Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7253 OF 2008
[Arising out of SLP (Civil) No. 9411 of 2006]
Bihar State Financial Corporation …Appellant
Versus
M/s. Chhotanagpur Minerals and Ors. …
Respondents
J U D G M E N T
S.B. SINHA, J :
1. Leave granted.
2. Appellant is a Corporation constituted under the State Financial
Corporations Act, 1951 (for short “the Act”). Respondent No. 1 intended to
set up a factory in the Industrial Area, Kokar in the town of Ranchi. It, on
or about 5.11.1976, for the aforementioned purpose, sought for and was
granted loan by the appellant for a sum of Rs. 3.36 lakhs.
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3. An agreement was entered into by and between the parties, in terms
whereof, the respondent no. 1 mortgaged the properties described in
Schedules ‘A’, ‘B’ and ‘C’ thereof in favour of the appellant – Corporation,
viz., the lease hold right over a piece of land admeasuring 0.56 acres at
Village Kokar.
4. In terms of the said deed of mortgage, the plaintiff was required to
liquidate the aforementioned amount of loan in fourteen instalments. The
interest payable thereupon was 14.25 per cent per annum payable every six
months. Indisputably, the plaintiff refunded a sum of Rs. 1,32,000/- out of
the total sum received from the appellant, viz., Rs. 3,34,300/-. The plaintiff
installed machineries upon construction of buildings over the plot. The
factory started operation from the month of November, 1978. However,
admittedly the factory was closed in March, 1982 for one reason or the
other.
5. Inter alia on the premise that the plaintiff failed and/ or neglected to
pay amount of loan in the manner specified, a proceeding in terms of
Sections 29 and 30 of the Act was initiated by the appellant on or about
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7.12.1981. Advertisements were issued for selling the factory on
16.12.1982 and 12.01.1983. However, no bid was received pursuant
thereto and in furtherance thereof.
6. A decision was taken to sell the said properties in favour of one Shri
Atma Lal Agrawal, respondent No. 2 herein. Plaintiff was not informed
thereabout. According to the plaintiff, the said sale was conducted in a
hush-hush manner. In disposing of the said property, the appellant did not
keep in mind the interest of the plaintiff at all. The factory premises was
handed over to the respondent No. 2 for which an inventory was prepared
on 16.02.1983 which is to the following effect:
“(A) PLANTS MACHINERY
(1) 312 (3-Roller) Raymond Mill Plant for
Veeorope drive but without Motor and
started complete with and Air-classifier.
(2) Jaw crusher – without Motor
(3) Blower 1 No.
(4) Disintegrator without Motor
1 No.
(5) Electrical installation with starter &
switch…”
7. Indisputably, in the said factory, the plaintiff had other properties
which were not the subject matter of mortgage. It is furthermore not in
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dispute that the plaintiff had taken a working capital loan for a sum of Rs.
1,60,000/- from the State Bank of India, Respondent No. 3 herein. Various
immovable properties including liquid assets and stock were hypothecated
in its favour. The purchaser allegedly utilised the said materials. Plaintiff
thereafter filed a suit being Money Suit No. 9 of 1984 in the Court of
Subordinate Judge – IV Ranchi wherein originally the following reliefs
were prayed for:
“A. That a decree for the payment of a sum of
Rs. 1,87,635.24 (One lac eight, seven thousand six
hundred thirty five and twenty four paise) by way
of damages as detailed in Schedule “A” of the
plaint be passed against the defendant no. 1 & 2.”
8. However, the plaint was later on amended and the following relief
was added:
“A decree for a sum of Rs. 1,86,934.46 paise be
passed against the defendant No. 1 being the
wrongful and deliberate loss caused to the plaintiff
as specified in Schedule “B”, “C” and “D” of the
plaint.”
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9. Appellant in its written statement inter alia contended that it had
exercised its power bona fide in terms of Sections 29 and 30 of the Act. It
furthermore contended that despite service of notice upon the Bank the
movable properties having not been removed from the factory premises, the
appellant was not liable to pay any damages.
10. The learned Trial Judge, having regard to the pleadings of the parties,
inter alia framed the following issues:
“1. Has the plaintiff any valid cause of action
for the suit?
2. Is the suit as framed maintainable under the
law?
3. Is the suit bad U/s 46(b) of the State
Financial Corporation Act?
4. Have the defendants taken and removed the
movable properties which were not mortgaged to
the corporation illegally and unauthorisedly?
5. Is the sale conducted by the Corporation
defendant no. 1 in favour of defendant no. 2
bonafide and legal one?
6. Whether the plaintiff is entitled to damages
for valuing the mortgaged properties by the
defendants?
7. Whether plaintiff is entitled for decree as
prayed for?
8. To what relief or reliefs, if any, the plaintiff
is entitled?”
