IN THE HIGH COURT OF JUDICATURE AT PATNA First Appeal No.243 of 2007 =========================================================== Bihar State Financial Corporation, Fraser Road, Patna through its Managing Director-Defendant/Appellant…………………………….... .... Appellant/s Versus 1. Shambhu Prasad Shroff, Sursand Road, Mahsaul, Sitamarhi proprietor of Vinit Udyog Mandir, Sursand Road, Sitamarhi, P.S.& District-Sitarmarhi- Plaintiff/Respondent 1st set. 2. State of Bihar through Collector, Sitamarhi. 3. Director of Industries, Bihar, Patna. 4. General Manager, District Industries Center, Industrial Estate, Sitamarhi. 5. Dr. Mahabir Thakur, S/o not known to the appellant. 6. Smt. Bibha Thakur, W/o Sri M.Thakur both of village-Sitamarhi Town, Station Road-Opposite Sitayan Hotel, P.S.& Town-Sitamarhi. Defendants/Respondents 2nd set. .... .... Respondent/s =========================================================== Appearance : For the Appellant/s : Mr. Vinay Krishna Tripathi, Adv. For the Respondent/s : Mr. Ashok Chaudhary, Adv. With Dr. Shobha Choubey, Adv with Miss. Juhi Kumari, Adv. For the State: Mr. J.S. Arora, S.C.6 with Indrajeet Singh, A.C.- S.C.6. =========================================================== CORAM: HONOURABLE MR. JUSTICE V. NATH ORAL JUDGMENT Date: 30-08-2012 V.Nath, J. This appeal has been filed against the judgment and decree dated 22.06.2007 by Sub Judge IV, Sitamarhi in T.S.No. 68/93 decreeing the suit of the plaintiff declaring the take over and auction sale of the hypothecated property of the plaintiff by the defendant corporation as illegal, and leaving it open to the plaintiff to pay the entire liability and get the hypothecated property redeemed as per the contract. Patna High Court FA No.243 of 2007 dt.30-08-2012 P2 o/30/30 2 The parties to this appeal, hereinafter for convenience, be referred by their position in the suit. 2. The broad essential facts of the case of the plaintiff is that he was an unemployed person and requested the defendant-Bihar State Financial Corporation (in short, as Corporation) for loan to establish a small scale industry for manufacturing coal briquettes (form of coal widely used in the area). The corporation in March 1979 sanctioned total sum of Rs. 1, 42,000/- to the plaintiff for establishing the industry. The plaintiff thereafter established the industry and started production. However, by accidental fire on 01.08.1980, the Drying Oven, an essential unit of the industry, burnt out seriously affecting the manufacturing and production. The plaintiff immediately made a claim to the Insurance Company but it declined to pay the claim. The plaintiff requested the Corporation to pursue the Insurance Company for payment of the claim but the corporation did not take much interest. The plaintiff also made request to the Corporation to pay the amount of claim for the purpose of a constructing a new Drying Oven and adjust the said amount with the claim amount to be paid by the Insurance Company but the same also did not find favour. As such the plaintiff’s industry started suffering loss for want of adequate production. All the more in 1981, the subsidiary amount of Rs. 19,500/- was only sanctioned against the claim of Rs. 43,000/- of the Patna High Court FA No.243 of 2007 dt.30-08-2012 P3 o/30/30 3 plaintiff and the corporation even did not consider the recommendation made by its Branch Manager for grant of special capital assistance. 3. The further case of the plaintiff is that due to the consistent indifferent attitude of the corporation by not granting adequate financial assistance, the plaintiff tried to revive the industry by private loans but ultimately due to financial pressure, the production completely stopped in the year 1986. The plaintiff applied before the Department of Industry, Government of Bihar for declaring his industrial unit as sick but that too lingered for long six years till 27.02.92 when it was declared sick. In the meantime, the plaintiff, on the instruction of the Industry department sent rehabilitation project on 26.09.91 to the corporation but that was not considered. Again after the declaration of the unit as sick, the plaintiff on 31.05.92 sent proposal for revival and rehabilitation of the unit but no response was made by the corporation. 