Sanjiv K. Goel v. Punjab Financial Corporation, Chandigarh
2010-05-20
K.KANNAN
body2010
DigiLaw.ai
Judgment K.Kannan, J. 1. I. The petitioners grievance- The above writ petition presents the grievance of Ex- Director of a debtor Company, which had lost its property of land and machinery in an action for sale through auction by the Punjab Finance Corporation in exercise of its power under Section 29 of the State Financial Corporations Act, for monies due and payable to the Financial Corporation. The action is now being taken by the Financial Corporation by resort to Section 32-G of the State Financial Corporations Act against the petitioner, who admittedly had given a letter of personal guarantee to the Corporation. The grievance of the petitioner is founded on two contentions: (i) the petitioner has ceased to be a Director of the Company even as early as on 22.12.1998 which was duly filed with the Registrar of Companies in Form 32 and no action could be taken against the petitioner under Section 32G of the State Financial Corporations Act; (ii) the properties had been sold for recovery of an initial loan of Rs.8.25 lacs advanced to the Company and the State Financial Corporation appropriated Rs.68,000/- recovered by sale of part of the machineries on 22.11.2006 and Rs.22.06 lacs by sale of the property of the Company on 25.01.2007. The Company itself had earlier taken possession of the property on 06.09.2000 and the recovery notice which was issued under Section 32-G purports to be the balance of amount due from the Company with interest at 26% as per the sale agreement and the bond of guarantee executed by the petitioner. The contention of the learned counsel appearing on behalf of the petitioner was that after the property was taken possession by the Company in the year 2000, it had no right to levy interest on the original loan since it had the benefit of the property which was secured for the loan and the demand made at Rs.21,76,863/- was, therefore, not tenable. II. Liability on personal guarantee could be enforced without reference to his status as resigned director 2. As regards the first contention that the petitioner had resigned from the Company even before the auction sale and, therefore, he would not be liable, it is not legally tenable since the document of personal guarantee has no relation to his status as a Director and it is independent of the same.
As regards the first contention that the petitioner had resigned from the Company even before the auction sale and, therefore, he would not be liable, it is not legally tenable since the document of personal guarantee has no relation to his status as a Director and it is independent of the same. The fact that the petitioner has resigned is irrelevant so long as the debt remains due. If, as per the calculation of the creditor-Corporation, the debt due by the Company has not been discharged, the liability of the petitioner under the personal guarantee would survive, no matter that he has ceased to be the Director. The first objection is, therefore, rejected. III. Extent of interest in the security and right of enforcement by the financial institution under the State Finance Corporation Act (a) Examination of the meaning accommodation in Section 32 G of the State Finance Corporation Act. 3. The second objection, is that the State Financial Corporation has no power to invoke Section 32G of the State Financial Corporations Act treating the debt as due, in spite of sale of property in the year 2007 by working out interest even from the period 06.09.2000 when the property was taken possession by the State Financial Corporation till the date of payment. The contention is rested on the language of Section 32G itself which, according to the learned counsel for the petitioner, enables the Financial Corporation to recover the amount only if it is in respect of "any accommodation granted by it to any industrial concern". The learned counsel would read this expression to mean situations where the Company has the benefit of continuance of possession of the premises and if it was dispossessed by virtue of the powers exercised under Section 32, then the Financial Corporation shall not be entitled to invoke Section 32G. 4. In order to understand the contention raised by the petitioner, it becomes necessary to examine the entire scheme of recovery provided under the State Finance Corporations Act. Section 29 of the State Financial Corporations Act addresses the rights of Financial Corporation, in case of default by a borrower industrial concern which includes 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 realize the property pledged, mortgaged, hypothecated or assigned.
