JUDGMENT
Pratibha Upasani, J. (Chairperson)
1. This appeal is filed by the appellants/ original applicants Central Bank of India being aggrieved by the judgment and order dated 31.7.2003 passed by the learned Presiding Officer of the Debts Recovery Tribunal-I, Mumbai in Original Application No. 2766 of 1999. By the impugned judgment and order, the learned Presiding Officer allowed the original application in favour of the Bank against the defendant Nos. 1 to 3 with costs and ordered them to jointly and severally pay to the Bank a sum of Rs. 1,67,27,825.65 with future interest at the rate of 30.25% per annum with quarterly rests from the date of the application till realization of the amount. He also gave certain consequential declarations. The learned Presiding Officer, however, dismissed the original application as against the defendant Nos. 4,6,7 and 8. It is this portion of the order, which is hurting the applicant Bank and hence, this appeal to that limited extent.
2. Few facts, which are required to be stated are as follows:
The defendant No. 1 Kirti N, Sanjanwala and defendant No. 2 Asha Sanjanwala had availed a credit facility from the applicant Bank. The defendant Nos. 3 to 7 were stated to be the guarantors. The defendant No. 8 is State Investment Corporation having first charge on the fixed assets of the defendant No. 6 Gravure Graphic System Pvt. Ltd. It is the case of the Bank that in or about May, 1988 the applicant Bank had granted an overdraft facility with a limit of Rs. 30,000/- to the defendant Nos. 1 and 2 in consideration thereof they executed a demand promissory note, letter of continuity security, letter of interest, letter of disbursement and a letter of lien. Under the said facilities, the defendant Nos. 1 and 2 utilized a sum of Rs. 265 lacs by 20.5.1991. They also executed demand promissory note for Rs. 265 lacs and executed similar security documents. On the same day, the defendant No. 1 on the letterhead of the defendant No. 4 Navneet Electronics Pvt. Ltd., wrote to the applicant Bank a letter sending a list of plant and machinery to be hypothecated to the applicant Bank as security. They also executed deed of guarantee.
The defendant Nos. 4 and 5, are the Private Limited Companies. In consideration of the applicants having granted the facilities to the defendant Nos. 1 and 2 and to further secure the amounts due and payable by the defendant Nos. 1 and 2 to the applicants, the defendant Nos. 4 and 5 were said to have agreed to create mortgage of their movable and immovable properties. On 20.5.1991, the defendant No. 4 passed a resolution that all its assets, movable and immovable be equitably mortgaged and charged to the applicants as security. On the same day, the defendant No. 5 also passed a similar resolution. The defendant Nos. 4 and 5 also agreed to create charge on the assets of the defendant Nos. 4 and 5 described in Exhibits J and L. The defendant No. 6 which is also a Private Ltd. Company agreed to create second charge on the fixed assets belonging to it, subject to the charge of the defendant No. 8. When the applicant Bank called upon the defendant No. 8 to give consent for creating second charge, the defendant No. 8 refused to do so. The applicant Bank has alleged that the defendant No. 8 cannot withhold the consent and its act in refusing to give consent was unreasonable.
It is further the case of the applicant Bank that under a deed of hypothecation dated 18.7.1991, the defendant No. 4 company hypothecated in favour of the applicant Bank, all movable properties described in Exhibit Q of the defendant No. 4. The defendant Nos. 1 and 2 also executed a deed of guarantee. The defendant No. 4 executed a deed of guarantee on 18.7.1991. The defendant No. 6 executed a deed of guarantee on 18.7.1991 and on the same day, the defendant No. 5 executed a deed of hypothecation in respect of the property described in Exhibit U and also the defendant No. 6 executed deed of hypothecation in respect of its movable assets described in Exhibit V and also executed a deed of guarantee. On 18.7.1991, the defendant No. 7 executed a deed of guarantee in favour of the applicants.
