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LAWS(APH)-1987-8-35

HIGH COURT OF ANDHRA PRADESH

Coram : P.KODANDARAMAYYA J.

Decided On : August 24, 1987

Appeal Type : C.C.C. APPEAL 98 of 1980

Appellant(s) :

STATE BANK OF INDIA

Respondent(s) :

S.B.SHAH ALI

Advocate(s) :

K.RAMA GOPAL, S.S.PRASAD

Equivalent Citation :

ALT-1987-2-470, LAWS(APH)-1987-8-35, APLJ-1994-2-334, AIR(AP)-1995-0-134, LS-

1994-1-213, CIVLJ-1995-1-402, BANKCLR-1994-2-292

Cited Judgement(s) :
- Indian Bank Vs. State Of Andhra Pradesh, [LAWS(APH)-1993-3-56] [Referred To]
- Tata Motors Ltd Vs. Bornali Dutta Bora, [LAWS(GAU)-2008-3-34] [Referred To]
- Meena Agrawal Vs. Worldlink Finance Limited, [LAWS(DLH)-1998-3-82] [Referred]
- Kotak Mahindra Primus Ltd Vs. S Laxmana Rao, [LAWS(APH)-2004-8-157] [Referred To]
- M Bernardsingh Vs. Syndicate Bank Nagercoil Branch, [LAWS(MAD)-1999-10-49] [Referred To]
- P. Sundaramoorthy Vs. Shriram Transport Finance Company Limited, [LAWS(MAD)-2014-9-404]
[Referred To]
- Mrs Rajyalakshmi Rao And Mr Justice K S Gupta Members
Citicorp Maruti Finance Ltd Vs. S Vijayalaxmi, [LAWS(NCD)-2007-7-10] [Referred To]
- L And T Finance Ltd Vs. G G Granites, [LAWS(MAD)-2013-9-214] [Referred To]
- M/S. L&T Finance Ltd. Vs. M/S. J.K.S. Constructions Pvt. Ltd., [LAWS(MAD)-2014-2-40]
[Referred To]
- Cholamandalam Investment And Finance Co. Ltd. Vs. The State Of A.P., [LAWS(APH)-2014-9-82]
[Referred To]
- Citicorp Finance (India) Ltd Vs. State Of West Bengal & Anr, [LAWS(CAL)-2007-7-96] [Referred]
- M G International Rep By Its Proprietor Vs. Syndicate Bank, [LAWS(MAD)-2018-4-387] [Referred
To]
Referred Act(s) :

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- Contract Act, 1872, S.176

Headnote:
A. CONTRACT ACT, 1872 - S.176 - Normally the Bank should have filed an appeal against the
judgment and decree obtained by the defendant but inasmuch as the damages assessed were
deducted accepting the counter-claim, the plaintiff is entitled to canvas the correctness of the
finding in this appeal and claim that the decree deducting the counter-claim for damages is
unsustainable 3. - The Bank, its Agents and Nominees shall be entitled at all times without
notice to the Borrower but at the Borrower's risk and expense and it so required as Attorney
for and in the name of the Borrower to enter any place where the said vehicle may be and
inspect value insure superintendent disposal and/or take particulars of all or any part of the
said vehicle and check any statements accounts reports and information and also on any
default of the Borrower in payment of any money hereby secured or the performance of any
obligation of the Borrower to the Bank or if any statement representation or warranty made
by the Borrower in its, their or his loan application or in any support in financial statement
shall be found to be false or inaccurage in any material respect or on the occurrence of any
circumstances in the opinion of the Bank endangering this security to take possession or
recover receive appoint receivers or remove and/or sell by public auction or private contract
despatch for realisation or otherwise dispose of or deal with all or any part of the said vehicle
and to enforce realise settle compromise and deal with any rights or claims relating thereto
without being bound to exercise any of these powers or being liable for any loss in the exercise
thereof and without prejudice to the Bank's rights and remedies of suit or otherwise and
notwithstanding there may be any pending suit or other proceedings the Borrower
undertaking to give immediate possession to the Bank on demand of the said vehicle and to
transfer and deliver to the Bank all relative bills contracts securities and documents and
agreeing to accept the Bank's accounts of sales and realisations as sufficient proof of amounts
realised and relative expenses and to pay any shortfall or deficiency thereby shown provided
that the Bank shall be entitled at all times to apply any other money or moneys in its band
standing to the credit of or belonging to the borrower in or towards payment of any amount
for the time being payable to the Bank and to recover at any time from the Borrower by suit
or otherwise the balance remaining payable to the Bank under this Agreement or otherwise
notwithstanding that all or any of the securities may not have been realised." - It is also
necessary to note a passage from Chitty on Contracts, 24th Edition, where the Author had
distinguished between pladge and mortgage, in paragraph 2278 :"Sale upon default in
payment of the debt is an incident of pledge, where as a lien gives merely a right to detain the
goods until the debt is paid again, a pledge, unlike a lien, is assignable, and may be taken in
execution against the pledgee. - A mortgage of chattels or bill of sale differes from a pledge in
that on a mortgage the property posses by assignment, subject to a right of redemition, while
possession need not pass to the mortgagee".We must also bear in mind the definition of
'pledge' given in Section 172 of the Indian Contract Act which States : "The bailment of
goods as security for payment of a debt or performance of a promise is called "pledge". -

