PRABHAT BANK LTD. AND ANOTHER VS BABU RAM, AIR 1966 ALL 134

CasePrabhat Bank Ltd. And Another vs Babu Ram, AIR 1966 ALL 134
CourtAllahabad High Court
BenchD P Uniyal, J.
Author of the judgementD P Uniyal, J.
Decided On29 January, 1965
Author of the briefAditi Mozika
Keywordspledge, section 176, reasonable notice, pawnee, indian contract act.

Facts:

The respondent had an overdraft account with the plaintiff Prabhat Bank Ltd. since 1945. On 31 December 1946, when the debit balance had risen to about Rs 4000, he executed a promissory note for a sum of Rs 5,000 by way of security for repayment of the overdraft. On the same day, the respondent executed a written agreement in favor of the appellant Bank, and it was agreed that the respondent would be entitled to take advances up to the maximum of Rs. 5,000 upon his personal security, as well as collateral securities, to wit, stocks and shares pledged by the respondent with the appellant Bank. One of the terms of the agreement was that the appellant Bank would be entitled to sell the securities without any notice to the respondent in the event of the loan not being repaid on demand.

In spite of several reminders and notices, the respondent failed to settle his cash-credit account and, in accordance with the terms of the agreement dated 31 December 1946, the appellant Bank sold the shares pledged by the Respondent and credited the proceeds to the account of the Respondent. This suit is for the recovery of the remaining amount (Rs 1,760) that was still outstanding in spite of the sale of the shares.

Decision of the Trial Court:

  1. The agreement had been executed by the respondent of his own free will and there was no fraud on the part of the appellant Bank in obtaining the said agreement.
  2. Since the money drawn from the bank by the respondent far exceeded the securities, the appellant Bank could realize the money from the respondent by sale of the securities.

Decision of the Lower Appellate Court:

  1. The terms of the contract of pledge which gave the appellant Bank unqualified power of sale of the securities, are not consistent with Section 176 of the Indian Contract Act and, therefore, are invalid.

Respondent’s Contentions:

  1. The agreement dated 31 December 1946 was fraudulent in that his signatures had been obtained on a blank piece of paper.
  2. Sale of securities by the Bank was bogus; price fetched was below market value of the shares.
  3. The Respondent also pleaded bar of limitation.

Appellant’s Contentions:

  1. Since the term in the agreement empowering the Bank to sell the securities for realizing the debt due from the respondent was unqualified, it was not necessary to comply with the provisions of Section 176 of the Contract Act.
  2. Secondly, it was urged that the letter sent by the bank on 5 December 1948 asking the respondent to pay the money due to the appellant, and the reply of the defendant, dated 13 August 1948 asking for time up to the 15 September, 1948 and requesting the postponement of the sale of securities clearly indicated that the respondent had notice of the intended sale of the securities pledged with the Bank. Consequently, it was contended that the sale of the securities by the appellant Bank was legal and the suit for recovery of the balance was maintainable.

Held:

The Honorable Court upheld the decision of the Lower Appellate Court:

  1. The letter dated 13 August 1948 cannot be treated as a notice to the respondent/pawner for the contemplated sale of securities. Notice contemplated by Section 176 refers to a ‘reasonable’ notice, and this cannot be implied from the letter given by the Bank to the debtor. Such notice has to be clear and specific in language indicating the intention of the pawnee to dispose of the security. No such intention was disclosed by the Bank in any letter to the respondent.
  2. As regards the terms of the agreement dated 31 December 1946 under which the pawnee had been authorized to sell the securities in case the credit balance of the debtor fell below the margin, it could not avail the Bank in acting contrary to law. An agreement of this character would be inconsistent with the provisions of the Contract Act and, as such, would be wholly void and unenforceable.