Alliance Inorganics Ltd. vs PRADESHIYA INDUSTRIAL AND INVESTMENT CORPORATION OF U.P. LTD

HOW much help could be extended to a company, which has waddled out of its commitments and declared as a ''defaulter''? What is the effect of keeping the material facts, under a hat and suppress those from a Court of law? Is it incumbent upon the opposite parties to approve the rehabilitation package? Is the complainant, a ''consumer''?. These are the few knotty problems which are to be adjudicated by this Commission. M/s. Alliance Inorganics Ltd., the complainant, submitted a Scheme to manufacture Sodium Dichromate and allied products to Pradeshiya Industrial and Investment Corporation, O.P. 1, and U.P. State Financial Corporation, O.P. 2 to have their financial assistance. An Agreement was executed between all the three parties. O.P. 1 was to be the leading financial institution and it agreed to advance Rs. 90.00 lakh and O.P. 2 agreed to advance Rs. 32.10 lakh as term loan. The complainant Company was to arrange Rs. 35.90 lakh as Equity Share Capital and Rs. 7.00 lakh as Unsecured loan, totalling to Rs. 42.90 lakh. Both O.P. 1 & 2 sanctioned the above said loan vide letters dated 7.3.1989 and 20.4.1989, respectively, which was proved on record as Annexure P -1 and P -2, respectively. The complainant also raised an amount of Rs. 40.00 lakh and invested more than 75% of the same towards implementation of the project, in accordance with the package approved by the OPs, before 31.7.1989. O.P. 1 agreed to sanction a bridge loan of Rs. 45.00 lakh vide sanction letter dated 20.8.1989.

O .P. 1 disbursed a loan of Rs. 35 lakh towards bridge loan on 9.11.1989. They also disbursed Rs. 10.00 lakh towards bridge loan, on 21.5.1990. A common Deed of Hypothecation with OPs 1 and 2, jointly, was executed on 26.6.1990, by deposit of title deeds. The bridge loan was converted into regular term loan, w.e.f. 5.7.1990. Third installment of Rs. 21.50 lakh, i.e., 15 lakh, on behalf of O.P. 2 and Rs. 6.50 lakh, on behalf of O.P. 1, on 24.7.1990, was released. Due to non -availability of central investment subsidy, O.P. 1 refused means of finance and under the new Scheme, O.P. 1 agreed to sanction additional term loan of Rs. 12.00 lakh and the burden of balance of gap of central investment worth Rs. 13.00 lakh was placed on the complainant company. O.P. 1 disbursed 4th loan term for Rs. 28.50 lakh on 28.11.1990, meaning thereby that till November, 1990, a sum of Rs. 80.00 lakh was disbursed by O.P. 1 against its term loan of Rs. 102 lakh. Under the revised Scheme, a sum of Rs. 15.00 lakh was disbursed by O.P. 1 against its term loan of Rs. 32.10 lakh.

THEREAFTER , the complainant asked O.P. 1 to disburse the remaining amount of Rs. 39.10 lakh and requested O.P. 1 vide letter dated 20.10.1991 for the rehabilitation of the project vide Annexure A -3. The said package was approved vide joint meeting dated 24.5.1993, Annexure P -4. After a delay of 1 1/2 months, the O.P. 1 issued sanction letter dated 6.7.1993 approving the package with revised ''cut -off'' date of the validity of the rehabilitation package. The said letter was placed on record as Annexure P -5.

O .P. 2 did not really sanction the package immediately, but only after repeated requests and reminders, it issued sanction letter dated 15.12.1993 with another ''cut off'' date i.e., 21.3.1994, without any coordination/consultation with O.P. 1. It is alleged that by the time O.P. 2 approved the rehabilitation package, the revised ''cut off date, i.e., 1.10.1993 had already expired. Thereafter, requests were made to O.P. 1 to extend the cut -off date upto 31.3.1993, but it did not pay any heed. Copy of the letter dated 15.12.1993, has been placed on record as Annexure P -6. Complainant, vide its letter dated 3.3.1994, informed O.P. 1 that it had raised Rs. 57.65 lakh in share capital and invested the same on the project. It also requested O.P. 1 to fix the date for inspection of the unit, before 16.3.1993, so that disbursement by O.P. 2 may be released. However, only O.P. 1 sent a team of experts for inspection only on 4.4.1994, after the expiry of cut -off date and therefore, no disbursement was released by O.P. 2. Later, both the OPs agreed to extend the ''cut -off'' date, but O.P. 1 issued its sanction letter only on 13.1.1995, vide Annexure P -7.

