Karnataka High Court
Rekha Rajendra, W/O. M.A. Rajendra vs The Karnataka State Financial ... on 1 June, 2006
Equivalent citations: AIR2006KANT266, I(2007)BC25, [2006]133COMPCAS105(KAR), ILR2006KAR2773, 2006(5)KARLJ409, AIR 2006 KARNATAKA 266, 2006 (4) AIR KANT HCR 725, (2006) 46 ALLINDCAS 217 (KAR), 2006 (46) ALLINDCAS 217, (2006) ILR (KANT) 2773, (2006) 5 KANT LJ 409, (2007) 1 BANKCAS 25, (2006) 3 BANKJ 840, (2006) 133 COMCAS 105
Author: Ajit J. Gunjal
Bench: Ajit J. Gunjal
ORDER Ajit J. Gunjal, J.
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1. The petitioner in this petition is questioning the action of the respondents 1 and 2 for taking over the unit in exercise of the powers under Section 29 of the State Financial Corporations Act, 1951 (for short 'the Act') as arbitrary and for quashing of the consequential proceedings which would relate to the sale of the unit or in the alternate direct the first respondent to furnish the details of the outstanding amount so as to enable the petitioner to pay 25% of the amount to avail the benefit of one time settlement policy.
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2. The matter arises in the following manner.
The petitioner sought financial assistance in respect of a project from the first respondent. The project estimate was Rs. 12.90 lakhs. The first respondent sanctioned a loan of Rs. 8 lakhs, out of which a sum of Rs. 4,13,000/- was released. The petitioner was permitted a repayment holiday period of 13 months and 10 days. It is only thereafter the repayment dues with interest, had to commence. According to the petitioner the loan having been sanctioned on 5.12.1998, the commencement of repayment of the said loan would be only on 5.3.1999. According to the petitioner till date i.e., 5.3.1999 the petitioner cannot be treated as a defaulter. On 4.11.2000 the petitioner sought for a further loan for the purchase of additional land for completion and expansion of the project. The said loan was sanctioned. The total estimate of the entire project was Rs. 32,15,000/- which was inclusive of the previous project cost of Rs. 12,19,000/-. The respondent sanctioned a sum of Rs. 17,50,000/- for the purchase of the site and construction. The petitioner consequently had to invest a sum of Rs. 14.65 lakhs as her share in the project. The first respondent had released an amount of Rs. 12,93,000/- in February 2001. It is the case of the petitioner that she purchased the property by paying a sum of Rs. 18 lakhs towards sale consideration, stamp duty, registration charges and other miscellaneous expenses. Suffice it to say that a sum of Rs. 50,000/- was paid by the petitioner to the respondent without there being any demand. However, on 15.6.2001 a demand notice was sent to submit certain documents and to remit a sum of Rs. 44,469/- as dues. According to the petitioner she paid a sum of Rs. 50,000/- to the respondent pursuant to the demand notice on 15.6.2001 as against the demand of Rs. 44,469/-. It is the further case of the petitioner that the remaining loan amount was not released and fresh notice was issued regarding non releasing of the remaining loan. As on 13.6.2003 the petitioner had completed ground floor, first floor and second floor constructions and what remained was only ancillary work to be carried out. The petitioner would state that the cost of actual construction put up by her was Rs. 22,46,000/-; the costs of construction is Rs. 50,000/- per square. Since the petitioner defaulted in payment of the loan amount, the respondents exercised their powers under Section 29 of the Act and took over assets of the petitioner. The valuation of the property as assessed by the KSFC was Rs. 35 lakhs. It is the case of the petitioner that the other goods which were not pert of the hypothecated property worth Rs. 5 lakhs was also taken over. Faced with such difficulty, the petitioner made correspondence with the General Manager seeking release of the unit by paying a sum of Rs. 1.50 lakhs and also requested for rescheduling the loan. It is the case of the petitioner that the General Manager directed that the unit be released in favour of the petitioner on depositing 20% of the interest arrears to reschedule the loan. The interest due as on that date was Rs. 7,00,000/- and 20%, according to the petitioner is Rs. 1,50,000/-. Suffice it to say that a paper Page 0645 publication was issued on 13.2.2004 proposing to auction the assets of the petitioner. But however, according to the petitioner, no sale took place and the sale was deferred. The respondent issued a letter stating that as against minimum price of Rs. 35 lakhs, there was an offer of Rs. 26.20 lakhs and called upon the petitioner to bring better offer within ten days. A copy of the said communication is produced at Annexure-B. The petitioner replied to the said letter inter alia stating that the unit was not released as promised and offered price was too meager to be accepted. But however did not bring a better offer. But however questioning the said sale the present writ petition is filed.
