AI Structured Summary
Not yet generated for this judgment
Judgment
Elipe Dharma Rao, J.
One M/s. Sun Electrical Industries, represented by its Proprietor A. Abdul Rahman, running business at the place of the appellant, has availed
financial assistance of Rs. 44,000/= on 29.11.1984 for the purpose of purchase and erection of machinery for which the appellant stood as
guarantor, offering his house property bearing Plot No. 84-A, Thiruvalluvar Nagar, Kattur, Trichy as collateral security. It is seen from the records
that the said borrower committed default in payments and therefore, the first respondent had issued a foreclosure notice u/s 29 of the State
Financial Corporations Act, 1951. Thereafter, by letter dated 6.2.2002, the first respondent proposed to hold a tender-cum-public auction
regarding the above said property belonging to the appellant and accordingly, after wide publicity, auction was conducted on 25.2.2002, wherein
the second respondent became the highest bidder, with an offer of Rs. 1.90 lakhs. Before confirmation of the sale, the appellant had approached
the first respondent and requested time to pay the amounts and by letter dated 11.3.2002, the first respondent directed the appellant to pay a sum
of Rs. 50,000/= before 20.3.2002 in addition to the sum of Rs. 25,000/= already paid by him on 8.2.2002, so as to consider the request of the
appellant. But, the appellant did not pay the same, but requested the first respondent to grant some more time to pay the amount in some
installments, for which the first respondent, by the letter dated 9.8.2002, had directed the appellant to pay the auction amount within seven days.
Aggrieved, the appellant filed W.P. No. 33499 of 2002, praying to issue a Writ of Certiorari, to call for the records relating to the auction dated
25.2.2002 conducted by the first respondent and letters dated 5.8.2002 and 9.8.2002 and quash the same. Since the learned single Judge has
dismissed the writ petition, the appellant has preferred this writ appeal.
Heard Mr. AR.L. Sundaresan, learned senior Counsel appearing for the appellant, Mr. R. Viduthalai, learned senior Counsel appearing for the
first respondent and Mr. M. Kamalanathan, learned Counsel appearing for the second respondent/the successful bidder.
Mr. AR.L. Sundaresan, learned senior Counsel appearing for the appellant would vehemently argue that in the case on hand, the first
respondent has invoked Section 29 of the State Financial Act, which can be invoked only against the principal borrower and not against the surety
and insofar as the property of the surety which was secured in favour of the first respondent corporation, the remedy, if any, lies u/s 31 of the Act
or by having recourse to civil Court and not u/s 29 of the Act. In support of his contentions, the learned senior Counsel for the appellant would rely
on a judgment of the Division Bench of the Karnataka High Court in N. Narasimahaiah v. Karnataka State Financial Corporation and Ors. AIR
2004 Kar 46, wherein the Division Bench of the Karnataka High Court, while dissenting from the judgments of the Orissa High Court in Miss.
K.T. Sulochana Nair Vs. Managing Director, Orissa State Financial Corporation and Others, and Punjab and Haryana High Court in Jasbir Kaur
and Another Vs. Punjab State Industrial Development Corporation Ltd., Chandigarh and Another, , has held as follows:
Section 29 clearly states that the Financial Corporation shall have the right to take over the management of possession of the industrial concern. It
does not refer to taking over of management or possession of the property belonging to the surety, which has been secured in favour of Financial
Corporation. The Legislature has been careful in conferring such power, only against the industrial concern and not against the surety. In the
absence of an express statutory provision, the power to take over the property of another, without intervention of Court, cannot be a matter of
inference. Any attempt by State Financial Corporation (SFC) to take possession of a surety''s property, even if mortgaged, in the absence of a
specific authority by law, will fall foul of Article 300-A of the Constitution of India. Section 29 specifically provides that the Financial Corporation
shall have right to take over the management or possession or both of the industrial concern. The words are clear and unambiguous. If they are
read literally or normally, they do not lead to any absurd result nor contract the object of the Act. There is no defect in Legislative drafting. There is
no reference to surety''s properties. The right to take over the management or possession or both is conferred only in regard to the industrial
concern and not conferred in respect of the security offered by the surety. Therefore, it is not permissible to add words to Section 29 and read the
Section as authorising the Financial Corporation to take over the management of possession of the property of the sureties also.
