CANARA BANK vs. M/S LEATHEROID PLASTICS PVT LTD.

1           [ 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)      J U D G M E N T 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 restructuring   of   past   debt­repayment.   The Signature Not Verified Digitally signed by ASHA SUNDRIYAL Date: 2020.05.21 17:12:37 IST Reason: arrangement   of   extending   such   credit   was   agreed 2 th upon   on   4   January   2001.   The   bank   agreed   to extend   the   following   financial   facilities   to   the respondent,   against   mortgage   of   land,   buildings stocks etc; towards security:­ 

Two documents were executed on that date, i.e. th 4  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 th respondent little beyond the midnight hours of 27 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 th made on 6   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 th on 20  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 nd National   Commission’)   dated   22 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 th 15  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 th partly allowed in its order of 6   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:­

13. It has been the respondent’s case that two letters th nd were sent dated 11   June, 2001 and 2   July, 2001 seeking copies and the status of the Insurance Policy but   there   was   no   reply   to   such   letters.     These   two th nd letters dated 11  June, 2001 and 2  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, th Dated: 20  May, 2020