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Section 29 in The State Financial Corporations Act, 1951
The State Financial Corporations Act, 1951
Section 29(1) in The State Financial Corporations Act, 1951
Mahesh Chandra vs Regional Manager, U.P. Financial ... on 12 February, 1992
Article 12 in The Constitution Of India 1949

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Andhra High Court
V. Gopal Reddy, Appellant vs Andhra Pradesh State Financial ... on 20 December, 1995
Equivalent citations: AIR 1996 AP 280, 1996 (1) ALT 500
Author: L Rath
Bench: L Rath, S D Reddy



ORDER
LINGARAJA RATH, J.

1. These two appeals arise out of the judgment in Writ Petition No. 12764 of 1990 and hence are disposed of by this common judgment. While Writ Appeal No. 1094 of 1994 has been preferred by the writ petitioner the Writ Appeal No. 1391 of '95 has been preferred by the respondents 1 and 2 of the writ petition. For sake of convenience the writ petitioner is referred in this judgment as the appellant and the appellants in Writ Appeal No. 1391 of '95 are referred as respondents whereas the respondent No. 3 of the writ petition is referred as respondent No. 3 in this judgment also.

2. The father of the appellant, one V. V, Koti Reddy, solicited a loan from the respondents to set up a rice mill, which was sanctioned. Two installments of the loan were advanced to him on 22-10-1979 and 28-12-1981 respectively of the sums of Rupees 1,49,000/- and Rs.33,780/- totalling Rupees 1,84,780/- The loanee died on 1-12-1989 but even prior to his death, because of defects and defaults in repayment, the Corporation was taking steps to put the unit to sale for realisation of its loans and ultimately the unit having been sold to respondent No. 3, the appellant filed a writ petition complaining of the sale not to have been effected bona fide to have been made without following the correct procedure, and seeking the relief of restoration of the mill to him. The claim was turned down by the judgment of the learned single Judge but, however, a direction was issued to the respondents to pay interest at the rate of 15% on the sum which was due to the appellant after deducting the dues of the Corporation. While the appellant has preferred the appeal for the self-same relief which was claimed in the W.P the respondents have preferred the appeal for quashing of the direction to pay interest.

3. Mr. Ramanna Reddy, learned counsel for the appellant, has urged the submissions that even though the loanee, V. Koti Reddy, had died to the knowledge of the respondents yet the sale-cum-recall notice issued on 8-12-1989 was not issued to the appellant and a notice instead was issued on 18-4-1990 to late Shri V. Koti Reddy purporting to inform him that the sale-advertisement of his unit would be published in the daily EENAAPU on 22-4-1990. Even the sale notice published on 22-4-1990 in EENAADU showed late Koti Reddy as the managing partner and thus notice has all along been issued to a dead person in the matter of sale of the unit. It is urged secondly that the appellant had been urging upon the respondents to inform him as to what action was taken on 9-5-1990, i.e., the date which had been fixed as the last day for receipt of tenders, as per the publication in daily EENAADU of 22-4-1990 but that he was never informed and was kept in dark and that even in the reply sent by the respondents on 10-7-1990 the purported sale said to have been made in favour of respondent No. 3 was not disclosed and instead he was merely intimated of being permitted to close the accounts, if he is willing. The other questions raised are that the sale in favour of respondent No. 3 was effected even prior to taking possession of the unit which was done on 25-8-1990, a procedure which is contrary to the scheme of Section 29 of the State Financial Corporations Act 1951 (referred hereinafter as 'the Act"). It is finally submitted that the sale was effected through negotiations with respondent No. 3 but, however, the appellant was never noticed of such negotiations which was done behind the back of everybody in a clandestine manner by not disclosing the date of the negotiation to anybody and even the other tenderers were not informed of the negotiations. Reliance is placed on the decision of the Apex Court in Mahesh Chandra v. U. P. Financial Corporation, to submit that the guidelines set out by the Supreme Court in the matter of taking over and sale of units under Section 29 of the Act were not adhered to. Resisting such submissions Mr. Lohita, learned counsel for the respondents, has urged that it was the desire of the loanee, V. Koti Reddy, himself that the unit should be sold and that after realisation of the loan amount the balance should be remitted to him and that the appellant had notice of the sale. He submits that the guidelines fixed in the decision of the Supreme Court in Mahesh Chandra's Case (supra) are not absolute and have stood modified by later decisions. Mr. Venkataramana, learned counsel for the respondent No. 3, has, while generally supporting the submissions advanced by Mr. Lohita, drawn our attention to State of Maharashtra v. Digambar, to submit that a person guilty of blameworthy conduct because of laches, undue delay, acquiescence, waiver and the like is disentitled to invoke the jurisdiction of the Constitutional Court under Article 226 of the Constitution of India.

