Important point
The exercise of the right by a Financial Corporation under Section 29 of the State Financial Corporation Act should be fair and reasonable. Ultimately, whether the action of the Financial Corporation is bonafide or not would depend on the facts and circumstances of each case.

Headnote:(i) State Financial Corporation Act, 1951—Section 29—Constitution of India—Article 226—Sale of properties of borrower by the State Industrial Investment and Development Corporation—Exercise of its right u/s 29 of the Act—Scope of interference by the High Court while exercising its writ jurisdiction—Legal principles.
       Held : From the aforesaid, the legal principles that emerge are:
       (i) The High Court while exercising its jurisdiction under Article 226 of the Constitution does not sit as an appellate authority over the acts and deeds of the financial corporation and seek to correct them. The Doctrine of fairness does not convert the writ courts into appellate authorities over administrative authorities.
       (ii) In a matter between the corporation and its debtor, a writ court has no say except in two situations;
       (a) there is a statutory violation on the part of the corporation or
       (b) where the corporation acts unfairly i.e., unreasonably.
       (iii) In commercial matters, the courts should not risk their judgments for the judgments of the bodies to which that task is assigned.
       (iv) Unless the action of the financial corporation is mala fide, even a wrong decision taken by it is not open to challenge. It is not for the courts or a third party to substitute its decision, however more prudent, commercial or businesslike it may be, for the decision of the financial corporation. Hence, whatever the wisdom (or the lack of it) of the conduct of the corporation, the same cannot be assailed for making the corporation liable.
       (v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold and this could be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer.
       (vi) Public auction is not the only mode to secure the best price by inviting maximum public participation, tender and negotiation could also be adapted.
       (vii) The financial corporation is always expected to try and realize the maximum sale price by selling the assets by following a procedure which is transparent and acceptable, after due publicity, wherever possible and if any reason is indicated or cause shown for the default, the same has to be considered in its proper perspective and a conscious decision has to be taken as to whether action under Section 29 of the Act is called for. Thereafter, the modalities for disposal of seized unit have to be worked out.
       (viii) Fairness cannot be a one-way street. The fairness required of the financial corporations cannot be carried to the extent of disabling them from recovering what is due to them. While not insisting upon the borrower to honour the commitments undertaken by him, the financial corporation alone cannot be shackled hand and foot in the name of fairness.
       (ix) Reasonableness is to be tested against the dominant consideration to secure the best price.
       True, the exercise of the right by a financial corporation under Section 29 of the Act should be fair and reasonable. Ultimately, whether the action of the financial corporation is bona fide or not would depend on the facts and circumstances of each case. (Paras 19 and 20)
       (ii) State Financial Corporation Act, 1951—Section 29—Sale of properties of borrower—Exercise of right by the Financial Corporation u/s 29 of the Act should be fair and reasonable—Sale conducted by issuing advertisements in newspapers—Respondent 1 had borrowed a sum of Rs. 116.30 lakhs from Karnataka State Industrial Investment and Development Corporation—Borrower committed defaults in payments of instalments—Order passed u/s 29 of the Act for taking over unit of borrower for recovery of its dues—Possession of unit was taken over after considerable correspondence between KSIIDC and the borrower—Borrower was given sufficient opportunity to pay the same amount as payable by the purchaser failing which the unit was directed to be sold—Whether High Court was justified in holding that the procedure adopted was not in conformity with the guidelines laid down by the Court—(No)—Impugned judgment directing KSIIDC to redo the entire sale process cannot be sustained—Financial Corporation cannot wait indefinitely to recover its dues.
       Held : The examination of the facts, in the light of the aforenoted legal principles reveals that KSIIDC acted in a bona fide manner. The procedure followed by KSIIDC to dispose of the assets of the borrower to realize the dues cannot be held to be unreasonable or unfair. The sale was conducted by issuing advertisements in the newspapers. Steps were taken to secure the best price. The question before the High Court was only about the validity of sale to Vinpack and the plea of the borrower was that the unit was sold at ridiculously low price. The learned Single Judge gave reasonable opportunity to the borrower to pay the same amount as payable by Vinpack failing which unit was directed to be sold to Vinpack after specified date. The borrower failed to comply with the order of the learned Single Judge or seek extension of time and also did not challenge it in writ appeal within time specified in the order of learned Single Judge. Under these circumstances, the unit was sold to Vinpack and the possession handed over to it. The Division Bench, after holding that the procedure adapted was not in conformity with the guidelines enumerated in Mahesh Chandra’s case did not examine the effect of offer given to the borrower and not availed by him resulting the sale in favour of Vinpack. In this view, the approach of the Division Bench cannot be sustained. (Para 21)
       It does appear from the facts that KSIIDC had been considerate and sympathetic towards the borrower and gave it ample opportunities. KSIIDC after passing an order under Section 29 of the Act, did not implement it for the considerable time. The correspondence that followed between KSIIDC and the borrower shows that sufficient opportunity was given to the borrower to enter into arrangement with third parties to work the unit. It was only when the borrower failed to enter into arrangements with the third parties or repay the amount, steps were taken to realize the dues. In this regard, the object enacting section 29 of the Act has to kept in mind. (Para 22)
       The relationship between the Corporation and the borrower is that of a creditor and debtor. That basic feature cannot be lost sight of. A Corporation is not supposed to give loan and then to write it off as a bad debt and ultimately to go out of business. It has to recover the amounts due so that fresh loans can be given. In that way industrialization, which is the intended object, can be promoted. It certainly is not and cannot be called upon to pump in more money to revive and resurrect each and every sick industrial unit irrespective of the cost involved. That would be throwing good money after bad money. As observed in Gem Cap promoting industrialization does not serve public interest if it is at the cost of public funds. It may amount to transferring public money to private account. Further, Financial Corporation cannot wait indefinitely to recover its dues. (Para 22)

