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S.B. Sinha & Lokeshwar Singh Panta
Karnataka State Financial Corporation - PETITIONER
Versus
N. Narasimahaiah & Ors - RESPONDENT
CIVIL APPEAL NOs. 610-612 OF 2004
Decided On : 13/03/2008
(b) State Financial Corporations Act, 1951 - Section 29 and section 69, T.P. Act - The lender can resort to take over or sale of the mortgaged property without intervention of the court. (Paras 10 and 11)
(2004) 6 SCC 758 - Referred
(c) State Financial Corporations Act, 1951 - Section 29 - If special provisions are made in derogation to the general right of a citizen, the statute should receive strict construction - Section 29 does not empower the Corporation to proceed against the surety - It can exercise its rights u/s 29 only on a defaulting party. (Paras 12 and 14)
(d) State Financial Corporations Act, 1951 - Section 29 - Interpretation - The words "as well as" occurring before "the right to transfer by way of lease or sale and realize the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation" confers two different rights - But such rights are to be enforced against the same person, viz., the industrial concern - "Guarantee" occurring in the provision is meant to be furnished by the Corporation in favour of a third party for the benefit of the industrial concern - It is not about a surety or guarantee given in favour of the corporation for the benefit of the industrial concern. (Para 15)
(e) Indian Contract Act, 1872 - Section 128 - By virtue of the provisions of section 128, the liability of a surety is made coextensive with the liability of the principal debtor - However, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction - In the absence of any express provision in the statute, a person being in lawful possession cannot be deprived thereof by reason of default on the part of a principal borrower. (Paras 17 and 18)
(f) State Financial Corporations Act, 1951 - Section 29 - Interpretation - The power of the Corporation to realize its dues from the borrowing Industrial concern in the manner provide cannot be exercised against the guarantor(s) in the same manner - Trite law that the entire statute must be first read as a whole then section by section, clause by clause, phrase by phrase and word by word - Casus omissus cannot be supplied. (Paras 21 and 26)
(2003) 4 SCC 257 - Relied upon
(1987) 1 SCC 424; 2007 (1) SCALE 32; 2007 (14) SCALE 263; JT 2008 (1) SC 31; (2005) 5 SCC 598; 2006 (13) SCALE 27; (2007) 5 SCC 447 - Referred
(g) State Financial Corporations Act, 1951 - Section 31 - Section 31 postulates an additional relief - Section 31 also provides for a relief against a surety and not confined to the industrial concern alone, but therefor a different procedure has to be adopted (Para 23)
(h) State Financial Corporations Act, 1951 - Section 31 - The provision does not speak of an industrial concern - Section 32G, therefore, can be resorted to both against the industrial concern as also the security. (Para 25)
(2004) 11 SCC 625 - Relied upon
(i) State Financial Corporations Act, 1951 - Section 31 - A surety may be a Director of the Company or any body - A Director of the Company is not an industrial concern - He in his capacity as a surety would certainly not be - A juristic person is a separate legal entity - Further, in a case where a court has to weigh between a right of recovery and protection of a right, it would lean in favour of the person who is going to be deprived therefrom. (Paras 31 and 32)
(1994) 2 SCC 647; (2007) 6 SCC 59; AIR 1985 SC 582; [1914-15] All E.R. Rep. 1061 - Relied upon
1897 AC 22; (1944) 12 ITR 458; (1969) 1 SCR 988:1969 (73) ITR 702; (2003) 6 SCC 1 - Referred
(j) State Financial Corporations Act, 1951 - Sections 29 and 31 - Well-settled that when more than one remedy is provided for, an option is given to a suitor to opt for one or the other remedy - It is open to the Corporation to exercise its right u/s 29 or 31. (Para 34)
(1974) 2 SCC 402; (1980) 2 SCC 332; (2004) 11 SCC 625 - Relied upon
Facts of the case:
1. AP Rocks Private Limited approached the appellant - Corporation for grant of loan in the form of non-convertible debenture facility to the extent of 100 lakhs to meet its working capital requirements.
2. Respondents who were Directors of Company executed deeds of guarantee agreeing to guarantee repayment/ redemption by the Company to the Corporation of the said non-convertible debenture subscription together with interest, etc. The said Company also executed a deed of hypothecation whereby and whereunder its plants and machinery were hypothecated.
3. The guarantors mortgaged their house properties as collateral security.
4. The company allegedly committed defaults.
5. Appellant - Corporation on or about 20.11.2000 directed that the possession of the said two properties of the guarantors be taken over. The guarantors filed writ petitions before the Karnataka High Court on the premise that the appellant - corporation could not have proceeded against the guarantors under Section 29 of the Act.
6. The High Court by reason of the impugned judgment upheld the said contention.
Findings of the Court:
The Corporation could not have proceeded against the guarantor u/s 29 of the Act.
Result:
Appeal dismissed with cost.
Certainly. Based on the provided legal document, the key points are as follows:
Section 29 of the State Financial Corporations Act does not authorize the Corporation to proceed against a surety. The rights under this section are limited to the defaulting industrial concern only (!) (!) .
A director of a company is not considered an industrial concern, nor does he act in that capacity as a surety. The legal distinction between the corporate entity and individual sureties or directors is significant, and the liabilities of sureties are separate from those of the industrial concern itself (!) (!) .
The provisions of Section 29 confer specific rights that are to be exercised only against the defaulting industrial concern, not against guarantors or sureties, unless explicitly provided for. The words "as well as" in Section 29 do not extend these rights to sureties or guarantors (!) (!) .
Section 31 of the Act provides for additional remedies, including enforcement of liability against sureties, which are distinct and separate from the remedies under Section 29. The procedure under Section 31 involves a court process and is not limited to the industrial concern alone (!) (!) .
