C AMARCNDRAN Vs. STATE BANK OF INDIA

JUDGEMENT

(1.) MISHRA, J. : The respondent-State Bank of India , Kancheepuram branch, filed a suit, 171 of 1975, for recovery of a sum of Rs. 14, 93, 615. 35 with interest at 14% per annum date of payment alleging inter alia that defendants 1 to 3 started a partnership firm the name and style of National Engineering Works which firm approached it in 1967 financial accommodation. The Bank sanctioned instalment credit loan of Rs. 67,994 19. 8. 1968, accepted a cash credit lock and key pledge agreement executed by the 122. 1970 for Rs. 45,000 and a cash credit mundy type pledge agreement for Rs. 2,75,000 the same date, viz. , 12. 2. 1970. According to the bank the firm pledged the machinery security for all types of advances sanctioned by the bank by their letter dated 12. 2. 1970. and executed a promissory note for Rs. 1,50,000 towards cash credit bills along with agreement for accommodation against bills tendered for collection, on 16. 3. 1970. The according to the bank, executed a trust letter on 6. 3. 1972 authorising it to hold all the pledged to it as trustees and renewed the promissory note by a renewal letter 17. 1. 1973.

(2.) THE fourth defendant, according to the bank, who is the wife of the first defendant propri-etrix of a firm Ashok Industries. This firm also approached the plaintiff financial accommodation in 1969. All other defendants (defendants 1 to 3) executed guarantee documents on 10. 3. 1971. THE bank granted cash-credit lock and key Rs. 3,00,000 to Ashok Industries on the execution of a demand promissory note 10. 3. 1971 on which date the goods mentioned in the agreement were pledged as security, for the repayment of the advance amount. This firm Ashok Industries also executed promissory note and a cash-credit Mundy type pledge agreement for Rs. 2,75,000 along a pledge letter. Subsequently, according to the bank, the unit was sanctioned cash credit limit of Rs. 3. 5 lakhs for collection of bills on the execution of an agreement, defendants 3 standing as guarantors for all the advances sanctioned to Ashok industries by a guarantee agreement dated 10. 3. 1971 which guarantee was revived by a letter dated 17. 1. 1974.

(3.) THEY (defendants 1, 2 and 4) have also described the transactions stated as follows: "it may not be out of place to point out at this, juncture that notwithstanding the fact under the arrangement between the parties the margin has been given in the document have been executed even on 12. 2. 1970, instead of giving the agreed margin, the has stated that the margin was fifty percent which was never the agreed margin. The in question had been got signed blank at separate points of time and consequently, same had been filled up as if the margin is SO per cent. In accordance with the agreement for cash credit executed on 12. 2. 1970, the amount in question had not been advanced and consequently the defendants charge that the plaintiff had committed the fundamental breach of the contract even at the time the contract in question had been entered into and "the true facts are as under, Defendants 1 to 3 had been carrying on business under name and style of National Engineering works at Kancheepuram. The said Engineering Works had banking transactions with the plaintiff Bank. The said Engineering Works applied for a loan to the plaintiff and the plaintiff, in pursuance letter dated 30th April, 1967 had granted unsecured overdraft against bills drawn on Electricity Board, Simpson & Co. and Ashok Leyland-margin 20 per cent cover period months upto a limit of Rs. 15,000. This limit was to be additionally secured by the pledge the said firm' ; s unencumbered machinery valued at Rs. 20,000.' ; "the said National Engineering Works had requested for cash credit Mundy type loan facility for which details were called for in the letter of the plaintiff to the National Engineering Works. Gradually the limit of the facilities had been increased' ;.' ; Similarly, the ashok Industries which is the proprietary concern of the 4th defendant had account with the plaintiff-bank from 1969 and there were some facilities extended by plaintiff-bank. Gradually the limit of loan facilities in respect of the Ashok Industries had been increased' ;.' ; In the meantime, in or about 1969, the tenders given by the National Engineering and Ashok industries to the Electricity Boards of Tamil Nadu and Andhra Pradesh had accepted and a large number of purchase orders were given by the said electricity Board the National Engineering Works and Ashok Industries for the manufacture and supply of electrical line items. In fact, the materials for which orders had been placed by the Electricity Board were worth several lakhs of rupees' ;. "as stated earlier, the National Engineering Works and Ashok Industries had banking transactions with the plaintiff. In view of the satisfactory operation of the said account the National Engineering Works and Ashok Industries from the electricity Boards, Officials of the plaintiff-Bank at Kancheepuram as well as officials from the Madras office the plaintiff had been watching the rapid progress of National Engineering Works and Industries and also their capacity to procure large number of orders worth lakhs of rupees. As a matter of fact, during and from the said period