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The learned Trial Judge held:
“…The Branch Manager B.B. Singh has admitted
in his evidence that nobody was present on behalf
of plaintiff at the time of preparation of inventory
vide para 13 and 15 and it falsified the written
statement of defendant no. 2 about presence of
Pradeep Modi at the time of preparation of
inventory. The documentary and oral evidences of
plaintiff and defendants fully support that
inventory Ext. B is not a reliable document at all
and has not been correctly and impartially
prepared and it is incomplete.
The defendant no. 2 had purchased the
mortgaged assets of plaintiff only vide Ext. 7/4
and hence defendant no. 1 and defendant no. 2
committed a wrong in taking possession of raw
materials, finished goods, spares etc. on 16.2.83
which were not subject matter of sale to defendant
no. 2 and on those account defendant no. 1 and 2
are liable to pay damages to the plaintiff as
claimed by plaintiff. Thus, issue no. 4 is decided
in favour of plaintiff against defendant no. 1 and
defendant no. 2.”
It was furthermore held:
“…The plaintiff is not entitled to decree against
bank defendant No. 3. The plaintiff is also entitled
for interest at a rate of 13% per annum pendente
lite and future till realization. Thus, it is ordered
that the suit be and the same is decreed for a sum
of Rs. 1,87,635.24 p (One lac eight, seven
thousand six hundred thirty five and twenty four
paise) for claim of relief no. A on contest against
defendant no. 1 and against defendant no. 2 with
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cost also with interest at a rate of 12% per annum
pendente lite and future till realization. The
plaintiff may recover the aforesaid amount jointly
or severally from defendant no. 1 and defendant
no. 2.
The suit is decreed for a sum of Rs.
1,85,934.46 (One Lack Eighty Six Thousand Nine
Hundred Thirty Four and paise forty six only) for
claim in relief no. A-1, on contest against
defendant no. 1 with cost along with interest at a
rate of 12% per annum pendente lite and future till
realization. The suit for claim of relief no. A-1 is
dismissed against defendant no. 2. The suit is
dismissed exparte against defendant no. 3.”
11. Aggrieved by and dissatisfied with the said judgment and decree, the
appellant preferred an appeal before the High Court. By reason of the
impugned judgment, the said appeal has been dismissed.
12. The High Court in its judgment framed the following three points for
consideration:
“Whether the appellant removed the movable
properties not mortgaged to the Corporation
illegally or unauthorisedly? Whether the sale
conducted by the Corporation, defendant –
appellant, in favour of the defendant no. 2
bonafide and legal one, and whether plaintiff –
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respondent is entitled to damages for undervaluing
the mortgaged properties by the defendants?
The High Court held that the appellant broke open the door of the
factory in absence of any representative of the plaintiff. Inventory of the
articles was also prepared without any representative of the plaintiff. The
inventory list of machineries which were in the factory premises was handed
over to the defendant No. 2. The plea of the appellant that there was no
movable property in the factory premises was disbelieved. Indisputably, the
properties which were hypothecated to the State Bank of India, respondent
No. 3 were also lifted without any information to the State Bank of India.
The first point was, thus, determined in favour of the plaintiff –
respondent No. 1. As regards points No. 2 and 3, the High Court opined:
“31. A plea has been taken on behalf of the
appellant Atma Ram who has filed F.A. No. 22 of
1994 against the judgment and decree of the
learned court below that he is not at fault, rather he
is at loss on account of the fact that prior to the
sale of the factory, some machines had been
removed from the factory just before the take over
of the factory. But question is that before
purchase of the factory by him, he entered into
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negotiation with the Branch Manager of Bihar
State Financial Corporation Ranchi and had
agreed to purchase the factory at the price agreed
upon in between him and the Branch Manager and
before purchase, it cannot be believed that he
purchased the factory without going through the
premises of the factory. Further, he did not appear
or take part in the tender that was opened at the
head office of Bihar State Financial Corporation
and Bihar State Financial Corporation also when
no tender was filed, should have re-issued the
tender and from the evidence of the Branch
Manager, defendant No. 1 obtained permission
from the head office at Patna for approval of sale
and in course of time, sale was approved. While
deciding issue no. 2, it was found that Bihar State
Financial Corporation did not conduct sale in
proper manner and did not fetch proper price for
the factory worth which the factory was in
possession of defendant no. 1 and, therefore, the
question of removal of articles from the factory
premises by the plaintiff – respondent does not
arise, although an F.I.R. to that effect has been
lodged against the plaintiff – respondent and a
case in this connection is said to be pending. But
the sale which was conducted by the defendant
No. 1 appellant was not conduct in a proper way
and there was collusion in between the defendant
no. 1 and defendant no. 2, so ignoring all the
norms, the sale was conducted and as such, both
defendant no. 1 and defendant no. 2 are liable,
and, therefore, the learned court below gave a
finding against the defendant no. 2 holding the
defendant no. 1 – appellant of F.A. No. 531 of
1993 responsible for the loss of the property as
described in Schedule – A of the plaint. So far as
relief A-1 was concerned, defendant no. 1 –
appellant has been held responsible.”
