State Bank Of India (Difc Branch) V (1) Moulds Pertochem Fze (2) Moulds & Metals Fze (3) Viwasvat Kumar Shastri [2019] DIFC CFI 069

Claim No. CFI 069/2019

THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS

In the name of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai

IN THE COURT OF FIRST INSTANCE

BETWEEN

STATE BANK OF INDIA (DIFC BRANCH)

Claimant

and

(1) MOULDS PERTOCHEM FZE
(2) MOULDS & METALS FZE
(3) VIWASVAT KUMAR SHASTRI

Defendants

JUDGMENT OF JUSTICE ROGER GILES

ORDER

UPON the Claimant’s Part 7 claim form dated 30 October 2019

AND UPON the Default Judgment made by Judicial Officer Nassir Al Nasser issued against the First and Second Defendant dated 10 February 2020

AND UPON the Third Defendant’s Defence filed on 24 February 2020

AND UPON the Claimant’s reply to defence filed on 7 April 2020

AND UPON the Case Management Order of Judicial Officer Nassir Al Nasser dated 11 May 2020

AND UPON hearing Counsel for the Claimant and Counsel for the Third Defendant at a hearing before Justice Roger Giles on 17 September 2020

AND UPON reading the submissions and evidence filed and recorded on the Court file

IT IS HEREBY ORDERED THAT:

1. Judgment for the Bank against Mr Kumar for USD 9,255,659.24 plus interest at the rate of USD 2,170 per day from 24 October to the date of judgment.

2. Mr Kumar to pay the Bank’s costs of the proceedings.

3. Liberty to apply in relation to the judgment amount and costs by letter to the Registry within 14 days.

Issued by:
Ayesha Bin Kalban
Assistant Registrar
Date of issue: 21 September 2020
Time: 1pm

JUDGMENT

1. This is a bank’s claim against a guarantor of its customer’s indebtedness. For the reasons which follow, the claim succeeds.

Facts

2. State Bank of India (the “Bank“) and Moulds Petrochem FZE (“Moulds Petrochem“) entered into a Facility Agreement dated 20 May 2015 (the “Agreement”) for the provision of finance to a total amount of USD 10 million for Moulds Petrochem’s working capital requirements. The Agreement included guarantees by Moulds & Metals FZE (“Moulds Metals”) and Mr Vivaswat Kumar Shastri (“Mr Kumar”) of the performance of Moulds Petrochem’s obligations. It was expressed to be governed by the laws of the UAE.

3. The body of the Agreement provided for security by pledge of an account of Moulds Petrochem with the Bank (the “pledged account”). Through a condition precedent, the Bank required that Moulds Petrochem provide mortgage security over six properties in Dubai. By a Security Agency Agreement also dated 20 May 2015 (“the S A Agreement”) the Bank appointed MashreqBank PSC (“Mashreq“) as its security agent, and pursuant to the S A Agreement by mortgages dated 26 May 2015 Mr Kumar mortgaged three properties to Mashreq and Moulds Metals mortgaged another three properties to Mashreq (the “mortgaged properties”) as security for repayment by Moulds Petrochem.

4. Mr Kumar was the shareholder in and Manager of the two companies. He provided the Bank with a personal cheque for USD 10 million (the “cheque”). The Agreement said nothing about this; it was common ground that it was the practice for lenders to require provision of a cheque for the loan amount, but there was no evidence of the request or the terms on which the cheque was provided. For what happened about the cheque, see later in these reasons.

5. The term of the facility was one year, but with provision for continuance at the Bank’s discretion. It was continued and was formally renewed by a Facility Letter dated 12 July 2018. Pursuant to a requirement then made, by an Addendum to the Agreement dated 8 August 2018 Moulds Petrochem mortgaged to the Bank as further security its stocks, receivables and movable property. The Facility letter referred to the cheque as one of a number of “Sanction Covenants”, but again said nothing about the terms on which it was held.

6. Moulds Petrochem fell into payment default on 8 March 2019. On 7 April 2019 the Bank wrote to it requiring that it “settle the irregularity“ by payment of an outstanding USD 340,741.38. It did not do so. On 11 June 2019 the Bank wrote to it advising that the account had been “classified as an NPA account“ and requiring payment of USD 10,074,010.69 as the total amount of its indebtedness. Payment was not made, and on 21 June 2019 the Bank wrote to Moulds Metals and Mr Kumar requiring payment as guarantors of Moulds Petrochem’s indebtedness, the amount then said to be USD 10,130,256.01.

7. The Bank appropriated the money in the pledged account. On 30 October 2019 it commenced these proceedings against Moulds Petrochem, Moulds Metals and Mr Kumar, claiming USD 9,302,659.24 plus interest at USD 2,170 per day from 24 October 2019.

