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Case Number

F.A.O No. 700 of 1989 and Civil Misc. No. 3581.CII/91.

Attorney(S)

V.K Jain
Sr. Adv. with S.K. Vij
J. S. Narang with P.P. Mehta
for Respondent No. 1; Somesh Ojha
for Respondent No. 2; S.P. Gupta
for Respondent No. 3; O.P. Goyal
Sr. Adv. with S.S. Salor
for Respondent No. 4

Judges

V.K Jhanji, J.

Acts

Order 38 rules 5 and 6 read with Order 39, Rules 1 and 2 of the Code of Civil Procedure (hereinafter called the Code)
Order 38 Rule 5 read with Order 39 Rules 1 and 2, Code of Civil Procedure,
Order 38, rule 5 read with Order 39, Rules 1 and 2 of the Code,
Order 38, rule 5, read with Order 39, rule 1 and 2, of the Code.
provisions of sub-rule (1) of Rule 5 of Order 38, of the Code,
sub-rule (4) inserted by section 85(1), of 1976 Amendment Act,
provisions of Order 38, Rules 5 and 6 of the Code,
provisions of sub-rule (1) of Rule 5 of Order 38,
provisions of sub-rule (1) of rule 5 Order 38,
sub-rule (4) inserted by Act of 1976
Order 38 rule 5, of the said Code,
Order 38, rule 5, of the Code,
Section 115 of the Code,
Order 38, Rules. 5
Order 38 rule 5,
Order 38, rule
Sub-rule (4)

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Smart Summary

Structured Summary of the Opinion (V.K. Jhanji, J.)

Factual and Procedural Background

The State Bank of Patiala ("the Bank") filed two suits against Punjab Spinning and Weaving Mills Limited and others for recovery of Rs. 93,3,876.12 and Rs. 84,03,020.40. The appellants were impleaded as defendants on the footing that they had stood as guarantors for repayment of the loan; the appellants in their written statements denied giving guarantees in their individual capacity and said they signed documents as Directors of the company. The Punjab State Industrial Development Corporation ("PSIDC") was the promoter and majority shareholder of the company.

During the suits, the Bank filed an application dated 7 February 1987 under Order 38 Rules 5 and 6 read with Order 39 Rules 1 and 2, Code of Civil Procedure ("the Code") seeking attachment of property of the company and of the Directors, supported by Annexures A and B listing properties. PSIDC had entered into an agreement dated 25 September 1986 with the appellants to purchase their shares for Rs. 91,00,000 with a specified instalment schedule; Rs. 24 lacs had been paid under that agreement. Before the remaining amounts were paid, the Bank filed another application dated 28 April 1987 under Order 38 Rule 5 read with Order 39 Rules 1 and 2 seeking attachment before judgment of the remaining amount payable by PSIDC to the appellants pursuant to that agreement.

The trial Court passed ex parte orders attaching Rs. 32 lacs on 30 April 1987 and Rs. 35 lacs on 23 May 1987. The appellants responded by contesting the ex parte attachments, filing replies and an application seeking an order directing PSIDC to deposit the amount payable so that appellants would not lose interest. The trial Court directed PSIDC to deposit the amount by an order dated 10 November 1988. PSIDC challenged that order in Civil Revision No. 3168 of 1988; in a decision dated 14 March 1989 J.V. Gupta, J. held that until the Bank's application under Order 38 Rule 5 was finally disposed of, the trial Court should not have directed PSIDC to deposit the amount and observed that if amounts were attached PSIDC might be liable to pay interest as per the agreement or bank rate from when the sums became payable to the appellants.

Pursuant to the direction in C.R. No. 3168/1988, the learned District Judge, Bhatinda disposed of the application under Order 38 Rule 5 read with Order 39 Rules 1 and 2 by the impugned order dated 29 April 1989, attaching the amount payable by PSIDC to the appellants and restraining the appellants from receiving it. The appellants challenged that impugned order by way of the present appeal.

