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Judgment
P. Sathasivam, J.—The above Writ Appeal has been filed against the order of the learned single Judge dated 25-11 -2004, made in Writ
Petition No. 30013 of 2003 in and by which the learned Judge confirmed the auction notice for bringing the property of the appellant by way of
public auction to realise the money due to Tamil Nadu Industrial Investment Corporation.
It is not in dispute that the third respondent borrowed a sum of Rs. 4,95 lakhs from the first respondent herein, namely, Tamil Nadu Industrial
Investment Corporation (hereinafter referred to as ""TIIC""), promising to repay the said sum with interest as agreed. The appellant herein stood as a
guarantor along with his wife K. Banumathy, 4th respondent herein (transposed as 2nd appellant as per order dated 25-1-2005 made in WAMP
No. 114/2005) and Flat, namely, C-2, Balaji Apartments, Dhandeeswarar Nagar, VI Main Road, Velachery, Chennai-42 was mortgaged by way
of equitable mortgage by depositing title deeds as security for the loan amount. It is further seen that since the principal borrower, namely, third
respondent herein, did not pay the amount, the TIIC initiated action against the guarantor, the 1st appellant herein and brought his property for sale
by public auction. Questioning the same, the appellant herein filed Writ Petition No. 30013/2003. Before the learned single Judge, it was
contended that the property sought to be brought for public auction does not belong to the principal borrower, but it belongs to the guarantor, and
that therefore, the said property cannot be taken for public auction exercising their power u/s 29 of the State Financial Corporation Act, 1951
(hereinafter referred to as ""the Act""). On the other hand, it is the claim of the Financial Corporation that the power u/s 29 of the Act extends to the
property mortgaged by the guarantor/surety and the said provision makes it clear that the TIIC has the right to take over not only the industrial
concern, but also the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation, of the surety/guarantor. The learned
single Judge accepting the claim of the Financial Corporation, after holding that the guarantor is bound to pay the loan obtained by the principal
borrower and the liability of the guarantor is coextensive with that of the principal borrower and the Corporation is well within their powers u/s 29
of the Act to recover the loan amount, dismissed the writ petition as devoid of merits; hence the present appeal.
Heard Mr. T. L. Ram Mohan, learned senior counsel for the appellants and Mr. Sampathkumar, learned senior counsel for the respondents 1
and 2 as well as Mr. S. Jaganathan, learned counsel for third respondent.
The only point for consideration in this writ appeal is, whether respondents 1 and 2 herein-Financial Corporation is empowered to proceed
against the property of the guarantor/surety for realisation of the loan borrowed by the principal borrower, namely, the third respondent herein?
In view of the limited question as mentioned above, there is no need to traverse the other factual details. As said earlier, the third respondent
borrowed a sum of Rs. 4.95 lakhs from the first respondent promising to pay the same with interest, for which the first appellant stood as a
guarantor along with his wife and the property bearing No. C2, Balaji Apartments, Dhandeeswarar Nagar, 6th Main Road, Velachery, Chennai-
42, owned by them was mortgaged by way of equitable mortgage by depositing title deeds. Mr. T. L. Ram Mohan, learned senior counsel for the
appellants, by heavily relying on Section 29, particularly Sub-sections (1) (4) and (5) of Section 29, and Section 31(1)(aa) of the Act, would
contend that though Section 31 covers surety, in the absence of such specific provision in Section 29, which refers to only industrial concern, the
action u/s 29 for bringing the property of the 1st appellant/guarantor to public auction cannot be sustained. In support of his claim, he also pressed
into service the following decisions :
(i) N. Narasimahaiah and Others Vs. Karnataka State Financial Corporation and Others,
(ii) Miss. K.T. Sulochana Nair Vs. Managing Director, Orissa State Financial Corporation and Others,
(iii) Jasbir Kaur and Another Vs. Punjab State Industrial Development Corporation Ltd., Chandigarh and Another,
(iv) Munnalal Gupta Vs. Uttar Pradesh Financial Corporation and Another,
With regard to the legal submissions made by the learned senior counsel for the appellants, Mr. Sampathkumar, learned senior counsel for the
respondents, submitted that the decision of the Karnataka High Court, referred to above, has been stayed by the Supreme Court and all other
decisions are not directly on the point, particularly in the light of the language used in Sections 29 and 31 of the Act. In other words, according to
him, Section 29 not only covers the property of the industrial concern, but also the property pledged, mortgaged, hypothecated or assigned to the
Financial Corporation which includes the property of the appellant which was mortgaged for sanction of the loan. He also very much relied on the
following decisions :
(i) W.P. Nos. 5694 and 8238 of 1998 D/-5-4-2004 (K. Kirubakaran v. T.N. Ind. Investment Corporation)
(ii) Thressiamma Varghese Vs. Kerala State Financial Corporation and Others,
(iii) M/s. Tirputi Plywood Product (P) Ltd. and another Vs. The Pradeshik Industrial Investment Corporation of Uttar Pradesh Ltd. and others,
(iv) Kailash Chand Jain Vs. Uttar Pradesh Financial Corporation and Others,
(v) Order passed in SLP (Civil) 15423-15427/2003 D/-27-1-2004 by the Supreme Court of India.
