Canara Bank vs M/S Leatheroid Plastics Pvt Ltd.

[ Non­Reportable ]

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4645 OF 2019

Canara Bank …….Appellant(s)

Versus

M/s. Leatheroid Plastics Pvt. Ltd. ……Respondent(s)

JUDGMENT

ANIRUDDHA BOSE, J.

The appellant, Canara Bank, had extended

credit facilities to the respondent­Company,

Leatheroid Plastics Private Limited under different

heads. The respondent had been having banking

relationship with the appellant since 1980. The

credit facilities involved in this appeal included

Signature Not Verified restructuring of past debt­repayment. The Digitally signed by ASHA SUNDRIYAL

arrangement of extending such credit was agreed Date: 2020.05.21 17:12:37 IST Reason:

2

upon on 4th January 2001. The bank agreed to

extend the following financial facilities to the

respondent, against mortgage of land, buildings

stocks etc; towards security:­

Sl. LOAN AMOUNT(RS) REMARKS No. 1 Fund 10,08,000/­ Amount of Interest interest Term Loan upto (FITL) 31.12.2000 2 Fresh Term 15,00,000/­ New facility Loan (TL) to restart the said unit 3 Open Cash 40,00,000/­ Credit (OCC) 4 Working 29,99,000/­ Capital Term Loan (WCTL) 5 Supply 10,00,000/­ Bills

Two documents were executed on that date, i.e.

4th January 2001 for such purpose. One was a deed

of hypothecation and the other an agreement of 3

collateral security for machinery and vehicles. The

former contemplated hypothecation of plant,

machinery, tools and accessories already purchased

as also the machinery to be purchased, which “are

erected/to be erected/kept/to be kept or in transit

for being erected at the premises in the occupation of

the borrower” in relation to term loan of Rs.15 lacs.

The latter agreement covered credit facilities under

other heads and also contemplated hypothecation of

additional security “plant, machinery, tools and

accessories and motor vehicles” already purchased

and to be purchased. Particulars of the

hypothecated assets were listed in the schedules to

the two deeds. Under the respective

deeds/agreements, it was borrower’s obligation to

keep the hypothecated assets insured but the bank

retained the liberty to obtain insurance coverage of

such assets. The bank had exercised the option of 4

effecting the policy, which was permissible under

both the agreements and debited the premium from

the respondent’s account. The entire set of

hypothecated assets, however, was not covered by

the policy. The said policy covered stocks­in­process

and building for Rs.50 lacs, Rs.2 lacs and Rs.28.88

lacs. No coverage was taken for plant, machinery and

accessories etc.

2. There was a fire in the premises of the

respondent little beyond the midnight hours of 27th

August 2001, which caused damage to their stocks

and machineries. The respondent lodged claim with

New India Assurance Company, Kanta Nagar branch.

It is the contention of the respondent that from the

survey undertaken in pursuance of such claim, they

came to learn that the policy did not cover plant,

machinery and accessories etc. The respondent’s

own assessment of replacement value of these 5

uncovered assets was Rs.1.50 crores. The

respondent also claimed to have had spent Rs.6.50

lacs on the machinery on order and overhaul for

restarting the unit. The unit had to remain shut for

some time on environmental issues. The appellant,

however, had valued the same for Rs.31.76 lacs. The

respondent received insurance claim for

Rs.34,92,970/­.

3. The respondent under those circumstances

became liable, as part of their debt repayment

obligation, for the price of such uncovered

hypothecated assets damaged by fire. The petition of

complaint before the Commission, however, was

founded on loss on account of portion of the assets

left uncovered in the insurance policy. The Bank had

initiated recovery process before the forum

constituted for such recovery. But for the purpose of

adjudication of this appeal, we do not consider it 6

necessary to give details of particulars and status of

such proceedings. The respondent approached the

National Consumer Disputes Redressal Commission,

New Delhi (the Commission) with an original petition

for compensation of Rupees two crores along with

certain other reliefs from the bank alleging deficiency

in service in not obtaining insurance for machineries,

accessories etc. That petition was registered as

Complaint No.173 of 2003. The Commission

accepted the plea of the respondent that there was

deficiency of service on the part of the bank but

directed the appellant to pay the compensation of

Rs.31.76 lac to the complainant along with interest

at the rate of 9% per annum from the date of

settlement of insurance claim within a period of 8

weeks from the date of the order. This order was

made on 6th February 2009. The present appeal is

against that decision. The respondent have also filed 7

a cross­objection in which they seek raising of the

compensation sum to Rs.2 crore, as

was originally claimed before the Commission.