3. The Bank’s further case is that on 12.8.1991, the defendant Nos. 1,2 and 4 executed an agreement of hypothecation-cum-guarantee whereunder the defendant No. 4 company irrevocably agreed to make payment on demand and without demur of the sum mentioned in the same and hypothecated all movable properties including plant and machinery, spare parts and equipments described in Exhibit Z.
The defendant Nos. 5,1 and 2 as well as 6,1 and 2 also executed similar agreement of hypothecation-cum-guarantee. The defendant Nos. 1 and 2 had created lien on National Saving Certificates (NSCs) and MMDCs.
The defendant Nos. 1 and 2 failed and neglected to repay the amount. The amounts received on maturity of pledged MMDCs and NSCs were appropriated. On 5.2.1992, a notice was issued by the Bank to the defendant Nos. 1 to 7 calling upon them to make good the outstanding amount, however, there was no response. Hence, the Bank was constrained to file the original application for recovery of a sum of Rs. 1,67,27,825.65, which according to the Bank was due to them. Thus, the original application came to be filed for recovering the said amount and for enforcement of the securities. In view of the agreement executed by the defendant Nos. 4 and 5 to create mortgage, an order for specific performance of the said agreements and creation of mortgage also was sought in the said original application. It was also prayed that the defendant No. 8 be ordered to create second charge on the fixed assets of the defendant No. 6.
4. Nobody appeared in the DRT-II, Mumbai to contest the original application except the defendant Nos. 4 Navneet Electronics Pvt. Ltd. and defendant No. 8 Gujarat Industrial Investment Corpn. Ltd. The defendant No. 4 filed its written statement and stated that at no point of time, the defendant No. 4 had agreed to create mortgage on any of its properties nor it had guaranteed the repayment of the amounts due against the defendant Nos. 1 and 2. It was stated that the resolution dated 20.5.1991 produced by the applicant Bank was never adopted by the Board of Directors of the defendant No. 4 and no such resolution was ever passed by the defendant No. 4. It was alleged that the said resolution was fabricated. It was also averred that the manner in which the applicant Bank had relied on the said resolution of creating charge on the assets of the defendant No. 4 company for repayment of the personal debts of the defendant Nos. 1 and 2 clearly showed that the applicant Bank had acted against elementary principles of Banking. It was contended that as per common practice, the personal guarantees of the directors are ordinarily secured for the repayment of the debts owed by the company, but the assets of the company are never secured for repayment of personal debts of the Directors. It was pointed out that the Director of the company is both; trustee and an agent of the company and cannot create any security on any of the properties of the company for repayment of his personal debts. It was contended that the applicant Bank had been grossly negligent and/or naive in dealing with the defendant Nos. 1 and 2 and/or had acted in collusion with them in order to foist their liability on the defendant No. 4, and that the applicant Bank ought to have taken reasonable care before acting on the alleged resolution dated 20.5.1991, which was ex facie invalid.
5. It was also contended that after having advanced large monies to the defendant Nos. 1 and 2, the applicant Bank was desperately seeking to secure the said advances on the basis of fictitious charge. It was further stated that none of the representatives of the applicant Bank had ever visited the factory of the defendant No. 4 with a view to ascertain as to what was the value of the movable and immovable properties belonging to defendant No. 4. It was alleged that after having given huge credit facilities to the defendant Nos. 1 and 2 without proper cover and security, the applicant Bank was looking out for ways and means to secure their claim against them.
6. It was further averred by the defendant No. 4 that one Gala family was holding 100% equity shares of the defendant No. 4 company. It was further averred that the defendant Nos. 1 and 3 were appointed as additional contractors for a very short period from 3.5.1991 to 26.9.1991 who were strangers to the defendant No. 4 and had no authority whatsoever to create security for the alleged advance made by the applicants to the defendant No. 1 prior to 20.5.1991. It was reiterated that the said resolution and alleged agreement were not genuine and would not bind the defendant No. 4 company. It was further stated that the defendant No. 4 did not own any immovable property and the property which was allegedly agreed to be mortgaged was known as Navneet Bhavan and it was owned by one Navneet Prakash Kendre, a partnership firm and the defendant No. 4 had no right, title and interest of any kind in the said property. It was stated that in view of this, there was no question of the defendant No. 4 agreeing to create mortgage. So far as the movable properties were concerned, it was contended that they were being utilized for business of the defendant No. 4 and there was no reason for the defendant No. 4 to agree to create equitable mortgage in respect of the movable properties.