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Though the learned Judge drew the distinction between the pledge and hypothecation, he did,
npt decide the question of the right to take possession and sell the goods be the hypothecatee
without the intervention, of the Court, but proceeded to state "it is not, disputed that in the
case of hypothecation the creditor has the right to take possession of the goods and to sail it
without the intervention of the Court" and hence the question now raised in this appeal did
not fall for consideration. - It, was held that the Bank is only a creditor of the owner of the
vehicle and holds the vehicle as a security with neither de jure or de facto possession of it nor
title to it and hence the Bank can only recover the dues in case of default by sale of the vehicle
and in view of this the Bank can never be taken to step into the shoes of the owner and cannot
be liable to pay the compensation to the victims of the accident caused by the owner's
employee.
B. Though the learned Judge drew the distinction between the pledge and hypothecation, he did,
npt decide the question of the right to take possession and sell the goods be the hypothecatee
without the intervention, of the Court, but proceeded to state "it is not, disputed that in the
case of hypothecation the creditor has the right to take possession of the goods and to sail it
without the intervention of the Court" and hence the question now raised in this appeal did
not fall for consideration. - It, was held that the Bank is only a creditor of the owner of the
vehicle and holds the vehicle as a security with neither de jure or de facto possession of it nor
title to it and hence the Bank can only recover the dues in case of default by sale of the vehicle
and in view of this the Bank can never be taken to step into the shoes of the owner and cannot
be liable to pay the compensation to the victims of the accident caused by the owner's
employee. - Now the Court below held that in the absence of the defendant, the vehicle is
taken clandestinely and the defendant sufferred loss due to this forcible seizure and this
finding is not seriouslv challenged before me bv the plaintiff's counsel.
C. In view of this, without going into the question of the reasonableness of the claim of the
defendant, I would hold that the present finding arrived at by the Court awarding damages
should cover the entire claim for 24 months 17 days without allowing the defendant to make a
fresh claim in respect of remaining period. - In the result, I hold that the decree in favour of
the defendant towards the damages caused for illegal seizure is clearly sustainable and
accordingly the appeal fails and the same is dismissed.

Judgment :

(1.) The State Bank of India the plaintiff in O.S. No. 530 of 1973 on the file of the IV Additional
Judge, City Civil Court, Hyderabad, is the appellant. The suit is filed for recovery of Rs. 46,987-62
Paise and for interest at 11% per annum on the toot of a mortgage by deposit of title deeds created by
the defendants in favour of the Bank.

(2.) In view of the sole question remained for determination, it is enough if I state that portion of the
defence and the pleadings relating to the controversy. The defendant disputed the nature of the loan

