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PETITIONER:

MAHESH CHANDRA

Vs.

RESPONDENT:

REGIONAL MANAGER, U.P. FINANCIAL CORPORATION AND ORS.

DATE OF JUDGMENT12/02/1992

BENCH:

RAMASWAMY, K.

BENCH:

RAMASWAMY, K.

SAHAI, R.M. (J)

CITATION:

1993 AIR 935 1992 SCR (1) 616

1993 SCC (2) 279 JT 1992 (2) 326

1992 SCALE (1)388

ACT:

State Financial Corporations Act, 1951:

Section 29-Uttar Pradesh State Financial Corporation-

Loan to industrial concern-Default in payment of loan-Power

of Corporation to take possession and sell the mortgaged

property-Guidelines for exercising powers under section 29

issued.

Financial Corporation-Loan to industrial concern

against hypothecated property-Default in payment of loan by

debtor- Corporation's refusal to release hypotheca to debtor

for private sale for repayment of debt-Taking possession of

property by Corporation and sale by invitation of tenders

without notice or opportunity to debtor-Corporation's action

held contrary to Section 24-Sale held vitiated and not

binding on debtor-Held Corporation is an instrumentality of

State-It is bound to act fairly and reasonably in selling

the property of debtor-Section 29 does not exclude

principles of natural justice.

Section 24-State Financial Corporation are extended

arms of Welfare State-Their approach should be public

oriented-Board should discharge its functions on business

principles.

Words and Phrases.

`Business'-Meaning of.

HEADNOTE:

The appellant was owner of two plots. In one of the

plots a rice mill was constructed by the partnership in

which he was a managing partner. For taking a loan he

hypothecated the mill and the plots with U.P. Financial

Corporation which sanctioned a loan of Rs. 4,28,000, but

disbursed only Rs. 3,78,660 to him. Due to non-cooperation

of other partners, lack of working capital and failure of

the Financial Corporation to release the balance loan the

mill landed into a rough weather. Consequently

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defaults were committed in repayment of loan. The appellant

requested the Corporation to release the vacant hypothecated

plot to enable him to negotiate for private sale to pay off

his debt and also stated that he was ready and willing to

pay the outstanding amount of Rs. 5,03,165 towards principal

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and interest in full satisfaction under "one time settlement

scheme". The Corporation rejected his request and

exercising its power under section 29 of the State

Financial Corporations Act, 1951 took possession of the

hypotheca, invited tenders for its sale and without giving

any notice or opportunity to the appellant accepted the

tender of Rs. 2,55,000 given by respondents 3 to 5.

Pursuant to the sale the 3rd respondent took possession of

the property and invested a large sums for the improvement

of the mill. The appellant filed a writ petition in the

High Court which was dismissed. Against the decision of the

High Court the appellant filed an appeal in this Court.

Allowing the appeal, this Court,

HELD :1. Section 29 of the State Financial Corporations

Act confers very wide power on the Corporation to ensure

prompt payment by arming it with effective measure to

realise the arrears. Every wide power, the exercise of which

has far reaching repercussion, has inherent limitation on

it. It should be exercised to effectuate the purpose of the

Act. [629D-E]

1.1. The Corporation has been given statutory right to

take over possession and management of the defaulting unit

or hypotheca or both including the right to sell and realise

the loan or advance due from the unit or debtor. The

Corporation is an instrumentality of the State. The

Corporation or its employees or officers are bound to act

reasonably and fairly in dealing with the property of the

debtor. The exercise of the power or discretion in its

dealing would be subject to the same constitutional or

public law limitation as the Government. The Corporation

also equally must conform its action with the same standard

that meet the test of justness, fairness, reasonableness and

relevance. [628G-H]

Kasturilal Laxmi Reddy v. State of J & K, [1980] 3

S.C.R. 1338, referred to.

1.2. Sub-section 4 of section 29 treats the Corporation

"to be a trustee" of the debtor or person claiming title

through him. It saddles the Corporation or the officer

concerned with inbuilt duties, responsibilities

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and obligations towards the debtor in dealing with the

property and entails him to act as a prudent and reasonable

man standing in the shoes of the owner. Therefore, when the

property of the debtor stands transferred to the Corporation

for management or possession thereof which includes right to

sell or further mortgage etc., the Corporation or its

officers or employees stand in the shoes of a debtor as

trustee and the property cestue que trust. They are bound to

exercise their power in good faith in selling or dealing

with the property of the debtor as an ordinary prudent man

would exercise in the management of his own affairs to

preserve and protect his own estate. Their acts should be

reasonable, just and fair which must meet the eye and the

offer accepted must be competitive and every attempt should

be made to secure as maximum price as possible to liquidate

the liabilities incurred by the industrial concern or the

debtor under the Act. [630G-H, 631C, 632C-D]

N. Suryanarayan Iyer's Indian Trust Act, 3rd Edn. 1987

page 275; Kerr on Receivers, 17th Edn., page 208; Halsbury's

Law of England, 4th Edn. Vol. 39, para 919, referred to.

Fertiliser Corporation Kamgar Union (Regd.) Sindri &

Ors. v. Union of India & Ors., [1981] 2 S.C.R. 52; Ram &

Shyam Co. v. State of Haryana, [1985] Supp. 1 S.C.R. 541;

Sachinand Pandey v. State of West Bengal, [1987] 2. S.C.R.

