M/S Dynamic Continental Pvt. Ltd v. Uco Bank

order: - "It is agreed that even though the cross-examination of the plaintiff's

witnesses has been conducted, the nature of the dispute in the suit is such that

oral evidence is not necessary and that it can be decided on the basis of

documentary evidence as it involves interpretation of contractual terms. Learned

counsel for the parties, therefore, submit that court may set down the suit for

final disposal on convenient dates on the basis of existing material i.e. the

affidavits of the plaintiff's witnesses, existing statements as well as

documents available on the record. It is submitted that in these circumstances Page 7

the parties waive the right to lead the further oral evidence.

In the light of the submissions, the existing material which includes the

affidavits/deposition of the parties shall be treated as a part of the record

along with depositions/statements made by the plaintiff's witness, so far."

¶14In view of the above, the sole issue which arises for consideration in the present case is whether the plaintiff is liable to pay the sum of ` 36,35,599/26 to the defendant UCO Bank and is consequentially entitled to declaratory and injunctive reliefs.

¶15The crux of the dispute is about whether the defendant bank is entitled to prepayment charges on the loan amount, payable by the plaintiff. There is no dispute between the parties about the following facts:

¶1A loan of eighteen crores was sanctioned to the plaintiff, to "part finance the cost of the project", by the UCO Bank, on 20-5-2005.

¶2The loan was repayable in 24 quarterly installments to commence after an initial moratorium period of 24 months from the date of first disbursement. The sanction letter contains only a reference to repayment.

¶3The amendment letter dated 04.06.05 Ex. P-2 stated that prepayment charges were leviable if the loan was repaid by borrowing from another bank.

¶4No indication of the rate, of the said repayment or prepayment charges were indicated; the only reference point here was in the original sanction letter of 20th May, 2005, which stated that the repayment charges would be as per Bank's guidelines. No guidelines were produced along with the list of documents entered by the Bank.

¶16The construction that is placed on the contract by the plaintiff is that the amended terms implied that the prepayment charges could only be levied till the time the liability to pay does not arise. The effect of the amended terms was that the liability to pay could arise on the sale of the property on an outright basis, as the proceeds of the sale had to be deposited to the defendant directly, or on the completion of the 24 month moratorium period, whichever is earlier. Since, the premises had been sold and the money realized was more than what they were liable to pay, the liability to pay had already arisen and so no pre-payment charges could be levied, as it was no longer "pre-payment". The loan had already become due. The plaintiff here concedes in the suit averments itself that a sum in excess of ` 25 crores had been received by it, towards sale or Page 8

part sale of some of the portions of the shopping complex. In the circumstances, it was necessary for it to prove that there was full compliance with terms of Special Covenant No. 3, as modified by stipulation No. 2, in the letter of 4-6-2005, i.e. that the amounts were kept in a designated Escrow account. The evidence on this regard is ambiguous and vague. In the pleadings, the plaintiff does not specifically state that the Escrow account had been opened, and that the Defendants had the benefit of the amounts, with them, as a result of which the repayment period never began, for the pre-payment charges could be recovered. The UCO Bank has, in the Written Statement denied that such account was opened, or that any amount was deposited.

¶17The cross-examination of the plaintiff reveals a confusing state of affairs, which does not inspire too much confidence as far as his testimony or version is concerned, particularly on two aspects. The first one relates to the deposit of the sale proceeds in the bank account, with regard to which he first stated that the sale proceeds were deposited in the bank account and then retracted to state that "it is a matter of record whether any amount was deposited in the loan account". The second relates to the utilization of the loan taken from Punjab National Bank. At first, he suggested that the loan taken from PNB was not utilized for repayment of the loan to UCO Bank and later on stated that it was actually the loan from PNB that had been utilized to settle the loan taken from the UCO Bank. Eventually, he stated that he did not recall whether the loan raised from PNB was utilized for paying back the loan to UCO Bank. In view of this discussion, it is held that in the absence of any document, disclosing that the plaintiff had complied with the requirements spelt out in the amended sanction letter, it is held that the plaintiff did not in fact deposit the amount, as required of it, in a designated Escrow account. Consequently, the plaintiff did not deposit the amount as agreed.

¶18That brings the discussion to the tenability of the plaintiff's argument that the repayment liability had not commenced, since it had sold and realized about ` 25 crores, which made Special Covenant No. 3 of the original sanction letter operative, and resultantly, there was no question of pre-payment. In short, the plaintiff contends that having realized such amount, by virtue of conditions imposed, the bank cannot call the amounts as pre-payments, and levy the impugned amount of ` 36 lakhs. Though such a submission is attractive, the court is not inclined to accept it. The moratorium period of 24 months from the date of first disbursement, is an agreed milestone. The payment to be made as per the mechanism provided under Special Page 9

covenant 3 provided for a contingency, i.e. prospective sale. In case such sales did not realize the expected potential, the bank was exposed to loss. Furthermore, as held previously, in the absence of anything to show that the plaintiff had acted on or complied with such condition, its liability to fulfil all parts of the contract, could not be absolved. Here, the court is not unmindful of the circumstance that the plaintiff had not paid any amount towards the outstandings; virtually the entire amount was paid by PNB. This fact itself undercuts the plaintiff's argument that amounts had to be or were deposited with the bank. The plaintiff was in a hurry to avail of further loans, which the PNB was willing to offer to it; it therefore, borrowed the outstanding amount and repaid the same to UCO Bank. It is therefore held that the plaintiff was liable to pay pre-payment charges for liquidating the liabilities of UCO Bank, by borrowing from other sources. This is in terms of Clause 5 of the letter Ex. P-3, which states that "5. Prepayment charges shall be levied only when a company prepays our loans by borrowing from other sources…."

