requirements of the letter since by no means can it pay the amounts demanded. He also said that he had been pursuing the mater closely with Mr. A. N. Haksar, Chairman of I. T. C. Limited who had in principle agreed to help the company at the critical juncture. In the end he requested that the proposed action as suggested by kindly deferred. On similar lines the reply of the notice was sent by the company (see Ext. P. 41). It was said in the reply that the promoters had been negotiating with certain parties since December, 1980 to implement the decision of 6th December, 1980 but no party had by then been able to bring in the needed funds. It was requested that petitioners No. 1 should not initiate the extreme irreversible step of enforcing the provisions of the various agreements and deeds of hypothecation. At this juncture it will also be proper to refer to the decision of 6th December, 1980 ( Ext P. 77) which was taken in a meeting of the representatives of the Punjab National bank, State Bank of Patiala, petitioners No. 1 and respondent No. 1. The conclusions reached in the meeting were as follows:
' i) The promoters of SPL should locate a financially sound party, acceptable to the institutions /banks for induction in the management of SPL. The party so located should be willing to provide substantial amount of funds to SPL for conducting its operations on a sustained and viable basis and for servicing its liabilities.
ii) Given (I) above, the definite indications about which should be made by Shri M.M. Sehgal in a week's time, though arrangement could be tied up in due course, the gaps in the organisation should be filled up through the appointment of the professional who would man the technical, production and marketing wings in SPL effectively.
iii) The question of providing further overrun finance, working capital or any associated reliefs and concessions to SPL by the Institutions/Banks would arise only after an acceptable financially sound party had been located and introduced and the organisational gaps filed in SPL. Even the question of considering provision of interim finance by the Institution/Banks would arise only after definite indications about the interest of an acceptable party in SPL were available, though regular arrangement was firmed up in a couple of months thereafter.
iv) The Head of the Institutions and banks would be kept informed by Shri Sehgal of the progress made in the direction of locating an acceptable party. A review of the progress might be made at a joint meeting around 15th December, 1980.'
From the above conclusions it is evident that respondent No. 1 was in great financial difficulty and it was not possible for it to make the payments unless it brought in some party who could provide substantial amount to funds for making the payments and conducting the operations of respondent No. 1.
25 It is not necessary to refer to other documents. However reference may be made to the oral statements of the witnesses.
26. Mr. R.K. Rajora (P.W. 1) deposed that the company had not repaid any amount on the loan account. The first instalment of the loan of principal amount became due on 20th November, 1980. Mr. M. N. Khushu (P.W. 2) affirmed the statement of Mr. Rajora and said that respondent No. 1 committed default in payment of the principal and interest. Both the witness were not cross-examined on the said points, which shows that the respondent did not challenge the said party of the statement. Mr. Bhim Rao ( R. 1 W. 2) admitted that the first instalment of first loan became due on 20th November, 1980, and it was not paid by the company. He further admitted that subsequently no instalment of the principal amount was paid by it to petitioners No. 1 Mr. Sehgal (R. 1 W. 4) also admitted about the non-payment of the instalments of principal amount.
27. From the evidence referred to above it is established that respondent No. 1 committed defaults in payment of instalments of the principal and interest. According to Clause 10.1 (a) and (b) of the agreements, if respondent No. 1 committed default in making the payment of the instalments of the principal or interest, petitioner No. 1 could claim whole of the amount from it. Therefore, petitioners No. 1 became entitled to recover the amount in dispute from respondent No.1.
28. Respondent No. 1 in addition to committing the breach of the said clause committed breach of clause (iv) of the subsidy agreement, cls. 10.1 (k), 10.1(1), 10.1(j) and 10.1 (i) of the 1st and 2nnd loan agreements and cl 6.2 (h) of the 2nd loan agreement.
29 Clause (iv) of the subsidy agreement, Exhibit P. 34 provided that respondent No. 1 would not go out of production within give years from the date of commencement of the production and in case it did so, petitioners No. 1 would be entitled to recall the loan. Respondent No. 1, however, went out of production within the said period. The facts is admitted by Mr. Sehgal. There is some dispute about the month of stoppage of the production, as according to the petitioners, it was December, 1980, but according to Mr. Sehgal it was 8th March, 1981 but that is not relevant. There is, however no controversy between the parties that the company stopped production within five years of starting the production. That fact is also clear from the letter Exhibit P-52 dated 15-12-1980 written by respondent No. 1 to the petitioners. It is stated therein that all the departments of the mill were completely shut down in all shifts for want of working capital and they were unable to purchase the raw materials for feeding the mills and that the two participating banks, namely, Punjab National Bank and the State Bank of Patella had withdrawn all facilities. The letter is signed by Mr. Sehgal and Mr. Venkatachalam, Financial Director. It thus stands proved from the above admission of Mr. Sehgal and the letter Ex. P-52 that the respondent-company had stopped production within the a period of five years from the date of commencement of the production. Therefore, petitioners No. 1 became entitled to recall the loan on this ground to.
30. Clause 10.1 (k) of the first and the second loan agreements provided that the loan could be recalled if the borrower (respondent No. 1) was unable or had admitted in writing its inability to pay its debts as they matured. The respondent-company in its letter Exhibit P-94, dated 27-8-1980, admitted that its financial position was not too happy. There had been erosion of working capital and on that account operational problems had arisen. Therefore, it was said that respondent was not in a position to meet its commitment of payment of interest on the terms loans. Consequently, a request was made that the project be revised and additional funds be sanctioned; that interest for the period from January 1, 1979 to June 30, 1981 be funded; that interest be not charged on funded interest and that the loan instalments be rescheduled. It thus stands proved that respondent No. 1 was unable to pay the debts and petitioner No. 1 became entitled to recover whole of the amount.
31.In the first and second loan agreements it was provided in cl 10.1(J) that if the borrower became the subject of proceedings under any bankruptcy and insolvency law, the amount of loan could be recalled. It was further provided in cl 10.1(1) that if the borrower had taken or suffered any action for its liquidation or dissolution, the amount could be recalled. Respondent No. 1, it is not disputed, was ordered to be would up in a creditors petition. Thus, petitioners No. 1 became entitled to recall the loan under these clauses also.
32. Clause 10.1(I) of the loan agreements says that the loan could be recalled if the other financial institution (s)/Bank(s) with whom the borrower (respondent No. 1) had entered into the agreement for financial assistance refused to disburse the loan or any part thereof or recalled the same under their respective loan agreements. it is not disputed by respondent No. 1 that ICICI respondent No. 3 had recalled the loan from it. Reference may be made to para 21 of the petition wherein it is pleaded by petitioners No. 1 that the ICICI respondent No. 3 had recalled the loans advanced to it. The said para had been admitted by the said respondent. Therefore, the petitioners also became entitled to recall the loan on this ground too.
33. There was also breach of Clause 6.2(h) of the second loan agreement by respondent No. 1 on account of which the petitioners-institution could recall recall the loan under S. 29 of the IFC Act. It was provided in the said clause that the promoters of respondent No. 1 would bring in unsecured loan/deposits subordinate to the loans of the institutions to the extent of Rs. 66 lacs for meeting a part of the over-run in the cost of the project. They would also produce by the internal generations an amount of Rs. 60 lacs by the end of June, 1980. . In the event of internal generations of respondent No. 1 falling short of Rs. 60 lacs at the end of June, 1980 or there being short-fall in there sources otherwise to complete the project, the promoters would make arrangement on their own, without looking to the institutions for further financial assistance on terms as may be approved by the lenders. The clause has already been reproduced.
34. It is relevant to give here the circumstances because of which the second loan agreement was entered into and the clause was incorporated. The cost of the project at the time of first loan agreement was Rs. 1740 lacs. However, there was escalation in the prices of various commodities and, therefore, the project cost increased to Rs. 2430 lacs. Thus there was an overrun of Rs, 690 lacs. The proposed resources of financing the original project and overrun were as follows:
(Rupees in lacs)
(I) SHARE CAPITAL (a) Promoters (b) For consideration other than cash (c) Subordinate unsecured loans already brought in by promoters (d) Public Issue (ii) RUPEE LOANS FROM (a) Industrial Development Bank of India (IDBI) (b) Industrial Finance Corporation of India (IFCI) (c)The Industrial Credit and Investment Corporation of India Limited (ICICI) (d) Life Insurance Corporation of India (LIC) (e) Unit Trust of India (UTI) (f) Banks (iii) FOREIGN CURRENCY LOANS FROM (a) IFCI (b) ICICI (iv) DEFERRED PAYMENTS (a) Imported machinery (b) Indigenous machinery (v) INTERNAL RESOURCES UP TO JUNE 1980 (vi) ADDITIONAL SUBORDINATE UNSECURED LOANS FROM PROMOTERS (vii) CENTRAL SUBSIDY (viii) DEFERMENT OF INTEREST (JAN. '79-March '80) ON INSTITUTIONAL LOANS TOTAL Original 200.35 25.65 35.00 304.00 600.00 300.00 42.00 50.00 10.00 158.00 -- -- -- -- -- 15.00 -- ------------------ 1,740.00 --------------- Overrun -- -- 35.00 -- 210.00 110.00 75,00 15.00 -- -- -- -- -- -- 60.00 66.00 -- 119.00 ------------- 690.00 -----------------
35. From the above data it is evident that the respondent-company to the tune of Rs. 410 lacs and they deferred the payment of interest on the loan to the tune of Rs. 119 lacs. The promoters had already brought in loans of Rs. 35 lacs which were taken into consideration. Further it was agreed that out of the balance amount of Rs. 126 lacs the promoters would make arrangement of Rs. 66 lacs by raising unsecured loans from internal resources. The above said clause also finds mention in the letter. Exhibit P. 106, dated 9th October, 1979 written by petitioners No. 1 to the respondent-company.