223; Haji T.M. Hassan v. Kerala Financial Corporation,

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[1988] 1 SCR 1079; Lakshmanasami Gounder v. C.I.T. Selvamani

JUDGMENT:

1.3. It is not mandatory as a matter of law, to observe

the process of taking over strictly. Defaults in payment of

loan may attract Section 29. But that alone is insufficient

either to assume possession or to sell the property.

Neither should be resorted to unless it is imperative. Even

though no rules appear to have been framed nor any guideline

framed by the Corporation was placed, yet the basic

philosophy enshrined in Section 24 has to be kept in mind.

Rationale of action and motive in exercise of it has to be

judged in the light of it. Lack of reasonableness or even

fairness at either of the two stages render the take over

and transfer invalid.

[630F, 629H, 630A-B]

1.4. In the instant case, the Corporation was guilty of

not acting in accordance with law either at the stage of

take over or in transferring the unit. [630B]

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1.5. The attitude adopted by the Corporation was

contrary to the spirit and scheme of section 24 of the Act.

Section 24 of the Act requires the Board to discharge its

function on business principles, due regard being had to the

interest of industry, commerce and general public. Instead

of agreeing to receive five lacs in lump-sum as offered by

the appellant it opted for two lacs fifty thousands tendered

by the purchaser that too in four yearly instalments. It

was neither business principle, nor in the interest of

commerce and industry, nor good of general public. This

solicitous attitude, at the expense of the appellant,

appears to be unjust and unfair and no reasonable prudent

owner would accept such an offer.

[626C, 625F; 626A-B; 635G; 636A]

1.6. Section 29 does not exclude the application of the

principles of natural justice. Before accepting the tender

of the third respondent, an opportunity should have been

given to the appellant as to why such an offer of the third

respondent be not accepted. No bonafide actions have been

taken or attempted by the Corporation. The sale of the

property is vitiated by unjust and unreasonable act on the

part of the Corporation and is liable to be set aside. The

appellant is not bound by the sale or the subsequent acts of

the purchasers claiming through them.

[636A, C-D, F]

The Corporation should immediately resume possession of

the hypotheca sold. It will be open to the appellant to pay

the entire liability and have the hypotheca redeemed as per

contract. If the appellant fails to do so, the Corporation

can sell the same in open auction, after giving wide

publicity in the press. [636G, 637A]

2. The financial corporations under the State Financial

Corporations Act were visualised not as a profit earning

concerns but an extended arm of a welfare state to harness

business potential of the country to benefit the common

man. They deal with public money for public benefit. Their

approach has to be public oriented, helpful to the loanee,

without loss to the Corporation. Endeavour should be to

adjust and accommodate as business considerations require

the sick unit to function for benefit, both of the general

public and the Corporation. The Corporation, therefore,

should honour their commitments of releasing entire loan

timely except for very good reasons which should be

intimated before hand to enable the unit holder to comply

with shortcoming if any. In the absence

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of completion of it, the proceedings for recovery under

section 29 may not be justified. [625F-G, 630D-F]

3. The following necessary directions are issued to be

observed by the Financial Corporations while exercising

power under section 29:-

(A) Every endeavour should be made, to make the

unit viable and be put on working condition.

If it becomes unworkable.

(B) Sale of a unit should always be made by public

auction.

(C) Valuation of a unit for purposes of determining

adequacy of offer or for determining if bid

offered was adequate, should always be

intimated to the unit holder to enable him to

file objection if any as he is vitally

interested in getting the maximum price.

(D) If tenders are invited then the highest price

on which tender is to be accepted must be

intimated to the unit holder.

(E) If unit holder is willing to offer the sale

price, as the tenderer, then he should be

offered same facility and unit should be

transferred to him. And the arrears remaining

thereafter should be re-scheduled to be

recovered in instalments with interest after

the payment of last instalment fixed under the

agreement entered into as a result of tendered

amount.

If he brings third parties with higher offer it

would be tested and may be accepted.

(F) Sale by private negotiation should be permitted

only in very large concerns where investment

runs in very high amount for which ordinary

buyer may not be available or the industry

itself may be of such nature that by normal

buyers may not be available. But before taking

such steps there should be advertisements not

only in daily newspapers but business magazines

and papers.

(G) Request of the unit holder to release any part

of the property on which the concern is not

standing of which he is the owner should

normally be granted on condition that sale

proceeds shall be deposited in loan account.

[634H, 635A-G]

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4. `Business' is a word of wide import. It has no

definite meaning. Its perceptions differ from private to

public sector or from institutional financing to commercial

banking. [625F]

5. The law consists of body and soul. The letter of

the law is the body and the sense and reason of its is the

soul quia ratio legis est enima legis. In other words, like

a nut the letter of the law represents the shell and sense

and the purpose of its Kernal. The law intends to serve the

purpose. Justice is both the cause and effect, the origin

and the legitimate end of law. One will receive no benefit

from the law, if the ratio and the letter of law defeats its

purpose. [629C]

6. In legislations enacted for general benefit and

common good the responsibility is far graver. It demands

purposeful approach. The exercise of discretion should be

objective. Test of reasonableness is more strict. The

public functionaries should be duty conscious rather than

power charged. Its actions and decisions which touch the

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common man have to be tested on the touchstone of fairness

and justice. That which is not fair and just is

unreasonable. And what is unreasonable is arbitrary. An

arbitrary action is ultra vires. It does not become bona

fide and in good faith merely because no personal gain or

benefit to the person exercising discretion should be

established. An action is mala fide if it is contrary to

the purpose for which it was authorised to be exercised.

