National Small Industries Corporation Ltd. v. M/s Equipment Conductors & Cables Ltd.

6. After the lapse of three years of settlement and passing of Consent Decree, the court vide Order dated 27th February, 2015 proceeded ex-parte against defendant No.4 and vide Order dated 07th May, 2015 framed issues ex-parte against him and ordered the trial to commence against defendant No.4. No Notice was served upon defendant No.4 before framing of issues. On becoming aware of the proceedings, he filed an application under Order IX Rule 7 CPC for setting aside the ex-parte Order dated 27th February, 2015 and also prayed for deletion of his name from the array of parties under Order I Rule 10 CPC on the ground that no cause of action was disclosed against him. This court vide Order dated 29th March, 2012, set aside the ex-parte Order dated 27th February, 2015 and observed that the plaintiff cannot seek recovery of the amount twice over from different defendants, even if it succeeds in establishing its claim. Relying on Clause 6(h) of the Agreement, the Court further held that rights of the plaintiff to claim the partial amount from other defendants cannot be denied merely because the plaintiff had entered into the settlement with defendant no.1 to

3.

7. The defendant No.4 has stated that since the suit has been settled by the plaintiff with defendant No.1 to 3, nothing survives against defendant No.4 and neither should he have been proceeded ex-parte nor issues framed against him. The Order was challenged by him vide FAO (OS)140/2016, which was allowed vide Order dated 17th April, 2017 when the defendant No.4 was given a liberty to approach the Single Judge for necessary findings in terms of Clause 6(h) of the Agreement which provided for continuation of suit against defendant No.4 to 8, till defendant No.1 to 3 did not pay the balance amount. It was also opined that compromise settlement between plaintiff and defendant No.1 to 3 is not binding on defendant 4 and 5 to 8.

8. Defendant No.4 has asserted that Clause 6(h) is not part of the Order dated 04th September, 2012 pursuant to which the Decree was drawn. Merely because of Clause 6(h), the plaintiff cannot be held entitled to seek recovery from defendant No.4.

9. The defendant No.4 has asserted that an important issue arose before the Division Bench that the present suit is not for foreclosure of mortgage under Order XXXIV CPC and there is no cause of action disclosed against defendant No.4. The Division Bench had opined that this aspect has not been gone into by the learned Single Judge and leave was granted to defendant No.4 to move an appropriate application. The important issues which thus arise for consideration are:

(i) Whether clause 6(h) of the settlement for continuation of suit against non parties to the settlement can be held to be binding on applicant/ defendant No.4.

(ii) Whether in absence of prayer for foreclosure of mortgage under Order XXXIV of CPC, no cause of action is disclosed against applicant/defendant No.4.

10. It is submitted that the issues framed vide Order dated 07th May, 2015 against defendant No.4 are as under: “(i) Whether def. no 4 created equitable mortgage of residential land bearing No A 30 /9, DLF, Qutab enclave, phase 1, Gurgaon Haryana ?

(ii) Whether defendant no.4 is liable to pay any amount to plaintiff ?”

11. It is claimed that Issue No.1 cannot be framed as the present suit is not under Order XXXIV CPC. Moreover, by entering into the Settlement, the plaintiff has forfeited his right to recover the amount from defendant No.4. A prayer is, therefore, made that the issues No.1 and 2 as framed against defendant No.4 be struck of and the compromise dated 23rd August, 2012 be held not binding upon defendant No.4. Also, additional issue may be framed as under: “(a) Whether Clause 6(h) of the settlement for continuation of the suit against non parties to the settlement can be held to be binding on defendant No.4? (b) Whether there is no cause of action surviving against defendant No.4 as the suit is not covered by Section 34 of CPC?”