36 Now it is to be seen whether the promoters could bring in Rs. 66 lacs or not. Respondent No.1 vide letter, Exhibit P. 91, dated 22nd October, 1979 addressed to the Regional Manager of Petitioners No. 1 informed him that the promoters would bring in additional Rs. 33 lacs and petitioners-institution should sanction disbursement of Rs. 88 lacs being 80 per cent of the additional term loan, as bridge loan. In reply to the said letter petitioners-institution informed respondent No. 1 vide letter Exhibition P. 107 dated 29th November, 1979, that it was ready to release Rs. 82.50 lacs subject to the conditions that the respondent-company would furnish a statement duly certified by its auditors showing the details of unsecured loans brought in by the promoters to the extent of Rs. 68.10 lacs i.e. Rs. 35.10 lacs as envisaged earlier and Rs. 33 lacs being 50% of additional unsecured loan/deposits to for in meeting the overrun that respondent No. 1 would furnish within a period of two months from the disbursement of bridging loan undertakings from all persons who had given unsecured loans /deposits to respondent No. 1 to furnish undertaking that the said unsecured loans/deposit to respondent No. 1 to furnish an loan of the institution and would not be withdrawn without the prior approval of the corporation and the Mr. M.M. Sehgal and Smt. Anjali Sehgal would give to petitioners No. 1 an undertaking for meeting the Shortfall in the resources of respondent No. 1 for completing the project and/or for working capital and that in the event of the internal generations falling short of Rs. 60 lacs by the end of June, 1980 or there being a shortfall in resources otherwise to complete the project, the promoters would make arrangements, on their own, without looking to the Institutions for further financial assistance on terms as might be approved by petitioners No. 1.
37. Petitioners No. 1 against in letter, Exhibit P. 56 dated 20th December, 1979 wrote to respondent No. 1 that as per particulars furnished, the said respondent had raised further unsecured loan to the extent of Rs. 40.12 lacs only up to 31st October, 1979 of which unsecured loans brought in by the promoters from their own sources amounted to Rs. 18.59 lacs and the balance amount of Rs. 21.53 lacs was raised as deposits from the dealers. It was made clear that the amount of Rs. 21.53 lacs was raised as deposits from the dealers. it was made clear that the amount of subordinate unsecured loan up to Rs. 66 lacs was to be brought in by the promoters from their won resources without taking into account the deposits from the dealers. Respondent No. 1 thereafter produced a certificate from its chartered Accountants S. N. Dhawan and company to the effect that the promoters, their friends, relatives, associates and others had brought in as unsecured loan/other deposits, a sum of Rs. 1,01,10,000 (See letter Exhibit P-93 dated 6th February 1980). It consequently requested to disburse 90 per cent of additional sanctioned terms loan i.e. Rs. 99 lacs. On the basis of the above representations, petitioners No. 1 paid an amount of Rs. 99 lacs but later it was discovered that the representations were not true. consequently, disbursement of Rs. 11 lacs was with held by the petitioners-institution. In this regard, reference may be made to letter Ex. P. 69 dated 16th August, 1980 written by Mr. Dawar to Mr. Punja, Executive Director,, Industrial Development Bank of India pointing out that 90 per cent of Rs. 110 lacs had been paid to respondent No. 1 as bridge loan but Mr. Khushu, a nominee director on the Board of Respondent No. 1 had pointed out that the book debts of respondent No. 1 had gone up from Rs. 47 acs as on 30the June, 1979 to Rs. 105 lacs as on 31st May, 1980 and evidently included an amount of Rs. 60 lacs which was due to the company from M/s. Alps and Kailashpati Traders, Jullundur which was one of the associate concerns of the promoters of the company. In fact that was the amount of Rs. 60 lacs which had been shows by the promoters their contribution in financing the first overrun on the project. In other words, the promoters had not brought in any contribution from their resources while financing the first overrun on the project.
38. The above facts have even been admitted by Mr. Sehgal in his letters Exhibit P-94 dated 9th October, 1980. In Ex. P-94 he said that the financial position of the company was not good. In Ex. P. 49 he frankly admitted that the deposits made by the dealers to cover the promoters contribution of Rs. 66 lacs were of the amounts receiver by then after sale of the goods of the respondent-company given to them on credit. The price of the goods still stood debited to their account. He, however, requested that the respondent-company should be deemed to have discharged its unsecured loan obligation of Rs. 66 lacs to the promoters and the company be deed to have recovered an equivalent amount of the sale proceeds of it products remaining outstanding under the head 'sundry debtors'. It is reiterated that he accepted in the letter that the transactions were entered into sole with a view to comply with the requirement of the promoters quote in financing the project, notwithstanding their complete inability to raise any fresh funds on their won independently and also expressed regrets for doing so.
39 Mr. N.K. Khushu (P.W. 2) supported the above story. He deposed that respondent No. 1 did not bring in Rs. 66 lacs. The goods worth Rs. 66 lacs were sold by the respondent to its associate concerns which were also acting as selling agents. The associates paid money to the company in consideration of the goods sold but the promoters indicated those amounts as their contribution towards the financing of the overrun of the project. Mr. Sehgal in his statement said that the amount was brought in but it was returned as the petitioners-institution failed to fulfil its part of the agreement. The amount is not reflected in the balance sheet. There is also no documentary proof on the record in support of it. Rather the documentary evidence is to the contrary. Therefore, this version cannot be accepted.
40. It had also been agreed that the respondent would produce by internal generation Rs. 60 lacs and in case it failed to do so, the promoters would be responsible to meet the shortfall on their own (see letters dated 9th October, 1979, Exhibit P-106 and dated 20th November, 1979, Ex. P-107). The clause also finds place in the second loan agreement, Ex. P-33. Later, however, Mr. Sehgal in an unsigned note dated 12th December, 1979, Ex. P-47 said that some mistake had crept in the expected sales figures and for the relevant period these had been shown as Rs. 381.86 lacs instead of Rs. 301.86 lacs. The result was that against an actual loss of Rs. 20 lacs ending June 1980, a cash generation of Rs. 60 lacs had been shown. He expressed regrets over the mistake. Mr. Sehgal does not admit the execution of the note by him. He says that the promoters undertook to provide Rs. 60 lacs by internal generation on the basis of wrong appraisal report prepared by the petitioners-institution. Even if it may be assumed that there was a mistake in the appraisal report, a duty was also enjoined upon Mr. Sehgal, to go through the same and point out the mistake. He had been running the factory and, therefore, could very easily know whether he was able to generate the amount or not. It may also be mentioned that Mr. Sehgal agreed that if he was unable to generate the amount, he would make up that shortfall from his own resources. Therefore, he cannot make a grievance that he was misled by the appraisal report. It is not disputed that the respondent-company could not generate Rs. 60 lacs from the internal resources. Thus there was breach of sub-clause (h) of Clause 6.2 of the 2nd loan agreement and the petitioners institution became entitled to recall the loan on this ground also.
41. The petitioners-institution in view of the aforesaid Circumstances served a notice dated 12th June, 1981 Ex. P-58, recalling the loan. Mr. Sehgal in his reply dated 19th June, 1981, Ex. P-53 and the respondent-company in its reply dated 20th June, 1981, Ex. P-41, asked the petitioners not to take any action as they were trying to make arrangement for repayment of the loan. But he was unable to make the arrangement. Issues Nos. 1 and 2 are, therefore decided in favour of the petitioners.
42. Issue No. 3
Section 29 of the IFC Act, inter alia, provides that the Corporation may be notice in writing require any industrial concern to discharge forthwith its liabilities to the Corporation if the industrial concern had failed to company with the terms of its contract with the petitioners-institution in the matter of loan or advance, or if there is a reasonable apprehension that the industrial concern is unable to pay its debts, or that the proceedings for liquidation may commence in respect thereof, or if for any reason it is necessary to protect the interests of the Corporation. It is evident from the language of the section that it also authorises the Institution to serve a notice in case there is possibility of initiation of liquidation proceedings against an industrial concern or if it fails to comply with the terms of the contract. In the present case, as already discussed above, not only proceedings for liquidation were initiated on a petition by creditor, but the respondent-company has been ordered to be wound up in that petition. It also failed to comply with the terms of various clauses of the agreements as discussed above. The respondent-Financial Institutions and banks also recalled their loans. In the Circumstances the petitioners-institution, could serve the notice under the said section and initiate proceedings. The receipt of the notice has not been denied by the respondent-company. This issue is decided accordingly.
43. Issues Nos. 4 and 5.
Issue No. 4 has been decided by G. C. Mital, J. vide order dated 3rd May 1982, and it has been held that section 30 of the IFC Act is not ultra vires Articles 14 and 19 of the Constitution of India. In view of the decision on issue No. 4 and issue No. 5, dated 3rd May, 1982, it is not necessary to decide the same
44. Issue No. 10
The respondent-company raised objections in the petition to the effect that the petition was filed mala fide; that the petitioners-institution committed default in the matter of advance of finances; that the petitioner-institution wrongly calculated the requirement of funds for respondent No. 1 while the second loan agreement dated 28the May, 1980 was entered into and that resulted in the shortfall of funds to the tune of Rs. 1, 4 crores; and that the contracts entered into between it and that the contracts entered into between it and the petitioner-institution in respect of payment of the loans and interest thereon stood rescinded and frustrated on account of acts and conduct of the petitioners-institution. The petitioners-institution took an objection that under S. 30 of the IFC Act, the aforesaid objections could not be taken. On the basis of the aforesaid pleas, issues Nos. 6 to 9 and the above issue were framed.