Dishonesty is discharge of duty vitiates the action without

anything more. An action is bad even without proof of

motive of dishonesty, if the authority is found to have

acted contrary to reason. [629E-H]

&

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4503 of

1990.

From the Judgment and Order dated 5.2.1990 of the

Allahabad High Court in Civil Misc. Writ Petition No. 13916

of 1987.

R.K. Jain, P.N. Lekhi, P.K. Jain, S. Markandeya, Ms. C.

Markandeya and M.K. Garg for the appearing parties.

The Judgment of the Court was delivered by

K. RAMASWAMY, J. The appellant, Managing Partner of M/s

Shiva Rice Mill situated at Nagina, Distt. Bijnor in Uttar

Pradesh, owned two

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plots bearing Nos. 208 and 220/2 admeasuring 18 and 8

Bishwas respectively purchased under a single sale deed. In

plot No. 208 in an extent of 2,700 sq. yards abutting

Highway, near Railway Goods Shed and one furlong to the

Railway Station, a strategic location of importance, the

rice mill was constructed by the partnership firm. The plot

bearing No. 220/2 remained vacant and was not even valued as

an asset of the partnership firm while hypothecating the

rice mill to the U.P. Financial Corporation for short `the

Corporation'. A loan of Rs. 4,28,000, was sanctioned in

1979 and Rs. 3,70,660 was alone disbursed in 1980 which was

repayable in eleven annual instalments upto 1991. The

appellant repaid a sum of Rs. 9000 in December, 1981. Non-

cooperation of the other partners and lack of working

capital, due to failure to release the balance loan, landed

the running mill into rough weather and defaults in payment

were committed. While finding that interest was getting

mounted, the appellant wrote repeated letters to the

Corporation requesting to release plot No. 220 so as to

enable him to negotiate for private sale of it along with

his two more plots to pay off the debt. It is his case

that, pursuant to his letter dated December 22, 1983, on

oral promise to release the plot, he paid a sum of Rs.

65,000 and was received by the corporation. He also

promised to pay Rs. 50,000. The Corporation did not release

it. According to him, in his letter dated February 10,

1986,Annexure 6, as on March 31, 1986 the simple interest

payable was Rs. 1,93,670, the principal amount was Rs.

3,70,660 and expenses was Rs. 3,835. After deducting Rs.

65,000 towards arrears of interest, the outstanding was Rs.

5,03,165 and he was ready and willing to pay the same in

full satisfaction under "one time settlement scheme",

provided compound interest is waived. The record also shows

that in a meeting held in September, 1985 a decision to

release the plot appears to have been reached by the

corporation and the Regional Manager was asked to be

contacted. Ultimately, the Corporation did not accede to

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that request but had taken possession of the hypotheca and

got valued at Rs. 3,28,717.97 and published for sale

inviting tenders. It is necessary to point out at this

juncture that as per the plan filed on record which is not

disputed that (a) Plot No. 221 faces the road, Plot No. 220

is in the middle and 219 is in the end towards north. They

are contiguous. (b) The appellant in his letter submitted

that the mill could not run due to lack of running capital

and non-cooperation of other partners; and (c) Sketch plan

clearly shows that plots Nos. 219 and 221 could be used to

carve out housing plots

623

only if 220 was released, and that might have fetched good

price to enable the appellant to clear off the arrears. Yet

it was not accepted, because according to the affidavit of

the corporation the appellant could have sold other two

plots. Several letters written by the appellant, thus,

received no response. Instead recovery proceedings were

initiated.

According to the purchasers, though the Corporation

did not assert, that no response was evoked from public for

several tenders called for. The last date to receive the

tender in question was January 13, 1987. Deshbandhu

Agarwal, the third respondent, per self, his wife (since

died) and his son, respondents Nos. 4 & 5, submitted the

tender on March 25, 1987 for a sum of Rs. 2,00,000 which was

on negotiation accepted at Rs. 2,55,000. The Corporation

agreed to receive 25% of the consideration, namely, Rs.

63,750 as initial payment and the balance consideration in

four years in equal half yearly instalments. Before

accepting the tender no notice nor an opportunity in this

regard was given to the appellant. The appellant,

therefore, filed the writ petition in the Allahabad High

Court which was dismissed by judgment dated February 9,

1990. This appeal under Art. 136 of the Constitution arises

against that judgment.

When the matter came up for hearing, this Court

suggested to the parties to have the matter settled

amicably. They had taken sufficient time. The purchasers

reported that they entered into an agreement to sell plot

No. 220, and the purchaser declined to rescind the contract

with a threat to file a suit for specific performance. They

offered to pay Rs. 40,000 said to be the consideration

therein but the appellant declined to accept the same. The

Corporation though filed an exhaustive counter affidavit,

did not deny the offer made by the appellant in his letter

dated February 10, 1986. When we enquired, the counsel for

the Corporation, on instruction, stated that they had

informed the appellant that his proposal was not acceptable

to the Corporation, but no material has been placed on

record of such communication. It was stated that as on the

date of the sale a sum of Rs. 8,61,969.57 was due from the

appellant towards principal and interest @ 18%. The break-

up has been given in a separate statement filed by the

counsel. Thus the proposed settlement had been fissled out.

