Karnataka High Court
Karnataka State Financial Corporation vs Associated Engineers on 17 December, 1993
Equivalent citations: [1997]88COMPCAS375(KAR), ILR1994KAR540
JUDGMENT K. Shivashankar Bhat, J.
1. The respondent is a proprietary industrial concern at Arsikere, Hassan district. In the year 1989, the respondent obtained a loan from the petitioner-Corporation which is an undertaking of the State Government. The loan advanced by the petitioner-Corporation was Rs. 6.20 lakhs. Obviously, there were difficulties resulting in certain negotiations between the parties. The Corporation agreed to reschedule the repayments and consequently in the year 1991, the Corporation agreed to reschedule the repayments. The Corporation also advanced a further sum of Rs. 3.35 lakhs as additional loan by way of rehabilitation assistance. This additional loan was to be repaid in 10 equal quarterly instalments of Rs. 37,500, each commencing from November 20, 1993. However, interest shall have to be paid until then commencing from March 20, 1991. The repayment of the first loan balance of Rs. 4,70,000 was rescheduled and refixed so as to be paid in 10 equal quarterly instalments of Rs. 47,000 commencing from May 20, 1996. Interest, however, shall have to be paid until then with effect from March 20, 1991. There was another loan of Rs. 1,56,000 referred to as the second loan which was rescheduled and refixed so as to be repaid in three equal quarterly instalments of Rs. 52,000 commencing from November 20, 1998, but interest thereon shall have to be paid from March 20, 1991, itself. It is unnecessary to refer to the other terms of this rehabilitation assistance. The respondent failed to pay the interest and consequently, the respondent was overdue in a sum of Rs. 2.37 lakhs towards the interest alone as on March, 1992. On March 18, 1992, the respondent requested the manager of the Corporation to grant three more weeks' time to clear the overdues which was rejected. Thereafter, the respondent filed a civil suit in the Court of the Munsiff at Arsikere. The respondent sought a decree for permanent injunction restraining the defendant-Corporation from dispossessing or seizing or interfering with the peaceful possession and quiet enjoyment of the schedule property - the schedule property included buildings, structures, fittings, fixtures, machinery, etc., apart from the land. The suit was filed on March 24, 1992. An application for temporary injunction was also filed. On a consideration of the material on record, the trial court rejected the application pointing out that the defendant-Corporation had a statutory right to take action under section 29 of the State Financial Corporations Act, 1951 (for short "the Act"), which should not be normally interfered with by the court. The trial court also observed that the plaintiff failed to pay the instalments as agreed to and in the circumstances the discretionary jurisdiction was denied.
2. The plaintiff filed an appeal. The learned civil judge reversed the order of the trial court mainly following the observations made by the Supreme Court in Mahesh Chandra v. Regional Manager, U. P. Financial Corporation .
3. The question before me is :
Whether the discretionary power under Order 39, rules 1 and 2 should be exercised in favour of the plaintiff in such a situation like this and whether the lower appellant court was justified in reversing the order made by the trial court.
4. It should be borne in mind that courts cannot be generous at the cost of public or private institutions. The judicial power shall have to be exercised only to see that the law is respected and obeyed. There is no such abstract concept of generosity or charity to be imparted while exercising judicial power. The defendant-Corporation no doubt is an instrumentality of the State; its action shall have to be guided by reason and fairness. But at the same time, it cannot be forgotten that the defendant-Corporation is essentially an institution set up to advance loans to the deserving entrepreneurs. The purpose of the Corporation is not to part with public funds as and when somebody in the guise of an enterprise seeks its assistance. Further, having lent its funds, the Corporation also owes a duty not only to itself but to the public to recover the same as and when the recoverable amounts are due. The power to recover the amounts shall have to be exercised without causing undue hardship or reflecting an attitude of vindictiveness against the borrower, but that does not mean that the Corporation should refrain from proceeding with the recovery, when it has found that the entrepreneur, who has borrowed from the Corporation is not able to act diligently and seems to be a thorough failure in the activity undertaken by the entrepreneur. Mahesh Chandra v. Regional Manager, U. P. Financial Corporation , is frequently cited to support the view that the State Financial Corporation should not proceed with recovering the loan which may cause undue hardship to the borrower. Several passages in the said judgment pointing out the need to encourage industrial activity in the country and promote the private sector were frequently referred to in this regard. But it should be noted that the entire decision is based on the following facts as stated by the Supreme Court at page 942 (at page 12 of 78 Comp Cas) :
"Unfortunately, the Corporation was guilty of not acting in accordance with law either at the stage of take over or in transferring the unit. Admittedly, the entire loan was not disbursed. The need of the capital in the last stages cannot be doubted. If the Corporation refused to release the amount at a time when the unit is nearing completion or is ready to start functioning, then it falls short of capital and it is bound to land itself in trouble. This is what happened in this case. The partners did not co-operate and the Corporation without any explanation refused to release the full amount. The result was, the appellant stood pressed on the one hand from absence of capital and on the other by recovery proceedings. The Corporation, therefore, should honour their commitments of releasing the entire loan timely except for very good reasons which should be intimated beforehand to enable the unitholder to comply with shortcomings, if any. In the absence of its completion, the proceedings for recovery under section 29 may not be justified."
