Madras High Court
S.Balachandran vs Tamil Nadu Industrial Investment on 12 October, 2012
Author: K.Chandru
Bench: K.Chandru
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.10.2012 CORAM: THE HONOURABLE MR.JUSTICE K.CHANDRU W.P.No.21308 of 2007 and M.P.No.2 of 2007 S.Balachandran .. Petitioner Vs. 1.Tamil Nadu Industrial Investment Corporation, Rep. By its Managing Director, Anna Salai, Nandanam, Chennai - 600 035. 2.The Regional Manager, Chennai Branch, Tamil Nadu Industrial Investment Corporation, Nandanam, Chennai. 3.The Manager, Special Recovery Branch II, Tamil Nadu Industrial Investment Corporation, 692, Anna Salai, Nandanam, Chennai. 4.S.Durai 5.S.K.Gnanam 6.K.Saravanan .. Respondents (R5 and R6 impleaded as per order dated 03.08.2010 in M.P.No.1/2008 by NPVJ) Writ petition filed under Article 226 of the Constitution of India praying for a writ of certiorari, calling for the records of the 2nd respondent herein in the publication dated 01.11.2006 under Tender Notification No.11/2006/2007 in so far as it relates to Sl.No.8 therein and the proceedings in TIIC/SRB/LAO-VRG/2007-08 dated 11.06.2007 of the third respondent herein and the sale deed dated 11.06.2007 executed by the respondents 1 to 3 in favour of 4th respondent and quash the same as null and void. (Prayer amended as per order dated 12.08.2010 in M.P.No.1/2010 by NPVJ). For Petitioner : Mr.ARL.Sundaresan, SC for Ms.A.L.Ganthimathi For Respondents : Mr.A.L.Somayaji, SC for Mr.A.Pannerchelvam for R1 to R3 Ms.Malar for R5 and R6 O R D E R
The petitioner has filed by the writ petition, initially, seeking to challenge an order dated 01.11.2006, wherein and by which, the respondent Tamil Nadu Industrial Investment Corporation (for short TIIC) made a publication followed by a letter dated 11.06.2007 sent by the Branch Manager, TIIC, Special Recovery Branch Division and sought to set aside the same.
2. By the communication dated 11.06.2007, the petitioner was informed that after due notice and procedures, they have sold the Collateral property for Rs.8 lakhs through public auction sale and hence, they were unable to consider the request of the petitioner for One Time Settlement made vide letter dated 24.05.2007.
3. The petitioner on coming to know of the sale of property amended the prayer and sought to set aside the sale deed 11.06.2007 executed by TIIC in favour of the 4th respondent as null and void. The petitioner also impleaded respondents 5 and 6 as party to the writ petition as the sale deed was executed in favour of respondents 5 and 6 in respect of the property of an extent of 15 cents land in S.No.96/3, in Keel Muthalampedu, Panapakkam Village.
4. The writ petition was admitted on 24.01.2008. Pending the writ petition, no interim order was granted even though an application was filed by the petitioner. On notice, the respondent TIIC has filed a counter affidavit dated 31.07.2007 followed by additional counter affidavit dated Nil (November 2010).
5. It is seen from the records that the petitioner was a partner of M/s.Noah Pharmaceuticals along with one Immanuel Sridharan. They applied for a Term loan as well as Soft Loan from the respondent TIIC for the purpose of purchase and erection of machineries. The property was situated at Survey No.96/3, Panapakkam Village, Gummidipoondi Taluk, measuring 24 cents owned by the petitioner. Term loan of Rs.6.60 lakhs and Soft Loan of Rs.0.83 lakhs was sanctioned for the firm on 20.06.1988. The petitioner offered his land as collateral security. The partners executed hypothecation deed and other documents, thereby, hypothecating the machinery in favour of TIIC for securing the loan on 29.08.1988. On 29.08.1988, the petitioner, being the Partner of the concern, deposited his title deeds for his property with the respondent Corporation with an intention to create equitable mortgage for the loan sanctioned to the Partnership firm. The petitioner also gave a letter on 30.08.1988 confirming the creation of equitable mortgage in favour of TIIC. First disbursement of Rs.1,92,912/- out of the loan sanctioned was made to the partnership firm for purchase of machinery on 21.09.1988.