Therefore, insofar as the property of the surety which is secured in favour of the State Financial Corporation, the remedy of the corporation lies
either u/s 31 of the Act or by having recourse to civil Court and not be recourse to Section 29 of the Act. The remedy available to Financial
Corporations against sureties, u/s 31 of SFC Act is also speedy and efficacious remedy. Therefore, non-application of Section 29 to the properties
of surety will in no way prejudice the rights of the Financial Corporation against sureties.
On the contrary, on the part of the first respondent Corporation, the learned Senior Counsel would contend that the rights and liabilities of the
surety are coextensive with that of the principal debtor and there is no equity in favour of a defaulting party, which may justify interference by the
courts in exercise of its equitable extraordinary jurisdiction and in matters of the Financial Corporations, the writ court has no say and the High
Court, in exercise of jurisdiction under Article 226 cannot act as an appellate authority while reviewing quasi-judicial or administrative action.
In support of his arguments, the learned senior Counsel for the first respondent would rely on the following judgments:
G. Kailasam v. The Tamil Nadu Industrial Investment Corporation Ltd. 2006 1 L.W.298,
The Andhra Pradesh State Financial Corporation v. Gar Re-Rolling Mills and Anr. 1994 2 L.W.36
Karnataka State Industrial Investment and Development Corporation Ltd. Vs. Cavalet India Ltd. and Others, ,
Tamil Nadu Industrial Investment Corporation Ltd. Vs. Millenium Business Solutions Pvt. Limited and Another,
U.P. Financial Corporation Vs. Gem Cap (India) Pvt. Ltd. and Others, .
In the first judgment cited above reported in 2006 1 L.W.298, a Division Bench of this Court has held:
...In other words, the relief available to the Corporation u/s 29 of the Act to realise its dues in the manner prescribed therein is wider in scope than
the limited relief available to it u/s 31 of the Act and the same is not controlled by Section 31 of the Act. Inasmuch as State Financial Corporations
Act is a special Act enacted by the Parliament with an object to recover the money due to the Financial Corporation/Institution, any interpretation
which frustrates the right of the Corporation to recover its dues must be eschewed. There is no equity in favour of a defaulting party which may
justify interference by the Courts in exercise of its equitable extraordinary jurisdiction under Article 226 of the Constitution of India to assist it in not
repaying its debts. The aim of equity is to promote honesty and not to frustrate the legitimate rights of the Corporation which after advancing the
loan takes steps to recover it dues from the defaulting party.
In the second judgment cited above, reported in 1994 2 L.W.36, the Honourable Apex Court has held as follows:
On a conjoint reading of Section 29 and 31 of the Act, it appears to us that in case of default in repayment of loan or nay instalment or any
advance of breach of an agreement, the Corporation has two remedies available to it against the defaulting industrial concern, one u/s 29 and and
another u/s 31 of the Act. The choice for availing the remedy u/s 29 or Section 31 of the Act is that of the Financial Corporation alone and the
defaulting concern has no say whatsoever in the matter, as to which remedy should be taken recourse to by the Corporation against it for effecting
the recovery....
There is no equity in favour of a defaulting party which may justify interference by the courts in exercise of its equitable extra-ordinary jurisdiction
under Article 228 of the Constitution of India to assist it in not repaying its debts. The aim of equity is to promote honesty and not to frustrate the
legitimate rights of the Corporation which after advancing the loan takes steps to recover it dues from the defaulting party....
In the third judgment cited above, reported in Karnataka State Industrial Investment and Development Corporation Ltd. Vs. Cavalet India Ltd.
and Others, , while rejecting the submissions about the genuine reason of the creditor for default and about non-cooperation of the Corporation in
not rescheduling loan, the Honourable Supreme Court has held:
In a matter between the Corporation and its debtor, a writ court has no say except in two situations i.e. (a) where there is a statutory violation on
the part of the Corporation, or (b) where the Corporation acts unfairly i.e. unreasonably. The High Court while exercising its jurisdiction under
Article 226 of the Constitution does not sit as an appellate authority over the acts and deeds of the Financial Corporation and seek to correct
them. The doctrine of fairness does not convert the writ courts into appellate authorities over administrative authorities. Unless the action of the
Financial Corporation is mala fide, even a wrong decision taken by it is not open to challenge. It is not for the courts or a third party to substitute its
decision, however, more prudent, commercial or businesslike it may be, for the decision of the Financial Corporation. Hence, whatever the
wisdom (or the lack of it) of the conduct of the Corporation, the same cannot be assailed for making the Corporation liable. In commercial
matters, the courts should not risk their judgments for the judgments of the bodies to which that task is assigned.
