In a recent legal case, the court delved into the intricacies of a bank’s obligations when it comes to insuring assets of borrowers. The court’s detailed legal analysis sheds light on the responsibilities of financial institutions in safeguarding the interests of their clients. This case underscores the importance of understanding legal obligations in financial transactions and signifies a landmark decision impacting consumer protection laws.
Facts
- Canara Bank extended credit facilities to Leatheroid Plastics Private Limited.
- Credit facilities included restructuring of past debt-repayment which was agreed upon on 4th January 2001.
- Deeds of hypothecation and collateral security agreement were executed on that date for mortgage of assets.
- Respondent became liable for uncovered hypothecated assets damaged by fire as their premises were sealed by the Delhi Pollution Control Committee.
- Insurance coverage was not taken for plant, machinery, and accessories, resulting in a deficiency of service by the bank.
- Debts on old limits scaled up to Rs. 40 lacs.
- Appellant valued insurance claim at Rs. 31.76 lacs while respondent valued it at Rs. 34.92,970/-.
- Bank directed to pay Rs. 31.76 lacs compensation with interest at 9% per annum by the Commission.
- Respondent filed a cross-objection seeking compensation raise to Rs. 2 crores.
- Matter remanded to the National Commission for reconsideration.
- Complaint partly allowed in the Commission’s order of 6th February 2019.
- Petition of complaint filed by respondent was based on loss due to assets left uncovered in the insurance policy.
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Arguments
- ARG_PETITIONER submits that the amendment does not have retrospective effect.
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Analysis
- Initially, objection was raised on maintainability due to the respondent not being a consumer, leading to dismissal of the petition by the Commission.
- The duty to effect insurance was primarily on the borrower, with the bank having the option to do so at the borrower’s expense for the value estimated by the bank.
- If the bank did choose to effect insurance, they were obligated to cover the entire set of hypothecated assets.
- The bank’s failure to cover the full set of assets under the insurance policy amounted to a lapse on their part.
- The respondent repeatedly requested details of the insurance policy, highlighting their awareness and concern.
- The Commission ruled in favor of the complainant, holding the bank responsible for the loss due to their negligence.
- The amendment to Section 2(d)(ii) of the Consumer Protection Act was raised as a defense by the bank, but the claim was related to a period preceding the amendment.
- The bank’s obligation to insure the assets arose from the clause allowing them the liberty to do so.
- The bank could absolve themselves from responsibility in case of claim rejection, but only if the full set of assets was covered under the policy.
- The bank’s inaction in response to the borrower’s requests for insurance details added to the deficiency in service.
- The respondent company’s efforts to obtain insurance information were evident, showcasing their attempt to stay informed and compliant.
- The clause stipulating the duty to insure rested with the borrower was challenged, emphasizing the bank’s responsibility in this instance.
- The importance of covering the entire set of assets under the insurance policy was reiterated to highlight the bank’s lapse in their actions.
- The Commission’s decision to award compensation to the complainant was based on the bank’s negligence and failure to fulfill their obligations.
- The specific clauses and communication regarding insurance policies formed crucial evidence in the proceedings, supporting the complainant’s case.
- The borrower undertakes to take all necessary steps to file claims and provide information to the bank or insurance company without being informed of the details of loss or damages.
- If a claim is rejected due to loss or damage to the security, the borrower is liable.
- The borrower agrees to indemnify the bank against any loss due to damage or destruction of the hypothecated asset.
- The bank is not obligated to insure the security but may do so at the borrower’s expense up to the value estimated by the bank.
- If the security is insured, the bank is not responsible for the rejection of a claim, whether made by the bank or the borrower.
- The bank is entitled to all benefits of insurance policies and the borrower must transfer these benefits to the bank.
- The borrower must insure the hypothecated machinery for its full market value against various risks and assign the benefits of the insurance policy to the bank.
- In case of non-settlement of a claim, the bank may take action against the insurance company without requiring the borrower to do so.
- If the bank does not file a claim within the policy’s time limit, the bank is not liable to the borrower for not pursuing the claim or recovering the amount.
- The Opposite Party was held responsible for the loss suffered by the complainant due to the lack of insurance for machinery.
- The Opposite Party was directed to compensate the complainant for the loss.
- The two Judge Bench decision of the Court in Karnataka Power Corporation & Another vs Ashok Iron Works Private Limited was cited.
- The complainant claimed Rs. 1.5 crores for machinery replacement, Rs. 45 lakh for loss of business and profit, Rs. 1.5 lakh for a mistake made by the OP, Rs. 3.5 lakh for mental agony, suffering, and loss in business and livelihood.
- Valuation report submitted by Mr. S.K. Kalia assessed the value of Plant and Machinery at Rs. 31.76 lakhs.
- The appeal was filed against the order of the National Consumer Disputes Redressal Commission dated 22 August, 2003.
- No particulars of the policies and statements were furnished.
- Bank’s claim that policies were made available to Directors not supported by material.
- Bank did not cover entire set of hypothecated assets once insurance was chosen.
- No reason found to interfere with the order under appeal.
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Decision
- The decision of the Commission is supported by adequate reasoning.
- No case has been made out by the respondent for enhancement of the compensation.
- The cross-objection of the respondent is rejected.
- All connected applications are disposed of.
- No order as to costs.
Case Title: CANARA BANK Vs. M/S LEATHEROID PLASTICS PVT LTD. (2020 INSC 402)
Case Number: C.A. No.-004645 / 2019