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13. A Letters Patent Appeal preferred thereagainst before a Division
Bench of the High Court has been dismissed as being not maintainable.
14. Mr. M.P. Jha, learned counsel appearing on behalf of the appellant,
would contend that the courts below committed a serious illegality in
passing the impugned judgments insofar as they failed to take into
consideration the letters issued by the appellant to the defandant No. 3 –
Bank for taking away the movable properties and in that view of the matter
the appellant cannot be said to be guilty of any negligence.
The learned counsel pointed out that damages awarded by the learned
Trial Court on two counts, as would appear from prayers A and A-1 of the
plaint are not maintainable. He, however, fairly conceded that the decree
passed in respect of prayer A-1 stands satisfied.
15. The learned counsel on behalf of the respondents, on the other hand,
would support the impugned judgment.
16. Sections 29 and 30 of the Act read as under:
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“29. Rights of Financial Corporation in case of
default - (1) Where any industrial concern, which
is under a liability to the Financial Corporation
under an agreement, makes any default in
repayment of any loan or advance or any
instalment thereof or in meeting its obligations in
relation to any guarantee given by the Corporation
or otherwise fails to comply with the terms of its
agreement with the Financial Corporation, the
Financial Corporation shall have the right to take
over the management or possession or both of the
industrial concern, as well as the right to transfer
by way of lease or sale and realise the property
pledged, mortgaged, hypothecated or assigned to
the Financial Corporation.
(2) Any transfer of property made by the Financial
Corporation, in exercise of its powers under Sub-
section (1), shall vest in the transferee all rights in
or to the property transferred as if the transfer had
been made by the owner of the property.
(3) The Financial Corporation shall have the same
rights and powers with respect to goods
manufactured or produced wholly or partly from
goods forming part of the security held by it as it
had with respect to the original goods.
(4) Where any action has been taken against an
industrial concern under the provisions of Sub-
section (1), all costs, charges and expenses which
in the opinion of the Financial Corporation have
been properly incurred by it as incidental thereto
shall be recoverable from the industrial concern
and the money which is received by it shall, in the
absence of any contract to the contrary, be held by
it in trust to be applied firstly, in payment of such
costs, charges, and expenses and, secondly, in
discharge of the debt due to the Financial
Corporation and the residue of the money so
received shall be paid to the person entitled
thereto.
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(5) Where the Financial Corporation has taken any
action against an industrial concern under the
provisions of sub-section (1), the Financial
Corporation shall be deemed to be the owner of
such concern, for the purposes of suits by or
against the concern, and shall sue and sued in the
name of the concern.
30. Power to call for repayment before agreed
period. Notwithstanding anything in any
agreement to the contrary, the Financial
Corporation may, by notice in writing, require any
industrial concern to which it has granted any loan
or advance to discharge forthwith in full its
liabilities to the Financial Corporation,--
(a) if it appears to the Board that false or
misleading information in any material particular
was given by the industrial concern in its
application for the loan or advance; or
(b) if the industrial concern has failed to comply
with the terms of its contract with the Financial
Corporation in the matter of the loan or advance;
or
(c) if there is a reasonable apprehension that the
industrial concern is unable to pay its debts or that
proceedings for liquidation may be commenced in
respect thereof; or
(d) if the property pledged, mortgaged,
hypothecated or assigned to the Financial
Corporation as security for the loan or advance is
not insured and kept insured by the industrial
concern to the satisfaction of the Financial
Corporation or depreciates in value to such an
extent that, in the opinion of the Board, further
security to the satisfaction of the Board should be
given and such security is not given; or
(e) if, without the permission of the Board, any
machinery, plant or other equipment, whether
forming part of the security or otherwise, is
removed from the premises of the industrial
concern without being replaced; or
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(f) if for any reason it is necessary to protect the
interests of the Financial Corporation.”
17. A bare perusal of the aforementioned provisions would clearly go to
show that the statutory power vested in the Corporation must be exercised
only in respect of the properties which were mortgaged. This aspect of the
matter has been considered by this Court in Ormi Textiles and Another v.
State of Uttar Pradesh and Others [(2008) 5 SCC 194], holding:
“15. For the purpose of invoking Section 29 of
the Act, the borrower must have a liability to the
Corporation under an agreement. It must make a
default in repayment of any loan or advance, etc.
