Full Judgment Text
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PETITIONER:
MAHESH CHANDRA
Vs.
RESPONDENT:
REGIONAL MANAGER, U.P. FINANCIAL CORPORATION AND ORS.
DATE OF JUDGMENT12/02/1992
BENCH:
RAMASWAMY, K.
BENCH:
RAMASWAMY, K.
SAHAI, R.M. (J)
CITATION:
1993 AIR 935 1992 SCR (1) 616
1993 SCC (2) 279 JT 1992 (2) 326
1992 SCALE (1)388
ACT:
State Financial Corporations Act, 1951:
Section 29-Uttar Pradesh State Financial Corporation-
Loan to industrial concern-Default in payment of loan-Power
of Corporation to take possession and sell the mortgaged
property-Guidelines for exercising powers under section 29
issued.
Financial Corporation-Loan to industrial concern
against hypothecated property-Default in payment of loan by
debtor- Corporation’s refusal to release hypotheca to debtor
for private sale for repayment of debt-Taking possession of
property by Corporation and sale by invitation of tenders
without notice or opportunity to debtor-Corporation’s action
held contrary to Section 24-Sale held vitiated and not
binding on debtor-Held Corporation is an instrumentality of
State-It is bound to act fairly and reasonably in selling
the property of debtor-Section 29 does not exclude
principles of natural justice.
Section 24-State Financial Corporation are extended
arms of Welfare State-Their approach should be public
oriented-Board should discharge its functions on business
principles.
Words and Phrases.
‘Business’-Meaning of.
HEADNOTE:
The appellant was owner of two plots. In one of the
plots a rice mill was constructed by the partnership in
which he was a managing partner. For taking a loan he
hypothecated the mill and the plots with U.P. Financial
Corporation which sanctioned a loan of Rs. 4,28,000, but
disbursed only Rs. 3,78,660 to him. Due to non-cooperation
of other partners, lack of working capital and failure of
the Financial Corporation to release the balance loan the
mill landed into a rough weather. Consequently
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defaults were committed in repayment of loan. The appellant
requested the Corporation to release the vacant hypothecated
plot to enable him to negotiate for private sale to pay off
his debt and also stated that he was ready and willing to
pay the outstanding amount of Rs. 5,03,165 towards principal
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and interest in full satisfaction under "one time settlement
scheme". The Corporation rejected his request and
exercising its power under section 29 of the State
Financial Corporations Act, 1951 took possession of the
hypotheca, invited tenders for its sale and without giving
any notice or opportunity to the appellant accepted the
tender of Rs. 2,55,000 given by respondents 3 to 5.
Pursuant to the sale the 3rd respondent took possession of
the property and invested a large sums for the improvement
of the mill. The appellant filed a writ petition in the
High Court which was dismissed. Against the decision of the
High Court the appellant filed an appeal in this Court.
Allowing the appeal, this Court,
HELD :1. Section 29 of the State Financial Corporations
Act confers very wide power on the Corporation to ensure
prompt payment by arming it with effective measure to
realise the arrears. Every wide power, the exercise of which
has far reaching repercussion, has inherent limitation on
it. It should be exercised to effectuate the purpose of the
Act. [629D-E]
1.1. The Corporation has been given statutory right to
take over possession and management of the defaulting unit
or hypotheca or both including the right to sell and realise
the loan or advance due from the unit or debtor. The
Corporation is an instrumentality of the State. The
Corporation or its employees or officers are bound to act
reasonably and fairly in dealing with the property of the
debtor. The exercise of the power or discretion in its
dealing would be subject to the same constitutional or
public law limitation as the Government. The Corporation
also equally must conform its action with the same standard
that meet the test of justness, fairness, reasonableness and
relevance. [628G-H]
Kasturilal Laxmi Reddy v. State of J & K, [1980] 3
S.C.R. 1338, referred to.
1.2. Sub-section 4 of section 29 treats the Corporation
"to be a trustee" of the debtor or person claiming title
through him. It saddles the Corporation or the officer
concerned with inbuilt duties, responsibilities
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and obligations towards the debtor in dealing with the
property and entails him to act as a prudent and reasonable
man standing in the shoes of the owner. Therefore, when the
property of the debtor stands transferred to the Corporation
for management or possession thereof which includes right to
sell or further mortgage etc., the Corporation or its
officers or employees stand in the shoes of a debtor as
trustee and the property cestue que trust. They are bound to
exercise their power in good faith in selling or dealing
with the property of the debtor as an ordinary prudent man
would exercise in the management of his own affairs to
preserve and protect his own estate. Their acts should be
reasonable, just and fair which must meet the eye and the
offer accepted must be competitive and every attempt should
be made to secure as maximum price as possible to liquidate
the liabilities incurred by the industrial concern or the
debtor under the Act. [630G-H, 631C, 632C-D]
N. Suryanarayan Iyer’s Indian Trust Act, 3rd Edn. 1987
page 275; Kerr on Receivers, 17th Edn., page 208; Halsbury’s
Law of England, 4th Edn. Vol. 39, para 919, referred to.
Fertiliser Corporation Kamgar Union (Regd.) Sindri &
Ors. v. Union of India & Ors., [1981] 2 S.C.R. 52; Ram &
Shyam Co. v. State of Haryana, [1985] Supp. 1 S.C.R. 541;
Sachinand Pandey v. State of West Bengal, [1987] 2. S.C.R.