In the fourth judgment cited above reported in Tamil Nadu Industrial Investment Corporation Ltd. Vs. Millenium Business Solutions Pvt.
Limited and Another, , the First Bench of this Court has held:
No writ lies merely for directing one time settlement or for directing re-scheduling of loan or fixing installments in connection with loan. It is only the
financial Institution/Bank which granted the loan which can re-schedule it. High Court has no jurisdiction under Article 226 to direct grant of One
Time Settlement or re-scheduling of loan or fixing installments.
In the last judgment cited by the learned senior Counsel for the first respondent reported in U.P. Financial Corporation Vs. Gem Cap (India)
Pvt. Ltd. and Others, , the Honourable Apex Court has held that the ''High Court while reviewing the administrative action of the appellant
Corporation under Article 226 cannot act as an appellate Court.''
On the part of the second respondent/successful bidder, the learned Counsel , besides adopting the arguments advanced on the part of the first
respondent, would further submit that she became the successful bidder, offering highest amount and that the auction sale was confirmed in her
favour on 27.2.2002 and confirmation to the sale was communicated to her on 1.8.2002 and she was always ready and willing to perform her part
of the obligation by paying the rest of the amount and get the sale deed registered in her favour and would pray to dismiss this writ appeal. It has
also been submitted on the part of the second respondent that she has already paid the balance of amount on 12.1.2005 under a receipt issued by
the first respondent and got the sale deed executed in her favour on 7.2.2005.
In the case on hand, there is no dispute that the appellant stood as a guarantor and offered his property as collateral security for the loan
availed by one Abdul Rahman, Proprietor of M/s. Sun Electrical Industries. Even from the averments made by the appellant in his affidavit filed
before the learned single Judge, it is seen that the said Abdul Rahman became a defaulter and his whereabouts are also not known and only in such
circumstances, the first respondent Corporation has initiated proceedings u/s 29 of the Act and has also proceeded to bring the property for
auction, wherein the second respondent emerged as the successful bidder.
The core contention of the appellant is that when a person stood as guarantor, he will be liable to pay the amount in case the principal debtor
fails to pay the amount and in the case on hand, the first respondent Corporation without proceeding against the principal debtor, has proceeded
against the appellant, guarantor. The appellant would also submit that ignorant of the consequences, he offered his property as security to the
principal debtor.
First of all it must be said that ignorance of law has no excuse and therefore, the appellant cannot seek protection under the guise that he is
ignorant of the consequences of his offering the property as a security for the loan obtained by the principal debtor. Further, as has already been
stated supra, the appellant himself has admitted that the whereabouts of the principal debtor are not known. When such is the position, the first
respondent who has rendered financial assistance to the principal debtor on the security furnished by the appellant could not be blamed for having
proceeded against the appellant. Only for that purpose, the Principle of Election has been enunciated in favour of the creditor and by exercising
such election, granted by law, the first respondent Corporation has proceeded against the appellant, the guarantor. The liability of a principal
debtor and surety being co-extensive, as per Section 128 of the Indian Contract Act, it follows that there is no need to exhaust the remedies
against the principal debtor before enforcing the liability of the surety, particularly in cases of this nature, wherein, admittedly, the whereabouts of
the principal debtor are not known even to the surety/guarantor.
For better appreciation, we shall now extract Section 29 of the State Financial Corporations Act, 1951, which reads as follows:
Rights of Financial Corporation in case of default-
(1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any
loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the corporation or otherwise fails to
comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management
or possession or both of the industrial concern, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged,
hypothecated or assigned to the Financial Corporation.
(2) Any transfer of property made by the Financial Corporation, in exercise of its powers under Sub-section (1), shall vest in the transferee all
rights in or to the property transferred as if the transfer had been made by the owner of the property.
(3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from gods
forming part of the security held by it as it had with respect to the original goods.
(4) Where any action has been taken against an industrial concern under the provisions of Sub-section (1), all costs, charges and expenses which
in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern
and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of
such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so
received shall be paid to the person entitled thereto.
(5) Where the Financial Corporation has taken any action against an industrial concern under the provisions of Sub-section (1), the Financial
Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern and shall sue and be sued in the
name of the concern.