till about 1973, the plaintiff were the advisers of the said National Engineering Works and Ashok Industries in respect all transactions. THEY had advised the said National Engineering Works and ashok Industries about the method in which accounts will have to be kept by the said National Engineering Works and Ashok Industries, how the machineries could be utilised, and how the applications to the plaintiff had to be made and in effect in respect of the entire business carried by said National Engineering works and Ashok Industries' ;. "the officials of the plaintiff had inspected the business premises of national Engineering Works and Ashok Industries and after inspecting the several purchase orders given to said National Engineering Works and Ashok industries, they had offered to increase limits and consequently the National engineering Works and Ashok Industries were advised by them as to the manner in which necessary applications to the bank will have to preferred and in fact some of the officials had dictated and corrected the drafts of the to be written by the said Ashok Industries and National Engineering Works to the plaintiff. "in 1970, the limit was thus increased in respect of National engineering Works in of the letter of the plaintiff dated 3. 1. 1990 and the terms of the overdraft sanctioned under: "in respect of cash credit (Mundy type) against pledge of raw materials viz. rounds, angle sheets, iron rods etc. semifinished goods and finished goods, the earlier of Rs. 25,000 was raised to rs. 2,75,000 In respect of Cash Credit (lock and key) stocks as mentioned above, the now limit was Rs. 45,000. The margins were stipulated per cent for M. S. Flats, 25 per cent for other raw materials, and 33-1/3 per semifinished goods/ finished goods. In respect unsecured overdraft against supply drawn on government Departments,otherbills,drawnon Simpson & Co. , and accompanied by lorry receipts, railway receipts/invoices accompanied by acknowledged delivery notices, the limit was raised from Rs. 1,00,000 to Rs. 1,50,000. The margin per cent and cover period was 3 months. Further, all the limits sanctioned collaterally secured by (1) pledge of entire machinery valued at Rs. 98,000 subject charge in respect of instalment credit loan, (2) equitable mortgage over the property at Rs. 50,000 belonging to Smt. Chandrammal, one of the partners, (3) Equitable over the properties valued Rs. 33,000 belonging to the managing partner Sri C. Amarendran. "in accordance with the above enhancement of limits, the properties bearing Door Veerasami Pillai Street, Madras and No. 24, Vaikuntaperumal Mada Street, Kanchee puram, belonging to the first defendant were given by way of equitable mortgage collateral securities for the overdrafts sanctioned by the plaintiff.' ; In respect of property bearing No. 29, Veerasami Pillai Street, Madras, the document was demanded to be deposited with the plaintiff-bank and which was in fact deposited the plaintiff-bank for creating an equitable mortgage was a partition document and said document it is specifically stated that the property in question was allotted to the of C. Gopalakrishnan and his minor son, the first defendant. The first defendant was minor and consequently the house tax receipt were in the name of his guardian Chandrammal. It was stated that the title deeds in respect of that property were handed over by Chandrammal, notwithstanding the fact that the property belonged only the first defendant herein. As on date the first defendant is the owner of the said property and he is the person affected in relation to the transaction. Since there was no conflict interest between the said Chandrammal and the first defendant, there was no objection the part of the first defendant when Chandrammal handed over the documents at Madras the plaintiff-Bank' ;.' ; Similarly the limit was increased in respect of Ashok Industries pursuance of the letter of the plaintiff dated 9th March, 1971 and the terms of the overdrafts sanctioned were as under: In respect of Cash Credit (Lock & Key) against pledge of stocks of raw materials M. S. Sheets, rods, etc. and finished goods viz. , electrical line equipment, the limit enhanced from Rs. 30,000 to Rs. 3,00,000 In respect of cash credit (Factory Type) pledge of stocks of raw materials viz. , m. L. Sheets, rods, etc. and finished goods, electrical line equipment, the existing cash Credit (Mundy Type) was converted into credit Factory Type the limit was enhanced from Rs. 30,000 to Rs. 2,75,000. The margin were 10 per cent for raw materials, 25 per cent for semi-finished goods and finished goods. sub limit was fixed at Rs. 1,75,000 for drawings against semifinished goods and finished goods. In respect of unsecured overdraft Bills accompanied by railway/lorry receipts course of collection, the limit was Rs. 3,50,000 The margin was 10 per cent and the period was 3 months for 90 per cent bills and 4 months for 10 per cent bills. The advances sanctioned were to be collaterally secured by pledge of the Unit' ; s machinery valued Rs. 45,000 by equitable mortgage of house property at Madras and Kancheepuram of the defendant, and personal guarantee of the partners of national Engineering Works' ;.' ; In view of the order obtained to the tune of about several lakhs of rupees by the