Miraj State Bank Ltd. vs Poonawalla Promoters Pvt. Ltd. and Another

M.L. Pendse, J.—The Miraj State Bank Limited has preferred this appeal to challenge legality of judgment and decree dated March 31, 1986 passed by Third Joint Civil Judge, Senior Division, Pune in Special Civil Suit No. 346 of 1983, By the impugned decree, the trial Court decreed the suit against respondent No. 1 for a sum of Rs. 10,06,683.69 together with interest thereon at the rate of 17% per annum from the date of institution of the suit till the date of payment. The suit was dismissed against defendant Nos. 2 to 6. The facts giving rise to the passing of this decree are as follows :

The respondent No. 1 is a registered Private Limited Company and carries on business as Construction Contractor and Builder. On August 8, 1976, the respondent No. 1 sought secured credit facility upto a limit of Rs. 3 lakhs towards the working capital for construction of building known as Paramount Apartments. The respondent No. 1 was desirous of constructing ownership flats and shop premises on the .plot. The appellant Bank agreed to grant cash credit facility on condition that respondent No. 1 Company should execute equitable mortgage by way of deposit of title deeds of the land and the building to be constructed thereon. The cash credit facility was for a duration of 30 months commencing from the date of first disbursement. The first disbursement was on September 20, 1976 and the limit was to remain in force till the end of March 1979. The respondent No. 1 had agreed to repay the advance by sum of Rs. 10.000/ every month. The interest was agreed to be paid at the rate of 1.7% per annum, plus 1% service charges with quarterly rests. On September 20, 1979, the respondent No. 2 who was the Managing Director of respondent No. 1 deposited title deeds relating to the property with the Bank. The respondent Nos. 2 to 5 executed continuing deed of guarantee assuring due payment of all advances, liabilities, and bills discounted before or after the date of the execution of the deed of guarantee. A continuing security letter was also executed and the guarantors also executed a promissory note dated September 20, 1976 for a sum of Rs. 3 lakhs in favour of the Bank.

As mentioned hereinabove, the first disbursement was made on September 20, 1976 and the facility was to remain in operation till the end * of March 1979. Before the expiry of that date on January 7, 1979, the respondent No. 2 as Managing Director of respondent No. 1 acknowledged the dues found on December 30, 1978. The acknowledgement is produced on record as Exh. 104. Subsequently, two more acknowledgment deeds were signed and they are produced on record as Exh. 105 and Exh. 106 and dated January 10, 1980 and July 10, 1981 respectively. The respondent No. 1 failed to clear the account and by end of June 30, 1983 an amount of Rs. 10,06,683.69 was found due and payable by respondent No. 1, On January 20, 1983 notices (Exhs. 81 to 83 ) were served by the Bank on the principal debtors and guarantors demanding payment but having failed to realise any amount, the Bank instituted suit on June 23, 1983 for realisation of that amount of Rs. 10,06,683.69 along with interest at the rate of 18% per annum from the date of the suit till realisation. The Bank also sought decree on mortgaged property towards the satisfaction of the decretal dues.

The respondents Nos. 1, 2 and 4 filed written statement (Ex.35) and claimed that respondent No. 3 is not a Director. It was also claimed that the suit was barred by law of limitation. The respondent No. 3 filed written statement at. Ex. 33 and disputed the claim. The respondent No. 5 filed written statement (Ex. 34) pleading that respondent No. 5 as a surety stood discharged due to alteration of the terms of the agreement between the Bank and the principal debtor. The respondent No. 5 also claimed that the signature on the deed of guarantee was secured by misrepresentation. The respondent No. 6 is a Co-operative Housing Society of flat purchasers and shop purchasers from respondent No. 1. The respondent No. 6, by written statement (Ex.26), claimed that the property was never mortgaged with the Bank in any way, the mortgage is illegal and the mortgaged property cannot be sold in view of the provisions of Section 9 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963.

