Gujarat High Court
Dhirajlal Jasmatbhai Viradiya And Anr. vs Gujarat State Finance Corporation on 16 July, 1990
Equivalent citations: [1991]72COMPCAS136(GUJ), (1990)2GLR1250, AIR 1991 GUJARAT 98
Author: G.T. Nanavati
Bench: G.T. Nanavati
JUDGMENT G.T. Nanavati, J.
1. The petitioners are carrying on business in the name and style of Bajrang Auto Electric at Rajkot. It is their case that they took on lease a shop from its owner, R. R. Engineering Works, Rajkot, on January 1, 1985. It was an oral lease. Subsequently, on November 28, 1986, they executed a rent note setting out the terms and conditions of the lease. Since October 1, 1985, they are in continuous possession of the shop as a tenant. On December 17, 1987, officers of the respondent-Corporation came to their shop and told petitioner No. 2 to vacate that shop and hand over possession immediately. On a request made by petitioner No. 2, time was given to him to consult his advocate. Petitioner No. 2 then locked the shop and went to consult his advocate.When he returned, he found that the lock was broken open and that another lock was put in its place. The petitioners, on making an inquiry, came to know that the said lock was put by the officers of the Corporation. They further came to know thereafter that their landlord, R. R. Engineering Works, had taken a loan from the respondent-Corporation and at that time agreed not to let or transfer its industrial establishment for which the loan was taken and as their landlord had not repaid the loan as agreed, the Corporation had taken the said action. The action of the Corporation in taking over possession of the shop is challenged in this petition on the ground that neither under the agreement entered into between the Corporation and the owner of the premises, nor under section 29 of the State Financial Corporations Act, the Corporation could have lawfully taken over possession in the manner in which it did, and that the only manner in which they could have lawfully taken possession from the petitioners was by resorting to the provisions of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, or under the ordinary law.
2. The petitioners, in order to prove their case that they are the tenants of the said shop, have produced a copy of a receipt showing payment of rent for the month of October, 1985, and a copy of the rent note dated November 28, 1986.
3. In their reply, the respondent-Corporation has pointed out that on March 3, 1982, it had sanctioned a loan of Rs. 10.52 lakhs to R. R. Engineering Works, an industrial concern, and Rs. 10.43 lakhs have already been disbursed. The industrial concern had repeatedly committed defaults in making repayment and, therefore, a public advertisement was given on August 21, 1986, inviting offers for sale of its assets. In exercise of its powers under section 29 of the Act, the Corporation had taken possession of the industrial concern on January 17, 1987. Possession of the shop over which the petitioners are now claiming tenancy rights was also taken over in the presence of petitioner No. 2. At that time, he had not claimed any tenancy right. The fact of attachment of the property of R. R. Engineering Works including the said shop was published in newspapers on February 3, 1987. Thereafter, the industrial concern approached the Corporation and promised to repay the dues. The Corporation, on February 9, 1987, by way of a last opportunity, returned possession of the properties attached. The industrial concern, however, did not honour the commitments made and the cheques issued by it were dishonoured. Under these circumstances, the Corporation once again took possession of the properties of the industrial concern including the shop over which the petitioners are now claiming tenancy rights. The Corporation denied that the petitioners are the tenants of the said shop, and that they were not aware of the correct state of affairs before October 17, 1987. It has also denied correctness of the version of the petitioners that the officers of the Corporation had put their lock during the absence of petitioner No. 2. They have raised a contention that this petition should be dismissed as the petitioners have concealed these material facts and made false averments in the petition. It is also their contention that this petition has been filed by the petitioners in collusion with the industrial concern in order to defeat the rights of the Corporation.
4. The Corporation has produced a copy of the panchnama dated January 17, 1987, to show that, to the knowledge of petitioner No. 2, possession of their shop was taken over by the Corporation along with other properties of the industrial concern and that petitioner No. 2 had acted as a panch witness and that the said panchnama bears his signature also. The Corporation has produced a cutting from the newspaper Fulchhab to show that the properties of the industrial concern were advertised for sale on August 18, 1986, by the Corporation. It has also produced cuttings from newspapers Fulchhab, Lok Satta and Jai Hind of February 3, 1987, to show that the fact of attachment of the properties of the industrial concern was published in those newspapers.
