Allahabad High Court
Radhey Shyam Garg And Anr. vs Uttar Pradesh Financial Corporation ... on 23 July, 2002
Equivalent citations: I(2003)BC61, (2003)1UPLBEC932
JUDGMENT S.P. Mehrotra, J.
1. This writ petition under Article 226 of the Constitution of India has been filed by the petitioners, inter alia, praying for issuance of a writ, order or direction in the nature of certiorari quashing the Recovery Certificate as well as Citations dated 15.4.2002 and 16.4.2002 (Annexure No. 12 to the writ petition), and further, for issuance of a suitable writ, order or direction in the nature of mandamus or prohibition restraining/ prohibiting the respondents from realization of any amount from the petitioners in pursuance of the said Recovery Certificate and Citation.
2. The petitioners have, inter alia, alleged in the writ petition that they were Directors of Om Steel and Alloys--unit of Om Refrigeration Private Limited, Faizabad which was a Private Limited Company incorporated under the Companies Act; and that Om Steel and Alloys sought financial assistance from U.P. Financial Corporation, Kanpur for establishing the unit; and that a loan of rupees sixty lacs was sanctioned by the U.P. Financial Corporation, Kanpur, out of which Rs. 52,88,900/- was disbursed to Om Steel and Alloys. It is, inter alia, further alleged by the petitioners that on 4th December, 1990, a loan agreement was entered into by Om Steel and Alloys with U.P. Financial Corporation and PICUP; and that on 4th December, 1990 itself the Hypothecation Deed was also executed by Om Steel and Alloys in favour of U.P. Financial Corporation as well as PICUP.
3. The petitioners, inter alia, further alleged that they stood as guarantors in the financial assistance granted by U.P. Financial Corporation to Om Steel and Alloys. Identical Guarantee Bonds were executed by the petitioner Nos. 1 and 2. A photostat copy of the Guarantee Bond executed by the petitioner No. 2 (Shyam Sunder Garg) in favour of the PICUP (Pradeshiya Industry and Investment Corporation of U.P. Limited) and the U.P. Financial Corporation has been annexed as Annexure No. 1 to the writ petition.
4. It is further alleged by the petitioners that petitioner No. 1 resigned from the Directorship of the company on 9.5.1994, and the petitioner No. 2 also resigned from the Directorship of the company on 31.12.1994; and that the information about it was duly given to the Registrar of Companies as provided under the Companies Act and the prescribed Form No. 32 was duly issued.
5. It is, inter alia, further alleged by the petitioners that the petitioners came to know that U.P. Financial Corporation had taken over the physical possession of the unit of the company on 9th January, 1996 at 3 p.m. and a detailed inventory was prepared at the time of taking over of the unit of the company, namely, Om Steel and Alloys (a unit of Om Refrigeration Private Limited, Faizabad). It is further alleged that the petitioners were under a bona fide belief that as physical possession of the unit was taken over by U.P. Financial Corporation from the new management, liabilities for the financial assistance taken by the company must have been cleared, but the petitioners were surprised to learn that the recovery proceedings were sought to be initiated against the petitioners on the ground that the petitioners had stood as personal guarantors for the disbursement of the loan/financial assistance given to the company.
6. Certain correspondence as detailed in the writ petition is alleged to have taken place between the petitioners and the U.P. Financial Corporation, inter alia, in regard to finding aprospective buyer and providing list/inventory of plant and machinery. However, ultimately, the petitioners received the Recovery Certificate as well as citations issued by respondent No. 3 dated 15th April, 2002 and 16th April, 2002 (Annexure No. 12 to the writ petition).
7. I have heard Mr. Bharatji Agarwal, Senior Advocate assisted by Mr. Piyush Agarwal, learned Counsel for the petitioners and Mr. Vikram Gulati, learned Counsel for the U.P. Financial Corporation.