Section 29(5) creates a fiction that when a Financial Corporation takes any action against an industrial concern by taking over of management or possession, it shall be deemed to be the owner of such concern for the purposes of suits by or against the concern. Section 31 empowers the Financial Corporation to apply to a District Judge within whose limits the property is situate for an order of sale of property mortgaged and for further restraint order. Section 32 and Sections 32A to G deal with procedures for recoveries. Section 32 deals with the procedure for sale of the property by a District Judge. Section 32-A empowers the Financial Corporation to appoint Directors or Administrators of an industrial concern when management is taken over. In this case, admittedly the property had been taken over by the Financial Corporation in the year 2000. The effect of take over notification under Section 32-A is set through Section 32B which vacates the directorship of industrial concern and vests the management and control wholly in the hands of Financial Corporation. Section 33C deals with powers and duties of Directors and Administrators after the Corporation is taken over under Section 32A. Section 32D provides for immunity against the claim for compensation for termination of contract or action against Managing Director for taking over of the management under Section 32A. Section 32E vacates the powers of the shareholders to give effect to any terms of memorandum or articles of association to nominate or appoint any person to be a Director or to pass any resolution in any meeting or take up any action in winding up of the Company. Section 32F bars any action for dissolution or partition of the industrial concern, if it is not a Company defined under the Companies Act. We are dealing with a Company and, therefore, there is no scope for application of this particular provision. Sector 32G is the provision which is applied and it is necessary to reproduce that section. Sector 32G reads as follows:- "32G.
We are dealing with a Company and, therefore, there is no scope for application of this particular provision. Sector 32G is the provision which is applied and it is necessary to reproduce that section. Sector 32G reads as follows:- "32G. Recovery of amounts due to the Financial Corporation as an arrear of land revenue.- Where any amount is due to the Financial Corporation in respect of any accommodation granted by it to any industrial concern, the Financial Corporation or any person authorized by it in writing in this behalf, may, without prejudice to any other mode of recovery, make an application to the State Government for the recovery of the amount due to it, and if the State Government or such authority, as that Government may specify in this behalf, is satisfied, after following such procedure as may be prescribed, that any amount is so due, it may issue a certificate for that amount to the Collector, and the Collector shall proceed to recover that amount in the same manner as an arrear of land revenue." 5. The expression, in respect of any accommodation granted by it to industrial concern has nothing to do with grant of possession in relation to industrial concern. On the other hand, the accommodation that it talks about is the financial accommodation that gives rise to the claim by the State Finance Corporation for recovery of monies. The financial accommodation must be understood in the context of the words preceding the same namely, where any amount is due to the Financial Corporation. P.Ramanatha Aiyars Advanced Law Lexicon, 3rd Edition, Book 1, defines the term, accommodation to mean, "the act of accommodating; in mercantile language, is used for a loan of money, pecuniary aid in an emergency, money loan either directly or by standing surety for the repayment of sums advanced by another. It also signifies a friendly agreement or composition of differences; Money that is lent to someone for a brief period (Banking)". It therefore, addresses merely an occasion where an amount is recoverable and when the Financial Corporation is authorized to apply to the State Government for recovery of the amount due to it. The expression accommodation is also used in the same sense in section 27 of the Act, while dealing with the power to impose conditions for accommodation.
It therefore, addresses merely an occasion where an amount is recoverable and when the Financial Corporation is authorized to apply to the State Government for recovery of the amount due to it. The expression accommodation is also used in the same sense in section 27 of the Act, while dealing with the power to impose conditions for accommodation. The matter that has to be seen is whether there exists any subsisting liability by the Company or the Director for recovery before Section 32G is put to action. Section 32G becomes operative in cases where the assets of the industrial concern which it takes over under Section 32 or 32A are not sufficient to discharge its liability. This can be done only under the terms of the contract. There is no dispute about the fact that in this case, the industrial concern had obtained a loan and it had failed to make the payment. Proceedings for recovery by sale of the property were taken initially by taking over possession in the manner laid down under Section. 29. To that extent also, there is no dispute. The amount due in favour of the Financial Corporation could be calculated only by reference to the terms of the contract and how the Financial Corporation could appropriate the proceeds of the sale for the debt over to it. There is no doubt that the Corporation is entitled to collect interest at 26% p.a. as per the terms of the contract. (b) Entitlement to collect interest during the period when the creditor takes possession of the security and before sale. 6. The primary remedies of the secured creditor, apart from an action on the debtors personal covenant for payment (if any) are possession, sale, appointment of a receiver, foreclosure and appropriation, in the case of financial collateral (See, Roy Goode, Commercial Law (3rd edn, 2004, Lexis Nexis at p. 637). m our case, we are concerned with the rights and duties of the creditor when exercising the remedy of possession. The issue still is whether the Financial Corporation is entitled to load interest even after it obtains possession of the property of the industrial concern.
