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TMI Blog1988 (4) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 142, 5th Cross, Rajmahal Vilas Extension Bangalore-560080 together advanced certain sums as cash credit loan upto a limit of ₹ 46,00,000/- a term loan upto a limit of ₹ 20,00,000/- and a term loan of ₹ 7,00,000/- between August, 1981 and March, 1982. In October, 1983 it is further alleged, at the request of the 1st respondent-Company, the petitioner-Bank in consortium with the 2nd respondent-Bank released a letter of credit facility upto a limit of ₹ 1,60,00,000/- to enable the 1st respondent-Company to import raw materials from foreign suppliers. It is further alleged that in consideration of the sanctioning of the loans and other banking facilities as described above, the 1st respondent-Company executed relevant loan documents agreeing to pay interest at rates agreed upon, having hypothecated the plant, machinery, book debts etc., belonging to the Company as well as mortgaged the immovable properties of the Company by deposit of title deeds. It is claimed that on account of the above transactions a total sum of ₹ 1,37,12,518-81 is due as detailed below: "(1) Cash Credit Hypothecation ₹ 45,82,880-29) Exclusive of interest (2) Medium Term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981 the Company was taken over by purchase of the shares by Shri V.P Shah and his Associates. The earlier management was manufacturing some inorganic chemicals. But after taking over, the new management prepared a fresh project report for manufacturing bulk drugs and drug intermediates and pharmaceutical fine chemicals. The Company made an application to Canara Bank, Rajmahal Vilas Extension Branch, the 2nd respondent herein, for financing the unit in accordance with the project report prepared by the Company. After considerable delay, the 2nd respondent-Canara Bank agreed to finance the 1st respondent-Company subject to the condition that the Company should find a consortium Bank who were willing to finance the project. Therefore, the Company approached the State Bank of India with the project report, but even there, there was considerable delay and in that circumstance approached the State Bank of Hyderabad. Ultimately, after holding consultations with the Canara Bank and being convinced about the technical feasibility and economic viability of the project for manufacturing the bulk drugs like Tetra Cycline Hydrochloride, Ethambutol Hydrochloride and drug intermediate 3, 4, 5 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commerce dated 3rd January 1983 in which it was stated that item Tetracycline in the canalised list also included Tetracycline Urea Complex and the same should be canalised through the State Trading Corporation. In that circumstances, in order to safeguard the interests of the Company and of the Banks, the Company filed a writ petition in the High Court of Judicature at Bombay. It was numbered as writ petition No. 1601/1983 and admitted on 8-7-1983. At the time of admission, the High Court of Bombay directed release of the material as an interim measure subject to the Company furnishing a Bank guarantee for possible levy of duty and penalty. In that context, it is asserted by the Company that the Circular challenged in the High Court of Judicature at Bombay, as subsequent events disclosed, had been issued at the instance of the Indian Drugs and Pharmaceuticals Limited (IDPL), the Government of India undertaking. This assertion of the Company is based on the unstarred question in the Rajyasabha bearing No. 1568(c) and (d) and the answer given thereto that is produced as Annexure-D to the petition. 9. In the meanwhile, the High Court of Judicature at Bombay, it is alleged, gave inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s guilty of not servicing the loans properly after sanctioning the same and not acting upon the letters of credit, as the Bank is duty bound to act and that there has been a breach of confidentiality as some officer or officers at the Bank in the credit department had leaked out the information to the rival manufacturers namely, I.D.P.L a Government of India concern which required the same chemical and therefore the Bank wanted to sell the materials as decided at the meeting of 8-5-1984. It is further alleged that the Bank is liable to pay damages to the Company on account of such breach and deliberate delay in furnishing the bank guarantee etc and therefore the Company is entitled to a counter-claim to the extent of its losses and as such there is no liability on the part of the Company to pay the sums now demanded by the Bank. It is further alleged that even the issuance of circular to the customs authorities was at the instance of the I.D.P.L who was a rival manufacturer in order to hurt the Company as the sequence of events and the answer given by the Minister on the floor of the House to which reference has been made earlier. In substance the thrust of the allegation is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain reasonable, if not essential, exceptions. That proposition was again explained by the English Courts in the case of Party Jones v. The Law Society (1968 A.E.R Vol. I at page 177). Jones' case related to maintenance of secrecy between the Solicitor and his clients. Lord Denning, M.R, observed as follows at page 178: "The second