O .P. 2 issued notice dated 27.1.1995, under Section 29 of the State Financial Corporation Act, for taking over physical possession of the project of the complainant company. The complainant had already brought to the notice of the O.P. 2, vide letter dated 16.1.1995 that O.P. 1 had already extended the cut -off date upto 31.3.1995. The said letter and notice were annexed as Annexures P -8 and P -9. On the other hand, vide letter dated 30.1.1995, Annexure P -10, the O.P. 2 informed the complainant that they were considering their request for extension of ''cut -off'' date but on the contrary, the recovery Cell of the O.P. hurriedly issued the above said notice for recovery. Request for withdrawal of notice and extension of the ''cut -off'' date was made vide letter dated 2.2.1995, Annexure P -11. Vide letter dated 19.5.1995, O.P. 1 requested O.P. 2 to expedite the extension of ''cut off'' date, Annexure P -12. O.P. 2 considered the request of the complainant for extension of ''cut off'' date, vide Annexure P -13, but at the same time, did not withdraw notice under Section 29 of State Financial Corporation Act.

IN the meantime, the Allahabad High Court passed an interim order directing the O.P. 2 not to make any recovery by way of any coercive action in pursuance to the notice dated 27.1.1995. A joint meeting was held on 6.4.1996 and 24.6.1996 due to intervention of Udyog Bandhu, a State Government Organisation for co -operation among the industries and Company Bodies for rehabilitation of the complainant company. Both the O.P. shad agreed to prepare a fresh package as required by O.P. 2. Joint inspection of the site was conducted on 16.8.1996. As required, the complainant furnished all requisite information to OPs vide copy of letter dated 7.1.1997, Annexure P -14. On 10.4.1997, O.P. 2 informed the complainant that it had decided to close the case of the complainant company because O.P. 1 is looking for sale/change of management of the complainant company vide copy of the letter, placed as Annexure P -15. In the meantime, O.P. 1 came up with rehabilitation programme for the complainant company vide letter dated 19.5.1997, and requested O.P. 2 to participate in the joint meeting on 29.5.1997, placed on record as Annexures P -16 and P -17 - O.P. 1 sought postponement for the date of meeting. Thereafter, no meeting was held despite of any requests. O.P. 1 vide its letter dated 4 -5.11.1997, vide Annexure P -18, closed the case of the complainant. Again, with the intervention of Udyog Bandhu, a joint meeting was convened on 13.5.1998 and both the parties agreed to call Tripartite meeting. O.P. 1 asked the complainant to furnish the details of the Bank to whom it had approached for the working capital assistance, vide copy of the letter, dated 1.8.1998, Annexure P -19. The complainant vide its letters dated 1.9.1998 and 23.9.1998, Ex. P -20 and P -21, informed the OPs that in view of the past experience of the Banks, "the proposal of the complainant company for working capital would be considered by them only after the approval and after the rehabilitation package by both the OPs.

THE O.P. 1 issued notice under Section 29 of the SFC Act on 26.5.1999, Ex. P -22. O.P. 1 also advertised that they were going to auction the unit of the complainant company vide newspaper dated 26.7.1999, Annexure P -23. Vide letter dated 6.8.1999, the State Minister for Industry and Export Promotion, Govt. of Uttar Pradesh, vide his letter dated 6.8.1999, directed O.P. 1 to prepare the rehabilitation package for the complainant, Annexure P -24. O.P. 2 advertised that they were going to auction the unit of the complainant vide newspaper dated 12.1.2000, Annexure P -25. Due to failure of the OPs to release the balance disbursement, led to the huge loss of the complainant. The negligence and deficiency on the part of the OPs stand established. Consequently, the following compliant was lodged on 28.5.2001, before this Commission, with the following prayers: (a) hold the opposite parties jointly and severally liable for causing loss and injury to the complainant on account of negligence and deficiency in service on part of the opposite parties; (b) direct the opposite parties to pay the complainant a sum of Rs. 389.96 lakh as compensation for the loss suffered by the complainant company; (c) direct the opposite parties to pay interest at the rate of 18% per annum; (d) direct opposite party No. 1 to waive the demand raised vide notice dated 26.5.1999; (e) pass such other orders as this Hon''ble Commission may deem fit in the facts and circumstances of the case.