3. Pursuant to the notice issued, respondents 1 to 3 have entered appearance and filed the statement of objections.
4. In the statement of objections, respondents 1 to 3 would contend that after the writ petition was filed an Interim order regarding confirmation of the sale was granted subject to the petitioner depositing a sum of Rs. 5 lakhs. But the petitioner did not choose to comply with the said order by depositing a sum of Rs. 5 lakhs. The said non-compliance was brought to the notice of the court on 14.6.2005 and the court observed that as the condition was not complied there shall be no impediment for the respondent to proceed further. According to the respondent, subsequent to the order dt 14.6.2005, they have confirmed the sale in favour of the auction purchaser on 28.6.2005. A copy of the said communication sent to the purchaser is to be found at Annexure-R2 and the acknowledgment thereof is at Annexure-R.3.
5. Mr. Ravishankar, learned Counsel appearing for the petitioner would contend that the fault lies at the threshold of the respondent. According to him, as against the sanctioned loan and the loan released, the difference would be Rs. 8,40,000/-, meaning thereby that the amount which was sanctioned was not released, but only a part of the loan. The total cost of the project was assessed at Rs. 32 lakhs. According to him, there was no justification for the respondent to take the assets and bring the property for sale as contemplated under Section 29 of the Act. He would also contend that the market value of the building in question is Rs. 36 lakhs and the sale amount is Rs. 26 lakhs, which is much below the actual market price. He would also further contend that the petitioner was not a defaulter. He would also contend that the General Manager of the respondent had directed for release of the unit to the petitioner on his depositing a sum of Rs. 1,50,000/-. Notwithstanding that the said amount having been deposited the unit is not released. He would also further contend that the entire procedure culminating in the sale of the unit is accentuated with malafide exercise of powers and consequently this is a fit case for interference under Article 226 of the Constitution of India. He would also rely on the judgment of the Apex Court in the case of Mahesh Chandra v. Regional Manager, U.P. Financial Corporation and Ors. .
6. Mr. Bipin Hegde, learned Counsel appearing for respondents 1 to 3 would justify the action of the respondents in bringing the unit for sale. He would further contend that the term loan of Rs. 8 lakhs was sanctioned on 5.2.1998 Page 0646 for completing the project Out of the said term loan, a sum of Rs. 4.13 lakhs was released, but the petitioner failed to complete the project by bringing margin money of Rs. 4.90 lakhs. Consequently the excess loan of Rs. 3,87 was recalled. The respondents also issued legal notice under Section 30 of the Act for which the petitioner gave reply on 17.7.1999. He would primarily contend that the respondents were justified in taking over the assets under Section 29 of the Act, which fact was also intimated to the petitioner. A legal notice was issued on 18.7.2003 to recall the loan. Since nothing transpired, the respondents had no option but to give an advertisement, for sale of the unit on 5.12.2003 in Vijaya Times and the sale negotiation was scheduled to take place on 17.12.2003. During this interregnum, the petitioner had submitted a letter and requested for release of the unit and for scheduling of payment of the loan. The General Manager had earlier directed for rescheduling of the loan after collecting Rs. 1.50 lakhs. But however the petitioner did not comply with the said direction of the General Manager and the two cheques of Rs. 50,000/- which were issued in compliance with the order of the General Manager were dis-honoured. In these circumstances, the respondents had no option but to bring the unit for sale. The respondent Corporation received an offer of Rs. 22.30 lakhs. He would also submit that all further proceedings pursuant to the sale was stayed subject to the petitioner depositing Rs. 5 lakhs and as the same was not complied with, the communication confirming the sale was issued to the auction purchaser. The sum and substance is that the petitioner is not entitled for any of the reliefs sought. Another contention which is urged by Mr. Bipin Hegde is that the unit in question was taken over on 18.6.2003 and after a lapse of two years the petition is filed. The petitioner has failed to bring the better offer. According to him, the petitioner is not entitled for the reliefs sought.
7. The points which fall for determination in this petition are:
1) Whether the respondents were justified in taking over the unit as contemplated under Section 29 of the Act?
2) Whether the third respondent was justified in bringing the unit for sale?