It was also denied by the defendant No. 4 that it had authorized the defendant Nos. 1 and 3 to sign and execute necessary documents in respect of the charge. It was stated that on 12.9.1991, the defendant No. 4 had received a letter from the Assistant Registrar of Companies informing that the Form Nos. 8 and 13 were filed in respect of their properties with him in respect of a charge for Rs. 2,16,00,000/- created by the defendant No. 4 company on 12.8.1991. It was further stated that under a letter dated 12.9.1991, addressed to the Assistant Registrar of Companies, the defendant No. 4 had informed that it had not created any charge of any of its assets and properties and the question of filing Form Nos. 8 and 13 did not arise at all. It was also informed that the defendant No. 4 had never taken a loan of Rs. 2,16,00,000/- or any other loan from the applicant Bank nor it had any account with the applicant Bank and had asked the Registrar of Companies to refrain from registering the alleged charge. After filing of the present proceedings, the defendant No. 4 came to know that the charge was registered and it had already lodged a complaint against such wrongful registration of a charge which was not created by the defendant No. 4 and it had also filed a suit bearing No. 2413/1994 for a declaration that the registration of the charge on the assets and properties of the defendant No. 4 company for securing repayment of the personal debts of the defendant Nos. 1 and 2 was illegal, void and was not binding upon the defendant No. 4.
Citing all these facts, it was stated that the defendant No. 4 was not in any way liable to repay the personal debts of the defendant Nos. 1 and 2 nor its property was at any time given as and by way of security for repayment of those amounts. It was stated that the defendant No. 4 had not agreed to create the mortgage and, therefore, the suit as against the defendant No. 4 deserved to be dismissed.
7. Navneet Prakash Kendre had intervened in the matter and had given an application for vacating the order of injunction passed by the Hon’ble High Court in Notice of Motion No. 632/1992. It was stated that the said property was allegedly agreed to be mortgaged by the defendant No. 4. However, the defendant No. 4 had no concern with the said property. It was stated that the property in question was purchased by the intervener from one Minoo Framroz Mehta under the deed of conveyance dated 14.6.1978 which was duly registered with the Sub-Registrar, Mumbai under No. BOM/1326-1978 on 1.12.1978. It was stated that the intervener Navneet Prakash Kendre was the exclusive owner of the said property and the order of injunction passed against the defendant No. 4 restraining it from selling or disposing of the said property was, therefore, bad in law and the said injunction order deserved to be vacated.
8. The defendant No. 8 filed its written statement and stated that there was no cause of action against the defendant No. 8 and the suit against it was misconceived and was not tenable. It was stated that the defendant No. 8 was not concerned with the applicant Bank’s transactions or business. It was stated that it had never consented to second charge being created in respect of the assets of the defendant No. 6 and that it was not bound or liable to give consent as prayed by the applicant Bank and that it was joined to the application without there being any privity of contract between the defendant No. 8 and the applicant Bank. It was prayed that the application, therefore, be dismissed.
9. The learned Presiding Officer after hearing both the sides and after going through the entire material placed before him, came to the conclusion that the defendant No. 4 was not bound by the guarantee purportedly executed by it. He further concluded that the applicant Bank had no charge on immovable property of which intervener Navneet Prakash Kendre claimed to be the owner. The learned Presiding Officer further concluded that the defendant No, 8 was not bound to give consent for creation of second charge in favour of the applicant Bank on the property of the defendant No. 6. Holding this, the learned Presiding Officer allowed the application only against the defendant Nos. 1 to 3 and dismissed the same as against the defendant Nos. 4, 6, 7 and 8. Hence, the appeal.