Mahatma Gandhiji, the father of the nation, in Swaraj

at page 92, stated that, "from the very beginning it has

been my firm belief that agriculture provides the only

unfailing and perennial support to the people

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of this country. India lives in villages". Villagers are

poor and most of them are unemployed or underemployed who

need productivity which would add to the wealth of the

nation. This vast human resources and man power remain

idle, since majority own little or marginal land holdings

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out depend on agriculture as their livelihood. Cottage,

agro-based or medium industries in rural areas give them

economic status to the owner, employment potential for

sustenance to the workmen and fair price to the producer.

The father of the nation laid, therefore, emphasis to

establish cottage industries, "to utilize the idle hours of

the nation and bring work to the people in their homes,

particularly when they had no other work to do." He further

stated, "I want the dumb millions of our land to be healthy.

I want them to grow spiritually. If we feel the need of the

machine we certainly will have them. Every machine that

helps an individual has a place". But he emphasised only on

such industries which would be, "self-sufficient, self-

reliant and free from exploitation". The founding fathers

of the Constitution in Art. 43 directed that, "the State

shall endeavour to promote cottage industries on an

individual and cooperative basis in rural areas". Without

social progress and economic development, democracy and

freedom would not take firm roots. Without social

stability, it would be impossible to achieve economic

development. Without economic development there would be no

social progress and without social progress it would be

impossible for the people to take the destiny in their own

hands in a democracy. Out Constitution, therefore, accepted

mixed economy as the base and the economic policy and

planning echo regeneration of social and economic justice.

Articles 38 and 39 aim in that pursuit that the ownership

and control of the material resources of the community are

so distributed as best to subserve the common good and that

the inequalities in income should be minimised. Facilities

and opportunities should be provided to eliminate

inequalities in status and opportunity among the individual

and groups of people. Our Bharat needs simultaneously

greater progress by building industries with modern

technological advances on all fronts and should create

greater employment opportunities. To accelerate economic

development the fiscal resources, human resources, their

abilities and expertise need harness. In the mixed economy

the public undertakings as well as private sector need

necessary assistance and encouragement. The growth of the

private sector should not be stifled, cribbed or cabined.

The bureaucracy should adopt positive approach to stimulate

production and

625

productivity in every sector of economy so as to increase

the size of the national cake.

Finance is the most important catalyst. The State of

Uttar Pradesh constituted the Corporation under s.3 of the

State Financial Corporation Act 1951, Act 63 of 1951, for

short, `the Act' which came into force from October 31,

1951. To promote industrialisation in the States by

encouraging small entrepreneurs to participate in economic

growth of the country by giving them financial assistance

for setting up medium and small scale industries. Section

25(1)(g) of the Act provides that the Corporation may grant

loans or advances to an industrial concern (rice mill is an

industrial concern) repayable within a period not exceeding

20 years from the date the loan was granted. Although the

activity has multiplied, capital has grown, field of

operation has been widened but the disturbing state of

affairs, which at times, surfaces, is complete lack of

awareness of principles on which these institutions are

required to function. More distressing is unreasonable

attitude adopted, often, by the Corporation while exercising

power under s.29 to take over possession of the unit for

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default, in repayment of loan. Evil is still greater in

transferring the unit as more often the owner stands

financially ruined the Corporation too does not gain much

but the transferee comes out, either with a working unit or

a unit ready to go at throw price, in easy instalments

giving rise to strong apprehensions that everything did not

proceed reasonably and fairly.

Corporations deal with public money for public benefit.

The approach has to be public oriented, helpful to the

loanee, without loss to the corporation. Section 24 of the

Act itself required the Board "to discharge its function on

business principles, due regard being had to the interest of

industry, commerce and general public". `Business' is a

word of wide import. It has no definite meaning. Its

perceptions differ from private to public sector or from

institutional financing to commercial banking. The

financial corporations under the Act were visualised not as

a profit earning concerns but an extended arm of a welfare

state to harness business potential of the country to

benefit the common man.

The release of plot No. 220 for private sale along with

other unemcumbered two plots would have fetched the

necessary amount to pay off the debt. Even the offer to

receive Rs. 5,00,000 in full quids would have salvaged the

problem. Any prudent businessman with least acumen would

626

have agreed to the proposal of the release of the plot for

sake of recovering its debts. Instead of agreeing to receive

five lacks in lump sum, it opted for two lacs fifty

thousands, that too in four yearly instalments. It was

neither business principle, nor in the interest of commerce

and industry, nor good of general public. Any reasonable

approach, which of course is not only desirable but

necessary, while dealing with such matters, would have

immediately demonstrated that the Corporation by such step

of releasing the plot, which was of no consequence to it,

was going to gain and perpetuated the objectives of the Act.

Instead it adopted an attitude which was contrary to the

spirit and scheme of s. 24 of the Act. Did the Corporation

gain from its ultimate decision of taking over possession

and transferring the unit ? Total loan disbursed was Rs.

3,78,660. The appellant paid in all Rs. 74,000 and if it is

added to the amount paid by the appellant, it comes to Rs.

3,29,000 only. Whereas the appellant was willing to pay Rs.

5,00,000 and odd in 1986 over and the above the amount which

he had paid, if plot No. 220 was released or one time

payment scheme was accepted. Similar offer was accepted in

relation to mill at Meerut. It did not get back the

interest. Even what it disbursed was the borrowed public

money. Of course, the transferee got a mill with project

cost estimated at 6 lacks and odd in 1980 at Rs. 2,55,000 in

1986 when the value must have gone up instead of going down.