The Corporation in such a situation shall inter alia
have the right to take over the management or
possession or both of the industrial concerns. This
power is in addition to the power of the right to
transfer by way of lease or sale and realize the
property pledged, mortgaged, hypothecated or
assigned to the Corporation. The right to transfer
by way of lease or sale, however, is not an
independent right. Only in case of default, such a
right can be exercised. We must keep in mind that
the powers contained in two parts of Section 29 of
the Act are separate and distinct. The power to
take over the management is ordinarily exercised
when the concern is an ongoing one. But, when a
power is conferred to sell the property unilaterally,
the same must have a nexus with the mortgaged
property. The power to sale cannot be read in
isolation. It can also realize the mortgaged
property which would mean that when a property
had been sold, only the mortgaged property can be
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realized and not any other property which was not
the subject matter of mortgage. What can be
transferred by the mortgagee even in terms of the
provisions of the Transfer of Property Act is the
property which was the subject matter of mortgage
and not any other. A power to take over the
management or possession is a statutory power. As
and when the debt is realized, the Corporation
would be bound to handover the management or
possession of the property, as the case may be,
back to the industrial establishment.
16. A mortgagee can have a right to sell a property
even under the contract. The same must
necessarily mean that the property to be sold is the
one over which he has the right, title and interest.
A sale without any right would be a nullity.
17. For proper construction of the provisions of
the Act, we may notice the provisions of Section
31 thereof. It provides for an additional remedy.
Whereas Section 29 confers a power to sale the
property unilaterally, Section 31 provides inter alia
for the same power only through the intervention
of the court.
18. Clause (a) of Sub-section (1) of Section 31
of the Act categorically states that the jurisdiction
of the District Judge can be invoked for order of
sale of the mortgaged or assigned property in
favour of the Corporation. Clause (b) thereof
provides for transferring the management of the
industrial concern. Clauses (aa) and (c) of Sub-
section (1) of Section 31 of the Act provide for
additional remedies. When an application is filed
in terms of Section 31 of the Act, the procedures
laid down in Sub-section (1A) of Section 32 of the
Act are required to be followed. A further
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additional remedy has been provided to a
Financial Corporation in terms of Section 32G of
the Act.”
18. In that view of the matter, there cannot be any doubt whatsoever that
the appellant did not have any right to sell any property which was not the
subject matter of the deed of mortgage. Any action taken in that behalf
must be held to be wholly illegal and without jurisdiction. Appellant,
therefore, was liable for payment of damages as had been opined by the
courts below.
19. We may, furthermore notice that the appellant has not placed before
us the amended plaint. Whereas prayer A relates to Schedule A, prayer A-1
relates to Schedules B, C and D appended to the plaint. We have not been
informed as to what these Schedules were about. Schedule ‘A’ appended to
the plaint, however, reads as under:
“SCHEDULE A
1. As per stocks statement
submitted to State Bank of
India, Main Branch Court
Compound, Ranchi on
31.3.1982
Rs. 1,30, 161.64
2. Cost of 10,808 MT of coal
Tar Pitch @ Rs. 4200/- PMT
Rs. 45, 393.60
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3. Cost of 190 bags of Pilla
Miiti @ Rs. 20/- per bag
Rs. 3,800.00
4. Cost of 1.5 MT of Graphite
powder @ Rs. 1,000/- PMT
Rs. 1,500.00
st
5. Cost of 4000 Nos. 1 Class
bricks @ Rs. 320/- 1000 Nos.
Rs. 1,280.00
6. Cost of channels Angles etc.
500 Kg. @ Rs. 5,000/- PMT
Rs. 2,500.00
7. Cost of 1.5 MT Iron Nails @
2,000/- PMT
Rs. 3,000.00
Total: Rs. 1,87,635.24 p”
20. It is accepted at the bar that the aforementioned movable properties
stood mortgaged in favour of the respondent No. 3. It has furthermore not
been denied or disputed that the respondent No. 3 – Bank had not initiated
any action for realisation of its dues. Probably, it could not do so because of
the pendency of the instant case and one of the claims made by the plaintiff
was also directed against the Bank.
21. We, therefore, with a view to do complete justice between the parties,
are of the opinion that the movable properties hypothecated to the bank
having not been realized and as it was permissible for it to remove the same,
the decretal amount in regard to prayer A should be held to be payable to
the State Bank of India – the respondent No. 3. We direct accordingly. The
decretal amount may be paid by the appellant to the respondent No. 3
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together with interest as directed by the courts below within six months
from date failing which it will be open to the bank to execute the decree.
22. The appeal is dismissed with aforementioned directions. However, in
the facts and circumstances of the case, there shall be no order as to costs.
………………………….J.
[S.B. Sinha]
..…………………………J.
[Cyriac Joseph]
New Delhi;
December 12, 2008