WA 1928/2022

WA.1928/2022 -:1:- # **`IN THE HIGH COURT OF KERALA AT ERNAKULAM`** # **`PRESENT`** ``` THE HONOURABLE THE CHIEF JUSTICE MR.S.MANIKUMAR ``` ``` & ``` ``` THE HONOURABLE MR. JUSTICE SHAJI P.CHALY ``` ``` FRIDAY, THE 16[TH] DAY OF DECEMBER 2022 / 25TH AGRAHAYANA, 1944 WA NO. 1928 OF 2022 ``` ``` AGAINST THE JUDGMENT IN WP(C) 18761/2022 OF HIGH COURT OF KERALA DATED 15.9.2022 ``` ``` APPELLANTS/3RD PARTIES: ``` - **`1 ABDUL JALEEL AGED 37 YEARS, S/O. ABU, PALLIYALI PEEDIYEKKAL HOUSE, ALATHURPADI, ERNAD, MALAPPURAM DISTRICT., PIN–676517`** - **`2 HASHIM AGED 34 YEARS, S/O. ABU, PALLIYALI PEEDIYEKKAL HOUSE, ALATHURPADI, ERNAD, MALAPPURAM DISTRICT, PIN–676517`** - **`3 NASHEED AMEEN.P AGED 32 YEARS, S/O. ABDUL AZEEZ.P, 2/245, PALAKKAN HOUSE, MELMURI P.O, ERNAD, MALAPPURAM DISTRICT, PIN–676517`** - **`4 AYISHA RUBI.N AGED 30 YEARS, D/O. ABDULLA.N, NAMBIDIKUNNEL HOUSE, MARIYAD P.O, MANJERI, NARUKARA, MALAPPURAM DISTRICT, PIN-678622`** - **`5 NABEELA SADIKHA.P AGED 31 YEARS, W/O. ABDUL JALEEL.P.P, PALLIYALI PEEDIYEKKAL HOUSE, ALATHURPADI, ERNAD, MALAPPURAM DISTRICT, PIN – 676517`** WA.1928/2022 -:2:- ``` 6NASEEBA KAMILA. P AGED 26 YEARS, D/O. ABDUL AZEEZ.P, PALAKKAN HOUSE, VADAKKEPURAM, MELMURI P.O, ERNAD, MALAPPURAM DISTRICT, PIN – 676517 ``` ``` BY ADVS. JACOB SEBASTIAN K.V.WINSTON ANU JACOB ``` ## **`RESPONDENTS/PETITIONER & RESPONDNS:`** - **`1 MUHAMMED MUSTHAFA PADINHAKKARA AGED 55 YEARS, S/O. MOHAMMED, RESIDING AT PADINHAKKARA HOUSE, VILAYUR POST, KARINGANAD, PALAKKAD DISTRICT, PIN – 679309`** ``` 2BANKING OMBUDSMAN SHRI. G. RAMESH, C/O. RESERVE BANK OF INDIA, BAKERY JUNCTION, THIRUVANANTHAPURAM DISTRICT, PIN-695033 ``` - **`3 THE FEDERAL BANK VICE PRESIDENT, LOAN COLLECTION AND RECOVERY DEPARTMENT, FEDERAL TOWERS, PO BOX NO.101, ALUVA, ERNAKULAM DISTRICT, KERALA., PIN – 683101`** - **`4 AUTHORIZED OFFICER UNDER SARFAESI ACT FEDERAL BANK, PALAKKAD, HAVING ADDRESS AT SAI KRISHNA RESIDENCY, KUNNATHURMEDU, PALAKKAD DISTRICT, PIN-678013`** ``` BY ADVS. PHILIP MATHEW MOHAN JACOB GEORGE ``` ``` THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON 16.12.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` WA.1928/2022 -:3:- ## **J U D G M E N T** Dated this the 16[th] day of December, 2022 ## **S. Manikumar, CJ.** Instant writ appeal is filed by third parties, being aggrieved by the judgment in W.P(C). No.18761 of 2022 dated 15.09.2022, passed by the learned Single Judge, recording the terms of settlement between the writ petitioner and the respondent Bank. 2. Appellants and the 1[st] respondent were guarantors to the credit facilities availed by Scot Free Steels Limited and comortgagors to the credit facility availed by M/s. Premier Alloys from Palakkad Branch of Federal Bank/ respondent No.3. 3. Before the writ court, petitioner has sought for the following reliefs: “a) Issue a writ of mandamus or any other appropriate writ, order directing respondent No. 1 to dispose of the complaint being Exhibit P6, within a specified period. b) Issue a writ of mandamus or any other appropriate writ, order directing respondent Nos. 2 and 3 to consider and dispose of the representations dated 03.03.2022 (Exhibit P-2) and 18.05.2022 (Exhibit P-5) in a time bound manner, considering the request for subrogation made by the writ petitioner from the bank while deferring Exhibit P-4 notice dated 18.04.2022.” 4. Short facts leading to filing of the writ petition are as under: 4.1. Writ petition is being filed by the petitioner, the WA.1928/2022 -:4:- Managing Director and shareholder of the registered company M/s. Scot Free Steels Limited, and, who is having links with the partnership firm M/s. Premier Alloys (regd.) wherein, his wife has a major share. According to the petitioner, the said two entities, M/s Premier Alloys and M/s. Scot Free Steels Limited had availed a loan through cash credit limit from the Federal bank, Palakkad, of which, respondents No.1 and 2 are functionaries, for amounts of Rs.7 Crores and Rs.4 Crores respectively, in 2020. Writ petitioner is one of more than 14 guarantors/ co-obligators for the said two loans and is facing proceedings of recovery. On account of the COVID-19 pandemic, the business of the two firms were affected and, therefore, repayment of the loan was defaulted. 