There is a theorem that the economic self-interest and

profit motive induce entrepreneurs to reallocate resources

among activities until they get the same (approximately, if

not exactly in practise) rate of return from different lines

of activity. No body would like to lose money. No body

would like to miss an opportunity to make profit or to lose

his money either. Resources allocation in a market economy,

thus, primarily is a matter of relative priority to

different activities. The very process of economic growth

implies continuous reallocation of resources to generate

income to plough it back and earn profit. One of the major

causes to incur loss is the erosion of working capital fund

which affects the day-to-day working of the unit. Unless

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working capital is provided for, the industry is bound to

get closed due to accumulated losses year after year. The

terms of loans are mainly to repay immediately after

disbursement with commercial rate of interest together with

annual on half yearly rests. Unless the unit starts

generating internal resources and earn profit, running the

unit on industrial concern itself becomes difficult and the

ability to repay principal or interest get impeded. The

result, therefore, is that it would commit default or breach

627

of contract by default attracting penal interest for the

period in default. The industrial concern or unit, thereby,

would be further burdened with additional cost of interest,

panel interest and interest over interest. With the result

they cannot come out from the red, nor generate internal

resources. Many a time the corporation takes over

possession and sell thereof. The genuine and enthusiastic

entrepreneur with no previous business experience would get

exposed to this hazard (the pretenders to make quick money

would maintain concerted conduits and the officers too would

be solicitious to them). Therefore, the Corporation as a

policy of wise investment should map out payment schedule in

disbursing the loan to see that the unit starts functioning

and its working capital is maintained. It is common

knowledge that due to apathy or indifference or for reasons

best known or hidden that the disbursements would be delayed

resulting in delay in completion of the project or to start

working or loss of running capital, which would give cause

for default in payment of the instalments; accumulation of

the liabilities and the ultimate closure of the unit or the

industrial concern, defeating the objectives of the Act and

the Constitution.

This case demonstrates that in spite of reminding the

corporation that due to lack of working capital, the

appellant was unable to run the mill. The corporation did

not release the balance loan and no explanation came forth.

Dr. Malcolm S. Adiseshaiah, the noted Economist, in his `The

Why, What and Whither of the Public Sector Enterprise at

page 42 under the caption `Problem of Loss-Making Units in

the Public Sector, Erosion of Working Capital and its

Results' stated that, "I was informed that the best course

would be to get money as loan and not as equity. Anyhow we

have to run the industry, margin money was provided as loan

on the same terms and conditions regarding interest and

repayment. So, on this question also, rethinking is needed.

Since margin money has to come from the owner, and since the

Government is the owner of the public sector, it should

consider margin money released as equity". At page 43 it is

stated that, "a drastic change in policy is needed to make

those units viable and to enable them to stand on their own

legs. The rehabilitation programme is going on (we do not

call it "modernisation", though in the government the term

"modernisation" is used)... For losing concerns, even the

payment of interest adds to their woes in finding necessary

working capital... by way of equity, so that these units are

able to overcome the difficulty and start standing on their

own legs". With regard to the problems with the bank at

page 45 and 46 it was stated thus: "If the banks take a

helpful

628

attitude in normally sanctioning the respective limits as

announced by the committee for working capital, it will be

quite helpful for the public sector-may be even for the

private sector".

Thus a helping attitude on the part of the Corporation

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to constantly monitor the working of the industrial concern

or units (it may even charge the overhead expense on this

account) would subserve the purpose of the loan, object of

the Act, and the constitutional objective of economic

justice to the needy. Equally employment and better working

conditions to the workmen are assured and the unit gets

stablised and starts yielding returns for repayment of

principal amount and interest payable thereon. The facts in

this case do demonstrate that non - cooperation by the

partners and depletion of working capital are causes to

close the mill and the consequential default in the payment

of the principal amount and the interest accrued thereon.

The corporation acted indifferently.

Let us turn to s. 29 for the scheme of dealing with

taken over sick unit. Section 29(1) of the Act says that if

an industrial concern makes any default in repayment of any

loan or advances or any instalment thereof, the Corporation

shall have the right to take over the management or

possession or both of the industrial concern as well as the

right to transfer by way of lease or sale and realise the

debt from the property pledged, mortgaged, or assigned to

the Corporation.

Sub-sec. 4 postulates that in the absence of any

contract to the contrary, the amount received "be laid by"

the corporation "in trust" firstly in the payment of cost,

charges and the expenses and secondly in discharge of the

debt due to the Corporation and the residue, if any, shall

be paid to the defaulter or the persons entitled thereto.

The Corporation has been given statutory right to take

over possession and management of the defaulting unit or

hypotheca or both including the right to sell and realise

the loan or advance due from the unit or debtor. The

Corporation is an instrumentality of the State. The

Corporation or its employees or officers are bound to act

reasonably and fairly in dealing with the property of the

debtor. The exercise of the power or discretion in its

dealing would be subject to the same constitutional or

public law limitation as the government. The Corporation

also equally must conform its action with the same standard

that meet the test of justness, fairness, reasonableness and

relevance. In Kasturilal Laxmi Reddy v. State of J. & K.,

[1980] 3

629

SCR 1338, this Court held that when any Government's action

fails to satisfy the test of reasonableness and public

interests are found to be wanting in quality of

reasonableness or lacking in the quality of public interest,

it would be liable to be struck down as invalid. It must

follow as a necessary corollary, that the Government cannot

act in a manner which would benefit a private party at the

cost of the State; such an action would not be both

unreasonable and contrary to public interest.