223; Haji T.M. Hassan v. Kerala Financial Corporation,
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[1988] 1 SCR 1079; Lakshmanasami Gounder v. C.I.T. Selvamani
JUDGMENT:
1.3. It is not mandatory as a matter of law, to observe
the process of taking over strictly. Defaults in payment of
loan may attract Section 29. But that alone is insufficient
either to assume possession or to sell the property.
Neither should be resorted to unless it is imperative. Even
though no rules appear to have been framed nor any guideline
framed by the Corporation was placed, yet the basic
philosophy enshrined in Section 24 has to be kept in mind.
Rationale of action and motive in exercise of it has to be
judged in the light of it. Lack of reasonableness or even
fairness at either of the two stages render the take over
and transfer invalid.
[630F, 629H, 630A-B]
1.4. In the instant case, the Corporation was guilty of
not acting in accordance with law either at the stage of
take over or in transferring the unit. [630B]
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1.5. The attitude adopted by the Corporation was
contrary to the spirit and scheme of section 24 of the Act.
Section 24 of the Act requires the Board to discharge its
function on business principles, due regard being had to the
interest of industry, commerce and general public. Instead
of agreeing to receive five lacs in lump-sum as offered by
the appellant it opted for two lacs fifty thousands tendered
by the purchaser that too in four yearly instalments. It
was neither business principle, nor in the interest of
commerce and industry, nor good of general public. This
solicitous attitude, at the expense of the appellant,
appears to be unjust and unfair and no reasonable prudent
owner would accept such an offer.
[626C, 625F; 626A-B; 635G; 636A]
1.6. Section 29 does not exclude the application of the
principles of natural justice. Before accepting the tender
of the third respondent, an opportunity should have been
given to the appellant as to why such an offer of the third
respondent be not accepted. No bonafide actions have been
taken or attempted by the Corporation. The sale of the
property is vitiated by unjust and unreasonable act on the
part of the Corporation and is liable to be set aside. The
appellant is not bound by the sale or the subsequent acts of
the purchasers claiming through them.
[636A, C-D, F]
The Corporation should immediately resume possession of
the hypotheca sold. It will be open to the appellant to pay
the entire liability and have the hypotheca redeemed as per
contract. If the appellant fails to do so, the Corporation
can sell the same in open auction, after giving wide
publicity in the press. [636G, 637A]
2. The financial corporations under the State Financial
Corporations Act were visualised not as a profit earning
concerns but an extended arm of a welfare state to harness
business potential of the country to benefit the common
man. They deal with public money for public benefit. Their
approach has to be public oriented, helpful to the loanee,
without loss to the Corporation. Endeavour should be to
adjust and accommodate as business considerations require
the sick unit to function for benefit, both of the general
public and the Corporation. The Corporation, therefore,
should honour their commitments of releasing entire loan
timely except for very good reasons which should be
intimated before hand to enable the unit holder to comply
with shortcoming if any. In the absence
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of completion of it, the proceedings for recovery under
section 29 may not be justified. [625F-G, 630D-F]
3. The following necessary directions are issued to be
observed by the Financial Corporations while exercising
power under section 29:-
(A) Every endeavour should be made, to make the
unit viable and be put on working condition.
If it becomes unworkable.
(B) Sale of a unit should always be made by public
auction.
(C) Valuation of a unit for purposes of determining
adequacy of offer or for determining if bid
offered was adequate, should always be
intimated to the unit holder to enable him to
file objection if any as he is vitally
interested in getting the maximum price.
(D) If tenders are invited then the highest price
on which tender is to be accepted must be
intimated to the unit holder.
(E) If unit holder is willing to offer the sale
price, as the tenderer, then he should be
offered same facility and unit should be
transferred to him. And the arrears remaining
thereafter should be re-scheduled to be
recovered in instalments with interest after
the payment of last instalment fixed under the
agreement entered into as a result of tendered
amount.
If he brings third parties with higher offer it
would be tested and may be accepted.
(F) Sale by private negotiation should be permitted
only in very large concerns where investment
runs in very high amount for which ordinary
buyer may not be available or the industry
itself may be of such nature that by normal
buyers may not be available. But before taking
such steps there should be advertisements not
only in daily newspapers but business magazines
and papers.
(G) Request of the unit holder to release any part
of the property on which the concern is not
standing of which he is the owner should
normally be granted on condition that sale
proceeds shall be deposited in loan account.
[634H, 635A-G]
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4. ‘Business’ is a word of wide import. It has no
definite meaning. Its perceptions differ from private to
public sector or from institutional financing to commercial
banking. [625F]
5. The law consists of body and soul. The letter of
the law is the body and the sense and reason of its is the
soul quia ratio legis est enima legis. In other words, like
a nut the letter of the law represents the shell and sense
and the purpose of its Kernal. The law intends to serve the
purpose. Justice is both the cause and effect, the origin
and the legitimate end of law. One will receive no benefit
from the law, if the ratio and the letter of law defeats its
purpose. [629C]
6. In legislations enacted for general benefit and
common good the responsibility is far graver. It demands
purposeful approach. The exercise of discretion should be
objective. Test of reasonableness is more strict. The
public functionaries should be duty conscious rather than
power charged. Its actions and decisions which touch the
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common man have to be tested on the touchstone of fairness
and justice. That which is not fair and just is
unreasonable. And what is unreasonable is arbitrary. An
arbitrary action is ultra vires. It does not become bona
fide and in good faith merely because no personal gain or
benefit to the person exercising discretion should be
established. An action is mala fide if it is contrary to
the purpose for which it was authorised to be exercised.
