IMPORTANT POINT
Where any industrial concern under a liability to the financial corporation makes any default in repayment of loan, the State Financial Corporation is empowered to take over possession of the industrial concern and realize the property pledged, mortgaged but the first charge holder must act in a manner which protects not only its own interest but also the interest of the subsequent charge holder and the mortgagor.

Headnote:State Financial Corporation Act, 1951-Sections 29 and 30-Transfer of Property Act, 1882-Section 100-Rights of Financial Corporation in case of default-Assets of flour mill were charged-Bihar State Industrial Credit and Investment Corporation respondent 2, had given a term loan of Rs. 90 lacs to the Company-Corporation having first charge while Central Bank had a second charge on plant and machinery of the company-Proceedings instituted against the company for recovery of outstanding amount-Respondent 2, State Financial Corporation took possession of assets of the company-Payment of full dues by appellant, shareholder of the company-However, respondent 2 entered into agreement of sale of assets in favour of respondent 4-Agreement challenged-Whether respondent 2 Corporation acted reasonably and in accordance with Section 29 of the 1951 Act in transferring assets of the company in favour of respondent 4 company-(No).
       Held : Respondent No. 2 corporation had a paramount first charge on the assets of the flour mill whereas the Central Bank of India had the second charge thereon. There is a difference between a charge and mortgage. In the case of a charge under section 100 of the T.P. Act, there is no transfer of interest in the property. A charge is not a jus in rem. It is jus ad rem. It creates a right of payment out of the property/fund charged with the debt or out of proceeds of the realisation of such property, a phrase used in section 29(1) of the 1951 Act. A charge as defined under section 100 of T.P. Act may be enforced by sale. (Para 11)
       Section 29(1) contemplates, therefore, a sale for distribution of sale proceeds and not a sale for distribution of property charged with the debt. It also implies that the first charge holder must act in a manner which protects not only its own interest but also the interest of the subsequent charge holder and the mortgagor. This in turn implies that the first charge holder is bound to obtain the best possible price for the mortgaged assets and the best possible price must, in the context, mean the fair market value. In the present case, it is not in dispute that the assets of the flour mill were charged. The first charge was in favour of the corporation; whereas the second was in favour of Central Bank of India. Under section 29(1), the corporation while enforcing the first charge was required to put the assets charged with the debt to sale and apply the sale proceeds in the manner stated in section 29(4). But before doing so, it is imperative to have the assets proposed to be sold, valued. In breach of sub-sections (1) and (4) of section 29, after putting the assets to sale by public auction the corporation enters into an agreement for sale of the assets with respondent No. 4 without ascertaining the market value and realising the sale proceeds for distribution. The assets are agreed to be sold for Rs. 198.85 lacs merely by adding the corporation dues and the claim of the Central Bank of India. Even this sale consideration is not realised in full. The corporation accepts downright payment of Rs. 28.85 lacs (its own dues) and the balance of Rs. 170 lacs is received by it in the form of a promise to it by respondent No. 4 to pay the dues of Central Bank of India, which is not even a party of the arrangement. (Paras 12 and 13)
       In the present case, there is no sale for distribution of sale proceeds in terms of section 29(1). There is no realisation of the property, charged wtih debt, in terms of sub-sections (1) and (4) of section 29 of the Act. The interest of Central Bank of India and the mortgagor is totally defeated by the impugned arrangement between respondents No. 2 and 4. The words "realisation of the property pledged, mortgaged, hypothecated" presupposes realisation of sale proceeds and application/appropriation thereof to liquidate the dues of the paramount charge-holder and from the surplus payment to person(s) entitled thereto. It is for this reason that the best possible price has got to be tried for under section 29 of the Act. In the circumstances, we hold that the impugned agreement of sale as well as the transfer of assets in favour of respondent No. 4 are in breach of section 29(1) and section 29(4) of the 1951 Act. (Para 13)
       In addition to the vitiating circumstances enumerated above, we find that under the public notice dated 22.2.2002, tenders were invited. They were to be submitted by 21.3.2002. Under the said notice, the tenders were to be opened on 22.3.2002. The take over of assets is on 18.3.2002. However, on 19.3.2002, the corporation hands over the assets to respondent No. 4 against down payment of Rs. 28.85 lacs plus promise to the corporation that the purchaser undertakes to pay the dues of Central Bank of India. A part of the amount of Rs. 28.85 lacs was paid by demand drafts dated 9.3.2002. These circumstances indicate collusion between respondent No. 2 corporation, respondent 3 and respondent No. 4. The take over of assets is ordered on 18.3.2002 and on 19.3.2002, the assets are handed over to respondent No. 4 against down payment of Rs. 28.85 lacs in demand drafts dated 9.3.2002. Under section 29(1) of the Act, the corporation is entitled to sell or lease the assets in order to realise the pledged/hypothecated or mortgaged property. Under what colour of title were the assets handed over to respondent No. 4 on 19.3.2002? Was it under sale, lease or repayment of loan? There is no explanation as to how respondent No. 4 could have drawn demand drafts in favour of corporation on 9.3.2002 when their offer to purchase was on 17/19.3.2002. (Para 15)

