Allowed

Union Bank of India v. M/s. Jivanlal & Sons and Ors.

DRAT12 Apr 2024MISC APPEAL/3/2012

Case brief

AI extract

What is this about?

Union Bank of India appealed the dismissal of an application to attach a fourth respondent's mortgaged flat for dues owed by a firm of which the respondent was a partner. The DRT had held that the flat was not liable as it was mortgaged for a housing loan that was closed, deeming the bank's attempt to revive the loan and attach the flat as harassment. The Appellate Tribunal set aside the DRT order, rejecting the reliance on promissory estoppel due to the bank's immediate rectification of the error, and held that the respondent's failure to disclose the firm's NPA liability indicated an intent to defraud, justifying attachment.

What did the court decide?

The dismissal of Interlocutory Application No. 349 of 2011 by the DRT was set aside and the I.A. for attachment of the fourth respondent's flat is allowed.

Union Bank of India versus M/s. Jivanlal & Sons and Ors. — Banking and Recovery | DRAT (2024)

Outcome

The dismissal of Interlocutory Application No. 349 of 2011 by the DRT was set aside and the I.A. for attachment of the fourth respondent's flat is allowed.

Issue for consideration

Whether the Debts Recovery Tribunal was justified in dismissing an application for attachment of a mortgaged flat prior to the recovery of dues due to a separate firm loan. +3 more

Detailed headnote5 paragraphs

1. Where a borrower is classified as a Non-Performing Asset (NPA) due to a default in one facility, including a housing loan, all other facilities granted to that borrower may be classified as NPA under prudential norms. The liability of the borrower and guarantors is co-extensive, making a guarantor who is also the Karta of an HUF partner in the firm liable for the firm's debt.

2. The power of attachment before judgment under Sec. 19(13)(A) of the RDDB & FI Act is analogous to Order 38 Rule 5 CPC. It is not intended to be used mechanically but to prevent the loss of assets where there is evident intent to defeat the realization of a decree due to unresolved debts.

3. The doctrine of promissory estoppel does not apply where the issuing authority, upon discovering the fraud or inadvertent error (such as ignoring a co-associated NPA), immediately retracts the Permission/Sale permit due to pending recovery proceedings. A No Objection Certificate (NOC) cannot shield a borrower from obligation if the sale proceeds were intended to hide asset fragmentation.

4. If a debtor attempts to sell a mortgaged property to discharge only a portion of the mortgage debt while retaining the surplus, or attempts to sell a property mortgaged for one loan while concealing another significant NPA facility involving the same person/entity, the bank has sufficient cause to invoke attachment provisions to secure recovery of the total outstanding dues until proper accounting is made.

5. The Appellant in this case was aggrieved because the DRT dismissed the attachment application, holding that the bank's action in revoking the NOC after discovering the undisclosed loan constituted harassment and improper exercise of power, whereas the Tribunal found otherwise.

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

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Appeal No. 03/2012

Between

Union Bank of India

… Appellant/s

V/s.

M/s Jivanlal & Sons & Ors. …Respondent/s

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Mr Nainesh N Amin, i/b M/s N. N. Amin & Co., Advocate for Appellant.

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Mr T. N. Tripathi i/b M/s T. N. Tripathi & Co., Advocate for Respondents

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Order dated: 12/04/2024:-

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Union Bank of India, the Appellant impugns the order of dismissal of Interlocutory Application (I.A.) No. 349 of 2011 in Original Application (O.A.) No. 28 of 2008 on the files of the Debts Recovery Tribunal-I, Mumbai (D.R.T.) vide order dated 22/07/2011.

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The Appellant had filed the aforesaid O.A. against the Respondents for recovery of debt due from them. The 1^st Respondent is a firm of which Respondents Nos. 2 and 3 are the partners. The firm availed a loan from the Appellant with Respondents Nos. 3 and 4 are the guarantors. The debt incurred by the firm was defaulted, and the aforesaid O.A. was filed for recovery. The Appellant proceeded against the property of the firm at Khalapur and recovered ₹26.61 crores from the sale of the secured properties under the provisions of the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (“SARFAESI Act”, for

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short). As of 21/06/2011, a sum of ₹23,78,87,701.90 is outstanding and payable under the aforesaid O.A.

¶15

The 4^th Respondent created a mortgage concerning Flat No. 708, 7^th floor, H P Employees Cooperative Housing Society Ltd., Tilak Nagar, Chembur, Mumbai to secure a housing loan availed by him from the Retail Mart branch of the Appellant bank. Repayment of the said housing loan was defaulted which resulted in the account being classified as a Non-Performing Asset (NPA) on 04/05/2009. The 4^th Respondent subsequently regularised the account by making payment on 08/06/2009.