m our case, we are concerned with the rights and duties of the creditor when exercising the remedy of possession. The issue still is whether the Financial Corporation is entitled to load interest even after it obtains possession of the property of the industrial concern. The learned counsel refers to the decision of Honble Supreme Court in Subhari Papers (P) Limited v. Haryana Financial Corporation, 1998(1) R.C.R. (Civil) 747 that dealt with a case where the Court.found that the Corporation was not justified in taking possession of the property. The Court gave liberty to the Financial Corporation to take fresh proceedings for the non-payment and wiped out interest for the period when the Financial Corporation took possession of the property till the date when it re-delivered the property to the Company. The decision cannot be taken as laying down any law that a mortgagee in possession is not entitled to interest. It should only be taken as confined to the facts of the case, where the Court held that the action of taking possession was itself found to be unjustified. In a recent case decided by the Honble Supreme Court in Haryana State Financial Corporation v. M/s Surya Auto Industries Ltd, 2010(1) R.C.R. (Civil) 205 arising out of Civil Appeal No 7910 of 2009 dated 1st December 2009, while setting aside a decision of the High Court disallowing the contract rate of interest for the period when the Financial Corporation took possession of the property, it held that when the contract terms as to interest itself was not in challenge, the High Court could not have suo motu altered the rights and obligations of parties. It must be noticed that the provisions of the State Finance Corporations Act that allows the Corporation to take possession of the assets of the industrial concern does not debar it from claiming interest. Since the transaction involves the security interest in immovable property, the provisions under the Transfer of Property Act would be instructive to discern the rights and duties of the mortgagee who gains possession of the security. Section 72 of the TP Act reads as follows:- 72.
Since the transaction involves the security interest in immovable property, the provisions under the Transfer of Property Act would be instructive to discern the rights and duties of the mortgagee who gains possession of the security. Section 72 of the TP Act reads as follows:- 72. Rights of mortgagee in possession A mortgagee may spend such money as is necessary- (a) for the preservation of the mortgaged property from destruction, forfeiture or sale; (b) for supporting the mortgagors title to the property; (c) for making his own title thereto good against the mortgagor; and (d) when the mortgaged property is a renewable leasehold, for the renewal of the lease; and may, in the absence of a contract to the contrary, add such money to the principal money, at the rate of interest payable on the principal, and, where no such rate is fixed, at the rate of nine per cent per annum: Provided that the expenditure of money by the mortgagee under clause (b) or clause (c) shall not be deemed to be necessary unless the mortgagor has been called and has failed to take proper and timely step to preserve the property or to support the title. (underlining mine) Where the property is by its nature insurable, the mortgagee may also, in the absence of a contract to the contrary, insure and keep insured against loss or damage by fire the whole or any part of such property; and the premiums paid for any such insurance shall be added to the principal money with interest at the same rate as is payable on the principal money or, where no such rate is fixed, at the rate of nine per cent per annum. But the amount of such insurance shall not exceed the amount specified in this behalf in the mortgage-deed or (if, no such amount is therein specified), two-thirds of the amount that would be required in case of total destruction to reinstate the property insured. Nothing in this section shall be deemed to authorize the mortgagee to insure when an insurance of the property is kept up by or on behalf of the mortgagor to the amount in which the mortgagee is hereby authorized to insure. This section specifically provides that the mortgagee in possession is entitled to levy interest.
Nothing in this section shall be deemed to authorize the mortgagee to insure when an insurance of the property is kept up by or on behalf of the mortgagor to the amount in which the mortgagee is hereby authorized to insure. This section specifically provides that the mortgagee in possession is entitled to levy interest. In the light of the provisions of the State Financial Corporation Act and the Transfer of Property Act, there is no scope for a contention that by the creditor taking possession of the property, he forfeits his right to claim interest. (c) The liability of the creditor- mortgagee in possession 7. The State Finance Corporation Act that provides for a right to possession of the mortgage interest does not spell out the duties, except to state in a general way through section 24 that the general duty of the Board shall be to act on business principles, due regard being had by it to the interests of industry, commerce and the general public. Section 25 details powers and duties of the Board and Sections 29 to 32 deal with right to possession and sale. Again, to read the provisions of the Transfer of Property Act complementarily to adjudge the duties of the mortgagee in possession, the following provisions would be instructive:- 76.