6. Subsequently, the company by name M/s.Tamil Nadu Antibiotics Private Limited was incorporated, i.e., after execution of documents by the partners of the earlier partnership in favour of TIIC on 28.10.1988. A request was made by the Partnership firm to approve the change in constitution from partnership firm into that of a private limited company. Approval was given on 20.01.1989 for change in constitution by the TIIC and newly constituted M/S.Tamil Nadu Antibiotics Pvt Ltd., consists of M/s.S.Mahendran, S.Balachandran (petitioner), K.G.Thomas, Nathew Daniel and Alphonse Fernando as Directors.
7. On 07.02.1989, the Company executed a deed of agreement confirming the liability of the partnership firm for repayment of the loan. It is stated by respondent TIIC that the petitioner gave his oral consent and assent to extend the equitable mortgage already created by him on 29.08.1988. On 08.02.1989, the petitioner gave a letter confirming the extension of equitable mortgage already created. Since there was default in the repayment of loan, TIIC foreclosed the loan account on 29.10.1991. On 04.08.1992, Primary assets of the company viz., machinery were sold in auction. Subsequently, the borrowers were advised to settle the loan amount under One Time Settlement Scheme. The petitioner was also informed about the Scheme on 31.11.2005 and 29.06.2006. The communication sent to the petitioner and others to the address available was returned as undelivered. It was thereafter on 28.09.2006 collateral security offered by the petitioner, measuring 15 cents out of 24 cents (9 cents of the same land was acquired by the government which includes 5 cents sold by the petitioner after creation of mortgage with the respondent) was taken possession by the respondent TIIC under Section 29 of the State Financial Corporation Act. On 01.11.2006, Auction sale advertisement was made in Tamil daily 'Dinakaran' for sale of collateral security of the petitioner. On 03.11.2006, all the Directors including the petitioner were intimated about the sale of collateral security. On 06.11.2006, valuation was done by panel valuer and public auction sale for the collateral security was conducted by the TIIC on 10.11.2006. There were 31 participants in the open auction. No sealed tender was received. Highest offer was given by 4th respondent at Rs.6.10 lakhs. Subsequently, enhanced to Rs.8.00 lakhs. On 03.03.2007, sale was confirmed in faovur of 4th respondent and a letter for confirmation of sale was sent to the 4th respondent on 06.03.2007. The petitioner was also informed about the sale of his property in auction. On 24.05.2007, the petitioner furnished his correct address along with the request for One Time Settlement to the respondent and requested to stop the auction proceedings.
8. The petitioner filed a writ petition before this Court being W.P.No.19397 of 2007 directing the respondent Corporation to dispose of his representation. This Court by an order dated 09.06.2007 directed the respondents to dispose of his representation. On 11.06.2007, the TIIC informed the petitioner about the inability to consider his request. A sale deed was executed in favour of the highest bidder, the 4th respondent on 11.06.2007. It is at that stage the petitioner filed the present writ petition challenging the earlier auction notice dated 01.11.2006 and the communication sent on 11.06.2007. Subsequent to the purchase of the property by sale deed dated 11.06.2007, the 4th respondent sold the property to respondents 5 and 6 and hence they were also made as parties to the writ petition. The said facts are not in dispute.
9. The only question raised by the petitioner was that the property which was offered as collateral security is not the property of the industrial concern for which loan was advanced. Section 29 of the State Financial Corporation Act empowers TIIC to resort to public auction without intervention of the Court is applicable only in so far as it relates to the property of the industrial concern. The property offered as collateral security is the property of the Director of the company, which was offered only as collateral security and therefore, the remedy available to the respondents is only to invoke Section 31 of the State Financial Corporation Act by filing appropriate application before the District Court. Since no such exercise was done, their action is without jurisdiction. The respondents in collusion formed a syndicate with the dealers of real estate and without proper notice sold the property without any justification. Hence, their action is violative of Articles 14, 21 and 300A of the Constitution.