On these pleadings, the trial Judge framed requisite issue and the parties led evidence both oral and documentary. On behalf of the plaintiff Bank, Venkatesh Bidnur was examined, while on behalf of respondent No. 6, Antony Britto entered the witness-box. Bidnur, who was examined on behalf of the Bank, produced requisite documents duly signed by respondents No. 1 to 5. Antony Britto deposed that the flat purchasers had entered into an agreement with respondent No. l in year 1974 and they were not aware of the existence of the mortgage. The trial Judge came to the conclusion that the Bank had established the claim against respondent No. 1 for a sum of Rs. 10,06,683.69. The trial Judge further held that respondents No. 1 to 5 are jointly and severally liable to pay the said amount. The trial Judge then recorded a finding that the claim is barred by law of limitation against respondent Nos. 2 to 5. The trial Judge further held that though respondent No. 1 had executed equitable mortgage, the same cannot be enforced for want of registration. The trial Judge also expressed some apprehension about whether the respondent No. 1 was the owner of the plot which was mortgaged. The suit carne to be dismissed against respondent Nos. 2 to 5 on the ground that the acknowledgement of debt by respondent No. 1 is not binding on the guarantors. The result of the findings recorded was that decree was passed only against respondent No. 1 for a sum of Rs. 10,06,683.69 but with the rate of interest at 17% per annum instead of at 18% per annum as agreed. The trial judge did not assign any reasons for reducing the rate of interest agreed. The suit against respondent Nos. 2 to 6 was dismissed and the dismissal of the suit against respondent Nos. 2 to 6 and awarding interest only at the rate of 17% per annum against respondent No. 1 has given rise to the filing of this appeal.

Shri Abhyankar, learned Counsel appearing on behalf of the appellant Bank, submitted that the trial Judge is in error in dismissing the suit against respondent Nos. 2 to 5 after holding that respondent Nos. 2 to 5 had executed continuing deed of guarantee. The learned Counsel urged that the finding of the trial Judge that the suit claim is barred by limitation against respondent Nos. 2 to 5 because the acknowledgments signed by the principal debtors do not save the limitation against guarantor is entirely incorrect. We find considerable merit in the submission urged by the learned Counsel. As mentioned hereinabove, the cash credit facility was available for duration of 30 Months from the date of the disbursement of the first amount of respondent No. 1. The amount was disbursed for the first time on September 20, 1976 and the facility was to remain in force till end of March 1979. It is not in dispute that respondent No. 1 has signed the acknowledgement (Ex. 104, 105 and 106) on January 7,''1979, January 10, 1980 and July 10,1981. The trial Judge held that the acknowledgments were duly proved and, therefore, the claim against respondent No. 1 was within limitation. It is not in dispute that the first acknowledgment was also signed by the Managing Director of the Company. After recording these findings, the trial Judge proceeds to dismiss the suit against respondent Nos. 2 to 5 on the ground that the guarantors are not bound by the acknowledgments given by the principal debtors. The trial Judge relied upon the provisions of Section 20(2) of the Limitation Act to reach this finding. Sub-section (2)of Section 20 reads as under :

Nothing in the said sections renders one of several joint contractors, partners, executors or mortgagees chargeable by reasons only of a written acknowledgment signed by the agent of any other or others of them.

The trial Judge held that the guarantors are the joint contractors and, therefore, in accordance with Sub-section (2) of Section 20 of the Limitation Act, the acknowledgments signed by the principal debtors do not bind the guarantors. In our judgment, the conclusion recorded by the trial Judge is entirely faulty and cannot be sustained. It is incorrect to suggest that the guarantors are the joint contractors. The guarantors have not entered into contract for securing loan or debt from the Bank but contract of guarantee merely ensures that the principal debtors will make payment, and the guarantor would also be liable. Shri Apte, learned Counsel appearing on behalf of respondent No. 5 submitted that the gurantors should be treated as joint contractor after accepting liability of the guarantor in joint and several. The submission is devoid of any merit. The liability of the guarantors is co-extensive with the principle debtor but that does not make guarantors the joint contractors. Shri Apte referred to two decisions in support of his submission. The first decision is of Single Judge of Madras High Court reported in 1916(32) I c, Mad 603 (Kothandaraman Chetty and others v. Shanmugam Chetty and others). The decision has no application whatsoever to the contention urged. In the case before the Madras High Court, defendant Nos. 1 and 5 had executed promissory note and to bring the suit within limitation, the plaintiff relied upon part-payment made by defendant No. 1 alone. The suit was dismissed against respondent No. 5 on the ground that the part payment by one of the joint promisor cannot save limitation in respect of other promisor. We are unable to appreciate how this decision is of any assistance. ''The other decision relied upon is reported in Federal Bank of India (Punjab) Ltd. Vs. Som Dev Grover and Others, . There also the Punjab High Court clearly held that payment made by debtor cannot extend limitation against co-debtor in view of the provisions of Sub-section (2) of Section 21 of the Limitation Act, the case of a co-debtor be equated with the case of guarantor. The Punjab High Court observed :

Unless it appears otherwise in the terms of the surety contract, an acknowledgment by a debtor does not extend limitation against surety.

