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Sec.29 & Sec.31 of State Financial Corporations Act – Sale of mortgaged property of guarantor to third parties as the original borrower failed to pay installments and not made available his hypothicated vehicle for sale directly under sec.29 – Writ – High court allowed – Apex court held that High court rightly allowed the writ and further held that However, the appellant before us is the purchaser of the property sold under Section 29 of the Act, who parted with the money in order to purchase the property. He is a victim of an illegal procedure adopted by the Orissa State Financial Corporation. The law regarding the authority of the State Financial Corporations to invoke the provisions of Section 29 with respect to properties other than those belonging to defaulter industrial concern is clearly declared by this Court in Karnataka State Financial Corporation (supra) by its judgment dated 30th March, 2008 whereas the sale in question before us is dated 9th February, 2009, almost a year later. The authorities of the 9th respondent Corporation sold the properties to the appellant herein in flagrant violation of the settled position of law. We, therefore, direct the 9th respondent to refund the amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the appellant with interest calculated at the rate 12% per annum. However, it is open to the Orissa State Financial Corporation to recover the amounts either from the defaulter – industrial concern or from such other third party against whom the Corporation has a legal right to proceed.= CIVIL APPEAL NO.7936 OF 2014 (Arising out of SLP(C) No. 12961 of 2011) Subhransu Sekhar Padhi …Appellant Versus Gunamani Swain & Others …Respondents = 2014 – Aug. Part – http://judis.nic.in/supremecourt/filename=41836

 Sec.29 & Sec.31 of  State Financial Corporations Act – Sale of mortgaged property of guarantor to third parties as the original borrower failed to pay installments and not made available his hypothicated  vehicle for sale directly under sec.29 – Writ – High court allowed – Apex court held that  High court rightly allowed the writ and further held that However, the appellant before us is  the  purchaser  of  the  property sold under Section 29 of the Act, who parted with  the  money  in  order  to purchase the property.  He is a victim of an illegal  procedure  adopted  by the Orissa State Financial Corporation.  The law regarding the authority  of the State Financial Corporations to invoke  the  provisions  of  Section  29 with  respect  to  properties  other  than  those  belonging  to   defaulter industrial concern is clearly declared by  this  Court  in  Karnataka  State Financial Corporation  (supra)  by  its  judgment  dated  30th  March,  2008 whereas the sale in question before us is dated 9th February,  2009,  almost a year later.  The authorities of the 9th respondent  Corporation  sold  the properties to the appellant herein in  flagrant  violation  of  the  settled position of law.  We, therefore, direct the 9th  respondent  to  refund  the amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the  appellant with interest calculated at the rate 12% per annum.  However, it is open  to the Orissa State Financial Corporation to recover the  amounts  either  from the defaulter – industrial concern or from such other  third  party  against whom the Corporation has a legal right to proceed.=

Some  time  in  the  financial  year  2002-2003,  the  9th

respondent i.e. the Orissa State Finance Corporation  (hereinafter  referred

to as “OSFC”) sanctioned a term loan of Rs. 5,26,500/-  for  purchase  of  a

TATA truck in  favour  of  the  6th  respondent  who  is  wife  of  the  7th

respondent.  

The said loan transaction is secured by a mortgage  of  certain

piece of land by the father-in-law of the 6th respondent and father  of  the

7th respondent (since died).

3.    As the borrower did not make the repayments in terms of the  agreement

between OSFC and the borrower, the OSFC attempted to seize the  truck  which

was also hypothecated to the OSFC. 

As the same was not traceable,  the  OSFC

proceeded against the mortgaged property. 

The value  of  the  said  property

was estimated  at  about  Rs.  10,08,000/-.  

Eventually,  the  property  was

brought to sale by auction  on  9.2.2009  where  the  appellant  became  the

highest bidder for an amount of Rs.10,09,000/-. 

The OSFC confirmed the  sale

in favour of the  appellant.  On  31.3.2009,  possession  of  the  mortgaged

property was handed over to the appellant.

4.    On 10.6.2009, the OSFC after  appropriating  the  amounts  due  to  it

intimated the three sons of the  mortgagor  (respondent  Nos.  2,  7  and  8

herein)  to  collect  the  residue  amount   of   Rs.2,86,460/-   from   the

Corporation.=

The right  of  financial  Corporation  in  terms  of  Section  29  must  be

exercised only on a defaulting party.   Section  29  does  not  empower  the

Corporation to proceed against  the  surety  even  if  some  properties  are

mortgaged or hypothecated to it.  Our view is further  strengthened  by  the

provisions of sub-section(4) of Section 29 which lays down appropriation  of

sale proceeds with reference to only industrial concern and  not  surety  or

guarantor.