10. Mr.ARL.Sundaresan, learned Senior Counsel appearing for Ms.AL.Ganthimathi, learned counsel for the petitioner contended that guarantor's property cannot be brought for sale by invoking Section 29 of the State Financial Corporation Act. Reliance was placed on the judgment of the Supreme Court reported in (2008) 5 SCC 176 [Karnataka State Financial Corporation v. N. Narasimahaiah] and referred to the following passages found in paragraphs 20,24, 32, 33, 37 and 41:-
"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.
24. Banking practice may enable a financial corporation to ask for a collateral security. Such security, we would assume, may be furnished by the Directors of a company but furnishing of such security or guarantee is not confined to the Directors or employees or their close relatives. They may be outsiders also. The rights and liabilities of a surety and the principal borrower are different and distinct. Apart from the defences available to a principal borrower under the provisions of the Contract Act, a surety or a guarantor is entitled to take additional defence. Such additional defence may be taken by the guarantor not only against the corporation but also against the principal debtor. He, in a given situation, would be entitled to show that the contract of guarantee has come to a naught. Ordinarily, therefore, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction. In the absence of any express provision in the statute, a person being in lawful possession cannot be deprived thereof by reason of default on the part of a principal borrower.
32. ...Such a relief, if prayed for, would also lead to grant of a final relief and not an interlocutory one.
33. Similarly, Clause (b) of sub-section (1) of Section 31 of the Act also provides for a final relief. Only Clause (c) of sub-section (1) of Section 31 of the Act empowers the District Judge in the event any application is filed by the corporation to pass an ad interim injunction. The very fact that Section 31 uses the terminology without prejudice to the provisions of Section 29 of the Act and/or Section 69 of the Transfer of Property Act, it clearly postulates an additional relief. What can be done by invoking Section 29 of the Act can inter alia be done by invoking Section 31 thereof also but therefor a different procedure has to be adopted. Section 31 also provides for a relief against a surety and not confined to the industrial concern alone. Sub-section (2) of Section 31 also refers to industrial concern and not the surety. The legislative intent, therefore, to our mind, is clear and unambiguous.
37. The legislative intent, in our opinion, is manifest. The intention of Parliament in enacting Sections 29 and 31 of the Act was not similar. Whereas Section 29 of the Act consists of the property of the industrial concern, Section 31 takes within its sweep both the property of the industrial concern and as that of the surety. None of the provisions control each other. Parliament intended to provide an additional remedy for recovery of the amount in favour of the Corporation by proceeding against a surety only in terms of Section 31 of the Act and not under Section 29 thereof.
41. A surety may be a Director of the company. He also may not be. Even if he is a close relative of the Director or the Managing Director of the company, the same is not relevant. A Director of the company is not an industrial concern. He in his capacity as a surety would certainly not be. A juristic person is a separate legal entity. Its veil can be lifted or pierced only in certain situations. (See Salomon v. Salomon and Co. Ltd.15, Dal Chand and Sons v. CIT16, Juggilal Kamlapat v. CIT17 and Kapila Hingorani v. State of Bihar18.)"
11. The learned Senior Counsel also referred to the judgment of the Kerala High Court reported in CDJ 2009 Ker HC 0223 [C.Thomas V. Kerala Financial Corporation and others] and placed reliance on the following passages found in paragraphs 28 and 29:-
"28. It is trite that if a special statute prescribes a particular mode for its enforcement, the provisions contained therein have to be scrupulously implemented. A conjoint reading of Sections 29 to 31 will unambiguously show that the Corporation can proceed against a secured/mortgaged asset of a surety/ guarantor only under those specified circumstances and that too in a manner prescribed under the Act.
