Delhi High Court Imposes ₹10.31 Crore Deposit Condition for Leave to Defend in Loan Recovery Suit: “Defendant’s Defence Plausible but Improbable; Unconditional Leave Denied in Order XXXVII CPC Proceedings”

Court’s Decision

The Delhi High Court ruled that the respondent could not be granted unconditional leave to defend in a loan recovery suit under Order XXXVII of the Code of Civil Procedure (CPC), 1908. The court found that while the respondent’s defence was plausible, it was also improbable, requiring a deposit of ₹10.31 crores in the court as a precondition to filing a written statement.

The judgment was based on the Supreme Court’s ruling in B.L. Kashyap & Sons Limited vs. JMS Steels and Power Corporation & Anr., which held that when a defendant’s defence is not frivolous but lacks strong credibility, courts should impose conditions before granting leave to defend.

The respondent was directed to deposit the amount within four weeks, failing which leave to defend would be denied, and the suit would proceed without a defence.

Facts of the Case

1. The appellant claimed that the respondent, a distant relative, sought a personal loan of ₹7.5 crores with an agreement to pay 12% interest per annum.
2. The loan was disbursed between December 12, 2017, and March 26, 2019, via RTGS and cheques, which the respondent encashed.
3. The respondent made regular interest payments until July 2019 but defaulted from August 2019 onward.
4. The respondent sought an extension for repayment until September 2021, citing financial difficulties due to the COVID-19 pandemic.
5. The parties formalized the loan agreement on September 15, 2021, acknowledging the ₹7.5 crore loan and committing to repay within 90 days upon demand.
6. Despite repeated demands for repayment in 2022, including emails and legal notices, the respondent failed to pay. Instead, he proposed settlement offers that:
   • Excluded interest payments
   • Spread the repayment over 5-6 years
   • Were rejected by the appellant
7. The appellant filed a summary suit under Order XXXVII CPC, seeking a decree for ₹10.31 crores (principal + interest).
8. The respondent sought leave to defend, which the Single Judge granted unconditionally on April 8, 2024.
9. The present appeal challenges that order, arguing that the defence was vague, sham, and lacked merit.

Issues Before the Court

1. Was the respondent’s defence credible enough to warrant unconditional leave to defend?
2. Did the Delhi High Court have territorial jurisdiction over the case?
3. Was the appellant entitled to claim 18% interest when the loan agreement mentioned only 12%?
4. Was the loan agreement signed under coercion, as claimed by the respondent?

Petitioner’s (Appellant’s) Arguments

1. The respondent admitted the loan agreement and payments
   • Nowhere in his pleadings did the respondent deny signing the loan agreement or other documents.
   • His claim that the agreement was signed under coercion was vague and baseless.
   • No police complaint or legal action was taken by the respondent to support the coercion claim.
2. Repeated acknowledgments of debt contradict coercion claims
   • The respondent made multiple interest payments till July 2019, showing compliance with the agreement.
   • The loan agreement of September 15, 2021, was executed voluntarily, as seen from emails acknowledging the debt.
3. Settlement proposals indicate liability
   • The respondent made two settlement offers (May 3, 2022, and May 6, 2022) proposing repayment over 5-6 years but excluding interest.
   • If the loan agreement was coercive, why would the respondent offer to repay the loan over time?
4. Law on Summary Suits does not support unconditional leave
   • Under Order XXXVII CPC, leave to defend can only be granted conditionally or unconditionally if the defence is genuine and substantial.
   • Since the respondent’s defence was plausible but improbable, the court should not have granted unconditional leave.
5. Court should have imposed a deposit condition
   • Given the respondent’s admission of liability, the trial court should have at least required him to deposit the disputed amount to show good faith.

Respondent’s Arguments

1. Loan was actually an investment
   • The respondent claimed the ₹7.5 crores was not a loan but an investment in a business venture.
   • No loan documentation existed before September 15, 2021, which was allegedly signed under duress.
2. Loan agreement signed under coercion
   • The respondent alleged that he was forced to sign the loan agreement under threats from the appellant’s henchmen.
   • WhatsApp messages produced by the appellant were also allegedly extracted under coercion.
3. Delhi High Court lacks territorial jurisdiction
   • The loan agreement was signed in Gurgaon, not Delhi.
   • The respondent was residing in Gurgaon at the time, meaning the Delhi High Court lacked jurisdiction.
4. 18% interest claim was excessive
   • The appellant claimed 18% interest when the agreement only mentioned 12% per annum.
   • This itself was a triable issue justifying leave to defend.

Analysis of the Law

1. Principles Governing Leave to Defend
   • The Supreme Court in B.L. Kashyap & Sons Ltd. (2022) 3 SCC 294 held that:
     • Leave to defend should not be denied unless the defence is frivolous.
     • If the defence is plausible but improbable, courts should impose conditions like deposits.
     • If the defence is genuine and substantial, unconditional leave should be granted.
2. When Conditional Leave Should Be Granted
   • If the court doubts the defendant’s good faith, but the defence is not entirely baseless, a deposit condition should be imposed.
   • If the defence is completely sham, leave to defend should be denied altogether.
3. Precedents Applied
   • IDBI Trusteeship Services Ltd. v. Hubtown Ltd. (2017) 1 SCC 568: Courts must balance speedy disposal with fair trial rights when granting leave to defend.
   • Mechelec Engineers & Manufacturers v. Basic Equipment Corporation (1976) 4 SCC 687: Unconditional leave is granted only if the defence is strong and credible.

Court’s Reasoning and Conclusion

1. The respondent’s coercion defence was weak, as no legal complaints were filed.
2. Repeated acknowledgments of debt and settlement offers contradicted his claims.
3. The jurisdiction issue and interest rate discrepancy were triable issues but did not justify unconditional leave.
4. Since the defence was plausible but improbable, the Single Judge erred in granting unconditional leave.

Final Order

• The respondent was directed to deposit ₹10.31 crores in court within four weeks.
• If the deposit was not made, the leave to defend would be denied.
• If deposited, the respondent could file a written statement and proceed with the trial.

Implications of the Judgment

1. Stronger enforcement of loan recovery suits
   • Borrowers cannot raise baseless defences to delay payments in summary suits.
2. Ensures fair play in financial disputes
   • While leave to defend is allowed, it comes with conditions if the defence is not strong enough.
3. Encourages commercial certainty
   • Lenders can expect faster recovery in similar disputes, reducing bad debt risks.

This ruling strengthens creditor protections while ensuring genuine defences are not unfairly shut out.

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