8. The main contention raised on behalf of the petitioners is that the U.P. Financial Corporation having already taken over the possession of the unit of the company, should first proceed against the assets of the company, and it is only when the entire liability of the company is not liquidated by the assets of the company that the proceedings may be taken against the petitioners as guarantors. In support of this contention learned Counsel places reliance on Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 : The reliance is further placed on the following decisions of this Court:
(a) Govind Prasad and Anr. v. U.P. Financial Corporation, Kanpur and Ors., 1990 AWC 627;
(b) Gyan Singh and Ors. v. Kanpur Development Authority and Ors., 1991 AWC 923.
9. Giving reply to the contention raised on behalf of the petitioners, learned Counsel for the U.P. Financial Corporation contended that Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 was not applicable to the facts of the present case.
10. Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972, the contention proceeds, would have been applicable had the assets of the petitioners as guarantors been mortgaged with the U.P. State Corporation. No assets, learned Counsel contends, of the petitioners as guarantors are mortgaged with the U.P. Financial Corporation, and, as such, Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 is not applicable and the proceedings being taken against the petitioners on the basis of their guarantees under Section 3 of the said Act are valid. Learned Counsel for the U.P. Financial Corporation places reliance on the following decisions :
(a) State Bank of India v. Indexport Registered and Ors., II (1992) BC 243 (SC)=AIR 1992 SCC 1740.
(b) Andhra Pradesh State Financial Corporation v. GAR Re-rolling Mills and Anr., AIR 1994 Supreme Court 2151.
(c) U.P. Financial Corporation v. Garlon Polyfeb Industries and Ors., AIR 2001 Allahabad 286.
11. Before proceeding to consider rival contentions of the learned Counsel for the parties, it is relevant to refer to Clauses 7, 9 and 15 of the Bond of Guarantee executed by the petitioners. Clause 7 of the Bond of Guarantee (Annexure No. 1 to the writ petition) reads as follows :
"7. The Guarantee herein contained shall be enforceable against the guarantors notwithstanding that no action of any kind has been taken by the Corporation against the Company/Borrower and an intimation in writing sent to the company by the corporation that a default of breach has occurred shall be treated as final and conclusive proof as to the fact stated therein."
Clause 9 of the Board of Guarantee lays down as under:
"9. In order to give effect to the guarantee herein contained the corporation shall be entitled to act as if the Guarantors were the principal debtors to the Corporation for all payment and covenants guaranteed as aforesaid to the Corporation."
Clause 15 of the said Bond of guarantee provides as under:
"15. The Guarantors hereby agree that it shall not be necessary for the corporation to sue the said Company/Borrower before seeing guarantors for the amount due hereunder."
12. Coming now to the rival contentions raised by the learned Counsel for the parties, the said contention revolved around Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972. Section 4 of the said Act is quoted below :
"4. Savings.--(1) Nothing in Section 3, shall,--
(a) affect any interest of the State Government, the Corporation, a Government company or any Banking company, in any property created by any mortgage, charge, pledge or other encumbrance; or
(b) bar a suit or affect any other right or remedy against any person other than a person referred to in that section, in respect of a contract of indemnity or guarantee entered into a relation to an agreement referred to in that section or in respect of any interest referring to in Clause (a).
(2) Where the property of any person referred to in Section 3 is subject to any mortgage, charge, pledge or other encumbrance in favour of the State Government or Corporation, a Government company or Banking company, then.-
(a) in every case of pledge of goods, proceedings shall first be taken for sale of the thing pledged, and if the proceeds of such sale are less than the sum due, then proceedings shall be taken for recovery of the balance as if it were an arrear of land revenue :
Provided that where the State Government is of opinion that it is necessary to do so for safeguarding the recovery of the sum due to it or to the Corporation, Government company or Banking company, as the case may be, it may for reasons to be recorded, direct proceedings to be taken for recovery of the sum due, as if it were an arrears of land revenue before or at the same time as proceedings are taken for sale of the thing pledged;
(b) in every case of a mortgage, charge or other encumbrance on immovable property, such property or, as the case may be, the interest of the defaulter therein, shall first be sold in proceedings for recovery of the sum due from that parson as if it were an arrear of land revenue and any other proceeding may be taken thereafter only if the Collector certifies that there is no prospect of realization of the entire sum due through the first mentioned process within a reasonable time".