 

5.    Challenging the seizure and sale of the mortgage  property,  the  writ

petition came to be filed by the wife and children of  the  mortgagor.   The

appellant herein and OSFC contested the  writ  petition.   By  the  impugned

judgment herein, the writ petition was allowed, hence the appeal.=

Whether the OSFC was legally entitled to invoke Section 29 of  the  Act  and

bring the  properties  of  guarantors  to  sale  without  resorting  to  the

procedure contemplated under Section 31 of the Act.

Whether the High Court was right in entertaining a  challenge  to  the  sale

from 150 days after the sale took place and the property was handed over  to

the auction purchaser (appellant herein)=

in Karnataka State Financial Corporation v. N.  Narasimahaiah

& Others, (2008) 5 SCC 176.  In that case, this Court categorically  held[1]

that it is only the properties of  the  defaulter  which  can  be  proceeded

against under Section 29 of the Act but not against the  properties  of  the

third parties whether they are guarantors, mortgagors etc.

However, the appellant before us is  the  purchaser  of  the  property

sold under Section 29 of the Act, who parted with  the  money  in  order  to

purchase the property.  He is a victim of an illegal  procedure  adopted  by

the Orissa State Financial Corporation.  The law regarding the authority  of

the State Financial Corporations to invoke  the  provisions  of  Section  29

with  respect  to  properties  other  than  those  belonging  to   defaulter

industrial concern is clearly declared by  this  Court  in  Karnataka  State

Financial Corporation  (supra)  by  its  judgment  dated  30th  March,  2008

whereas the sale in question before us is dated 9th February,  2009,  almost

a year later.  The authorities of the 9th respondent  Corporation  sold  the

properties to the appellant herein in  flagrant  violation  of  the  settled

position of law.  We, therefore, direct the 9th  respondent  to  refund  the

amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the  appellant

with interest calculated at the rate 12% per annum.  However, it is open  to

the Orissa State Financial Corporation to recover the  amounts  either  from

the defaulter – industrial concern or from such other  third  party  against

whom the Corporation has a legal right to proceed.

12.   Appeal is dismissed.

  2014 – Aug. Part – http://judis.nic.in/supremecourt/filename=41836   

Non-Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.7936 OF 2014
(Arising out of SLP(C) No. 12961 of 2011)

Subhransu Sekhar Padhi …Appellant

Versus

Gunamani Swain & Others …Respondents

J U D G M E N T

Chelameswar, J.

1. Leave granted.

2. Aggrieved by the judgment dated 6.12.2010 of the High Court of Orissa
in Writ Petition (C) No. 13033 of 2009, one of the respondents therein who
is the purchaser of the property in an auction held under Section 29 of the
State Financial Corporations Act, 1951 (for short “the Act”) preferred the
instant appeal. Some time in the financial year 2002-2003, the 9th
respondent i.e. the Orissa State Finance Corporation (hereinafter referred
to as “OSFC”) sanctioned a term loan of Rs. 5,26,500/- for purchase of a
TATA truck in favour of the 6th respondent who is wife of the 7th
respondent. The said loan transaction is secured by a mortgage of certain
piece of land by the father-in-law of the 6th respondent and father of the
7th respondent (since died).

3. As the borrower did not make the repayments in terms of the agreement
between OSFC and the borrower, the OSFC attempted to seize the truck which
was also hypothecated to the OSFC. As the same was not traceable, the OSFC
proceeded against the mortgaged property. The value of the said property
was estimated at about Rs. 10,08,000/-. Eventually, the property was
brought to sale by auction on 9.2.2009 where the appellant became the
highest bidder for an amount of Rs.10,09,000/-. The OSFC confirmed the sale
in favour of the appellant. On 31.3.2009, possession of the mortgaged
property was handed over to the appellant.

4. On 10.6.2009, the OSFC after appropriating the amounts due to it
intimated the three sons of the mortgagor (respondent Nos. 2, 7 and 8
herein) to collect the residue amount of Rs.2,86,460/- from the
Corporation.

5. Challenging the seizure and sale of the mortgage property, the writ
petition came to be filed by the wife and children of the mortgagor. The
appellant herein and OSFC contested the writ petition. By the impugned
judgment herein, the writ petition was allowed, hence the appeal.

6. Two questions arise for our consideration;

Whether the OSFC was legally entitled to invoke Section 29 of the Act and
bring the properties of guarantors to sale without resorting to the
procedure contemplated under Section 31 of the Act.

Whether the High Court was right in entertaining a challenge to the sale
from 150 days after the sale took place and the property was handed over to
the auction purchaser (appellant herein)

7. In the impugned judgment, the High Court answered the first question
emphatically against the OSFC.
“The right of financial Corporation in terms of Section 29 must be
exercised only on a defaulting party. Section 29 does not empower the
Corporation to proceed against the surety even if some properties are
mortgaged or hypothecated to it. Our view is further strengthened by the
provisions of sub-section(4) of Section 29 which lays down appropriation of
sale proceeds with reference to only industrial concern and not surety or
guarantor.

xxx xxx xxx xxx

In view of the above, we are of the considered view that the OSFC in
exercise of power vested under Section 29 of the SFC Act cannot sell out
the properties mortgaged to it by the guarantors.”