12. The plaintiff in its reply took a preliminary objection that the FAO (OS) 140/2016 was dismissed by the Division Bench. It is clear that neither Single Judge nor the Division Bench interfered in the Order dated 07th May, 2015 vide which the issues were framed against defendant No.4. Hence, the prayer of defendant No.4 that suit is not maintainable against him, is without any merit. The defendant No.4 is trying to take advantage of the observations made by the Division Bench leaving it open for defendant No.4 to move appropriate application, if so advised. However, the defendant No.4 was not permitted to move the present application for framing of additional issues. The plea of defendant no.4 that suit does not disclose any cause of action as no prayers for foreclosure of mortgage under Order XXXIV CPC was made, has already been taken care of as the issue on this aspect has already been framed. It is asserted that the application is without merit and is liable to be dismissed.

13. Submissions heard.

14. In order to determine the issues which need to be framed/ re-framed in the present suit, it would be relevant to give in brief, the factual matrix as stated in the plaint.

15. The plaintiff is a Government of India Enterprise engaged in development and growth of small scale units throughout the country. Defendant No.1 which is a Company engaged in manufacturing of Aluminium Cables and Conductors for supply to the various State Electricity Boards and others, availed assistance from the plaintiff under Raw Material Assistance Scheme, whereby plaintiff agreed to provide financial assistance to the defendant No.1 to procure supply orders from various Electricity Boards. As per the procedure, formal application dated 20th September, 1994 was made by defendant No.1 for grant of financial assistance of Rs. 100 lakhs under Raw Material Assistance Scheme of the plaintiff against security of Bank Guarantee and Letter of Credit. Agreement dated 20th September, 1994 was duly executed between the plaintiff and defendant No.1. Initially a limit of Rs.10 lakhs was sanctioned by the plaintiff against the security of Letter of Credit and Bank Guarantee. Thereafter, this limit was extended from time to time upon furnishing additional securities.

16. In the mean while, defendant No.1 informed the plaintiff vide letter dated 20th November, 1995 that it had procured an Order for supply of 6400 Kms. 30 sq. mm AAA Conductors valuing approximately Rs. 850 lakhs from Andhra Pradesh State Electricity Board/defendant No.5 and sought cash assistance to procure the raw material. It acknowledged that a sum of Rs.69 lakhs (principal) was due to the plaintiff and also agreed to bear the interest and service charges as per policy guidelines. The proposal was accepted by the plaintiff in addition to the assistance already given to defendant No.1. Similar Raw Material Assistance was extended to the defendant No.1 by plaintiff against the security of its supply bill received by defendant No.1 from U.P. State Electricity Board/defendant No.6, Kerala State Electricity Board/defendant No.7 and Himachal Pradesh State Electricity Board/defendant No.8 In terms of the Agreement, defendant No.1 executed a Power of Attorney respectively in favour of the plaintiff authorizing the plaintiff to receive the payments due to defendant No.1 directly from defendant No.5 to 8.

17. It is stated that the plaintiff had granted financial assistance to defendant No.1 against security of Bank Guarantee and Letter of Credit. As and when the limit of defendant No.1 was increased, additional securities were obtained for and on behalf of defendant No.1. The details of the securities are as under: “(i) Equitable mortgage of Residential land bearing A- 30/9, DLF, Qutab Enclave, Phase-I, Gurgaon, Haryana in the name of M/s Alok Sharma & Sons (HUF) /Defendant No.3 and M/s Anil Sharma and Sons (HUF) / Defendant No.4 since August 1996. (Valued approximately at Rs. 1,17,42,000/- by Defendant No.1).

(ii) Equitable mortgage of Factory land at 14th

Mile stone, Mathura Road, DLF Area, Faridabad Haryana belonging to Sh. Alok Sharma / Defendant No.2 since June 1999 (valued approximately at Rs. 3,08,72,000/by Defendant No.1).