4. A brief narration of the facts essential to unfold the basis of the submissions of either parties is necessary On 17-1-1988 a letter had been addressed by late V. Koti Reddy saying that he had been sick for last two years for which his son had not been able to manage the business properly and that the mill had suffered financial trouble as due to lack of irrigation sources the crops had failed for which reason he should be allowed to pay the arrears by 31-3-1988. Steps were taken by the respondents to sell the mill for which 25-8-1988 was the last date for receipt of tenders. On 13-10-1988 and 30-10-1988 two other letters were addressed by late V. Koti Reddy stating in the first letter that the mill was not in working condition, that there was failure to repay the amounts for which the Corporation may call for tenders for sale of the mill and send the balance amount by DD after appropriating the sale proceeds towards the loan amount and stating in the other letter that though the mill had been notified in daily EENAADU for sale on 30-12-1988 yet possession of the mill had not been taken, that the possession of the mill may be taken over and seizure may be effected forthwith failing which the Corporation would be liable for resultant losses. It appears, thereafter, pn 23-11-1988, V. Koti Reddy entered into a partnership in respect of the mill with some persons of which the father of the respondent No. 3 was one. In the deed of partnership the stipulations were that the steps would be taken to regularise the loan in the name of the partnership. On the next day, 24-11-1988, an amount of Rs.45,000/-was paid by V. Koti Reddy to the Corporation and on the same day a letter was addressed by the Corporation to Koti Reddy cancelling the proposal of the sate of the rice mill because of the payment made and requesting him to repay the balance of the amount within two months. The next correspondence by V. Koti Reddy was of 8-8-1989 seeking permission of the Corporation to sell the machinery of the mill but there was no reply by the Corporation. Koti Reddy died on 1-12-1989 and thereafter the sale-cum-recall of the loan-notice issued by the Corporation on 8-12-1989 to the mill styling it as being addressed to M/s.- Krishna Modern Rice Mill, managing partner Shri V. Koti Reddy, The facts shows the fact of the mill having been converted to a partnership was to the notice of the respondents. Nothing further was done and on 18-4-1990, as already stated, a notice was issued by the respondents to "M/s. Krishna Modern Rice Mill, Managing Partner Shri V. Koti Reddy (late)" of the fact that the sale-advertisement in respect of the unit was being published in EENAADU on 22-4-1990. On 22-4-1990 the publication was made fixing 9-5-1990 as the last date for receipt of tenders. On 28-5-1990, a letter was addressed on behalf of the appellant by his legal advisers to the respondent No. 2, the Senior Branch Manager, APSFC, referring to the sale publication in EENAADU of 22-4-1990 and stating that in view of the sale notice the appellant had gathered many prospective bidders who were willing to purchase the mill for not less than a price of Rs. Five lakhs to Rs. Six lakhs who had made the tender forms and funds ready but in view of the recent cyclone the bidders could not attend in time on the schedule date. The notice thereafter stated:

"That thereafter my client approached you number of times after cyclone to know the things happened on 9-5-1990 to note about your next step regarding the auction and also to know the future dates to be fixed by you for auction regarding the said rice mill. But your employees are giving evasive replies and irresponsible answers and refused to disclose the things happened on 9-5-1990 on one pretext or the other. My client suspects the bona fides of your subordinates and suspect that there is something fishy in the said proceedings. My client sincerely and honestly believed that you have not received no (sic) tender forms within time and even otherwise the said tender forms are collusive and antedated. So any auction proceedings are null and void and will not bind my client."

