UNITED BANK LTD. Versus LAKHANI TEXTILE MILLS
1. This is a suit for recovery of loan. The plaintiff is a bank. Defendant No.1 is a partnership. Defendants Nos. 2 to 7 are the partners of defendant No.1. The defendants requested the plaintiff bank by a letter, dated 13th August, 1973 Exh.6/2 sanctioning a loan to them upto a limit of Rs.7.5 lacs against hypothecation of cotton yarn and spare parts. The plaintiffs agreed to grant this facility and on 15th August, 1973 a cash credit agreement was executed by the defendants with the plaintiff under which the predecessor‑in‑interest of plaintiff namely the Commerce Bank Ltd., agreed to grant a loan under; a cash credit account to the defendants Nos.l to 7 to the extent of Rs.7,50,000 with interest thereon A Loan Account bearing No.4379 was opened by the defendant No.1 with the plaintiff for this purpose. Advances were made from time to time and vide Exh.6/6 which‑ is the statement: of account the defendants utilised this cash credit facility in full. At the time of granting the loan the plaintiff obtained from the defendants a promissory note Exh.6/‑3 a cash credit agreement Exh.6/4 letter of continuity Exh.6/5. The defendants had hypothecated with the plaintiff, stock of cotton yarn and spare parts Defendants No.8, guaranteed the repayment of the loan and for this purpose executed a letter of guarantee. Exh :6/9 arid also placed F . D . R's . of the value of Rs .5 lacs as security. As evident from the letter of guarantee wide powers were given to the plaintiff to encash these F.D.R's if the defendants failed to pay back the loan or any part thereof with interest: The following paras. 12 and 13 from this letter of guarantee are reproduced below:‑
2. "12. The Bank shall be at liberty to take any securities from the principal for the said advances and to release of forbear to enforce all or any of its remedies upon ‑or under such securities and any collateral security or securities now held by the Bank and that no such release or forbearance as aforesaid, shall have the effect of releasing me/ us from my/our liability or of prejudicing the Bank's rights and remedies against me/us.
13. That the neglect or forbearance of the Bank in enforcing payment of any moneys, the payment whereof is intended to be hereby secured or the giving of time by the Bank for the payment thereof shall not in any way release me/us of my/our liability under the guarantee hereinbefore contained."
3. By a letter, dated 15th August, 1974 Exh.6/10 the defendant No.8 requested the plaintiff to change the F.D.R's. which they had deposited earlier with new F.D.Rs. in the sum of Rs.5 lacs and accept the fresh F.D.Rs. as security against the advance. This request was accepted and the old F.D.R's. deposited with the plaintiff Bank on 15th August, 1973 were replaced by fresh F.D.R's. on 15th August, 1974. The validity of these newly‑supplied F.D.R's. was upto 15th August, 1975.
4. It is not necessary to refer to the deposit of other documents or the correspondence which passed between the parties but mention, may be made to a letter, dated 16th‑ April, 1974 ExL6/16, by which the plaintiffs wrote to say that they had decided to convert the hypothecated goods into pledge with immediate effect and had deputed their Godown Inspector to take over the goods in his personal supervision. By this letter the defendants Nos.l to 7 were requested to extend their full co‑operation in this connection. It appears that the defendants resisted this attempt and did not allow the godown‑keeper of the plaintiff to take the goods in the godown in his control. Consequently the plaintiff wrote another letter dated 18th April, 1974, saying that as the defendants had not co‑operated with their Inspector and had not segregated the goods from their other stock, they would not allow further continuation ‑of the advance arrangement. As the liability, had already mounted to Rs.7,94,971 till 30th March, 1974 they would insist that the defendants should repay the "entire dues with upto date interest within forty‑eight hours from the receipt of this letter". This was replied by defendants Nos.l to 7 by their letter, dated 8th May, 1974 Exh.B/18 in which the following paragraph is note worthy: ‑
5. "Your decision to convert the entire stocks hypothecated to you into pledge with immediate effect and your demand to store the hypothecated goods in a separate godown cannot be possibly complied with as you are aware that the stocks remain continuously in process and lying in the Mill premises, while the goods pledged with other banks never mix up as the same are stored in the separate godown. We 'assure you that everything possible is being done to enable Banks officials to make proper checking as we have done all along."
