Dismissed

State of Gujarat v. Kotak Mahindra Bank Ltd.

DRAT25 Sept 2023REGULAR APPEAL/249/2010

Case brief

AI extract

What is this about?

This deportation allows the appeal filed by the State of Gujarat against the Debt Recovery Tribunal's order. The bench held that the assignment of debt was legal and the notice under Section 80 CPC was sufficient, dismissing the claim that guarantees could not be enforced before asset realization.

What did the court decide?

The appeal was dismissed and the impugned judgment and order were upheld.

State of Gujarat versus Kotak Mahindra Bank Ltd. — Dowry and Cruelty | DRAT (2023)

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BEFORE THE DEBTS RECOVERY APPELLATE TRIBUNAL, AT: MUMBAI Present: Mr Justice Ashok Menon, Chairperson

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Appeal No.249/2010

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Between

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State of Gujarat … Appellant/s

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V/s.

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Kotak Mahindra Bank Ltd. & Anr. …Respondent/s

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Mr. Mangal Bhandari along with Ms Khushbu Prabhu, i/b M/s Vipul Modi & Associates, Advocate for the Appellant.

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Mr Rohit Gupta along with Mr Nikhil Rajani, i/b M/s. V. Deshpande & Co., Advocate for the respondent No. 1.

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-: Order dated: 25/09/2023:-

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State of Gujarat, the second defendant in Original Application (O.A.) No. 350 of 2001 on the files of the Debts Recovery Tribunal II, Ahmedabad (D.R.T.) is the Appellant challenging the judgment and order dated 04.02.2010 favouring the first respondent herein namely Kotak Mahindra Bank Ltd. to recover a sum of ₹9,14,72,535.89 from the second respondent herein and ₹3,59,06,990.23 from the Appellant as the guarantor.

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The facts can be summarised thus:

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The second respondent namely Gujarat Communications and Electronics Ltd. (the company) had in 1994 borrowed money towards working capital and other credit facilities from a consortium of banks consisting of the State Bank of India (SBI), Bank of Baroda (BOB) and the Bank of India (BOI). The Appellant stood as guarantor for repayment of the debt by the second respondent and executed a deed

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of guarantee on 05.06.1999 for 12 months for non-fund advance facilities to a limit of ₹40 crores which were extended for a further period of one year till 04.06.2001 vide resolution dated 06.06.2000. 3. The second respondent company suffered huge losses and had to be shut down on 01.02.2001 under the provisions of the Industrial Disputes Act. The account was classified as a non-performing asset (NPA) on 31.03.2001.

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A demand notice was issued by the SBI on 12.05.2001 to the Appellant and the second respondent under Sec. 80 of the Code of Civil Procedure (CPC) demanding repayment of dues. There was no repayment made and hence, the aforesaid O.A. was filed on 07.08.2001 against the Appellant, the second respondent and others.

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The debt was assigned to the first respondent Kodak Mahindra Bank Ltd. on 23.03.2006. The application filed for substitution of the Applicant in the O.A. and allowed on 22.03.2007.

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The company went into liquidation and an Official Liquidator was appointed. The assets belonging to the company were sold in the auction and ₹2.90 crores were paid to the first respondent. 7. The Appellant challenges the impugned order on various grounds. The substitution of the SBI with the assignee bank allowed by the D.R.T. is challenged. The stamp duty on the assignment was insufficient. It is pointed out that the guarantee created by the Appellant was in favour of nationalised banks and therefore, the assignment of the debt to the first respondent will not permit it to invoke the guarantee given by the Government. It is further contended that the Applicant in the O.A. has not led evidence to prove the

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guarantee. It is also contended that the notice under Sec. 80 of the CPC is bad in law. The breakup of the amount concerning the fund and non-fund-based outstanding dues is not given. It is reiterated that the Appellant is a guarantor only to non-fund-based credit facilities, which is not marked and crystalised in the notice. Thus, the notice being inadequate and not proper, the same cannot be treated as a valid invocation of the guarantee within the period of limitation against the Appellant.