8. The powers of the court under Article 226 of the Constitution in respect of the financial loan under the State Financial Corporations Act, more so, in relation to Section 29 of the Act has been categorically stated by the Apex Court in the case of Karnataka State Industrial Investment and Development Corporation Ltd. v. Cavalet India Limited and Ors. reported in I.L.R. 2005 Kar. 3247. The Apex Court in an identical situation has stated the legal principle as follows:
From the aforesaid, the legal principles that emerge are:
(i) The High Court while exercising its jurisdiction under Article 226 of the Constitution does not sit as an appellate authority over the acts and deeds of the Financial Corporation and seek to correct them. The doctrine of fairness does not convert the writ courts into appellate authorities over administrative authorities.
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(ii) In a matter between the Corporation and its debtor, a writ Court has no say except in two situations:
(a) there is a statutory violation on the part of the Corporation, or
(b) where the Corporation acts unfairly i.e., unreasonably.
(iii) In commercial matters, the Courts should not risk their judgments for the judgments of the bodies to which that task in assigned.
(iv) Unless the action of the Financial Corporation is mala fide, even a wrong decision taken by it is not open to challenge. It is not for the Courts or a third party to substitute its decision, however, more prudent Commercial or business like it may be, for the decision of the Financial Corporation. Hence, whatever the wisdom (or the lack of it) of the conduct of the Corporation, the same cannot be assailed for making the Corporation liable.
(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold and this could be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer.
(vi) Public auction is not the only mode to secure the best price by inviting maximum public participation, tender and negotiation could also be adopted.
(vii) The Financial Corporation is always expected to try and realise the maximum sale price by selling the assets by following a procedure which is transparent and acceptable, after due publicity, wherever possible and if any reason is indicated or cause shown for the default, the same has to be considered in its proper perspective and a conscious decisions has to be taken as to whether action under Section 29 of the Act is called for. Thereafter, the modalities for disposal of the seized unit have to be worked out.
(viii) Fairness cannot be a one-way street. The fairness required of the Financial Corporations cannot be carried to the extent of disabling them from recovering what is due to them. While not insisting upon the borrower to honour the commitments undertaken by him, the Financial Corporation alone cannot be shackled hand and foot in the name of fairness.
(ix) Reasonableness is to be tested against the dominant consideration to secure the best price.
9. Keeping these principles in mind, one will have to examine whether the petitioner is entitled to any of the reliefs.
10. Admittedly, it is not in dispute that the petitioner had approached the respondent Corporation for availing of the loan for construction of a restaurant. It is also not in dispute that there is series of defaults on the pert of the petitioner in repayment of the loan. If one were to take into Page 0648 consideration the attitude of the petitioner from the date of availment of loan i.e., 5.12.1998 till filing of the writ petition on 17.2.2005, it is to be noticed that there is no sincere and serious effort on the part of the petitioner to repay the loan which she had borrowed. Time and again the Corporation had given enough time to the petitioner to come forward and repay the loan. It is to be noticed that the General Manager had directed that the loan should be rescheduled and the unit should be released in favour of the petitioner after collecting a sum of Rs. 1.50 lakhs. This direction was given on 15.12.2003. Pursuant to the said direction, the petitioner had paid a sum of Rs. 50,000/- in cash and issued two post-dated cheques of Rs. 50,000/- payable on 24.12.2003 and 27.12.2003 towards the condition imposed for the release of the unit The said two cheques were presented to the bank, but both the cheques were dishonoured. Consequently the respondents obviously could not have released the unit to the petitioner. Notwithstanding such a serious lapse on the part of the petitioner, on 12.2.2004 a meeting was scheduled and in the said meeting the petitioner having come to know that the unit is brought to sale on 13.2.2004 paid the amount of dishonoured cheque which is a sum of Rs. One lakh and sought for release of the unit without any fresh payment This fact would clearly show that notwithstanding the fact that there was a direction by the General Manager for the release of the unit and for re-scheduling of the loan on certain conditions the petitioner did not come forward to comply with the said dues. The said two cheques which were presented for collection on 12.1.2004 were dishonoured. This fact would clearly disclose that the petitioner was aware that the cheques which were issued by her are likely to be dishonoured. But however she did not choose to come and explain the situation to the respondent. She kept quiet for a period of one month. It is only when the unit was being brought to sale on 13.2.2005, she would come forward with the said amount. But however it is to be noticed that the second advertisement was issued on 13.2.2004. But however the petitioner did not pay any amount. The respondent once again intimated to the petitioner that the beneficial scheme which was extended to her was to expire on 31.3.2004 and requested the petitioner to pay the balance within 31.3.2004. The said communication is to be found along with the synopsis which is filed. It appears to avail the said benefit of DRS scheme, the petitioner issued a cheque on 31.3.2004. But however the said cheque also was dishonoured. Consequently the respondents have issued a legal notice on 24.4.2004 under Section 138 of the Negotiable Instrument Act. Looking at the conduct of the petitioner, the respondent had no option but to advertise the sale of the unit for the third time on 3.7.2004. The said unit was brought to sale for 4th time on 28.9.2004 and the 4th respondent who is the auction purchaser purchased the same after paying the amount.