8. At some point Mashreq initiated proceedings before the Dubai Court claiming to exercise a power of sale over the mortgaged properties. Those proceedings have not come to a conclusion.

9. Default judgment was signed against Moulds Petrochem and Moulds Metals. Mr Kumar defended the claim against him.

The Defences

10. Mr Kumar did not dispute his guarantee or Moulds Petrochem’s indebtedness. He contended as his defences –

Is the Claim Barred?

11. Article 1092 of the Code appears in the section of the Code concerned with the effect of suretyship between the surety and the creditor. In the agreed translation, it provides-

“If a debt is due, the creditor must claim for it within six months from the date on which it fell due, otherwise the surety shall be deemed to have been discharged.”

12. Mr Kumar submitted that upon default on 8 March 2019, Moulds Petrochem’s indebtedness fell due, and because these proceedings were not commenced until 30 October 2019, he was discharged.

13. For at least two reasons, the submission cannot be accepted. First, the Code does not apply at all to Mr Kumar’s guarantee. Secondly, even if it did, on the facts of this case Article 1092 would not operate to discharge Mr Kumar.

14. Article 1 of the Code states that it “shall operate in respect of civil transactions for the UAE”, but goes on to say, “However, commercial transactions shall continue to be governed by the existing laws and regulations relating thereto until the Federal Commercial Law is enacted”. The Commercial Transactions Law, Federal Law No 18 of 1993 (the “CT Law”), was subsequently enacted. By Article (1), it applies to all commercial activities carried out by any person, whether or not a trader, and it is given an expansive scope in Articles (4) and (5), such that Moulds Petrochem’s shareholder and Manager giving a guarantee supporting the provision of finance to it, it undoubtedly being engaged in commerce, was a commercial activity.

15. This is put beyond doubt by Article (73) of the CT Law, providing that a guarantee shall be commercial “if the guarantor has guaranteed a debt which is deemed in relation to the debtor to be commercial…”. It follows that the Code excludes any operation in relation to Mr Kumar’s guarantee in favour of the CT Law.

16. This is also the view taken in two recent decisions of the UAE courts, the Federal Supreme Court (Sharjah) UAE 458/2017 (30 January 2018) and the Dubai Court of Cassation DCC 272/2018 (2 July 2018), to which the Bank referred. An earlier case in the Dubai Court of Cassation DCC 423/2002/1 (9 February 2002) to which Mr Kumar referred may have held otherwise, but I respectfully find the reasons difficult and, if it did, regard it as overtaken by the later cases.

17. Going to the operation of the Article, I pass over whether “must claim for it” means must require payment, which the Bank did on 19 June 2019, or (as was necessary for the submission) must bring court proceedings. The debt of Moulds Petrochem in respect of which the Bank claims did not fall due on 8 March 2018. The default on that date was an Event of Default under the Agreement, by cl 15.2 entitling the Bank to require payment of the entire indebtedness of Moulds Petrochem, but did not of itself make that indebtedness payable. It was not payable until the Bank wrote requiring payment on 11 June 2019, which was less than six months before the commencement of these proceedings.

18. I note the Bank’s reliance on cl 14.10 of the Agreement, providing that the guarantors expressly agreed –

“… that the provisions of Article 1092 of the Federal Civil Code…, to the extent that a court should hold that Article may be applicable to this Guarantee, shall not apply to this Guarantee and that the Lender shall not be obliged to make any demand within the six (6) month period mention in that Article.”

19. It is not clear to me that the agreement of the parties could trump the operation of the Code, if the Code were applicable, although a decision of the Dubai Court of Cassation DCC 221/2003/1 (28 September 2003) to which Mr Kumar referred, rather against his interests, may suggest that it can. The question was raised in the hearing but not the subject of submissions. It is not necessary to decide the question, and I express no view.

Is the Claim Premature?

20. Article 1082, appearing in the same section of the Code, provides:

“If a debt is secured by a security in rem prior to the suretyship arising, and the surety has made it a condition that recourse should be had against the principal obligor first, it shall not be permissible to execute against the property of the surety prior to executing against the property standing as security for the debt.”

21. Mr Kumar submitted that he could now, and did, make it a condition that recourse be had against Moulds Petrochem, so that the Bank had first to exhaust its rights in executing against the mortgaged properties.

22. It is not clear that execution against property in the Article includes, as regards the surety, in personam proceedings to obtain a money judgment: I will assume for the submission that it does. The submission must fail because the Code does not apply to Mr Kumar’s guarantee. Even if it did, the Article appears to apply only when a guarantee is given after mortgage security has been given, not when (as here) they are contemporaneous or when they are in reverse order, although that was not the subject of submissions and I do not express a concluded view. But it also cannot be accepted that Mr Kumar can now impose the condition. The Article plainly requires imposition of the condition when the suretyship arises, that is, at the time the guarantee is entered into. There was no such condition in the Agreement. On the contrary, by cl 14.6 the guarantors waived any right of first requiring the Bank or its agent to proceed against or enforce any other rights or security or claim payment from any other person before claiming from them.