Dishonesty is discharge of duty vitiates the action without
anything more. An action is bad even without proof of
motive of dishonesty, if the authority is found to have
acted contrary to reason. [629E-H]
&
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4503 of
1990.
From the Judgment and Order dated 5.2.1990 of the
Allahabad High Court in Civil Misc. Writ Petition No. 13916
of 1987.
R.K. Jain, P.N. Lekhi, P.K. Jain, S. Markandeya, Ms. C.
Markandeya and M.K. Garg for the appearing parties.
The Judgment of the Court was delivered by
K. RAMASWAMY, J. The appellant, Managing Partner of M/s
Shiva Rice Mill situated at Nagina, Distt. Bijnor in Uttar
Pradesh, owned two
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plots bearing Nos. 208 and 220/2 admeasuring 18 and 8
Bishwas respectively purchased under a single sale deed. In
plot No. 208 in an extent of 2,700 sq. yards abutting
Highway, near Railway Goods Shed and one furlong to the
Railway Station, a strategic location of importance, the
rice mill was constructed by the partnership firm. The plot
bearing No. 220/2 remained vacant and was not even valued as
an asset of the partnership firm while hypothecating the
rice mill to the U.P. Financial Corporation for short ‘the
Corporation’. A loan of Rs. 4,28,000, was sanctioned in
1979 and Rs. 3,70,660 was alone disbursed in 1980 which was
repayable in eleven annual instalments upto 1991. The
appellant repaid a sum of Rs. 9000 in December, 1981. Non-
cooperation of the other partners and lack of working
capital, due to failure to release the balance loan, landed
the running mill into rough weather and defaults in payment
were committed. While finding that interest was getting
mounted, the appellant wrote repeated letters to the
Corporation requesting to release plot No. 220 so as to
enable him to negotiate for private sale of it along with
his two more plots to pay off the debt. It is his case
that, pursuant to his letter dated December 22, 1983, on
oral promise to release the plot, he paid a sum of Rs.
65,000 and was received by the corporation. He also
promised to pay Rs. 50,000. The Corporation did not release
it. According to him, in his letter dated February 10,
1986,Annexure 6, as on March 31, 1986 the simple interest
payable was Rs. 1,93,670, the principal amount was Rs.
3,70,660 and expenses was Rs. 3,835. After deducting Rs.
65,000 towards arrears of interest, the outstanding was Rs.
5,03,165 and he was ready and willing to pay the same in
full satisfaction under "one time settlement scheme",
provided compound interest is waived. The record also shows
that in a meeting held in September, 1985 a decision to
release the plot appears to have been reached by the
corporation and the Regional Manager was asked to be
contacted. Ultimately, the Corporation did not accede to
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that request but had taken possession of the hypotheca and
got valued at Rs. 3,28,717.97 and published for sale
inviting tenders. It is necessary to point out at this
juncture that as per the plan filed on record which is not
disputed that (a) Plot No. 221 faces the road, Plot No. 220
is in the middle and 219 is in the end towards north. They
are contiguous. (b) The appellant in his letter submitted
that the mill could not run due to lack of running capital
and non-cooperation of other partners; and (c) Sketch plan
clearly shows that plots Nos. 219 and 221 could be used to
carve out housing plots
623
only if 220 was released, and that might have fetched good
price to enable the appellant to clear off the arrears. Yet
it was not accepted, because according to the affidavit of
the corporation the appellant could have sold other two
plots. Several letters written by the appellant, thus,
received no response. Instead recovery proceedings were
initiated.
According to the purchasers, though the Corporation
did not assert, that no response was evoked from public for
several tenders called for. The last date to receive the
tender in question was January 13, 1987. Deshbandhu
Agarwal, the third respondent, per self, his wife (since
died) and his son, respondents Nos. 4 & 5, submitted the
tender on March 25, 1987 for a sum of Rs. 2,00,000 which was
on negotiation accepted at Rs. 2,55,000. The Corporation
agreed to receive 25% of the consideration, namely, Rs.
63,750 as initial payment and the balance consideration in
four years in equal half yearly instalments. Before
accepting the tender no notice nor an opportunity in this
regard was given to the appellant. The appellant,
therefore, filed the writ petition in the Allahabad High
Court which was dismissed by judgment dated February 9,
1990. This appeal under Art. 136 of the Constitution arises
against that judgment.
When the matter came up for hearing, this Court
suggested to the parties to have the matter settled
amicably. They had taken sufficient time. The purchasers
reported that they entered into an agreement to sell plot
No. 220, and the purchaser declined to rescind the contract
with a threat to file a suit for specific performance. They
offered to pay Rs. 40,000 said to be the consideration
therein but the appellant declined to accept the same. The
Corporation though filed an exhaustive counter affidavit,
did not deny the offer made by the appellant in his letter
dated February 10, 1986. When we enquired, the counsel for
the Corporation, on instruction, stated that they had
informed the appellant that his proposal was not acceptable
to the Corporation, but no material has been placed on
record of such communication. It was stated that as on the
date of the sale a sum of Rs. 8,61,969.57 was due from the
appellant towards principal and interest @ 18%. The break-
up has been given in a separate statement filed by the
counsel. Thus the proposed settlement had been fissled out.
