2020 (5) TMI 736 - HC - Indian Laws

Recovery with future interest on the basis of written contract and negotiable instrument - It was contended that in view of the commencement of the proceedings under the SARFAESI Act there was a bar to institution of the suit - HELD THAT - There can be no quarrel with the proposition that once the Pawnee invokes the pledge and sells the security the Pawnee is in law bound to give credit to the Pawner of the value of the sale proceeds. If the value of the sale proceeds exceeds the amount of debt the Pawnee is bound to refund the said excess amount to the Pawner. He would be entitled to institute an action to recover the balance amount of debt only. During the subsistence of the pledge the voting rights in respect of the pledged securities were to be exercised by Defendant Nos. 4 and 5. However, once the pledge was invoked the voting rights in respect of the pledged securities were to be transferred and exercisable by the Plaintiff. This stipulation by itself does not amount to the sale of the pledged securities. It is nobody s case that the Plaintiff has in fact sold the pledged securities and realized the value thereof - A mere stipulation in the agreement of pledge that after the invocation of the pledge, the Pawner would exercise the rights in respect of the pledged securities does not ipso facto amount to sale of the pledged securities by the Plaintiff unto itself. The pronouncement of the Supreme Court in the case of IDBI TRUSTEESHIP SERVICES LTD. VERSUS HUBTOWN LTD. 2016 (11) TMI 1529 - SUPREME COURT , especially the proposition expounded in para 17.6 that, if any part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit, (even if triable issues or a substantial defence is raised), shall not be granted unless the amount so admitted to be due is deposited by the defendant in Court governs the facts of the case - conditional leave to defend the suit granted subject to deposit of the principal amount of Rs. 29 Crore and interest of Rs.3,94,71,781/- at the agreed rate of 13.50% p.a. as of 10th January, 2019. Summons disposed off.

Summary

Issues Involved:
1. Recovery of loan amount with interest.
2. Legality of instituting a suit under SARFAESI Act.
3. Discrepancies in demand notices.
4. Allegation of financial assistance being a subterfuge.
5. Insufficient stamping of loan documents.
6. Invocation of pledged shares and exercise of voting rights.

Issue-wise Detailed Analysis:

1. Recovery of Loan Amount with Interest:
The Plaintiff, a non-banking finance company, sought recovery of Rs. 34,04,76,149/- with future interest based on a loan agreement and negotiable instruments executed on 29th December 2017. The Plaintiff disbursed Rs. 29 Crores to Defendant No. 1, who defaulted on interest payment due on 28th June 2018. Subsequent demand notices were issued, but the Defendants failed to pay, prompting the Plaintiff to file the suit.

2. Legality of Instituting a Suit under SARFAESI Act:
The Defendants challenged the suit's tenability, citing the Plaintiff's initiation of proceedings under the SARFAESI Act. They argued that this barred the institution of the suit. However, the court did not find this argument sufficient to dismiss the suit.

3. Discrepancies in Demand Notices:
The Defendants pointed out discrepancies in the demand notices issued on 31st July 2018, 21st August 2018, and 31st October 2018, questioning the Plaintiff's entitlement to recover the amount. The court noted these discrepancies but did not find them significant enough to grant an unconditional leave to defend.

4. Allegation of Financial Assistance Being a Subterfuge:
Defendant No. 1 claimed that the loan was a subterfuge, asserting that the Rs. 29 Crores were transferred to M/s. Vadraj Cement Ltd., and thus, there was no outstanding debt from Defendant No. 1. The court found this defense to be an admission of the loan transaction and held that the liability to repay the loan remained with Defendant No. 1, regardless of the subsequent transfer of funds.

5. Insufficient Stamping of Loan Documents:
The Defendants argued that the loan agreement, letters of guarantee, and Pledge Agreement were insufficiently stamped, rendering them unenforceable. The court acknowledged this issue but followed the precedent of impounding such documents and referring them for adjudication of stamp duty and penalty, allowing the suit to proceed conditionally.

6. Invocation of Pledged Shares and Exercise of Voting Rights:
The Defendants contended that the Plaintiff's invocation of the pledge and exercise of 100% voting rights over the pledged shares required the Plaintiff to account for the value of the shares before suing for the debt. The court clarified that the mere exercise of voting rights did not amount to the sale of pledged securities. Since there was no evidence of the Plaintiff selling the pledged shares, this defense was not upheld.

Conclusion and Order:
The court granted conditional leave to defend the suit, requiring the Defendants to deposit Rs. 32,94,71,781/- within twelve weeks. The loan agreement and related documents were impounded and sent for adjudication of stamp duty and penalty. The Plaintiff was directed to pay the adjudicated stamp duty and penalty within two weeks of receiving the order. The suit would proceed based on the compliance with these conditions.