45. The question to be determined is whether the respondent-company could take the above pleas in petition under Section 30 of the IFC Act. It is not necessary to elaborate the point as a similar matter came up before me in Man Singh V. Punjab Financial Corpn., Chandigarh, AIR 1985 Punj and Har 149. In that case Ss. 31 and 32 and of the State Financial Corporation Act which are similar to S. 30 of the IFC Act were interpreted by me. The relevant observations are as follows (Para 6):--
'From a reading of sub-section (1) of S. 31 it is evident that the Corporation can make an application for seeking three reliefs, which do not include passing of a decree for recovery of the amount. Under sub-section (2) the Corporation is required to mention the nature and extent of liability of the industrial concern in the application. Sub-section (1) of S. 32 authorises the District Judge to pass an ad interim order attaching the property or part of the property. Sub-section (4) of S. 32 empowers the District Judge to issue notice to the industrial concern calling upon it to show cause why the ad interim order of attachment should not be made absolute. Under sub-section (5) the District Judge is entitled to make the ad interim order absolute and direct the sale of the property, in case no cause is shown by the industrial concern and under sub-section (6) he is required to proceed to investigate the claim of the Corporation if cause is shown by the industrial concern. After making the investigation he can grant the reliefs under sub-section (7). From a reading of the aforesaid provisions it is apparent that the District Judge can go into correctness of the claim including that of the future interest to the extent that it is in terms of the agreement. He is not required to go into all the objections of the industrial concern as is done by a civil Court, while deciding a suit of a mortgagee for recovery of mortgage amount. He is also not required to pass a decree as is done in civil suits. S. 34 of the Code has no applicability to these proceedings. In the above observations I am fortified to some extent by a decision of the Supreme Court in Gujarat State Financial Corpn. v. Natson Mfg. Court. Pvt. Ltd., AIR 1978 SC 1765. An argument was advanced in that case that if cause was shown by the industrial concern it was obligatory upon the District Judge to investigate the claim of the Financial Corporation in accordance with the provisions contained in the Civil P. C. Once and industrial concern showed cause and contested the application of the Corporation, there arose a lis between the parties which would include the investigation of the monetary claim of the Corporation and per separate it would be a suit between the mortgagee and mortgagor in which the ultimate relief was sale of mortgaged property for repayment of the mortgage money. The contention was repelled by their Lordships. The following observations may be read with advantage :-- 'Sub-section (b) of S. 32 of the act has to be read in the context in which it is placed. The claim of the Corporation is not the monetary claim to be investigated though it may become necessary to specify the figure for the purpose of determining how much of the security should be sold. But the investigation of the claim does not involve all the contentions that can be raised in a suit. The claim of the Corporation is that there is a breach of agreement or default in making repayment of loan or advance or instalment thereof and, therefore, the mortgaged property should be sold. It is not a money claim. The contest can be that the jurisdictional fact which enables the Corporation to seek the relief of sale of property is not available to it or no case is made out for transfer of management of the industrial concern. Sub-section (7) of S. 32 prescribes what reliefs can be given after investigation under sub-section (6) is made, and it clearly gives a clue to the nature of contest under sub-section 6 Sub-section (8) of S. 32 only prescribes the mode and method for executing the order of attachment or sale of property as provided in the Civil P. C. Sub-secs. (6), (7) and (8) of S. 32 read together would give an opportunity to the industrial concern to appear and satisfy the District Judge that the situations envisaged by S. 31(1) has not arisen and the relief should not be granted.......... The substantive relief in an application under S. 31(1) is something akin to an applications for attachment of property in execution of a decree at stage posterior to the passing of the decree. We are unable to appreciate the view taken by the High Court that the proceeding is not in the nature of execution of a decree because the question of enforcement of the order of attachment of sale would only arise after the same is made absolute under sub-section (7)'.
46. The above observations are fully applicable to the present case. Therefore, I am of the opinion that the objections taken by the respondent-company which are subject-matter of issues Nos. 6 to 9 cannot be taken by it in the present proceedings.
47. Issues Nos. 7 and 9.
In view of my decision on issue No. 10 in favour of the petitioners it is not necessary to decide these issues and issues Nos. 6 and 8 but as the counsel for the parties have also argued the said issues, therefore, I deem it proper to deal with them briefly.
48. It is contended by Mr. Jain that the project was started in 1976 and the loan of Rs. 300 lacs was sanctioned on principle in December, 1976 but the first loan agreement was not executed on account of delaying tactics of the petitioners institution till 7th November. 1978, The loan of Rs. 300 lacs was also not paid in time. Consequently the respondent-company had to take bridging loans at very high rates of interest from the petitioners-institution, the other financial institutions and the Banks. The entire loan was required to be paid by the petitioners-institution to the respondent-company according to the terms of the first loan agreement by 30th November, 1978 but out of it, the amount of Rs. 160 lacs was paid much later, i.e., Rs. 140 lacs on 23rd March, 1979 and Rs. 20 lacs on 19th October, 1979. According to him, the project, therefore, could not be completed by the end of 1978 though it had been started in 1976. The result was that the cost of project went up and the respondent-company thus suffered a great loss.
49. I have duly considered the argument. Prima facie the argument appeared to be plausible but when examined minutely, it was found to be without any merit. In the written statement the respondent-company took objection regarding the delay in payment of Rs. 160 lacs which were paid in two instalments of Rs. 140 lacs and Rs. 20 lacs. (Note : In para 1 (ix) of the written statement instead of the figures of Rs. 160 lacs and Rs. 140 lacs, the figures of Rs. 60 lacs and Rs. 40 lacs are mentioned which appear on account of typographical mistake.) From the pleas it is clear that it did not raise any objection regarding the disbursement of the amount of Rs. 140 lacs which was given by way of bridging loan on 24th May, 1977, 27th February, 1978 and 19th April, 1978 as detailed in earlier part of the judgment. Consequently the objection regarding the bridging loan cannot be allowed to be raised at the time of the arguments. However, I have examined the matter on merits regarding amount of bridging loan and amount of term loan of Rs. 160 lacs and find no merit in the contention.
50. The letter by which the loan of Rs. 300 lacs on principle was sanctioned by the petitioners-institution is Exhibit P. 102 dated 2nd December, 1977. It inter alia provides that the Company should deposit an amount of Rs. 10, 000/-towards legal charges and the title deeds of the properties proposed to be mortgaged in favour of the petitioners-institution so that it could be investigated that the title of the Company was good. It further provided that the respondent-company should obtain necessary approval under the Urban Land (Ceiling and Regulation) Act, 1956 for transfer of the land; that the Company should broadbase its Board of Directors by inducting suitable persons with experience of industry, business and management; that the equity shares of Rs. 200. 35 lacs should be subscribed by the promoters, their friends, relatives and associates by paying cash amount, before any shares were offered to the public; and that the Company should get its Memorandum and Articles of Association suitably amended so as to be able to issue and raise equity share capital for financing the project as proposed.
51. All the aforesaid conditions were not fulfilled by the Company as is evident from the annual report, Exhibit R. 4 ending 30th June, 1978. It is mentioned therein that the Company had been allotted 174.31 acres of land by the Haryana Urban Development Authority out of which payment for 81. 31 acres had been made/provided for and liability of the remaining land would be accounted for as and when demanded by it. It further says that the land and buildings had not been registered in the name of the Company (see pages 30 and 24). If the possession of the total land had not been taken by the Company and the conveyance deed of even that part of the land the payment of which had been made, had not been registered in its name, the question of mortgaging it with the petitioners-institution could not arise. It is also not clear that the price of how much land was paid by the Company. The condition regarding broad basing the Board of Directors by inducting suitable persons with experience of industry, business and management had also not been fulfilled as is a evident if the said annual report is read with the annual report relating to the previous year. The number of Directors in the annual report ending 30th June, 1977, Ex. R. 3, was 7 and the same number is shown in Ex. R. 4. Thus there was no increase in the number of Directors and there was breach in that condition too. In Exhibit R. 4 there is mention that the Company had been sanctioned term loans by the petitioners-institution and other financial institutions with a condition that the Company would agree to vest in the financial institutions the option to acquire through conversion of loan into equity shares of the Company equivalent to 20% of term loans. The petitioners-institution vide letter dated 20th October, 1978 had asked the Company to raise its authorised capital from Rs. 7.50 crores to R. 7. 66 crores in order to enable the financial institutions to exercise conversion option (see page 6). That required amendment in the Memorandum and Articles of Association. But is was not done as required by the petitioners-institution. Ex. R. 4 further provides that the promoters had contributed a sum of about Rs. 149 lacs (see page 7) as share capital. Prior to that, the promoters had assured the petitioners-institution vide letter dated 29th December, 1977. Exhibit p. 84, that they would subscribe fully to the share capital of Rs. 226 lacs by the end of February, 1978 and any additional funds as might be required would be brought in by the end of June, 1978. However, in the balance-sheet, Exhibit R. 4, even the promoters' contribution had not been brought in by them. Thus the condition regarding contribution of the promoters, their friends and relatives as required in the letter, Ex. P. 102, had also not been fulfilled by the Company by 30th June, 1978. In terms of the letter it did not become entitled to withdraw the term loan from the petitioners-institution.
52. It appears that in view of the above Circumstances the respondent-company requested the petitioners-institution for disbursement of bridging loan of Rs. 1, 5 crores and not term loan vide letter dated 5th December, 1977, Exhibit P. 83. Again the Company requested the petitioners-institution vide letter dated 29th December, 1977, Exhibit P. 84, to disburse the bridging loan as early as possible and assured that the promoters would bring in entire share capital of Rs. 2. 26 crores by February, 1978. This further shows that it was insisting on a bridging loan because it knew that it was not entitled to ask for the term loan, as it was unable to fulfil some of the pre-requisites, which were necessary to be fulfilled before it could get the term loan.