4. It is the further case of the plaintiff that Sri. P.P. Sharma, the senior branch Manager of the corporation at its Muzaffarpur Branch on 10.08.92 forcibly took over the entire mortgaged assets of the plaintiff’s industry by breaking open the lock, and handed over the same to the defendant no. 6. The plaintiff has alleged that Sri. P.P. Sharma had been in collusion with the defendant no. 6, who is a Patna High Court FA No.243 of 2007 dt.30-08-2012 P4 o/30/30 4 Nepali citizen, and with malafide intention Sri Sharma manonevred the things without the knowledge and approval of the corporation which was the only competent authority to exercise power under Section 29 of the State Financial Corporation Act. On these basic facts, the plaintiff has prayed for declaration against the take over and the transfer of his unit to the defendant no. 6 and subsequently to defendant nos. 7 and 8 as fraudulent, illegal and not binding upon the plaintiff. Further the plaintiff has also sought for the declaration that he is not liable to pay interest on the loan amount or any claim of the corporation. 5. The defendant-corporation, the defendant no. 6, and defendant nos. 7 and 8 filed their separate written statements. The corporation in its written statement has accepted that the plaintiff’s unit was established with the financial assistance of the corporation but has stated that the plaintiff did not adhere to the scheduled repayment and consistently defaulted. The damage to the Drying Oven in fire affecting the production in the factory has also not been denied. However, it is the case of the corporation that before its Advisory Committee, on 24.08.84, the plaintiff admitted that he was interested in running a petrol pump and thus unable to run his unit and then, the decision was taken to send notice to the plaintiff under Sections 29 and 30 of the State Financial Corporation Act. The notice Patna High Court FA No.243 of 2007 dt.30-08-2012 P5 o/30/30 5 was issued on 21.11.84 and served upon the plaintiff. It has also been stated that the special capital loan by way of soft loan was not granted as the plaintiff had already invested 19% of the total cost and the proposal for rehabilitation also could not have been considered before the declaration of the unit as sick which was done only in February 1992. 6. The corporation has further stated that on 31.07.87, the Advisory committee decided to sell the mortgaged assets, and accordingly the sale order was issued on 16.01.92 and after the advertisement for sale in the news papers on 19.01.92 and 20.01.92, the defendant no. 6 submitted his tender on 26.03.92 which was accepted on 30.03.92, and accordingly the order for the sale of the mortgaged assets had been made to him. It has been asserted that Sri. P.P. Sharma was a duly authorized person under the Act to exercise power for taking over and handing over charge and he had legally done all the acts. 7. The defendant no. 6 in his written statement has almost repeated the same facts as disclosed in the written statement of the corporation and has further stated that the intervener defendants joined him as partners in purchasing the unit of the plaintiff and had deposited their share in the sale money and after purchase came in joint possession with him over the mortgaged assets. The intervenor Patna High Court FA No.243 of 2007 dt.30-08-2012 P6 o/30/30 6 defendants in their written statement have also stated the same facts. 8. The defendant nos. 7 and 8, who have been impleaded as defendants in the suit are pendente lite purchasers of the mortgaged assets sold to them by the corporation and they sought permission to adopt the written statement of the defendant nos. 2 and 3 which was allowed by the learned court below by order dated 21.04.2006. 9. In view of the pleadings of the parties the learned court below framed altogether 10 issues out of which issue nos. 4, 5 and 6 were material issues and are as follows:- Issue No.4: Whether the taking over the Vinit Udyog by the defendant 1st party is legal, valid and the same has been acted upon? Issue No.5: Whether the transfer of Vinit Udyog by the defendant 1st party to the defendant no.6 is valid, genuine and the same has been acted upon? Issue No.6: Whether the subsequent transfer of Vinit Udyog by defendant 1st party to defendant nos. 7 and 8 is valid, genuine for consideration and the same has been acted upon? 10. The learned court below after scrutinizing the evidence of the parties has come to the finding that the entire action of the Corporation in taking over of the plaintiff’s unit and selling the same to the defendants was mala fide, arbitrary and against the provisions of law. It has been further held that the sale of the unit in favour of the Patna High Court FA No.243 of 2007 dt.30-08-2012 P7 o/30/30 7 defendant nos. 7 & 8 is also subject to the doctrine of lis pendens. Accordingly, the learned court below has set aside the sale in favour of the defendants and directed the Corporation to resume possession of the hypothecated property from the defendant-purchasers with liberty to the plaintiff to redeem the mortgage according to the contract. It has also been held that the plaintiff is not liable to pay interest on the loan amount or any claim of the Corporation. 