JUDGMENT

Kapadia, J.-Leave granted.

2. The question in this civil appeal by special leave is - whether Bihar State Industrial Credit and Investment Corporation Limited (hereinafter referred to as "BICICO") acted mala fide and in breach of section 29 of the State Financial Corporation Act, 1951 by transferring the assets of the debtor company on 19.3.2002 and executing the agreement dated 26.4.2002 with M/s. Stichworth Exports Pvt. Ltd. (respondent No. 4).

3. The facts giving rise to this appeal are as follows :

In 1982, a company by the name M/s. Katihar Flour Mills (P) Ltd. was incorporated to take over the assets and business of a partnership firm M/s. Katihar Flour Mills, a business conducted by Jeloka group. The said company was promoted by Gopi Krishna Jeloka (since deceased), Binod Jeloka and Pradeep Jeloka (since deceased). The company is engaged in the business of manufacturing, processing, buying and selling of all kinds of grains and wheat products. The flour mill is the main asset of the company. It is located in Katihar, Bihar. On 16.5.1988, a term loan of Rs. 90 lacs was taken by the said company from BICICO, a State Financial Corporation within the meaning of the State Financial Corporation Act, 1951 (hereinafter referred to as "the 1951 Act") and a charge was registered under the Companies Act, 1956. At this stage, it is important to mention that Central Bank of India had advanced working capital of Rs. 1.40 crores to the company and therefore, had a second charge on the plant and machinery of the company. On 20.10.1993, an agreement was approved by the share-holder of the company in terms of which three directors belonging to Jeloka group resigned and three nominees of the Jain group were inducted. Under the said agreement, 50 of the paid up capital was transferred to Jain group, which deployed Rs. 1.24 crores in the company. Accordingly, the appellant became a share-holder of the company. In January, 2001, Central Bank of India instituted case No. 2 of 2001 against the company and its directors for recovery of its dues amounting to Rs. 1.47 crores and for enforcement of security. On 2.2.2002, BICICO - respondent No. 2 gave notice under sections 29 and 30 of the 1951 Act for recovery of its dues of Rs. 28.85 lacs. On 22.2.2002, respondent No. 2 issued a sale notice for auction of the flour-mill at Katihar in Bihar. Under the said notice, the last date for submitting tenders was 21.3.2002. The tenders were to be opened to 22.3.2002. On 17.3.2002, the Jeloka Group wrote a letter to respondent No. 2 that the company has approached a financier M/s. Stichworth Exports Pvt. Ltd. who was willing to pay the dues of respondent No. 2 against transfer of the assets of the company in their favour. By a take over notice dated 18.3.2002, respondent No. 2 took possession of the assets of the company. The possession receipt was signed by respondent No. 3. On 19.3.2002, M/s. Stichworth Exports Pvt. Ltd., respondent No. 4, wrote a letter to respondent No. 2 offering to acquire the assets of the company for Rs. 28.85 lacs plus the dues of Central Bank of India amounting to Rs. 1.70 crores. On the same day, respondent No. 4 made a down payment of Rs. 28.85 lacs and the assets were handed over by respondent No. 2 to respondent No. 4. On 20.3.2002, the appellant herein met the law officer of respondent No. 2. Pursuant to the sale notice dated 22.2.2002, the appellant submits his tender on 21.3.2002. He deposits Rs. 1 lac as earnest money. On 22.3.2002, he pays Rs. 28.85 lacs representing the entire dues of respondent No. 2. Despite payment of the full dues by the appellant, respondent No. 2 enters into agreement of sale of assets in favour of respondent No. 4. Aggrieved, appellant moves the High Court on 21.5.2002 under Article 226 of the Constitution inter alia challenging the validity of the agreement on the ground of collusion between respondents No. 2, 3 and 4. On 22.5.2002, respondent No. 2 returns the earnest money paid by the ap

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2004 Supreme(SC) 679

Cases Referred (4)