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advanced to him and mainly raised the contention that the plaintiff-Bank high handedly seized the
lorry ADT 1520 which was hypothecated to the Bank and thus caused damage and loss to him and for
that purpose he made a counter-claim for damages in the suit. In fact, the defendant filed a suit earlier
to the suit filed by the Bank in O.S. No. 2449 of 1973 before the II Asst. Judge, City Civil Court,
Hyderabad, for declaration that the seizure of the lorry is illegal and for an injunction restraining the
Bank for selling the lorry. That suit was transferred and tried with the suit filed by the Bank and
numbered as O.S. No. 315 of 1976. Both the suits were tried together and the issues are almost
common and the main controversy being, whether the seizure of the lorry by the Bank is legal and if
not whether the Bank is liable to pay compensation for the illegal seizure for the damage caused to the
defendant. On that controversy, the Court below held that the seizure is illegal and the Bank is liable to
pay compensation at Rs. 100/- per day and awarded a sum of Rs. 15,300/- from 27-6-1973 to 27-11-
1973 and on that finding decreed the suit filed by the defendant restraining the Bank from selling the
vehicle and also decreed the suit filed by the Bank deducting Fs. 15.300/- towards the damages
sustained by the defendant and passed a decree for the balance of Rs. 31,687-62 Paise. Normally the
Bank should have filed an appeal against the judgment and decree obtained by the defendant but
inasmuch as the damages assessed were deducted accepting the counter-claim, the plaintiff is entitled
to canvas the correctness of the finding in this appeal and claim that the decree deducting the counter-
claim for damages is unsustainable

(3.) No the point for determination in this appeal is, whether the seizure of the vehicle is legal and if
not whether the damages awarded is reasonable and just.

(4.) It is to be remembered that the plaintiff-Bank while grant ingmedium term loan to purchase this
lorry in question took hapothecation of the lorry and also equitable mortgage of the house property
belonging to the second defendant, who is the wife of the first defendant. It is urged by the learned
counsel for the appellant that as per Ex. A-2, the agreement for medium term loan, the vehicle in
question was hypothecated to the Bank and clause 10 empowers the Bank to seize the vehicle and sell
if the defendant commits default in payment of the instalment. We have already noticed, besides
hypothecation of the vehicle under Ex- A-2, an equitable mortgage was also taken for the house
property and the suit was decreed accepting that the equitable mortgage created in favour of the Bank
as true and valid. Now there is no controversy regarding the legality and enforcement of the mortgage
of the property in respect of the very debt. However, it is urged that the claim of the defendant for
damages on the basis that the seizure is unsustainable as Clause 10 of the agreement for medium term
loan hypothecating the vehicle clearly empowers the Bank to do so. Hence it is seen that the nature of
the hypothecation of the vehicle and the legal consequences of such hypothecation should be
examined.

(5.) To start with, the agieement for medium term loan describes the document as hypothecation of
the vehicle. Clause 6 states that, as security fr the said loan and also for payment of any other charges,
costs and expensos payable to or incurred by the Bank in relation thereto, the borrower hereby charges
and hypothecates to the Bank all the said vehicle specified and described in the Schedule which will at

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any time during the continuance of this security normally be garaged in or about Hyderabad or
elsewhere in India. Clause 10 no doubt empowers the Bank to take possession and sell the vehicle if
there is default. It is also necessary to notice the entire clause which reads as follows :

"10. The Bank, its Agents and Nominees shall be entitled at all times without notice to the
Borrower but at the Borrower's risk and expense and it so required as Attorney for and in the name of
the Borrower to enter any place where the said vehicle may be and inspect value insure superintendent
disposal and/or take particulars of all or any part of the said vehicle and check any statements accounts
reports and information and also on any default of the Borrower in payment of any money hereby
secured or the performance of any obligation of the Borrower to the Bank or if any statement
representation or warranty made by the Borrower in its, their or his loan application or in any support
in financial statement shall be found to be false or inaccurage in any material respect or on the
occurrence of any circumstances in the opinion of the Bank endangering this security to take
possession or recover receive appoint receivers or remove and/or sell by public auction or private
contract despatch for realisation or otherwise dispose of or deal with all or any part of the said vehicle
and to enforce realise settle compromise and deal with any rights or claims relating thereto without
being bound to exercise any of these powers or being liable for any loss in the exercise thereof and
without prejudice to the Bank's rights and remedies of suit or otherwise and notwithstanding there may
be any pending suit or other proceedings the Borrower undertaking to give immediate possession to
the Bank on demand of the said vehicle and to transfer and deliver to the Bank all relative bills
contracts securities and documents and agreeing to accept the Bank's accounts of sales and realisations
as sufficient proof of amounts realised and relative expenses and to pay any shortfall or deficiency
thereby shown provided that the Bank shall be entitled at all times to apply any other money or
moneys in its band standing to the credit of or belonging to the borrower in or towards payment of any
amount for the time being payable to the Bank and to recover at any time from the Borrower by suit or
otherwise the balance remaining payable to the Bank under this Agreement or otherwise
notwithstanding that all or any of the securities may not have been realised."