13. A reading of Section 4(2)(b) pf the U.P. Public Moneys (Recovery of Dues) Act, 1972 shows that if the immovable property of a person referred to in Section 3 of the said Act is subject to any mortgage, charge or other encumbrance in favour of the U.P. Financial Corporation and if proceedings for recovery of the sum due "from that person" as arrears of land revenue are taken against that person, then the immovable property of that person which is subject to mortgage, charge or other encumbrance shall first be sold. Any other proceedings against that person may be taken thereafter only if the Collector certifies that there is no prospect of realization of the entire sum due through the first mentioned process within a reasonable time.
14. It is thus evident that Section 4(2)(b) applies only to such cases where the immovable property of the person against whom the proceedings are being taken for recovery of the sum due as arrears of land revenue, is subject to mortgage, charge or other encumbrance. For example, if immovable property of a person "A" is subject to mortgage, charge or other encumbrance and proceedings for recovery of the sum due against that person "A" as arrears of land revenue are being taken, then such immovable property of that person "A" will first be proceeded against, and only, thereafter, any other proceedings against that parson "A" will be taken. However, if immovable property of a person "A" is subject to mortgage, charge or encumbrance and proceedings for recovery of the sum due as arrears of land revenue are being taken against another person "B", then such a person "B" cannot insist that proceedings should first be taken against the property of "A" which is subject to mortgage, charge or other encumbrance.
15. In the present case, possession of the unit of the company has already been taken over by the U.P. Financial Corporation, However, the U.P. Financial Corporation has started recovery proceedings against the petitioners as guarantors for the loan given to the company, and recovery certificate and citation have already been issued against the petitioners. Question is as to whether the petitioners can insist that in view of Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972, the U.P. Financial Corporation should first proceed against the assets of the company, and only thereafter, the proceedings be taken against the petitioners. In my opinion, the petitioners as guarantors cannot insist that the U.P. Financial Corporation should first proceed against the assets of the company, and only thereafter, the U.P. Financial Corporation should proceed against the petitioners under the U.P. Public Moneys (Recovery of Dues) Act, 1972. No property of the petitioners, as guarantors is mortgaged or charged with the U.P. Financial Corporation as a security for loan given to the company. Therefore, Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 cannot be relied upon by the petitioners. Had any immovable property of the petitioners been mortgaged or charged, etc. with the U.P. Financial Corporation as security for loan given to the company, the petitioners could have insisted that first their such immovable property be proceeded against, and then only any other proceedings be taken against the petitioners. However, this is not the case here. No property of the petitioners is subject to mortgage or charge, etc. as security for loan given to the company. Therefore, Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 has no application to the present case where proceedings are being taken against the petitioners as guarantors under Section 3 of the said Act.
16. Coming now to the decisions cited on behalf of the petitioners, let us first consider the decision in Gyan Singh (supra). In this case, a Division Bench of this Court considered the provisions of Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 and held as follows :
"The scheme of the Act is clear and unambiguous, it provides that where dues of the public recovered are secured by a mortgage, charge or other encumbrance on immovable property authority should first proceed to recover the dues from mortgaged property before resorting to any other mode of recovery."
17. In this Gyan Singh case, the petitioners therein took a loan from Kanpur Development Board in 1955 for construction of a house. The loan was secured by a Deed of Mortgage executed by the petitioners with respect to a piece of land over which the house was to be constructed. Clause 10 of the Mortgage Deed provided that in default of payment of the loan it would be open to the mortgage to realize the amount due by sale of the mortgaged property. It was in his context that the Division Bench held that in view of Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972, the respondents were unjustified in proceeding to recover the loan from the petitioners straightaway without having taken recourse to the remedy available to them, under the Mortgage Deed by the sale of the mortgaged property.
