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Allahabad High court
Hon'ble M. Katju and Rakesh Tiwari, JJ.
Civil Misc. Writ Petition No. 11217 of 2002
Decided on 31.10.2002
S. P. Gupta
versus
State and others
The liability of the guarantor is co-extensive with that of the borrower, and the financial corporation must act reasonably and as a prudent owner in exercising its powers under the State Financial Corporation Act, 1951.
Headnote:
Guarantee - Recovery Proceedings - State Financial Corporation Act, 1951 - Section 29 - Summary of Acts and Sections: State Financial Corporation Act, 1951 - Section 29 - The judgment discusses the application of principles of natural justice, the liability of guarantors, and the exercise of powers by the financial corporation under Section 29. It emphasizes the corporation's duty to act reasonably and as a prudent owner in disposing of property for a fair price.
Fact of the Case:
The petitioner, a director of a company, sought to quash recovery proceedings for arrears of land revenue by U.P. Finance Corporation. He contested his liability as a guarantor, alleging lack of knowledge and unfair actions by the corporation in selling the company's assets.
Finding of the Court:
The court found that the petitioner's guarantee covered past and future loans, release of other guarantors did not discharge his liability, and the corporation's actions were not arbitrary or unfair. It held that the petitioner failed to establish statutory violations or infringement of natural justice.
Issues: The issues involved the petitioner's liability as a guarantor, fairness of the corporation's actions, and alleged malafide in the sale of company assets.
Ratio Decidendi: The court held that the petitioner's guarantee covered past loans, release of other guarantors did not discharge his liability, and the corporation's actions were not arbitrary or unfair. It emphasized the duty of the corporation to act reasonably and as a prudent owner in disposing of property for a fair price.
Final Decision: The writ petition was dismissed, and no costs were awarded.
Rakesh Tiwari, J. : Heard the learned counsel for the parties and perused the records.
2. The petitioner has preferred this writ petition under Article 226 read with Article 227 of the Constitution of India for quashing the proceedings arising out of Case No. SDM/CL/2001/ 13, where by a demand has been raised for recovery of a sum of Rs. 1,90,63,344.40 as arrears of land revenue by U.P. Finance Corporation. He further prays for deleting him from the array of judgment debtors in the recovery proceedings.
3. The admitted facts of the case are that M/s. Apex Leathers (P) Ltd. hereinafter called as the borrowing/obligent company, applied for grant of loan and an agreement was executed on 25.5.1992 between the company through its Directors and the U.P. Financial Corporation, hereinafter referred to as U.P.F.C. Under the agreement, a loan of Rs. 82 lacs was sanctioned by the U.P.F.C. Out of this sanctioned sum a sum of Rs. 74,45,336/- was paid to the borrower company. For repayment of the loan personal guarantees were given by (1) Sri Sandeep Singhal, (2) Sri Parag Singhal, (3) Sri S.P. Singhal, (4) Sri J.S. Gupta, (5) Sri Sadek Chand and (6) Sri V.P. Gupta, All the aforesaid six persons were promoters Directors. The loan was repayable in seventeen half yearly instalments upto June, 1999. It is submitted that against the aforesaid loan of Rs. 83 lacs, the borrower company had already paid a sum of Rs. 92,39,255/- till date.
4. The case of the petitioner is that he became Director of the company in 1994. The company approached for an additional loan, which was sanctioned furnishing of additional guarantee which was given by the present petitioner, who is a close relation of the Directors of the borrower company. The borrower company defaulted in payment, hence on 28.7.1998, the U.P. Financial Corporation commenced proceedings under section 29 of the State Financial Corporation Act, 1951 and eventually took possession of the plant, machinery and other assets of the obligant company. It is alleged by the petitioner that the obligant company was formed by the real sister's sons of the petitioner, who approached for becoming an additional guarantor, as the U.P. Financial Corporation had agreed to extend additional facilities to them provided they submit an additional guarantor. Relying upon his relation, the petitioner alleged that he was entrapped and gave guarantee.
5. It is further alleged by the petitioner that respondents No. 6 to 8 are in the Directors and are primarily answerable for the affairs of the said company and he had no knowledge of the financial affairs of the company nor he had knowledge of financial bungling committed by the Directors.
6. It is submitted by the petitioner that on coming to know he made efforts to avail one time settlement scheme issued by the Reserve Bank of India and had permitted the U.P.F.C. to do so. The matter would have been sorted out in full and final settlement, when the liability on the said date was hardly Rs. 35 lacs and the assets were sufficient at that time to meet the dues. However, the U.P.F.C. issued recovery certificate subsequently for a sum of Rs. 1,90,83,344.40. The petitioner also alleges that a prospective purchaser had offered Rs. 90 lacs for the assets of the borrower company which was turned down by the Financial Corporation and the property was sold to some purchaser for Rs. 60 lacs only, that too, on deferred payment basis, which shows that the sale was malafide and the action of the financial corporation was unfair, unjust and improper.
7. The petitioner denies his liabilities as guarantor on the grounds that:
(i) He had joined the company as Director two and a half years after the disbursement of the entire loan and financial facility of any nature was not given after he stood guarantor for repayment of loan.
(ii) As many as 4 other guarantors were released of their guarantee without his consent, concurrence or intimation. Thus there was variation in contract.
(i