The learned Counsel for respondent No. 5 overlooks that there is a specific contract between the gurantorss and the appellant Bank that the liability of the guarantors will continue till the liability of the principal debtor is not settled and there is no refusal on the part of the principal debtor to make payment. The mere perusal of the deed of guarantee and the letter of continuing security addressed by respondent Nos. 2 to 5 to the appellant Bank clearly established that the guarantors had assured payment of Rs. 3 lakhs along with interest as continuing security and enforceable for all monies which may, at any time, become due from respondent No. 1. The Supreme Court examined the ambit of continuing guarantee bond in the decision reported in Mrs. Margaret Lalita Samuel Vs. The Indo Commercial Bank Ltd., The Supreme Court observed that in the case of a continuing guarantee there is an undertaking by the defendant to pay any amount that may be due by a Company to a Bank on the general balance of its account or any other account (so long as the account is a live account) in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation for a suit to enforce the bond could not be said to have commenced running, and the limitation would only run from the date of breach under Article 115. In view of the decision of the Supreme Court, the finding recorded by the trial Judge that the suit was barred against respondent Nos. 2 to 5 is entirely incorrect and cannot be sustained.

Shri Abhyankar then submitted that the trial Judge was in error in awarding interest at the rate of 17% per annum when the agreement between the Bank and respondent No. 1 clearly provided that payment of interest at the rate of 18% per annum. The submission is correct. The agreement prescribes for payment of interest at the rate of 17% per annum, plus 1% service charges per annum with quarterly rests and we are unable to appreciate why the trial Judge deprived the appellant Bank of interest of 1 % as agreed by respondent No. 1. That part of the decree is, therefore, required to be modified.

Shri Abhyankar then submitted that the trial Judge was in error in dismissing the suit against defendant No. 6 and also declining to pass decree on mortgage secured by the Bank as a security for realisation of the amount advanced. The learned Counsel submitted that respondent No. 1 purchased the plot by sale deed (Ex. 64) and thereafter executed equitable mortgage by deposit of title deeds in favour of the Bank to secure the loan advanced under secured cash credit facility. The trial Judge held that the execution of the equitable mortgage was established but expressed some doubt as to whether respondent No. 1 was absolute owner of the property and as such had right to mortgage the property. The observation overlooks that it was never challenged by respondent Nos. 2 to 6 that respondent No. 1 was the absolute owner and, in any event, whatever the right, title or interest the respondent No. 1 had in the property was mortgaged in favour of the Bank. The trial Judge then proceeded to hold that the equitable mortgage was also evidenced by agreement (Ex. 60) and as the said agreement was not registered, the Court cannot take notice of the mortgage, Shri Abhyankar complains and, in our judgment, with considerable merit that Ex. 60 is merely agreement to create a mortgage ''arid the factum of mortgage is demonstrated only by deposit of title deeds and letter written by the Managing Director to the Bank and which is produced at Ex. 62. The submission is correct and deserves acceptance. Exhibit 60 merely provides that the borrower will execute a deed of mortgage in favour of the plaintiff Bank. Clause 7 of the Agreement (Ex. 60) sets out that the borrower agrees to deposit with the Bank all deeds, writings and documents of title or its property at House No. 1981, Convent Street, Pune Cantonment, Pune with an intention to create an equitable mortgage. Thereafter letter was addressed by the Managing Director stating that the title deeds have already been deposited relating to the property owned by the company with intent to create equitable security for repayment of cash credit facility of Rs. 3 lakhs. The letter then sets out the title deeds which were deposited. We are unable to agree with the conclusion of the trial Judge that Exhibit 60 is the contract of mortgage and, therefore, it requires compulsory registration and in absence of registration was not receivable in evidence. Shri Dalvi, learned Counsel appearing on behalf of respondent No. 66, urged that Exhibit 60 should be read along with Exhibits 61 and 62. As mentioned hereinabove, Exhibit 60 is an agreement whereby respondent No. 1 agreed to execute an equitable mortgage. Exhibit 62 is the letter written by Managing Director recording the fact of deposit of title deeds with the Bank, and Exhibit 61 is the Memorandum prepared by the Bank for its own record and is not a document executed by respondent No. 1. It is therefore, obvious that the Memorandum prepared by the Bank has no relevance to examine whether letter (Ex. 62) is a contract of mortgage which required registration. The perusal of Ex. 62 makes it clear that the document does not require registration. The letter merely recites that the documents are already deposited with the intent to create security for repayment of cash credit facility of Rs. 3 lakhs. The document does not mention the crystalised liability or the rate of interest which was to be paid. Shri Dalvi referred to the decision recorded in Rachpal Mahraj Vs. Bhagwandas Daruka and Others, to urge that as the parties have choosen to reduce the contract in writing and there is a document as a sole evidence of its term, the deposit of title deeds and the document both form integral part of the transaction and are essential ingredients in the creation of the mortgage. The learned Counsel submitted that in such cases registration is necessary. Shri Abhyankar submitted that the contention is not correct and relied upon the decision of the Supreme Court reported in Deb Dutta Seal Vs. Ramanlal Phumra and Others, . Mr. Justice Sikri, (as he then was) speaking on behalf of the majority observed that if a document on the face of it and properly interpreted in the light of the circumstances does not disclose the creation of mortgage, or in the words of the Privy Council in AIR 1939 167 (Privy Council) even the document is not an operative instrument and is merely evidential, it does not require registration. The Supreme Court further observed that the document must contain all the essentials of the transaction and the essentials are debt, date of repayment, sum secured, nature of mortgage and subject matter of mortgage. Applying the test laid down by the supreme Court, we find that the document (Ex. 62) does not contain the requisite essentials so as to demand that the document requires registration. In our judgment, the finding of the trial Court that the document was inadmissible for want of registration and consequently equitable mortgage was not established cannot be sustained.