Section 25 details powers and duties of the Board and Sections 29 to 32 deal with right to possession and sale. Again, to read the provisions of the Transfer of Property Act complementarily to adjudge the duties of the mortgagee in possession, the following provisions would be instructive:- 76. Liabilities of mortgagee in possession.-When, during the continuance of the mortgagee the mortgagee takes possession of the mortgaged property,- (a) he must manage the property as a person of ordinary prudence would manage it if it were his own; (b) he must use his best endeavours to eollect the rents and profits thereof; (c) he must, in the absence of a contract to the contrary, out of the income of the property, pay the Government revenue, all other charges of a public nature and all rent accruing due in respect thereof during such possession, and any arrears of rent in default of payment of which the property may be summarily sold; (d) he must, in the absence of a contract to the contrary, make such necessary repairs of the property as he can pay for out of rents and profits thereof after deducting from such rents and profits, the payments mentioned in clause (c) and the interest on the principal money; (e) he must not commit any act which is destructive or permanently injurious to the property; (f) where he has insured the whole or any part of the property against loss or damage by fire, he must, in case of such loss or damage, apply any money which he actually receives under the policy, or so much thereof as may be necessary, in reinstating the property, or, if the mortgagor so directs, in reduction or discharge of the mortgage money; (g) he must keep clear, full and accurate accounts of all sums received and spent by him as mortgagee, and at any time during the continuance of the mortgage, give the mortgagor, at his request and cost, true copies of such accounts and of the vouchers by which they are supported; (h) his receipts from the mortgaged property, or, where such property is personally occupied by him, a fair occupation-rent in respect thereof, shall, after deducting the expenses properly incurred for the management of the property and the collection of rents and profits and the other expenses mentioned in clauses (c) and (d), and interest thereon, be debited against him in reduction of the amount (if any), from time to time due to him on account of interest..........and, so far as such receipts exceed any interest due, in reduction or discharge of the mortgage money; the surplus, if any, shall be paid to the mortgagor: 77.
Receipts in lieu of interest- Nothing in Section 76, clauses (b), (d), (g) and (h), applies to cases where there is a contract between the mortgagee and the mortgagor that the receipts from the mortgaged property shall, so long as the mortgagee is in possession of the property, be taken in lieu of interest on the principal money, or in lieu of such interest and defined portions of the principal. 8. The right to be in possession creates an obligation to account for the profits and rent, except in cases of usufructuary mortgagee who, under the terms of the debt instrument, becomes entitled to receipts from the mortgaged property in lieu of interest. The duty of Financial Corporation gives a corresponding right to the debtor to be credited with the profits and earnings of the security interest to the extent of actual benefit that accrues by its possession. In other words, reading together some of the relevant provisions, the Financial Corporation is liable to account for profits and rent from the business and property of the debtor, which it earns by following sound business principles (see section of 24 of SFC Act), but shall not engage in prohibited business (see section 28 of SFC Act) and manage the property as a person of ordinary prudence. Consequently, when the Corporation takes possession, it is to be expected that it does not commit acts of waste and if it does, shall be accountable to the debtor. In a claim for recovery of money by the corporation, this duty shall extend to answering a counter claim for profits and rent earned by it and also become answerable to the extent of damage or loss caused by its conduct. (d) Duty cast on the Financial Corporation leads to examination of reasonableness of its conduct in an action by it for recovery against the debtor. 9. If the right to enforcement of the security comes with its trappings for examination of its duty towards the borrower for the period when it was in possession, it becomes certainly relevant to examine whether the action in bringing the property to sale is within reasonable time; whether the property was properly preserved against being wasted; whether due care was taken, etc.
