Muhammed Musthafa Padinhakkara v. Banking Ombudsman, The Federal Bank, Authorized Officer under SARFESI Act

W.P(C).18761/2022 1 # **`IN THE HIGH COURT OF KERALA AT ERNAKULAM`** ## **`PRESENT`** ## **`THE HONOURABLE MR. JUSTICE GOPINATH P.`** ``` THURSDAY, THE 15[TH] DAY OF SEPTEMBER 2022 / 24TH BHADRA, 1944 ``` ## **`WP(C) NO. 18761 OF 2022`** ## **`PETITIONER/S:`** ``` MUHAMMED MUSTHAFA PADINHAKKARA AGED 55 YEARS HAVING ADDRESS AT: PADINHAKKARA HOUSE, VILAYUR, POST, KARINGANAD, PALAKKAD DISTRICT -679309. BY ADVS. PHILIP MATHEW VINAY MATHEW JOSEPH M.A.SHAJI K.J.KARTHIKA MUHAMMED RIYAS A.T. ``` ## **`RESPONDENT/S:`** ``` 1BANKING OMBUDSMAN SHRI G RAMESH, C/O RESERVE BANK OF INDIA, BAKERY JUNCTION, THIRUVANANTHAPURAM-695 033. 2THE FEDERAL BANK, VICE PRESIDENT, LOAN COLLECTION AND RECOVERY DEPARTMENT, FEDERAL TOWERS, PO BOX NO.101, ALUVA, KERALA- 683101. 3AUTHORIZED OFFICER UNDER SARFESI ACT, FEDERAL BANK, PALAKKAD, HAVING ADDRESS AT SAI KRISHNA RESIDENCY, KUNNATHURMEDU, PALAKKAD - 678013. BY ADVS. MOHAN JACOB GEORGE P.V.PARVATHY (P-41) REENA THOMAS NIGI GEORGE ``` ``` THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 15.09.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` W.P(C).18761/2022 2 ## **JUDGMENT** The petitioner is a guarantor in respect of the credit facilities availed by a company known as M/s. Scot Free Steels Limited from the Palakkad branch of the respondent Bank. As on 29.8.2022, the total amounts due from M/s. Scot Free Steels Limited is stated to be Rs.4,77,32,129/-. The petitioner is also a coobligant in respect of credit facilities availed by an associate business enterprise (a registered partnership firm) known as M/s. Premier Alloys, which also owes money to the respondent bank. The total amount claimed by the respondent bank from M/s. Premier Alloys is Rs.8,47,32,369/- as on 29.8.2022. It is not in dispute that eight items of properties, out of which six are common (to both loans) are mortgaged with the respondent bank as collateral security by way of equitable mortgage. The total liability in respect of the facilities extended by the respondent Bank to M/s. Scot Free Steels Limited and to M/s. Premier Alloys is Rs.13,24,64,498/-. 2. The petitioner has approached this Court stating that the petitioner, as a guarantor in respect of the facilities extended to M/s. Scot Free Steels Limited and as a co-obligant in respect of facilities extended to M/s. Premier Alloys, is willing to settle the liabilities subject to the condition that the petitioner is permitted to proceed against the securities now held by the bank. Pursuant to interim orders issued by this Court, the petitioner has deposited, in total, a sum of Rs.2.50 crores, which is now maintained in a no-lien account by the respondent bank. W.P(C).18761/2022 3 3. In respect of the facilities where the petitioner is a guarantor, the provisions of Sections 140 and 141 of the Indian Contract Act, 1872 make it clear that where the guarantor is called upon to discharge the liability of the principal borrower, the guarantor has the right to recover the amounts from the principal borrower and also that the guarantor is entitled to every security that is available against the principal borrower. Sections 140 and 141 of the Indian Contract Act, 1872 read as under: “140. **Rights of surety on payment or performance** .—Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 141. **Surety’s right to benefit of creditor’s securities** .—A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.” 4. I am of the view that in respect of facilities extended by the respondent Bank to M/s.Scot Free Steels Limited, where the petitioner is a guarantor, the provisions of Sections 140 and 141 of the Contract Act, 1872 W.P(C).18761/2022 4 suggest that the petitioner has the right to proceed against the principal borrower and also to proceed against all securities held by the respondent bank. 5. In respect of the liabilities of M/s.Premier Alloys, it must be noticed that the petitioner is a co-obligant. Whether on discharge of the liability of M/s. Premier Alloys, the petitioner will enjoy the same rights as a guarantor discharging the liabilities of the principal borrower, is the moot question. 