53. In the letter dated 23rd January, 1978, Ex. P. 85, the Company also assured the petitioners-institution that it would execute hypothecation/mortgage deeds in favour of the petitioners-institution within six months from the date of the availing of the bridging loan but it failed to do so even up to 30th June, 1978. The equitable mortgage was effected by the Company in favour of the petitioners-institution on 23rd December, 1980. In Ex. P. 85 it again assured that the promoters would subscribe in full the entire share capital of Rs. 2. 26 lacs by the end of February, 1978, but as already said, it failed to do so. According to the terms of the letter, Ex. P. 102 and the terms of first loan agreement it was not entitled to withdraw term loan unless the equitable mortgage was created by it in favour of the petitioners-company. Even when the additional loan of Rs. 110 lacs were sanctioned by the petitioners-institution in favour of the respondent-company, no grievance was made that the institution did not disburse the first loan in time.
54. From the aforesaid Circumstances it is evident that the delay in execution of the loan agreement and disbursement of the term loan on the basis of the first loan agreement did not take place on account of any fault on the part of the petitioners-institution. If it is so, the delay in completion of the project also cannot be assigned to the petitioners-institution.
55. It is next contended by Mr. Jain that the loan was also not disbursed under the second loan agreement in time on account of which the Company suffered huge loss. The full amount of loan has not been paid till date. Thus the petitioners-institution committed breach of the agreement.
56. I do not find any substance in this submission as well. The Company's application for additional loan was accepted on principle by the petitioners-institution vide letter dated 9th October, 1979, Exhibit P. 106. However, the additional loan of Rs. 110 lacs was to be given subject to the prior approval of I. D. B. I. and the conditions mentioned in the said letter. One of the conditions was that the promoters would bring in unsecured loan/deposits subordinate to the loan of the institution to the extent of Rs. 66 lacs for meeting a part of the overrun for the cost of the project and provide Rs. 60 lacs by internal a generation by the end of June, 1980. In case there was shortfall in the resources to complete the project the promoters would make arrangements of their own without looking to the institution for further financial assistance. The aforesaid condition was later provided in the second loan agreement also. However, the promoters failed to bring in Rs. 66 lacs. The matter has already been discussed above and it is not necessary to refer to the documents again. Regarding the generation of Rs. 60 lacs it is not disputed that the Company was unable to do so. However, its plea is that the clause was added on account of wrong preparation of the appraisal report. Whether there was mistake in the appraisal report and if so, what is its effect, is the subject-matter of issue No. 8 and shall be dealt with in some detail under that issue, but the fact remains that the company was unable to generate the amount of Rs. 60 lacs as undertaken by it. In the letter, Exhibit P. 106, and the second loan agreement, it was specifically provided that if there was shortfall in the resources, the promoters would make arrangement of their own. Moreover, if there was any mistake in the appraisal report the Company could point it out to the petitioners-institution and get the conditions of the fresh loan amended. In case the Company could not bring in the amount of Rs. 66 lacs and generate Rs. 60 lacs it was not entitled to get the loan of Rs. 110 lacs, from the petitioners-institution.
57. The petitioners-institution while releasing the amount of Rs. 20 lacs as term loan out of the loan Rs. 300 lacs, required the respondent-company, inter alia, to broadbase its Board of Directors by inducting two independent persons, to constitute a Managing Committee with the Corporation's approval, to strengthen its organisational set-up, particularly on the financial side by appointing whole time Finance Director to the satisfaction of the Corporation and to give an undertaking to keep the Corporation informed of the developments in regard to execution of conveyance deed in respect of the land, measuring 109-57 acres and to create a mortgage in respect thereof after the title thereto had been found to be clear and marketable by the petitioners (see Ex. P. 105, letter dated 16th October, 1979). The respondent-company, vide letter dated 19th October, 1979, Ex. P. 89, gave an assurance to comply with the aforesaid terms within a period of two months. The respondent-company thereafter, vide, it letter dated 22nd October, 1979, Ex. P. 91, requested the petitioners-institution to grant a bridge loan of Rs. 88 lacs being 80 per cent of the additional term loan as bridge loan. It assured that the promoters would bring in additional Rs. 33 lacs being 50 per cent of additional commitment as agreed to qualify for the aforesaid disbursement. The petitioners-institution in spite of the fact that the respondent-company had failed to carry out the aforesaid promises, sanctioned a bridge loan of Rs. 82. 50 lacs subject to hypothecation of machinery, guarantees of Mr. and Mrs. Sehgal and on their furnishing and undertaking that in the event of internal generation falling short of Rs. 60 lacs, the promoters would make arrangements on their own without looking to the institutions for further financial assistance on the terms as might be approved by the petitioners-institution (see Ex. P-107-letter dated 29th November, 1979).
58. The respondent-company again requested the petitioners-institution vide letter dated 6th February, 1980, Ex. P. 93, for a bridge loan of Rs. 16. 50 lacs so that this amount along with the earlier bridge loan, came to 90 per cent of the total amount of Rs. 110 lacs. The second loan agreement was executed on 28th May, 1980. The petitioners-institution even released the amount of Rs. 16.50 lacs as a special case, in spite of the fact that some of the earlier undertakings had not been carried out by the respondent-company. These facts show that the petitioners-institution and its officers have been helpful to the Company. If they wanted, they could refuse to release even the abovesaid amounts in view of various breaches committed by the Company. In the Circumstances it cannot be held that there was delay because of some inaction on the part of the petitioners in disbursing Rs. 99 lacs.
59. Now it is to be decided whether the petitioners-institution was justified in not releasing the amount of Rs. 11 lacs. It has already been mentioned that there were various defaults on the part of the respondent-company and the petitioners-institution could refuse to release the amount for any of the defaults. In addition, the respondent-company also made defaults in making payment of the interest and instalments of principal amount to the extent of about Rs. 63 lacs regarding 1st loan as detailed at page 6 above. It also failed to bring in Rs. 66 lacs by June, 1980 and generate Rs. 60 lacs as undertaken by it. It is rather surprising that the Company was asking for the further loan, without honouring the terms of the agreement regarding payment of the interest and instalments of the loan. According to the terms of the agreements, if there was default in payment of the interest or the instalment of the principal amount, the petitioners-institution could recall the whole of the amount paid by it and was not obliged to pay the remaining instalments of the loan. The petitioners-institution was also entitled to adjust the remaining amount towards the amount due to it from the respondent. After considering all the Circumstances I am of the view, that the petitioners-institution was justified in not releasing the amount of Rs. 11 lacs. Thus there was no breach of 2nd loan agreement by the petitioners-institution.
60. Mr. Jain has next argued that the agreement consisted of reciprocal promises and as the petitioners-institution did not disburse the amount of loan according to the terms of that agreement, it is not entitled to recover the amount which has been advanced by it. He made reference to S. 54 of the Contract Act. I have given my thoughtful consideration to the argument but do not find any substance therein. I do not think that section 54 is applicable in the Circumstances of this case as the contract does not consist of reciprocal promises. Even if it may be assumed that the said section is applicable, the breach of agreement has been committed by the respondent-company and, therefore, the petitioners-institution is entitled to recover the amount. Mr. Jain has referred to Bolton v. Mahadeva, (1972) 2 All ER 1322. In that case the plaintiff had agreed with the defendant to install central heating and to perform certain other work in the defendant's house. The contract price for the central heating installation was a lump sum of 560. After the work had been completed, the defendant complained that the work was defective and refused to pay. It was held by the Court of Appeal that the plaintiff was not entitled to recover the amount. The ratio of the judgment as extracted in the head-note is as follows :
'The plaintiff was not entitled to recover..... for the following reasons-
(I) a plaintiff was only entitled to recover on a lump sum contract, subject to a set-off in had respect of deficiencies, where the contract had been substantially performed; the test was substantial performance and not whether the defects were of such a trifling nature that they could be disregarded under the de minimis rule; in considering whether there had been substantial performance it was relevant to take into account both the nature of the defects and the proportion between the cost of rectifying them and the contract price....... ;
(ii) on the Judge's findings the defects in the central heating system were such that, when installed, it did not perform effectively the function which it was intended to perform in that it failed to heat the house adequately and gave off fumes so as to make the living rooms uncomfortable; as those defects could not be put right by some slight amendment of the system, and taking into account the cost of repairs, it was impossible to say that the contract had been substantially performed by the plaintiff '.
The agreement in the present case was to provide finances to the respondent-company. There were no reciprocal promises between the parties as already observed. The facts of this case are thus distinguishable and the ratio in that case is not applicable to it.