Mahatma Gandhiji, the father of the nation, in Swaraj
at page 92, stated that, "from the very beginning it has
been my firm belief that agriculture provides the only
unfailing and perennial support to the people
624
of this country. India lives in villages". Villagers are
poor and most of them are unemployed or underemployed who
need productivity which would add to the wealth of the
nation. This vast human resources and man power remain
idle, since majority own little or marginal land holdings
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out depend on agriculture as their livelihood. Cottage,
agro-based or medium industries in rural areas give them
economic status to the owner, employment potential for
sustenance to the workmen and fair price to the producer.
The father of the nation laid, therefore, emphasis to
establish cottage industries, "to utilize the idle hours of
the nation and bring work to the people in their homes,
particularly when they had no other work to do." He further
stated, "I want the dumb millions of our land to be healthy.
I want them to grow spiritually. If we feel the need of the
machine we certainly will have them. Every machine that
helps an individual has a place". But he emphasised only on
such industries which would be, "self-sufficient, self-
reliant and free from exploitation". The founding fathers
of the Constitution in Art. 43 directed that, "the State
shall endeavour to promote cottage industries on an
individual and cooperative basis in rural areas". Without
social progress and economic development, democracy and
freedom would not take firm roots. Without social
stability, it would be impossible to achieve economic
development. Without economic development there would be no
social progress and without social progress it would be
impossible for the people to take the destiny in their own
hands in a democracy. Out Constitution, therefore, accepted
mixed economy as the base and the economic policy and
planning echo regeneration of social and economic justice.
Articles 38 and 39 aim in that pursuit that the ownership
and control of the material resources of the community are
so distributed as best to subserve the common good and that
the inequalities in income should be minimised. Facilities
and opportunities should be provided to eliminate
inequalities in status and opportunity among the individual
and groups of people. Our Bharat needs simultaneously
greater progress by building industries with modern
technological advances on all fronts and should create
greater employment opportunities. To accelerate economic
development the fiscal resources, human resources, their
abilities and expertise need harness. In the mixed economy
the public undertakings as well as private sector need
necessary assistance and encouragement. The growth of the
private sector should not be stifled, cribbed or cabined.
The bureaucracy should adopt positive approach to stimulate
production and
625
productivity in every sector of economy so as to increase
the size of the national cake.
Finance is the most important catalyst. The State of
Uttar Pradesh constituted the Corporation under s.3 of the
State Financial Corporation Act 1951, Act 63 of 1951, for
short, ‘the Act’ which came into force from October 31,
1951. To promote industrialisation in the States by
encouraging small entrepreneurs to participate in economic
growth of the country by giving them financial assistance
for setting up medium and small scale industries. Section
25(1)(g) of the Act provides that the Corporation may grant
loans or advances to an industrial concern (rice mill is an
industrial concern) repayable within a period not exceeding
20 years from the date the loan was granted. Although the
activity has multiplied, capital has grown, field of
operation has been widened but the disturbing state of
affairs, which at times, surfaces, is complete lack of
awareness of principles on which these institutions are
required to function. More distressing is unreasonable
attitude adopted, often, by the Corporation while exercising
power under s.29 to take over possession of the unit for
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default, in repayment of loan. Evil is still greater in
transferring the unit as more often the owner stands
financially ruined the Corporation too does not gain much
but the transferee comes out, either with a working unit or
a unit ready to go at throw price, in easy instalments
giving rise to strong apprehensions that everything did not
proceed reasonably and fairly.
Corporations deal with public money for public benefit.
The approach has to be public oriented, helpful to the
loanee, without loss to the corporation. Section 24 of the
Act itself required the Board "to discharge its function on
business principles, due regard being had to the interest of
industry, commerce and general public". ‘Business’ is a
word of wide import. It has no definite meaning. Its
perceptions differ from private to public sector or from
institutional financing to commercial banking. The
financial corporations under the Act were visualised not as
a profit earning concerns but an extended arm of a welfare
state to harness business potential of the country to
benefit the common man.
The release of plot No. 220 for private sale along with
other unemcumbered two plots would have fetched the
necessary amount to pay off the debt. Even the offer to
receive Rs. 5,00,000 in full quids would have salvaged the
problem. Any prudent businessman with least acumen would
626
have agreed to the proposal of the release of the plot for
sake of recovering its debts. Instead of agreeing to receive
five lacks in lump sum, it opted for two lacs fifty
thousands, that too in four yearly instalments. It was
neither business principle, nor in the interest of commerce
and industry, nor good of general public. Any reasonable
approach, which of course is not only desirable but
necessary, while dealing with such matters, would have
immediately demonstrated that the Corporation by such step
of releasing the plot, which was of no consequence to it,
was going to gain and perpetuated the objectives of the Act.
Instead it adopted an attitude which was contrary to the
spirit and scheme of s. 24 of the Act. Did the Corporation
gain from its ultimate decision of taking over possession
and transferring the unit ? Total loan disbursed was Rs.
3,78,660. The appellant paid in all Rs. 74,000 and if it is
added to the amount paid by the appellant, it comes to Rs.
3,29,000 only. Whereas the appellant was willing to pay Rs.
5,00,000 and odd in 1986 over and the above the amount which
he had paid, if plot No. 220 was released or one time
payment scheme was accepted. Similar offer was accepted in
relation to mill at Meerut. It did not get back the
interest. Even what it disbursed was the borrowed public
money. Of course, the transferee got a mill with project
cost estimated at 6 lacks and odd in 1980 at Rs. 2,55,000 in
1986 when the value must have gone up instead of going down.