29. We have carefully perused the entire materials available on record. In our view, the Corporation was not justified in proceeding against the secured assets of the appellants/guarantors under Section 29 of the Act, in view of the statutory provisions contained therein, which in clear and unambiguous terms delineate the powers of the Corporation. The Corporation could have proceeded against the secured assets of the guarantors only under Section 31 of the Act. In that view of the matter the challenge raised by the appellants has to be upheld. We do so. It is held that sale of item No.4 in Ext.P6 in W.P.No.15125/2007 (Ext.P1 in W.P.No.19045/2007) is null and void and all actions taken by the Corporation pursuant to the sale in respect of the said item of property are also held to be invalid and inoperative. Writ Appeals are allowed in the above terms."
12. The learned Senior Counsel also referred to the decision of the Supreme Court in (2004) 7 SCC 151 [Gajraj Jain v. State of Bihar] for contending that Corporation must act reasonably, failing which its action can be tested under Article 226 of the Constitution and in the absence of valuation report and reserve bid, the auction sale becomes only pretence.
13. The learned counsel further referred to the judgment of the Supreme Court reported in (2009) 4 SCC 590 [Annamalai University Represented By Registrar v. Secretary To Government, Information] and placed reliance on the following passage found in paragraph 57:-
"57. Relaxation, in our opinion, furthermore cannot be granted in regard to the basic things necessary for conferment of a degree. When a mandatory provision of a statute has not been complied with by an administrative authority, it would be void. Such a void order cannot be validated by inaction"
14. The learned Senior Counsel also referred to the judgment of the Supreme Court reported in (2004) 3 SCC 553 [ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd.] for contending that even in respect of money claim, resorting to Article 226 is not prohibited.
15. Further, by relying upon the decision in S.J.S. Business Enterprises (P) Ltd. v. State of Bihar, (2004) 7 SCC 166, the learned Senior Counsel would contend that Corporation must act bonafide and before resorting to auction, wide publicity must be given. Reference was made to the following passages found in paragraphs 17 and 18:-
"17. We are of the view that the sale effected in favour of Respondent 6 cannot be sustained. It is axiomatic that the statutory powers vested in State financial corporation under the State Financial Corporations Act, must be exercised bona fide. The presumption that public officials will discharge their duties honestly and in accordance with the law may be rebutted by establishing circumstances which reasonably probabilise the abuse of that power. In such event it is for the officer concerned to explain the circumstances which are set up against him. If there is no credible explanation forthcoming the court can assume that the impugned action was improper. (See Pannalal Binjraj v. Union of India9, AIR at p. 409.) Doubtless some of the restrictions placed on State financial corporations exercising their powers under Section 29 of the State Financial Corporations Act, as prescribed in Mahesh Chandra v. Regional Manager, U.P. Financial Corpn.10 are no longer in place in view of the subsequent decision in Haryana Financial Corpn. v. Jagdamba Oil Mills11. However, in overruling the decision in Mahesh Chandra10 this Court has affirmed the view taken in Chairman and Managing Director, SIPCOT v. Contromix (P) Ltd.12 and said that in the matter of sale under Section 29, State financial corporations must act in accordance with the statute and must not act unfairly i.e. unreasonably. If they do, their action can be called into question under Article 226. Reasonableness is to be tested against the dominant consideration to secure the best price for the property to be sold.
This can be achieved only when there is a maximum public participation in the process of sale and everybody has an opportunity of making an offer. Public auction after adequate publicity ensures participation of every person who is interested in purchasing the property and generally secures the best price. (SCC p. 601, para 12)
18. Adequate publicity to ensure maximum participation of bidders in turn requires that a fair and practical period of time must be given to purchasers to effectively participate in the sale. Unless the subject-matter of sale is of such a nature which requires immediate disposal, an opportunity must be given to the possible purchaser who is required to purchase the property on as-is-where-is basis to inspect it and to give a considered offer with the necessary financial support to deposit the earnest money and pay the offered amount, if required."
16. The learned Senior Counsel, lastly, referred to the judgment of the Supreme Court reported in (2009) 8 SCC 257 [Sardar Associates v. Punjab & Sind Bank] for contending that even in respect of One Time settlement claim, the power of the Court to interfere is not taken away.