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The Appellant would contend that given the provision under section 105 of the CPC, a party to the suit preferring the appeal against the judgment/decree is entitled to assail any error, defect or irregularity in any order passed during the suit affecting the decision of the case and may be set forth as a ground of objection in the memorandum of appeal and, thus, the Appellant points out that the non-framing of an issue concerning the validity of the assignment of the debt from the original Applicant to another banking company without registration of the assignee company as a securitisation company or an asset construction company under the provisions of the SARFAESI Act, was to be decided.

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It is also contended that the D.R.T. failed to appreciate that clause 6 of the Deed of Guarantee mandated that such a guarantee shall not be enforced till all rights and remedies for recoveries have been exhausted. Thus the guarantee could not be adjusted and crystalised and allowed until remedies against the 2^nd respondent were fully exhausted. Hence, the Appellant is not liable to pay any dues so adjudicated and the impugned judgment and order deserve to be set

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aside on that ground as well.

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The Appellant would further point out that the D.R.T. failed to appreciate that the amount paid by the Official Liquidator by the sale of the assets of the company was unilaterally credited towards cash credit facilities. The same ought to have been appropriated towards non-fund-based credit facilities guaranteed by the Appellant which would have substantially reduced the liability of the Appellant to less than half of the claim sought.

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There is also a contention taken up that the O.A. was filed after the expiry of the guarantee period. As per the terms of the guarantee any claim had to be lodged against the Appellant within one month of the expiry of the guarantee period, that is on or before 03.07.2001. The O.A. was filed on 07.08.2001. For that reason, also, the O.A. should have been dismissed against the Appellant.

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It is pointed out that the Appellant had settled the dues of the other banks in the consortium namely, the BOB and BOI at 50% of the principal amount. The SBI did not accept the offer and the discussions with them did not yield any result.

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The Appellant therefore seeks to quash and set aside the impugned judgment and order dated 04.02.2010 and this must the O.A. is also the recovery proceedings therein as against the Appellant 14. Per contra, the first respondent contends that the Appellant’s allegation against the assignment of the debt is not sustainable. The assignment deed was duly executed by the Collector and hence, the contention of the stamp duty will not lie. The adjudication is a Stateordered adjudication. The Ld. Counsel arguing for the Appellant fairly

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submitted that the objection regarding stamp duty is withdrawn. The respondent contends that there is no notification that debars the assignment of debt by the SBI and it is also permissible under the Banking Regulation Act. It is submitted that the Official Liquidator sold all the secured assets of the company and realised ₹16.55 crores from that sale. The Hon’ble High Court of Gujarat was pleased to distribute ₹10 crores out of the total sale proceeds lying with the Official Liquidator amongst all the secured creditors and workers vide its order dated 27.02.2008. The 1^st respondent had received ₹2,24,77,307/-on 10.07.2009 towards its share of the said sale proceeds. The said amount was appropriated towards part payment of the liability under the cash credit amount (fund-based facility) of the borrower company. The office of the company situated in Ahmedabad was yet to be sold and the said property was not part of the secured assets. This would indicate that all charged assets of the company have been sold and therefore the Appellant cannot raise a defence that the guarantee cannot be invoked till the securities are enforced. Thereafter the Official Liquidator distributed a further sum of ₹1,46,30,000/-to the 1^st respondent towards its share of the amount due and that too has been appropriated towards the cash credit facility (fund-based facilities) of the company. The 1^st respondent has this credited a total sum of ₹3,71,07,307/-under the cash credit account (fund-based facilities) of the 2^nd respondent company. The respondent would also contend that the Appellant has challenged the impugned order and judgment on grounds which are beyond the scope of the pleadings filed before the D.R.T. and those cannot be now taken in appeal as a

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ground. There was no pleading concerning the inadequacy of the statutory notice under section 80 of the CPC. Such a ground cannot now be taken in appeal. No challenge whatsoever was raised regarding the invocation of the guarantee by the 1^st respondent. The Appellant, a promoter of the 2^nd respondent company, decided to close the company under the Industrial Disputes Act. As a result, the 2^nd respondent company ceased its operations with effect from 01.02.2001. The Appellant by executing a guarantee has stood as a guarantor for due repayment of non-fund-based facilities availed by the 2^nd respondent company in the principal sum not exceeding ₹40 crores. The company defaulted in repayment and therefore the Appellant being the guarantor is jointly and severally liable to pay the amount as per the order of the D.R.T. Since the liability of the guarantor is coextensive with that of the principal borrower, the creditor is entitled to proceed against the borrower or the guarantor or both simultaneously.