5. The above facts clearly bring out the circumstances which persuaded the Supreme Court to hold that the action challenged in the said proceeding was arbitrary and uncalled for and the requisite fairness was not shown by the financial corporation.
6. The aforesaid decision, therefore, shall have to be confined to the facts of the particular case, as has been pointed out in a subsequent decision of the Supreme Court in U. P. Financial Corporation v. Gem Cap (India) Pvt. Ltd. [1993] 78 Comp Cas 408; AIR 1993 SC 1435. The Supreme Court distinguished Mahesh Chandra's case, at page 1440 thus (at page 417 of 78 Comp Cas) :
"That was a case where the debtor was anxious to pay off the debt and had been taking several steps to discharge his obligation."
7. In the same decision at an earlier stage, the Supreme Court pointed out the approach to be adopted while considering the reasonableness of the action taken by the Corporation, thus (at page 414 of 78 Comp Cas) :
"We agree that the Corporation is not like an ordinary money-lender or a bank which lends money. It is a lender with a purpose - the purpose being promoting the small and medium industries. At the same time, it is necessary to keep certain basic facts in view. The relationship between the Corporation and the borrower is that of creditor and debtor. The Corporation is not supposed to give loans once and go out of business. It has also to recover them so that it can give fresh loans to others. The Corporation no doubt has to act within the four corners of the Act and in furtherance of the object underlying the Act. But this factor cannot be carried to the extent of obligating the Corporation to revive and resurrect every sick industry irrespective of the cost involved. Promoting industrialisation at the cost of public funds does not serve the public interest; it merely amounts to transferring public money to private account. The fairness required of the Corporation cannot be carried to the extent of disabling it from recovering what is due to it. While not insisting upon the borrower to honour the commitments undertaken by him, the Corporation alone cannot be shackled hand and foot in the name of fairness. Fairness is not a oneway street, more particularly in matters like the present one. The above narration of facts shows that the respondents have no intention of repaying any part of the debt. They are merely putting forward one or the other ploy to keep the Corporation at bay. Approaching the courts through successive writ petitions is but a part of this game. Another circumstance. These Corporations are not sitting on King Solomon's mines. They too borrow monies from the Government or other financial corporations. They too have to pay interest thereon. The fairness required of it must be tempered - nay, determined - in the light of all these circumstances. Indeed, in a matter between the Corporation and its debtor, a writ court has no say except in two situations : (1) there is a statutory violation on the part of the Corporation, or (2) where the Corporation acts unfairly, i.e., unreasonably. While the former does not present any difficulty, the latter needs a little reiteration of its precise meaning. What does acting unfairly or unreasonably mean? Does it mean that the High Court exercising its jurisdiction under article 226 of the Constitution can sit as an appellate authority over the acts and deeds of the Corporation and seek to correct them? Surely, it cannot be. That is not the function of the High Court under article 226. The doctrine of fairness evolved in administrative law was not supposed to convert the writ courts into appellate authorities over administrative authorities. The constraints - self - imposed undoubtedly - of writ jurisdiction still remain. Ignoring them would lead to confusion and uncertainty. The jurisdiction may become rudderless."
8. The reference to the High Court under article 226 may also be equated to the ordinary jurisdiction of the civil court and if so read, it is clear that it is not for the courts to sit in appeal against the particular action of the Corporation and the question of reasonableness shall have to be resolved by reference to the particular set of circumstances alone. The Supreme Court also further pointed out that in the matter of administrative action, it is well-known that more than one choice is available to the administrative authorities and that they have a certain amount of discretion available in this regard.
9. There is no standard test of reasonableness applicable to all situations. This has been clearly brought out by the Supreme Court in G. B. Mahajan v. Jalgaon Municipal Council, .
10. Therefore, the courts, while testing the reasonableness of the action of the statutory bodies or of the administrative authorities, cannot act mechanically and consider what is reasonable depending upon the attitude of the particular judge. The test of reasonableness entirely depends upon the particular statutory provisions read with the particular set of circumstances under which the law shall have a operate.
