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CASE NO.:

Appeal (civil) 2062 of 2002

PETITIONER:

Karnataka State Industrial Investment and Development Corporation Ltd.

RESPONDENT:

Cavalet India Ltd. and Ors.

DATE OF JUDGMENT: 30/03/2005

BENCH:

Y.K. Sabharwal & Tarun Chatterjee

JUDGMENT:

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').

The appeals have been preferred by KSIIDC as 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.

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 any 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.

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.

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

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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 and 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.

Subsequently, on 26th February, 1999, the borrower filed the Writ Appeal

challenging the order of the learned Single Judge. The Division Bench by

judgment under appeal, inter alia, held that the learned Single Judge,

after coming to the conclusion that the guidelines provided in Mahesh

Chadra's case were not followed, was not right in directing KSIIDC to make

an offer on the same terms on which it had finalized the sale of the

property to Vinpack and, therefore, KSIIDC was directed to undertake the

entire process of selling of the unit again by following the guidelines

enumerated in Mahesh Chandra and by giving an opportunity to the borrower

to bring better offer.

Learned counsel appearing for KSIIDC submits that a fair chance was given

to the borrower to either bring a better offer or a one time settlement,

but the borrower failed to do so; the KSIIDC was considerate and

sympathetic towards the borrower and having passed an order on 30th March,

1995 under Section 29 of the Act, it was not implemented, in view of the

fact that the borrower was negotiating with third parties to enter in to

arrangements to work the unit; the guide lines laid down in Mahesh Chandra

have been overruled and in any case, the borrower was given by learned

Single Judge same offer on which unit was sold to Vinpack, further

directing that on borrower's failure to pay in the stipulated period,

KSIIDC could sell the unit to Vinpack. The borrower neither complied with

the directions of learned Single Judge nor obtained any stay or extension

of time and, in fact, filed the appeal after expiry of the period granted

by learned Single Judge and, thus, by its conduct the buyer could not

challenge the sale made to Vinpack which was made as a result of failure of

the borrower.

Learned counsel appearing for Vinpack-the purchaser also submits that since

the borrower failed to comply with the order of the learned Single Judge,

KSIIDC rightly sold the unit to it and, thus, third party interest was

created even before the filing of the writ appeal. No interim order was

granted by the Court during the pendency of the writ appeal preventing the

confirmation of sale in favour of Vinpack. The counsel also submits that

substantial investments have been made after purchase of the unit by the

purchaser and hundreds of workers are working in the unit. It is submitted

that the order of the learned Single Judge was passed on the undertaking

filed by the borrower to purchase the unit on the same terms as offered by

Vinpack and having failed to comply with the order, sale was confirmed in

favour of Vinpack.

Supporting the impugned judgment, learned counsel appearing for the

borrower submits that KSIIDC is under an obligation to consider the reasons

for default and when there are genuine reasons for default, it should

cooperate with the borrower by rescheduling the repayment of loan. It has

been further submitted that the manner of disposing the unit shows that

there was no transparency or fairness and efforts were not made to secure

the best price and that the terms and conditions for borrower to purchase

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were more onerous.

The sale of the unit has been effected by KSIIDC in favour of Vinpack under

directions of learned Single Judge, having regard to its right of sale

under Section 29 of the Act. Section 29 gives a right to Financial

Corporation inter alia to sell the assets of the industrial concern and

realize the property pledged, mortgaged, hypothecated or assigned to

Financial Corporation. This right accrues when the industrial concern,

which is under a liability to Financial Corporation under an agreement,

makes any default in repayment of any loan or advance or any installment

thereof or in meeting its obligations as envisaged in Section 29 of the

Act. Section 29(1) gives Financial Corporation in the event of default the

right to take over the management or possession or both and thereafter deal

with the property.

The sale was set aside by the High Court relying upon the interpretation

placed on Section 29 by this Court in Mahesh Chandra's case (supra). The

subsequent line of cases have distinguished the decision in Mahesh

Chandra's case.

In U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd. and Ors.,

[1993] 2 SCC 299, it was held the High Court while exercising its

jurisdiction under Article 226 of the Constitution cannot sit as an

appellate authority over the acts and deeds of the corporation and seek to

correct them and that the Doctrine of fairness, evolved in administrative

law was not supposed to convert the writ courts into appellate authorities

over administrative authorities. On the facts of the case it was held that

the borrower had no intention of repaying any part of the debt and was

merely putting forward one or other reason to keep the corporation at bay.