National engineering Works and Ashok Industries and since the orders have to be executed within very short period of time and delivery has to be made in accordance with the delivery schedule given along with the purchase orders, the personnel of the Electricity advised the National Engineering Works and Ashok Industries to get the raw materials required for the manufacture and supply of items covered by the purchase orders in the market and said that if subsequently quote is allotted the same could be utilised by defendants' ;.' ; It may be pertinent to point out at this juncture that atleast in regard to one item materials, namely, cold rolled sheets, the open market price was more than double the in the controlled market. The concerned Electricity Board also promised to give allotment from J. P. C. as soon as they received the allotment orders. The J. P. C. allotment given Ashok Industries had been utilised and the sheets had been purchased and they were included in the lock and key loan given by the plaintiff. "the National Engineering Works also approached the Tamil Nadu small Industries Development Corporation for the allotment of necessary raw materials at the controlled but the said Corporation refused to supply them at the controlled price' ;.' ; In view of the aforesaid circumstances, the National Engineering Works and Industries had to purchase M. S. Flats in the open market even though as already stated, open market price was price was about twice the controlled price. The National engineering Works purchased iron flats from Sri Ram Machinery Corporation through the plaintiff and entire purchase price for the said flats had been paid by the plaintiff.' ; Since the said M. S. Flats purchased from the said Rama Machinery Corporation were not suitable for the job in question, they being brittle, they could not be utilized purpose for which they were brought. The National Engineering Works found it difficult return the materials to the said Rama Machinery Corporation and get back the money The National Engineering Works approached the plaintiff and appraised them of the in which they had been pleased on account of the above situation. For the purpose salvaging the materials that had been purchased, the said National Engineering suggested that if permitted, the flats could be exchanged for sheets in the open since the said sheets could be used for the manufacture of B type boxes to be supplied the Electricity Boards, Tamil Nadu and Andhra Pradesh' ;.' ; The plaintiff also agreed with the suggestion and consequently the National Engineering Works exchanged the flats for cold rolled sheets in the open market. At that stage, plaintiff, on verification, was satisfied about the price at which the materials were valued exchanged at the rate of Rs. 100 per sheet, the same being the market value thereof. that basis, the National Engineering Works were called upon to provide the necessary valuing the same as aforesaid at the rate of Rs. 100 per sheet. All the sheets that obtained in exchange for the flats were taken by the plaintiff into lock and key godown the time the limit was increased by the plaintiff. As a matter of fact, for the purpose verification the plaintiff wanted a letter from the person from whom sheets were obtained exchange for fiats, viz. , Messrs. P. Raghavalu Chetty, Naraya-nasami Chetty and such was obtained by the first defendant and handed over to the plaintiff. The first defendant also given a letter stating that for such exchange of materials, cash bills could obtained' ;.' ; As stated earlier, even while the purchase orders were placed, the Electricity Board stated that they would make arrangements for J. P. C. allotment to the defendants and J. P. Callotment was given. In view of the fact that the raw materials required had been purchased by the National Engineering Works and also in view of the fact National Engineering Works did not have sufficient funds to pay the e. M. Deposit for and since there were materials already in stock, the materials were not indented J. P. Callotment by the National Engineering Works' ;.' ; The Ashok Industries which had also been given J. P. Callotment utilised the purchased the same with the help of the funds provided by the plaintiff and brought stocks of j. P. Callotment into the lock and key loan with the plaintiff' ;.' ; Till about the early part of 1971, the Electricity Boards of Tamil Nadu and Andhra had placed purchase orders with the National Engineering Works and Ashok respectively for the manufacture and sale of Electrical line materials worth Rs. 12,68,820 and about Rs. 14,87,000.'' ; As ill-luck would have it, some time in 1971, due to power out and stringent position and local policies, the purchase orders which had been placed by the boards with the National Engineering Works and Ashok Industries were suspended, result the Sheets that had been stocked by the National Engineering Works and industries which' ; could be used only for the materials to be manufactured and supplied the electricity Boards were of no immediate use. The materials were lying idle and rusted, while interest on the advances made by the plaintiff was mounting up. In circumstances, the plaintiff was approached and on the advice of the then local Kancheepuram Branch, one Mr. Kalyanasundaram and