There is a theorem that the economic self-interest and
profit motive induce entrepreneurs to reallocate resources
among activities until they get the same (approximately, if
not exactly in practise) rate of return from different lines
of activity. No body would like to lose money. No body
would like to miss an opportunity to make profit or to lose
his money either. Resources allocation in a market economy,
thus, primarily is a matter of relative priority to
different activities. The very process of economic growth
implies continuous reallocation of resources to generate
income to plough it back and earn profit. One of the major
causes to incur loss is the erosion of working capital fund
which affects the day-to-day working of the unit. Unless
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working capital is provided for, the industry is bound to
get closed due to accumulated losses year after year. The
terms of loans are mainly to repay immediately after
disbursement with commercial rate of interest together with
annual on half yearly rests. Unless the unit starts
generating internal resources and earn profit, running the
unit on industrial concern itself becomes difficult and the
ability to repay principal or interest get impeded. The
result, therefore, is that it would commit default or breach
627
of contract by default attracting penal interest for the
period in default. The industrial concern or unit, thereby,
would be further burdened with additional cost of interest,
panel interest and interest over interest. With the result
they cannot come out from the red, nor generate internal
resources. Many a time the corporation takes over
possession and sell thereof. The genuine and enthusiastic
entrepreneur with no previous business experience would get
exposed to this hazard (the pretenders to make quick money
would maintain concerted conduits and the officers too would
be solicitious to them). Therefore, the Corporation as a
policy of wise investment should map out payment schedule in
disbursing the loan to see that the unit starts functioning
and its working capital is maintained. It is common
knowledge that due to apathy or indifference or for reasons
best known or hidden that the disbursements would be delayed
resulting in delay in completion of the project or to start
working or loss of running capital, which would give cause
for default in payment of the instalments; accumulation of
the liabilities and the ultimate closure of the unit or the
industrial concern, defeating the objectives of the Act and
the Constitution.
This case demonstrates that in spite of reminding the
corporation that due to lack of working capital, the
appellant was unable to run the mill. The corporation did
not release the balance loan and no explanation came forth.
Dr. Malcolm S. Adiseshaiah, the noted Economist, in his ‘The
Why, What and Whither of the Public Sector Enterprise at
page 42 under the caption ‘Problem of Loss-Making Units in
the Public Sector, Erosion of Working Capital and its
Results’ stated that, "I was informed that the best course
would be to get money as loan and not as equity. Anyhow we
have to run the industry, margin money was provided as loan
on the same terms and conditions regarding interest and
repayment. So, on this question also, rethinking is needed.
Since margin money has to come from the owner, and since the
Government is the owner of the public sector, it should
consider margin money released as equity". At page 43 it is
stated that, "a drastic change in policy is needed to make
those units viable and to enable them to stand on their own
legs. The rehabilitation programme is going on (we do not
call it "modernisation", though in the government the term
"modernisation" is used)... For losing concerns, even the
payment of interest adds to their woes in finding necessary
working capital... by way of equity, so that these units are
able to overcome the difficulty and start standing on their
own legs". With regard to the problems with the bank at
page 45 and 46 it was stated thus: "If the banks take a
helpful
628
attitude in normally sanctioning the respective limits as
announced by the committee for working capital, it will be
quite helpful for the public sector-may be even for the
private sector".
Thus a helping attitude on the part of the Corporation
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to constantly monitor the working of the industrial concern
or units (it may even charge the overhead expense on this
account) would subserve the purpose of the loan, object of
the Act, and the constitutional objective of economic
justice to the needy. Equally employment and better working
conditions to the workmen are assured and the unit gets
stablised and starts yielding returns for repayment of
principal amount and interest payable thereon. The facts in
this case do demonstrate that non - cooperation by the
partners and depletion of working capital are causes to
close the mill and the consequential default in the payment
of the principal amount and the interest accrued thereon.
The corporation acted indifferently.
Let us turn to s. 29 for the scheme of dealing with
taken over sick unit. Section 29(1) of the Act says that if
an industrial concern makes any default in repayment of any
loan or advances or any instalment thereof, the 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
debt from the property pledged, mortgaged, or assigned to
the Corporation.
Sub-sec. 4 postulates that in the absence of any
contract to the contrary, the amount received "be laid by"
the corporation "in trust" firstly in the payment of cost,
charges and the expenses and secondly in discharge of the
debt due to the Corporation and the residue, if any, shall
be paid to the defaulter or the persons entitled thereto.
The Corporation has been given statutory right to take
over possession and management of the defaulting unit or
hypotheca or both including the right to sell and realise
the loan or advance due from the unit or debtor. The
Corporation is an instrumentality of the State. The
Corporation or its employees or officers are bound to act
reasonably and fairly in dealing with the property of the
debtor. The exercise of the power or discretion in its
dealing would be subject to the same constitutional or
public law limitation as the government. The Corporation
also equally must conform its action with the same standard
that meet the test of justness, fairness, reasonableness and
relevance. In Kasturilal Laxmi Reddy v. State of J. & K.,
[1980] 3
629
SCR 1338, this Court held that when any Government’s action
fails to satisfy the test of reasonableness and public
interests are found to be wanting in quality of
reasonableness or lacking in the quality of public interest,
it would be liable to be struck down as invalid. It must
follow as a necessary corollary, that the Government cannot
act in a manner which would benefit a private party at the
cost of the State; such an action would not be both
unreasonable and contrary to public interest.