Legal Issues Presented

Whether the trial Court's order of attachment before judgment under Order 38 Rule 5 (read with Order 39 Rules 1 & 2) is sustainable where the Bank's application did not allege that the defendants were about to dispose of property or remove it from jurisdiction with intent to obstruct or delay execution of any decree.
Whether the trial Court complied with the mandatory requirements of sub-rule (1) of Rule 5 of Order 38 of the Code, particularly as affected by Sub‑rule (4) inserted by the 1976 Amendment (making non‑compliance void).
Whether ex parte orders of attachment issued without first asking the defendants to furnish security (as required by Order 38 Rule 5) are valid.
Whether this Court should interfere with the trial Court's order in exercise of revisional jurisdiction (including consideration of the respondent‑Bank's contention that the impugned order was an interim order and that interference would be inappropriate under Section 115 of the Code).

Arguments of the Parties

Appellants' Arguments

The appellants denied that they gave guarantees in their individual capacity and stated they signed relevant documents only as Directors of the company.
The appellants maintained that company assets were substantial (they asserted assets of the company were not less than Rs. 15 crores) and offered in this Court to take over the company on payment of Rs. 15 crores.
The appellants contested the ex parte orders of attachment and requested that PSIDC be ordered to deposit the amount payable so they would not lose interest.
They relied on consortium Minutes and the fact that PSIDC had taken over the affairs and shareholding of the company (including an agreement dated 25 September 1986) to show that the amount sought to be attached was part of consideration payable by PSIDC and that nothing indicated company assets were insufficient to meet the Bank's claims.

Respondent (Bank)'s Arguments

The Bank maintained the order of attachment was appropriate and contended the impugned order was only an interim order.
The Bank argued that this Court should not interfere in the exercise of its revisional powers under Section 115 of the Code (i.e., that appellate interference was not warranted).

Table of Precedents Cited

The opinion cites a prior decision of this Court relevant to the contested procedural orders.

Precedent	Rule or Principle Cited For	Application by the Court
Civil Revision No. 3168 of 1988 (J.V. Gupta, J., decision dated 14.3.1989)	(i) That the trial Court should not have directed PSIDC to deposit the amount until the Bank's application under Order 38 Rule 5 was finally disposed of; (ii) That should the amount be attached, PSIDC would be liable to pay interest thereon as per the agreement or at the prevailing bank rate from the date the amount became payable.	The Court relied on that earlier decision to observe that the learned trial Court had been directed to keep in mind the company's property having been mortgaged with the Bank and that the trial Court in the present matter did not adequately heed the directions of C.R. No. 3168/1988 when passing the impugned order.

Court's Reasoning and Analysis

The Court began by restating the settled legal standards governing attachment before judgment under Order 38 Rules 5 and 6 read with Order 39 Rules 1 and 2. It extracted and summarized guiding principles (as derived from prior judicial interpretation), including that:

An order under Order 38 Rules 5 and 6 can be issued only if circumstances exist to the satisfaction of the Court.
Whether such circumstances exist is a question of fact to be proved to the satisfaction of the Court.
The Court must be satisfied that the defendant is really about to dispose of property or remove it from jurisdiction and that the disposal or removal is with intent to obstruct or delay execution of a future decree; such satisfaction must be based on material in affidavits or on record and not be illusory.
Affidavits supporting applications must not be vague; if based on information or belief, the portion true to knowledge and the source of information must be disclosed.
Transactions prior to suit may be considered, but the object of attachment is to prevent future transfers or alienation; mere transfers or partial disposals without other incriminating circumstances are not enough.
Where Sub‑rule (4) (inserted by the 1976 Amendment) is applicable, an order of attachment made without complying with sub‑rule (1) of Rule 5 is void.

The Court then applied these principles to the facts before it:

The Bank's application dated 28 April 1987 did not allege anywhere that the appellants were about to dispose of property or remove it from the jurisdiction with intent to obstruct or delay execution. The Court emphasized that absence of such specific material meant the statutory pre‑conditions for attachment were not satisfied.
The impugned attachment appeared to be based solely on the possibility that if the Bank's suits were decreed the company and the appellants would be jointly and severally liable; such a conclusion by itself did not satisfy the requirement under Order 38 Rule 5 that the Court be satisfied of imminent disposition or removal with an obstructive intent.
The earlier application of 7 February 1987 (with Annexures A and B listing company and directors' properties) and the fact that the company's assets were said by the appellants to be substantial (appellants put forward that assets of the company were not less than Rs. 15 crores and even offered to take over the company for that sum) were considerations pointing away from an inference that the appellants were about to render themselves insolvent or intended to defeat the Bank.
The Court noted consortium Minutes and the fact that PSIDC had taken over the company's affairs and shareholding. The amount attached by the Bank was part of the consideration payable by PSIDC under the share purchase agreement dated 25 September 1986 — and nothing had been shown to demonstrate the company's assets would be insufficient to meet the Bank's claims.
The ex parte attachments dated 30 April 1987 and 23 May 1987 did not indicate that the appellants had been called upon to furnish security as required by Order 38 Rule 5; the record did not show that the appellants were asked to furnish security and refused. The Court treated this as a material non‑compliance with the mandatory procedure.
Given that Sub‑rule (4) (1976 amendment) renders an attachment void where sub‑rule (1) of Rule 5 is not complied with, the Court concluded the impugned order was void because the trial Court had not applied its mind to the statutory requirements and had not recorded satisfaction based on material on the record that the defendants intended to obstruct or delay execution.
The Court rejected the Bank's contention that the impugned order was merely interim and that this Court should not interfere in exercise of revisional jurisdiction or under Section 115 of the Code; the Court held it could not leave an inherent, illegal and void order uncorrected and had a duty to set it aside.
The Court clarified that setting aside the impugned order would not prevent the trial Court from deciding the earlier application dated 7 February 1987 under Order 38 Rule 5 (which dealt with attachment of properties listed in Annexures A and B).

Holding and Implications

Holding: The appeal is allowed and the impugned order of attachment passed by the learned trial Court dated 29 April 1989 is set aside.

Implications and direct consequences:

The ex parte order of attachment under challenge is declared void for failure to comply with the mandatory requirements of sub‑rule (1) of Rule 5 of Order 38 as read with Sub‑rule (4) inserted by the 1976 Amendment; accordingly, the attachment and restraint on the appellants receiving the amounts payable by PSIDC are vacated.
It is open to PSIDC to meet its commitment under the agreement dated 25 September 1986 (i.e., the parties are freed to proceed with performance under that agreement insofar as the set‑aside order permits).
The trial Court remains free to consider and decide the Bank's earlier application dated 7 February 1987 concerning attachment of properties listed in Annexures A and B on the merits, consistent with the statutory requirements.
Each party was directed to bear its own costs.

Note: The Court's ruling was corrective of a procedurally void order; the opinion applied existing statutory requirements and prior Court directions rather than announcing a new principle of law beyond the articulated application of Order 38 Rule 5 and the effect of the 1976 Amendment.

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Onkar Mal Mittal . v. State Bank Of Patiala .

V.K Jhanji, J. — This order of mine shall dispose of F.A.O Nos. 700 and 701 of 1989 and Civil Misc. Nos. 3581-CII and 3204-CII of 1991.

2. State Bank of Patiala (hereinafter called. ‘The bank’), filed two suits against the Punjab Spinning and Weaving Mills Limited and others, for the recovery of Rs. 93,3,876,12 and 84,03,020.40. The appellants were impleaded as defendants in those suits as it was alleged that they stood as guarantors for the repayment of the loan given to the company. The appellants in their written statement have denied that they gave guarantee in their individual capacity. Their case is that they signed the documents in the capacity as Directors of the Company. The Punjab State Industrial Development Corporation (hereinafter called the ‘PSIDC’) is the promoter of the company, holding majority shares of it.