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Heard the Ld. Counsel appearing for the Appellant and the respondents. Records perused.

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The Learned counsel for the Appellant has relied upon an Official Memorandum dated 22.09.2010 Ministry of Finance, Government of India to rely upon clause 10(iii) wherein it is stated that the guarantee given would not be transferable to any other agency. Hence it is contended that the assignment of the debt to the 1^st respondent bank is not justified. The memorandum however does not preclude the SBI from assigning its debt. If an assignment of debt which is the essence of the bank is permissible under the Banking

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Regulation Act is also the RDB Act and the SARFAESI Act under sections 5 and 18, it cannot be held that the assignment of the debt by the SBI to the 1^st respondent can be challenged. The Ld. Counsel appearing for the Appellant has relied upon the decisions of the Hon’ble Supreme Court in ICICI Bank Limited vs. Official Liquidator of APS Star Industries Limited & Ors. Civil Appeal No. 8393 of 2010 . In the said decision the borrower had relied upon section 130 of the Transfer of Property Act to argue that the assignment of Financial Instruments in possession of a bank transfers not merely the right to recover the debt but also transfers the obligation under the Financial Instruments. It was argued that the impugned deed of assignment is legally unsustainable without novation of the original contract between the assignor and the assignee. The Hon’ble Supreme Court however did not find merit in the argument. It was observed that the debt is an asset in the hands of the bank as a secured creditor or mortgage or a hypothecatee. The bank always transfers its assets. Such transfer in no manner affects any right or interest of the borrower. It is also observed that there is no prohibition in the Banking Regulation Act in the bank transferring its assets inter se.

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In contention that is taken up by the Appellant is that unless the secured properties are proceeded against and the amount realised, the guarantee cannot be invoked. There is no dispute that all the secured properties have been proceeded against and sold by the Official Liquidator. The O.A. has described the properties of the 1^st defendant company which need to be proceeded against. Paragraph C to Schedule 1 describes a property which is not mortgaged though owned

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by the 1^st defendant company.

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The Appellant had raised the contention concerning a bar of limitation in the written statement. It is also pleaded by the Appellant in the written statement that unless and until the assets belonging to the borrower company are disposed of, no application against the Appellant will lie. The Appellant finds fault with the Applicant in the O.A. for having proceeded against the Appellant by invoking the guarantee prematurely without exhausting the remedy to proceed against the secured assets. At the same time, it is also contended that the O.A. is time-barred as against the Appellant.

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The Ld. Counsel appearing for the Appellant relies upon a decision of the Hon’ble Supreme Court in Amar Nath Dogra vs. Union of India (1963) SCR 657 to argue that the notice under section 80 CPC is defective. In the above-cited decision, the Hon’ble Supreme Court found that it was apparent from the calculation that there is a complete variance between the claim made in the notice and the claim made in the plaint. There are also several heads of claim. I do not think that this decision would help the Appellant in any manner. The Hon’ble Supreme Court has held that a notice under section 80 is not a pleading and need not be a copy of the plaint and that no particular technical form is prescribed for such a notice. It is also observed that a notice under section 80 has to be interpreted not pedantically, but in the light of commonsense without one being hypercritical about the language but the question is whether in the notice there is a piece of substantial information conveyed based on which the recipient of the statement could consider the claim of the would-be plaintiff and avoid the suit.

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In the case at hand, I do not think that there was any ambiguity regarding the claim put forth in the demand notice issued under section 80 CPC. The purpose of a notice to the government is only to avoid litigation. The notice issued in the instant case definitely would serve that purpose.

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After having anxiously considered the rival contentions and the arguments raised by the Ld. Counsel appearing for the parties, I do not find any reason to fault the judgment impugned. There are no merits in the appeal in the appeal needs to be dismissed.

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Resultantly, the appeal is dismissed.

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Sd/Chairperson

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mks-01

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State of Gujarat v. Kotak Mahindra Bank Ltd.

Case brief

What is this about?

What did the court decide?

State of Gujarat v. Kotak Mahindra Bank Ltd.

Case brief

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