The law consists of body and soul. The letter of the
law is the body and the sense and reason of its is the soul,
quia ratio legis est enima legis. In other words, like a
nut the letter of the law represents the shell and sense and
the purpose of its Kernal. The law intends to serve the
purpose. Justice is both the cause and effect, the origin
and the legitimate end of law. One will receive no benefit
from the law, if the ratio and the letter of law defeats its
purpose.
Section 29 confers very wide power of the Corporation
to ensure prompt payment by arming it with effective measure
to realise the arrears. But the simplicity of the language
is not an index of the enormous power stored in it. From
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notice to pay the arrears, it extends to taking over
management and even possession with a right to transfer it
by sale. Every wide power, the exercise of which has far
reaching repercussion has inherent limitation on it. It
should be exercised to effectuate the purpose of the Act.
In legislations enacted for general benefit and common good
the responsibility is far graver. It demands purposeful
approach. The exercise of discretion should be objective.
Test of reasonableness is more strict. The public
functionaries should be duty conscious rather than power
charged. Its actions and decisions which touch the common
man have to be tested on the touchstone of fairness and
justice. That which is not fair and just is unreasonable.
And what is unreasonable is arbitrary. An arbitrary action
is ultra vires. It does not become bona fide and in good
faith merely because no personal gain or benefit to the
person exercising discretion should be established. An
action is mala fide if it is contrary to the purpose for
which it was authorised to be exercised. Dishonesty in
discharge of duty vitiates the action without anything more.
An action is bad even without proof of motive of dishonesty,
if the authority is found to have acted contrary to reason.
Power under section 29 of the Act to take possession of a
defaulting unit and transfer it by sale requires the
authority to act cautiously, honestly, fairly and
reasonably. Default in payment of loan
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may attract section 29. But that alone is insufficient
either to assume possession or to sell the property.
Neither should be resorted to unless it is imperative. Even
though no rules appear to have been framed nor any guideline
framed by the Corporation was placed, yet the basic
philosophy enshrined in section 24 has to be kept in mind.
Rationale of action and motive in exercise of it has to be
judged in the light of it. Lack of reasonableness or even
fairness at either of the two stages renders the take over
and transfer invalid. Unfortunately the Corporation was
guilty of not acting in accordance with law either at the
stage of take over or in transferring the unit. Admittedly
the entire loan was not disbursed. Need of the capital in
the last stages cannot be doubted. If the Corporation
refused to release the amount at a time when the unit is
nearing completion or is ready to start functioning, then it
falls short of capital and it is bound to land itself in
trouble. This is what happened in this case. The partners
did not cooperate and the Corporation without any
explanation refused to release the full amount. Result was
the appellant stood pressed on one hand from absence of
capital and on the other by recovery proceedings. The
Corporation, therefore, should honour their commitments of
releasing entire loan timely except for very good reasons
which should be intimated beforehand to enable the unit
holder to comply with shortcoming if any. In its absence of
its completion, the proceedings for recovery under section
29 may not be justified. Similarly various situations may
arise which may hamper start of the unit - delay in electric
supply or delayed delivery of machinery vital for the
functioning of the unit. Such difficulties do require
rescheduling of payment of instalment because, if the unit,
for reasons beyond the control of the unit holder, could not
start, then how will the amount be repaid. Endeavour should
be to adjust and accommodate as business considerations
require the unit to function for benefit, both, of the
general public and the Corporation. It is not mandatory, as
a matter of law, to observe the process of taking over
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strictly. But if there is no option left out and the unit
is taken over then its transfer require not only sincere
effort but to act reasonable and fairly.
Equally Sub-section 4 of s.29 treated the Corporation
"to be a trustee" of the debtor or person claiming title
through him. It saddles the Corporation or the officer
concerned with inbuilt duties, responsibilities and
obligation towards the debtor in dealing with the property
and entails him to act as a prudent and reasonable man
standing in the shoes of the owner. According to Prof.
Issac, a noted author on Trusts, trusteeship has
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become a readily available tool for everyday purpose of
organisation financing, risk shifting, credit operations,
settling disputes and liquidation of business affairs.
Maitland, the other renowned writer on Equity, observed that
one of the exploits of equity; the largest and the most
important, is the innovation and development of the trust.
Thus, trust has been and is being applied for all purposes
mentioned by Prof. Issac and many others as device to
accomplish different purposes. Trusteeship is an
institution of elasticity and generality. The broad base of
the concept of property or its management vested in one
person and obligation imposed for its enjoyment by others is
accepted in Hindu jurisprudence. Therefore, when the
property of the debtor stands transferred to the Corporation
for management or possession thereof which includes right to
sell or further mortgage etc., the Corporation or its
officers or employees stands in the shoes of the debtor as
trustee and the property cestue que trust. In N.
Suryanarayan Iyer’s Indian Trust Act, Third Edition, 1987 at
page 275 in s. 37 it is stated that, "Where the trustee is
empowered to sell any trust property... by public auction or
private contract and either at one time or at several times
should, therefore, use reasonable diligence in inviting
competition to that end. Where a contract of sale has been
entered into bona fide by a trustee the court will not allow
it to be rescinded or invalidated because another purchaser
comes forward with a higher price. It would, however, be
improper for the trustee to contract in circumstances of
haste and improvidence. Where in a trust for sale and
payment of creditors the trustee sold at a gross under
valuation showing a preference to one of the creditors, he
was held guilty of breach of trust. If the purchaser is
privy of the fraud the property itself can be recovered from
him."