3. During the pendency of the suit, the bank filed an application dated 7th of February, 1987, under Order 38 rules 5 and 6 read with Order 39, Rules 1 and 2 of the Code of Civil Procedure (hereinafter called ‘the Code’) vide which the property of the company as well as of the Directors was sought to be attached. Alongwith the application, it also filed Annexures ‘A’ and ‘B’ giving the details of property belonging to the company and the Directors. The application is pending consideration with the trial Court. P.S.I.D.C entered into an agreement dated 25th of September, 1986 the appellants and under the said agreement, P.S.I.D.C agreed to purchase shares of the company held by the appellants or their nominees for a total consideration of Rs. 91,00,000/- (Rs. Ninety one lacs only). Under the said agreement, it was also agreed that sum of Rs. 48,00,000/- (Rs. forty eight lacs) will be paid by February, 1987 in monthly instalments of Rs. 7.90 lakhs and the balance of Rs. 43 lacs was to be paid to the petitioners in suitable instalments of Rs. 7.90 lacs each month and the total payment was to be made by August, 1987. It was also agreed vide the said agreement that in case of any delay in the payment of instalments the same shall be payable with interest @ 18% p.a on the defaulted payment for the defaulted period. It is not in dispute as per the conditions of the agreement that a sum of Rs. 24 lacs has already been paid to the appellants. Before the remaining amount could be paid by the P.S.I.D.C to the appellants, the bank filed another application dated 28.4.1987 under Order 38 Rule 5 read with Order 39 Rules 1 and 2, Code of Civil Procedure, seeking attachment before judgment regarding remaining amount which was to be paid by P.S.I.D.C to the appellants in pursuance of the agreement dated 25.9.1986

4. The trial Court passed an ex parte order dated 30th of April, 1987, attaching a sum of Rs. 32 lacs which had become due and payable to the appellants and the remaining amount of Rs. 35 lacs was attached by an ex parte order dated 23rd of May, 1987. The appellants in response to the notice of the said application, filed reply and contested the ex parte order of attachment passed attaching the amount which was payable to them under the agreement. The appellants also filed an application that P.S.I.D.C be ordered to deposit the amount payable to them under the agreement in the bank so that they may not lose interest in the said amount. The trial Court vide order dated 10th of November, 1988, directed the P.S.I.D.C to deposit the amount. P.S.I.D.C challenged the said order in Civil Revision No. 3168 of 1988 in this Court and the same was decided on 14.3.1989 by J.V Gupta, J. (as then he was). J.V Gupta, J. was of the view that unless the application under Order 38 rule 5, of the said Code, filed by the bank is finally disposed of, the trial Court should have not directed P.S.I.D.C to deposit the amount in the bank as directed by the trial Court vide order dated 12th of November, 1988. In the concluding paragraph of the judgment in C.R No. 3168 of 1988, J.V Gupta, J. also held that in case the amount lying with P.S.I.D.C is attached under Order 38, rule 5 of the Code, PSIDC will be liable to pay interest thereon as per the agreement or at the bank rate then prevalent, from the date when it become payable to the appellants, till actual payment. The trial Court was also directed to keep in mind the fact that the property of the company already stood mortgaged with the Bank while passing the final orders under Order 38, rule 5 of the Code.

5. In pursuance of the order of this court in C.R No. 3168 of 1988, the learned District Judge, Bhatinda, before whom the suit is pending for decision, disposed of the application under Order 38, rule 5 read with Order 39, Rules 1 and 2 of the Code, vide the impugned order dated 29.4.1989, attaching the amount payable by PSIDC to the appellants and also restrained the appellants to receive the said amount. The appellants have challenged the impugned order passed by the learned District Judge, Bhatinda, by way of present appeal.

6. It is now well settled that the order of attachment before judgment cannot be made on the mere asking of the plaintiff. Before making the order, the court must be satisfied not only that the defendant is really about to dispose of his property or about to remove it from its jurisdiction, but also that the disposal or removal is with intent to obstruct or delay the execution of any decree that may be passed. The satisfaction must be of the Court as regards these matters and it must be based on some material derived either from the affidavit of party applying under Order 38, rule 5 or there must be some material on record to indicate that the satisfaction was not illusory. The necessity for orders under Order 38 rule 5, of the Code, arises almost daily among the litigants. This Court as well as the other Courts have interpreted the provisions of Order 38, Rules 5 and 6 of the Code, in a series of judgments. From a perusal of all the authorities the following guiding principles can be deduced:

(1) That an Order under Order 38, Rules. 5 and 6 can only be issued, if circumstances exist to the satisfaction of the Court.

(2) Whether such circumstances exist is a question of fact that must be proved to satisfaction of the court.

(3) That the Court would not be justified in issuing an order for attachment before judgment, or for security, merely because it thinks that no harm would be done thereby or that the defendants, would not be prejudiced.