23. Mr Kumar said that it would be unfair if the Bank could recover twice over, both from him and from the mortgaged properties. That will not happen: the Bank must give credit for its first recovery.

The Cheque

24. The Bank presented the cheque for collection on 11 April 2019; it appears that this was without notice to Mr Kumar. It was returned due to insufficient funds. On 24 June 2019 the Bank filed a criminal complaint against Mr Kumar for the bounced cheque.

25. Mr Kumar submitted that the Bank had not been entitled to present the cheque for collection, and that the claim against him should therefore be dismissed. There are difficulties with both the premise and the conclusion.

26. As to presentation of the cheque, the submission as I understand it was that when it was presented the only default in payment was the USD 340,741.38; that there was sufficient money in the pledged account for the Bank to be secured as to that amount, and it had the right to resort to that money; that the total indebtedness was not then payable; and that presentation of the cheque for USD 10 million was therefore not justified. In cross-examination of Mr Rajinder Kumar, the Bank’s officer overseeing the Moulds Petrochem account at the time, Ms Bini Saroj, appearing for Mr Kumar, sought to establish non-compliance with a “protocol” within the Bank, and she submitted that demand for the whole indebtedness, as was done on 11 June 2019, was necessary before the Bank could present the cheque.

27. An internal protocol – and I do not think one was usefully established – cannot be the measure of the Bank’s entitlement, as regards Mr Kumar, to present the cheque. The Agreement being silent as to the cheque, it provides no measure: the Bank suggested presentation could come within “invoke all legal remedies” in cl 15.2 (w) as a course open to the Bank upon an Event of Default, but that cannot be said without a basis for saying that presentation of the cheque was an available legal remedy. As the evidence was left, it is not known on what terms the cheque was provided to the Bank, including when it was open to the Bank to present it. Presentation only when USD 10 million was owing cannot be the measure, since it cannot have been intended that the cheque could be presented only when that precise sum or a greater sum was due and not when a dollar less was due, and Mr Kumar did not suggest otherwise; if it could be presented when less than USD 10 million was due, when? In short, because the terms on which the cheque was provided are not known, which it was for Mr Kumar to establish, it cannot be concluded that the Bank was not entitled to present the cheque when it did.

28. Even if it be assumed that the Bank was not entitled to present the cheque, it has not been shown that it is therefore unable to succeed in its claim against Mr Kumar.

29. In his skeleton argument Mr Kumar said that in presenting the cheque the Bank acted illegally, mala fide and dishonestly. That was not put to Mr Rajinder Kumar, as it should have been if maintained. There was no illegality, and no attempt was made to establish mala fides or dishonesty; those extravagances should not have been alleged without a proper basis and can be ignored. At the hearing, the submission was lack of entitlement.

30. Despite a number of invitations, it was not explained how the presentation of the cheque without entitlement led to failure of the Bank’s claim. In the evidence led by Mr Kumar, it was said that following the filing of the criminal complaint Mr Kumar, who was in India at the time, felt unable to return to Dubai, and that running the business became difficult; but that was not taken further beyond perhaps a suggestion (from the filed Defence) that the Bank’s claim was therefore “unfair”. It is clear from the evidence that Moulds Petrochem was in dire straits before the filing of the criminal complaint. Any consequences to the Bank’s claim from presentation of the cheque without entitlement would have to come from the terms of the guarantee or from the law of the UAE, and Mr Kumar did not identify and argue for either.

Orders

31. In preparing these reasons, I noted that the USD 9,302,659.24 claimed by the Bank included USD 47,000 as “approx legal costs incurred”. As at present advised, I do not think the judgment should include that amount. It appears that other than perhaps in cl 20.2, the Agreement did not make Moulds Petrochem liable to the Bank for the costs of recovery action taken against it, and that that clause required demand upon Moulds Petrochem: there was no evidence of demand for legal costs, as an approximate amount it is unlikely that there has been demand, and in any event as an approximate amount it has not been proved. I exclude the USD 47,000 from the judgment sum, leaving the Bank with its costs order in the proceedings; but because this was not raised in the hearing for the parties’ submissions I will reserve liberty to apply in relation to it.

32. The Bank has all but wholly succeeded, and in the ordinary course is entitled to costs. I will so order but will also reserve liberty to apply in relation to costs in case either party wishes to submit that some other order should be made.

33. I make the following orders –

Issued by:
Ayesha Bin Kalban
Assistant Registrar
Date of issue: 21 September 2020
Time: 1pm