The sale may be either by public auction or private
contract. In either case the trustee has to keep in mind
that the most advantageous price. Kerr on Receivers 17th
Edition, at page 208 stated that "a receiver, however, is
not expected any more than a trustee or an executor to take
more care of their property entrusted to him than he would
have as a reasonably prudent man of business". In
Halsbury’s Law of England, 4th Edition, Vol. 39, at para 919
it is stated that the "receiver will be compelled to show
that he has acted with perfect regularity and has used such
degree of prudence as would be expected from a private
individual in relation to his own affairs". The trustee or
a receiver is, therefore, duty bound to protect and preserve
the property in his possession and the
632
standard of conduct expected of him, in dealing with the
property or sale thereof, is as a prudent owner would
exercise in dealing with his own property or estate. The
degree of care expected of him in handling property taken
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possession of is measured by the degree of care expected of
a person acting as trustee, executors or assignees. The
object and endeavour should also be to secure maximum
advantage or price in a sale of the property in lots or as
whole, as exigencies warrant.
The Corporation or its officers or servants as trustee
are bound to exercise their power in good faith in selling
or dealing with the property of the debtor as an ordinary
prudent man would exercise in the management of his own
affairs to preserve and protect his own estate. Therefore,
the acts of the officer or servant of the corporation should
be reasonable, just and fair which must meet the eye and the
offer accepted must be of competitive and every attempt
should be made to secure as maximum price as possible to
liquidate the liabilities incurred by the industrial concern
or the debtor under the Act.
In Fertiliser Corporation Kamgar Union (Regd.), Sindri
& Ors. v. Union of India & Ors., [1981] 2 S.C.R. 52, this
court clearly said that, "we want to make it clear that we
do not doubt the bona fides of the Authorities, but as far
as possible sales of public property, when the intention is
to get the best price, ought to take place publicly. The
vendors are not necessarily bound to accept the highest or
any other offer, but the public at least get satisfied that
the Government has put all its cards on the table." In Ram
& Shyam Co. v. State of Haryana, [1985] Supp. 1 S.C.R. 541
this court held that unilateral offer summarily made, not
correlated to any reserve price made by the forth respondent
after making full settlement in the matter was accepted
without giving an opportunity to the appellant to raise the
bid, as also inadequacy of his bid, it was held that the
State failed to discharge its administrative functions
fairly and unfair treatment was meted out to the appellant
violating the principles of fair play in action. In
Sachinand Pandey v. State of West Bengal, [1987] 2 S.C.R.
223 this court held that :-
"On a consideration of the relevant cases cited at
the bar the following proposition may be taken as
well established; State owned or public owned or
public owned property is not to be dealt with at
the
633
absolute discretion of the executive. Certain
precepts and principles have to be observed.
Public opinion is the paramount consideration. One
of the methods of securing the public interest,
when it is considered necessary to dispose of a
property, is to sell the property by public auction
or by inviting tenders. Though that is the
ordinary rule, it is not an invariable rule. There
may be situation where there are compelling reasons
necessitating departure from the rule but then the
reasons for the departure must be rational and
should not be suggestive of discrimination.
Appearance of public justice is an important as
doing justice. Nothing should be done which give
an appearance of bias, jobbery or nepotism."
In Haji T.M. Hassan v. Kerala Financial Corporation,
[1988] 1 S.C.R. 1079 this court further held thus:-
"The public property owned by the State or by any
instrumentality of the state should be generally
sold by public auction or by inviting tenders.
This court has been insisting upon that rule, not
only to get the highest price for the property but
also to ensure fairness in the activities of the
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state and public authorities. They should
undoubtedly act fairly. There actions should be
legitimate. There dealings should be above board.
There transactions should be without aversion or
affection. Nothing should be suggestive of
discrimination. Nothing should be done by them
which gives an impression of bias, favourtism or
nepotism. Ordinarily these factors would be absent
if the matter is brought to public auction or sale
by tenders.".
In Lakshmanasami Gounder v. C.I.T., Selvamani & Ors.,
[1991] 2 SCALE 956 this court, by a bench to which one of us
(K. Ramaswamy, J. was a member) in the context of sale of
debtor’s property for recovery of the Government dues, held
that sale officer has statutory duty and the responsibility
to have the date and place of sale mentioned in the notice
and given due publication in terms of the Act and the Rules.
Public Auction is one of the mode of sale intending to get
highest Competitive price for the property. Public auction
also ensures fairness in action of the public authorities or
the sales officers who should act fairly, objectively and
kindly. Their actions should be legitimate. Their dealing
should be free
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from suspicion. The fair and objective public auction would
relieve the public authorities or sale officers from the
charge of bias, favourtism, nepotism or else beset with
suspicious feathers and of their non-account-ability.
The sale by public auction or tender or private
negotiation should be bona fide action. First is
universally recognised to be the best and most fair method.
It is expected to fetch best competitive price and is beyond
reproach. Second would be resorted to rarely only if first
is an impossibility. Generally tenders should be calling
quotation to execute public work or to award contracts etc.
And third should always be avoided as it cannot withstand
public gaze. It casts reflection on Corporation and its
officials and is against social and public interest. In case
transfer cannot be effected by public auction and it is
necessary to resort to sale by tender it is both fair and
necessary to inform the unit holder, if unit has been got
valued for purposes or transfer of the estimated value for
sale as he is as much interested as the Corporation. Sale
of public property by calling tenders escape attention of
many an intending participants. Every endeavour should,
therefore, be made to give wide publicity and to get the
maximum price. Bureaucracy feels that accountability is an
impediment to efficient discharge of the duty.