privilege arises out of the confidence subsisting between solicitor and client similar to the confidence which applies between doctor and patient, banker and customer, accountant and client, and the like." 15. Mr. Amin on the strength of these observations of the English Courts and the Banking Practice wants the Court to draw an inference that in the circumstances stated, namely, an officer of the Bank having leaked out the information relating to the opening of letters of credit caused I.D.P.L to write a report to the Ministry of Chemicals and Fertilisers and therefore the circular was issued by the said Ministry treating the chemical in question to be one which was not exempt from duty but one which was required to be imported through the channel of the State Trading Corporation, failing which, as a heavy chemical was liable to customs duty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay" occurring in Section 434 of the Act. It observed as follows: "It will not do for a creditor merely to put forward a claim. The company may not accept it or may dispute either its factum or validity. Where there is a genuine dispute of this description, it cannot be resolved by having recourse to winding up proceeding. But, just as it will not do for a creditor merely to put forward a claim, it will not do for the company do deny a claim recklessly. If the denial of the dispute is neither bona fide nor reasonable then the Court does not lose its power of granting relief by passing a winding up order. 22. Under certain circumstances, counter claim against the petitioning creditor may also amount to bona fide claim. 23. The Court is entitled to investigate the question as to whether a dispute has been manufactured in order to delay and defeat the realisation of the dues of the petitioning creditor and is merely a cloak for the inability of the company to pay its just debts." 24. Apparently, the learned Counsel for the Company wants to rely upon the reference by the learned Judges of the Calcutta High Court to counter-claim against the petitioning creditor amounting to a bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e welsh Brick Industries Ltd. (1946) 2 All. E.R 197, it was held that in spite of the fact that unconditional leave to defend had been granted in the King's Bench action, the winding up court could look into the matter and held that there was no substance in the defence. The alleged oral agreement was far too vague and uncertain to obtain recognition by a court of law and therefore he would reject the cross-claim and allow the appeal. 27. However, the majority view was whether the Judge had rightly exercised his discretion. There was at least a chance that the court would believe the story of the alleged oral agreement. Although the question of uncertainty had made him pause, the appeal was liable to be dismissed. Agreeing with Lord Hannan's views Lord Russell, L.J said that he would not say that there could not be a substantial matter on the cross-claim and agreed that the appeal should be dismissed. 28. In other words, in Portman Provincial Cinema's case the Court of appeal, by majority recognised that the defence of cross-claim or counter claim to be a matter that should be settled in the course of normal civil action. 29. In this context, it will not be out of pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering every aspect of the resistance put up by Hegde and Golay Ltd. passed the winding up order inter alia holding that the Company therein had not proved its substantial counter-claim against the Bank (See ILR 1987 KAR 2364). Therefore what we in India have come to accept falls in line more with the view of Lord Denning, M.R (as he then was) that there must be substance in the plea of cross-claim or counter-claim. Mr. Sundaraswamy relied upon the decision of the Supreme Court in the case of Union Of India v. Raman Iron Foundry . [(1974) 2 SCC 231 : A.I.R 1974 S.C 1265] to the effect that claims of damages are really not to be taken note of till they are quantified. In the case on hand process of quantification has commenced only during the hearing of the case. 31. So far the Court has been concerned with the plea of breach of confidentiality by the Bank giving rise to the cause of action for damages resulting in the counter-claim. There is not an iota of proof that there has been breach of confidentiality, placed before the Court. The Court is pressed to draw inferences from the nexus that exists between certain events which affected the company following the report by I.D.P.L a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice, bank guarantee was issued in a particular form and once that was issued, it was for the Company to persuade the customs authorities at Bombay to accept the guarantee given; and to accuse the bank now of neglect in servicing the loans and letters of credit was only an after thought which the Court should ignore. There appears to be some force in the contention of Mr. Sundaraswamy. Mr. Amin, learned Counsel for the Company, has not pointed out any rule or banking practice that makes it mandatory for the bank to issue bank guarantee in any form preferred by the one for whose benefit it is given. In this Court no attempt was made to show in what way the bank guarantee given was not acceptable to the customs authorities. One cannot but realise that banks must conform to a particular form of issuing bank guarantee in the general interest of banking and not cater to the whims of any one in particular would create unhealthy precedents and disrupt general banking practice apart from leading to possible litigation, Court therefore cannot accept the Company's contention that the bank was negligent in servicing the loans or in not issuing the bank guarantee in the form desired by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore cannot be held to be guilty of negligence in the matter of sale of consignments to I.D.P.L On the other hand, Annexure-E squarely establishes that the company was anxious to sell the consignments to I.D.P.L If it was not sold the company must assume the full responsibility in the absence of any other evidence. 