While examining the vires of SARFAESI Act in Mardia Chemicals v Union of India, (2004-3)138 P.L.R. 271 (S.C.):(2004)4 S.C.C 311 in the context of duties of a secured creditor who has a right to possession and sale of the secured assets, held: "Arguments have been advanced as to how far principles of lenders liability are applicable. Whatever be the position, however, it cannot be denied that the financial institutions namely, the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and the financing companies/institutions are not free to ignore performance of their part of the obligation as a party to the contract. They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American courts, in view of the facts and circumstances and the terms of the contract and other details relating to those matter, that may or may not strictly apply, nonetheless even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of concept of lenders liability. It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defence deficiencies on the part of the banks and financial institutions." 10. What was said of a financial institution under SARFAESI Act is equally applicable of a financial corporation under the SFC Act. From the point of view of fairness approach in lending, a greater primacy for borrowers rights as expressed in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation, AIR 1993 SC 1435 was subsequently watered down through subsequent decisions till it was ultimately found to have not laid down the law correctly. There have been a gradual application of hands- off approach by the Courts starting from U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd?
There have been a gradual application of hands- off approach by the Courts starting from U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd? (1993)2 S.C.C 299, later in U.P. Financial Corporation v. Naini Oxygen & amp; Acetylene Gas Ltd., (1995)2 S.C.C 754, and still later in Karnataka State Financial Corporation v. Micro Cast Rubber & amp; Allied Products (P) Ltd., (1996)5 S.C.C. 65, where the Honble Supreme Court held that "the scope of judicial review is confined to two circumstances i.e. (a) where there is statutory violation on the part of State Financial Corporation, or (b) where State Financial Corporation acts unfairly i.e. unreasonably. While exercising its jurisdiction under Article 226 of the Constitution of India, 1950, the High Court does not sit as an Appellate Authority over the acts and deeds of the Corporation. Similarly, the courts other than the High Courts are not to interfere with action under Section 29 of the Act unless the aforesaid two situations exist." (e) Law as regards mortgagee in possession exercising the right of sale in foreign jurisdiction 11. The only duty for the creditor is to act in "good faith" and take "reasonable care to obtain a proper price". (Downsview Nominees Ltd v. First City Corp Ltd, [1993] AC 295; Cuckmere Brick Co Ltd v. Mutual Finance Ltd, [1971] Ch 949.) Apart from this, there are no general duties of care in dealing with the secured assets. The difference has been neatly summarized by one commentator thus (Paul J. Omar, "A delicate balance of interests: the power of sale and the duty to maximize asset values", Sep/Oct Conveyancer and Property Lawyer 380 (2005) at p. 382.) - "It has been settled law for some time that a mortgagee in possession is to be treated more onerously than a mortgagee exercising a power of sale, the difference being justified by the trust-like status possession of the debtors property imposes on the secured creditor. Thus, while in possession, the secured creditor must not waste the asset and must maximise the return from the property. A trust relationship is not imposed by the mortgagee appointing a receiver, nor necessarily by the exercise of a power of sale, which may occur even in the absence of possession.
Thus, while in possession, the secured creditor must not waste the asset and must maximise the return from the property. A trust relationship is not imposed by the mortgagee appointing a receiver, nor necessarily by the exercise of a power of sale, which may occur even in the absence of possession. Once the power of sale arises and is exercisable, the mortgagee may choose to sell at his own convenience and at any moment, however unpropitious." There has however been an oscillation of judicial view in relation to the above, (Id at pp. 383- 387.) with the different strands of reasoning converging in Medforth v. Blake. [2000] Ch 86, where a "general duty of due diligence" was laid down. The following propositions were laid down in this case (which would be equally relevant to determine the scope of duties of the mortgagee in possession) (Medforth v. Blake [2000] Ch 86 at p 102: "A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption. (2) The duties include, but are not necessarily confined to, a duty of good faith. (3) The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case. (4) In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself repaid. (5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence. (6) Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor. (7) If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps to be taken in order to try to do so profitably." 12. The mortgagees right to possession as a prelude to sale to ensure that there is a hassle free sale with vacant possession is brought out well in the following text from American experience:- Two major reasons excite a mortgagee into taking possession of the mortgaged property.