The legislative intent clearly distinguishes the scope of Sections 29 and 31, with Section 31 providing a broader scope that includes actions against sureties and security, whereas Section 29 is confined to the defaulting industrial concern (!) (!) .
The right to recover dues can be exercised through multiple remedies, including filing suits, invoking Sections 29 or 31, or resorting to Section 32G for recovery of dues as land revenue. The choice of remedy is at the discretion of the Corporation, and these remedies are not mutually exclusive (!) (!) .
The exercise of statutory powers must be within the bounds of the law and exercised reasonably and bona fide, especially given the Corporation's status as a State entity (!) (!) .
The interpretation of statutory provisions should align with legislative intent, and the entire statute should be read as a whole. Specific provisions are to be applied according to their plain language and purpose, without implying powers or rights not explicitly granted (!) (!) .
A person in lawful possession cannot be deprived thereof due to default by the principal debtor unless explicitly authorized by law. The rights of a surety or guarantor are distinct and cannot be exercised against them under Section 29 unless specific conditions are met (!) (!) .
The legislative amendments and the language used in the statutes reflect a clear intent to limit certain powers and remedies to specific parties, reinforcing that Section 29 does not extend to guarantors or sureties, which are governed separately under Section 31 (!) (!) .
Overall, the legal framework emphasizes that remedies against sureties are to be invoked through appropriate court procedures under Section 31, and not under Section 29, which is restricted to the defaulting industrial concern (!) (!) .
The rights of property and human rights considerations are also recognized, but these do not override the specific statutory provisions governing recovery and enforcement actions (!) .
The distinction between corporate legal entities and individual sureties is fundamental, and the legal process must respect this separation, especially in enforcement actions (!) (!) .
The statutory provisions are designed to facilitate speedy recovery of dues, but within the framework of constitutional and legal principles, including the rights of individuals and entities involved (!) (!) .
The appeals in the case are dismissed as without merit, affirming that proceedings against sureties or guarantors under Section 29 are not permissible, and that the appropriate remedy involves court proceedings under Section 31 (!) .
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JUDGMENT
S.B. SINHA, J :
INTRODUCTION
1. Interpretation of Section 29 vis-`-vis Section 31 of the State Financial Corporations Act, 1951 (for short "the Act") is in question in these appeals which arise out of a judgment and order dated 26.03.2003 passed by a Division Bench of the Karnataka High Court in Writ Petition Nos. 37209 & 37907 of 2000, 24452 of 2001, 13354 and 16614 of 2002.
FACTUAL BACKDROP
2. Respondents herein furnished sureties and/ or guarantees in respect of the loans taken by the industrial concerns (Respondent Company)
3. We may notice the fact of the matter from the case of AP Rocks Private Limited (Writ Petition No. 37209 and 30907 of 2000) before the High Court. AP Rocks Private Limited is an industrial concern. It approached the appellant Corporation for grant of loan in the form of non-convertible debenture facility to the extent of 100 lakhs to meet its working capital requirements.
Respondents who were Directors of Company executed deeds of guarantee dated 15.05.1996 and 9.08.1996 agreeing to guarantee repayment/ redemption by the Company to the Corporation of the said non-convertible debenture subscription together with interest, etc. The said Company also executed a deed of hypothecation on or about 9.08.1996 whereby and whereunder its plants and machinery were hypothecated. A collateral security agreement was also executed by Shri S.K. Rajan wherefor a property bearing No. 49, House List Khata No. 100-A, Hennarayanapalya, Hemlet of Cholanayakamahalli, Kasba Hobli, Bangalore North Taluka was mortgaged as a security therefor. Respondent No. 1 executed an agreement on 15.05.1996 in terms whereof his property bearing Site No. 55 (old), New No. 59, Annammadevi Temple Extension, Subedar Chatram Road, B.C. C. Division No. 22, Bangalore was given as a collateral security. The 'Industrial Concern' allegedly committed defaults.
PROCEEDINGS
4. Appellant Corporation on or about 20.11.2000 in exercise of its power under Section 29 of the Act directed that the possession of the said two properties of the guarantors be taken over. Respondent No. 1 and Shri S.K. Rajan filed writ petitions before the Karnataka High Court on the premise that the appellant corporation could not have proceeded against the guarantors under Section 29 of the Act. The High Court by reason of the impugned judgment while upholding the said contention directed:
"(i) The impugned orders passed by the Karnataka State Financial Corporation under Section 29 of the State Financial Corporations Act authorizing its officers to take possession of the properties of petitioners are quashed.
(ii) The Karnataka State Financial Corporation is directed not to proceed against the property of the surety, mortgaged/ hypothecated in its favour, under Section 29 of the State Financial Corporations Act.
(iii) Parties to bear their respective costs."
Appellant is, thus, before us.
SUBMISSIONS
5. Mr. K.K. Venugopal, learned senior counsel appearing on behalf of the appellant, submitted:
(i) the High Court committed a serious error in passing the impugned judgment in so far as it failed to take into consideration that the second part of Section 29 of the Act being an independent provision and having not referred to an 'industrial concern', it was within the jurisdiction of the appellant to take possession of the said property also.
(ii) Section 29 of the Act confers two independent rights, viz., taking over of the mortgaged property and sale of the mortgaged, hypothecated and charged property. Whereas first part of Section 29 of the Act covers taking over possession and/ or management of the mortgaged property, the second part thereof covers the case of sale of the property mortgaged, irrespective of the fact as to whether the same belonged to the industrial concern or not.
(iii) Section 29 having taken within its umbrage security and/ or guarante
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