Defence of OPs

THE OPs have challenged the jurisdiction of this Commission. It is explained that since the recovery proceedings are pending, the complainant can approach the appropriate forum. They did not pick up a conflict with the loan agreement. They contend that the complainant is a defaulter and deserve no leniency. The rehabilitation package to the OPs was not approved by them because the complainant had committed default in repayment of loan. Consequently, notice under Section 29 of the SFC Act was served. The property of the complainant was auctioned as per law, in order to recover the loan amount. The complainant has not come to this Commission with clean hands and suppressed a number of facts and, therefore, the complaint should be dismissed at the very threshold. Findings: We have heard the Counsel for the parties. The learned Counsel for the complainant vehemently argued that the complainant has to suffer because the OPs failed to honour their commitments. Both the parties did not pay the loan amount, in time. The complainant was not in a position to run the factory. He contended that he has already placed on record all the necessary documents pointed out above, to prove its case. She has invited our attention towards the Annexures P -1 to P -25, in support of her case. She has cited the authority reported in Aquadev India Ltd. v. State Bank of Hyderabad and Ors., 0169/2012 : II (2012) CPJ 128 (NC) : 1986 -2005 Consumer 9193 (NS), decided on 2.9.2004. Its para. 66, runs as follows: 66. Hence, even though we have arrived at the conclusion that the banks were entitled to repudiate the contract for justifiable reasons, the delay in taking such decision and in the meantime, asking the complainant to proceed ahead with the project has caused heavy loss to the complainant. The loss claimed by the complainant is for implementing the project, for commencing the civil works, for recruitment of senior officers, for placement of orders for machinery and components, for release of advances to various contractors, besides spending large amount for obtaining Government clearances and the amount incurred for public issue. On this account, the complainant has claimed large amount of Rs. 8.5 crores, which we are not inclined to grant in view of various facts stated above. It is also quite possible that public at large might not have subscribed for the shares if it was not stated that the State Bank of Hyderabad was the lead bank and the State Bank of Travancore and the Bank of Maharashtra were Co -Managers to the public issue. Hence, even though this is not a fit case for grant of compensatory compensation/damages, but grant of nominal compensation is fully justified for the deficiency in service arising out of repeatedly obtaining appraisal reports/verifications and giving assurances, and thereafter not disbursing the funds. Hence, we direct the State Bank of Hyderabad which has accepted to be the lead Bank as mentioned in the prospectus by the complainant to pay Rs. 10.00 lakh as nominal compensation and also refund the amount of Rs. 6.00 lakh which was charged as fees for appraisal report, because the appraisal report was in favour of the complainant. Respondent Nos. 2 and 4, i.e., the State Bank of India and the Dena Bank are directed to pay Rs. 2.00 lakh and the Respondent Nos. 3, 5 and 6 are directed to pay Rs. 1.00 lakh each to the complainant towards nominal compensation.

THE facts of the above said authority hardly dovetail with the facts of this case. The most pertinent question is, "Why did the complainant fail to abide, to what it had offered in the agreement - Why notice under Section 29 of the SFC Act had to be issued? Notice under Section 29 was given on 27.1.1995, its relevant portion runs as follows: That in contravention of the terms of the said deed of mortgage several defaults have been committed by you, to the Corporation as per the repayment schedule and the following amount is still outstanding against you:

WE enquired from the Counsel for the complainant as to why there was a default. The complainant had signed the agreement with open eyes. The complainant was quite aware of pros and cons of the said agreement. The learned Counsel indulged in hubble bubble and did not clarify the position. It, therefore, stands proved that the complainant was a defaulter. Even the Banks did not want to come to its rescue. Secondly, the complainant did not approach this Commission with clean hands. It has made a vain attempt in pushing the facts under the carpet. It mentioned that it filed a Writ Petition No. 12095/1995 and an interim order was also passed but did not state as to what happened to that Writ Petition, which was pending before the Hon''ble High Court. Both the Counsel admitted that, that Writ Petition was dismissed in default for nonappearance of both the parties. The complainant did not make any attempt to get that Writ Petition restored. Moreover, the complainant, earlier, filed a suit before the Civil Court, Kanpur, being Suit No. 895/1995 of 1995, which was pursued by the complainant. As a matter of fact, an injunction order was passed in favour of the complainant, subject to deposit of entire dues on or before 30.9.1995. Obviously, the complainant failed to pay the said dues and as such, his case was dismissed. All these facts were not disclosed by the complainant, for the reasons best known to it.

IT is also interesting to note that the Counsel for the complainant vehemently argued that the OPs were bound to approve the rehabilitation package. The State Government also desired the same. In this context, our attention was invited to the letter written by a Minister. The said letter is hereby reproduced: Babu Ram, M.Com. Vidhan Bhavan Lucknow Minister Small Industries And Export Promotion To Managing Director PICUP, Gomti Nagar Lucknow (U.P.) Please take notice of enclosed letters. It is mentioned in the letter that Company Alliance Inorganics Ltd., Kanpur, has been jointly financed by PICUP and UPFC but due to non -coordination between these institutions, the company could not receive the sanctioned loan. Thus, production could not be started whereas the project is in the last stage. It has been requested in the letter to prepare a rehabilitation package. I would wish that an order should be passed to grant a rehabilitation package to the above named company. Sd/ - (Babu Ram)/6.8.99.

MOREOVER , the complainant also concealed the fact that there were earlier, three Directors of the Company, along with Sh. S.R. Bansali, but because, after the loan was sanctioned in their favour, in the year 1989, the dispute arose between the Directors and the Company did not transact any business. The following authorities go to fortify the case of the OPs. In U.P. Financial Corporation and Ors. v. Naini Oxygen and Acetylene Gas Ltd. and Anr., I (1996) BC 1 (SC) : 1995) 2 SCC 754, it was held as under: 21. However, we cannot lose sight of the fact that the Corporation is an independent autonomous statutory body having its own constitution and rules to abide by, and functions and obligations to discharge. As such, in the discharge of its functions, it is free to act according to its own light. The views it forms and the decisions it takes are on the basis of the information in its possession and the advice it receives and according to its own perspective and calculations. Unless its action 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 business like it may be, for the decision of the 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.

It cannot further be forgotten that in the present case, the Company had made persistent defaults in repayment of the loan instalments with the result that recovery certificate had to be issued against it under Section 3 of the U.P. Public Moneys (Recovery of Dues) Act. The then Management had mismanaged the Company and a company petition had to be filed seeking its removal on grave charges of manipulation of accounts, re -allotment of forfeited shares, etc. The non -discharge of the liabilities of the Company was on account of the said fraudulent practices of the Management. By 30.5.86, the dues of the Company mounted to Rs. 90,31,102.13 with the result that on 13.6.1986, the Corporation had to take over its industrial establishment under Section 29 of the Act. The report of the IRBI which was given at the instance of this Court on 29.1.1988, had stated that the industrial unit could be made only marginally viable provided another Rs. One crore were invested in it and the loan instalments were rescheduled. Between 1981 when the industrial establishment was closed down and 1988 when the IRBI report was submitted, the machinery of the establishment was lying idle and became almost rusty with the result that by 1988, the value of the machinery had gone down considerably, while its liabilities had gone up still further. In the circumstances, if the Corporation thought that the revival of the Unit even after giving all concessions and reliefs as per the package deal was problematic and the Corporation will stand to lose whatever little it could retrieve towards its dues, the Corporation could hardly be blamed for the same.