The mortgagees right to possession as a prelude to sale to ensure that there is a hassle free sale with vacant possession is brought out well in the following text from American experience:- Two major reasons excite a mortgagee into taking possession of the mortgaged property. The first and the usual object of a mortgage taking possession is the interception of the accruing income so as to secure punctual payment of interest (Megarry & Wade, The Law of Real Property (5th ed., 1984), p. 932.S.508 U.L.S.I.A. (1985). The notice, must also be sent to any other person who is obligated on the debt for the purpose of preserving the mortgages right to proceed against them for any deficiency and the second has to do with the fact that the taking of possession has become an important precursor to the exercise of the power of sale. This is because to sell with advantage he must sell with vacant possession. Rudden, "Mortgagees Right to Possession" [1961] Conv. 278 at p. 282. Scott v. Paisley 9 271 U.S. 632 at p. 635 (1926). (f) Examination of reasonableness of conduct of the Financial Corporation 13. In this case, the objection by the petitioner has been that even when a notice under Section 32G was issued, the Corporation made no allowance to the fact that it had taken possession of the property in the year 2000 and it had not taken any action immediately for disposal of the assets. It did not choose to run the Company which it could have. However, it had displaced the Directors and taken over administration. I must observe that all the relevant records have not been made available or placed before the Court to know whether the State Financial Corporation had taken over of the administration of the Company itself or it had merely taken possession of the property with intent for sale. It appears that the petitioner himself had applied through a notice dated 23.04.2007 to supply information with regard the initiation of proceedings for recovery:- "1. The date on which the possession of the Unit/land measuring 0 Bigha 15 Biswa comprised in Khewat No.14, Khatauni No.58, Khasra No. 1109/1068/85/1 (0-15) situated in Village Gelumajra, HB No.209, Derabassi, District Patiala along with machinery installed therein had been taken along with a copy of the possession memo and the inventory prepared by the Corporation. 2.
The date on which the possession of the Unit/land measuring 0 Bigha 15 Biswa comprised in Khewat No.14, Khatauni No.58, Khasra No. 1109/1068/85/1 (0-15) situated in Village Gelumajra, HB No.209, Derabassi, District Patiala along with machinery installed therein had been taken along with a copy of the possession memo and the inventory prepared by the Corporation. 2. The accounts statement with regard to the said Unit as on the date of taking over of possession. 3. A copy of the notice sent to me before resuming the possession of the Unit. 4. The date of sale of the Unit by PFC and the efforts made by the Corporation for the sale of the Unit between the date of resumption and the resale. 5. A complete copy of the account statements as on 26.02.2007 with regard to the amount of Rs.21,76,863/-." 14. The Financial Corporation has not favoured the petitioner with any details. The reply on behalf of the respondents I and 2 does not state any more than the fact that the property was taken over and sold in exercise of its power under the sale agreement dated 22.12.1998. No details have been given as to why, after the property was resumed by the Corporation on 06.09.2000, it was not immediately sold. Para 9 of the reply states that the properties had been advertised for sale in newspapers on 01.12.2000, 26.01.2001, 31.122001, 15.10.2002, 29.11.2003, 10.10.2006 and 13.11.2006. The grievance of the petitioner is that during the internal, the value of the machineries had fallen down to such an extent that they had been sold only at Rs.68,000/- as scrap. It is not possible for me to even ascertain what the book value of the machineries was and how much more or lower than the book value, the machineries could have been sold or were actually sold. In this case, the Financial Corporation seems to have assumed that the power to take over possession of the property statutorily enables it to choose its own date as to when it can bring the property to sale without in any way being accountable to the loss that may be caused to the borrowing industrial concern. The power to take possession under Section 32 comes with a duty to act reasonably.
The power to take possession under Section 32 comes with a duty to act reasonably. The whole law was considered in Haryana Financial Corporation v Jagadamba Oil Mills, (2002) 3 SCC 496 and while holding that the Corporation would be driven by its best interest still cautioned:- "The obligation to act fairly on the part of the administrative authorities was evolved to ensure the rule of law and to prevent failure of justice. This doctrine is complementary to the principles of natural justice which the quasi-judicial authorities are bound to observe. It is true that the distinction between a quasi-judicial and the administrative action has become thin, as pointed out by this Court as far back as 1970 in A.K. Kraipak v.Union of India (1969) 2 SCC 262. Even so the extent of judicial scrutiny/judicial review in the case of administrative action cannot be larger than in the case of quasi-judicial action. If the High Court cannot sit as an Appellate Authority over the decisions and orders of quasi- judicial authorities, it follows equally that it cannot do so in the case of administrative authorities. In the matter of administrative action, it is well known, more than one choice is available to the administrative authorities; they have a certain amount of discretion available to them. They have "a right to choose between more than one possible course of action on which there is room for reasonable people to hold differing opinions as to which is to be preferred" (as per Lord Diplock in Secy. of State for Education and Science v. Metropolitan Borough Council of Tameside, All ER at p.695). The court cannot substitute its judgment for the judgment of administrative authorities in such cases. Only when the action of the administrative authority is so unfair or unreasonable that no reasonable person would have taken that action, can the court intervene." (para 10) IV. Circumstances that exist for judicial intervention 15.
