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Canara Bank v. M/s Leatheroid Plastics Pvt. Ltd.

Civil Appeal · 2020 INSC 402Decided 20 May 2020
Civil Appeal No. 4645 of 2019
Justice Uday Umesh Lalit · Justice Aniruddha Bose

Background

A bank had extended credit facilities to a company against hypothecation of its plant, machinery and other assets, and under the loan agreements the bank had the option (though not an absolute duty) to itself arrange insurance for the secured assets at the borrower's cost. The bank exercised that option but only insured part of the hypothecated assets; when a fire destroyed the uninsured machinery, the borrower was left bearing a large uncovered loss and complained of deficiency of service before the consumer forum.

Decision Breakdown

The Supreme Court held that once a bank voluntarily exercises its contractual liberty to arrange insurance on a borrower's behalf, it takes on an implicit obligation to insure the entire set of hypothecated assets, not merely a part, leaving significant assets uncovered without informing the borrower amounted to negligence and deficiency of service. The Court noted the bank never alerted the borrower that some assets were excluded from coverage despite repeated written requests for policy details. It upheld the National Consumer Disputes Redressal Commission's award of about Rs. 31.76 lakh compensation, dismissed the bank's appeal, and also rejected the borrower's cross-objection seeking a higher amount.

Lesson Learnt

If a bank or lender takes it upon itself to insure a borrower's pledged assets, it must insure them completely and keep the borrower informed: silently leaving part of the security uncovered, and ignoring the borrower's requests for information, can make the lender liable to compensate for the resulting loss.

Official source (sci.gov.in)View Judgment (PDF)

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