Admittedly, the property belonging to the appellant was offered as security to the first respondent towards the loan obtained by the principal
debtor, whose whereabouts are not known. Therefore, in the light of the language used in Section 29(1), as has been extracted supra, the first
respondent Corporation has the right to realise the property pledged, mortgaged, hypothecated or assigned to it. On a careful reading of the entire
Section, we have no hesitation to hold that the power conferred u/s 29 is wide and it does not make any distinction between the assets of the
industrial concern and assets not belonging to the industrial concern but mortgaged to the Corporation. The Section gives ample power to the
Corporation to deal with the property either pledged, mortgaged or hypothecated or assigned by anyone including the surety or guarantor. Only
exercising this power, the Corporation has brought the property of the appellant/guarantor, which was offered as a security, for sale, for realisation
of the amount due to it, wherein the second respondent became the highest bidder, in which we are unable to find any illegality. Therefore, we are
unable to appreciate the contentions raised on the part of the appellant.
The State Financial Corporations have been established to create institutional framework for financing medium and small scale industries. The
State Financial Corporations Act, 1951 was enacted by the Parliament with a view to promote industrialization and offer assistance by giving
financial assistance in the shape of loans and advances, etc. repayable in instalments. The Act confers special privileges on the State Financial
Corporations in the matter of enforcement of claims against borrowers. The Corporation has to recover the loans and advances, so as to be able
to give financial resources assistance to other industries and unless it recovers its dues, the money will not remain in circulation for long.
At this juncture, we feel it apt to quote the observations of the Honourable Apex Court in A.P. State Financial Corporation case (cited supra):
The relief available to the Corporation u/s 29 of the Act to realise its dues in the manner prescribed therein is wider in scope than the limited
relief available to it u/s 31 of the Act and is not controlled by Section 31 of the Act. The Legislature clearly intended to preserve the rights of the
Corporation u/s 29 of the Act, by expressly stating in Section 31 of the Act, that its recourse to action under that Section is without prejudice to
the provisions of Section 29 of the Act.... Any interpretation which frustrates the right of the Corporation to recover its dues must be eschewed.
The learned senior Counsel for the appellant would press into service a Division Bench judgment of the Karnataka High Court, which has not
favoured any action against the surety or his properties. But, it is to be mentioned that this judgment of the Division Bench of the Karnataka has
been challenged before the Honourable Supreme Court in SLP (Civil Nos.) 15423-15427 of 2003, wherein an order of stay has been granted by
the Honourable Apex Court, by the order dated 27.1.2004. Therefore, no reliance can be pleaded on the above judgment of the Division Bench
of the Karnataka High Court.
From the materials placed on record, it is clear that the auction sale was confirmed in favour of the successful bidder/the second respondent on
27.2.2002 and confirmation to the sale was communicated to her on 1.8.2002, calling upon her to remit the balance of 90% of the bid amount. It
has been asserted on the part of the second respondent that she is always ready and willing to remit the balance of the bid amount, which has not
been denied by the first respondent Corporation also. It is seen that by the said communication dated 1.8.2002, the second respondent was given
thirty days time for payment of the balance amount and in the meantime, the appellant filed the writ petition and obtained the interim order, as a
result of which the second respondent could not pay the balance of the amount. Thereafter, on 12.1.2005, the second respondent paid the balance
of amount of Rs. 1,71,000/= under a receipt issued by the first respondent and on 7.2.2005, the first respondent has also executed a sale deed in
favour of the second respondent. Copies of both these documents are submitted in the typedset of papers by the second respondent. Therefore,
everything has come to a close on 7.2.2005, even before the order of status quo obtained by the appellant in this appeal in W.A.M.P. No. 23 of
2005, dated 19.3.2005.
Admittedly, even though the property was auctioned, the first respondent, by the communication dated 9.8.2002 has given a time of seven
days for the appellant to pay the auction amount, so as to stop the further proceedings, which opportunity was not availed by the appellant. While
such is the factual position, as has been held by the Honourable Apex Court in Karnataka State Industrial Investment case cited supra, ''it is not for
the Courts or a third party to substitute its decision, however, more prudent, commercial or business like it may be, for the decision of the Financial
Corporation and in commercial matters, the Courts should not risk their judgments for the judgments of the bodies to which that task is assigned.''
Further, as has been further held in the judgments cited on the part of the first respondent there is no equity in favour of a defaulting party which
may justify interference by this Court in exercise of its extra-ordinary jurisdiction under Article 226 of the Constitution of India.
In view of our above discussion, there is no merit in the writ appeal and the same fails and is dismissed accordingly. No costs.