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Thursday, September 4, 2014

Sec.29 & Sec.31 of State Financial Corporations Act - Sale of mortgaged property of guarantor to third parties as the original borrower failed to pay installments and not made available his hypothicated vehicle for sale directly under sec.29 - Writ - High court allowed - Apex court held that High court rightly allowed the writ and further held that However, the appellant before us is the purchaser of the property sold under Section 29 of the Act, who parted with the money in order to purchase the property. He is a victim of an illegal procedure adopted by the Orissa State Financial Corporation. The law regarding the authority of the State Financial Corporations to invoke the provisions of Section 29 with respect to properties other than those belonging to defaulter industrial concern is clearly declared by this Court in Karnataka State Financial Corporation (supra) by its judgment dated 30th March, 2008 whereas the sale in question before us is dated 9th February, 2009, almost a year later. The authorities of the 9th respondent Corporation sold the properties to the appellant herein in flagrant violation of the settled position of law. We, therefore, direct the 9th respondent to refund the amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the appellant with interest calculated at the rate 12% per annum. However, it is open to the Orissa State Financial Corporation to recover the amounts either from the defaulter - industrial concern or from such other third party against whom the Corporation has a legal right to proceed.= CIVIL APPEAL NO.7936 OF 2014 (Arising out of SLP(C) No. 12961 of 2011) Subhransu Sekhar Padhi …Appellant Versus Gunamani Swain & Others …Respondents = 2014 - Aug. Part - http://judis.nic.in/supremecourt/filename=41836

     Sec.29 & Sec.31 of  State Financial Corporations Act - Sale of mortgaged property of guarantor to third parties as the original borrower failed to pay installments and not made available his hypothicated  vehicle for sale directly under sec.29 - Writ - High court allowed - Apex court held that  High court rightly allowed the writ and further held that However, the appellant before us is  the  purchaser  of  the  property sold under Section 29 of the Act, who parted with  the  money  in  order  to purchase the property.  He is a victim of an illegal  procedure  adopted  by the Orissa State Financial Corporation.  The law regarding the authority  of the State Financial Corporations to invoke  the  provisions  of  Section  29 with  respect  to  properties  other  than  those  belonging  to   defaulter industrial concern is clearly declared by  this  Court  in  Karnataka  State Financial Corporation  (supra)  by  its  judgment  dated  30th  March,  2008 whereas the sale in question before us is dated 9th February,  2009,  almost a year later.  The authorities of the 9th respondent  Corporation  sold  the properties to the appellant herein in  flagrant  violation  of  the  settled position of law.  We, therefore, direct the 9th  respondent  to  refund  the amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the  appellant with interest calculated at the rate 12% per annum.  However, it is open  to the Orissa State Financial Corporation to recover the  amounts  either  from the defaulter - industrial concern or from such other  third  party  against whom the Corporation has a legal right to proceed.=

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  6th  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.=

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.

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.=

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.

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)=

in Karnataka State Financial Corporation v. N.  Narasimahaiah
& Others, (2008) 5 SCC 176.  In that case, this Court categorically  held[1]
that it is only the properties of  the  defaulter  which  can  be  proceeded
against under Section 29 of the Act but not against the  properties  of  the
third parties whether they are guarantors, mortgagors etc.
However, the appellant before us is  the  purchaser  of  the  property
sold under Section 29 of the Act, who parted with  the  money  in  order  to
purchase the property.  He is a victim of an illegal  procedure  adopted  by
the Orissa State Financial Corporation.  The law regarding the authority  of
the State Financial Corporations to invoke  the  provisions  of  Section  29
with  respect  to  properties  other  than  those  belonging  to   defaulter
industrial concern is clearly declared by  this  Court  in  Karnataka  State
Financial Corporation  (supra)  by  its  judgment  dated  30th  March,  2008
whereas the sale in question before us is dated 9th February,  2009,  almost
a year later.  The authorities of the 9th respondent  Corporation  sold  the
properties to the appellant herein in  flagrant  violation  of  the  settled
position of law.  We, therefore, direct the 9th  respondent  to  refund  the
amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the  appellant
with interest calculated at the rate 12% per annum.  However, it is open  to
the Orissa State Financial Corporation to recover the  amounts  either  from
the defaulter - industrial concern or from such other  third  party  against
whom the Corporation has a legal right to proceed.

12.   Appeal is dismissed.
  2014 - Aug. Part - http://judis.nic.in/supremecourt/filename=41836   

                                                     Non-Reportable
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO.7936  OF 2014
                  (Arising out of SLP(C) No. 12961 of 2011)

Subhransu Sekhar Padhi                       …Appellant

            Versus

Gunamani Swain & Others                      …Respondents






                               J U D G M E N T




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  6th  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;

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.

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.

xxx         xxx        xxx        xxx

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[1]
that it is only the properties of  the  defaulter  which  can  be  proceeded
against under Section 29 of the Act but not against the  properties  of  the
third parties whether they are guarantors, mortgagors etc.