The law consists of body and soul. The letter of the

law is the body and the sense and reason of its is the soul,

quia ratio legis est enima legis. In other words, like a

nut the letter of the law represents the shell and sense and

the purpose of its Kernal. The law intends to serve the

purpose. Justice is both the cause and effect, the origin

and the legitimate end of law. One will receive no benefit

from the law, if the ratio and the letter of law defeats its

purpose.

Section 29 confers very wide power of the Corporation

to ensure prompt payment by arming it with effective measure

to realise the arrears. But the simplicity of the language

is not an index of the enormous power stored in it. From

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notice to pay the arrears, it extends to taking over

management and even possession with a right to transfer it

by sale. Every wide power, the exercise of which has far

reaching repercussion has inherent limitation on it. It

should be exercised to effectuate the purpose of the Act.

In legislations enacted for general benefit and common good

the responsibility is far graver. It demands purposeful

approach. The exercise of discretion should be objective.

Test of reasonableness is more strict. The public

functionaries should be duty conscious rather than power

charged. Its actions and decisions which touch the common

man have to be tested on the touchstone of fairness and

justice. That which is not fair and just is unreasonable.

And what is unreasonable is arbitrary. An arbitrary action

is ultra vires. It does not become bona fide and in good

faith merely because no personal gain or benefit to the

person exercising discretion should be established. An

action is mala fide if it is contrary to the purpose for

which it was authorised to be exercised. Dishonesty in

discharge of duty vitiates the action without anything more.

An action is bad even without proof of motive of dishonesty,

if the authority is found to have acted contrary to reason.

Power under section 29 of the Act to take possession of a

defaulting unit and transfer it by sale requires the

authority to act cautiously, honestly, fairly and

reasonably. Default in payment of loan

630

may attract section 29. But that alone is insufficient

either to assume possession or to sell the property.

Neither should be resorted to unless it is imperative. Even

though no rules appear to have been framed nor any guideline

framed by the Corporation was placed, yet the basic

philosophy enshrined in section 24 has to be kept in mind.

Rationale of action and motive in exercise of it has to be

judged in the light of it. Lack of reasonableness or even

fairness at either of the two stages renders the take over

and transfer invalid. Unfortunately the Corporation was

guilty of not acting in accordance with law either at the

stage of take over or in transferring the unit. Admittedly

the entire loan was not disbursed. Need of the capital in

the last stages cannot be doubted. If the Corporation

refused to release the amount at a time when the unit is

nearing completion or is ready to start functioning, then it

falls short of capital and it is bound to land itself in

trouble. This is what happened in this case. The partners

did not cooperate and the Corporation without any

explanation refused to release the full amount. Result was

the appellant stood pressed on one hand from absence of

capital and on the other by recovery proceedings. The

Corporation, therefore, should honour their commitments of

releasing entire loan timely except for very good reasons

which should be intimated beforehand to enable the unit

holder to comply with shortcoming if any. In its absence of

its completion, the proceedings for recovery under section

29 may not be justified. Similarly various situations may

arise which may hamper start of the unit - delay in electric

supply or delayed delivery of machinery vital for the

functioning of the unit. Such difficulties do require

rescheduling of payment of instalment because, if the unit,

for reasons beyond the control of the unit holder, could not

start, then how will the amount be repaid. Endeavour should

be to adjust and accommodate as business considerations

require the unit to function for benefit, both, of the

general public and the Corporation. It is not mandatory, as

a matter of law, to observe the process of taking over

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strictly. But if there is no option left out and the unit

is taken over then its transfer require not only sincere

effort but to act reasonable and fairly.

Equally Sub-section 4 of s.29 treated the Corporation

"to be a trustee" of the debtor or person claiming title

through him. It saddles the Corporation or the officer

concerned with inbuilt duties, responsibilities and

obligation towards the debtor in dealing with the property

and entails him to act as a prudent and reasonable man

standing in the shoes of the owner. According to Prof.

Issac, a noted author on Trusts, trusteeship has

631

become a readily available tool for everyday purpose of

organisation financing, risk shifting, credit operations,

settling disputes and liquidation of business affairs.

Maitland, the other renowned writer on Equity, observed that

one of the exploits of equity; the largest and the most

important, is the innovation and development of the trust.

Thus, trust has been and is being applied for all purposes

mentioned by Prof. Issac and many others as device to

accomplish different purposes. Trusteeship is an

institution of elasticity and generality. The broad base of

the concept of property or its management vested in one

person and obligation imposed for its enjoyment by others is

accepted in Hindu jurisprudence. Therefore, when the

property of the debtor stands transferred to the Corporation

for management or possession thereof which includes right to

sell or further mortgage etc., the Corporation or its

officers or employees stands in the shoes of the debtor as

trustee and the property cestue que trust. In N.

Suryanarayan Iyer's Indian Trust Act, Third Edition, 1987 at

page 275 in s. 37 it is stated that, "Where the trustee is

empowered to sell any trust property... by public auction or

private contract and either at one time or at several times

should, therefore, use reasonable diligence in inviting

competition to that end. Where a contract of sale has been

entered into bona fide by a trustee the court will not allow

it to be rescinded or invalidated because another purchaser

comes forward with a higher price. It would, however, be

improper for the trustee to contract in circumstances of

haste and improvidence. Where in a trust for sale and

payment of creditors the trustee sold at a gross under

valuation showing a preference to one of the creditors, he

was held guilty of breach of trust. If the purchaser is

privy of the fraud the property itself can be recovered from

him."