While striking down the directions issued by the High Court, this Court

held that the High Court had not kept in mind the well recognised

limitations of their jurisdiction under Article 226 of the Constitution

and acted as an appellate authority over the actions of the financial

corporation, in a matter where not a single provision of law was violated.

The court observed that the ``financial corporations were not sitting on

King Solomon's mines, but they too borrow monies from Government or other

financial corporations and they also have to pay interest thereon''. The

court observed that ``fairness is not a one way street and the fairness

required of the corporation cannot be carried to the extent of disabling

it from recovering what is due to it. While not insisting upon the

borrower to honor the commitments undertaken by him, the corporation alone

cannot be shackled hand and foot in the name of fairness''. The court

pointed out that in a matter between the corporation and its debtor, a

writ court has no say except in two situations : (1) there is a statutory

violation on the part of the corporation or (2) where the corporation acts

unfairly i.e., unreasonably. Mahesh Chandra was distinguished noticing

that it was a case where the debtor was anxious to pay off the debt and

had been taking several steps to discharge his obligation and on the facts

of that particular case it was found that the corporation was acting

unreasonably.

In U. P. Financial Corporation and Ors. v. Naini Oxygen & Acetylene Gas

Ltd. and Anr, [1995] 2 SCC 754, this Court held that it was not a matter

for the Courts to decide as to whether the financial corporation should

invest in the defaulting unit, to revive or to rehabilitate it and whether

even after such investment the unit would be viable or whether the

financial corporation should realise its loan from the sale of the assets

of the Company. The Court observed that a Corporation being an independent

autonomous statutory body having its own constitution and rules to abide

by, and functions and obligations to discharge, in the discharge of its

functions, it is free to act according to its own right. The views it forms

and the decisions it takes would be on the basis of the information in its

possession and the advice it receives and according to its own perspective

and calculations. In such a situation, more so in commercial matters, the

courts should not risk their judgments for the judgments of the bodies to

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which that task is assigned. The Court further held that, ``Unless its

action 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 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.''

In Chairman and Managing Director, SIPCOT, Madras and Ors. v. Contromix

Pvt. Ltd. and Anr., [1995] 4 SCC 595, the financial corporation after

taking over the unit of the defaulting borrower under Section 29 of the Act

issued advertisement inviting offers for sale of the mortgaged assets. An

intending purchaser made a offer, and after further negotiations the offer

was revised. The revised offer was accepted by the financial corporation

and the sale was finalized. A writ petition was filed by the borrower

challenging the sale, on the ground that the market value of the assets was

more than the sale price and the guidelines laid down Mahesh Chandra have

not been followed. The writ petition was allowed and it was held that the

said sale was not conducted in accordance with the guidelines laid down in

Mahesh Chandra inasmuch as (i) the sale was not held by auction and was

held by inviting tenders followed by negotiations; (ii) the price for which

the properties were sold was low; and (iii) before accepting the offer, no

intimation was given to the borrower so as to enable it to make a higher

offer. Directions were issued to the effect that the sale effected by the

financial corporation shall stand set aside if the borrower deposits, in

installments, the sale price as agreed between the financial corporation

and the intending purchaser. It was further directed that in the event of

the non-payment of any one of the amounts on or before the specified dates

the said sale shall stand validated. However, the borrower did not comply

with the directions and preferred a Writ Appeal against the judgment of the

learned Single Judge. In the said appeal it was held that instead of

imposing conditions on the borrower for setting aside the sale by tender

even though the said sale was found illegal and opposed to the judgment in

Mahesh Chandra, the learned Single Judge ought to have set aside the sale

straight away without imposing any conditions. The court directed the

appellants to put up the unit for sale afresh by giving reasonable time to

the borrower to repay the amount which had become due. Feeling aggrieved,

the financial corporation approached the Supreme Court by preferring an

appeal.