61. Faced with this situation Mr. Jain has urged that on account of not paying the instalments of term loan in time, the respondent-company suffered huge loss and the petitioners-institution is, therefore, not entitled to recover the loan, unless it compensates the respondent-company to the extent of the loss suffered by it. I am not impressed with this submission as well. If the respondent-company is entitled to some damages, may institute a suit for recovery thereof against the petitioners-institution. It cannot be allowed to say that the petitioners-institution is not entitled to recover the loan, unless it is compensated by the petitioners-institution to the extent of loss suffered by it. In the above view I am fortified by the observations of a Division Bench of Allahabad High Court in Mirza Javed Murtaza v. U.P. Financial Corpn., AIR 1983 All 234. In that case the U. P. Financial Corporation recalled the instalments of loan paid by it to the petitioners as he failed to carry out certain conditions of the agreement and issued a recovery certificate for recovering the amount due from him. The petitioners challenged the recovery certificate through the writ petition inter alia on the ground that he suffered loss as the Corporation failed to release the huge amount of Rs. 1/-lac and odd and, therefore, the loan stood wiped out. It was observed by the learned Bench :
'If the breach of the contract has been committed by the Corporation the petitioners may file a suit for recovery of damages which he has suffered but his liability to repay the loan with interest is not wiped out merely on the ground that the Corporation has committed breach of contract. The amount of loan is to be repaid but if the petitioners has suffered damages and the Court in an appropriate suit, if filed by him, finds that particular amount of damages has been suffered any passes a decree for the same the petitioners may ask for adjustment of the principal amount of loan together with interest thereon. Similarly, if the contract has been breached by the petitioners by not paying the overdue interest at the stipulated time and by not complying with other conditions of the contract then too the petitioners would be liable to repay the loan with interest. In either event the amount of loan with interest as discussed above is repayable and so long as that is not paid up the petitioners cannot ask for the release of his title deeds because those title deeds were given to the Corporation while creating equitable mortgage'.
I am in respectful agreement with the above observation.
62. Lastly, Mr. Jain has contended that the contract between the petitioners-institution and the respondent-company stands frustrated and, therefore, the former is not entitled to recover the amount.
63. There is no merit in this submission also. It is well settled that if a contract stands frustrated, the party who has received benefit under the contract is liable to return it to the other. S. 65 of the Contract Act comes to its rescue. Reference in this regard may be made to illustration (b) under the said section which is as follows:
'A contracts with B to deliver to him 200 maunds of rice before the first of May. A delivers 130 maunds only before that day and none after. B retains the 130 maunds after the first of May. He is bound to pay A for them'.
Both the issues are, therefore, decided against the respondent-company.
64. Issue No. 8
The matter relating to this issue has already been discussed to some extent. It has already been mentioned that on account of escalation in the prices there was an overrun of Rs. 690 lacs in the cost of the project. Consequently an appraisal report was prepared by the petitioners-institution to find out how much more money was required to meet the overrun. According to the respondent-company, in the appraisal report wrong estimates were given though best expertise was available to the petitioners-institution. It is argued that in view of wrong estimates there was a shortfall of the funds. The counsel also made a grievance that in the appraisal report it was wrongly shown that the Company could generate Rs. 60 lacs and that no provision was made therein for the higher rate of interest, paid by the respondent on the bridging loans.
65. I have given my thoughtful consideration to the matter. Mr. Khushu in his statement stated that the calculation of the revised project cost was made on the basis of the report of the Company and the latter had admitted that it was made under a mistake. Mr. Sehgal has denied the aforesaid fact. Therefore, much reliance cannot be placed on the oral testimony. However, it was the duty of the respondent-company and its experts to go through the appraisal report carefully and find out the mistakes therein. If there was any mistake, it could be pointed out by it. But for the reasons best known it was not done at that time and an agreement on the basis of the report was entered into by the parties. It is, therefore, evident that the respondent-company gave its approval to the appraisal report. Even immediately after the agreement there was no protest on behalf of the Company or Mr. Sehgal that there was a mistake in the appraisal report. It is also noteworthy that it was no provided in Clause 6. 2(h) that in case there was shortfall in the internal generation the promoters would make arrangements of their own without looking to the institutions for further financial assistance. The clause has already been reproduced. It is evident from the said clause that the respondent-company agreed to provide the shortfall from its own resources in case it failed to generate Rs. 60 lacs from internal generation. In the Circumstances the respondent-company cannot get any benefit in the present proceedings even if the appraisal report in this regard was not correct. I decide the issue against the respondent-company.
66. Issue No. 6.
Mr. Jain has argued that the following acts of the petitioners-institution go to show that it acted mala fide against the respondent-company :--
1. The entire amount of loan was recalled by the petitioners-institution vide notice dated 12th June, 1981 from he respondent-company though the assets of the Company were of the value of more than Rs. 33 Crores, which were sufficient to meet all the liabilities. In fact the proceedings have been taken with a motive to crush it.
2. No proceedings against other companies were instituted by the petitioners-institution in similar Circumstances. Therefore, there was no good reason to start the proceedings against the respondent-company.
3. The amount of Rs. 11 lacs out of the second loan agreement of Rs. 110 lacs was not disbursed by the petitioners-institution to respondent-company.
4. The entire loan of Rs. 300 lacs was not disbursed by 30th November, 1978 by the petitioners-institution in terms of the 1st loan agreement and the amount of Rs. 110 lacs was not disbursed before 30th September, 1980 in terms of second loan agreement.
5. The petitioners-institution defaulted in the disbursement of the term loan with the result that the respondent-company had to take bridge loans at higher interest.
6. A raid by the Income-tax authorities was made on the respondent-company at the instigation of Mr. Khushu.
7. The factory was ordered to be closed in December, 1980 at the instance of the petitioners-institution.
8. The petitioners-institution ignored the suggestion of Mr. Venkatachalam, the Finance Director, to arrange for more loan, in spite of the fact that he was inducted at the instanced of the petitioners-institution.
9. The company was gradually taken over by the petitioners-institution and it appointed Directors of its own choice. The eminent persons, who were suggested by Mr. Sehgal to be appointed as Directors were not accepted by the petitioners-institution. The Company suffered losses due to the acts of the Directors representing the petitioners-institution.
10. Mr. Khushu asked the HSIDC not to purchase shares of Mr. Sehgal and, therefore, the amount of loan as undertaken by Mr. Sehgal could not be arranged.
11. The respondent-company was forced to sell the old turbines and to purchase the new ones at a high cost.
12. The petitioners-institution charged commitment charges from the respondent-company, though there was default on the part of the former in disbursing the loan. Even otherwise it should not have charged commitment charges.
13. The loans were not rescheduled by the petitioners-institution, in spite of the request of the respondent-company.
67. I shall discuss each item separately.
1. The matter has been discussed in some may detail under issues Nos. 1 and 2. However, it may be highlighted that when the amount was recalled vide notice dated 12th June, 1981 (Ext. P. 58) the respondent-company had committed 14 defaults in payment of interest and instalments as detailed at page 6 of the judgment. The fact has also not been disputed by the respondent. (See reply to paras 17 and 18 of the petition). The amount due to the petitioners on account of the said defaults came to about Rs. 63 lacs. There was also default on the part of the respondent-company in bringing in Rs. 60 lacs account of internal generation and Rs. 66 lacs as promoters contribution in accordance with the second loan agreement. In addition to the said defaults, there were also other defaults, as discussed under issues Nos. 1 and 2. It was agreed between the parties that if there was any breach on the part of the respondent-company, the whole amount of loan could be recalled. It is also relevant to state that the Board of Directors of the petitioners-institution decided to start the proceedings vide resolution dated 31st March, 1981 (Ex. P. 3). In pursuance of that the above notice for recalling the money was given after 3 months. The proceeding were started in this Court in October, 1981. Thus another period of 4 months was given to the respondent to pay the debt. Thus enough time was given to the respondent to pay the amount. By that date even the winding-up proceedings had been initiated by some of the creditors against the respondent-company. In the Circumstances it cannot be held that the total amount was recalled on account of mala fide intention and the proceedings were started in haste.
Mr. Jain has contended that the assets of the Company were more than Rs. 3300 lacs whereas the total loan of the petitioners-institution was Rs. 410 lacs. The loan of the other institutions was about Rs. 1500 lacs. Thus the security was sufficient to recover the loans and the petition for recovery has been made mala fide to harm Mr. Sehgal, the Managing Director of the Company.
I do not find any substance in this submission. It is for the lender institution to see whether the security for the loan is sufficient and it can recover whole of the amount from it. Even if the security was sufficient, it could still ask the Company to repay the debt if the latter committed breach of the agreement. Further it is disputed by the petitioners-institution that the report of the valuer is correct and in my view for valid reasons. The valuer worked out the prices of the machines on the basis of the quotations on the date of preparing the report. The source from which the prices of the new machines were obtained, has not been disclosed by him. It is also relevant to mention that the prices of some of the machines in the report are shown to be more than five/six times the purchaseprice. For example, in the case of writing and printing machine, the purchase price was Rs. 48 lacs and odd whereas it has been assessed at Rs. 300 lacs. Similarly in the case of carbonless copying machine, the purchase price was Rs. 134 lacs and odd and it has been assessed at Rs. 650 lacs. The report of the valuer appears to be unrealistic. There are some discrepancies between his statement and the report. In cross-examination he said that he visited the factory for 10/11 days before preparation of the report. However, in the report he said that he visited it on 5th November, 1981, i.e., only once. No satisfactory explanation could be given as to why he did not mention therein with regard to did not the deates of his other visits. He admits that he did not enquire the prices from the persons dealing in such machines outside Delhi. He did not mention the names of the persons in the report from whom he made enquiries about the prices of the machines. He also did not make enquiry regarding the old machines. In the Circumstances no reliance can be placed on the said report.
2. In the replication it is denied by the petitioners that the proceedings for recovery were not initiated against the other Companies. There is, however, no evidence on the record that in similar Circumstances no action had been taken by the respondent-company against any other Company. The burden to prove the said fact was on the respondent-company. Even if it may be assumed that action had not been brought by the petitioners-institution against any other Company, the respondent-company cannot be allowed to say that the action should not have been brought against it. At the most it can say that action should be taken against other Companies also.
3. The matter has already been discussed at considerable length. It may, however, be reiterated that there was a condition in the loan agreement that if the respondent-company committed default in payment of the instalment or breach of any of its terms, the petitioners-institution was under no obligation to disburse the amount of loan. There were various defaults on the part of the respondent-company as mentioned above.