18. It is thus clear that in this Gyan Singh case the property of the petitioners therein against whom the proceedings for recovery of dues as arrears of land revenue were being taken, was subject to mortgage, and, therefore, Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 was applicable.
19. In Gyan Singh case (supra), the Division Bench of this Court referred to an earlier Division Bench decision of this Court in Udai Pratap and Anr. v. U.P. Financial Corporation, Varanasi and Anr., 1978 ACN 6. In Udai Pratap case, there was a partnership firm running business under the name and style of Vishwakarma Auto Industry, with their place of business at Bhashkar Sagar Kosripur, Police Station Rohania, Varanasi. A loan of Rs. 47,000/- was taken by the firm at Bhashkar Sagar Kesripur from the U.P. State Financial Corporation for the construction of a factory building on Plot Not 401 situated at village Kesripur. The firm mortgaged and hypothecated certain properties specified in Schedules 'A', 'B' and 'C' to the indenture dated 8.7.1973 for securing the loan taken by it. Due to certain reason, the firm was not able to re-pay the loan, total amount of which came to Rs. 62,000/- and odd. The Deputy Director of the U.P. State Financial Corporation issued a Recovery Certificate to the Collector authorising him to recover the amount of loan due from Vishwakarma Auto Industry. Pursuant to the said Recovery Certificate, the Collector proceeded to recover the loan from the properties belonging to Vishwakarma Auto Industry situated at Shivdaspur, G.T. Road, Varanasi, and attached the said properties. It was admitted position in the case that the properties of Vishwakarma Auto Industry situated at Shivdaspur, G.T. Road, Varanasi had neither been pleaded nor mortgaged for securing the loan in question. As stated earlier, the properties which had been mortgaged and hypothecated by the firm for securing the loan taken by it were specified in Schedules 'A', 'B' and 'C' to indenture dated 8.7.1973.
In view of the said facts, the Division Bench held as follows (paragraph 6 of the said ACN):
"6. ............................................".
20. In the circumstances, it is quite obvious that the respondents in attempting to realize the loan advanced by the U.P. State Financial Corporation, by attaching and selling the properties situated at Shivdaspur (which properties had neither been hypothecated nor pledged for securing the loan) without first proceeding to realize the same by proceeding against the properties which had been mortgaged or pledged for securing the loan in question, are acting without jurisdiction.
21. Thus in this case, certain properties of the firm had been mortgaged and hypothecated for securing the loan taken by the firm from the U.P. State Financial Corporation, while certain other properties of the firm situated at Shivdaspur, G.T. Road, Varanasi had not been pledged or mortgaged for securing the said loan. In the circumstances, the Division Beach held that first the properties which had been mortgaged and hypothecated under the indenture dated 8.7.1973 be proceeded against, and only thereafter, it would be open to proceed against the other properties of the firm for recovery of the balance amount, if any. This decision supports my interpretation of the provision of Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972.
22. In Govind Prasad (supra) relied upon by the learned Counsel for the petitioners, a Division Bench of this Court held as follows (paragraph Nos. 3 and 4 of the said A.W.C.):
"3. The learned Counsel is clearly right. We think that the Corporation could not legally and, at any rate ought not in all fairness to proceed against the petitioners while keeping the property mortgaged with them under its control. The Corporation having decided to proceed against the borrowers and having taken possession of their assets, could not turn around and proceed against the petitioners without attempting to sell the assets seized from the borrowers. It should not be forgotten that the Corporation is an instrumentality of the State. It must, therefore, at all times act reasonably and fairly. There is nothing to indicate that value of the property seized by the corporation is less than the amount remaining due from the borrowers. The impugned action against the petitioners is hence plainly unjust and unfair.