6. The learned counsel for the petitioner and the learned counsel appearing for the respondent bank would submit that the issue appears to be squarely covered by the judgment of the Honourable Supreme Court in **Krishna Pillai v. Padmanabha Pillai [2004 (2) KLT 61]** , where an identical situation was considered by the Supreme Court in paragraphs 11, 20 and 21 of the judgment, which read as follows:- “11. Having examined the issue from all possible angles and having referred to Sir Rashbehary Ghose on Law of Mortgage in India, Harris on Subrogation, Sheldon on Subrogation, Pomeroy on Equity Jurisprudence and a few English and Indian authorities available on the point, what their Lordships concluded in Ganeshi Lal's case may be summed up as under: (1). When the co-debtor or co-mortgagor pays more than his share to the creditor for the purpose of redeeming a mortgage, the redeeming mortgagor is principal debtor to the extent of his share of the debt and a surety to the extent of the share in the debt of other co-mortgagors. The redeeming co-mortgagor being only a surety for the other co-mortgagors, his right is, strictly speaking, a right of reimbursement or contribution. W.P(C).18761/2022 5 (2). The substitution of the redeeming co-mortgagor in place of the mortgagee does not precisely place the new creditor (ie, the redeeming co-mortgagor) in place of the original mortgagee for all purposes. If, therefore, one of several mortgagors satisfies the entire mortgage debt, though upon redemption he is subrogated to the rights and remedies of the creditor, the principle has to be so administered as to attain the ends of substantial justice regardless of form, in other words, the fictitious cession in favour of the person who effects the redemption, operates only to the extent to which it is necessary to apply it for his indemnity and protection (Digambar Das v. Harendra Narayan Panday (14 CWN 617)). (3). The doctrine of subrogation must be applied along with other rules of equity so that the person who discharges the mortgage is amply protected and at the same time there is no injustice done to the other jointdebtors. He who seeks equity must do equity. (4). There is a distinction between a third party who claims subrogation and a co-mortgagor who claims the right. The co-mortgagors stand in a fiduciary relationship qua each other. The redeeming comortgagor can only claim the price which he has actually paid together with incidental expenses. Strictly speaking. therefore, when one of several mortgagors redeems a mortgage, he is entitled to be treated as an assignee on the security which he may enforce in the usual way for the purpose of reimbursing himself. The subrogation to the rights of the mortgagee by the redeeming co-mortgagor is confined only to the extent necessary for his own equitable protection. The redeeming co-mortgagor can, just as the surety would, ask to indemnify for his loss and he can invoke the doctrine of subrogation as an aid to right of contribution. xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx 20. A subrogation rests upon the doctrine of equity and the principles of natural justice and not on the privity of W.P(C).18761/2022 6 contract. One of these principles is that a person, paying money which another is bound by law to pay, is entitled to be reimbursed by the other. This principle is enacted in S.69 of the Contract Act, 1872. Another principle is found in equity: "he who seeks equity must do equity." (See Rashbehary Chose on Law of Mortgage, Seventh Edition, 1997, at p. 461). 