4.2. The respondent Bank proceeded to issue Section 13(2) notice which was followed by notice of possession of mortgaged properties dated 12.01.2022. It is stated that, as the members were reluctant to raise capital themselves, the petitioner, upon himself, took a stand that he would clear all the dues owed to the bank and sent a letter dated 03.03.2022 stating the same. The officer of the respondent No.2 sent a letter dated 16.04.2022 wherein, it accepted in principle the offer made by the petitioner and some other members and asked for a detailed time-line to be provided. However, two days later the bank through respondent WA.1928/2022 -:5:- No.3 sent a notice intimating sale wherein it was stated that the mortgaged properties were to be sold by auction on 15.06.2022. 4.3. The petitioner approached the bank several times thereafter to get clarity upon an offer of settlement made by him; but no clarity was forthcoming. The petitioner thereafter, sent a letter dated 18.05.2022 requesting the bank to allow him to settle the entire dues. Since no response was forthcoming, the petitioner approached the banking Ombudsman,, by way of a complaint on 02.06.2022, which is not yet decided. The petitioner having no other option, is thus forced to file the writ petition seeking directions from this court. 5. Recording the terms of settlement between the writ petitioner and respondent Bank, writ court disposed of the writ petition as under: “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 WA.1928/2022 -:6:- as 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.1081550 0003388) 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 amount 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 WA.1928/2022 -:7:- 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 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 WA.1928/2022 -:8:- 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.” ## 6. Being aggrieved, instant writ appeal is filed, _inter alia_ , on the following grounds: WA.1928/2022 -:9:- - A. First and foremost contention is that the writ petition is not legally maintainable. This Court had, vide the impugned judgment, proceeded to record the terms of settlement between respondent No. 1, who is the co-borrower/ co-mortgagor, and respondent No. 3, as against the appellants, who are the other co-mortgagors, for which the respondent No. 1 could have approached the Civil Court, rather than invoking the jurisdiction under Article 226 of the Constitution of India. There was no violation of a legal or equitable right which requires interference of this Court under Article 226 of the Constitution of India. - B. It is further contended that the 2[nd] respondent is not an instrumentality of State, coming within the sweep of Article 12 of the Constitution of India. None of the statutory rights of the writ petitioner has been infringed. Relying on the decision in **Federal Bank** v. **Sagar Thomas** [AIR 2003 (SC) 4325], appellants have contended that a Writ petition is not maintainable against the Federal Bank. In view of the alternative remedy under Section 17 of the SARFAESI Act, 2002, the challenge against the recovery action also could not have been entertained by this Court. - C. Appellants have also contended that the writ petition, which is not maintainable, is entertained and a collusive settlement entered into between mutually benefiting parties which makes 3[rd] parties liable has been given the stamp approval of this Court in the judgment impugned. - D. The appellants have further contended that the terms of settlement between respondent Nos.1 and 3 cannot be recorded when the appellants are not parties to W.P.(C) No.18761/2022. There are conditions in the terms of settlement which are prejudicial to the appellants. Without the appellants being on the party array, the learned Single Judge should not have entertained the settlement. Such recording of terms of settlement has put the appellants to grave injustice/prejudice. Hence, they stated that the recording of terms of settlement under the impugned judgment is in stark violation of the principles of natural justice. The appellants were neither afforded an WA.1928/2022 -:10:- opportunity nor made a party to the proceedings in W.P(C) No.18761/2022. - E. It is further contended that the impugned judgment has misinterpreted the doctrine of subrogation, as envisaged under Sections 140 and 141 of the Indian Contract Act, 1872. The doctrine of subrogation can be invoked against the principal debtor only under Sections 140 and 141 of the Contract Act, 1872 and cannot be invoked against co-guarantors/co-borrowers/co-mortgagors. It is against the clear provisions of Section 135 of the Contract Act, 1872. The judgment of the Hon'ble Supreme Court quoted in the judgment impugned was rendered in a totally different context. Even otherwise, in view of the non-obstante clause in Section 35 of the SARFAESI Act, 2002, the provisions of Transfer of Property Act