11. Heard the learned counsel for the defendant-appellant- corporation and also the learned counsel for the plaintiff-respondent and defendant-purchaser-respondents. 12. Learned counsel for the appellant has firstly submitted that the learned court below has wrongly relied upon principles laid down by the Apex Court in Mahesh Chandra’s Case, reported in AIR 1993 SC 935, and decided the suit on that basis. It has been urged that the aforesaid decision has been overruled in a later decision of the Apex Court by a three Judge Bench in the case of Haryana Financial Corporation Vs.Jagdamba Oil Mill 2002(3) SCC 496. It has been contended by the learned counsel that the plaintiff committed default and had never expressed genuine eagerness to run his unit or revive and rehabilitate it, and therefore the corporation was left with no option but to take action under Section 29 of the Act. It has been submitted that the action under Section 29 of the Act has been taken Patna High Court FA No.243 of 2007 dt.30-08-2012 P8 o/30/30 8 after service of notice upon the plaintiff in accordance with law. It has been further argued that in view of the default by the plaintiff in repayment of the instalments of the loan, the Corporation was well within its rights to take over the mortgaged assets and auction sale the same for realization of the loan amount and the plaintiff has failed to establish his allegations of malafide, and illegality in the said action of the corporation. It has been pointed out that the decision to proceed under Section 29 of the Act had been taken by the Advisory Committee, which was a statutory body, after assessing the plaintiff’s declination to run the unit, and accordingly the subsequent actions taken by Sri. P.P.Sharma, Senior Branch Manager, in selling the mortgaged assets, to defendant no. 6 and taking over the possession over the same were all done in accordance with law and prescribed procedure. It has been further contended by the learned counsel that the learned court below has misconstrued and misinterpreted the evidence on record and has reached to a wrong conclusion against the Corporation. 13. Per contra, the learned counsel appearing for the plaintiff- respondent has submitted that the evidence on record clearly demonstrate that from the very beginning the officials of the financial corporation had adopted indifferent attitude towards the plaintiff and never co-operated in the smooth running of the unit. It has been further Patna High Court FA No.243 of 2007 dt.30-08-2012 P9 o/30/30 9 submitted that even after the irreversible damage to the Drying oven, the corporation did not take necessary remedial steps leaving the plaintiff to fend for himself. The service of notice under Section 29 and 30 of the Act has been strongly denied on behalf of the plaintiff- respondent and it has been submitted that in a sudden action, the defendant no. 3, a Senior Branch Manager of the corporation, pounced upon the unit of the plaintiff by breaking open the gate and took away all the articles forcibly although he was not legally authorized to do so. It has been contended that it is only the Board of Directors of the Corporation who could have taken the decision for exercise of power under Section 29 of the Act against the plaintiff but no evidence has been produced to show that such decision has ever been taken by the Board of Directors. Elaborating his submission, the learned counsel has placed the evidence to show that the decision to take the unit of the plaintiff was, in fact, taken by the defendant no. 3 who had no such legal authority. It has next been submitted that the collusive sale of the hypothecated assets by the defendant no.3 in favour of the defendant no.6 had been made without fully advertising the process of sale and in fact the defendant nos. 7 and 8 have been introduced in the picture to make the things cumbersome by way of camouflage. It has been thus urged that the entire action of the officials of the financial corporation was malafide, arbitrary, and illegal which is also Patna High Court FA No.243 of 2007 dt.30-08-2012 P10 o/30/30 10 substantiated when the unit was hurriedly sold to the defendant no.6, and thereafter, to defendant nos. 7 and 8, even during the pendency of the suit in which the corporation had already appeared. It has been lastly submitted that the learned court below has reached to the right conclusions which do not require interference in this appeal. 