4. and 5. The matter has been already dealt with at a considerable length and it has been observed that the disbursement of the term loans could not be made as the respondent had not fulfilled the pre-conditions of the loan. Therefore, the respondent-company applied for bridge loan. Now it cannot make grievance about bridge loan. It is not necessary to deal with the matter again.
6. There is no plea in the written statement of the respondent-company that the raid by the Income-tax authorities on its premises was made at the instance of Mr. Khushu. Even no such question was put to Mr. Khushu when he appeared in the witness-box. Ext. P. 69 dated 16-8-1980 on which reliance has been placed by Mr. Jain is a report of Mr. Khushu in which he sought the comments of Mr. Sehgal on several points. It was also said in the report that the Income-tax Department during the raid on the Company's premises had seized books of account and documents copies of which had been given to him (Mr. Khushu) by Mr. Jain Personal Manager of the Company whose service had been terminated several months back by Mr. Sehgal. By no stretch of imagination it can be said on the basis of the report that the raid was made at the instance of Mr. Khushu. Therefore, the allegation appears to be without any basis.
7. In order to determine the question it is appropriate to give brief history of the case. The value of the original project was of Rs. 3. 40 crores out of which the share of the petitioners-institution was Rs. 50 lacs. In December, 1977 the cost of the project increased to Rs. 17. 40 crores. The petitioners, in view of the increases in the cost of the project, agreed to increase its share of loan to Rs. 300 lacs. Thereafter there was another overrun in the project of Rs. 6. 90 crores. The petitioners still helped the respondent-company and agreed to advance further loan to the extent of Rs. 110 lacs. In October, 1979, when the petitioners-institution found that the Company was unable to pay the interest amounting to Rs. 35. 60 lacs it agreed to funds the same. It also overlooked various defaults made by the respondent-company in making the payment of the instalments of the principal and interest. In the Circumstances it cannot be said that the petitioners-institution was interested in crushing the respondent-company. If the petitioners-institution had been interested in doing so, it would not have given so many facilities to the respondent-company.
On 6th December, 1980, a meeting of the representatives of the institutions, Banks and Mr. Sehgal was held in which on principle it was agreed that the factory could not be run unless a financially sound party, who could invest a substantial amount, was brought in. Mr. Sehgal was a party to the resolution and he agreed to bring in such a party. He corresponded with several parties but failed to bring in one. The fact goes to show that even Mr. Sehgal admitted that the factory could not be run unless some financially sound party was brought in. He also contacted some parties but he could not persuade any one of them to help him.
The contention of the learned counsel for the respondent-company is that Mr. Sehgal's consent was obtained on the said resolution by threat. There is no document on the record which goes to prove the allegation of Mr. Sehgal. The petitioners-institutions is managed by the Board of Directors and Mr. Sehgal could make a grievance against Mr. Khushu or Mr. Dawar to the Chairman or other Directors but it was not done. It is also relevant to point out that he had been meeting Shri B. B. Singh, Chairman, very often but he also did not talk in this regard to him. There is reference of the resolution in his letters, Ex. P. 97 dated 11-2-1981 and Ex. P. 96 dated 22-12-1980 but there is not grievance against the same in them. It goes a long way to show that the consent of Mr. Sehgal in the resolution was not obtained by threat.
It is further relevant to mention that the financial institutions had already served notice upon the respondent-company recalling their loans. The Punjab National Bank and State Bank of India withdrew all the facilities of loan provided to the respondent-company in December, 1980 (see Ex. P. 52). After withdrawal of the facilities by the Banks, Mr. Sehgal expressed inability to run the factory. Even at that stage no allegation of threat was made by Mr. Sehgal. He has also not given any date on which the alleged threat was given. Mr. Sehgal wrote letters Ex. P. 53, on 19th June, 1981 and the Company wrote letter, Ex. P. 41 dated 20th June, 1981 in reply to the notice dated 12th June, 1981. No allegation of threat was made in those letters. He also wrote a letter dated 22nd June, 1981, Ex. P. 40, to the Managing Director of the petitioners-institution in which he did not make such a grievance.
On the other hand, he said in that letter that he was new to the problems of industry and as result to which management of the project and the management of the company went out of his control resulting in heavy overrun and financial problem. Taking into consideration all the Circumstances it cannot be held that the petitioners-institution was responsible to close the factory.
8. It is true that Mr. Vankatachalam, Finance Director who was acting as such at the instance of the institution, vide letter dated 27th August, 1980, Ex. P. 94 wrote to the petitioners that an extra amount of Rs. 718. 35 lacs was required by them over and above Rs. 2430 lacs which was previously approved by the institutions. However, he was appointed as Director on account of his experience in financial matters, so that the affairs of the Company could be managed efficiently and its funds be not misutilised. His appointment did not mean that all his recommendations should have been accepted by the petitioners-institution which had to look primarily to its interest. It has already been discussed that the respondent-company had committed various breaches regarding the loan agreements. Morevoer, it had been suffering losses continuously. Mr. Sehgal later in view of the resolution dated 6th December, 1980 had also agreed to bring in a new party, which could provide finances, but he failed to do so. In the Circumstances if the petitioners-institutions refused to advance further an amount of Rs. 718. 35 lacs as loan, it cannot be said that it acted mala fide.
9. The question to be seen is whether the Company was taken over by the institutions and if so, at what stage and with what effect. The contention of Mr. Jain is that during the year 1979-80 according to the annual report, Ex. R. 6, the control of the Company was taken by the financial institutions. In the year 1978-79 there were 8 Directors were of the financial institutions and the remaining 5 of the promoters. In 1979-80, 6 Directors were added by the financial institutions; thus making the number of Directors as 14. In the newly constituted Board, the strength of the Directors of the financial institutions rose to 9 and that of the promoters remained 5. The result was that as against the cash loss of Rs. 46, 18, 857/-suffered by the Company during the year ending 30th June 1979, it rose to Rs. 1, 66, 90, 825/-during the year ending 30th June, 1980. According to him, the petitioners-institution and other financial institutions were responsible for the said losses and consequently ruination of the respondent-company.
I have duly considered the argument but do not find any substance in it. It is true that in the year ending 30th June, 1979 there were 8 Directors out of which 2 Directors, namely, Mr. M. N. Khushu and Mr. P. L. Dabral were the nominees of the petitioners-institution and I. D. B. I. respondent respectively. Mr. A. N. Mathur was representative of the Haryana State Industrial Development Corporation (hereinafter referred to as HSIDC). HSIDC was a promoter along with Mr. Sehgal. In the Circumstances it cannot be said that Mr. A. N. Mathur was the nominee of the financial institutions, who advanced the loan. Out oif the 14 Directors mentioned in the annual report ending 30th June, 1980 (Ex. R. 6) two Directors, namely, Dr. S. P. Verma and Mr. Romesh Mehra were introduced as such on 25th April, 1980, Dr. N. C. B. Nath and Dr. O. P. Kharbanda on 5th November, 1980 and Mr. K. C. Mehra and Mr. Shada on 16th December, 1980. Thus during the year ending 30th June, 1980, 8 Directors as shown in the balance-sheet ending 30th June, 1979 (Ex. R. 5) remained on the Board of Directors up to the end of April, 198. It may be highlighted that the promoters Directors at that time wherein majority in that Board. After coming in of Dr. S. P. Verma and Mr. Romesh Mehra as Directors on 25th April, 1980 the position did not change and the majority of the Directors remained those of the promoters. Moreover, these two Directors worked only for two months and, therefore, could not be held responsible for the losses. Consequently the losses suffered by the Company during the year ending 30th June, 1980 cannot be said to be due to the induction of the new Directors. The argument of the learned counsel is thus devoid of all force.
It is also contended by Mr. jain that after Mr. M. K. Venkatachalam was appointed as Finance affairs. he could not properly look after them and on that account the Company suffered losses. This argument has also no substance. Mr. M. K. Venkatachalam was appointed as Finance Director on 7th July, 1980, i.e., after the period to which the annual report, Exhibit R. 6, relates. In this situation the losses during the period cannot be said to have been incurred by the respondent-company on account of Mr. Venkatachalam. Thereafter on account of huge losses suffered by the Company and for the reason that it could not fulfil its obligations under the second loan agreement as already discussed its financial position became worse. Reference in this regard may again be made to the letter dated 27th August, 1980, Ex. P. 94, wherein the Company requested the petitioners-institution for a further loan of Rs. 718. 36 lacs. Therefore, it cannot be held that Mr. Venkatachlam was responsible for the ruination of the Company.
Mr. Jain has then argued that Mr. Sehgal suggested to the petitioners-institution that Mr. Raghu Raj. Mr. T. R. Tuli and Mr. M. P. Khare who were well-know in the field of industry be appointed Directors but the petitioners-institution did not agree to that. On the other hand, the petitioners-institution brought Directors of its own choice and that was the other reason for the losses suffered by the Company.