Among the various clauses, sub-section (1) of Section 29 is relevant which reads as under:
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) to (5) xx xx.
According to him, the above sub-section (1) enables the Financial Corporation only to take over the management or possession or both of the
industrial concern and it does not enable the Corporation to enforce the liability of a surety by bringing the property/ properties of the surety as
specifically provided in Section 31(1)(aa) of the Act. On a careful reading both the provisions, namely, Section 29(1) and Section 31(1)(aa) of the
Act, we are unable to accept the said contention for the following reasons.
Though the Division Bench of the Karnataka High Court in N. Narasimahaiah and Others Vs. Karnataka State Financial Corporation and
Others, , has held that the Financial Corporation can enforce the liability of the surety or proceed against the property secured against the surety
only by approaching the Civil Court or by initiating action u/s 31 of the State Financial Corporations Act, it is brought to our notice that the said
decision of the Karnataka High Court has been stayed by the Supreme Court in SLP (Civil) No. 15423-15427/ 2003 dated 27-1-2004. Though
it is an interim order, the fact remains that the Hon''ble Supreme Court has stayed the decision of the Karnataka High Court, hence placing reliance
upon the said decision N. Narasimahaiah and Others Vs. Karnataka State Financial Corporation and Others, may not be considered for the
present.
It may be useful to refer the Division Bench decision of the Kerala High Court reported in Thressiamma Varghese Vs. Kerala State Financial
Corporation and Others, wherein the Division Bench had an occasion to consider similar question, namely, the property of a surety which was
mortgaged by the principal borrower can be proceeded u/s 29 of the Act to realise the loan amount. After a due consideration, the learned Judges
have held that the recovery proceedings under State Financial Corporations Act cannot be restricted to properties of industrial concern only and
properties of co-mortgagors, guarantors can be proceeded and recourse to civil Court is not necessary in respect of such property. The conclusion
arrived at therein is extracted hereunder :
(para 14)
The Legislature has taken great care to ensure speedy recovery of the loans. The scheme is provided in Sections 29 to 32 of the Act.
Operation of Section 29 is attracted whenever there is default by a borrowing industrial concern. The Corporation shall have the right (a) to take
over management or possession or both of the industrial concern and (b) to transfer by way of lease or sale and realise the property pledged,
mortgaged, hypothecated or assigned to the Corporation. Section 30 empowers the Corporation to call for repayment before the agreed period.
Power conferred u/s 29 is of widest possible amplitude and has dual aspects. There is the power to take over management or possession of the
industrial concern; there is also the power to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or
assigned to the Corporation. There is nothing in any of the provisions of the Act indicating that only property or assets of the industrial concern can
be mortgaged or hypothecated. Absence of such a provision is understandable and well-advised. To insist that every industrial concern must have
sufficient assets of its own before it can approach the Corporation for accommodation is to stifle entrepreneurial enthusiasm and that would
adversely affect public interest. Sub-section (2) of Section 25 only prohibits accommodation being granted unless it is sufficiently secured, inter
alia, by mortgage, hypothecation, movable or immovable property or other tangible assets. The provision does not indicate that the property or the
assets must belong to the industrial concern. It should be possible for the industrial concern to arrange to secure hypothecation or mortgage of
assets belonging to well-wishers who are prepared to assist the concern. That is why the provision does not indicate that assets mortgaged or
hypothecated must belong to the industrial concern. Section 29 does not make any distinction between assets of the industrial concern and assets
not belonging to the industrial concern but nevertheless mortgaged to the Corporation. Both kinds of assets can be proceeded against u/s 29. It is
not possible for us to read into Section 29 a restriction to the effect that the right conferred on the Corporation thereunder is restricted to the right
to proceed only against property belonging to the industrial concern and mortgaged to the Corporation. The provision would apply to property not
belonging to the industrial concern but nevertheless mortgaged by the owners of the assets to the Corporation, as guarantee or security.
In the light of the language used in sub-section (1) of Section 29, it is clear that the Financial Corporation has powers not only to take over the
management or possession of the industrial concern, but to transfer by way of lease or sale or realise the property pledged, mortgaged,
hypothecated or assigned to them (Financial Corporation). In other words, we are satisfied that the power conferred u/s 29 is of widest possible
amplitude and has dual aspects, namely, that it has power to take over management or possession of the industrial concern and also the power to
transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Corporation. It cannot be construed
that it refers to only the property or assets of the industrial concern. As rightly observed by the Division Bench, Section 29 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. It gives
the Corporation ample power to deal with the property either pledged, mortgaged or hypothecated or assigned by any one including third party or
surety or guarantor. We are in respectful agreement with the view expressed by the Division Bench of the Kerala High Court.