Since there was no reply from the Corporation and ho information was given regarding the happennings on 9-5-1990 another notice was sent by the same law-firm addressed to the respondent No. 2 bringing it to the notice of the respondents that it is the bounden duty of the Corporation to give all information and furnish particulars and copies of the documents and requesting the Corporation to furnish the particulars of the things and other proceedings which happened on 9-5-1990 as also about the Corporation's future plans regarding the auctions relating to the rice mill. On 10-7-1990 a reply was sent by the respondents to the notice of 28-5-1990 without adverting in any manner to the sale which was purported to have taken place on 9-5-1990 and the confirmation of which was purported to have been made on 28-6-1990 but only calling upon the appellant that the Corporation would have no objection if the heirs of V. Koti Reddy close the loan account with the Corporation within ten days from the receipt of the letter. In the meantime, it appears from the additional papers furnished by the res-

pendents, that on 9-5-1990 two tenders had been received one from one Venkateswarlu for Rs. 1,55,000/- and another from the respondent No. 3 for Rs. 1,70,000/-, that the tenders were opened at 4-30 p.m. on that day and that on negotiation the respondent No. 3 had raised his offer to Rs. 1,90,000/ -. But as the amount was very low compared to engineer's valuation of the unit at Rs. 3,00,500/- the respondents decided to accept the request of the bidders for allowing them some more time to submit their revised offers. Thereafter an endorsement appears on the reverse of the paper "Details of Tenders received for the purchase of M/s. Krishna Modern Rice Mill....." as follows:

One of the tenderers, Sri J. Sivaiah, today, i.e., on 25-6-1990 shows interest in enhancing his final offer to Rs. 2,80,000/- (land and building Rs. 1,30,000/- and machinery Rs. 1,50,000) which is marginal to the engineer's valuation of Rs. 3,00,500/-. Hence it is decided to accept the offer of Shri J. Sivaiah, S/o. Shri Pullaiah, Pulipadu."

The signatures below the endorsement are on the date 25-6-1990. The respondent No. 3 deposited Rs. 1,80,000/- on 31-7-1990. On 8-8-1990, the appellant sent notice to the Corporation requesting permission to verify the account books as the copy of the accounts sent to him on 27-4-1990 was not tallying. The respondent No. 2 sent notice on 18-5-1990 informing that respondent No. 3's tender had been accepted and also mentioning the fact that the recall-cum-sale notice was issued on 8-12-1989 and that the appellant may check up the accounts on any working day. On 25-8-1990 the mill was seized and possession was handed over the respondent No. 3 on 28-8-1990. In the counter-affidavit of the respondents 1 and 2 filed in the writ petition it is stated that third respondent was communicated on 28-6-1990 of the tenders having been finalised in his favour at the enhanced price of Rs. 2,80,000/-.

5. From the above narration certain facts which emerge indisputably are : (1) That even though the fact of death of V. Koti Reddy was known to the respondents yet no notice was sent to the legal heirs including the appellant of the recall of the loan and the sale of the unit. (2) Such notice was given in the name of a dead person. (3) The fact of arrangement of partnership having been made in respect of the unit was to the knowledge of the respondents but nonetheless the notice was addressed to a dead person describing him as dead and yet being the managing partner. (4) The transaction made on 9-5-1990 and 25-6-1990 were not brought to the notice of the appellant even though he had been repeatedly asking to be informed as to what transpired on 9-5-1990. Possession of the mill was taken over after the transaction of 9-5-1990 and 25-

6-1990.

6. State Financial Corporations are statutory authorities constituted under the Act and indisputably are "State" under Article 12 of the Constitution of India. It has been emphasised by various judicial pronouncements that the State Financial Corporation are not like ordinary moneylenders and in the transactions are also to discharge their role as "State" though it cannot be expected that they would not be vigilant to safeguard the amounts sanctioned as loan by them. Their action and conduct must be a balancing one between the need of industrialisation in the small and medium sector which would include the function also of giving proper guidance to the entrepreneurs for the maximum beneficial utilisation of the loan sanctioned and at the same time to ensure that regular recovery of the loan is made so that the Corporation does not suffer loss and it is itself able to repay the loans it receives and utilises for advancement of loans to the entrepreneurs. This fact is clear from the Statement of Objects and Reasons of Act XLIII of 1985 which inter alia stated :

"It is proposed to expand the list of business which the Financial Corporations could undertake. This will, inter alia, enable them to undertake research and service relating to marketing and investment, carry out techno-economic studies, provide technical and administrative assistance to industrial concerns, plan and assist in the promotion and development of industries, discount bills of exchange, promissory notes, etc. The said expansion will enable them to undertake promotional and developmental work and play the role of regional development banks."