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Under the prudential norms for income recognition, asset classification and provisioning for the advance portfolio as laid down in the guidelines of the bank, in cases where any borrower is availing of several facilities, in the event of any one of the facilities or part thereof becoming a regular enables the bank to treat all the facilities granted by the bank to the said borrower as NPA/NPI though some of the facilities may not have become irregular.

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The liability of the borrower and the guarantors being coextensive the 4^th Respondent being the Kartha of the Hindu Undivided Family (HUF) which was a partner of the firm is also liable for the debt incurred by the firm and the housing loan availed by him should also have been classified as NPA together with their debt of the firm on 31/05/2007. However, the staff of the Retail Mart Department of the bank being unaware of the loan advanced to the firm and that being classified as NPA, the housing loan account of the 4^th Respondent continued to operate as a normal account without

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being classified as NPA.

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On 14/02/2011 the 4^th Respondent addressed the assistant manager of the Retail Mart of the Appellant bank expressing his desire to close the housing loan by March 2011 and requested for a no objection certificate (NOC) to be issued to enable him to sell the flat and close the debt. The 4^th Respondent deliberately and fraudulently did not disclose to the assistant manager the existence of a loan in favour of the firm and that is classified as NPA. On being misguided, the assistant manager issued a no-objection certificate on 15/02/2011. The 4^th Respondent intended to sell the aforesaid flat to Ashish Chheda and his wife Meeta Chheda and they intended to avail of a loan from Bharat Cooperative Bank Mumbai which addressed the assistant manager of the Retail Mart vide letter dated 23/05/2011 to which the assistant manager sent a reply on 25/05/2011 stating the outstanding dues and the Cooperative Bank forwarded a pay order for ₹18,10,310/-towards the outstanding dues and requested to close the outstanding housing loan and release the title deeds with an NOC. The 4^th Respondent had also deposited amounts on 02/06/2011 and 06/06/2011 totalling ₹60,205/-. The housing loan was thus closed. On 06.06.2011, the Retail Mart of the Appellant bank put up the papers relating to the housing loan account of the fourth Respondent and the Assistant General Manager made enquiries with the Assets Recovery Branch of the Appellant and was informed that NOC could not have been issued concerning the housing loan since recovery was pending against the firm. On getting this information, the Retail Mart returned the sum of ₹18,10,310/- received from Bharat Co-operative

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Bank. The housing loan was thus, revived.

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Thereafter, the Appellant filed I.A. No.349 of 2011 for attachment of the fourth Respondent’s flat referred to above for recovery of the balance amount due toward the loan account of the first Respondent firm under the provisions of Sec. 19 (13) (A) of the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (“RDDB & FI Act”, for short).

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The fourth Respondent opposed the I.A. stating that the housing loan was availed by him in May 2006 and the loan amount of ₹20 lakhs was undertaken to repay in 180 equated monthly instalments (EMIs) of ₹20,280/- each. The above-mentioned flat was admittedly mortgaged for the said housing loan. The fourth Respondent states that in February 2011 he approached the bank to close the housing loan account and sought permission from the Manager to sell the flat and divert the proceeds towards the housing loan. The Manager agreed and vide letter dated 15.02.2011 informed the fourth Respondent about having no objection to selling the flat subject to adjustment of the sale proceeds toward the pending dues. There was an outstanding amount of ₹19,13,247/-. Consequent to the issuance of the no objection by the bank, the fourth Respondent proceeded to negotiate to sell the flat to Ashish Chheda who was interested in purchasing the flat. He was informed about the outstanding housing loan and contacted his banker Bharat Co-operative Bank Mumbai which agreed to finance the purchase on getting information from the Appellant bank transmitted ₹18,10,310/- to the Appellant and requested them to hand over the title deeds together with the no objection certificate.

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The housing loan was, thus closed after the balance was paid by the fourth Respondent in cash to the Appellant. To the surprise of the fourth Respondent, the Appellant returned the amount received from Bharat Co-operative Bank and refused to close the housing loan account stating that amounts were due toward another loan incurred by the first Respondent firm of which, the fourth Respondent was a partner. The fourth Respondent and the prospective purchasers were, thus put to untold hardship.