10.I have heard Mr. Joshi for the appellants and Mr. Davis for the respondent Nos. 1 and 2.1 have also heard Ms. Priya Ranade for the respondent No. 4.1 have also gone through the proceedings including the impugned order and in my view, the learned Presiding Officer has correctly passed the order.
It has to be pointed out that no other defendants except the defendant No. 4 has disputed the liability.
From the entire evidence, it becomes obvious that it is a clear case of fraud and defendant No. 1 had made an attempt to wriggle out of the situation in which he was placed, by passing the resolution and executing the documents of hypothecation and guarantee on behalf of the defendant No. 4. The resolution was apparently an eye-wash and the applicant Bank blindly accepted the same and relied on the documents without going in details. It is evident that none of the officers of the Bank had even bothered to verify the movable and immovable properties in order to ascertain the value of the said properties before accepting those properties as securities. It is also evident that the Bank officers had not bothered to check the Memorandum and Articles of Association of the defendant No. 4 company. The doctrine of indoor Management would be applicable when a company does a particular act which is within the scope of the Memorandum and Articles of Association. In such a case, whether a particular formality was complied with or not, would certainly be a question of indoor management and the third parties may presume that all such formalities are complied with but the doctrine of indoor management is not applicable when some of ^he Directors do such things which they are not empowered to do under the Memorandum and Article of Association of the company. These documents are public documents and are open for all to inspect the same. If the applicant Bank had taken care to go through the same, they would have realized that no Director had a power to mortgage the property of the company for securing his personal debts.
Even though the charge has already been registered, it cannot be overlooked that the defendant No. 4 had already initiated proceedings for declaration that creation of such charges was illegal by filing a civil suit. I am in agreement with the findings given by the learned Presiding Officer that the creation of charge is a ministerial act and if the charge has been created on the basis of some inherent act, it cannot be said that since the charge has been duly registered, now the property is subject to such charge.
As far as the guarantee is concerned, even if it is presumed that everything was done in order by the defendant Nos. 1 and 3 and they had due authority to execute the deed of guarantee on behalf of the defendant No. 4, still the said guarantee would not have been enforceable because this guarantee was executed subsequent to availing the facilities by the defendant Nos. 1 and 2 and there would be clear bar of Section 127 of the Indian Contract Act for the enforceability of the guarantee. There would be clear bar in view of illustration to Section 127 of the Indian Contract Act and that such guarantee was without any consideration, as no amount was advanced by the applicant Bank on the basis of such guarantee. Since the guarantees executed by the defendant Nos. 5, 6 and 7 were also subsequent to advancing the amounts to the defendant Nos. 1 and 2, those guarantees would be void and cannot be enforced.
Even though the defendant Nos. 5 to 7 had not contested the claim, the learned Presiding Officer in all fairness considered the legal bar in passing any order against these defendants to enforce the guarantees.
11. As far as intervener’s application is concerned, he had produced on record the documents to show that the property exclusively uelonged to him. The fact that the defendant No. 9 was a sister concern of the defendant No. 4 and that the office of the defendant No. 4 was situated in the same building, would not make the defendant No. 4 owner of the said property and the defendant No. 4 could not have created any charge or mortgage on the property which did not belong to it. Therefore, the learned Presiding Officer rightly held that the applicant Bank had no charge on the immovable property of which in fact the intervener was the owner as revealed from the documents produced before him.
12. As far as consent of the defendant No. 8 for creation of second charge in favour of the applicant Bank on the property of the defendant No. 6 is concerned, the learned Presiding Officer held that there was absolutely no privity of contract between the applicant Bank and the defendant No. 8 and any undertaking unilaterally given by the defendant No. 6 could not be binding on the defendant No. 8 and, therefore, the defendant No. 8 would not be bound to give consent for creation of second charge on the property of the defendant No. 6.1 find nothing wrong in this finding.
13. In view of the aforesaid discussion, in my view, no interference is warranted in the impugned order. The appeal, therefore, will have to be dismissed and the impugned order will have to be upheld. Accordingly, following order is passed:
ORDER
Appeal No. 170/2003 is dismissed.