17. Per contra, Mr.A.L.Somayaji, learned Senior Counsel appearing for Mr.A.Panneerchelvam, counsel for respondents 1 to 3 contended that the petitioner, being a partner of the partnership firm had deposited the title deeds with intention to create equitable mortgage for the loan sanctioned. He also gave a letter dated 30.08.1998 for confirming the creation of equitable mortgage in favour of the respondent Corporation. Subsequently, when the company was started by them, a request was made by the erstwhile partners to accept the change in constitution from partnership firm to private limited company of which the same petitioner is also a Director. A deed of agreement for confirming the liability of the partnership of the firm for due repayment of the loan was also executed by the company. The petitioner himself gave a letter confirming extension of equitable mortgage already created by him on 07.02.1989. When the loan was foreclosed as early as 29.10.1991, the petitioner has not cared to settle the dues and defaulted for more than 3 years and hence, they should not be heard in this writ petition. Under Section 29 of the State Financial Corporation Act, the Corporation can take possession and sell the asset to recover the dues without intervention of the Court.
18. Reference was made to the judgment of this Court reported in 2010 (1) CTC 163 [V.Karuppan v. The Tamil Nadu Industrial Investment Corporation Ltd] wherein, this Court held that when petitioner acquiesced himself in the auction cannot later challenge the action of the TIIC and since there was no malafides on the part of the respondent Corporation and subsequently persons have participated in the auction and property has been sold, no relief can be given to the petitioner.
19. In the terms and conditions of allotment of the loan in favour of the partnership firm, it was stipulated that the concern should offer the land at Gummidipoondi as Collateral security and also should furnish two personal guarantees acceptable to the corporation. In the letter written by the petitioner dated 30.08.1988 he had given the following undertaking:-
"I, S.Balachandran have already deposited with you on 29.08.1988 at your office at Madras the title deeds specified in the first schedule here to relating to my properties at Survey No.96/3 Panpakkam Village, Gummidipoondi Taluk, Chingleput District, as described in the second schedule hereto with intent to create an equitable mortgage by deposit of title deeds of the said properties together wioth all structures, stnading thereon, to secure the aforesaid term loan of Rs.6,60,000/- (Rupees Six Lakhs and Sixty thousands only) and soft loan of Rs.83,000/- (Rupees Eighty Three thousands only) due and owing by the said concern to you including interest, penal interest commitment charges, costs, charges and other monies that may become due and payable from time to time by my concern to you and/or any liability arising out of the aforesaid loan and undertaken by you in that behalf and payable by the concern."
20. As per the said undertaking, original title deeds were furnished. Subsequently when new company was formed, they had agreed to abide by the letter sent by TIIC dated 20.01.1989 and that letter reads as follows:-
"We hereby accord our approval for the change of Constitution to Private Limited in the name and style of M/s.Tamilnadu Antibiotics Pvt. Ltd subject to the following conditions:-
1.The Private Limited Company should execute necessary documents as required by the Corporation.
2.All the partners of the erstwhile firm (Noah Pharmaceuticals) and the directors of the newly formed company M/s.Tamilnadu Antibiotics P.Ltd) should guarantee the loan.
3.The articles of association of the company should be suitably amended to include the nominee of TIIC Ltd. in the Board of the Company, before the last drawal of the loan.
4.Theother terms and conditions stipulated at the time of sanction will apply mutatis mutandis."
21. Though the legal contention raised by the learned Senior Counsel appearing for the petitioner may look attractive but in the fact and circumstances of the case, this Court is not inclined to entertain the writ petition. Further, the property has been sold after auction. The Court also do not find any infirmities in the auction as it is admitted by the petitioner, the property had also been further sold away to R5 and R6. It is not a fit case where any relief can be granted to the petitioner.
22. Accordingly, the writ petition stands dismissed. No costs. Connected miscellaneous petition is closed.
svki To
1.The Managing Director, Tamil Nadu Industrial Investment Corporation, Anna Salai, Nandanam, Chennai - 600 035.
2.The Regional Manager, Chennai Branch, Tamil Nadu Industrial Investment Corporation, Nandanam, Chennai.
3.The Manager, Special Recovery Branch II, Tamil Nadu Industrial Investment Corporation, 692, Anna Salai, Nandanam, Chennai