The sale may be either by public auction or private

contract. In either case the trustee has to keep in mind

that the most advantageous price. Kerr on Receivers 17th

Edition, at page 208 stated that "a receiver, however, is

not expected any more than a trustee or an executor to take

more care of their property entrusted to him than he would

have as a reasonably prudent man of business". In

Halsbury's Law of England, 4th Edition, Vol. 39, at para 919

it is stated that the "receiver will be compelled to show

that he has acted with perfect regularity and has used such

degree of prudence as would be expected from a private

individual in relation to his own affairs". The trustee or

a receiver is, therefore, duty bound to protect and preserve

the property in his possession and the

632

standard of conduct expected of him, in dealing with the

property or sale thereof, is as a prudent owner would

exercise in dealing with his own property or estate. The

degree of care expected of him in handling property taken

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possession of is measured by the degree of care expected of

a person acting as trustee, executors or assignees. The

object and endeavour should also be to secure maximum

advantage or price in a sale of the property in lots or as

whole, as exigencies warrant.

The Corporation or its officers or servants as trustee

are bound to exercise their power in good faith in selling

or dealing with the property of the debtor as an ordinary

prudent man would exercise in the management of his own

affairs to preserve and protect his own estate. Therefore,

the acts of the officer or servant of the corporation should

be reasonable, just and fair which must meet the eye and the

offer accepted must be of competitive and every attempt

should be made to secure as maximum price as possible to

liquidate the liabilities incurred by the industrial concern

or the debtor under the Act.

In Fertiliser Corporation Kamgar Union (Regd.), Sindri

& Ors. v. Union of India & Ors., [1981] 2 S.C.R. 52, this

court clearly said that, "we want to make it clear that we

do not doubt the bona fides of the Authorities, but as far

as possible sales of public property, when the intention is

to get the best price, ought to take place publicly. The

vendors are not necessarily bound to accept the highest or

any other offer, but the public at least get satisfied that

the Government has put all its cards on the table." In Ram

& Shyam Co. v. State of Haryana, [1985] Supp. 1 S.C.R. 541

this court held that unilateral offer summarily made, not

correlated to any reserve price made by the forth respondent

after making full settlement in the matter was accepted

without giving an opportunity to the appellant to raise the

bid, as also inadequacy of his bid, it was held that the

State failed to discharge its administrative functions

fairly and unfair treatment was meted out to the appellant

violating the principles of fair play in action. In

Sachinand Pandey v. State of West Bengal, [1987] 2 S.C.R.

223 this court held that :-

"On a consideration of the relevant cases cited at

the bar the following proposition may be taken as

well established; State owned or public owned or

public owned property is not to be dealt with at

the

633

absolute discretion of the executive. Certain

precepts and principles have to be observed.

Public opinion is the paramount consideration. One

of the methods of securing the public interest,

when it is considered necessary to dispose of a

property, is to sell the property by public auction

or by inviting tenders. Though that is the

ordinary rule, it is not an invariable rule. There

may be situation where there are compelling reasons

necessitating departure from the rule but then the

reasons for the departure must be rational and

should not be suggestive of discrimination.

Appearance of public justice is an important as

doing justice. Nothing should be done which give

an appearance of bias, jobbery or nepotism."

In Haji T.M. Hassan v. Kerala Financial Corporation,

[1988] 1 S.C.R. 1079 this court further held thus:-

"The public property owned by the State or by any

instrumentality of the state should be generally

sold by public auction or by inviting tenders.

This court has been insisting upon that rule, not

only to get the highest price for the property but

also to ensure fairness in the activities of the

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state and public authorities. They should

undoubtedly act fairly. There actions should be

legitimate. There dealings should be above board.

There transactions should be without aversion or

affection. Nothing should be suggestive of

discrimination. Nothing should be done by them

which gives an impression of bias, favourtism or

nepotism. Ordinarily these factors would be absent

if the matter is brought to public auction or sale

by tenders.".

In Lakshmanasami Gounder v. C.I.T., Selvamani & Ors.,

[1991] 2 SCALE 956 this court, by a bench to which one of us

(K. Ramaswamy, J. was a member) in the context of sale of

debtor's property for recovery of the Government dues, held

that sale officer has statutory duty and the responsibility

to have the date and place of sale mentioned in the notice

and given due publication in terms of the Act and the Rules.

Public Auction is one of the mode of sale intending to get

highest Competitive price for the property. Public auction

also ensures fairness in action of the public authorities or

the sales officers who should act fairly, objectively and

kindly. Their actions should be legitimate. Their dealing

should be free

634

from suspicion. The fair and objective public auction would

relieve the public authorities or sale officers from the

charge of bias, favourtism, nepotism or else beset with

suspicious feathers and of their non-account-ability.

The sale by public auction or tender or private

negotiation should be bona fide action. First is

universally recognised to be the best and most fair method.

It is expected to fetch best competitive price and is beyond

reproach. Second would be resorted to rarely only if first

is an impossibility. Generally tenders should be calling

quotation to execute public work or to award contracts etc.

And third should always be avoided as it cannot withstand

public gaze. It casts reflection on Corporation and its

officials and is against social and public interest. In case

transfer cannot be effected by public auction and it is

necessary to resort to sale by tender it is both fair and

necessary to inform the unit holder, if unit has been got

valued for purposes or transfer of the estimated value for

sale as he is as much interested as the Corporation. Sale

of public property by calling tenders escape attention of

many an intending participants. Every endeavour should,

therefore, be made to give wide publicity and to get the

maximum price. Bureaucracy feels that accountability is an

impediment to efficient discharge of the duty.