Allowing the appeal this Court held that 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 can be achieved only when there is maximum

public participation in the process of sale and everybody has an

opportunity of making an offer. It was further held that public auction is

not the only mode to obtain the best price and it could be done by inviting

tenders, by giving wide publicity so as to get the maximum price. On facts,

it was held that through negotiations, the financial corporation was able

to secure a revised offer which was more than the price at which the unit

had been valued and the borrower had sufficient opportunity, to secure an

offer higher, but was not able to bring any higher offer. As regards the

valuation of the unit the Court observed that, the value of the plant and

machinery could have fallen on account of its being used or due to the same

getting outdated and if the value of the unit was higher than the sale

price it would have been possible for the borrower to obtain a better offer

and his failure to do so negatives the inference that the sale price was

low. The court also observed that, the failure on the part of the financial

corporation to give intimation to the borrower before accepting the offer

made by the purchaser was of little consequence in the facts of the case

because the borrower had sufficient opportunity to obtain a higher offer,

but he has failed to do so.

In Karnataka State Financial Corporation v. Micro Cast Rubber & Allied

Products (P) Ltd. and Ors., [1996] 5 SCC 65, the issue was whether the

financial corporation was wrong in rejecting the offer given by the

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borrower which, after proper evaluation, was considered lower than the

offer made by the purchasers. This Court, while upholding the action of the

financial corporation, held that the guidelines contained in Mahesh Chandra

are in the nature of guidelines for the exercise of the power under Section

29 of the Act and the action of the State Financial Corporation should not

be interfered with if it has acted broadly in consonance with those

guidelines. The Court reiterated the law laid down in Gem Cap as regards

the scope of judicial review in matters of sale by the State Financial

Corporation in exercise of the power conferred on it under Section n 29 of

the Act.

In Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr.,

[2000] 3 SCC 496, a Three Judge Bench, while over ruling the decision in

Mahesh Chandra held that it was contrary to the letter and intent of

Section 29 of the Act and observed that the views expressed in that case

were too wide and did not take note of the ground realities and the

intended objects of the statute and if the guidelines as indicated were to

be strictly followed, it would be giving premium to a dishonest borrower.

The views would not further the interest of any Corporation and

consequently of the industrial undertakings intending to avail financial

assistance and would only provide an unwarranted opportunity to the

defaulter, in most cases chronic and deliberate, to stall recovery

proceedings. Further, the court observed that ``it is one thing to assist

the borrower who has intention to repay, but is prevented by insurmountable

difficulties in meeting the commitments. That has to be established by

adducing material''. The Court found that the guidelines issued in Mahesh

Chandra placed unnecessary restrictions on the exercise of power by

Financial Corporation contained in Section 29 of the Act by requiring the

defaulting unit-holder to be associated or consulted at every stage in the

sale of the property. The court felt that the procedure indicated in Mahesh

Chandra would lead to further delay in realization of the dues by the

financial Corporation by sale of assets. The Court held that it was always

expected that the Corporation would 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. The Court

approved the view expressed in Gem Cap and found it to be more in line with

the legislative intent behind enacting the Act.

Recently in S.J.S Business Enterprises (P) LTD. v. State of Bhiar and Ors.,

[2004] 7 SCC 166, while reiterating the aforestated legal position, it was

held that reasonableness of the action of financial corporation under

Section 29 of the Act should be tested against the dominant consideration

to secure the best price.

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.

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(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.

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. Further, the subsequent line of

cases distinguishing Mahesh Chandra and the decision in the case of

Jagdamba Oil Mills (supra) which overruled Mahesh Chandra have already been

noticed hereinbefore.

The submission about the genuine reason of the borrower for default and

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about non-cooperation of KSIIDC is not rescheduling loan, are not relevant

at this stage as the main issue urged before the High Court was about

validity of sale. That apart, 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. As was observed in Gem Cap and Jagdamba Oil Mills,

the legislative intent in enacting the statute was to promote

industrialization of the States by encouraging small and medium industries

by giving financial assistance in the shape of loans and advances,

repayable within a stipulated period. Though the Corporation is not like an

ordinary moneylender or a bank which lends money, there is purpose in its

lending i.e. to promote small and medium industries. 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.

Having regard to the facts of the case and the legal principles above

noted, the impugned judgment directing KSIIDC to redo the entire sale

process cannot be sustained. Therefore, the impugned judgment is set aside

and it is held that on failure of the borrower to comply with the

directions of the Single Judge, the action of KSIIDC to sell the unit in

favour of Vinpack was valid and legal. The appeals are accordingly allowed.