¶27

The Ld. Presiding Officer in the impugned order, observed that the Appellant was aware that the flat was not mortgaged concerning the loan availed by the first Respondent firm. The only intention of the Appellant in not closing the housing loan and seeking to attach the flat for the firm's debt is to harass the Fourth Respondent. The mortgaged flat was agreed to be sold with the permission of the bank and the entire money due as per the mortgage was received by the bank. Without closing the housing loan and returning the amount received from Bharat Co-operative Bank and thereafter, seeking attachment of the subject flat for another loan which was never secured with the subject flat was not appropriate.

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The Ld. Presiding Officer also refers to the fact that all the properties mortgage to secure the loan which is the subject matter of the O.A. were already sold and ₹26.61 crores realised. That sale has been challenged by the defendants in the O.A. and is pending consideration by the Hon’ble High Court of Bombay. These facts have been suppressed.

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The impugned order also points out that the bank has not

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produced any material to indicate that the fourth Respondent has been attempting to contravene the statutory provisions of Sec. 19(13) (A) of the RDDB & FI Act.

¶32

The Ld. Presiding Officer observed that after having granted permission to sell the mortgaged flat for settling the housing loan and having received the entire dues, it was not appropriate on the part of the bank to have turned around and caused obstruction to the sale of the flat. The NOC issued by the bank to the fourth Respondent to sell the flat would amount to promissory estoppel. It is further observed that the subject flat is not an identified property but a property which is already mortgaged with the Retail Mart Branch of the Appellant bank for a housing loan. Hence, the Ld. Presiding Officer concludes that the provisions of Sec. 19(13)(A) of the RDDB&FI Act are not applicable.

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The impugned order further holds that the guidelines of the RBI relied upon by the Appellant to the effect that if one facility becomes NPA all other facilities granted by the Bank to the borrower also would be classified as NPA does not apply to the instant case because the fourth Respondent is not a principal borrower but only a guarantor for the credit facility availed by the first Respondent firm. Hence, the attachment sought was declined and the I.A. was dismissed. the Appellant is aggrieved and hence, in appeal.

¶34

The Ld. Counsel appearing for the Appellant submits that the Branch Manager of the Appellant Bank’s Retail Mart Branch had issued NOC without confirming the existence of another loan which was classified as NPA. Soon after he came to know about the existence

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of the loan, he recalled the NOC and returned the amount received from Bharat Co-operative Bank. It is pointed out that the fourth Respondent should have informed the Manager about the existing loan in the name of the firm. The fourth Respondent is the Karta of the HUF and the firm M/s Jivanlal and Sons is being represented by him. He is also arrayed as the fourth Respondent being a guarantor. It cannot, therefore, be submitted that he is not the principal borrower. His capacity as the Karta of the HUF which is a partner of the firm makes him the principal borrower. He cannot, therefore, skulk from his responsibility as a borrower, the Ld. Counsel appearing for the Appellant submits. The justification that the housing loan was also granted by the same branch is not an excuse for the fourth Respondent to submit that he had sold the flat with the consent of the Appellant, argues the Ld. Counsel. It is also pointed out by the Ld. Counsel for the Appellant that the action of the Branch Manager of the Retail Mart recalling the NOC and returning the amount was challenged before the High Court of Bombay in Writ Petition No. 1294/2011. The writ petition was dismissed on 28.09.2011 vide reported decision in Kamlesh Gandhi vs. Union Bank of India & Ors. 2011 SCC OnLine Bom 1298 . The fourth Respondent was directed to file a separate suit or a counterclaim for relief. The Ld. Counsel for the Appellant also submits that the liability of a guarantor is co-extensive with that of the principal borrower. Hence, even if the fourth Respondent is only a guarantor, he would still fall within the definition of a borrower.

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Per contra, the Ld. Counsel appearing for the Respondent submits that the housing loan for which the subject flat offered as