(4) That the affidavits in support of the contentions of the applicant, must not be vague, and must be properly verified. Where it is affirmed true to knowledge or information or belief, it must be stated as to which portion is true to knowledge, the source of information should be disclosed, and the ground for belief should be stated.

(5) That a mere allegation that the defendant, was selling off and his properties is not sufficient particulars must be stated.

(6) There is no rule that transactions before suit cannot be taken into consideration, but the object of attachment before judgment must be to prevent future transfer of alienation.

(7) Where only a small portion of the property belonging to the defendants, is being disposed of, no inference can be drawn in the absence of other circumstances that the alienation is necessarily to defraud or delay the plaintiff's claim.

(8) That the mere fact of transfer is not enough, since nobody can be prevented from dealing with his properties simply because a suit has been filed. There must be additional circumstances to show that the transfer is with an intention to delay or defeat the plaintiff's claim. It is open to the Court to look to the conduct of the parties immediately before suit, and to examine the surrounding circumstances, and to draw an inference as to whether the defendant is about to dispose of the property, and if so, with what intention. The Court in entitled to consider the nature of the claim and the defence put forward.

(9) The fact that the defendant is in insolvent circumstances or in acute financial embarrassment, is a relevant circumstance, but not by itself sufficient.

(10) That in the case of running businesses the strictest caution is necessary and the mere fact that a business has been closed or that its turnover has diminished, is not enough.

(11) Where however the defendants starts disposing of his properties one by one, immediately upon getting a notice of the pitf's claim and/or where he had transferred the major portion of his properties shortly prior to the institution of the suit and was in embarrassed financial condition, these were grounds from which an inference could be legitimately drawn that the object of the defendant was to delay and defeat the plaintiff's claim.

(12) Mere removal of properties outside jurisdiction is not enough, but where the deft, with notice of the pltf's claim suddenly begins removal of his properties outside the jurisdiction of the appropriate Court, and without any other satisfactory reason, an adverse inference may be drawn against the defendant. Where the removal is to a foreign country, the inference is greatly strengthened.

(13) The defendant in a suit is under no liability to take any special care in administering his affairs, simple because there is a claim pending against him. Mere neglect, or suffering execution by other creditors, is not a sufficient reason for an order under Order 38 of the Code.

(14) The sale of properties at a gross under value, or benami transfers, are always good indications or an intention to defeat the plaintiff's claim. The Court must however be very cautions about the evidence on these points and not rely on vague allegations.

Now, under Sub-rule (4) inserted by section 85(1), of 1976 Amendment Act, if the order of attachment is made without complying with the provisions of sub-rule (1) of Rule 5 of Order 38, of the Code, such an attachment shall be void.

7. By applying these principles to the facts of the present case, I find that the order of the trial Court cannot be sustained in law. As a matter of fact, the order is void as the same has been passed by the trial Court without complying with the provisions of sub-rule (1) of Rule 5 of Order 38, of the Code. In the application dated 28.4.1987, the Bank has nowhere alleged that the appellants are about to dispose of the property or remove the same from the jurisdiction of the Court. The learned District Judge, Bhatinda, has passed the order of attachment and restrained the appellants only on one consideration that in case the suits of the bank are decreed, the company and the appellants would by jointly and severally liable to make the payment. This Court in Civil Revision No. 3168 had directed the trial Court to keep in mind while deciding the application under Order 38, rule 5, of the Code, that the property of the company already stood mortgaged with the Bank. This direction was given keeping in view that the entire property of the company, i.e land, building and raw material already stand mortgaged with the Bank would be sufficient or not to discharge the liability of the company in the event of the suits of the bank being decreed.

8. The learned trial Court while passing the impugned order has not taken into consideration the directions of this Court. Earlier to the aforesaid application, the Bank had filed an application dated 7.2.1987 for attachment of the property belonging to the Company and the Directors. In Annexures ‘A’ and ‘B’ attached to the said application not only the details of the land, building and machinery of the Company sought to be attached, is given but also the property owned by the Directors is mentioned.