the Development Officer, mr. Sridharan, a letter dated 28th December, 1971 was given to the plaintiff giving the details in relation to the circumstances in which the defendants were placed. The was asked to look into the case and advise as to whether the materials could be disposed As a matter of fact, the abovementioned letter was written in the manner suggested said officials themselves since it was stated that unless the letter was written in manner, it would be very difficult to get necessary permission from the Head office. said letter, a complete resume of all events that had happened had been given and it had been specifically that if alternative orders were not procured, the entire materials will have to be sold plaintiff was requested for grant of permission to sell the materials' ;.' ; It may not be out of place to point out at this juncture that permission was necessary the materials since they were under the lock and key of the plaintiff.' ; Further, at the time when permission was sought for sale of the materials in the market, the price of those materials in the open market was higher than even the purchase prices of those materials in the open market' ;.' ; It may also be pointed out at this juncture that even earlier there had been a number discussions with the plaintiff' ; s then agent at Kan-cheepuram, Mr. Kalyanasundaram, the Officer, Mr. Sundaram, the Development Officer, Mr. Sridhran, and Technical Mr. Balasubramaniam and others and during such discussions, it was specifically pointed that in view of the fact that orders had been suspended by the Electricity Boards, no purpose would be served by retaining the sheets and incurring interest charges amounts advanced by the plaintiff. It was also made clear that certain materials which been kept under lock and key store of such nature that they would become damaged in stock for a long time and that there was no possibility of using those materials in the future and therefore, it was better that the goods were' ; disposed of. In fact the defendants only wanted permission to sell the materials so that the sale proceeds could be appropriated towards the dues of the defendants to the plaintiff-bank. The defendants impressed them that if the goods are sold the liabilities of these defendants would be wiped off".' ; The then local agent of the plaintiff had on several occasions written to the Head seeking directions as to whether permission could be given for the sale of the materials, ultimately, the plaintiff' ; s Madras office had turned down the said proposal for sale materials. Thus the plaintiff had prevented the defendants from selling the materials were in stock with the plaintiff under lock and key loan'' ; It may be pertinent to point out that as a matter of fact, in March, 1972, the defendants a ready purchaser for the entire materials with a cheque for rs. 55,000 as advance payment. But alleging that there had been instructions from the higher authorities not to permission for sale the local agent of the plaintiff Mr. Kalyanasundaram refused to permit defendants to sell the goods' ;.' ; The plaintiff has thus prevented the defendants from carrying on the business in the possible interests of the business in the circumstances that prevailed then and hence is no jurisdiction whatsoever for the plaintiff to charge any interest on the amount due the defendants. The plaintiff is not only not entitled to charge any interest but the must also reimburse the defendants in respect of all losses sustained by them by reason the plaintiff' ; s acts. The plaintiff is estopped from claiming any amount in view of the plaintiff itself.' ; As on 31. 12. 1971, for the purpose of fulfilment of various orders the National engineering had stocked raw materials worth Rs. 5,34,664. 20, The stock under the lock and key plaintiff comprised of 31 axles, 1355 G. P. Sheets, 1730 B. P. Sheets, 863 Kg. E. M. Steel and 1390 C. R. Sheets and were of the value of Rs. 4,65,541 Raw materials Rs. 69,123. 20 were secured to the plaintiff under the Open Mundy Type loan. The entire stock as on 31. 12. 1971 in respect of National Engineering works, as stated was Rs. 534,664. 20' ;.' ; Similarly, as on 31. 12. 1971 the Ashok Industries had stocked raw materials Rs. 5,44,980. 90. The stock under lock and key of the plaintiff comprised of 618 B. P. Sheets, 2175 g. P. Sheets, 500 G. P. Sheets, 2800 H. R. Sheets of the value of Rs. 4,36,000. The materials worth Rs. 1,09,980. 90 were under the open Mundy Type loan. Besides the said Ashok Industries had also with them finished and semi-finished goods of the of Rs. 88,713. 