5. In order to support their case, the petitioners have, subsequent to the filing of the petition, produced more receipts showing payment of rent in respect of the shop in question. The Corporation, on the other hand, has produced a copy of the mortgage deed executed by the industrial concern in their favour.
6. The fact that petitioner No. 2 had acted as a panch witness and correctness of the contents of the panchnama are not denied. Execution of the mortgage deed by the petitioners is also not denied. As against that, the Corporation has disputed the correctness of the receipts produced by the petitioners. From what is stated in the panchnama, it becomes apparent that, to the knowledge of the petitioners, possession of the shop was taken over by the Corporation on February 7, 1987, and was returned on February 9, 1987. Thus, they have knowingly made an incorrect statement that they are in continuous possession of the shop since October 1, 1985, and that they did not know, till they made inquiries after January 17, 1987, as to why the Corporation had earlier taken over possession of their shop.
7. Further, the mortgage deed discloses that the shop in question is a part of the mortgaged properties, and that the mortgagors had agreed to give up their rights under section 65 of the Transfer of Property Act to give the mortgaged properties on lease without the written consent of the Corporation. The mortgage deed also gives to the Corporation power to enter upon and take over possession of the mortgaged properties in case of default in payment of the dues. This is the factual position in this case.
8. What is urged by learned counsel for the petitioners is that section 29 of the Act does not permit the Corporation to take forcible possession from a third party or from a tenant of the borrower industrial concern. It merely confers a right on the Corporation to take possession of the industrial concern and that right can be exercised, like any other right, if there is no obstruction. If there is an obstruction, the Corporation must resort to legal remedies. He further submitted that section 29 was not intended to affect the rights of a third party and, therefore, the Corporation cannot do what the borrower cannot do itself.
9. On the other hand, it is urged by the learned Advocate-General that, by enacting section 29, Parliament intended to confer special privileges on the Corporation in the matter of enforcement of its claims against borrowers. He submitted that section 29 confers more rights on the Corporation than ordinarily available to a creditor under the ordinary law. When the Financial Corporation takes action against an industrial concern under section 29(1) of the Act, the Financial Corporation becomes the owner of such concern for the purpose of suits by or against the concern. He also submitted that section 46B overrides all the provisions of the previous laws which are inconsistent with the rights created in favour of the Financial Corporations under the Act. If section 29 is read with section 46B, then it becomes clear that the right of the Corporations to take over possession of the industrial concern is without any limitation. It has also the right to transfer by way of sale or lease and realise the property pledged, mortgaged, hypothecated or assigned to it. He submitted that these types of rights are given by Parliament to Financial Corporations in order to safeguard their own interest against unscrupulous borrowers and to take speedy action for recovery without going to a court of law.
10. The question that arises for consideration is what is the nature and extent of the right conferred on the State Financial Corporations by section 29(1) of the Act. Section 29 reads as follows :
"29. Rights of Financial Corporation in case of default.-(1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial 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 property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.
2) Any transfer of property made by the Financial Corporation, in exercise of its powers under sub-section (1), shall vest in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property.
(3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods.
(4) Where any action has been taken against an industrial concern under the provisions of sub-section (1), all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied, firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto.
(5) Where the Financial Corporation has taken any action against an industrial concern under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of the concern."
11. Along with other rights, the right which is conferred by sub-section (1) of section 29 is to take over possession of the industrial concern where the industrial concern has made a default in repayment of loan or advance or an instalment thereof or in meeting its obligations or otherwise has failed to comply with the terms of agreement with the Financial Corporation. Ordinarily, the person lending money does not have such a right. Therefore, it can be said that it is a special right conferred by the Act. That also becomes clear from the object and the relevant provisions of the Act.
12. Before the Act was enacted, medium and long-term credits were not easily available to industrial undertakings. That was the result of various difficulties experienced by the financial institutions in recovering their dues from the borrowers. In the absence of special provisions like sections 29 and 31 of the Act, financial institutions were finding it difficult to freely invest their money in industrial concerns as they were required to adopt lengthy and cumbersome procedure of sale through courts in cases of defaults by the borrowers. The funds of the financial institutions were thus getting locked up for a long time and were not available to as many industrial concerns and as quickly as possible. For quick industrial progress, it was found necessary that the flow of credit remains quick and unimpaired. For achieving that object, it was also found necessary that the money invested by financial institutions is recovered as speedily as possible. It is for that reason that Parliament has enacted the Act.
