IMPORTANT POINT
Under Section 29 of the State Financial Corporations Act, 1951 properties of the defaulter can be proceeded against but not the properties of the third parties whether they are guarantors, mortgagors etc.

JUDGMENT

Chelameswar, J.

1. Leave granted.

2. Aggrieved by the judgment dated 6.12.2010 of the High Court of Orissa in Writ Petition (C) No. 13033 of 2009, one of the respondents therein who is the purchaser of the property in an auction held under Section 29 of the State Financial Corporations Act, 1951 (for short “the Act”) preferred the instant appeal. Some time in the financial year 2002-2003, the 9th respondent i.e. the Orissa State Finance Corporation (hereinafter referred to as “OSFC”) sanctioned a term loan of Rs. 5,26,500/-for purchase of a TATA truck in favour of the th respondent who is wife of the 7th respondent. The said loan transaction is secured by a mortgage of certain piece of land by the father-in-law of the 6th respondent and father of the 7th respondent (since died).

3. As the borrower did not make the repayments in terms of the agreement between OSFC and the borrower, the OSFC attempted to seize the truck which was also hypothecated to the OSFC. As the same was not traceable, the OSFC proceeded against the mortgaged property. The value of the said property was estimated at about Rs. 10,08,000/-. Eventually, the property was brought to sale by auction on 9.2.2009 where the appellant became the highest bidder for an amount of Rs.10,09,000/-. The OSFC confirmed the sale in favour of the appellant. On 31.3.2009, possession of the mortgaged property was handed over to the appellant.

4. On 10.6.2009, the OSFC after appropriating the amounts due to it intimated the three sons of the mortgagor (respondent Nos. 2, 7 and 8 herein) to collect the residue amount of Rs.2,86,460/-from the Corporation.

5. Challenging the seizure and sale of the mortgage property, the writ petition came to be filed by the wife and children of the mortgagor. The appellant herein and OSFC contested the writ petition. By the impugned judgment herein, the writ petition was allowed, hence the appeal.

6. Two questions arise for our consideration;

(i) Whether the OSFC was legally entitled to invoke Section 29 of the Act and bring the properties of guarantors to sale without resorting to the procedure contemplated under Section 31 of the Act.

(ii) Whether the High Court was right in entertaining a challenge to the sale from 150 days after the sale took place and the property was handed over to the auction purchaser (appellant herein)

7. In the impugned judgment, the High Court answered the first question emphatically against the OSFC.

“The right of financial Corporation in terms of Section 29 must be exercised only on a defaulting party. Section 29 does not empower the Corporation to proceed against the surety even if some properties are mortgaged or hypothecated to it. Our view is further strengthened by the provisions of sub-section(4) of Section 29 which lays down appropriation of sale proceeds with reference to only industrial concern and not surety or guarantor.

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In view of the above, we are of the considered view that the OSFC in exercise of power vested under Section 29 of the SFC Act cannot sell out the properties mortgaged to it by the guarantors.”

As a consequence of such conclusion, the second question is also answered against the OSFC.

“14. In view of the above, sale of the properties of the guarantors and subsequent execution of deed of transfer under Annexure-5 are liable to be quashed for being done in flagrant violation of the statutory provision contained in Section 31 of the SFC Act which we direct accordingly.”

8. The High Court rested its judgment rightly on a decision of this Court reported in Karnataka State Financial Corporation v. N. Narasimahaiah & Others, (2008) 5 SCC 176. In that case, this Court categorically held [Para 20. Section 29 of the Act nowhere states that the corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it. The right of the financial corporation in terms of Section 29 of the Act must be exercised only on a defaulting party. There cannot be