The main legal point established in the judgment is the need for an authoritative interpretation of the provisions of the State Financial Corporations Act, 1951, particularly regarding the rights of the Financial Corporation in case of default by an industrial concern and the enforcement of claims against the surety.

In these two writ petitions, the petitioners have raised a legal question to the following effect :

"Whether in terms of Section 29 of the State Financial Corporations Act, 1951 the Financial Corporation could take over the possession and/or management of the property of the surety secured in favour of the Corporation and could direct the sale or lease of the property of the surety mortgaged/hypothecated to the Corporation ?"

2. The petitioners have placed reliance on the judgment of Honble Karnataka High Court in N. Narasimahaiah v. Karnataka State Financial Corpn., 2003(2) ISJ (Banking) 594 wherein the Honble High Court of Karnataka has laid down as under :

"It, therefore, follows that in so far as the property of the surety which is secured in favour of the State Finance Corporation, the remedy of the corporation lies either under Section 31 of the Act or by having recourse to Civil Court and not by recourse to Section 29 of the Act. The remedy available to Financial Corporations against sureties, under Section 31 of SFC Act is also speedy and efficacious remedy. Therefore, non-application of Section 29 to the properties of surety will in no way prejudice the rights of the Financial Corporation against sureties. The corporation can neither take over the possession and/or management of the property of the surety secured in favour of the Corporation nor directing sale or lease the property of the surety mortgaged/hypothecated to the Corporation by exercising the power under Section 29."

3. It has also been pointed out that prior to the decision of Honble Karnataka High Court there had been other decisions i.e. Miss K.T. Sulochana Nair v. M.D. Andhra Pradesh Financial Corporation, AIR 1992 Orissa 157; Surjit Singh v. Haryana Financial Corporation, (1)1999 Banking Cases 86 and Jasbir Kaur v. Punjab State Industrial Development Corporation, 2002(2) ISJ (Banking) 138 holding the view that like in the case of Industrial concern, State Financial Corporations had the power to take over and sell the other mortgaged properties under Section 29 of the SFC Act.

4. The contention of the learned counsel for the petitioners is that the view taken by Andhra Pradesh High Court and this Court was not a correct view. Section 29(1) of the SFC Act is in two parts; first pertaining to take over of management/possession of Industrial Concern alone. Second half of Section 29(1) of the said Act simply provided for the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the State Financial Corporation. Firstly, this part of the sub- section conferred right to transfer and the Legislature had nowhere conferred the "power" of take over with regard to other properties not connected with the industrial concern. This right to take over simply did not extend to properties other than the Industrial Concern although mortgaged. As such, a residential property having nothing to do with the industrial concern could not be taken over and/or sold by a State Financial Corporation on its own i.e. without the assistance of the Court by way of suit or a petition under Section 31 of the SFC Act.

5. At the time of issuing notice of motion the following order was passed by this Court on 19.9.2005 :

"In support of the proposition the recourse to Section 29 of the State Financial Corporation Act, 1951 (for short, the Act) cannot be taken by the Corporation in respect of the property mortgaged by Surety, Mr. Ratta, learned counsel for the petitioner has placed reliance on a Division Bench decision of the Karnataka High Court in N. Narasimahaiah v. Karnataka State Financial Corp., 2003(2) ISJ (Banking) 594. Learned counsel submits that in view of the said decision, the decision of this Court in Jasbir Kaur v. Punjab State Industrial Development Corporation, 2002(2) ISJ (Banking) 138 needs reconsideration, particularly when the effect of insertion of sub-clause (aa) in sub-section (1) of Section 31 of the Act