4. The upshot of the foregoing discussion is that so long as the property in possession of the Corporation is not sold or released by the Corporation, it would be unfair and unjust for the Financial Corporation to proceed against the petitioners. The Corporation may, therefore, either sell the properties and recover the balance from the petitioners or it may release the property and proceed against the petitioners."
23. This decision, as is apparent from the passages quoted above proceeded on the ground that the U.P. Financial Corporation should act in fair and just manner. Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 was not considered in this case.
24. Applying the test of fairness laid down in Govind Prasad case (supra) to the facts of the present case, it cannot be said that the U.P. Financial Corporation is acting in any unfair manner in taking proceedings against the petitioners. As is evident from Clauses 7, 9 and 15 of the Bond of Guarantee quoted above, the guarantors i.e. petitioners agreed that the U.P. Financial Corporation could proceed against the guarantors "notwithstanding that no action of any kind has been taken by the Corporation against the company/borrower". Thus, the proceedings being taken by the U.P. Financial Corporation are in accordance with the Bond of Guarantee executed by the petitioners as guarantors. The U.P. Financial Corporation thus cannot be said to have acted in any unfair or unreasonable or arbitrary manner.
25. Coming now to the decisions relied upon by the learned Counsel for the U.P. Financial Corporation, the Supreme Court in its decision in State Bank of India (supra) held as follows (paragraph 13 of the said AIR):
"13. In the present case before us the decree does not postpone the execution. The decree is simultaneous and it is jointly and severally against all the defendants including the guarantor. It is the right of the decree-holder to proceed with it in a way he likes. Section 128 of the Indian Contract Act itself provides that "the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract."
The Supreme Court further held (paragraph 18 of the said AIR):
"18. It will be noticed that the guarantor alone could have been sued, without even suing the principal debtor, so long as the creditor satisfies the Court that the principal debtor is in default."
The Apex Court further observed (paragraph 22 of the said AIR) :
"22. The decree for money is a simple decree against the judgment-debtors including the guarantor and in no way subject to the execution of the mortgage decree against the judgment-debtor No. 2. If on principle a guarantor could be sued without even suing the principal debtor there is no reason, even if the decretal amount is covered by the mortgaged decree, to force the decree-holder to proceed against the mortgaged property first and then to proceed against the guarantor............ But if the composite decree is a decree which is both a personal decree as well as a mortgage decree, without any limitation on its execution, the decree-holder, in principle, cannot be forced to first exhaust the remedy by way of execution of the mortgage decree alone and told that only if the amount recovered is insufficient, he can be permitted to take recourse to the execution of the personal decree ........................................."
26. In view of this decision of the Supreme Court, it is evident that the petitioners as guarantors cannot insist that (he U.P. Financial Corporation must first proceed against the company i.e. principal borrower.
27. In Andhra Pradesh State Financial Corporation (supra), the Supreme Court was dealing with the remedies available to the State Financial Corporation under Sections 29 and 31 of the State Financial Corporation Act, 1951. The Supreme Court held as follows (paragraph No. 13 of the said A.I.R.):
"13. On a conjoint reading of Sections 29 and 31 of the Act, it appears to us that in case of default in repayment of loan or any instalment or any advance or breach of an agreement, the Corporation has two remedies available to it against the defaulting industrial concern, one under Section 29 and another under Section 31 of the Act. The choice for availing the remedy under Section 29 or Section 31 of the Act is that of the Financial Corporation alone and the defaulting concern has no say whatsoever in the matter, as to which remedy should be taken recourse to by the Corporation against it for effecting the recovery. The expression "without prejudice to the provisions of Section 29 of this Act" as appearing in Section 31 of the Act clearly demonstrates that the Legislature did not intend to confine the Corporation to take recourse to only a particular remedy against the defaulting industrial concern for recovery of the amount due to it. It left the choice to the Corporation to act in the first instance under Section 31 of the Act and save its rights and remedies under Section 29 of the Act to be availed at later stage, with the sole object of enabling the Corporation to recover its dues. It is not, however, obligatory on the part of the Financial Corporation to invoke the special previsions of Section 31 of the Act, it can even without taking recourse to the provisions of the said section invoke the procedure prescribed under Section 29 of the Act for realization of its dues."