The court cannot substitute its judgment for the judgment of administrative authorities in such cases. Only when the action of the administrative authority is so unfair or unreasonable that no reasonable person would have taken that action, can the court intervene." (para 10) IV. Circumstances that exist for judicial intervention 15. The circumstances that existed before the Honble Supreme Court in M/s Surya Auto (supra), while setting aside the judgment of the High Court, which took serious note of the Corporation going into slumber after taking over the unit of the respondent in furtherance of the first notice under section 29 of the Act, were: (i) The respondent (the debtor- industrial concern) miserably failed to discharge its obligation to repay the loan together with interest and as against the outstanding dues of more than Rs.36 lacs in 2002, a paltry sum of Rs.2.70 lacs was deposited. (ii) The appellant-Corporation issued notices dated 2.12.2002, 3.3.3003, 30.5.2003 and 29.8.2003 to the respondent requiring it to pay the amount specified therein, but the latter did not respond to either of the notices; (iii) Vide letter dated 10.9.2004, the appellant-Corporation offered to reduce the rate of interest and reschedule the payment of dues, but the respondent did not avail the same; (iv) The respondent did not take benefit of the schemes notified on 3.1.2005 and 18.3.2005 for restoration of the unit by paying the principal amount along with 10% of the outstanding interest. On a consideration of all the above factors, the Supreme Court held that, "In our view, the appellant-Corporation had acted in a most reasonable and fair manner and the High Court was not justified in nullifying the second notice issued under Section 29 of the Act by assuming that the appellant-Corporation had not taken effective steps for realization of its dues in furtherance of first notice." The Court further reasoned that the respondent had not only adopted a recalcitrant attitude in the matter of payment of the outstanding dues, but also failed to avail the concessions offered by the appellant-Corporation by reducing the rate of interest and rescheduling the payment of outstanding dues and did not take benefit of the schemes notified by the appellant- Corporation for restoration of unit on payment of the principal amount with a 10% outstanding interest.
The Court further said that a debtor who not challenged the terms of contract with reference to payment of interest could not have the benefit of obtaining suo motu alteration of the terms of the contract through judicial intervention. 16. In contrast, we have seen that even to the notice issued by the petitioner seeking details of the amount owed by the company and other details, there was no response. There is no explanation even in the reply of the corporation as to why there arose a delay of more than 6 years in bringing the property to sale. The reasonableness of their action itself would be assessed by examining the amount due on the date of taking possession and the value of the land and machineries on that day. If by unreasonably delaying the process of sale, which was not contributed by the petitioner or by the company, if the value of the machineries had fallen or indebtedness of the company had increased considerably, the action of the corporation would be suspect. To the notice issued by the Specified Authority under Section 32G of the Act, the petitioner has given a reply on 11.7.2007 pointing out inter alia an inexplicable delay in bringing the property to sale and the loss occasioned by such wanton conduct by loading interest during all the time when the property was held in possession. We have already seen that the mortgagee is entitled to interest even during the period but the reasonableness of the action by the delay is still relevant for consideration. V. Powers under Section 32G as laid down by Hon ble Supreme Court and actions that become necessary under the special circumstances. 17. The 2nd respondent, in the impugned order has stated: "Only thing which the State Government or the Specified Authority is required to do is to make a mathematical calculation of the amount due in accordance with the terms of the agreement including the rate on which the interest is payable by the loanee/guarantor and then pass the necessary order for issuance of Recovery Certificate." This observation is not correct.