In Miss. K.T. Sulochana Nair Vs. Managing Director, Orissa State Financial Corporation and Others, , the Division Bench of the Orissa High
Court, after considering sub-section (1) of Section 29, has held that there is nothing in the provision to indicate that the right u/s 29 of the Act is
only in respect of the property of the loanee mortgaged with the Corporation. The learned judges also held that all the properties mortgaged with
the Corporation would come within the purview of Section 29 of the Act.
Section 128 of the Indian Contract Act, 1872 lays down that the liability of the guarantor/surety is coextensive with that of the principal debtor.
Accordingly and in the light of the provisions in the Special Enactment, namely, State Financial Corporations Act, particularly Section 29(1), we
hold that the Financial Corporation has every right to deal with the property in any manner not only the property of the industrial concern, but also
that of the surety or guarantor. Similar view has been expressed by the Division Bench of the Punjab and Haryana High Court in Jasbir Kaur and
Another Vs. Punjab State Industrial Development Corporation Ltd., Chandigarh and Another, . In AIR 2002 All 302 (cited supra) the Division
Bench of Allahabad High Court has also held that the guarantor cannot compel Financial Corporation to first proceed against unit of the borrower
company taken over and only thereafter proceed against him. In the light of the above discussion, particularly Section 29(1) of the Act, with
respect we are unable to share the view expressed by the Full Bench of the Allahabad High Court in Munnalal Gupta Vs. Uttar Pradesh Financial
Corporation and Another, to the effect that the property of the surety cannot be subject matter of proceedings u/s 29 and surety can be proceeded
only against under general Law. We are also unable to accept the view expressed by the Division Bench of the Orissa High Court in Miss. K.T.
Sulochana Nair Vs. Managing Director, Orissa State Financial Corporation and Others, that though the Financial Corporation can take possession
of the mortgaged property of a guarantor u/s 29 of the Act, but cannot sell the same by taking recourse to the power conferred u/s 31 of the Act.
In this regard, it is useful to refer the judgment of the Supreme Court in Andhra Pradesh State Financial Corporation Vs. M/s. GAR Re-Rolling
Mills and another, . In this decision, while considering Sections 29 and 31 of the State Financial Corporations Act, Their Lordships have held that
the expression ""without prejudice to the provisions of Section 29 of the Act"" as appearing in Section 31 of the Act clearly demonstrates that the
Legislature did not intend to confine the Corporation to take recourse to only a particular remedy against the defaulting industrial concern for
recovery of the amount due to it. Their lordships have further held that it left the choice to the Corporation to act in the first instance u/s 31 of the
Act and save its rights and remedies u/s 29 of the Act to be availed at a later stage, with the sole object of enabling the Corporation to recover its
dues. It is clear from the above decision that recourse to remedy available u/s 29 of the Act can still be taken without executing order u/s 31 of the
Act. 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 its dues from the defaulting party.
Before concluding our discussion, it is also worthwhile to extract hereunder the observation of the Hon''ble Supreme Court in Andhra Pradesh
State Financial Corporation Vs. M/s. GAR Re-Rolling Mills and another, (para 18).
18...A Court of equity, when exercising its equitable jurisdiction under Article 226 of the Constitution must so act as to prevent perpetration of a
legal fraud and the Courts are Obliged to do justice by promotion of good faith, as far as it lies within their power. Equity is always known to
defend the law from clefty evasions and new subtelities invented to evade law. Since the legislature enacted Sections 29 and 31 with a view to aid
the Corporation to recover its legitimate dues, etc., from the defaulting party, the saving clause in Section 31 of the Act, preserving the rights u/s 29
of the Act by giving up the pursuit u/s 31 at any stage of the proceedings is available to the Corporation. The two provisions must be so
harmonized as to facilitate the Corporation to recover its dues from the defaulting party. The Act was enacted by the parliament with a view to
promote industrialisation and offer assistance by giving financial assistance in the shape of loans and advances etc., repayable in easy installments.
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. It is with this end in view that the Parliament gave the corporation the right to
proceed u/s 31 of the Act, preserving at the same time its rights and remedy u/s 29 of the Act, so that the corporations are not chocked by the
defaulting debtors by adopting frustrating or dilatory tactics in the proceedings in the Court initiated u/s 31 of the Act.
Keeping the above view in mind and in the light of our discussion, we are unable to accept the contentions raised by the learned senior counsel
for the appellants. On the other hand, we are in agreement with the conclusion arrived at by the learned single Judge and we do not find any merit
in the appeal; consequently, the same is dismissed. No costs. The connected W.A.M.P., is closed.