The Supreme Court further observed (paragraph 17 of the said AIR):
"17. ..................... 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 of 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........................"
The Supreme Court further observed (paragraph 18 of the said AIR) :
"18. There is no equity in favour of a defaulting party which may justify interference by the Courts in exercise of its equitable extraordinary jurisdiction under Article 226 of the Constitution of India to assist it in not repaying its debts. The aim of equity is to promote honesty and not to frustrate the legitimate right of the Corporation, which after advancing the loan takes steps to recover its dues from the defaulting party. Thus, the intention of the Legislature in using the expression "Without prejudice to the provisions of Section 29 of the Act" clearly appears to be that recourse to the provisions of Section 29 of the Act is not prohibited, where an order or decree under Section 31 of the Act obtained by the Corporation has not been complied with or honoured by the defaulting concern or is otherwise insufficient to satisfy the dues of the Corporation and the Corporation withdraws and abandons to pursue further proceedings under Section 31 of the Act. Passing a money decree for recovery of the outstanding dues, not being within the jurisdiction of the Court under Section 31 of the Act, the Corporation retains its right to recover its dues by invoking the provisions of Section 29 of the Act in the manner proscribed therein notwithstanding any order, final or interim, obtained by it under Section 31 of the Act by withdrawing from and abandoning these provisions at any stage of the proceedings. A Court of equity, when exercising its equitable jurisdiction under Article 226 of the Constitution must so act as to prevent perpetration of a legal fraud and the Courts are obliged to do justice by promotion of good faith, as far as it lies within their power. Equity is always known to defend the law from clefty evasions and now subtleties invented to evade law. Since the Legislature enacted Sections 29 and 31 with a view to aid the Corporation to recover its legitimate dues, etc. from the defaulting party, the saving clause in Section 31 of the Act, preserving the rights under Section 29 of the Act by giving up the pursuit under Section 31 at any stage of the proceedings is available to the Corporation. The two provisions must be so harmonized as to facilitate the Corporation to recover its dues from the defaulting party........
The Supreme Court further held (paragraph 19 of the said AIR):
" 19. The right vested in the Corporation under Section 29 of the Act is besides the right already possessed at common law to institute a suit or the right available to it under Section 31 of the Act. Since the Corporation can withdraw from the Court its proceedings under Section 31 of the Act at any stage, it would imply that it has the right to withdraw from further proceedings under Sections 31 and 32 of the fact even after obtaining an order in its favour and take recourse to the proceedings under Section 29 of the Act without pursuing the proceedings under Section 31 of the Act any further. The Corporation cannot, indeed, execute the order under Section 31 of the Act and yet simultaneously take recourse to proceedings under Section 29 of the Act for the same relief. The position may also be different if the claim of the Corporation is negatived, on facts, by the Court in the proceedings under Section 31 of the Act. In that event depending upon the facts of each case, it may be permissible to hold that fair play and justice demand that the Corporation is not allowed to take recourse to the provisions of Section 29 of the Act."
From this decision it is evident that if there are several remedies available to the State Financial Corporation, it is the choice of the Corporation as to which remedy it would pursue and the defaulting party cannot compel the State Financial Corporation to take recourse to any particular remedy.
28. In view of this decision, the petitioners as guarantors in the present case cannot compel the U.P. Financial Corporation to first proceed against the assets of the company taken over under Section 29 of the State Financial Corporation Act, 1951, and only thereafter, to proceed against the petitioners. It is the choice of the U.P. Financial Corporation as to which of the remedies it would pursue and against which of the parties it would proceed.