IN Punjab Financial Corporation v. Surya Auto Industries, IX (2009) SLT 181 : IV (2009) CLT 375 (SC) : (2010) 1 SCC 297, it was held: 21. The proposition of law which can be culled out from the decisions noted above is that even though the primary function of a corporation established under Section 3 of the Act is to promote small and medium industries in the State, but it is not obliged to revive and resurrect every sick industrial unit dehors the financial implications of such exercise. The Corporation is not supposed to give loans and refrain from taking action for recovery thereof. Being an instrumentality of the State, the Corporation is expected to act fairly and reasonably qua its borrowers/debtors, but it is not expected to flounder public money for promoting private interests.

The relationship between the Corporation and borrower is that of creditor and debtor. The Corporation is expected to recover the loans already given so that it can give fresh loans/financial assistance to others. The proceedings initiated by the Corporation and action taken for recovery of the outstanding dues cannot be nullified by the Courts except when such action is found to be in violation of any statutory provision resulting in prejudice to the borrower or where such proceeding/action is shown to be wholly arbitrary, unreasonable and unfair. The Court cannot sit as an appellate authority over the action of the Corporation and substitute its decision for the one taken by the Corporation.

IN Chairman -cum -Managing Director, Rajasthan Financial Corporation and Anr. v. Commander S.C. Jain (Retd.) and Anr., III (2010) SLT 466 : 11 (2010) CPJ 24 (SC) : (2010) 4 SCC 107, it was held that: Thus, it is clear that the Act has provided provision for correcting the shortcomings in the service or goods provided by way of awarding compensation or other means specified in the provision above mentioned only when the Consumer Forum comes to the conclusion that there is "deficiency" in service provided or goods sold. The loss suffered by the respondent for the reason of not being able to start the unit cannot be the basis for awarding the compensation specifically when the respondent was at fault for the non -release of the balance loan amount. Therefore, when there is no deficiency found on the part of the appellant Corporation, it cannot be asked to pay compensation. Lastly, the Delhi High Court in case titled Chinar Fabrics v. SBI, decided on 17.11.2005, by Hon''ble Markandeya Katju, Chief Justice and Hon''ble Mr. Justice M.B. Lokur, was pleased to hold in para. 24, of its judgment: 24. In our opinion, no one has a legal right to get rehabilitation. When a person has taken a loan, he has to repay the same in accordance with the loan schedule as per the agreement between the parties. Rescheduling of the loan is in the sole discretion of the bank or the financial institution which granted the loan and the Court cannot compel it to reschedule the loan. The matter regarding loan from financial Corporation/banks is purely contractual and a party has to abide by the agreement which he has entered into.

TO rehabilitate the company is the discretion of the OPs. The OPs were playing the game of ''hide and seek'' because of the pressure from the Minister of a State Government. The Minister of State has no business to write such like letters without knowing the facts of this case or putting pressure on his employees. Otherwise too, the complainant did not deserve the rehabilitation package in view of its previous record. The complainant was given enough time, including vide order passed by the Civil Court, to pay off the dues, but it failed to do so.

LAST , but not the least, the complainant does not fall in the category of ''consumer'', as defined in Section 2(1)(d) of the Consumer Protection Act, 1986. It must be borne in mind that the definition of ''consumer'', was amended, with effect from 18.6.1993, and the celebrated authority in Laxmi Engineering Works v. PSG Industrial Institute, II (1995) CPJ 1 (SC) : (1995) 3 SCC 583, was delivered on 4.4.1995. The complainant is transacting ''commercial activities'', and as such, this Commission has no jurisdiction to try this case. In the result, we find that the complainant''s attempt to tilt at wind mills, does not ring the bell. Section 26 of the CP Act, 1986, runs as follows: 26. Dismissal of frivolous or vexatious complaints - -Where a complaint instituted before the District Forum, the State Commission or, as the case may be, the National Commission, is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, dismiss the complaint and make an order that the complainant shall pay to the opposite party such cost, not exceeding ten thousand rupees, as may be specified in the order. The complainant had wasted the precious time of this Commission and that of both the opposite parties, for about more than a decade. Consequently, we dismiss the complaint with the direction to the complainant, to pay a sum of Rs. 10,000 to each of the OPs, within a period of 90 days, from the receipt of this order, through demand draft in favour of the OPs, else, it will carry interest @ 9% p.a., till its realization. Learned Registrar to see the compliance of the order and report.