(6.) A perusal of clauses 6 and 10 discloses that there is no assignment of interest in the property
(vehicle) and no possession was given to the Bank. However it was described that the vehicle was
hypothecated to the Bank.

(7.) What is the legal consequence of hypothecating the vehicle? It is necessary to remember that the
word 'hypothecation' is not a legal expression, but it is accepted in the law merchant by long usage and
peactice. The Contract Act and the Transfer of Property Aet did not recognise such transaction. The
literal meaning of hypothecation connotes either 'pledge', or 'mortgage'. The New Webster
Encyclopedic Dictionary, 1980 Edition gives the meaning of the word 'hypothecates' as, "to pledge in
security for a debt, but without transfer; to mortgage".

(8.) P.G. Osborn in his 'Concise Law Dictionary' also gives two meanings for the word 'hypothecation'
and states :

"(1) Pleading a ship or her freight or cargo for the payment of money borrowed by the

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master. It is either bootomry or respondentia : (2) a charge on property as security for the payment of a
sum of money where the property remains in the possession of the debtor".

Thus it is seen the expression 'hypothecation' is extended to both the legal institutions of pledge and
mortgage. As pointed out by Cotton Lord Justice in re Morritt (1).

"A pledge of personal chattels as a rule is and must be accompanied by delivery of

possession. It is out of the possession given him under the contract that the pledgee's right
spring............... A mortgage of personal chattels involves in its essence, not the delivery of possession,
but a conveyance of title as a security for the debt."

(9.) The Transfer of Property Act does not apply to the mortgage of moveables as it refers to transfer
of immoveable property only and the Indian Contract Act refers to pledges of moveables only but
neither Act deals with the mortgage of moveable property. It may be pertinent to note that in England
a mortgage of personal property in writing govern by Bill of Sale Act, 1882. But a bill of sale given as
security for payment of money by the grantor of a bill must be in a statutory form and it must be
attested and registered. If it is not in a statutory form, it is absolutely void although the creator can
recover money lent with reasonable interest as if the money has not been received.

(10.) Two passages from Halsbury's Laws of England, Fourth Edition, Vol. 32, paragraph 414, may
be usefully noted :

"Personal Chattels : Personal chattels may be made security for repayment of a debt in two
ways, namely by pledge or by mortgage. If a mortgage of personal chattels is in writing, it is subject to
the - statutory provisions affecting bills of sale, but such a mortgage need not be in writing. A parol
mortgage of chattels, completed by actual delivery, is not within the statutory provisions affecting bills
of sale, and the terms of the mortgage may be proved by oral evidence. A parol mortgage, even
without delivery, is good at common law, although as the chattels then remain in the debtor's order the
general creditors upon the debtor's bankruptcy. Mortgages of ships and aircraft, debentures of
incorporated companies arid certain agricultural charges are excluded from the operation of the
statutory provisions affecting bills of sale".

(11.) Similarly, Vol. 43 of Halsbury's Laws of England, Fourth Edition, paragraph 635 states :

"Hypothecation of the cargo" means a pledge of the cargo without immediate change of
possessson of the goods if the advances are not paid at th estipulated time; but it leaves to the owner of
the goods hypothecated the power of making the repayment, and thereby freeing them from the
obligation".

(12.) It is also necessary to note a passage from Chitty on Contracts, 24th Edition, where the Author
had distinguished between pladge and mortgage, in paragraph 2278 :

"Sale upon default in payment of the debt is an incident of pledge, where as a lien gives
merely a right to detain the goods until the debt is paid again, a pledge, unlike a lien, is assignable, and
may be taken in execution against the pledgee. A mortgage of chattels or bill of sale differes from a

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pledge in that on a mortgage the property posses by assignment, subject to a right of redemition, while
possession need not pass to the mortgagee".