29. The third decision in U.P. Financial Corporation v. Garlon Polyfeb Industries and Ors. (supra) relied upon by the learned Counsel for the U.P. Financial Corporation, a Division Bench of this Court was considering the legality of an injunction order issued by the learned Civil Judge (Senior Division), Kanpur Nagar whereby the U.P. Financial Corporation (defendant-appellant) was directed to take recourse to proceedings under Section 29 of the Stage Financial Corporation Act, 1951 and to recover the amount by enforcing the personal liability only if entire amount due is not recovered in the aforesaid manner. The Division Bench relied upon the decision of the Apex Court in Andhra Pradesh State Financial Corporation (supra) and held as follows (paragraph 10 of the said A.E.R):
"10. .........This authoritative pronouncement shows clearly that it is open to the U.P. Financial Corporation to recover the amount in any manner. If the law permits several modes to recover the amount, the debtor cannot dictate which mode should be adopted by the creditor. It is therefore not permissible for a Court to issue an injunction directing U.P. Financial Corporation to first proceed under Section 29 of the Act. Such an order is wholly against the provisions of the State Financial Corporation Act and also the Contract Act. The impugned order dated 6.1.2001 therefore cannot be sustained and has to be set aside."
30. Applying this principle to the present case, it is held that even though the U.P. Financial Corporation has already taken possession of the assets of the Company, still it is open to the U.P. Financial Corporation to proceed against the petitioners on the basis of their guarantees.
31. In this connection, it is pertinent to refer to the decision of the Supreme Court in the Bank of Bihar Limited v. Dr. Damodar Prasad and Anr., AIR 1969 Supreme Court 207. The Supreme Court laid down as follow (Paragraph Nos. 3, 4 and 5 of the said AIR):
"3. The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is co-extensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
4. Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simpson, (1802) 6 Vas Jun 714 at p. 734=31 HR 1272 at p. 1282. "But the surety is a guarantee; and it is his business to sec whether the principal pays, and not that of creditor." In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings.
5. Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. In Lachhman Joharimal v. Bapu Khandu, (1869) 6 Bom. HCR 241, the Judge of the Court of Small Causes, Ahmednagar, solicited the opinion of the Bombay High Court on the subject of the liability of sureties. The creditors having obtained decrees in two suits in the Court of Small Causes against the principals and sureties, presented applications for the imprisonment of the sureties before levying execution against the principals. The Judge staled that the practice of his Court had been to restrain a judgment-creditor from recovering from a surety until he had exhausted his remedy against the principal but in his view the surety should be liable to imprisonment while the principal was at large. Couch, C.J. and Melvill, J. agreed with this opinion and observed :
"The Court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."
32. It was next contended on behalf of the petitioners that the petitioners had already resigned from the Directorship of the company in the year 1994, and, therefore, proceedings cannot be taken against the petitioners on the basis of guarantee in respect of the loan given to the company. This contention cannot be accepted.
33. A reading of the Bond of Guarantee (Annexure No. 1 to the writ petition) shows that the petitioners gave their guarantees in their personal capacity for the loan given to the Company, and not in their capacity as Directors. As such, the said guarantees were not dependent on the continuance of the petitioners as Directors, and the said guarantees would remain operative even after the alleged cessation of the Directorship of the petitioners.
In this connection, it is relevant to refer to Clauses 10, 12, 13 and 17 of the Bond of Guarantee which are quoted below :
"10. The guarantee herein contained shall be a continuing one for all amount advance in respect of the said loan as also for all interest costs and other charges or expenses that may from time-to-time become due and payable and remain unpaid to the Corporation.