The submissions also without merit. In the annual report ending 30th June, 1977 seven Directors were constituting the Board of Directors. Out of them, on Director was the nominee of the petitioners-institution, one was nominee of HSIDC and the other 5 Directors were of the promoters. In the balance sheet ending 30th June, 1978 again seven Directors were constituting the Board of Directors out of which one was the nominee of the petitioners-institution and one of IDBI. Out of the remaining five Directors, one was the nominee of the HSIDC. In the balance sheet ending 30th June, 1979, 8 Directors were constituting Board of Directors. Out of them, two were the nominees of IFCI and IDBI. Out of the remaining six, five were the nominees of the promoters and one that of HSIDC. HSIDC was one of the promoters as said above. The during the aforesaid three years, the promoters has admittedly majority of Directors. Regarding the year ending 30th June, 1980, the matter has already been discussed above. In that year also the promoters had majority of Directors. If the promoters thought that Mr. Raghu Raj. Mr. T. R. Tuli and Mr. M. P. Khare were experienced persons, they could induct them in place of their nominees as the promoters could appoint the Directors of their own choice. However, they could not force the financial institutions to appoint Directors of their (promoters') choice. It has also been argued by Mr. Ghosh that the institutions wanted to bring such persons as Directors who had experience in the field. That also appears to be a good argument. Normally, a person having experience in paper industry could be more useful for the respondent. It has not been shown by the respondent that the aforesaid three persons had any experience in the field of manufacturing paper. In fact, the crises came in 1979-80 as pointed out above. What happened during 1980-81 has already been discussed. Therefore, there is not substance in the argument.
After taking into consideration all the aforesaid circumstances, it cannot be held that the Company suffered losses on account of the Directors nominated by Institutions.
10. Mr. Jain has argued that the HSIDC agreed to purchase the shares of Mr. Sehgal but later at the instance of Mr. Khushu it had refused to purchase them. Consequently, Mr. Sehgal was unable to arrange for the amount undertaken by the Company to be brought in. According to him this was done by Mr. Khushu in order to harm Mr. Sehgal and the respondent-company.
I have duly considered the argument but find no substance in it. In the written statement no plea was taken by the respondent-company in this regard. It is well settled that unless a point is taken in the written statement, it cannot be raised at the time of arguments. Even no question on this matter was put to Mr. Khushu when he appeared in the witness-box. Mr. Jain referred to the letter dated 16th August, 1980, Exhibit P. 69. There is a report signed by M. Sehgal stated that he had approached Haryana Government through HSIDC and had received an assurance form the Government that they were prepared to purchase 2 lac shares immediately and would consider the promoters' request for the purchase of 3. 9 lac shares in due course on certain terms and conditions which included the buy-back arrangement with promoters after 10 years at par value plus interest at 12% p.a., less dividend paid to the State Government Mr. Khushu pointed out that the promoters should not take nay further action in the matter unless the approval of the institutions in this behalf had been received by the Company. It is not said in the aforesaid para that Mr. Khushu stopped the HSIDC to purchase the shares. There was condition in the lease deed that the promoters could not transfer their shares to any person except with the permission of the institutions. Mr. Khushu had pointed out to Mr. Sehgal regarding that condition. In the Circumstances no inference of mala fide on the part of Mr. Khushu can be spelt out. The contention of Mr. Jain is, therefore, rejected.
11. It is contended by Mr. Jain that the respondent-company was forced to sell the turbines by the pet-institution, which it had purchased for Rs. 17 lacs. Later, it was forced to purchase another type of turbines, the cost of which was more than Rs. 200 lacs. The act of the petitioners-institution, it is submitted, was mala fide. He also referred to the second loan agreement wherein it was a condition precedent for advancing the loan.
I have duly considered the argument but find no merit in it. Mr. Khushu (P. W. 2) deposed that the respondent made a proposal for selling the turbines for the reason that they were not enough to balance the steam and power. He further deposed that the Company actually needed extraction type turbines for balancing the steam and power but it purchased condensed type turbines. The respondent-company was not able to show that the turbines already purchased were good enough for their purpose and it was not necessary to purchase extraction type turbines. It also did not protest when it was asked to sell the old turbines and purchase a new turbine. In the report dated 21st August, 1979, Exhibit P. 73, it was pointed out that the original arrangements provide for a package boiler of 10 tph (tons per hour) capacity and 2 second-hand coal-fired boilers of 18. 5 tph and 12. 5 tph capacities together with one 2, 00 KVA (1750 KW) non-condensing pass-out type turbine. Instead, SPL has gone in for two package type boilers of 5 type turbine. But if SPL uses these turbines, there would be hardly any steam left for the s process use. SPL has, therefore, now decided to dispose of the condensing type turbines and go in for a new extraction-type turbine of about 6. 2 MW capacity either of imported or indigenous origin. The estimates for expenditure incurred/to be incurred under the head 'equipment for generation of steam and power ' have been reduced by Rs. 30 lacs because of possible realisation of this amount from the sale of turbines.
From the above its appears that the Company had decided to dispose of the condensing type turbines and to go in for an extraction type turbine. The report, it may be mentioned, was produced by the petitioners-institution at the instance of the respondent-company. It is also relevant to point out that no disputes had arisen between the parties before executing of the second agreement dated 28th May, 1980. The present report was prepared on 12th November, 1979, i.e., about six months prior to the execution of the second agreement. Even the turbines had been sold before that date. This fact is admitted by Mr. Sehgal in his letter, dated 13th November, 1979, Exhibit P. 92, addressed to the Regional Manager of the petitioners-institution. It was stated therein that the turbines had been sold to Messrs. National Rayon Corporation, Bombay for a gross amount of Rs. 35. 36 lacs. Later Mr. Sehgal wrote to Mr. Khurana of the petitioners-institutions wrote to Mr. Khurana of the petitioners-institution that the respondent-company would like to purchase 1. 5 MW set from Triveni Engineering Works at the earliest. Even at that stage it was not pointed out by him that he was forced to sell the turbines already purchased by him without any reason. It may also be pointed out that at that point of time relations between the parties were good. It is evident from the fact that the institutions on 9th October, 1979 had agreed to meet the overrun of Rs. 6. 90 crores out of which the petitioners-institution had to advance an amount of Rs. 110 lacs. The petitioners-institution had further agreed that the amount of Rs. 35. 36 lacs which was due from the respondent-company on account of interest be refunded. In this regard reference may be made to letter dated 9th October, 1979 Exhibit P. 106.
Legally also the respondent-company can make no grievance in this regard as it was agreed between the parties at the time of execution of the second loan agreement that it would dispose of the two condensing turbines. No complaint was made by the respondent-company at the time of execution of the second loan agreement or immediately thereafter. After considering all the aforesaid facts, I do not find any substance in this submission.
12. The contention of Mr. Jain is that according to condition 3. 12 of the first loan agreement, the respondent-company was liable to pay one per cent on the amount of sanctioned loan as commitment charges from the date the loan was sanctioned, in case it failed to withdraw the amount of the loan. According to him, in addition to heavy interest paid by the respondent-company, on bridge loans, it was required to pay one per cent more on account of commitment charges, even though the delay in releasing the term loan was due to the fault of the petitioners-institution.
I have given my thoughtful consideration to the argument but am not take any such plea in the written statement and consequently no evidence was led by the parties on this matter. It is well settled that a party to the litigation cannot be allowed to raise a new point at the time of arguments. There is also no force in the contention on merits. The reason is that after the term loan is sanctioned, the amount has to be kept handy by a financial institution for payment to the loanee. It is common knowledge that if an amount is kept in current account in a bank the depositor is not entitled to any interest thereon. Therefore, it appears that such a clause was incorporated in the agreement by the financial institutions. It has already been observed above that the amount of loan could not be released on account of default by the respondent-company in performing its part of the agreement. Moreover, clause 3, 12 was a part of the agreement. The respondent-company cannot be allowed to challenge the clause now, especially when no grievance was made by it at any time earlier. It is also pointed out by Mr. Ghosh that such clause is incorporated in all the agreements entered into by the petitioners-institution. For the aforesaid reasons the respondent-company cannot make a grievance about commitment charges.
13. Mr. Jain has argued that an application was filed for re-scheduling the loans but no action was taken thereon. In case the petitioners-institution had re-scheduled the loans the Company would have been able to run the Mill. On the other hand, the counsel for the petitioners-institution has argued that no application for re-scheduling the loans was received by the petitioners-institution and consequently the question of re-scheduling the loans did not arise.
I have considered the argument of the learned counsel. It is true that there is no application on behalf of the respondent-company on the record in which a request for re-scheduling the loans had been made, However, there is a note in the balance-sheet ending 30th June, 1980, Ex. R. 6, that the Company made request to the financial-institutions and Banks for deferment of interest and re-scheduling of term loans. The balance-sheet is signed by the representatives of the financial institutions. Therefore, it cannot be accepted that no request was made to the petitioners-institution for re-scheduling of loans.
Faced with that situation Mr. Ghosh has vehemently argued that in the crisis through which the respondent-company was passing, it was not possible for the petitioners-institution to re-schedule the loans. He has further highlighted that there were various defaults in payment of the instalments by the Company and it could not bring in the amount undertaken to be brought in for meeting the overrun of Rs. 690 lacs. I find force in the submission. Mr.Venkatachalam vide letter dated 27th August, 1980, Ex. P. 94 required a further amount of Rs. 718. 35 lacs in order to run the factory. Mr. Sehgal was unable to find any such party who could make the finances available. In addition, he had even defaulted in bringing in Rs. 66 lacs as promoters contribution and generate Rs. 60 lacs by internal generation as agreed to in the second loan agreement. An amount of more than Rs. 63 lacs was also due from the respondent-company as detailed at page 6 of the judgment. This fact has been admitted by the respondent-company it is also relevant to point out that on 6th December, 1980 a decision was taken in a meeting held between the representatives of the financial-institutions and Banks and Mr. Sehgal that it was not possible to run the factory unless some financially sound party acceptable to the institution was inducted in the management of the company. That party should be willing to provide substantial amount of funds for conducting its operation sustained and viable basis. In view of that decision, Mr. Sehgal had been corresponding with certain parties but he was unable to find any. The working of the factory had already been stopped as is clear from the letter dated 15th December, 1980, Ex. P. 52. In the aforesaid Circumstances if the loans were not re-scheduled by the petitioners-institution no fault can be found with its decision. Consequently I reject this submission of Mr. Jain.