We must also bear in mind the definition of 'pledge' given in Section 172 of the Indian Contract Act
which States : "The bailment of goods as security for payment of a debt or performance of a promise is
called "pledge". The bailor is in this case called the "pawnor". The bailse is called the "pawnee". In the
Indian Stamp Act under Article 29 of Act I of 1879 which provided a special duty upon hypothecation
of movebale property. "The word "hypothecation" of moveable property, "The word "hypothecation"
was held by the Calcutta High Court in Ko SHmy Aung vs. Strong Steel & Co. 2 to refer only to
pledge of moveable property as distinquished from a transfer of an interest in, or fight over property
for the purpose of mortgage". Irrespective of the correctness of that view, giving effect to that view,
that expression is Omitted In the Clause of the present Stamp Act, 1899 and we find the expression
"hypothecation" only in Article 40 of Schedule I of the Indian Stamp Act securing exemption in
respect of letter of hypothecation accompanying a Bill of Exchange. Courts have occassion to examine
the expression "hypothecation" occurred in Act I of 1879 and Jalso in Article 40 in the present Stamp
Act II of 1899. Though these expression in Stamp Act have wider in connotation than substantive law,
broadly stated the expression "hypothecation" is extended to both pledge and mortgage.

(13.) Thus to sum up, hypothecation of goods may cannote an idea that the goods are pledged or
mortgaged. Hypothecation is a pledge when there is bailment of goods lor the security of debt. There
must be delivery of possession of the goods either actual or constructive. The title in the goods
remains with the pledgor or the pownor as described under the Indian Contract Act. That is why under
common law it is stated that the general property in goods remains with the pledger but special
properly alone is transferred and hence the pledge has no right of forclosure since he has only a special
property in goods. Hypothecation, is a mortgage, when there is assignment of title or what is called
general property in goods is transferred. Transfer of possession of goods is not necessary for a
mortgage of moveables. (Vide : Chinni Venkatachalam Chetti vs. Athivarapu Venkatarami Reddy. 3
Hence hypothecation of moveables which is neither pledge, nor mortgage, operates only as a. charge
creating acquitable interest in the goods hypothecated. It is well known that a charge is a jus ad ram
unlike a mortgage which is jus in ram. Thus the description of a transaction as hypothecation is not
decisive and the Court must examine whether under the hypothecation a pledge, mortgage or a charge
is qreated in respect of such moveables,

(14.) Now the question is whether the right of seizure and sale can be exercised without the
intervention of the Court when the hypothecation creates only a charge.

(15.) Let us now notice some of the judgments cite J at the Bar at this stage. In Jayant T. Shah vs, The
Andhrq Bank Ltd. 4 the learned Judge, Gangadhara Rao J., held that the, goods were only
hypothecated but not pledged as possession was not transferred to the Bank. Though the learned Judge
drew the distinction between the pledge and hypothecation, he did, npt decide the question of the right
to take possession and sell the goods be the hypothecatee without the intervention, of the Court, but
proceeded to state "it is not, disputed that in the case of hypothecation the creditor has the right to take

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possession of the goods and to sail it without the intervention of the Court" and hence the question
now raised in this appeal did not fall for consideration.

(16.) In Sri Harish Chandra vs.. Punjab National Bank Ltd 5 the case arose under the Stamp Act. It
was stated that in by pothecation the, possession, over the property is retained by the owner. But only
certain, fights, in the moveable property that are transferred to the person in whose favour the
properties are hypothecated. As noticed above the distinction was material for the purpose of plaiming
exemption of duty under Article 40 of Schedule of Stampt Act when a letter of hypothecation is
exempt from Stamp duty,

(17.) In Bank of Baroda vs. Rabari Bachubhai Hirabhai 6 the question arose whether the, vehicle
which was hypothecated to the Bank is liable to. the claim made by; the victim when the hypothecated
vehicle caused accident to the claimant. It, was held that the Bank is only a creditor of the owner of the
vehicle and holds the vehicle as a security with neither de jure or de facto possession of it nor title to it
and hence the Bank can only recover the dues in case of default by sale of the vehicle and in view of
this the Bank can never be taken to step into the shoes of the owner and cannot be liable to pay the
compensation to the victims of the accident caused by the owner's employee.

(18.) It was ruled that the title and possession remains with the owner under the hypothecation and the
Bank had merely a right to recover the dues and nothing more and hence the Bank is not liable to pay
any compensation to the victims of the accident.