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security was closed by payment of the entire amount due and the Appellant bank had also issued a no objection certificate for the sale of the property. After having issued the NOC, the bank could not have turned around and recalled it. The Appellant bank is situated at the M.S. Marg, Mumbai and the Retail Mart which has granted the housing loan is also situated in the M.S. Marg as can be seen from the letterhead of the bank. Hence, the Appellant cannot feign ignorance about the issuance of the NOC by the Retail Mart to facilitate the sale of the flat. It is pointed out that not paying the entire sale consideration will not nullify the sale. The Appellant bank is estopped from recalling the NOC to sell the property. The Ld. Counsel relies on the decision of the Hon’ble Supreme Court in Raman Tech & Process Engg. Co. & Ano. vs. Solanki Traders (2008) 2 SCC 302 wherein it is held that the power under Order 38 Rule 5 of CPC is a drastic and extraordinary power. Such power should not be exercised mechanically or merely for the asking. It should be used sparingly and strictly following the Rule. The purpose of Order 38 Rule 5 is not to convert an unsecured debt into a secured debt. Any attempt by a plaintiff to utilise the provisions of Order 38 Rule 5 as leverage for coercing the defendant to settle the suit claim should be discouraged. Instances are not wanting where bloated and doubtful claims are realised by unscrupulous plaintiffs by obtaining orders of attachment before judgment and forcing the defendant for out-of-court settlements under threat of attachment. It is further pointed out by the Ld. Counsel for the Respondent that the provisions of attachment before judgment are to prevent a defendant from defeating the realisation of decree that may be ultimately passed

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in favour of the plaintiffs, either by attempting to dispose of, or remove from the jurisdiction of the court, his movables. In the instant case, the fourth Respondent had no intention to defeat the claim over the property. He had rather approached the bank for permission to sell the flat on the undertaking that the entire housing loan would be closed.

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There is no doubt that the subject flat was not offered as security for the loan incurred by the first Respondent firm. There is also no doubt that the properties offered as security for the loan in favour of the Appellant were already sold and amount to the tune of ₹26.61 crores realised under the provisions of the SARFAESI Act. But there was still a balance of ₹23,78,87,701.90 due towards the loan for which the O.A. was filed. The fourth Respondent was fully aware of the existence of the debt. However, he induced the Retail Mart Branch Manager of the Appellant Bank to close the housing loan for which the subject flat was offered as a security and issue NOC for the sale of the flat. He did not disclose the existence of the loan in favour of the firm which was, then classified as NPA. The fourth Respondent could not have disassociated himself from the debt of the firm in which he was a substantial partner. It is admitted that the sale of the flat was for a sum of ₹45 lakhs while the outstanding dues towards the housing loan were only ₹18,10,310/- after the fourth Respondent had paid in cash ₹68,205/- towards uncovered interest. The Appellant bank had a lien over the property for all debts which were outstanding and classified as NPA. The fact that the Branch Manager of the Retail Mart had issued the NOC to sell the flat and closed the outstanding due

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towards the housing loan without being aware of the fact that a huge loan was pending to be discharged and classified as NPA is only an inadvertent omission on his part which was immediately rectified by recalling the NOC and refunding the amount to the Bharat Cooperative Bank. The attempt made by the fourth Respondent to stealthily sell the flat on agreeing to close the housing loan is a dubious attempt to mislead the bank. Admittedly, the flat was agreed to be sold for a larger amount and the fourth Respondent had not offered to pay the entire sale consideration towards the debt. The intention of the fourth Respondent was, therefore, to delay and frustrate the execution or recovery of the debt. The powers granted to the D.R.T. under Sec. 19 (13) (A) of the RDDB & FI Act are analogous to the provisions under Order 38 Rule 5 CPC. The 4^th Respondent was attempting to sell the flat for a higher price and from out of that consideration, he wanted to settle the housing loan, which was only a small portion of the sale consideration that he was receiving towards consideration on the sale of the flat. From this, it is adequately clear that the bank had sufficient reasons to invoke the provisions under Sec. 19 (13) (A) as the 4^th Respondent was attempting to sell the flat to 3^rd parties for a larger sum, and thereby discharge only a small amount from out of it to close the housing loan. It could have been said to be a bona fide sale in case the 4^th Respondent had offered to pay the entire sale consideration for the satisfaction of the housing loan as also the loan due to be paid by the firm of which he was an integral part. The 4^th Respondent had thus attempted to mislead the branch manager by not disclosing the existence of the debt due from the firm and attempted

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to appropriate the balance sale consideration all for himself. Given the discussions made, the dismissal of I.A. No. 349 of 2011 by the D.R.T. was improper. The impugned order is therefore, set aside and the said I.A. for attachment of Flat No. 708, 7^th floor, H P Employees Cooperative Housing Society Ltd., Tilak Nagar, Chembur, Mumbai is allowed.

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The Misc. Appeal stands allowed as above.

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Sd/Chairperson

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mks-02

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Union Bank of India v. M/s. Jivanlal & Sons and Ors.

Case brief

What is this about?

What did the court decide?

Union Bank of India v. M/s. Jivanlal & Sons and Ors.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Statutes considered

Parties & counsel

Coram

Case details

All orders in this case

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