68. Mr. Ghosh has argued that even if it may be held that he decision to recall the loan and institute the proceedings was mala fide, it was in accordance with the terms of the agreements between the parties, and the petitioners-institution is entitled to recover the amount. According to him, motive in such Circumstances is not taken into consideration. In support of his contention he places reliance on Thomas Francis Allen v. William Cridge Flood and Walter Taylor, 1989 AC 1 and Yarlagadda China Rattayya v. Donepudi Venkataramayya, AIR 1995 Andh Pra 551.
69. I find force in the submission. It is well settled that in civil matters if an action itself is not illegal, it will not become illegal because it is taken in pursuance of bad motive. The reason is that an invasion on civil right itself constitutes a legal wrong. Motive may be taken into consideration while punishing a person but where civil liabilities are determined, it is normally not taken into account. In this view I am fortified by the observations of Lord Watson in Thomas Francis Allen's case (supra). The following observations may be read with advantage:
'Although the rule may be otherwise with regard to crimes, the law of England does not, according to my apprehension, take into account motive as constituting an element of civil wrong. Any invasion of the civil rights of another person is in itself a legal wrong, carrying with it liability to repair its necessary or natural consequences, in so far as these are injurious to the person whose right is infringed, whether the motive which prompted it be good, bad, or indifferent. But the existence of bad motive, in the case of an act which is not itself illegal, will not convert that act into a civil wrong for which reparations due, A wrongful act, done knowingly and with a view to its injurious consequences, may in the sense of law, be malicious; but such malice derives its essential character from the Circumstances the t the act done constitutes a violation of the law. There is a class of cases which have sometimes been referred to as evidencing that a bad motive may be an element in the composition of civil wrong; but in those cases the wrong must have its root in an act which the law generally regards as illegal, but excuses its perpetration in certain exceptional Circumstances from considerations of public policy. These are well known as cases of privilege, in which the protection which the law gives to an individual who is within the scope of these considerations consists in this--that he may with immunity commit an act which is a legal wrong and but for his privilege would afford a good cause of action against him, all that is required in order to raise the privilege and entitle him to protection being that he shall act honestly in the discharge of some duty which the law recognises, and shall not be prompted by a desire to injure the person who is affected by his act. Accordingly, in a suit brought by that person, it is usual for him to allege and necessary for him to prove an intent to injure in order to destroy the privilege of the defendant. But none of these cases tend to establish that an act which does not amount to a legal wrong, and therefore needs no protection, can have privilege attached to it; and still less that an act in itself lawful is converted into a legal wrong if it was done from a bad motive'.
The above observations were followed by the Andhra pradesh High Court in Yarlangadda China Rattayya's case (AIR 1959 Andh-Pra 551) (supra). In that case a civil action was brought by the plaintiff lessee against defendants for recovery of sum of Rs. 3 lacs on account of damages for illegal cancellation of a lease and value of the timber, etc. The trial Court came to the conclusion that the contract was validly cancelled, that 2nd defendant brought about a breach of contract with a view to benefit the 3rd defendant company in which he had financial interest and that the defendants acted in concert in terminating the contract and consequently the plaintiff had a cause of action against them. The learned Chief Justice, speaking for the Division Bench observed-
'We find it difficult to reconcile this conclusion of the lower Court with the finding that the contract was validly terminated. If the view that the 1st defendant was entitled to cancel the contract is correct, the motive behind the action even if bad, would not convert in into an illegal act. The motive is absolutely irrelevant'.
The doctrine that an act even harmful does not become actionable, by reason of its being done with a bad motive and with intention of injuring another, provided that it was otherwise lawful, though not new, was fully expounded in the celebrated case of Allen v. Flood, 1898 Ac 1 at p. 92..... Therefore, the test is whether the defendant had a right to do the act complained of, however selfish or malicious him conduct may be.
Another rule to be remembered in this context is that if the defendant had done something lawful in promotion of his own interest and had not employed and unlawful means the plaintiff would have no cause of action, if any right of his has not been violated. See moghul Steam Ship Court. V. Mc Gregor, 1892 AC 25. This proposition is also contained in Crofter Hand Woven Hari Tweed Court. V. Veitch, 1942 AC 435. It was therein stated that if people acted in combination with each other for the purpose of promoting their legitimate interests, the combination would not be unlawful it the means employed were neither criminal nor tortious in themselves.
In the light of this proposition, the act of the defendants in terminating the contract would not be actionable if their purpose was to advance the interests of the 3rd defendant, as found by the trial Court, if the cancellation was otherwise lawful. Thus, if it is a lawful act, the first defendant had right to do it however bad the motive might be. If, on the other hand, it is an unlawful act he would have had no right to do it even if prompted by a good motive. Motives and intentions in such questions are not quite relevant'.
I am in respectful agreement with the above observations. It is also relevant to point out that an application for appointment of Receiver was made by the Petitioners along with the petitioners. Mr. M. M. Sehgal had filed an affidavit that he was keen to run the factory. He undertook to spend all moneys from his own resources for its up-keep. He further stated that if the factory started production he would be able to return the loan in due course. It was not disputed that some of the goods produced by respondent No. 1 were not manufactured anywhere in India. In view of the aforesaid statement, I had declined the application of the petitioners with the observations that if respondent No. 1 failed to fulfil the undertakings given by in the affidavit, the petitioners would be entitled to make a fresh application for the said purpose. Mr. Sehgal started production but after sometime he found it difficult to run the factory. Ultimately on 25th January, 1985 it was agreed between the counsel for the petitioners and that of respondent-company that Mr. B. R. Tuli, a retired Judge of the High Court, be appointed as Receiver of the property. Consequently I appointed Mr. Tuli as the Receiver. Later he expressed his inability to work as such. Therefore I appointed Mr. S. N. Anlay., retired Chief Justice of Delhi High Court as Receiver, vide order date 31st January, 1985. The Circumstances show that Mr. Sehgal was unable to run the factory though sufficient opportunity was given to him.
70. It is not disputed that the particulars of the charges under the deeds of mortgage/hypothecation executed in favour of the petitioners were duly filed within the period of limitation for registration of the charges with Registrar of Companies, Haryana and Delhi under the Companies Act (see Para 4 of the petition and written statement).
71. After taking into consideration all the facts and Circumstances, I decide the issue against the respondent-company.
The petitioners-institution claimed an amount of Rs. 8, 00, 07, 069, 99 p. as on 19th May, 1985, as detailed in Annexure 'A' attached herewith. I pass a decree for recovery of the said amount with future interest at the agreed rate from 19th May, 1985 till the date of its realisation by sale of the hypothecated/mortgaged property. The petitioners shall also be entitled to the costs of the petition from the respondent-company.
73. The respondent-financial institutions and Bank (i.e. respondent Nos. 2 to 6) also company. Admittedly the aforesaid properties are also mortgaged with them and they rank pari passu with the petitioners-institution ICICI, the Punjab National Bank and the State Bank of Patiala have instituted suits for recovery of the amounts due to them at Bombay, Delhi and Narnaul respectively. The petitioners has no objection in case the amount recovered by sale of the properties be distributed on pari passu basis to the respondent-financial institutions and Banks.
74. Mr. Jain has argued that the suits filed by the ICICI, the Punjab National Bank and the State Bank of Patiala are being contested by the Company and if those suits are dismissed, they will not be entitled to any share in the sale proceeds.
75. I have duly considered the argument. The matter is not free from difficulty. However, in view of the concession of Mr. Ghosh that the respondent-institutions and Banks are entitled to get the amounts due to them on pari passu basis with the petitioners from the sale proceeds, I consider it proper that they should be allowed to take their share on that basis. However, the payment will be made after the undertakings having been given by them that if the pending suits are dismissed or those are partly decreed they shall be liable to refund the whole/excess amount with interest at the rate of 12 per cent per annum. The amount so refunded shall be disbursed to the petitioners, the Banks and institutions, whose claims rank pari passu with the petitioners,. in case their claims remain unsatisfied. The amount which is left after satisfaction of the said claims, shall be paid to the Official Liquidator, who shall distribute the same amongst the creditors of the Company. In the aforesaid view, I find support from the observations of the Delhi High Court in representatives : Industrial Finance Corpn. of India v. Excersior Plants Corpn. Ltd. Civil Misc. (M) 17 of 1979, decided on 20th April, 1979 and Madras High Court in Industrial Finance Corpn. of India v. M/s. Micro Tools Ltd. and Industrial Finance Corpn. of India v. Sakthi Pipes Ltd., O. P. Nos. 200 of 1977 and 510 of 1978, decided on 23rd April 1980 and 2nd April, 1982, respectively.
76. In order to determine the claims of the said respondent, I appoint Mr. Satish Chander Mital as Commission and fix Rs. 5, 000, 00 as his fee. He shall, after giving an opportunity to the respondent to submit the claims and hearing the parties, decide as to what amount is due to them. The matter may be decided by the Commission expeditiously preferably within three months. The Commission shall also determine, whether the particulars of the charges created by the respondent-company in favour of each of the respondent-institutions and Banks, under the deeds of mortgage/hypothecation were filed by them within the statutory period for registration with the Registrar of Companies of Haryana and Delhi. The amount recovered by sale of the properties would be disbursed after determination of the claims of the respondent by the Commission on pari passu basis to the petitioners-institution and the respondent-financial institutions and Banks. Before disbursing the amount to the respondent-financial institutions and Banks, an undertaking would be taken from them as stated above. The fee of the Commission shall be paid equally by respondent Nos. 2 to 6. commission on 11-9-1985 at 4 p. m.
77. Petition allowed.