14. In view of the rival contentions of the parties, the following points emerge for consideration in this appeal: (i) Whether the actions of the Corporation in selling away the mortgaged assets of the plaintiff on 30.03.1992 to the defendant no.6, and then pendente lite to defendant nos. 7 & 8, and taking over the possession of the same on 10.08.92 were malafide, illegal and in violation of the provisions of statute? (ii) Whether in the facts and circumstances of the case the plaintiff is entitled to the reliefs as claimed? (iii) Whether the impugned judgment is sustainable in law as well as on facts? 15. The basic facts are not in dispute that the plaintiff set up a Small Scale Industry in the name and style Vinit Udyog for manufacturing coal briquettes with the financial assets of the corporation which granted him the loan upon the mortgage of the machineries and tools of Industries and also the land of the plaintiff. Patna High Court FA No.243 of 2007 dt.30-08-2012 P11 o/30/30 11 The amount of loan was to be repaid in accordance with the agreed schedule of repayment. It is not in dispute that soon after the industry started production, the Drying Oven, which was essential equipment, burnt out. It is the case of the plaintiff that in absence of the Drying Oven, the production was substantially affected resulting in loss to the plaintiff and his attempt to realize the claim for the burnt out Drying Oven from the Insurance Company did not materialize in time and even the Corporation did not seriously pursue the matter with the Insurance Company. The plaintiff has alleged that the Corporation even thereafter did not provide necessary financial assistance to the plaintiff for revival of the unit and ultimately it was declared sick by the Department of Industries but even then the defendant no.3 forcibly took over the possession of the hypothecated assets of the plaintiff after selling it to the defendant no.6, and thereafter it was sold to defendant nos. 7 & 8 during the pendency of the suit when the defendant no.6 did not deposit the sale price. The corporation has denied the allegations and put the blame on the plaintiff with assertion that the plaintiff was not interested to run the Industry rather he was more interested in having a petrol pump business. The corporation has justified the actions taken under Section 29 of the State Financial Corporations Act (In short as Act) and has asserted that the same had been taken after notice to the plaintiff. Patna High Court FA No.243 of 2007 dt.30-08-2012 P12 o/30/30 12 16. Point No.1: It has been submitted on behalf of the plaintiff that the decision to exercise the power under Section 29 of the Act is to be taken by the Board of Directors of the corporation but the defendant no.3, who was only a Senior Branch Manager of the Corporation, in collusion with the defendant no.6 passed the order under Section 29 of the Act, sold the mortgaged assets of the plaintiff to the defendant no.6 and handed over the possession to him after forcibly dispossessing the plaintiff. In the written statement the Corporation has not stated that the decision to exercise the power under Section 29 of the Act against the unit of the plaintiff was taken by the Board of Directors of the Corporation. Instead it has been stated that the Advisory Committee, being a statutory body, took the decision to proceed against the plaintiff’s unit under Section 29 of the Act and further in paragraph 15 of the written statement it has been stated that Sri.P.P.Sharma was a duly authorized person under the Act to exercise power of taking over and handing over of the mortgaged assets and he had legally done all the acts. 17. Section 29 of the State Financial Corporations Act, 1951 provides as follows: S. 