13. The Act provides for setting up State Financial Corporations. The Financial Corporation is to be managed by a board of directors. That board has to discharge its functions under the Act on business principles, due regard being had to the interest of the industries and the general public. Its main business is to give financial accommodation, but at the same time it is also required to take sufficient steps to secure the accommodation by pledge, mortgage, hypothecation, etc. With a view to safeguard its interest, it is given power to impose conditions on the industrial concern seeking financial accommodation. In order to see that the funds of the Financial Corporation are not locked up because of defaults by the industrial concern, various rights and powers have been conferred on it as can be seen from sections 29 to 31 and section 32A of the Act. Section 46B gives an overriding effect to the provisions of the Act with the result that the rights conferred by sections 29, 31 and other provisions of the Act or any rules or orders made thereunder, have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of association of an industrial concern, or in any other instrument having effect by virtue of any law other than the said Act. The survey of these provisions makes it clear that Parliament wanted special financial institutions to be set up for giving financial accommodation to industrial concerns and, at the same time, confer on them special rights for recovery of their dues in case of defaults by the industrial concerns even without, in some cases, any adjudication by judicial authorities. Section 29 confers certain rights on the Financial Corporation in case of default by the industrial concern. It is given a right to take over the management or possession or both, of the industrial concern. The Financial Corporation can, therefore, exercise either of these rights or both of them simultaneously. This section also confers a right on the Financial Corporation to transfer by way of lease or sale and thereby realise the property pledged, mortgaged, hypothecated or assigned to it. All these rights are independent rights. The right to take over possession of the industrial concern becomes available to the Financial Corporation, if there is a default by the industrial concern as contemplated by that section.
14. Therefore, looking to the language of the section, it is not possible to accept the contention raised on behalf of the petitioners that the Financial Corporation can take over possession of only that property where industrial activities are carried on. It was contended that the right extends to taking over possession of a factory of the concern where it can be said that an industrial activity is carried on and not to other immovable properties like buildings and shops owned by the industrial concern. In the absence of any word of limitation to that effect, it is not possible to accept this contention. The right to take over possession of the industrial concern, would mean that the said right extends to taking over possession of all that which belongs to the industrial concern and which may be in its possession or custody at the time when possession is sought to be taken over. As stated earlier, the board has to act on business principles, due regard being had to the interest of the general public. Here, a special right has been conferred on the Financial Corporation with a view to see that it is able to recover its dues promptly and effectively, and without the necessity of resorting to a court of law. In the absence of section 29, the Board would have been powerless even in a case where defaults are made by the industrial concern and no attempt has been made by it to fulfil its obligations and the factory is allowed to remain idle. Such situations and consequent delay in recovering its dues would be harmful to the interest of the Financial Corporation as the machinery of the industrial concern, etc., may rust and the undertaking may be found to be useless when it is brought to sale later on. So also, an unscrupulous industrial concern, in order to defeat the right of the Financial Corporation, or to delay the recovery, may hand over possession of the property belonging to it to third parties, contrary to the terms and conditions on which financial accommodation was given to it. It is in this context that the content or extent of the right has to be found. Considering the purpose for which such a right has been conferred, it has to be held that this right to take over possession of the industrial concern extends to taking over possession of all things that are found to belong to the industrial concern, and this right will include the right to take over possession of even that property belonging to the industrial concern which is found in the possession or custody of a third party. If any part of the property of an industrial concern is found by the Financial Corporation to be validly transferred at the time of taking over possession of the industrial concern, obviously the Financial Corporation will have to return its possession to the person or the party in whose favour it is validly transferred, because that property cannot be said to belong to the industrial concern, but when there is no doubt regarding ownership of the property of the industrial concern, or where it appears to it that possession of it has not been validly transferred to a third party, it can take over possession of such property even from the hands of the third party. Can it be successfully urged that the Financial Corporation cannot take over possession of the property belonging to the industrial concern from a third party who is put in possession by the industrial concern contrary to the terms and conditions on which financial accommodation was given to the industrial concern ? The answer must be in the negative because the industrial concern, with a view to frustrate the right of the Financial Corporation, or to create difficulties in the way of speedy recovery of its dues, may put a third party in possession of the property belonging to it, or the property which has been pledged, mortgaged, hypothecated or assigned to it. If the right to take over possession which is conferred by section 29(1) is construed as a right to recover possession, subject to rights of third parties, meaning thereby that if the third parties raise obstructions or objections, possession thereof cannot be taken over by the Financial Corporation directly but should obtain the same only through courts of law, then such an interpretation would defeat the very purpose of giving a special right to the Financial Corporation.
