published in http://judis.nic.in/supremecourt/imgst.aspx?filename=40772
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
1 CIVIL APPEAL NO. 8182 OF 2003
(Arising out of SLP ( C) No. 12161 of 2006)
Karnataka State K.V. Industries Board …..APPELLANT
Punjab National Bank & Ors. ….RESPONDENTS
1 J U D G M E N T
1 ANIL R. DAVE, J.
1. Leave granted.
2. Being aggrieved by the judgment delivered by the High Court of
Karnataka in Regular First Appeal No. 1684 of 2004 dated 29th July,
2005, this appeal has been filed by the Karnataka State Khadi and
Village Industries Board, who was defendant No. 3 in the Suit, which
had been filed by Punjab National Bank, who is respondent No. 1 (for
sake of convenience, the creditor- Punjab National Bank has been
described as ‘the Bank’ whereas the appellant has been described as
the ‘Board’ and the principal debtor Shevashakti Gramodyoga Sangh,
Gulbarga, who had borrowed funds from the Bank has been described as
3. The facts, giving rise to the present litigation, in a nutshell, are
as under :
The Borrower had borrowed money from the Bank for its business and as
per policy of the State of Karnataka, the Board had assured the Bank that
by way of subsidy, the amount of interest would be paid by the Board to the
Bank, provided there was no default in repayment of the principal amount by
4. As the Borrower could not pay its dues to the Bank in spite of several
notices, the Bank was constrained to file Original Suit No. 83 of 2002
in the Court of Civil Judge (Sr. Division) at Gulbarga. In the said
Suit, the Board was joined as defendant no. 3 as the Board had given
an assurance that the interest would be paid by the Board to the Bank
, if the Borrower was paying its dues regularly i.e. without any
5. Upon perusal of the evidence and after hearing the learned advocates,
the suit was decreed. All the defendants, namely the Borrower, the
Secretary of the Borrower, who was defendant No. 2 and the Board were
made liable to pay a sum of Rs.1,60,827.68/- with interest at the rate
of 12% p.a. to the Bank. However, from the said amount, defendant no.
3 was made liable to pay only Rs.75,213/- alongwith other defendants,
namely the Borrower and the Secretary of the Borrower as the said
amount was towards interest.
6. Being aggrieved by the aforestated judgment delivered in the suit, the
Board had filed Regular First Appeal No. 164 of 2004, which has been
dismissed by the High Court and being aggrieved by the said judgment,
the Board has filed the present Appeal.
7. We have heard the learned counsel appearing for the parties and have
also perused the impugned judgment and the judgment delivered in the
Suit and the relevant documents. Upon hearing the concerned counsel
and looking at the contents of a letter dated 23rd March, 1988, we
find that the Board has been wrongly saddled with the liability of
8. It is an admitted fact that the Borrower had borrowed Rs.1,00,000/-
from the Bank and the said amount, along with interest thereon could
not be repaid by the Borrower to the Bank. The question only is with
regard to the liability of the Board. The Board is neither a borrower
nor a guarantor. In pursuance of policy of State of Karnataka, the
Board was to give subsidy to the Borrower. The letter dated 23rd
March, 1988, which had been written by the Chief Executive Officer of
the Board to the Manager of the Bank reads as under:
“The above mentioned Sri Shiva Shakti Gramodyoga Sangha, Gulbarga has
applied to Gulbarga (sic) for a loan of Rs.1,00,000-00 for working
capital for P.C.P.I. Industry.
The above loan upto Rs. 1,00,000 ( Rupees One Lakh Only) will be
eligible for the interest subsidy payable by the Commission in terms
of Government of India, Ministry of Industry (Department of Industrial
Department) letter No. 4(47) 75 –KVI (1) dated the 17th May 77.
The Commission agrees to surrender its first charge over the
assets (moveable and immoveable) the above instruction in favour of
the Bank (sic).
The final decision to accept or reject any loan application from
eligible borrowers will vest with the Bank. However, in case the Bank
reject the application they may indicate to the Commission / the State
Board the reasons for rejecting the Loan Application.
The Commission and the Karnataka State Khadi and Village
Industries Board, will have no liability of any kind either in respect
of the principal amount of loan or payment of 4% or revised rate of
interest to be borne by the borrowers for which interest subsidy
eligibility certificate has been issued by the Commission. Its
liability shall be restricted only to the extent of payment of
interest subsidy as per scheme.
The Commission would be liable to pay interest subsidy as per
the scheme only for the period of which the loan is sanctioned by the
Bank and is not liable to pay such interest subsidy for the defaulted
9. Upon perusal of the said letter, it is clear that the Board had agreed
to pay interest on behalf of the Borrower and the Board had also
agreed that whatever charge had been created on the Borrower’s assets
in favour of the Board would be released in favour of the Bank.
Moreover, the interest payable by the Borrower was to be paid by the
Board by way of subsidy, provided the borrower does not commit any
default in the payment. It is an admitted fact that the Borrower had
committed default by not paying its dues to the Bank regularly. In the
aforestated circumstances, the Board cannot be held liable to pay
interest on behalf of the Borrower. The liability, which the board
had, was only with regard to surrendering its first charge over the
assets of the Borrower in favour of the Bank as one can see from the
third para of the letter dated 23rd March, 1988. In other words, upon
default committed by the Borrower, the Board was absolved of its
liability of paying interest on behalf of the Borrower to the Bank and
its liability was only to the effect that it would surrender its first
charge over the moveable and immoveable assets of the borrower in
favour of the Bank.
10. In spite of the aforestated facts, the trial court came to the
conclusion that the Board was liable to pay interest which was due and
payable by the Borrower. In our opinion, the said finding of the
trial court is not correct. Even the High Court’s view of confirming
the said finding is not correct and therefore, we quash and set aside
the judgment of the appellate court as well as the decree passed by
the trial court so far as it makes the Board liable to pay the
interest on behalf of the Borrower. In view of the contents of the
aforestated letter dated 23rd March, 1988, the Board shall surrender
its first charge over all the moveable and immoveable assets of the
Borrower in favour of the Bank as soon as possible.
11. The appeal stands partially allowed to the above extent with no order
as to costs.
(ANIL R. DAVE)
September 13, 2013