11. Another fact which is note worthy is that the petitioner had the benefit of the interim order at the hands of this Court But however did not choose to comply with the said order. Consequently this Court had no option but Page 0649 to observe that if the said condition while granting the interim order is not complied with, it is open for the respondent to proceed further and confirm the sale in favour of the auction purchaser respondent No. 4. It is to be noticed that notwithstanding the time granted by the Corporation for repayment of the schedule Joan, the petitioner did not avail the opportunity. The unit was directed to be released on payment of certain amount. The said amount was also not deposited immediately and it is only when the noose was tightened she came up with the deposit of balance amount of Rs. One lakh, that too after one month from the date of dishonour of the cheque. Thereafter the petitioner has once again defaulted in not depositing an amount of Rs. 5 lakhs as directed by this Court The chronological events would disclose that the petitioner at no point of time had made any serious and sincere efforts to repay the loan. In the case of Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. , the Apex Court while considering the scope of Section 29 has observed as follows:
The obligation to act fairly on the part of the administrative authorities was evolved to ensure the rule of law and to prevent failure of justice. This doctrine is complementary to the principles of natural justice which the quasi-judicial authorities are bound to observe.
The fairness required of the Corporation cannot be carried to the extent of disabling them from recovering what is due to them. Also, the Corporation is an independent autonomous statutory body having its own constitution and rules to abide by, and functions and obligations to discharge. As such in the discharge of its functions, it is free to act according to its own light. The views it forms and decisions it takes are on the basis of the information in its possession and the advice it receives and according to its own perspective and calculations. Unless its action is mala fide, even a wrong decision by it is not open to challenge. It is not for the courts or a third party to substitute its decision, however, more prudent, commercial or businesslike it may be, for the decision of the Corporation. In commercial matters the courts should not risk their judgments for the judgments of the bodies to whom that task is assigned.
12. In the said decision the Apex Court has observed as follows:
The Corporation cannot be shackled hand and foot in the name of fairness. In matters like the present one, fairness cannot be a one-way street. Corporations borrow money from the Government or other Financial Corporations and are required to pay interest thereon. Where the borrower has no genuine intention to repay and adopts pretexts and ploys to avoid payment, he cannot make the grievance that the Corporation was not acting fairly, even if requisite procedures have been followed.
The State Financial Corporation as an instrumentality of the State deals with public money. There can be no doubt that the approach has to be public-oriented. It can operate effectively if there is regular realisation of the instalments. While the Corporation is expected to Page 0650 act fairly in the matter of disbursement of the loans, there is corresponding duty cast upon the borrowers to repay the instalments in time, unless prevented by insurmountable difficulties. (emphasis supplied by me). Regular payment is the rule and non-payment due to extenuating circumstances is the exception. If the repayments are not received as per the schedule time-frame, it will disturb the equilibrium of the financial arrangements of the Corporations. They do not have at their disposal unlimited funds. They have to cater to the needs of the intended borrowers with the available finance. Non-payment of the instalment by a defaulter may stand in the way of a deserving borrower getting financial assistance.
13. It is not brought to my notice that the respondents have acted in a manner which is unfair or with any malafide intention. The petitioner was given enough chance and time to repay the loan and postponed the sale of the unit not once but thrice. But the petitioner has not chosen to avail the said opportunity. Obviously the respondent cannot postpone the sale indefinitely to recover the dues. The fairness required of the respondent cannot be carried to the extent of disabling them from recovering what is due to them.
14. In so far as better offer which is brought by the petitioner is concerned, there is no concrete proof that such an offer has been made. Assuming that such an offer is made, it is to be noticed that it has been made only after confirmation of sale. Obviously much water has been flown under the bridge. Consequently, it cannot be said that the petitioner is also entitled for resale of the property.
15. A solemn undertaking was given by the petitioner to discharge the loan. But, however, she has not chosen to do so. It is also to be noticed that a writ court can interfere with the action of the Corporation only in two situations where there is a practical failure on the part of the Corporation or where the Corporation has acted unfairly, i.e., unreasonably. It is not brought to my notice that there is a statutory failure on the part of the Corporation or the Corporation has acted in an unfair and unreasonable manner.
16. Consequently, I do not find any merit in this writ petition. Petition stands rejected.