6. In the mean time the Inspector made the enquiries and vide Exh.6/19, dated 24th July, 1974 informed the plaintiff "I have to inform that on my enquiry I have come to know that all the stocks of Messrs Lakhany Textile Mills are pledged to Habib Bank Ltd. I have repeated by requested the party to send the stock statements. It all proved fruitless".
7. The defendants had their own version and by sending a statement, dated 8th April, 1975 Exh.6/21 hey informed the plaintiff that the value of the hypothecated goods was Rs.10 lacs. This assessment was contested by the plaintiff's representative as is evident from his note, dated 28th April, 1975. This representative verified the stock only upto 3,50,000.
8. The plaintiffs sent a notice, dated 4th June, 1974 Exh.6/24 through their Advocate complaining about the attitude adopted by the defendants. The text of this notice would indicate the grievance expressed by the plaintiff "that our clients have now come to know that you have made false declaration in order to secure the cash credit limit of Rs.7,50,000 from our clients as the entire goods are under the lien of Habib Bank Limited.
9. In the concluding para. plaintiff wrote "that our clients hereby finally call upon you to deposit with them the entire balance outstanding against you in credit account amounting to Rs.7,85,005 with upto date interest from April, 1974 within forty‑eight hours of the receipt of. this final legal notice failing which we have definitely instructions from our client to take action against you." Two letters were written in reply to this notice which are, dated 12‑6‑1974 and 8‑7‑1974 Exhs.6/25 and 6/26. In both these letters evasive attitude was adopted by the defendants. A new element was introduced by defendants Nos.l to 7 at this stage. It was alleged that defendants had appointed Messrs Aslam Agency as their agents for selling their products at the plaintiff request; the plaintiff had in turn granted to the defendants the loan facility. The following paragraph from Exh.6/26 would show the thinking of the defendants Nos.l to 7 at this stage:‑
10. "In the events that have happened it appears that your client in collusion with Messrs Aslam Agency is precipitating a situation to our clients' manifest detriment by illegally recalling the advances. In case your clients are now in haste they can, upon the guarantee tendered by Messrs Aslam Agency and accepted by your clients recall the amount in question."
11. On 25th July, 1974 the Advocate of the plaintiff sent a reply to the aforesaid letter and denied that the cash credit facility was granted by the plaintiff‑Bank for the 'consideration that the defendants had appointed Messrs Aslam Agency as their selling agents. In this letter complete lack of knowledge was pleaded for the arrangement between Aslam Agency and the defendants and it was positively asserted that the loan facility was a direct and straight transaction between the plaintiff and defendants Nos.l to 7 and the arrangements between the defendants and the Aslam Agency had no bearing on this loan transaction between the plaintiff and the defendants Nos.l to 7. This is the background of the case with which the parties proceeded and the litigation started.
12. Plaintiff has filed this suit for the recovery of Rs.9,63,653.23 with interest at 11 per cent from the date of the suit till realisation. This suit has been filed after a notice calling upon the defendants to pay back the loan was duly served on the defendants and their failure to comply with this notice. The main defence of the defendants Nos.l to 7 is contained in paragraph 6 of their written statement which is as follows: ‑
13. "6. That the contents of para. 6 are not denied. It is, however, submitted that the answering defendants were prevailed upon to grant a sales agency to the defendant No.8. It was in pursuance of the said arrangement that the answering defendants opened an account with the plaintiff‑Bank although in the past they had no dealings with the said bank. The cash credit limit was sanctioned in consideration of the answering defendants appointing the defendant No.8 as their agent. Since the cash credit limit was given in consideration of the said appointment it was intended to be a continuing limit and was not subject to arbitrary termination. It is, however, submitted that the mala fides of the plaintiff is revealed by the fact that it has not encashed the F. D. R' s. pledged by the defendant No."8 and which are lying with it."