It is in this context of the role of Financial Corporations as "State" that they are obliged to conform to the requirement of natural justice in discharge of their actions which must satisfy the test of having acted fairly. There must be lack of arbitrariness or unreasonableness in their actions and if such is the complaint which on the statement of facts appears to be correct, the High Court, in discharging its Constitutional Obligations, would be under a duty to apply the corrective measures for putting the Corporation back to the right path so as to enable it to modulate its actions and reach the decisions in a proper manner answering the demands of Rule of Law. The power under Section 29 of the Act has been held, to which we shall presently refer, as being not available to be resorted merely for the asking of it or in a routine manner but as a matter of last resort and as arising out of a compelling necessity. Even when a unit is sick, policies have been evolved by the State, both at the Central and State levels, for revival of the units. 'Even where sale of a unit becomes an absolute necessity, in the matter of conducting of the sale the same rule of fairness, incorporating in itself the rule of natural justice, has to be followed and the person whose unit is to be sold is required to be noticed so that he can be present at the auction to safeguard his interests since it is his interest to see that the unit is neither under-valued 'nor undersold and that a proper price is obtained so that he may ultimately gain after reimbursement of the loan amount. He may also bring customers on his own who are prepared to pay higher price and hence adequate opportunity must be afforded to him. Even if the sale is to be finalised on the basis of negotiations or by invitation of tenders, similar opportunity has to be made available to him. The matter was examined by the Supreme Court in Mahesh Chandra's case (supra) wherein guidelines, directions were issued for taking action under Section 29. So far as the present case is concerned, it does not appear that the valuation determined by the engineer of the unit was intimated to the appellant nor the valuation was indicated in the sale notice of 22-4-1990. The highest price at which the tender was sought to be accepted was not intimated to the appellant and opportunity to him to offer the sale price so that the unit could be transferred to him was not made and he did not have the opportunity also to bring in higher bidders. When the matter was sought to be settled by negotiations, no date was fixed for the purpose nor advertisement was made in the papers nor the fact that the amount was to be settled by negotiation was brought to the notice of the appellant for him to be present or to bring in more persons who could have given higher offers. Mr. Lohita submits that the decision of the Supreme Court was later considered in U.P. Financial Corporation v. M/s. Gem Cap (India) Private Limited, AIR 1993 SC 1435 : 1993 AIR SCW 1189 and Chairman & Managing Director, Sipcot, Madras v. Contromix Pvt. Limited, . After carefully going through the cases we do not find the Supreme Court to have taken any contrary view in the two decisions to the views propounded in Mahesh Chandra's case (supra). In the first case emphasis was laid upon the fact that the Corporation is not like an ordinary moneylender or a bank which lends money and that the loan by it is for the purpose of promoting small and medium industries but at the same time it is necessary to emphasise the basic facts that the relationship between the Corporation and the borrower is that of creditor and debtor and that the Corporation is not supposed to give loans once and go out business. The Corporation cannot be expected to revive and resurrect every sick industry irrespective of the cost involved and that the fairness required of the Corporation cannot be carried to the extent of disabling it from recovering amounts due to it. So far as the second case is concerned it only clarified that sale by inviting tenders is not ipso facto invalid and that resort to the method has to be considered in the light of facts and circumstances of each particular case. In Mahesh Chandra's case (supra) itself the sale by tender system was also contemplated but direction had been given that where tenders has to be accepted is to be intimated to the unit-holder. The decision in Sipcot's case (supra) did never say anything to the contrary.

7. A further fact which has been brought to our notice by Mr. Ramana Reddy is that while in the additional papers filed by the Corporation it is shown that the respondent No. 3 had originally submitted tenders for Rs. 1,70,000/- which he raised to Rupees 1,90,000/- and subsequently at negotiations agreed to the price of Rs. 2,80,000/-, yet very affidavit of the respondent 3 in the writ petition stated that he submitted tender along with the other tenderer Venkateshwarlu but his tender was accepted as his was the highest. His offer was Rs. 2,80,000/- on 9-5-1990 itself and on that day he paid Rs. 10,000/-. Such statement and the paper submitted in the additional paper showing that the offer of Rs. 2,80,000/- was made on 25-6-1990 are contrary to each other.

8. A question has been raised that the appellant being not a partner of M/ s. Krishna Modern Rice Mill is not entitled to come before this Court assailing the sale of the unit. It is explained on behalf of the appellant that though a partnership deed was drafted and signed yet it was not acted upon as the loan by the Corporation had not been transferred in favour of the partnership. The appellant has all along been treated as managing the mill on behalf of his father. We do not think the appellant as disentitled to contest proceedings. If at all it was a partnership it is a matter between the partners to decide. But so far as to resist the taking over of the unit the appellant, as the successor of his father, cannot be held to be disentitled to challenge the action of the Corporation. That apart, the partnership deed also does not make any provision for continuance of the partnership even after the death of a partner and as admittedly V. Koti Reddy died, the question of continuance of the partnership is questionable.