(iii) Fixed deposits amounting to Rs. 48,60,732/-

(iv) Shares originally valued at Rs. 110 lacs (present market value NIL as said shares are not being quoted presently)

(v) Bank Guarantee amounting to Rs. 85 lacs issued by Dena Bank, Nehru Place, New Delhi (the said Bank Guarantee has already been encashed by the Plaintiff as this Hon'ble Court vide its order dated 4.5.2000 dismissed the application of the Defendant No.1 restraining the Plaintiff from encashing the said Bank Guarantee being lA No. 2859/2000 in Suit No.114/2000).”

18. Aside from defendant no.1, defendant No.2 who is the Managing Director of defendant No.1 Company, had also executed Personal Guarantee Deeds dated 15th January, 1998 and 29th June, 1999 whereby he undertook and guaranteed to pay the dues of the plaintiff in case of default by defendant No.1.

19. For the year ending 31st March, 1998 the defendant No.1 vide its letter dated 12th February, 1999 acknowledged that as per its Books of Account a sum of Rs.3,00,38,786.01/- was due and payable, though as per the Books of Accounts of the plaintiff, the sum due and payable was Rs.3,12,85,846.53/-. The plaintiff had asserted that even though some payments were received from defendant No.1/ State Electricity Boards, but a large amount of money still remain due and payable for and on behalf of defendant No.1. The plaintiff further asserted that it was entitled to receive payments due from defendant No.5 to 8, the State Electricity Boards to defendant No.1 directly, but it came to know that not only the various irrevocable Power of Attorneys executed in favour of the plaintiff were cancelled, but also the payments were being taken by defendant No.1 instead of plaintiff.

20. The amounts claimed to be recoverable from defendant No.5 to 8 are as under: STATE ELECTRICITY BOARD AMOUNT PAYABLE

(i) Transmission Corporation of

(ii) Uttar Pradesh State Electricity

(iii) Kerela State Electricity Board/

(iv) Himachal Pradesh Electricity

21. The plaintiff thus, claimed that defendant No.1 is liable to pay Rs.9,84,07,792.39/- as on 30th September, 2000 along with interest @ 17.5% per annum and additional interest @ 3% per annum on the overdue amounts, processing and administrative charges as amended from time to time and further interest on the suit amount @ 20.5% per annum which was the agreed rate of rent.

22. During the pendency of the suit, defendant No.1 submitted its proposal for compromise vide letter dated 11th October, 2010 for an amount of Rs.8,55,00,000/-. The compromise proposal was sanctioned vide letter No.NSIC/DMRB/NOIDA/LAW/20/Vol.III/2010-11 dated 19th May, 2011 by the plaintiff Company. The defendant No.1 accepted the terms of settlement vide its letter dated 14th June, 2011. It was agreed that defendant No.1 shall deposit the entire sale deeds of property at Faridabad, worth Rs. 6.[5] Crores with the plaintiff. However, because of various legal hurdles the Faridabad property could fetch only Rs.5.55 Crores.

23. The defendant No.1 vide I.A No.10304/2012 sought modification of the Compromise sanction vide letter dated 19th May, 2011. Thereafter, a joint application was filed on behalf of the plaintiff and defendant No.1 to 3 under Order XXII Rule 3 read with Section 151 CPC stating that the parties had arrived at a compromise whereby the defendant No.1 agreed to pay a sum of Rs.8.55 Crore along with interest @ 11.25% per annum on reducing balance w.e.f 19th May, 2011 i.e. the date of acceptance of proposal by the plaintiff. The entire settlement amount along with interest was undertaken to be paid before 31st December, 2012. Out of the said settled amount, the plaintiff had received Rs.6.50 Crore and the balance amount of Rs.2.05 Crores along with interest @ 11.25% was agreed to be paid on or before 31st December, 2012. Defendant No.1 and 2 were permitted to sell the mortgaged property at 14 Milestone, Mathura Road, DLF Area, Faridabad and the original title deeds of the property were accordingly released to defendant No.1. The post dated cheques were accordingly handed over by defendant No.1 to the plaintiff. Defendant No.1 to 3 agreed that in the event of non-payment of full settlement amount along with interest, the entire suit amount along with interest and cost as claimed in the suit adjustments of the payment made by the defendant shall become due and payable from defendant No.1 to 3. Defendant No.3 agreed that in case of default in the payment of settlement amount, as agreed, he shall have no objection to the plaintiff disposing of the property bearing No.A-30/9, DLF, Qutub Enclave, Phase-I, Gurgaon, which was already mortgaged in favour of the plaintiff to realize its dues.