14. There is an unambiguous admission by the defendants Nos.l to 7 that they have received the loan.
15. Defendant No.8 have also filed a written statement. They have raised certain technical objections. They have denied that the cash credit facility was granted to the defendants Nos.l to 7 at their request or in consideration of the defendants Nos.l to 7 having appointed Messrs Aslam Agency as their selling agents. The defendant No.8 have further‑ pleaded that they are discharged because the plaintiff tailed to keep vigil over defendant No.1's conduct vis‑a‑vis the cash credit agreement, dated 15‑8‑1973 and they committed gross neglect in allowing defendants Nos.l to 7 to trade the goods hypothecated without realising amount due from defendant No.1 and "because of plaintiff gross negligence as aforesaid the unsecuring defendants rights were seriously prejudiced". Further, it is pleaded that the "plaintiff have allowed the securities to be diminished or varied as averred above. The plaintiff have absolved the guarantor of the liability, if any, on account of their gross negligence and not acting as prudent banker". It is further pleaded that the plaintiff have been negligent in not getting the deed of pledge signed by the defendants Nos.l to 7 the answering defendants are thus not liable for the amount in suit.
16. On these pleadings the following issues were framed:‑
(1) Whether the suit is misconceived and riot maintainable?
(2) Whether the plaintiff is in any way concerned and effected by dealings between defendant No.8 and defendants Nos.l to 7?
(3) Whether defendants Nos.l and 7 liable to pay the plaintiff's amount as borrower and the defendant No.8 as guarantor?
(4) Whether the plaintiff is entitled to the suit amount?
(5) Whether the claim against defendant No.8 is time‑barred?
(6) Whether the guarantee is legal and valid for reasons stated in para. 5 of the written statement of defendant No.8?
(7) Whether plaintiffs are entitled to avail the security of F.D.R.?
(8) What is effect of defendants Nos.1 to 7 failure to transpose hypothecated goods into a pledge as per agreement, dated 15‑8‑1979?
(9) Whether the bank guarantee form was signed by defendant No.8 on the understanding that the same would remain with the plaintiff till the deed of pledge is executed. If so, what is its effect?
(10) Whether defendant No.8 are entitled to idemnity and contribution under Rule 176 of Sind Chief Court Rules?
(11) Whether the suit is misconceived and not maintainable under Order XXXVII, C.P.C.?
(12) Whether the defendants Nos.l to 7 were prevailed to enter into a selling agency in consideration of the plaintiff advancing to them and, if so, on what terms and to what effect?
(13) Whether the advance was intended to be a continued advance?
(14) Whether the plaintiffs were justified in not adjusting the Fixed Deposit Receipts in their possession against the claimed amount?
(15) Whether the plaintiffs were entitled to demand conversion of the hypothecation into a pledge?
(16) What should the decree be and against whom?
17. Parties have led evidence in this case Ghulam Syed‑ul‑Kaunain Naqvi has been examined for the plaintiff. He has produced promissory note Exh.6/3 cash credit Agreement Exh.6/4 letter of continuity Exh.6/5 statements of accounts Exh.6/6. He also produced other documents. Haji M. Arif Lakhani has been examined on behalf of the defendants Nos.l to 7. Ashraf Ali Rasheed has been examined on behalf of the defendant No.8. These witnesses 'have supported the pleas taken by them in their respective written statement. Now I proceed to dispose of these issues in the light of the pleadings and the evidence of the parties.