Shri Dalvi then submitted that even if the existence of the mortgage is established, still the flat purchasers and the shop purchasers are not liable to make payment, nor the property is liable to be sold in view of the provisions of Section 9 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963. The learned Counsel submitted that the evidence of Antony Britto indicates that the flats and the shops were booked in 1974, i.e. long prior to respondent No. 1 secured cash credit facility from the appellant Bank on September 20, 1976. Shri Abhyanker, on the other hand, submitted that some of the flat purchasers and the shop owners have entered into agreements with respondent No. 1 after September 20,1976 and referred to documents at Exhibits 121 and 126. It is undoubtedly true that some agreements were executed by respondent No. 1 after year 1976. Now Section 9 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 reads as follows :

No promoter shall, after he executes an agreement to sell any flat, mortgage or create a charge on the flat or the land, without the previous consent of the persons who take or agree to take the flats, and if any such mortgage or charge is made or created without such previous consent after the agreement referred to in Section 4 is registered, it shall not affect the right and interest of such persons.

It is not disputed that save and except two or three agreements, the rest of the agreements are duly registered in accordance with Section 4 of the Act. Section 9 clearly provides that in case any mortgage is created without previous consent of the persons who had agreed to purchase the flats, then such mortgage shall not affect the rights and interests of such persons. It is, therefore, obvious that in cases where the agreements were executed prior to September 20, 1976, the purchasers of the fiats or the shops under those agreements are not bound by the mortgage secured by the Bank, The Bank is entitled to enforce the mortgage in respect of any other portion of the property and a right to enforce the mortgage will be subject to the provisions of Section 9 of the Act. The contention of Shri Dalvi that decree cannot be passed against respondent No. 6, therefore, cannot be accepted but the decree against respondent No. 6 must be subject to the provisions of Section 9 of the Act. It is, therefore, necessary to pass a preliminary decree of mortgage in favour of the Bank and against all the respondents.

Accordingly, appeal is allowed and decree passed by the trial Judge is set aside and substituted by the following decree :

The defendant Nos. 1 to 5 shall pay a sum of Rs. 10.06,683.60 to the plaintiff Bank along with interest at the rate of 18% per annum from the date of the institution of the suit till realisation. The defendants Nos. l to 5 shall pay the costs of the suit to the plaintiff Bank.

There shall be a preliminary decree in respect of mortgage executed by respondent No. 1 in respect of property situated at House No. 1981, Convent Road, Pune Cantonment, Pune and the decree can be enforced against all the defendants but against defendant No. 6 subject to the provisions of Section 9 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, management and Transfer) Act, 1963.

The defendant No. 6 shall bear its own costs.