4. As we have indicated earlier, the respondent

had been obtaining credit facilities from the bank

since the year 1980. In the year 1998 their

manufacturing unit had to discontinue operation,

their premises having been sealed by the Delhi

Pollution Control Committee on the order of this

Court. They were permitted to restart their

operations in the month of December 1989. By that

time there was default in meeting their earlier credit

obligation to the bank and they had approached the

bank for rescheduling, refinancing and rehabilitation

of the unit. The debts on account of old limits of

Rs.15 lacs open cash credit and Rs.8 lacs key shut

cash credit along with interest had scaled upto Rs.40 8

lacs. This sum was funded as part of the refinance

and rehabilitation package.

5. The fixed assets and the prime securities were

to be insured by the borrower for adequate value in

terms of the bank’s guidelines. To the Special Leave

Petition, the bank has annexed copies of the said two

documents. The first one is captioned “Deed of

Hypothecation re: Machinery”. This appears to be in

standard form as in the copy annexed, identity of the

borrower has been left blank. We, however, proceed

on the basis that the Deed actually executed had the

identical terms and conditions. In the clause relating

to consideration, it is provided that the hypothecated

assets were for security of repayment to the bank of

a sum of Rs.15,00,000/­ together with interest, bank

charges, costs of recovery commission etc. Clause 9

of this deed specifies:

“The borrower shall adequately insure the Hypothecated Machinery for the 9

full market value against risk of fire war, riots, civil commotion, strike, accident, risk, thefts and also for such other purposes as may be prescribed by any law for the time being in force and as required by the Bank and keep the policy always current by duly and punctually paying the premia from time to time and to assign the benefits in insurance policy thereof to the bank. The bank shall be entitled for all the benefits of all such policies. The borrower hereby agrees and undertakes to do everything necessary to transfer and effectively vest in the bank the benefits of all such policies. The borrower further agrees to indemnify the bank against loss by reason of damage to or destruction or loss of the Hypothecated Machinery from any cause whatsoever by reason of claim by third party in respect of the same.

The bank is at liberty and is not bound to effect such insurance at the risk, responsibility and expenses of the borrower with any insurance company only the extent of the value of security as estimated by the bank and that in the event of insuring the security, the bank shall not be considered or deemed to be responsible or liable for non­admission or rejection of the claim wholly or in part whether the claim is made by the bank or by the borrower. It is expressly undertaken by the 10

borrower that he shall himself/ of his own accord take all steps like initiation of filing claims/furnishing necessary information to the bank/insurance company without being informed of details of loss/damage for any reason whatsoever. In the event of rejection of claim either wholly or in the part on account of loss/damage to the security. The borrower shall be liable to repay to the bank the entire outstanding liability without requiring the bank to proceed in the first instance against the insurance company.

In the event of non­settlement of claim, the bank may as its absolute discretion take action against insurance company without being under any obligation to do so or require the borrower himself to take action, in which case the borrower shall not be entitled to question the decision of the bank, if the bank does not lodge any claim under the policy within the time limit prescribed under such policy, the bank shall not be liable to the borrower for not filing any claim or suit for recovery of the incurred amount against the Insurance Company or any other person.”

6. The particulars of the credit facilities extended to 11

the respondent has also been specified in the second

document, captioned “Agreement re: Collateral Security:

Machinery; Vehicles.”. The first recital clause thereof

stipulates:

“WHEREAS the Borrower is engaged in the business of Mfr. Of Synthetic Leather illegible and for the said purpose applied to the Bank for certain credit facilities and the Bank as sanctioned the following credit facilities amongst others on the terms and conditions inter alia that the borrower shall secure repayment of the sums and advanced by the Bank including interest, bank charges, costs, commission, etc. by way of further security by hypothecation of borrowers machinery and/or vehicles. Amount in words)

1. OCC Rs. 40.00 Lacs (Rupees Forty Lacs only

2. SDB Rs.­ (Rupees­)

3. BE/SB Rs. 10.00 lacs *(Rupees Ten Lacs only)

4. TL Rs. 15.00 (Rupees Fifteen Lacs only)

5. FITL Rs. 10.08 Lacs (Rupees 12

Ten Lacs Eight thousand only)

6. WLTL Rs. 29.99 lacs (Twenty Nine Lacs Ninety Nine Thousand only)

In case where only machinery or vehicle is hypothecation words machinery and or and vehicle may be deleted, as the case may be.” (quoted verbatim).