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 Patna High Court FA No.243 of 2007 dt.30-08-2012 P13 o/30/30 13 repayment of loan or advance or any installment thereof or in meeting its obligation 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 concerns, 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) x x x x x x x x (4) x x x x x x x x 18. By the provision of Section 9 of the Act, the powers of the Financial Corporation stand vested in a Board of Directors which has also been vested with the powers of general superintendence, direction and management of affairs and business of the Financial Corporation. It would be apt to notice this provision; 19. “Section 9:-Managements:(1) The general superintendence, direction and management of affairs and business of the Financial Corporation shall vest in a Board of Directors which may exercise all Patna High Court FA No.243 of 2007 dt.30-08-2012 P14 o/30/30 14 powers and do all such acts and things, as may be exercised or done by the Financial Corporation and are not by this Act expressly directed or required to be done by the Financial Corporation in general meeting. (2) The Board may direct that any power exercisable by it under this Act shall also be exercisable in such cases and subject to such conditions, if any, as may be specified by it, by the chairman, managing director or the whole time director”. 20. From the aforesaid two provisions it is clearly discernible that the decision to take over the management or possession of an Industrial concerns as well as the right to transfer the same by way of lease or sale is to be taken by the Board of Directors of the Corporation. However, the power of the Board of Directors, under its direction, may also be exercised by the Chairman, Managing Director or the whole time Director. In the present case it has not been stated in the written statement that the Board of Directors had taken the decision to take over the industrial concern and sell the hypothecated assets of the plaintiff. There is also no averment that the Board of Directors had directed the Chairman or the Managing Director or the whole time Director to exercise its powers, and thereafter the decision to proceed against the plaintiff had been taken by any of the said authorities. Sri P.P.Sharma is admittedly a Senior Branch Manager of the Corporation posted at the relevant time in its Muzafarpur branch. Patna High Court FA No.243 of 2007 dt.30-08-2012 P15 o/30/30 15 There is no averment in the written statement by the Corporation that he had ever been delegated the power to act under Section 29 of the Act, and even otherwise also he could not have been delegated the said power in view of the provision of Section 9(2) of the Act as he was admittedly neither the chairman nor the managing director nor the whole time director of the Corporation. In absence of the necessary pleading or even materials on record to establish that the Board of Directors of the Corporation or any authority, to whom the said power could have been legally delegated, had taken the decision to proceed against the plaintiff in exercise of the power given under Section 29 of the Act, the entire action of the sale of the Industrial concern and hypothecated assets of the plaintiff and the subsequent take over becomes illegal and without jurisdiction. 21. It has been submitted by the learned counsel for the appellant that the Advisory Committee which is a statutory body in fact had decided in its meeting on 24.08.84, in which the plaintiff was also present, to send notice to the plaintiff under Section 29 and 30 of the Act. It has been further submitted that even after the service of the said notice the plaintiff did not repay the outstanding dues and then on 31.07. 1987 the Advisory Committee decided to take action for sale of the unit of the plaintiff. The learned counsel for the plaintiff however has denied any decision by Advisory Committee in his presence. The Patna High Court FA No.243 of 2007 dt.30-08-2012 P16 o/30/30 16 appellant has relied upon Ext.G/5 to show that the meeting of the Advisory Committee (legal and default cases) was held at Muzaffarpur on 24.08.1984 in which the plaintiff also was present and the decision to proceed under Section 29 of the Act had been taken. The perusal of this Ext.G/5 reveals that it does not bear signature of any authority or any member of the Advisory Committee and it also does not appear to be a duly certified copy of the proceeding of the said Advisory Committee. No other corroborating evidence like the minute book of the proceeding bearing the signatures of the members of the said Advisory Committee has been produced on behalf of the defendant- appellant to substantiate the writings on the Ext.G/5. As such no reliance can be placed upon the Ext.G/5 in order to fasten the plaintiff with the knowledge of the order under Section 29 of the Act. It has also been submitted that on 31.07.1987 the said Advisory Committee decided to take action for the sale of the unit but again the decision by the Advisory Committee has not been produced so that the reasons forming the basis of the said order could be appreciated. The letter dated 09.09.87(Ext.B/8) issued