Judgment

Y.K. Sabharwal, J.—The question that arises for consideration in these matters is whether Karnataka State Industrial Investment and Development Corporation (for short, ‘KSIIDC’) acted in a bona fide manner in sale of the properties of the borrower exercising its right under Section 29 of State Financial Corporation Act, 1951 (for short, ‘the Act’).

2. The appeals have been preferred by KSIIDC a well as M/S Vinpack Investments Pvt. Ltd., the purchaser (for short ‘Vinpack’) against the judgment and order of the Division Bench of the Karnataka High Court directing KSIIDC to undertake the entire sale process once again and give opportunity to respondent No.1 to bring better offer for the properties.

3. Respondent No.1, M/s Cavalet Industries Ltd. (for short, ‘the borrower’) borrowed a sum of Rs. 116.30 lakhs from KSIIDC as per the sanction letter dated 22nd April, 1991. The borrower committed defaults in payment of the installments and, therefore, KSIIDC on 30th March, 1995 passed an order under Section 29 of the Act for taking over the unit of the borrower for recovery of its dues. However, KSIIDC did not implement that order. There was considerable correspondence between KSIIDC and the borrower, in regard to the offers of some third parties, who were proposing either to purchase the unit or enter into some working arrangement with the borrower to run the unit. The efforts of the borrower to enter in to arrangement with third parties to work the unit did not yield and result. The borrower also did not clear the dues and, therefore, KSIIDC passed another order dated 30th October, 1996 under Section 29 of the Act for taking over the unit to recover a sum of Rs. 98,36,636 which was due as on 24th May, 1996 and in pursuance of the order, possession of the unit was taken over on 14th November, 1996.

4. KSIIDC between January and December, 1997, viz., a period of about one year issued three advertisements for sale of the unit. Suffice it to note that out of all offers, ultimately Vinpack, after negotiating increased its offer to Rs. 171 lakhs which was accepted by KSIIDC by its letter dated 8th October, 1998.

5. The borrower filed the writ petition on 4th November, 1998 for declaring the sale as void, illegal and contrary to Section 29 of the Act. On 18th November, 1998, the borrower filed an application for directions to keep the premises open as some prospective purchasers desired to inspect the unit. The application was allowed and KSIIDC was directed to keep the premises open during the period directed by the High Court. The borrower did not bring any concrete better offer. An affidavit was, however, filed by the borrower offering to purchase the unit on the same terms on which KSIIDC had agreed to sell the unit to Vinpack. Though KSIIDC did not accept the offer, but the learned Single Judge by judgment dated 29th January, 1999, on consideration of factual and legal position, held that since there was non-compliance of the guidelines laid down in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation & Ors. [(1993) 2 SCC 279], the borrower was entitled to an opportunity to make an offer on the same terms on which KSIIDC had finalized the same with Vinpack. The learned Single Judge issued directions fixing the sale price at Rs. 171 lakhs. The first installment of Rs. 30.50 lakhs was to be paid on or before 20th February, 1999. The borrower was also given liberty to bring a third party making a better offer. It was further held that if the borrower failed to bring a better offer or agree to buy the unit or if the first installment is not made to KSIIDC on or before 20th February, 1999, KSIIDC would be at liberty to proceed with the sale in favour of Vinpack. The borrower failed to avail the opportunity granted in the judgment of the learned Single Judge. Therefore, KSIIDC sold the unit to Vinpack on 25th February, 1999.

6. Subsequently, on 26th February, 1999, the borrower filed the Writ Appeal challenging the order of th

Click Here to Read the rest of this document

2005 Supreme(SC) 528

Important pointThe exercise of the right by a Financial Corporation under Section 29 of the State Financial Corporation Act should be fair and reasonable. Ultimately, whether the action of the Financial Corporation is bonafide or not would depend on the facts and circumstances of each case.

Cases Referred (7)

Important point
The exercise of the right by a Financial Corporation under Section 29 of the State Financial Corporation Act should be fair and reasonable. Ultimately, whether the action of the Financial Corporation is bonafide or not would depend on the facts and circumstances of each case.