38. The third aspect of negligence attributed to the Bank is founded on the fact that the consignments were hypothecated to the bank when letters of credit were opened and therefore the bank as hypothecated had an obligation in law to preserve the value of the consignments hypothecated to it, and the bank not having done, it cannot saddle the company with the losses. In support of the above Mr. Amin relied upon some authorities and they will be dealt with hereafter. 39. Attention of the Court was drawn to a passage in Paget's Law of Banking (Eight Edition) at page 566 which reads as follows: "This difficulty in the way of owner's being in a position to pledge goods in his own possession has been circumvented by the institution of letters of lien or letters of hypothecation. The distinction seems a narrow one, but it is clear that an owner, though he can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under law when as in the present case the efforts of the bank to protect the consignments as evidenced by the letters in 'Q' series met with resistance by the clearing agents and as correctly contended by Mr. Sundaraswamy the hypothecatee's right of lien is optional and not compulsory. 43. Another limb of the same contention was that the company had no obligation to discharge its liabilities under the letters of credit opened in respect of the consignments in question as legally the bank had the possession of the consignments as they were hypothecated to it and therefore it should sell the consignments and realise its security and cannot be permitted to retain the pledged goods as well as sue for the price thereof. Reliance in this behalf was placed on a few decided cases and the observations made therein. 44. In the case of Lallan Prasad v. Rahmat Ali [A.I.R 1967 S.C 1322] the Supreme Court ruled that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property. In the case of Bank of Bihar v. State of Bihar [(1972) 3 SCC 196 : A.I.R 1971 S.C 1210], our Supreme Court ruled that Pawnee's right to goods pawned or hypothecated against letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nutes of the meeting produced and relied upon by the company. There is much force in the submissions on behalf of the Bank. As already noticed in Annexure-E to the statement of objections it was the company which was prepared to sell the imported chemicals and made the offer but failed to give the offer in writing as the case was pending in the High Court. This Court is not now appraised what course of action the company pursued after the pending matter was disposed of by the High Court of Bombay in February 1986, when there was no impediment to give the offer in writing. 48. Apart from the conduct of the company which establishes that it claimed not only title to the imported chemicals but also right to exclusive possession of the same, the laws governing imports would definitely prohibit a non-consumer importer like the bank from exercising the right of lien. Banks business is Banking and not to carry on trading or manufacturing activities, notwithstanding the fact that bill of lading is issued generally in the name of the banks that open the letters of credit as part of import-export trade. 49. Therefore, the Court has no hesitation to reject the contention advanced for the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force in the 4th contention but then despite that, certain loans are due and payable, particularly the loans arising out of letters of credit opened and paid for the chemicals imported which have been the harbinger of evil fortune to the company. The company in its letter dated 28th July 1986 (Annexure-M to statement of objections) addressed to the bank and others apart from not agreeing to have the chemicals sold to I.D.P.L insisted upon rehabilitation assistance from the bank on the basis of the proposal made soon after the judgment of the High Court of Bombay, admitted its liability in following terms: "At this juncture, we wish to emphasise on the fact that at no point of time have we ever denied our liability to the Bank, and despite all efforts and convincing proposals, representative bank officials had preconceived decision of negation and surely distorted and damaged our reputation. We have only requested for a reasonable and considerable attitude and financial assistance towards the unit so that we would be able to rehabilitate the unit and pay back the dues to the bank from generated profits." 54. The above acknowledgment of liability in positive terms defeats the c ..... 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