Small Industries Development Bank of India v. M/S Sibco Investment Pvt. Ltd. (2022)

It is the modern case on a very old question: when may a party to an unconditional undertaking to pay lawfully withhold payment?

The instruments were bonds in the form of promissory notes, freely tradable in the market. On their face they carried an unconditional undertaking to pay — the very quality which makes an instrument negotiable. The holder said that it was entitled to interest for delay because the undertaking was unconditional and there was nothing more to be said. The Court held otherwise, and the reasons it gave form a short and usable list of what makes a withholding bona fide.

The case also shows the Reserve Bank's regulatory action reaching a transaction between two private parties, which is the Module 2 theme in an unusual setting.

The plaintiff, SIBCO Investment Pvt. Ltd., sued the Small Industries Development Bank of India for interest on the allegedly belated payment of principal and accrued interest on bonds the defendant had issued.

The bonds were promissory notes: SIDBI Bonds 2003 (4th Series) carrying interest at 13.50 per cent, redeemable on 21 December 2003, and SIDBI Bonds 2004 (5th Series) carrying 12.50 per cent, redeemable on 21 December 2004. They were freely tradable.

The chain of title matters:

1. The 41 bonds were originally issued by SIDBI to CRB Capital Markets Ltd. in 1993.
2. CRB Capital sold them to one Shankar Lal Saraf in February 1997.
3. Saraf sold them to SIBCO on 1 July 1998; SIBCO purchased 15 bonds on that date.

Meanwhile CRB Capital faced winding up proceedings at the instance of the Reserve Bank of India in the Delhi High Court.

On 2 July 1998 SIBCO deposited the bonds with SIDBI, asking that its name be endorsed on them. SIDBI refused to register or record SIBCO's name, on the ground that CRB Capital had gone into involuntary liquidation at the instance of the Reserve Bank.

SIBCO first moved the Calcutta High Court by writ petition for a mandamus to transfer the bonds and pay the accrued interest. On 9 January 2001 that court held the writ court was not the proper forum and permitted SIBCO to approach the Company Court, the High Court at Delhi, seeking intervention in the liquidation proceeding against CRB Capital.

On 17 December 2004 the Company Court clarified that SIBCO was in the clear for the transactions concerned, and on 17 February 2005 it directed Saraf to put up the matter before SIDBI. On 21 February 2005 SIDBI paid the principal together with interest calculated up to date, deducting tax at about 20 per cent. On objection, it issued a further warrant of Rs. 58,86,833 on account of excess deduction.

About seven months later, SIBCO's case in the suit was that interest had in fact been calculated only up to a date short of payment, and that further interest was due for the period of delay.

The single judge dismissed the suit. The Division Bench of the Calcutta High Court reversed him on 25 November 2019. SIDBI appealed.

Whether the plaintiff had set forth a just claim based on the bonds issued by the defendant, or whether it was a case of that trial in Shakespeare's The Merchant of Venice where Shylock claims the promised pound of flesh — here, in the form of interest on delayed payment on the bonds purchased by the plaintiff.

SIDBI's appeal was allowed and the trial court's judgment restored; SIBCO's cross-appeal was rejected. No order as to costs.

Why the withholding was bona fide

The Court accepted that the payment was demanded in furtherance of an unconditional undertaking in the bonds, but held that the plaintiff was not entitled to it until the Company Court's order of 17 December 2004.

Three elements weighed on the defendant, and the Court held that none could be brushed aside as irrelevant:

1. contravention of the Reserve Bank's directives;
2. the issue being related to the ongoing litigation in the Delhi Company Court; and
3. concerns about title over the bonds transacted during the suspect spell.

The defendant had proactively sought the advice of the Official Liquidator about payment of the interest income. In the absence of the Official Liquidator's consent and guidance it could not have made payment without inviting onerous consequences for itself. It therefore acted prudently, conscious of its legal obligation, in withholding payment.

On title, the Court read s. 531 of the Companies Act 1956 with s. 441(2). There was a suspicion over the title of the plaintiff's predecessor in interest; and the plaintiff's own title, acquired by a transaction during the suspect spell, was therefore also under a cloud. That suspicion was not misplaced, being shared by the Reserve Bank and by the Official Liquidator. As soon as the Company Court clarified the position on 17 December 2004, the defendant duly complied. It had acted bona fide.

Why the claim failed on its own conduct

The Court also weighed what SIBCO had and had not done. Its purchase from Saraf did not sound right, being made during the suspect spell, with concurrent alarm bells rung by the Reserve Bank and by the court. When it approached the writ court to validate the transaction, it put forward no claim for interest on delayed payment. It chose not to approach the Company Court directly, relying instead on Saraf to secure a favourable verdict. It forwent the first opportunity to claim interest, when the defendant remitted the amount due in compliance with the Company Court's verdict. The payment was accepted without protest, and only about seven months later were additional sums demanded.

The holder of the bond had received its due; an additional sum was not merited.

Even where an instrument contains an unconditional undertaking to pay, a payer who withholds payment bona fide in the face of a regulator's directives, pending liquidation proceedings against a predecessor in title, and a genuine cloud over the holder's own title acquired during the suspect period, is not liable for interest on the delayed payment for the period before the cloud is judicially removed; and a holder who accepts payment without protest and raises the claim months later will not be assisted.