21. The present one is a case of subrogation by the operation of law and hence governed by the first para of S.92 of the Transfer of Property Act. The provision recognises the same equity of reimbursement as underlies S.69 of the Indian Contract Act that "a person who is interested in the payment of money, which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other." Such a payment made, carries with it, at times, an equitable charge. S.92 of the Transfer of Property Act does not have the effect of a substitutee becoming a mortgagee. The provision confers certain rights on the redeeming co-mortgagor and also provides for the remedies of redemption, foreclosure and sale being available to the substitutee as they were available to the substituted. These rights the subrogee exercises not as a mortgagee reincarnate but by way of rights akin to those vesting in the mortgagee.” 7. A reading of the judgment of the Supreme Court in **Krishna Pillai** (supra) suggests that the petitioner is entitled to the right of subrogation, in equity, and also the right flowing from Section 69 of the Indian Contract Act, 1872, in respect of the amounts that he may pay to settle the liabilities of M/s. Premier Alloys. 8. The learned counsel for the petitioner and the learned counsel for the respondent bank have jointly suggested certain terms upon which the petitioner will be permitted to clear the liabilities. These terms are recorded as W.P(C).18761/2022 7 under:- ## **TERMS** 1. The Writ Petitioner shall pay to the Federal Bank Ltd the entire amounts due in respect of M/s.Scot Free Metals Ltd (ODCC A/c No.10815500002927) of which he is a guarantor and in the account of M/s.Premier Alloys (a Partnership Firm) (ODCC A/c No.10815500003388) of which he is a co-obligant. 2. The amount in respect Scot Free Steels Ltd as on 29.08.2022 is Rs.8,47,32,369.00. The amounts due in the account of M/s.Premier Alloys is Rs.4,77,32,129.00 as on 29.08.22. The Writ Petitioner shall clear the entire dues in respect of the aforesaid accounts with accrued interest on or before 30.09.2022 with interest at 13% p.a with monthly rests calculated from 30/08/2022 onwards till date of actual payment. 3. The amount of Rs.2.5 Crores already deposited in the no-lien account pursuant to the interim orders passed by this court shall be adjusted into the account of M/s Premier Alloys forthwith by the Bank. 4. On settlement of the entire liability to the Bank in respect of the aforesaid two accounts, the Bank shall issue a letter to the Writ Petitioner stating that the writ Petitioner is a guarantor to the credit facilities availed by Scot Free Steels Ltd and a co-obligant in the credit facility availed by M/s.Premier Alloys (a Partnership Firm) from the Palakkad Branch of the Federal Bank. The letter will also make it clear that the Writ Petitioner has paid the entire amounts due from the aforesaid Company and the Partnership Firm and specifying the amounts so paid into the aforesaid accounts. 5. The Bank shall also make it clear in the said letter that the accounts have been settled by way of payments made by the Writ Petitioner and that the Writ Petitioner is entitled to claim the right of Subrogation in accordance with law before appropriate legal Forums towards his claims against the principal debtors/principal borrowers and other co-obligants, mortgagors/ co-mortgagors including the guarantors/co-guarantors to the aforesaid financial facilities availed from the Bank. 6. The Bank shall also hold the title deeds for a period of six months from 01.10.2022 and shall not release the said title deeds back to the mortgagors so as to enable the Writ Petitioner to initiate appropriate legal W.P(C).18761/2022 8 proceedings before any competent Court or Tribunal to enforce his legal rights accruing to him on account of the right of Subrogation. 