cpc

negligence of bank

Proprietor

My nephew who ran a Pvt. Ltd company, took a loan from a local co-operative bank in 1998 against Stock (raw material, in process goods & finish goods), Machinery, Furniture & Fixtures. In 2001 he stopped paying interest towards the loan. I am Guarantor in this loan along with my other nephews (borrowrer's brothers) and my sister. 

 

What are the duties of the Bank once they come to know that the borrowrer of this type of loan has gone default? They had declared this account to be NPA in 2001 while the borrowrer has shown the stock worth the original loan amount in 2004 statement. Shouldn't this stock be confiscated by bank? 

 

Also is it okay to give a loan of Rs. 25,00,000/- without taking any property as security?

 

Now they are asking me to pay the outstanding amount. Can I ask them to handover the "stock" to me against my payment of the outstanding?

 

Can I file a suit of Negligence on the part of bank under section 139 of The Contract Act 1872? What are the chances of my release as guarantor from this loan against this suit?

 
Reply   
 

1.   As a matter of fact for enforcing claim against the borrower and gurantors, the time limit is three years provided you have not agreed in your guarantee letters the following conditions:

i).  that the debt acknowledgment given by the borrower is binding on the guarantors

ii). the guantor's liability shall not cease untill the debt of the borrower is discharged to the satisfaction of the bank

iii).the ommission to deal with hypotheca by the bank does not discharge the guarantors 

2.    If  the bank has made any written demand you may send a reply that the bank acted negligently and it is responsible for its own negligence and ommissions. If there is no written demand you may keep quite.

3. The question of filing suit by you (guarantors) against the bank does not arise. How ever if bank files claim (suit) against you, you may resist the claim under Sec. 139 of Indian Contract Act provided you have not conceeded to the above three conditions in your guarantee deeds favouring the bank. 


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Proprietor

Thanks for the detailed reply. I'll refer to documents and get back again.

Another thing I wish to know is that can a suit of a Multi State Co-operative be run in a "Court of Nominee"? I have heard that such bank can file their suit with Civil Court or higher only and not in a "Court of Nominee". Any idea?

 
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Proprietor

Can a co-operative bank give a loan of Rs. 25,00,000/- without any property as guarantee? Can it be given only on basis of personal guarantees?

 
Reply   
 

It is discretion of cooperative bank to give loan with or without insisting for tangible security. Guarantee is distinct from tangible security. There are good loan accounts advanced in banks based on personal guarantee(s). Sometimes personal guarantee(s) proved to be best form of securities than the tangible securities and the loan accounts based on such personal guarantee(s) have not even turned out of order or slipped to NPAs. The banks keep them in force by obtaining debt acknowledgments periodically. Hypotheca may vanish by vagories of weather or diminish in their value but such eventuality of diminishing in value of guarantor(s) is very rare. 

 
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Chief Manager(Law)

If you pay the dues of the Bank as a guarantor, then you step in the shoe of the bank. Under the provisions of section 140 of the contract Act, you will be vested with all the rights of the Bank to enforce your remedy against the Borrower and other guarantors.

Now you have raised an interesting point: Will the Bank give me custody of security held by it? Yes it has to. Stocks hypothecated to the Bank can be given to you provided the bank has enforced right to seizure and has custody of the stocks and to the extent it holds the stock.


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Proprietor

Originally posted by : narendra.s.p

Now you have raised an interesting point: Will the Bank give me custody of security held by it? Yes it has to. Stocks hypothecated to the Bank can be given to you provided the bank has enforced right to seizure and has custody of the stocks and to the extent it holds the stock.

 

What if the bank didn't seizure the hypothecated goods? The account went NPA in 2001, then they again sanctioned another loan in 2002. The borrowrer didn't pay interest in 2003 & 2004 but they did provide the stock statements. They filed the suit for recovery in 2004 but didn't seize the material. 

 
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Chief Manager(Law)

 

Bank reserves its right to enforce the hypothecated Security. If the Bank actually takes the custody of the stocks, it is required to arrange for its safe custody and insure the same. This process is cumbersome and deters the Banks from actually enforcing its rights. Banks only enforce easy charges such as Hypothecation of Vehicles; that too by employing outsourced seizure agents.

In one case, the Supreme Court has held that Bank was negligent in allowing the machinery charged to be sold by the borrower. “Public Accountability” was made applicable to Bank officers in the case of Euraka Forbs Ltd Vs. Allahabad Bank in Civil Appeal No.4029/2010 [judgment dated.03/05/2010]


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