(19.) In Bank of India vs. Yogeshwar Kant Wadhera 7 the right of a surety in respect of a
hypothecated vehicle under section 141 of the Contract Act was considered. It was ruled that the
surety cannot claim the benefit of Section 141 of discharging himself when the creditor parted with the
security pledged as the goods are not even under the constructive possession of the creditor, as the
hypothecation creates only equitable charge for enforcing the debt in the event of default.

(20.) In Union of India vs. CT. Shentiianathan 8 the question arose between two competing creditors
in execution for priority ; a person who took the prior hypothecation and another who attached the
property in pursuance of a debt. No doubt the later is the State viz., the Income-Tax Department. A
part from the priority of State debts, the Court has to consider the effect of prior hypothecation before
the attachment of the goods by the Income-Tax Department. Their Lordships ruled that hypothecation
creates a national or equitable charge in favour of hypothecatee and the remedy is only to sue on the
debt and proceed in execution against the hypothecated goods if they are available. Accordingly, it
was held that inspite of a clause providing that the Creditor is at liberty to seize the goods and sell ths
same, his remedy is to enforce it through a Court of Law.

(21.) Thus these decided cases disclose that the expression "hypothecation" is used to denote either a
mortgage of moveables or a pledge. The Court must see whether the document in question created a
mortgage or pledge or merely a charge.

(22.) Now let us consider the right to seize and sell the property by the creditor when the goods are
hypothecated. If the hypothecation constitutes pledge or pawn, the said right is specifically given

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under Section 176 of the Contract Act. Further, if the hypothecation constitutes a mortgage, Courts
have recognised the right of such mortgages if he is in possession to sell the property without the
intervention of the Court. (Vide : Ahmed Alimohomed Khoja, in Re. 9 ) But when the hypothecation
creates only a charge, it is only a right in respect of the property and such a covenant in the Contract
can only be enforced through Court. The reason being that in the absence f de jure or de facto
possession or transfer of title, a person cannot take the law into his own hands and take possession of
the goods forcibly when the debtor ubstructs taking of possession. The Clause in the- Deed providing
seizure and sale only enables the creditor to enforce through a Court of law as it operates an equitable
charge in favour of the creditor.

(23.) Applying this test to the case in question, clauses 6 and 10 read together do not give the Bank a
right to seize the goods forcibly, without the intervention of the Court.

(24.) Now the Court below held that in the absence of the defendant, the vehicle is taken clandestinely
and the defendant sufferred loss due to this forcible seizure and this finding is not seriouslv challenged
before me bv the plaintiff's counsel. What was urged is that the findins of the trial Court that Clause 10
is invalid is incorrect. I must say that the clause may be valid but it can be enforced only through a
Court of law when possession is resisted by the debtor. Hence I am of the opinion that the seizure is
illegal and the damages custained by the debtor can be reasonably assessed.

(25.) On the question of quantum, the defendant reserved his right to claim damages for 24 months
and 17 days and claimed dimages in the present case for 5 months only. On the other hand, the Bank
contended that the quantum at Rs. 100/- per day is excessive. There is yet another aspect of the matter.
The evidence discloses that the Bank left the vehicle in the premises of the Bank unprotected exposing
it to rain and sun and it suffered heavy deterioration in its usefulness. Hence even assuming that the
seizure is valid, I am inclined to hold that the Bank failed to take reasonable steps to protect the
vehicle without being deteriorated in its utility and for that negligence the Bank is liable to pav
compensation. Tt is aereed bv both the counsel that the claim of the defendant may be held to cover
the entire period. In view of this, without going into the question of the reasonableness of the claim of
the defendant, I would hold that the present finding arrived at by the Court awarding damages should
cover the entire claim for 24 months 17 days without allowing the defendant to make a fresh claim in
respect of remaining period. Accordingly I hold the present d-cree in favour of the defendant for a sum
of Rs. 15,300/- should cover the damages for the entire period during which he was deprived of the
use of the vehicle and he is precluded from claiming any further demages from the Bank.

(26.) In the result, I hold that the decree in favour of the defendant towards the damages caused for
illegal seizure is clearly sustainable and accordingly the appeal fails and the same is dismissed.
However, I make no order as to costs. I place on record my appreciation for the assistance by Sri S. S.
Prasad, Advocate when requested to act as amicus curiae.

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