The authority has justified its approach to an observation of the Honble Supreme Court in Civil Appeal No 7818 of 2002 (in Delhi Financial Corporation v. Rajiv Anand (2004) 11 SCC 625) that the procedure prescribed under Section 32G is merely to make a mathematical calculation and not an adjudication of lis between parties. The decision was rendered while there was a challenge to the vires of the section itself. The Court has said, "In cases of amounts due to financial corporations all that is required is a simple arithmetical calculation or a simple verification. It is for that reason that in Section 32-G only a provision identical to Section 33-C(l) has been incorporated. The legislature has knowingly omitted to incorporate a provision like Section 33-C(2). It must be presumed that the legislature intentionally omitted such a provision. The reason of such omission being that the legislature wanted the recovery of dues to the financial corporation in a summary manner on a simple arithmetical calculation or a simple verification. A plain reading of Section 32-G shows that there is no lis or adjudication contemplated under Section 32-G. The Punjab and Haryana High Court is right in holding that all that is contemplated is a mere mathematical calculation after looking into the papers. The borrower and the surety or the guarantor know what the amounts due are, they know what amounts have been repaid, they know when the amounts were to be repaid, what has not been repaid or how belatedly amounts have been repaid. They know what the rate of interest is. Thus a mere calculation has to be made to ascertain the amount due. If on such calculations it is found that an amount due is due to the financial corporation then a certificate of recovery can be issued Undoubtedly, the provision is in the nature of an execution proceeding but it is not a recovery proceeding pursuant to a decree of a court. It is a recovery proceeding on the amount being found to be due by a simple verification by the State Government or the authority appointed by it. Further, to accept the interpretation suggested by counsel would be to go against the very purpose and object of the Act which is to ensure speedy recovery. It is with that object in view that Sections 29, 31 and 32 have been enacted.
Further, to accept the interpretation suggested by counsel would be to go against the very purpose and object of the Act which is to ensure speedy recovery. It is with that object in view that Sections 29, 31 and 32 have been enacted. These have been found to be inadequate. Thus, by Section 32-G one more remedy of recovery is given to a financial corporation. Merely for execution of a decree of a court no such provision is required. Once a decree is passed it can be executed in the normal manner. That Section 32-G is not for execution of a decree of a court is also clear from the fact that it does not use the word "decree". All that Section 32-G contemplates is that where an amount is due an officer will make an application to the State Government, the State Government or an authority appointed by them would, after following procedure as may be prescribed, issue a certificate for that amount to the Collector and the Collector shall proceed to recover that amount as arrears of land revenue." (para 21) 18. We have already reproduced the section above. It contemplates that on the Financial Corporation making an application to the State Government, the State Government or such authority, as the Government may specify is satisfied, issue a certificate. Surely, there is no scope for a roving enquiry into validity of the debt instrument, the decision to sell the property, etc. But when a person against whom the certificate is issued raises the issue that there is no amount due or the amount calculated must factor the extent to which the corporation itself must account for during the period when the secured asset was held in its possession, the satisfaction that this section contemplates, cannot be meant as a meaningless formality of picking up a calculator to do the pluses, minuses and ascertaining the multiplier and the multiplicand. In a situation like this, it should also involve the ascertainment of any amount that is due from the corporation by its duty to account for the period when it held the secured asset in its possession and the fall in value of the assets by its lapse or want of reasonable care. VI. Disposition 19.
In a situation like this, it should also involve the ascertainment of any amount that is due from the corporation by its duty to account for the period when it held the secured asset in its possession and the fall in value of the assets by its lapse or want of reasonable care. VI. Disposition 19. The 2nd respondent shall require the Corporation to supply the documents and information sought for by the petitioner and other persons to whom the notices had been sent, call for details for the alleged delay in effecting the sale of the secured assets, allow the parties to adduce documentary evidence as to the value of machineries as on the date of taking possession and the amount that was due on the date of taking possession, fix the liability on the Corporation for any loss that has been occasioned by its conduct, obtain satisfaction of the extent of claim as made by the corporation and proceed in accordance with law. The impugned order is set aside and the matter is remitted to the 2nd respondent for consideration of the case in the light of the directions given above. The writ petition is allowed on the above terms but there shall be no direction as to costs.