7. The Writ Petitioner shall also execute an agreement of indemnity in favour of the Bank agreeing to indemnify the Bank in the event of any complaints, claims or any disputes that may arise on account of the Bank holding the title deeds etc including indemnifying the Bank against any consequential legal verdicts that may arise on account of the aforesaid complaints/claims or proceedings initiated by the principal debtor, co-obligants or mortgagors against the Bank. The Writ Petitioner shall indemnify the Bank against any losses, expenses, costs that may be incurred on account of the Bank being dragged into any litigation arising out of the above including in any legal proceedings seeking any relief initiated by the Writ Petitioner against the Bank. 8. The details of the properties covered under the loan transactions with the Federal Bank are given below: - a) 2 Acres and 28 Cents Plus(+) 8 Acres and 89 cents of land at Pookottur Village Ernad Taluk, Malappuram in the name of Mr. Favas N, Mr. Abdul Jaleel, Mr. Hasheem Palliyali Peediyekkal, Mr. P. Nasheed Ameen, Mrs. N.Aysha Rubi, Mrs. Nabeela Saikha and Mrs. Naseeba Kamila. - b) 5 Acres and 67 Cents of Land at Anakkayam Village Ernad Taluk , Malappuram in the name of Mr. Nasheed Ameen. - c) 0.3655 Hectors and 0.0394 Hectors at Vilayur Village, Ottappalam Taluk, Palakkad Dist., in the name of Shri. Abdul Shukkoor, Mundakkathodi and Mrs. Kadeeja. - d) 0.1440 Hectors at Vilayur Village, Ottappalam Taluk, Palakkad Dist. In the name of Mrs. Safiya Mammu. - e) 0.0971 Hectors at Vilayur Village, Ottappalam Taluk, Palakkad Dist. In the name of Mr. Shanawas E.P. - f) 0.1214 Hectors at Koppam Village, Ottappalam Taluk, Palakkad Dist. In the name of Shri. Abdul Shukkoor, Mundakkathod. - g) 159.50 Cents at Pudussery Central Village, Palakkad Taluk, Palakkad Dist. In the name of M/s. Premier Alloys. - h) 200 Cents at Pudussery, Pudussery Central Village, Palakkad Taluk, Palakkad Dist. In the name of M/s. Scot Free Steels Ltd. W.P(C).18761/2022 9 9. The writ petition is disposed of recording the terms agreed between the petitioner and the respondent Bank and by making it clear that the parties will be governed, strictly, by the terms of the settlement. I also make it clear that the findings in this judgment are only for the purpose of disposing of this case and should not be read as finally adjudicating the claims of the petitioner as against the principal borrower/other guarantors/mortgagors, co-obligants. All issues that may be raised by such persons are left open to be adjudicated in proceedings that may be initiated by the petitioner. ## **GOPINATH P. JUDGE** okb/ //True copy// P.S. to Judge W.P(C).18761/2022 10 ## **`APPENDIX OF WP(C) 18761/2022`** ``` PETITIONER EXHIBITS Exhibit P1TRUE COPY OF THE POSSESSION NOTICE DATED 12.01.2022 ISSUED BY THE RESPONDENT NO. 3. Exhibit P2TRUE COPY OF THE LETTER DATED 03.03.2022 SENT BY THE PETITIONER TO THE COMMITTEE FORMED BY THE RESPONDENT NO. 2. Exhibit P3TRUE COPY OF THE LETTER DATED 16.04.2022 SENT BY THE OFFICER OF RESPONDENT NO. 2 TO THE PETITIONER. Exhibit P4TRUE COPY OF THE NOTICE DATED 18.04.2022 ISSUED BY THE RESPONDENT NO. 3. Exhibit P5TRUE COPY OF THE LETTER DATED 18.05.2022 SENT BY THE PETITIONER TO THE RESPONDENT NO. 2 AND 3. Exhibit P6TRUE COPY OF THE COMPLAINT DATED 02.06.2022 SENT BY THE PETITIONER TO RESPONDENT NO. 1. RESPONDENT EXHIBITS Exhibit R2(A)COPY OF SALE NOTICE DATED 25-04-2022. Exhibit R2(B)COPY OF THE PAPER PUBLICATION MADE IN THE MALAYALA MANORAMA DAILY DATED 26-04-2022. Exhibit R2(C)COPY OF THE PAPER PUBLICATION MADE IN THE INDIAN EXPRESS DAILY DATED 26-04-2022. PETITIONER EXHIBITS Exhibit P7The true copy of the statement of account of Premier Alloys for the period from 11.09.2020 to 28.07.2022 issued by the 2nd respondent on 29.07.2022 Exhibit P8The true copy of the statement of account of Scot Free Steels Ltd. for the period from 11.09.2020 to 28.07.2022 issued by the 2nd respondent on 29.07.2022 ```