As a consequence of such conclusion, the second question is also answered
against the OSFC.
“14. In view of the above, sale of the properties of the guarantors and
subsequent execution of deed of transfer under Annexure-5 are liable to be
quashed for being done in flagrant violation of the statutory provision
contained in Section 31 of the SFC Act which we direct accordingly.”

8. The High Court rested its judgment rightly on a decision of this
Court reported in Karnataka State Financial Corporation v. N. Narasimahaiah
& Others, (2008) 5 SCC 176. In that case, this Court categorically held[1]
that it is only the properties of the defaulter which can be proceeded
against under Section 29 of the Act but not against the properties of the
third parties whether they are guarantors, mortgagors etc.

9. A submission is sought to be made that the impugned judgment is
contrary to the ratio of the decision of this Court in A.P. State Financial
Corporation v. M/s. GAR Re-rolling Mills & Another, (1994) 2 SCC 647. In
our opinion, the said decision has no application to the facts of the
present case. It was a case where the APSFC initially proceeded against
Section 31 of the Act against the properties mortgaged by the borrower
(industrial concern) and obtained an order/decree but subsequently invoked
the powers under Section 29. The question before this Court was – whether
the Financial Corporation set up under Section 3 of the State Financial
Corporation Act is entitled to take recourse to the remedy available to it
under Section 29 of the Act even after having obtained an order or a decree
after invoking the provisions of Section 31 of the Act but without
executing that decree/order? This Court held[2] that it is always open to
the State Financial Corporation to resort to such a course of action.

10. Therefore, we do not see any merit in the appeal.

11. However, the appellant before us is the purchaser of the property
sold under Section 29 of the Act, who parted with the money in order to
purchase the property. He is a victim of an illegal procedure adopted by
the Orissa State Financial Corporation. The law regarding the authority of
the State Financial Corporations to invoke the provisions of Section 29
with respect to properties other than those belonging to defaulter
industrial concern is clearly declared by this Court in Karnataka State
Financial Corporation (supra) by its judgment dated 30th March, 2008
whereas the sale in question before us is dated 9th February, 2009, almost
a year later. The authorities of the 9th respondent Corporation sold the
properties to the appellant herein in flagrant violation of the settled
position of law. We, therefore, direct the 9th respondent to refund the
amount of Rs.10,09,000/- (rupees ten lakhs nine thousands) to the appellant
with interest calculated at the rate 12% per annum. However, it is open to
the Orissa State Financial Corporation to recover the amounts either from
the defaulter – industrial concern or from such other third party against
whom the Corporation has a legal right to proceed.

12. Appeal is dismissed. Costs quantified at Rs.1,00,000/- (rupees one
lakh) to be borne by the 9th respondent Corporation. It is open to the 9th
respondent Corporation to recover the said amount from such of those
officers who are responsible for taking a wrong decision to proceed against
the property in question under Section 29 of the Act.

13. All the payments, as directed above, shall be made within a period of
30 days from today.

………………………….J.
(J. Chelameswar)

……………………..….J.
(A.K. Sikri)
New Delhi;
August 21, 2014

———————–
[1] Para 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.
[2] Para 17. The relief available to the Corporation under Section 29
of the Act to realise its dues in the manner rescribed therein is wider in
scope than the limited reliefs available to it under Section 31 of the Act
and is not controlled by Section 31 of the Act. The Legislature clearly
intended to preserve the rights of the Corporation under Section 29 of the
Act, by expressly stating in Section 31 of the Act, that its recourse to
action under that section is without prejudice to the provisions of Section
29 of the Act. What alone is not desirable or permitted, by the Act is to
pursue both the remedies simultaneously by the Corporation and not
that it cannot withdraw or abandon the proceedings initiated under
Section 31 at ’any stage’ and then take recourse to the provisions of
Section 29 of the Act. Any interpretation which frustrates the right of the
Corporation to recover its dues must be eschewed. 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 the 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. Indeed, if the order of the court issued under
Section 31 of the Act has been fully complied and honoured with by the
defaulting concern, no occasion would arise for the Corporation to invoke
the provisions of Section 29 of the Act. However, to hold that since the
Corporation has initially taken action under Section 31 of the Act and
obtained an order/decree from the court, the Corporation is prohibited from
invoking the provisions of Section 29 of the Act, notwithstanding the fact
that the defaulting concern has not honoured the court’s order or decree
made under Section 31 of the Act, would amount to putting premium of the
activities of the defaulting concern aimed at frustrating the order/decree
of the court and
depriving the Corporation of recovering its legitimate dues and
thereby rendering the expression “without prejudice to …” occurring in
Section 31 otiose. Courts do not favour such a course.

———————–
8

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