7. Clause 9 of this agreement is near­identical to

clause 9 of the deed of hypothecation and we reproduce

below this clause as well:­

“9.That the borrower shall adequately insure the Hypothecated Machinery for the full market value against risk of fire war, riots, civil commotion, strike, accident, risk, thefts and also for such other purposes as may be prescribed by any law for the time being in force and as required by the Bank and keep the policy always current by duly and punctually paying the premia from time to time and to assign the benefits in insurance policy thereof to the bank.

The bank shall be entitled for all the benefits of all such policies. The borrower hereby agrees and 13

undertakes to do everything necessary to transfer and effectively vest in the bank the benefits of all such policies. The borrower further agrees to indemnify the bank against loss by reason of damage to or destructions, loss of the hypothecated asset from any cause whatsoever by reason of claim by third party in respect of the same. The bank is at liberty and is not bound to effect such insurance at the risk, responsibility and expenses of the borrower with any insurance company only to the extent of the value of security as estimated by the bank and that in the event of insuring the security the bank shall not be considered or deemed to be responsible or liable for non­ admission or rejection of the claim wholly or in part whether the claim is made by the bank or by the borrower. It is expressly undertaken by the borrower that he shall himself or his own accord take all steps like imitation of filing claims, furnishing necessary information to the bank/Insurance Company without being informed of details of loss or damages for any reason whatsoever. In the event of rejection of claim either wholly or in part on account of loss/damage to the security the borrower shall be liable to repay to the bank the entire outstanding 14

liability to repay to the bank the entire outstanding liability without requiring the bank to proceed in the first instance against the insurance company. In the event of non­ settlement of claim, the bank may at its absolute discretion take legal action against insurance company without being under any obligation to do so or require the borrower himself to take action in which case the borrower shall not be entitled to question the decision of the bank, if the bank does not lodge any claim under the policy within the time limit prescribed under such policy, the bank shall not be liable to the borrower for not filing any claim or suit for recovery of the insured amount against the Insurance Company or any other person.

That the registration certificate issued in respect of the hypothecated vehicles shall contain requisite entry regarding hypothecation of the vehicle in favour of the bank. That the borrow hereby makes it clear that through the hypothecated vehicles is registered in the name of one of its partner Sri…………………………………………… …………. with the Regional Transport Authorities the said vehicle is the property of the firm and that it has got authority to create its 15

hypothecation.” (The copy annexed to the petition leaves the space above blank).

8. At the initial stage of the proceeding before the

Commission, objection was taken on maintainability

thereof on the ground that the respondent was not a

consumer. The Commission had sustained this objection

and dismissed the petition. That dispute had reached

this Court in Civil Appeal No. 445 of 2004, which was

preferred by the respondent. Their appeal was allowed

on 20th January, 2010. It was held by this Court:­

“This Appeal has been filed against the impugned order of the National Consumer Disputes Redressal Commission, New Delhi (for short ‘the National Commission’) dated 22nd August, 2003.

The National Commission has dismissed the claim petition of the appellant on the ground that the appellant is not a consumer after the

amendment to Section 2 (d) (ii) of the Consumer Protection Act, 1986 (for short ‘the Act’).

16 Learned counsel for the appellant submitted that the amendment to section 2 (d) (ii) came into force only on 15th March, 2003 whereas the claim of the appellant relates to the year 2001. He submitted that the amendment does not have retrospective effect. This controversy is covered by a two Judge Bench decision of this Court in Karnataka Power Corporation & Another vs. Ashok Iron Works Private Limited reported in (2009) 3 SCC 240. Accordingly, this appeal is allowed; judgment of the National Commission is set aside and the impugned judgment of the National Commission is set aside and the matter is remanded to the National Commission to consider the case on expeditiously. Merits afresh in accordance with No costs.”