12. The guarantee herein contained shall not be revoked or effected by the death, dissolution/insolvency of any one or more of the guarantors but shall continue to be binding and operative in respect of liabilities which have arisen up to the date of death as well as to liabilities which may arise thereafter in all respects and for all purposes until repayment of all moneys due to the Corporation as aforesaid PROVIDED HOWEVER that the said liabilities shall in no case exceed the whole of the principal sum interest and other moneys which shall be due to the Corporation at any time under the provisions of the aforesaid mortgage.
13. The guarantee herein contained shall not be determined or in any way prejudiced by any absorption of or by the Corporation or by any amalgamation thereof or therewith but shall ensure and be available for any of the absorbing or amalgamated Corporations or concerns.
15. The guarantors hereby agree that it shall not be necessary for the Corporation to sue the said Company/borrower before sueing guarantors for the amount due hereunder.
17. The guarantors further hereby agree that till such time as the guarantee is not released by the Corporation the guarantors and the property of each guarantor jointly and severally and all money that belong to either of the guarantors or jointly to the guarantors shall be available to the Corporation for the repayment of all moneys which shall at any time be due from the said Company/borrower subject to the limit aforesaid."
These clauses of the Bond of Guarantee executed by the petitioners clearly show that the guarantee given by the petitioners would remain operative till such time as the guarantee is not released by the U.P. Financial Corporation. Hence, even if it is assumed that the petitioners resigned from the Directorship in the year 1994, the same would not absolve them from their liabilities under guarantee given by them in respect of the loan given to the Company.
34. The second contention raised on behalf of the petitioners thus has no force, and the same is liable to be rejected.
35. In view of the aforesaid discussions, I am of the view that the writ petition filed by the petitioners lacks merit, and the same is liable to be dismissed.
36. However, as there is difference of opinion between us on some of the questions involved in this case regarding which the matter has already been referred to Larger Bench by the order dated 12.7.2002 passed in Suresh Chand Gupta and Anr. v. Collector, Kanpur Nagar and Ors., Civil Misc. Writ Petition No. 8386 of 2002, I am not passing any order dismissing this writ petition, and instead, I am directing this writ petition to be listed after the decision of Suresh Chand Gupta and Anr. v. Collector, Kanpur Nagar arid Others, Civil Misc. Writ Petition No. 8386 of 2002.
S.R. Singh, J.
I have gone through the judgment prepared by my learned brother S.P. Mehrotra, J. I agree with my learned brother that Section 4(2)(b) of the U.P. Public Moneys (Recovery of Dues) Act, 1972 has no application to the facts of the present case. However, on the question as to whether the Corporation would be justified to proceed against the guarantor while retaining the properties and assets of the borrower company under Section 29 of the State Financial Corporation Act, 1951. I have taken the view contrary to the view taken by my learned brother in Suresh Chand Gupta and Anr. m. Collector, Kanpur Nagar and Ors., Civil Misc. Writ Petition No. 8386 of 2002, in which case I have also held that recourse to Section 3 of the U.P, Public Moneys (Recovery of Dues) Act, 1972 stands abrogated in view of Section 46B of the State Financial Corporation Act, 1951 and recourse to the provisions of Section 3 of the U.P. Public Moneys (Recovery of Dues) Act, 1972 cannot be taken by the U.P. Financial Corporation. By ajudgment of date the case aforesaid has been referred to Larger Bench. In this view of the matter it would be just and proper to direct this case to be listed after final decision in Suresh Chand Gupta and Anr. v. Collector, Kanpur Nagar and Ors., Civil Misc. Writ Petition No. 8386 of 2002.
BY THE COURT The writ petition is directed to be listed after the decision of Suresh Chand Gupta and Anr. v. Collector, Kanpur Nagar and Ors., Civil Misc. Writ Petition No. 8386 of 2002. Interim order dated 1.5.2002 is, however, modified to the extent that it shall be open to the Financial Corporation to proceed against the petitioner either under the provisions of Sections 29, 31 and 32G of the State Financial Corporation Act, 1951 or under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.