have no application when recovery action is initiated under the SARFAESI Act. - F. It is further contended that the judgment impugned is against the clear directives of the RBI Circular governing the subject. Learned Single Judge has failed to appreciate the Master Direction – Reserve Bank of India (Transfer of Loan - Exposures) Directions, 2021 (Loan Exposure Directions) which was released on 24.09.2021, as evident from Annexure-A2. Clause 4 of the said Directions states that the lenders shall not undertake any loan transfers or acquisitions other than those permitted under these directions. In this regard, appellants have stated that clause (4) can be read along with clause (54) of the Loan Exposure Directions, which states that lenders shall transfer stressed loans only to permitted transferees and Asset Reconstruction Companies. - G. It is further contended that apart from the fact that loan transfers can only be made to permitted transferees, the lenders, as provided under clause (3), should make appropriate disclosures under clause (86) of the Loan Exposure Directions in either financial statements, under ‘Notes to Accounts’ relating to total amount of loans not in default/stressed loans transferred and acquired to/from other entities on a quarterly basis. It is, therefore, clear that the loan transfer by a lender WA.1928/2022 -:11:- under the Loan Exposure Directions cannot be made to an individual. Further, the terms of settlement have been entered into by the respondents, pursuant to a collusive proceeding carried out by way of W.P.(C) No. 18761/2022. - H. It is finally contended that once the loan is discharged, bank has no business to retain the title deeds of the appellants, which are offered as security for the loan. Appellants are entitled to get back their title deeds. The retention of the title deeds has infringed the rights of the Appellants under Article 300A of the Constitution of India. 7. Based on the above grounds, Mr. Jacob Sebastian, learned counsel for the appellants, made submissions. 8. Heard the learned counsel for the parties and perused the pleadings and material on record. 9. At paragraphs (6) and (7) of the impugned judgment, writ court has observed as under: “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 WA.1928/2022 -:12:- ## 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. (2). The substitution of the redeeming comortgagor 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 joint debtors. He who seeks equity must do equity. (4). There is a distinction between a third party who claims subrogation and a comortgagor who claims the right. The comortgagors stand in a fiduciary relationship WA.1928/2022 -:13:- 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 comortgagor can, just as the surety would, ask to be indemnified 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 xxxxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxxx 20. A subrogation rests upon the doctrine of equity and the principles of natural justice and not on the privity of 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 WA.1928/2022 -:14:- 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.” 10. Going through the impugned judgment, ultimately the learned Single Judge has made it clear that the findings in the judgment are only for the purpose of disposing of the case and should not be read as finally adjudicating the claims of the writ petitioner as against the principal borrowers/other guarantors/ mortgagors or co-obligants. Therefore, we do not think that the appellants have made out a case for interference with the judgment of the learned Single Judge. This is more so when the appellants are at liberty, to proceed against the principal debtor for any loss suffered by them consequent to the guarantee extended, or, for defending themselves consequent to any violation of the terms and conditions of the loan agreement(s), in accordance with law. 11. It is also the case of the appellants that the respondent WA.1928/2022 -:15:- bank can realize the claims from the principal borrower initially and thereafter, to proceed against the guarantor; Bank is directed to consider the same. With the above directions, writ appeal is disposed of. Sd/S. Manikumar, Chief Justice Sd/Shaji P. Chaly, Judge sou. ///TRUE COPY/// P. A. TO JUDGE WA.1928/2022 -:16:- ## **`APPENDIX OF WA 1928/2022`** ## **`PETITIONER ANNEXURES:`** |**`Annexure-A1`**|**`A TRUE COPY OF THE LEGAL NOTICE DATED`**| |---|---| ||**`22.10.2022.`**| |**`Annexure-A2`**|**`A TRUE COPY OF THE CIRCULAR DATED`**| ||**`24.09.2021 ISSUED BY RESERVE BANK OF`**| ||**`INDIA.`**|