Accountability is no more and no less than, the concept of

accountability of a private concern to their shareholders.

There is a distinction between prying into details of day to

day administration and of the legitimate actions or

resultant consequences thereof. To enthuse efficiency into

administration, a balance between accountability and

autonomy of action of management in public enterprises

should be carefully maintained. Over emphasis on either

would impinge upon public efficiency. But undermining the

accountability would give immunity or carte blanche power to

deal with the public property or of the debtor at whim or

vagary. Whether the public authority acted bona fide and in

the best interest as prudent owner in the given facts would

do, be gauged from impugned action and attending

circumstances. The authority should justify the action

assailed on the touchstone of justness, fairness,

reasonableness and as a reasonable prudent owner.

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Keeping these various factors giving rise to

conflicting interest the following directions are necessary

to be issued to be observed by the Corporation while

exercising power under s. 29:

635

Every endeavour should be made, to make the unit viable

and be put on working condition. If it becomes unworkable:

(1) Sale of a unit should always be made by public

auction.

(2) Valuation of a unit for purposes of determining

adequacy of offer or for determining if bid offered was

adequate, should always be intimated to the unit holder to

enable him to file objection if any as he is vitally

interested in getting the maximum price.

(3) If tenders are invited then the highest price on

which tender is to be accepted must be intimated to the unit

holder.

(4)(a) If unit holder is willing to offer the sale

price, as the tenderer, then he should be offered same

facility and unit should be transferred to him. And the

arrears remaining thereafter should be rescheduled to be

recovered in instalments with interest after the payment of

last instalment fixed under the agreement entered into as a

result of tendered amount.

(b) If he brings third parties with higher offer it

would be tested and may be accepted.

(5) Sale by private negotiation should be permitted

only in very large concerns where investment runs in very

huge amount for which ordinary buyer may not be available or

the industry itself may be or such nature that by normal

buyers may not be available. But before taking such steps

there should be advertisements not only in daily newspapers

but business magazines and papers.

(6) Request of the unit holder to release any part of

the property on which the concern is not standing of which

he is the owner should normally be granted on condition that

sale proceeds shall be deposited in loan account.

In the light of the above guidelines it becomes clear

that though tenders were invited the 3rd respondent alone

had given the tender for a sum of Rs. 2 lacs. On

negotiation it was said to have been raised to Rs. 2,55,000.

But deferred payments, on initial deposit of 25% and balance

payment within four years of half yearly instalments, were

given. This solicitous attitude, at the expense of the

appellant, appear to be unjust

636

and unfair and no reasonable prudent owner would accept such

an offer. The appellant himself, long prior to sale,

offered to pay Rs. 5 lacs and odd in full quids. Section 29

does not exclude the application of the principles of

natural justice. It is not a straight jacket formula. It

depends on facts in each case. Nothing prevented the

Corporation to have given the appellant a chance for payment

thereof at reasonable instalments with interest thereon.

Nothing prevented them to release the open site, the subject

of mortgage on condition that the entire sale price of the

plots should be paid to discharge the liability and it be a

condition in the sale deed itself. Before accepting the

tender of the third respondent, an opportunity should have

been given to the appellant as to why such an offer of the

third respondent be not accepted. The appellant would have

come forward to give his own offer or brought third parties

with higher offers. No such bona fide actions have been

taken or attempted by the Corporation. Thus the acts

smacked of bona fides or responsibility or reasonableness as

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an ordinary prudent businessman/trustee/owner acting in or

dealing with such trust. Thus the sale of the property is

vitiated by unjust and unreasonable act on the part of the

Corporation or its officers or employees and is liable to be

set aside.

The possession given to the respondents 3 to 5 or L.Rs.

of the respondent is illegal and immediately be resumed by

the Corporation. The third respondent claimed to have

improved the mill or entered into an agreement of sale of

open plot No. 220/2 with third parties. But this is subject

to litigation attracting the doctrine of lis pendens under

s. 52 of the Transfer of Property Act. The appellant,

therefore, is not bound by the sale or the subsequent acts

of the purchasers/persons claiming through them. One of the

objections raised by the purchasers is that the appellant is

one of five partners and the other did not object to the

sale. This is no ground to deny the relief to the appellant

when injustice stares at the face. The sale is accordingly

set aside. The Corporation should immediately resume

possession of the hypotheca sold. It is open to the

appellant to pay the entire liability and have the hypotheca

redeemed as per contract. If it not possible, the

respondent shall release plot No. 220 to enable the

appellant to do plotting along with plot Nos. 219 and 221.

The release shall be made within four weeks from the date of

the receipt of the copy of this order or is produced before

the respondent. The release shall be subject to payment of

the entire sale price to the loan account. The respondent

shall grant six months' time from the date of release to the

appellant to pay the entire arrears outstanding towards the

loan. If he fails to do so, the Corporation

637

is directed to sell the same in open auction, after giving

wide publicity in the press and by beat of drum/microphone

in the town and neighbouring area. The transfree would be

entitled, if available at law, to proceed against the

Corporation, for such reliefs as is open to them in law for

damages.

The appeal is accordingly allowed. The writ of

certiorari is issued quashing the sale. Mandamus is issued

to the first respondent to immediately resume possession of

the hypotheca and implement the directions contained in the

judgment. The parties would bear their own costs.

T.N.A. Appeal allowed.

638