24. Clause (h) of the Agreement which is relevant, reads as under: “that present suit shall continue against defendant No.4 to 8 till the time the defendants No.1 to 3 pay the entire settlement amount to the plaintiff along with the interest.”

25. The joint application for a compromise decree was accepted vide Order dated 04th September, 2012 and the decree sheet in terms of the settlement between the plaintiff and defendant No.1 to 3 was directed to be drawn. Thereafter, the matter was listed on various dates for the balance payment by defendant No.1. However, since the payment was not forthcoming, the matter was continued against defendant No.4 to 8. None appeared on behalf of defendant No.4 and he was proceeded ex-pare on 21st February, 2015. Ex-parte issues were framed on 07th May, 2015.

26. Subsequently, defendant No.4 moved an application for setting aside ex-parte Order against him wherein a plea had been taken that once the matter had been settled with defendant No.1 to 3 who had agreed to pay the entire settlement amount along with interest, the suit could not be continued against defendant No.4. This application was dismissed vide Order dated 29th March, 2016. While considering this application, it was observed that while the plaintiff cannot seek recovery of the suit amount twice or multiple times from different defendants even if it succeeds in establishing its claim. The liability of defendant No.1 to 4 was joint and several to pay the suit amount. The settlement specifically provided that in case the entire amount is recoverable from defendant No.1 to 3 along with interest but it also provided that the suit shall continue against the defendants who are not part to the settlement. Accordingly, the prayer of the defendant No.4 for recall of the Order dated 07th May, 2015 vide which the ex-parte issues were framed against defendant No.4 could not be recalled.

27. FAO(OS) 140/2016 was filed against the said Order. However, the Division Bench in its Order dated 17th April, 2017 made a reference to paragraph 6(h) of the Compromise Agreement wherein it was stated that the suit would continue against the present defendant No.4 and defendant No.5 to 8 till the time defendant No.1 to 3 pay the entire settlement amount along with interest and gave liberty to defendant No.4 to agitate in respect of relief of foreclosure of mortgage under Order XXXIV of CPC before this Court. Accordingly the present application has been filed.

28. The first aspect which emerges from the averments made in the plaint itself are that the plaintiff had claimed recovery of Rs. 9,84,07,792.39 from defendant No.1, the principal borrower. Defendant No.2 was the Managing Director of defendant No.1 and had stood surety in his personal capacity for the loans which had been taken by defendant No.1 Company. Defendant No.3 and 4 had stood surety by submitting collaterals, i.e. the papers of their property bearing Residential land bearing A-30/9, DLF, Qutab Enclave, Phase-I, Gurgaon.

29. According to the plaintiff itself, defendant No.1 had entered into independent contracts with defendant No.5 to 8, the various Electricity Boards and it was agreed that the amounts to be paid by each Electricity Board respectively to the defendant No.1 shall be received directly by plaintiff by virtue of Special Power of Attorney executed by defendant No.1 in its favour. However, it is the case of the plaintiff itself that the Power of Attorney were revoked by defendant No.1 and the payments were received directly by defendant No.1 instead of they being paid to the plaintiff.

30. On a specific query, the learned Counsel on behalf of defendant No.1 had clarified that the amounts which are claimed to be due from defendant No.5 to 8 are included in the sum of Rs. 9,84,07,792.39/-, which is claimed from defendant No.1. Therefore, the amounts which are due from defendant No.5 to 8 have already been included in the suit amount and it was fairly conceded that the amounts claimed from defendant No.5 to 8 would not be due and payable if the said amounts are paid by defendant No.1 to 4. It is evident that the amounts claimed from defendant No.5 to 8 are being claimed twice; once from defendant No.1 and the second time from defendant No.5 to 8. Once, the claim amounts are included in the amounts due and payable by defendant No.1, there cannot be any independent liability against defendant No.5 to 8.