18. Issue No.1 was not pressed by any of the parties. Issue No.2. This issue was argued by Mr. Vasvani counsel for the defendants Nos.l and 7. It was contended by the learned counsel that the defendant No.1 obliged the guarantor, defendant No.8 by appointing Messrs Aslam Agency as their selling agents for selling the products on commission. According to the learned counsel this favour was shown to Messrs Aslam Agency who are sister concern of defendant No.8 on the understanding that defendant No.8 would offer guarantee of the defendants Nos.l to 7. The learned counsel tried to argue that on account of this favour shown by the defendants Nos.l to 7 to Aslam Agency the liability of loan was to be discharged by the defendant No.8 and not by the defendants Nos.l to 7. On the face of it this seems to be a very fantastic assertion for which concrete proof must be produced. No such agreement has been placed on record in support of this contention. Moreover, even if there was such a understanding between the defendants Nos. 1 to 7 and 8 the plaintiff not being a party to such an understanding cannot be non‑suited. Nothing has been placed on the record to substantiate this contention. This issue is, therefore, answered in negative.
19. Issue No.3 is the most important issue in this case. Plaintiffs have produced all the documentary evidence mentioned above. There is no denial that the amount of loan was not obtained by the defendants Nos.l to 7 or anything except a sum of Rs.10,000 alleged to have been paid by the defendants Nos. l to 7 to the plaintiff has been paid. On the top of it by Exh.6/18, dated 8‑5‑1974 the defendants Nos.l to 7 have categorically, admitted that advance of Rs.7.5 lacs allowed to us had been materialised as per arrangement arrived at between ours and Messrs Aslam Agency and their guarantee. The defendant No.1 has led evidence and P.W. 1 Haji Muhammad Arif Lakhani has been examined on their behalf. This witness has categorically admitted that "we have not repaid amount due to the bank. We were not repaying the amount and that is why the bank cancelled our facility and then filed the present suit. The facility was granted to us by the bank sometimes in 1973 or 1974." For purpose of disposal of this issue, this is enough to say that the receipt of payment of accepted and it is also admitted that this amount was never returned. As such both the defendants Nos.l to 7 as principal debtor and defendant No.8 as guarantor are liable to plaintiff.
20. Issue No.4 is answered in the affirmative not only on account of the documents executed by the defendants Nos.l to 7 but also on their own admission.
21. Issue No.5. This issue was not pressed and not argued.
22. Issue No.6. Mr. S.A. Shamsi, learned counsel for the defendant No.8 has contended that he had offered guarantee on the assumption that the loan was advanced against the hypothecation of stock of substantial value. This hypothecation was to be convered to pledge. The contention is that because the plaintiff-Bank failed to convert the hypothecation into pledge and also allowed the hypothecated stock to be traded by the defendants Nos.l to 7 the guarantors are discharged from their liability. Reference is made to the cash credit agreement Exh.6/4 in which on page 2 the plaintiff Bank has been given extensive powers to deal with the stock and goods belonging to the debtors. It is contended that the bank failed to exercise these powers resulting in the liquidation of the stock by the debtors without depositing the sale proceeds with the bank as and when the hypothecated cotton was being sold by the defendant /debtors. This allegation is not born out by the facts of the case. By letter Exh.6/16, dated 16‑4‑1974 the plaintiff took prompt action by converting the hypothecated stock into pledge and intimated the defendants to accord all facility to their representative in this connection. The defendants resisted this attempt and turned away the plaintiffs' inspector from entering the premises or from taking control of the stock. The plaintiff without any loss of time, by their letter, dated 18‑4‑1974 protested against this conduct of the defendants, and demanded payment of the entire liability within forty‑eight hours. The defendants by their letter Exh.6/18, dated 8th May, 1974 replied to these two letters only to ask for more time and thus avoided payment. They even submitted the statement of stock of the hypothecated goods by Exh.6/21 showing its value to be Rs.10 lacs which turned out to be an exaggersted figure. The plaintiff's inspector had checked the stock on the premises and reported that entire stock was already under lien of other Banks. In the circumstances, it cannot be said that the plaintiff Bank was not vigilant in pursuing the debt or had allowed any such concession to the debtors as to show any favour or partiality. Moreover, the defendant No.8 'would be bound by the terms of the guarantee which they have executed with the plaintiff Bank. By looking to the f letter of guarantee and particularly to paras. Nos.12 and 13 of the letter of guarantee, it would be clear that the defendant No.8 cannot change the position now. They cannot be permitted to back out from their obligation under the letter of guarantee. Learned counsel for the defendant No.8 relied on a case, Central Exchange Bank v. Zaitoon Begum and others P L D 1968 S C 83. But this case is distinguishable from the present case because in that case the goods were pledge with the bank and were in possession of the bank while in the present case from the very beginning the goods never came in possession or control of the bank. The hypothecation could not be converted into pledge in spite of best efforts of the plaintiff. The Supreme Court case has been considered in a very recent case United Bank Limited v. Mujahid Transport PLD 1986 Kar.