9. We also do not find any force in the submission of Mr. Venkataramana of relief being not available to the appellant because of his blameworthy conduct. From the narration of facts made we do not find that the decision in Digambar's case (supra) has any relevance. This submission is rejected. Before, we part however, a submission raised on behalf of the appellant needs mention. It was argued that the sale by the Corporation of the unit was void having been effected without taking over the unit first. For the purpose," reliance is placed on Section 29(1) of the Act which is in the following words:

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, any instalment thereof, or in meeting its obligation, 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."

The words "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" are sought to be interpreted as meaning that until the possession has been taken over there cannot be any transfer by way of a lease or sale. The words are not amenable to such a restrictive interpretation as use of the word first 'or' indicates alternatives that the management of the unit could be taken over independently of the possession or that both management and possession are also an alternative to the right of transfer by way of a lease or sale which is possible to be made even without management or possession having been taken over. It is fairly conceivable in law of the right to sell or lease to be exercised even when the Corporation is not physically in management of the unit. The matter is also clear from the observations of the Supreme Court in A.P. State Financial Corporation v. M/s.Gar Rerolling Mills, wherein it was clarified in paragraph 9 as follows:

"Section 29 of the Act, therefore, deals not only with the rights of the Corporation in cases of default by the industrial concern, but also provides for a remedy to take over the management of the defaulting industrial concern with or without possession as well as the right to transfer by way of lease or sale of the hypothecated property to realise its dues".

10. It is hence possible to take over the management with or without possession. If it is possible to take over the management even without possession it would stand to reason to say that the unit can be sold or leased out even without the Corporation being in possession. This contention of the appellant has to be negatived.

11. Having come to such conclusions we are to hold that the sale of M/s. Krishna Modern Rice Mill to respondent No. 3 has not been properly made for which the sale is set aside. It is brought to our notice of the respondent No. 3 having , stated in the counter-affidavit of having leased out the mill to some other person. Since such transfer is penifente lite during the course of the hearing of the case such lessee cannot have a higher right than the respondent No. 3 himself and has to abide by the result of the case. Learned counsel for the appellant makes an offer that the appellant is willing to clear up the dues of the respondents within a reasonable time fixed by the Court and he should be restored the possession of the unit whereas respondent No. 3's counsel submits of there having been improvements made to the on it in the meantime. Learned counsel for "the respondents very fairly submits that the liability of the appellant would be as it was on 25-8-1990 when the unit was taken over.

12. Considering all such facts, we direct a valuation to be conducted of any improvement that might have been done to the mill in between 25-8-1990 and the date of inspection, in the presence of the appellant and respondent 3 after due notice to them, by the Corporation's own engineers. The valuation be made within two months from today. After the valuation is made the notice be issued to the appellant forthwith to repay the impro-ments as assessed, within two months from the date of the communication. If the amount is paid by the appellant, the respondent 3 and the respondents 1 and 2 shall restore possession of the mill to him within a week of the payment. If, however, the appellant does not pay as directed now, the respondents 1 and 2 shall take possession of the unit from the respondent No. 3 and resort to disposal of the unit by auction or tender or negotiation as is thought best but only after giving proper notice to the appellant to remain present so as to safeguard his interests and also granting opportunity to him to bring bidders or purchasers to participate in the process of disposal. Mr. Venkataramana submits that in view of the directions the Corporation be directed to refund the amounts received from the respondent No. 3. The submission is fair and the Corporation is directed accordingly.

13. In the result, Writ Appeal No. 1094 of 1994 is allowed on terms as above, with costs. Hearing fees Rs. 1,000/-. As a result of the decision in Writ Appeal No. 1094 of 1994, Writ Appeal No. 1391 of 1995 is also allowed quashing the directions in the impugned judgment of refunding the balance of the sale proceeds with interest to the appellant.

MEMORANDUM OF COSTS With Appeal No. 1094 of 1994 Appellant's Costs   Rs.   Ps.

Stamp used for the Writ 100.00 Stamp of Vakalatnama 5.00 Stamp of enclosures 2.00 Advocate's fees (as fixed by court) Batta and Postage 1000.00   Total 1107.00 Appeal allowed.