60. As stated earlier, in view of the suspension of the purchase orders Electricity Board, the materials stocked by the defendants became not useful immediate manufacture. That was why permission was applied for to sell the materials and to appro -. priate the sale proceeds towards the due from the defendants to the plaintiff on various accounts. As stated earlier, permission for sale was not given. Subsequently, it was suggested by the plaintiffs officers, Sridharan, Kalyanasundaram, Venkata-raman, after discussion at Madras that if the stock were revalued, it would be possible for the plaintiff to give permission for the the materials. On such revaluation of the goods with the National Engineering Works, goods of the value of rs. 4,65,541 and 39,800 were valued at Rs. 2,12,711 and Rs. 26,220 the same way, the goods that were lying with Ashok Industries were revalued. The worth rs. 4,36,000 and Rs. 15,776 were revalued' ; at Rs. 2,53,428 and Rs. 8,208. On of the revaluation, the value of the goods with the defendants was brought by Rs. 2,66,410 in the case of National Engineering works and Rs. 1,91,140 in the case of Ashok Industries totalling to an under-valuation of Rs. 4,57,550' ; It may be pertinent to point out juncture that when an account of the revaluation the value of the goods with the defendants had come down and the stipulated margin had not been maintained the plaintiff did upon the defendants to bring in additional amount in accordance with the agreement between the parties. Nor did the plaintiff take any fresh document in view circumstances that prevailed after re-valuation' ;.' ; Even in spite of the revaluation of the stocks, which was said to be for the purpose granting permission to sell the materials, the plaintiff, as stated earlier, did not permission to sell the goods at that point of time.'' ; But, ultimately, in June, 1973, when the market was very dull and when the power in full force, the sale of the materials was compelled by the plaintiff. At that time, defendants have stated that the market value was very low and that they would be serious' ; loss if the goods were sold at that time. The plaintiff' ; s regional Mr. Vaidhyanathan, in the presence of Messrs. Venkataraman and ren-garajan, said goods should be immediately sold and he assured that for some period a moratorium be given to the defendants in respect of the existing liability after adjustment of the proceeds of the goods towards the amount due to the plaintiff and that the defendants commence the business afresh and that fresh advances would be given thereafter. Accordingly, the defendants bona fide believing the assurances of the above- officers of the plaintiff including the regional Manager Mr. Vaidhyanathan and for the purpose of avoiding unpleasantness, agreed to sell practically all the raw materials including c. R. Sheets, notwithstanding the fact that the defendants had been put to serious losses for which the defendants could even then have claimed damages from the plaintiff' ;.' ; All the sheets were sold and the entire sale proceeds had been paid to the credits of the defendants' ; various accounts with the plaintiff-Bank. In fact, the purchasers themselves had paid the amount straight into the plaintiff-bank and no portion of the sale consideration the materials was utilised otherwise. There were some materials which could not be sold and they are even now lying at the premises' ;.' ; In October, 1973, the plaintiff suddenly stopped the overdraft facilities and the discounting of Bills without any notice to the defendants. The defendants gave a telegram to the regional report of the plaintiff Mr. Vaidhynathan who sent the Administrative Officer one mr. Pillix to Kancheepuram and there was a discussion between the defendants and the said officer along with the agent of Kancheepuram branch Mr. Kalyanasundaram and it was agreed by the plaintiff that they would give overdraft upto 90 percent of Labour bills and 10 percent of sales bills. Even this facility was suddenly stopped in March, 1974 without prior notice to the defendants. After march 1974, the defendants have written a letter dated 22. 4. 1974 to the plaintiff agreeing to pay Rs. 1,000 per month. The National Engineering Works have paid the said monthly instalments upto March, 1975 and the Ashok industries had also paid for about six months' ;.' ; The loss that had been caused to the defendants on account of the acts of the plaintiff should be reimbursed by the plaintiff. While so, the plaintiff had suddenly on 24. 3. 1975 locked up even the remaining materials though the plaintiff is not entitled to do so. All the said materials are now under the lock and key of the plaintiff. The plaintiffs action in locking the materials is high handed illegal and serious damage had been caused to the defendants by reason of the conduct of the plaintiff and such damages also should be borne plaintiff. Subsequently the partnership had been dissolved and all the assets and liabilities were taken over by the first defendant and the first defendant is entitled to realize assets and liabilities of the said dissolved firm of National Engineering works". "after the sale of the said goods, systematically the plaintiff had been squeezing neither the moratorium promised was given nor any fresh advances as promised was This would abundantly prove that the intention of the plaintiff was merely to throttle defendants". "the defendants state that both the National Engineering Works and Ashok Industries entitled to recover the losses from plaintiff and for that purpose, a true and correct in respect of all the dealings will have to be taken. The plaintiff has not given a true correct account in respect of all transactions. The correct position of the account arrived at only after a true and correct account is taken. Even in the accounts given, interest had been charged and unless copies of statements of accounts are given, defendants will not be in a position to controvert the same".