9. On remand, the matter was heard by the

Commission and the complaint of the respondent was

partly allowed in its order of 6th February, 2019. The

Commission, in substance, held that there was

deficiency in service on the part of the bank on the 17

following reasoning: ­

“The main issue in this case is that the loss to machinery and accessories was not paid because of no insurance coverage. As made out in the above­ mentioned submissions, Insurance Policies were regularly taken by the Bank and premium amount debited from the accounts of the complainant. The complainant had repeatedly requested the opposite party to furnish details of the Insurance Company and premium fixed. Documentary evidence, with letters written by the complainant and received by the Opposite Party, have been adduced by the Complainant by was of evidence. It is not the case of the Opposite Party that notice was given at any point of time calling upon the complainant to get the insurance done. Suddenly when fire broke out in the Complainant’s premises and it was found that no insurance was taken for the machinery, the onus and blame for taking the insurance was shifted to the complainant, for the inaction and negligence on the part of the Opposite Party. Thus the complainant had to suffer the loss and was denied the benefit of insurance claim.”

10. Relying on three earlier decisions of the Commission 18

in the cases of Allahabad Bank vs. J.D.S. Electronic

Company MANU/CF/0433/2006 : I (2007) CPJ 270

(NC), Union Bank of India vs. Annu Vastralaya and Anr.

MANU/CF/0262/2007 : IV (2007) CPJ 187 (NC), and

Kashmir Singh vs. Punjab National Bank & Anr.,

[Revision Petition No. 1552 of 2012 decided on

03.12.2014], the Commission held and directed:­

“In view of above, the Opposite Party is clearly responsible for the loss suffered by the complainant and there is every duty cast upon it to compensate for the same. The Complainant has prayed to allow the Complaint by passing an order against the Opposite Party to pay compensation/damages of Rs. 2 crores. He has claimed replacement value of Rs. 1.5 crores for the machinery, Rs. 45 lakh on account of loss of business and profit. Rs. 1.5 lakh loss on account of the mistake made by the OP, deducted as miscalculation charges by the Insurance Policy, Rs. 3.5 lakh on account of mental agony, suffering hardship and loss in business and livelihood.

As per the valuation report dated 14.12.2000 submitted by the valued Mr. S.K. Kalia of Kalia Technical 19

Services, appointed in consultation with the Complainant, the value of Plant and Machinery has been assessed at Rs. 31.76 lakhs. In our considered view, therefore, a compensation of Rs. 31.76 lakhs to the complainant, alonwith interest @ 9% p.a. from the date of settlement of insurance claim, would meet the ends of justice.

In view of the above, the Opposite Party is directed to pay a compensation of Rs. 31.76 lakhs to the Complainant alongwith interest @ 9% p.a. from the date of settlement of insurance claim within a period of 8 weeks from the date of this order.”

11. Assailing the decision of the Commission, it has

been urged on behalf of the bank that it was the

responsibility of the borrower to obtain the insurance

policy under the respective contracts. As a

consequence thereof, the bank could not be held

responsible for any shortcoming in the policy. It has

also been pleaded in the bank’s written statement or

reply before the Commission, portions of which has

been reproduced in the petition of appeal, that copy 20

of the policy, statement of other relevant papers

regarding the policies and payments used to be

supplied by the bank to the respondent company

whenever their directors used to visit bank premises.

To sustain their case that the duty to insure rested

with the borrower, clause 18 of the sanction letter

has been relied upon by the bank, which stipulates:­

“18. The fixed assets such as Building, Plant and Machinery and the prime securities to be insured for the adequate value as per our bank’s guidelines.”

12. What we have to adjudicate here is as to

whether there was any deficiency of service on the

part of the bank in not covering the whole set

hypothecated assets under the insurance policy. The

respondent company’s stand has been that they had

been asking for copies of the policies but they were

not given particulars thereof. The premium for the

same was deducted by the bank from their account. 21

In their counter affidavit, payment of insurance

premium from their account has been shown in the

following table:­

S.NO DATE AMOUNT(RS.)

.

1 17.05.2000 18,537/­ 2 08.07.2000 999/­ 3 14.11.2000 7,219/­ 4 14.05.2001 28,375/­ TOTAL 55,130/­

13. It has been the respondent’s case that two letters

were sent dated 11th June, 2001 and 2nd July, 2001

seeking copies and the status of the Insurance Policy

but there was no reply to such letters. These two

letters dated 11th June, 2001 and 2nd July, 2001 have

been annexed at pages 71 and 72 of the Counter

Affidavit of the respondent­company filed in connection

with the subject appeal.