9. The case of the appellants is that the assets of the Company are not less than Rs. 15 crores. The appellants had also made an offer in this court that they are willing to take over the company on payment of Rs. 15 crores. However, this offer was not acceptable or found favour with plaintiff-bank. The applicants have brought on record vide C.M No. 3581-CII of 1991, the Minutes of Consortium held on 30th May, 1989 at New Delhi, which was attended by the representatives of PSIDC, Punjab Spinning and Weaving Mills Ltd. Indian Overseas Bank and State Bank of Patiala. Perusal of the Minutes shows that the representatives of these Institutions, agreed to absolve the appellants from liability and for taking other assets and liabilities of the company by the PSIDC. It is also not disputed that PSIDC has taken over the affairs of the company and the appellants are no more involved in the working of the company. The entire share-holding of the company held by the appellants, was. taken over by PSIDC vide the agreement dated 25th of September, 1986 for total consideration of Rs. 91 lacs. The amount now sought to be attached by the Bank, is part of the said amount which is payable to the appellants by the PSIDC in pursuance of the agreement. Nothing has been brought on record to show that the assets of the company are not sufficient to meet the amount sought to be recovered by the Bank covered under the two suits against the Company and others.

10. Ex parte orders of attachment dated 30.4.1987 and 23.5.1987 clearly show that while passing ex parte orders of attachment, the appellants were not called upon to furnish security first. Under Order 38, rule 5 of the Code, the court has first to ask the appellants to furnish security, conditional order of attachment can be made. As I have already indicated above that there is nothing to show that the appellants were called upon to furnish security and they refused to furnish the same. Even the impugned order does not show that the appellants were called upon to furnish security and they refused to furnish the same. Order 38, rule 5 of the Code is a mandatory provision, and the Court has to satisfy itself first that the defendant is intending to obstruct or delay the execution of the decree that may be passed against him. If the order passed by the Court does not speak or show that the Court has applied its mind to the requirements of Order 38 rule 5, or if the order passed by the Court below does not clearly show that it has considered the material on record, or if the order does not show that the Court is satisfied that the defendant with intent to obstruct or delay the execution of the decree that may be passed against him, is about to dispose of the whole or any part of the property, the order would be in violation of Order 38, rule 5 as it stood before the amendment in 1976, would have at the most rendered such order irregular. But, now Sub-rule (4) inserted by Act of 1976 reads that if an order of attachment is made without complying with the provisions of sub-rule (1) of Rule 5 of Order 38, such attachment shall be void. Sub-rule (4) has been inserted with a view to see that the Courts do not pass such an extraordinary order in a cavalier manner and without satisfying themselves about the requirements of Order 38, rule 5. The simple reproduction of the language used in Order 38, rule 5, will not meet the requirements of Order 38, rule 5 of the Code. Unless the Court is satisfied with the material on record with the requirements Order 38, rule 5, of the Code the Court shall not hasten to pass an order for attachment. Thus, in my view, the order of attachment passed by the learned trial Court is clearly void as it has been made without complying with the provisions of sub-rule (1) of rule 5 Order 38, of the Code.

11. The argument of the learned counsel for the respondent-bank that the impugned order is only an interim order, is also without any merit. The trial Court vide impugned order had finally disposed of the application dated 28.4.1987 under Order 38, rule 5, read with Order 39, rule 1 and 2, of the Code. The other argument of the learned counsel for the respondent-Bank that this Court shall not interfere in exercise of the powers under Section 115 of the Code, is also devoid of any merit. This Court cannot shut its eyes against the inherent, illegal and void order. It is the bounden duty of the Court to exercise its jurisdiction and interfere when such void orders are passed. It however, shall not bar the trial Court to decide the application dated 7.2.1987 under Order 38, rule 5, of the Code which was filed by the plaintiff-Bank seeking attachment before judgment of the properties belonging to the company and Directors, the details of which have been given in Annexure ‘A’ and ‘B’, attached with the said application. Thus, in my opinion, the order of the learned trial Court cannot be sustained in law. Since the order is being set aside, it shall be open to the PSIDC to meet its commitment under the agreement dated 25th of September, 1986.

12. As a result thereof, the appeal is allowed-and the order of the learned trial Court stands set aside. However, the parties are left to bear their own costs.

Appeal allowed.

Onkar Mal Mittal . v. State Bank Of Patiala .

Structured Summary of the Opinion (V.K. Jhanji, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellants' Arguments

Respondent (Bank)'s Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Onkar Mal Mittal . v. State Bank Of Patiala .

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