Accountability is no more and no less than, the concept of
accountability of a private concern to their shareholders.
There is a distinction between prying into details of day to
day administration and of the legitimate actions or
resultant consequences thereof. To enthuse efficiency into
administration, a balance between accountability and
autonomy of action of management in public enterprises
should be carefully maintained. Over emphasis on either
would impinge upon public efficiency. But undermining the
accountability would give immunity or carte blanche power to
deal with the public property or of the debtor at whim or
vagary. Whether the public authority acted bona fide and in
the best interest as prudent owner in the given facts would
do, be gauged from impugned action and attending
circumstances. The authority should justify the action
assailed on the touchstone of justness, fairness,
reasonableness and as a reasonable prudent owner.
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Keeping these various factors giving rise to
conflicting interest the following directions are necessary
to be issued to be observed by the Corporation while
exercising power under s. 29:
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Every endeavour should be made, to make the unit viable
and be put on working condition. If it becomes unworkable:
(1) Sale of a unit should always be made by public
auction.
(2) Valuation of a unit for purposes of determining
adequacy of offer or for determining if bid offered was
adequate, should always be intimated to the unit holder to
enable him to file objection if any as he is vitally
interested in getting the maximum price.
(3) If tenders are invited then the highest price on
which tender is to be accepted must be intimated to the unit
holder.
(4)(a) If unit holder is willing to offer the sale
price, as the tenderer, then he should be offered same
facility and unit should be transferred to him. And the
arrears remaining thereafter should be rescheduled to be
recovered in instalments with interest after the payment of
last instalment fixed under the agreement entered into as a
result of tendered amount.
(b) If he brings third parties with higher offer it
would be tested and may be accepted.
(5) Sale by private negotiation should be permitted
only in very large concerns where investment runs in very
huge amount for which ordinary buyer may not be available or
the industry itself may be or such nature that by normal
buyers may not be available. But before taking such steps
there should be advertisements not only in daily newspapers
but business magazines and papers.
(6) Request of the unit holder to release any part of
the property on which the concern is not standing of which
he is the owner should normally be granted on condition that
sale proceeds shall be deposited in loan account.
In the light of the above guidelines it becomes clear
that though tenders were invited the 3rd respondent alone
had given the tender for a sum of Rs. 2 lacs. On
negotiation it was said to have been raised to Rs. 2,55,000.
But deferred payments, on initial deposit of 25% and balance
payment within four years of half yearly instalments, were
given. This solicitous attitude, at the expense of the
appellant, appear to be unjust
636
and unfair and no reasonable prudent owner would accept such
an offer. The appellant himself, long prior to sale,
offered to pay Rs. 5 lacs and odd in full quids. Section 29
does not exclude the application of the principles of
natural justice. It is not a straight jacket formula. It
depends on facts in each case. Nothing prevented the
Corporation to have given the appellant a chance for payment
thereof at reasonable instalments with interest thereon.
Nothing prevented them to release the open site, the subject
of mortgage on condition that the entire sale price of the
plots should be paid to discharge the liability and it be a
condition in the sale deed itself. Before accepting the
tender of the third respondent, an opportunity should have
been given to the appellant as to why such an offer of the
third respondent be not accepted. The appellant would have
come forward to give his own offer or brought third parties
with higher offers. No such bona fide actions have been
taken or attempted by the Corporation. Thus the acts
smacked of bona fides or responsibility or reasonableness as
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an ordinary prudent businessman/trustee/owner acting in or
dealing with such trust. Thus the sale of the property is
vitiated by unjust and unreasonable act on the part of the
Corporation or its officers or employees and is liable to be
set aside.
The possession given to the respondents 3 to 5 or L.Rs.
of the respondent is illegal and immediately be resumed by
the Corporation. The third respondent claimed to have
improved the mill or entered into an agreement of sale of
open plot No. 220/2 with third parties. But this is subject
to litigation attracting the doctrine of lis pendens under
s. 52 of the Transfer of Property Act. The appellant,
therefore, is not bound by the sale or the subsequent acts
of the purchasers/persons claiming through them. One of the
objections raised by the purchasers is that the appellant is
one of five partners and the other did not object to the
sale. This is no ground to deny the relief to the appellant
when injustice stares at the face. The sale is accordingly
set aside. The Corporation should immediately resume
possession of the hypotheca sold. It is open to the
appellant to pay the entire liability and have the hypotheca
redeemed as per contract. If it not possible, the
respondent shall release plot No. 220 to enable the
appellant to do plotting along with plot Nos. 219 and 221.
The release shall be made within four weeks from the date of
the receipt of the copy of this order or is produced before
the respondent. The release shall be subject to payment of
the entire sale price to the loan account. The respondent
shall grant six months’ time from the date of release to the
appellant to pay the entire arrears outstanding towards the
loan. If he fails to do so, the Corporation
637
is directed to sell the same in open auction, after giving
wide publicity in the press and by beat of drum/microphone
in the town and neighbouring area. The transfree would be
entitled, if available at law, to proceed against the
Corporation, for such reliefs as is open to them in law for
damages.
The appeal is accordingly allowed. The writ of
certiorari is issued quashing the sale. Mandamus is issued
to the first respondent to immediately resume possession of
the hypotheca and implement the directions contained in the
judgment. The parties would bear their own costs.
T.N.A. Appeal allowed.
638