107. I may quote from the judgment the observations made about this case. "Reliance was placed on a decision of the Supreme Court reported as Central Exchange Bank v. Mst. Zaitoon Begum and others P L D 1968 S C 83 The above case is distinguishable as in that case the goods were pledged with the bank and was in its possession which was lost by the Bank by its own acts, whereas in the present case the possession of the vehicles was with defendant No.l who were plying them on road and making money. It has never been claimed that the said vehicles were ever in possession of the plaintiffs. It has also not been shown that the said vehicles have been lost by the plaintiffs. In fact, no overt act on the part of the plaintiff was alleged. This plea is, therefore, baseless and is rejected." On the same reasoning I would also hold that this case is not applicable to the present case. The argument of the learned counsel is, therefore, rejected and the issue is decided in the affirmative. The defendant No.8 and the defendants Nos.l to 7 are co‑extensively liable for the payment of the loan. No other arguments regarding validity of the guarantee was advanced by the learned counsel.
23. Issue No.7. In this connection the only argument advanced was that the validity of the F.D.R's. expired on 15‑8‑1975. The learned counsel however, could not develop the arguments as to what consequences would follow in such an event. The F.D.R's. would not loss their intrinsic value. As the most the bank may refuse to pay interest upon them after the date of expiry. But it cannot be said that the F.D.R's. have become waste papers after the expiry date mentioned on them. Factually speaking the amounts covered by these F.D.R's. are still lying intact with the plaintiff‑Bank.
24. Issues Nos.8 and 15. These two issues may be taken together. The counsel for the plaintiff and defendants Nos.l to 7 did not touch these issues. The counsel for the defendant No.8 advanced the same arguments which have been examined in connection with issue No. 6 and discussed above. These arguments have no merit and are rejected.
25. Issue No.9 was not pressed.
26. Issue No.10 also not pressed.
27. Issue No.11.‑‑The suit has been converted into a regular cause and this issue has become infructuous.
28. Issue No.12‑‑As discussed above the learned counsel for the defendants Nos.l to 7 advanced the plea that the loan was sanctioned to the defendants Nos.l to 7 on account of these defendants having granted selling agency of their goods to the defendant No.8. This argument not only remains unsubstantiated but appears to have been raised without any basis as would be evident from the admission of the defendants own witness in cross‑examination. Learned counsel for the defendants Nos. 1 to 7 frankly admitted that there is no such written agreement or any writing to establish this plea. This issue also, is disposed of as not proved.
29. Issue No.13.‑‑No arguments were advanced on this issue.
30. Issue No.14.‑‑The Advocate for the defendants Nos.1 to 7 advanced half‑hearted arguments to say that the plaintiff should have adjusted the loan by encashing the F.D.R's. lying with them. But he could not show how the plaintiffs position would be prejudiced by the delay in encashing these F.D.R's.?
31. No other point was argued. The suit is, therefore, decreed with cost as prayed against the defendants.
32. A.A.
33. Suit decreed.