22

14. Turning to clause 9 of the respective

deeds/agreements, we find that it was the duty of the

respondent to obtain the insurance policy. But

liberty was with the bank also to effect such

insurance at the risk, responsibility and expenses of

the borrower only to the extent of the value of the

securities as estimated by the bank. In the event of

rejection of the claim wholly or in part irrespective of

the fact as to whether the claim was made by the

bank or the borrower, the bank’s responsibility

ceased. What emerges from a plain reading of clause

9 of the respective documents is that the duty to

effect insurance was with the borrower, and the bank

could not be held responsible if there was any loss or

damage to the hypothecated assets which was not

adequately covered by insurance taken by the

borrower. Bank also would not remain responsible if

the claim was rejected, whether in whole or part 23

thereof. But the question that arises for adjudication

in this appeal is that if the bank themselves effected

the insurance and left significant part of

hypothecated assets out of it without any intimation

to that effect to the borrower, could such omission be

held to be a lapse on the part of the bank? Going

through the said two clauses, in our opinion, their

proper construction would be that once the bank

exercised the liberty to effect the insurance, it was

implicit that such insurance ought to have covered

the entire set of hypothecated assets, against which

the credit facilities were extended. The bank could

absolve themselves from any obligation in the event

the claim was rejected wholly or in part. If, however,

the bank in exercise of their liberty effected the

insurance, then it became their obligation to cover the

entire set of hypothecated assets. The clause under

which liberty is given to the bank to effect insurance 24

starts with the phrase – “The bank is at liberty and is

not bound to effect such insurance……” The

employment of the adjective “such” in this clause

demonstrates that if the bank effected insurance, that

policy would have to carry the features which a

borrower’s policy would have covered as per the terms

of the deeds or agreements. The borrower’s liability in

such a situation to repay to the bank could arise in

the event of rejection of the claim or part thereof,

such claim arising on account of loss/damage to the

hypothecated assets. But the grievance of the

borrower here is that though the bank effected such

insurance, part of the hypothecated securities was left

out from the coverage. It was a case of

underinsurance. We have already construed the

relevant clauses to mean that if the bank had

exercised liberty to effect insurance, it was their duty

to take out policies covering the entire set of 25

hypothecated assets. That would constitute part of

services the bank were rendering to the borrower.

Effecting insurance was not their absolute obligation.

But such obligation they had taken it upon

themselves. The contractual terms also envisaged

bank’s option or liberty to take up such obligation.

15. This being the position of law, in our opinion, the

Commission was right in holding that the

complainant had suffered loss because of inaction

and negligence on the part of the Bank. This

constituted deficiency in service. Any loss arising out

of such deficiency was compensable under the

provisions of the Consumer Protection Act, 1986.

Before the Commission, certain decisions of the

Commission were relied upon. The bank sought to

distinguish these decisions, again relying on certain

order of the Commission. But we have considered this

case independently, on its own factual basis and 26

accept the view of the Commission. The position could

have been different in the event the Bank had alerted

borrower at the time of effecting the policy that the

entire set of assets was not being covered by the

policies being effected by them. No such case has

been made out. On the other hand, the Bank

remained silent to the two letters of the respondent

seeking particulars of the policy. The bank’s stand

that the policies and statements were made available

to the Directors of the respondent­Company is also

not backed by any material. No particulars thereof

has been furnished. We also do not find any reason

as to why once the Bank had exercised their liberty or

option for effecting insurance chose not to cover the

entire set of hypothecated assets.

16. In such circumstances, we do not find any

reason to interfere with the order under appeal. The

appeal is dismissed. As regards the cross­objection of 27

the respondent, we find the decision of the

Commission to be supported by adequate reasoning.

In our opinion, the respondent have not made out any

case for enhancement of the sum awarded as

compensation. We reject the cross­objection.

17. All connected applications shall stand disposed

of.

18. No order as to costs.

…………………………J. (Uday Umesh Lalit)

………………………..J. (Aniruddha Bose)

New Delhi, Dated: 20th May, 2020