11. The defendant-Corporation is governed by the State Financial Corporations Act. The recovery of the advances made by the Corporation is also governed by the said legislation. Section 29 is one such provision which empowers the Corporation to take over the management or possession or both of the industrial concern. The Corporation also has a right to transfer by way of lease or sale or realise the property pledged, mortgaged, hypothecated or assigned to the financial corporation. The Corporation is an impersonal body. It is manned by officers who function like Government employees. It cannot be readily inferred that the Corporation would be biased or prejudiced or would be swayed by the ordinary emotions which normally govern the conduct of a private individual. The test for the recovery of the loan is not that no injury would be caused to the Corporation by the non-recovery. The Corporation deals with the funds similar to the funds of the State, but it has to function like a commercial institution; its functions are, at the same time, statutory. When the borrower, to whom money was lent by the Corporation to establish an industry has totally failed to develop the industry and the borrower has not been prompt at any time in making the repayments, and the circumstances reveal that the borrower has become a perennial loanee, the Corporation cannot be expected to forget the advances made and fail to take action to safeguard its funds; the concept of justice is not to propagate the idea of : "once a borrower shall remain a borrower always".
12. Action to be taken under section 29 is a statutory function. Normally, courts are not expected to restrain a person from exercising his or its statutory powers. Restraint on the exercise of the power is permissible when it is shown that the person proceeding to exercise it has no competence or is proceeding unreasonably (in the sense, explained by the Supreme Court in G. B. Mahajan's case, . It is always difficult to infer arbitrariness in a proposed action. The arbitrariness, if proved after the action, remedial measures could be easily taken, when compared to a preventive measure to restrain such an action, in anticipation of it.
13. Learned counsel for the plaintiff referred to several letters, wherein it was written on behalf of the plaintiff that vast orders are being received from various parties and if the plaintiff is allowed to continue to operate, the plaintiff will be in a position to repay the instalments. It is also contended that there has been considerable delay on the part of the State Government to make payments in respect of the supplies made by the plaintiff.
14. Most of these letters which are produced before me are letters addressed after the filing of the suit. Earlier, the plaintiff actually sought three weeks' time to make the payment of Rs. 2.37 lakhs which was admittedly overdue by that time in March, 1992, and this request was rejected by the manager. The Corporation cannot be found fault with for this attitude, because the Corporation had already rescheduled the payments and had advanced additional loan of Rs. 3.35 lakhs by way of rehabilitation assistance in the year 1990. The terms of the rehabilitation assistance are found in the letter dated March 20, 1990. The history of the plaintiff's borrowings indicates that the plaintiff is not in a position to make the repayments promptly in spite of the generous attitude shown by the defendant-Corporation. Even after the rehabilitation assistance, there has been a failure on the part of the plaintiff to stick to the liberal rescheduled instalments. In fact, the plaintiff had to pay only the interest part of the loan with effect from March 20, 1991, and the instalment regarding the principal amounts are to commence much later.
15. In these circumstances, it is not possible to sustain the order of the learned civil judge. The order of the lower appellate court is accordingly set aside and that of the trial court restored. The civil revision petitions are allowed.
16. It was contended by learned counsel for the respondent that the Corporation seized the unit after the interim order made by this court.
17. On October 5, 1993, an interim stay was granted by this court at the instance of the petitioner-Corporation staying the operation of the order of the learned civil judge.
18. It was brought to my notice by learned counsel for the petitioner that action was taken by the Corporation to take the unit, only after October 5, 1993, on which date this court stayed the order of the learned civil judge. Learned counsel for the plaintiff-respondent contends that a mere order of stay would not enable the Corporation to take the law into its own hands and ignore the substance of the order made by the learned civil judge. I do not think so. When there is an order of stay, the injunction issued by the trial court gets stayed and this revives the power of the Corporation to exercise its statutory powers under section 29. If the argument of the respondent is accepted, the resultant position will be to nullify the interim order made by this court.
19. It was contended that the petitioner obtained an interim order by this court without serving a copy of the petition on the respondent's counsel who had filed a caveat. The order sheet shows that learned counsel for the caveator was absent when the case was called on October 5, 1993. If counsel was absent, it is not open to the counsel now to contend that the copy of the petition was not served on him.
20. No doubt when the caveat has been served, the party seeking the interim relief shall have to furnish the caveator with a copy of the application seeking the relief as stated in section 148A(4) of the Civil Procedure Code, 1908, but the copy shall have to be furnished at the expense of the caveator which pre-supposes that the expenses shall have to be paid before he avails of the benefit of the supply. If the caveator's counsel was absent in the court and counsel for the petitioner was not in a position to serve a copy, the same cannot be taken advantage of by the respondent, to contend that the interim order made by this court should not be recognised for any purpose. The civil revision petition is accordingly allowed. Even now it is open to the plaintiff to approach the Corporation with an appropriate offer persuading the Corporation to refrain from proceeding further. If the offer is made by the plaintiff, the same shall be considered by the respondent - Corporation according to law. However, it is made clear that there shall not be any order of temporary injunction as sought for by the plaintiff.