9.    A submission is sought to  be  made  that  the  impugned  judgment  is
contrary to the ratio of the decision of this Court in A.P. State  Financial
Corporation v. M/s. GAR Re-rolling Mills & Another, (1994) 2  SCC  647.   In
our opinion, the said decision has  no  application  to  the  facts  of  the
present case.  It was a case where the  APSFC  initially  proceeded  against
Section 31 of the Act against  the  properties  mortgaged  by  the  borrower
(industrial concern) and obtained an order/decree but  subsequently  invoked
the powers under Section 29.  The question before this Court was  –  whether
the Financial Corporation set up under Section  3  of  the  State  Financial
Corporation Act is entitled to take recourse to the remedy available  to  it
under Section 29 of the Act even after having obtained an order or a  decree
after invoking  the  provisions  of  Section  31  of  the  Act  but  without
executing that decree/order?  This Court held[2] that it is always  open  to
the State Financial Corporation to resort to such a course of action.

10.   Therefore, we do not see any merit in the appeal.

11.   However, the appellant before us is  the  purchaser  of  the  property
sold under Section 29 of the Act, who parted with  the  money  in  order  to
purchase the property.  He is a victim of an illegal  procedure  adopted  by
the Orissa State Financial Corporation.  The law regarding the authority  of
the State Financial Corporations to invoke  the  provisions  of  Section  29
with  respect  to  properties  other  than  those  belonging  to   defaulter
industrial concern is clearly declared by  this  Court  in  Karnataka  State
Financial Corporation  (supra)  by  its  judgment  dated  30th  March,  2008
whereas the sale in question before us is dated 9th February,  2009,  almost
a year later.  The authorities of the 9th respondent  Corporation  sold  the
properties to the appellant herein in  flagrant  violation  of  the  settled
position of law.  We, therefore, direct the 9th  respondent  to  refund  the
amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the  appellant
with interest calculated at the rate 12% per annum.  However, it is open  to
the Orissa State Financial Corporation to recover the  amounts  either  from
the defaulter - industrial concern or from such other  third  party  against
whom the Corporation has a legal right to proceed.

12.   Appeal is dismissed.  Costs quantified at  Rs.1,00,000/-  (rupees  one
lakh) to be borne by the 9th respondent Corporation.  It is open to the  9th
respondent Corporation to  recover  the  said  amount  from  such  of  those
officers who are responsible for taking a wrong decision to proceed  against
the property in question under Section 29 of the Act.

13.   All the payments, as directed above, shall be made within a period  of
30 days from today.


                                                               ………………………….J.
                                                          (J. Chelameswar)


                                                              ……………………..….J.
                                                   (A.K. Sikri)
New Delhi;
August 21, 2014

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[1]     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 any default as is envisaged  in  Section  29  by  a  surety  or  a
guarantor.  The liabilities of a surety or the guarantor to repay  the  loan
of the principal debtor arises only when a default is made by the latter.
[2]      Para 17. The relief available to the Corporation under  Section  29
of the Act to realise its dues in the manner rescribed therein is  wider  in
scope than the limited reliefs available to it under Section 31 of  the  Act
and is not controlled by Section 31 of  the  Act.  The  Legislature  clearly
intended to preserve the rights of the Corporation under Section 29  of  the
Act, by expressly stating in Section 31 of the Act,  that  its  recourse  to
action under that section is without prejudice to the provisions of  Section
29 of the Act. What alone is not desirable or permitted, by the  Act  is  to
pursue both the remedies simultaneously by the Corporation and not
      that it cannot withdraw or abandon  the  proceedings  initiated  under
Section 31 at ’any stage’ and  then  take  recourse  to  the  provisions  of
Section 29 of the Act. Any interpretation which frustrates the right of  the
Corporation to recover its dues must be eschewed. Similarly, if in  a  given
case, the Corporation has taken recourse to the provisions of Section 29  of
the Act, there is no bar for it without taking those  proceedings  to  their
logical conclusion to abandon them and approach the court under  Section  31
of the Act to seek one or more of the reliefs available  to  it  under  that
section. Where, the defaulting party fails to honour the order or decree  of
the court made under Section 31 of the Act, it has  neither  any  legal  nor
even a moral right to object to the Corporation from taking recourse to  the
provisions of Section 29 of the Act only on the ground that it has  obtained
a proper relief under Section 31 of the Act which relief it  does  not  wish
to pursue any further. Indeed, if  the  order  of  the  court  issued  under
Section 31 of the Act has been fully  complied  and  honoured  with  by  the
defaulting concern, no occasion would arise for the  Corporation  to  invoke
the provisions of Section 29 of the Act. However, to  hold  that  since  the
Corporation has initially taken action under  Section  31  of  the  Act  and
obtained an order/decree from the court, the Corporation is prohibited  from
invoking the provisions of Section 29 of the Act, notwithstanding  the  fact
that the defaulting concern has not honoured the  court’s  order  or  decree
made under Section 31 of the Act, would amount to  putting  premium  of  the
activities of the defaulting concern aimed at frustrating  the  order/decree
of the court and
      depriving the Corporation of recovering its legitimate dues and
thereby rendering the expression "without prejudice to ..." occurring in
Section 31 otiose. Courts do not favour such a course.


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