31. In this context it may also be observed that plaintiff itself has stated that the privity of contract was between defendant No.1 and defendant No.5 to 8 respectively and the plaintiff only had to receive the money which it had given to defendant No.1 by way of loan to secure its contracts with defendant No.5 to 8. There is no privity of contract as per the averments of the plaintiff between it and defendant No.5 to 8 and the amounts due and payable, if any, by defendant No.5 to 8 were in fact to defendant No.1, who in turn was liable to make the payments to the plaintiff. In so far as defendant No.5 to 8 are concerned, there is no privity of contract and no independent cause of action disclosed against defendant No.5 to 8.

32. The issue which is before this Court is of reframing of issues against defendant No.4 and also to consider if issue in regard to foreclosure of mortgage can be framed.

33. In the present case, the plaintiff has entered into a settlement with defendant No.1, 2 and 3. Defendant No.1 is the principal borrower while defendant No.2 who was the Managing Director of defendant No.1, had stood as personal guarantor. Defendant No.3 and 4 submitted collateral security for and on behalf of defendant No.1.

34. The defendant No.2 who is the Managing Director of defendant No.1, had submitted original title deed of property bearing No.A-30/9, DLF, Qutub Enclave, Gurgaon along with the Valuation Report as Guarantor for the loans taken by defendant No.1 vide letter dated 12th August, 1996. Again defendant No.2 vide letter dated 15th January, 1998 deposited the title deeds of the properties bearing No. Part Khasra Nos.5/16/1, 6/20 and 6/19/8, village Atmadpur, Mathura Road, Faridabad with the plaintiff along with the Valuation Report with an intention to create equitable mortgage in favour of the plaintiff on account of RMA/Bill facility availed by defendant No.1. Similarly, along with this letter, a Bond of Guarantee was executed by defendant No.2. Defendant No.2 Alok Sharma gave his personal guarantee vide Bond dated 29th June, 1999.

35. In so far as defendant No.3 and 4 are concerned, the plaintiff has stated in para 2 of the plaint that defendant nos. 3 and 4 had submitted collateral security for and on behalf of the defendant no.1. The plaintiff in paragraph 19 has further stated that he is presently having the following security, i.e. equitable mortgage of residential land bearing A-30/9, DLF, Qutab Enclave, Phase-I, Gurgaon, Haryana which is in the name of M/s Alok Sharma & Sons (HUF) /Defendant No.3 and M/s Anil Sharma and Sons (HUF) / Defendant No.4 since August 1996 which is valued at approximately Rs.1,17,42,000/- by Defendant No.1.

36. The liabilities of the guarantor are provided in Chapter 8 of the Indian Contract Act, 1872 from Section 124 to 147. Section 127 reads as under:

47. In the light of the facts as asserted in the plaint, the issue no.1 is deleted and the issues as framed on 07th May, 2015 are reframed as under:

(i) Whether defendant No.4 is liable to pay the due amount having stood as a guarantor for the loan taken by defendant No.1? If yes, then what amount? OPP

(ii) Whether Clause 6(h) of the Agreement dated

(iii) Whether there is no cause of action against defendant No.4? OPD

(iv) Whether there is any privity of contract between the plaintiff and defendants No.5 to 8? OPP

(v) Whether defendants No.5 to 8 are liable to pay any amount to the plaintiff? If so, then what amount? OPP

(vi) Relief.

48. In view of the above discussion, the application is allowed and the Issues are reframed as stated above.

49. The application is accordingly disposed of.

50. List before the Joint Registrar on 10.01.2023 for recording of evidence.

JUDGE DECEMBER 08, 2022