15. It is no doubt true, as contended by learned counsel for the petitioners, that the Act does not create a statutory charge over the property of the industrial concern, nor does it extinguish the rights of third parties and vest all the properties of the industrial concern in the Financial Corporation free from all claims or encumbrances as soon as it takes over possession of the industrial concern. That is because the right which is conferred is a right to take over possession of the industrial concern. At that stage, the question of extinguishing rights of third parties or vesting of all the properties of the industrial concern in the Financial Corporation free from all claims or encumbrances does not arise. Such a question may arise when a different and an independent right of realising the properties pledged, mortgaged, hypothecated, or assigned to the Financial Corporation is exercised by it. In this case, such a question does not arise because the Financial Corporation has not exercised that power, but has thought it fit to take over possession only. Therefore, the absence of a provision creating a statutory charge over the property of the industrial concern or extinguishing rights of third parties or vesting such property in the Financial Corporation free from all claims or encumbrances cannot affect its right to take over possession of the property belonging to the industrial concern even from the hands of third parties as contended. Therefore, it cannot be said that, in taking over possession from the third party in the absence of such a provision, it has acted beyond the objects of the Act and section 29. Considering the nature and extent of the right, it will have to be held that the State Financial Corporation can validly take over possession of properties belonging to the industrial concern even when they are found in the possession of third parties. If a third party has any right, it can get the same established in a court of law and obtain proper relief for recovery of possession or can sue the Financial Corporation for the damage or loss caused to it thereby. As stated earlier, if the third party is able to satisfy the Financial Corporation when it takes over possession of the industrial concern that it has a valid right to retain possession of the property belonging to the industrial concern, then the Financial Corporation will have to release the said property in favour of that party. In all other cases of doubt or dispute, the third party will have to go to the court of law and establish its right to recover possession of the property taken over by the Financial Corporation.
16. Learned counsel for the petitioners, in support of his submissions, relied upon the following observations in Ramshree Mahavir v. Girdharlal [1970] 11 GLR 971 :
"In a civilization where the rule of law obtains, it is difficult to envisage a court of law upholding any such right in favour of a person who claims the right to dispossess by use of force without recourse to due process of law. If this were to be permitted, there would be a violent conflict between persons claiming individual rights. There is no manner of doubt that no such right can be claimed by the defendant regardless of the question whether or not the plaintiff himself has any right to remain in possession. Once it is established by the plaintiff that he is in exclusive possession and it is admitted by the defendant from dispossessing the plaintiff by force must be issued as a matter of course, more readily, if the defendant persists in asserting the claim that he has a right to take the law into his own hands and forcibly dispossess the plaintiff."
17. In my opinion, the above observations cannot be of any help in interpreting the right to take over possession conferred by section 29. The above observations pertain to the right to take over possession under the ordinary law and cannot have any relevance where the law itself confers a special right or power to take over possession. He also relied upon another decision of this court in Gujarat State Financial Corporation v. Jayshree Industries, AIR 1986 Guj 29; [1985] 1 GLR 445. In that case, this court was concerned with the interpretation of section 31 read with section 46B of the Act, and the inherent power of the court to grant instalments to the borrower. This court observed that, in view of the specific procedure laid down in the Act, it was not possible to hold that the court would, in exercise of its inherent powers, grant instalments to the borrower who has defaulted in paying instalments or in discharging his obligations. Even this decision cannot be of any help in deciding the question which has arisen in this case.
18. For the reasons stated above, it will have to be held that the Corporation had the power to take over possession of the shop in question and the action of the Corporation in taking over possession which is challenged in this petition was quite legal. If the petitioners believe that a valid right was created in their favour, notwithstanding the fact that the industrial concern has parted with possession contrary to the terms on which loan was granted to the industrial concern, it will be open to them to get their right established in a court of law and obtain proper relief from it. As there is no substance in this petition, it is dismissed. Rule is discharged with no order as to costs.
19. Petition dismissed.