¶19The last aspect pertains to the question of what is the rate of "prepayment charges". It seems that the bank calculated the same at 2 % of the outstanding amount. The original sanction letter, as well as the amended or modified terms, do not clearly spell out the rate of pre-payment charges. The first document merely refers to some guidelines; no guidelines have, however been produced. The materials on record, on the other hand, do not show that the plaintiff any time had any objection to the inclusion of a pre-payment clause. The plaintiff, in his evidence, or pleadings does not impeach the amount on the ground that it was not according to the guidelines, or that such prepayment condition did not exist as a matter of contract. What the plaintiff argues in the case, is that the precondition for applicability of the said condition was not fulfilled. In these state of pleadings and evidence, it has to be concluded that the plaintiff had knowledge and awareness about the rate of pre-payment charges applicable.

¶20For the above reasons and in view of the conclusions outlined above, the Court is of opinion that the suit has to fail. It is accordingly dismissed, without any order as to costs.

21st January, 2011

(S.RAVINDRA BHAT) JUDGE

Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 14.12.2010 Decided on: 21.01.2011 CS(OS) 1061/2007, I.A. No. 6752/2007 M/S DYNAMIC CONTINENTAL PVT. LTD. ..... Plaintiff Through : Sh. R.K. Gupta, Dr. A.N. Aggarwala, Sh. Pawan Verma and Ms. Rekha, Advocates. versus UCO BANK ..... Defendant Through : Sh. C.M. Manktala, Advocate. CORAM: MR. JUSTICE S. RAVINDRA BHAT 1. Whether the Reporters of local papers Yes. may be allowed to see the judgment? 2. To be referred to Reporter or not? Yes. 3. Whether the judgment should be Yes. reported in the Digest? MR. JUSTICE S.RAVINDRA BHAT % 1. The plaintiff, a private company, sues through its Director, Mr. Pawan Garg. It claims a declaration that no amount is payable to the defendant (hereafter called "the bank") as repayment, or prepayment charges. 2. The plaintiff is involved in the real estate business, particularly in the development of shopping-malls-cum-multiplexes in Ludhiana. It decided to construct a shopping-mall-cum- multiplex called "Flamez" at the premises, measuring 4140 square yards in area, owned by the plaintiff at Gurdev Nagar, Ludhiana. For this purpose the plaintiff applied for a term loan from the defendant. The estimated total cost of the project at the time was approximately ` 33 Crores. Page 2 3. The Bank sanctioned a term loan of `18 crore on 20.05.2005, to partly finance the cost of the project on certain terms and conditions. The loan sanction document stated that the loan would be repayable "In 24 quarterly installments to commence after an initial moratorium period of 24 months from the date of first disbursement". The other terms and conditions in the sanction letter were as follows: (i) Equitable mortgage of title deeds of land and building of the plaintiff, being two plots measuring 4140 sq. yards, at Ludhiana; (ii) Personal guarantee of Shri Pawan Garg for ` 29.33 crores. According to Special Covenants incorporated in the sanction letter (produced as Ex. P-1) the plaintiff could execute the conveyance deed in favour of the prospective buyers of its commercial space after the bank's dues were fully repaid; till that time, it could issue allotment letters to such prospective purchasers, and could receive gradual payments linked with progress in construction of the building through escrow account. Special covenant No. 2 and 3 read as follows: "2. Sale proceeds and advance against sale should be deposited with us in the Escrow account to be opened with us. 3. If any space in the complex is sold on outright basis the entire sale proceeds to be deposited with Bank towards Part/ Full liquidation of the loan. In no case proceeds of sale to be used for any other purpose.." 4. At the request of the plaintiff, the Bank agreed to amend some of the terms of the sanction letter. This letter dated 4-6-2005 is exhibited as Ex. P-2. The amended/clarified terms further provided that "2. The company is allowed to execute conveyance deed to prospective buyer before liquidation of bank finance subject to the receipt of full consideration from the buyers and depositing the same in the bank. …… …… ……… 5. Prepayment charges shall be levied only when a company prepays our loans by borrowing from other sources…." Page 3 5. During the construction, the project costs escalated and the plaintiff approached UCO Bank for the enhancement of the loan amount to ` 25 crore from ` 18 crore, which was turned down by the bank. The plaintiff again approached the bank – on 25-1-2007- for a loan under a new scheme called the "UCO Rental Scheme" against the future lease/rent discounting scheme for ` 30 crores for the purpose of adjusting its outstanding loan and to meet the escalated costs. It is alleged that UCO Bank asked for more stringent conditions on the loan, by their response (Ex. P-3, dated 29-3-2007) and the plaintiffs were unable to furnish the details required by them, and therefore, did not go ahead with the transaction. The plaintiff, instead, proceeded with the offer of