THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLESRI JUSTICE N. RAVI SHANKAR WRIT APPEAL Nos.32, 33 and 295 of 2009 Date of Order: 29-04-2011 WA No.32/2009: Between: Bandaru Nageswar Rao ..Appellant And 1. Bandaru China Narayana Murthy and others. . ..Respondents The Court made the following: THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLESRI JUSTICE N. RAVI SHANKAR WRIT APPEAL Nos.32, 33 and 295 of 2009 COMMON JUDGMENT: (Per Hon’ble Sri Justice A.Gopal Reddy) These three appeals have been heard together because they raise a common issue about the validity of sale of primary security and collateral security by the A.P. State Financial Corporation in exercise of its power conferred under Sec. 29 of the State Financial Corporations Act, 1951 (for short “the Act”). Hence, they are being disposed of by this common order. 2. The petitioner in WP No.20203/2004 approached the first respondent, A.P. State Financial Corporation (for short “SFC”) for sanction of loan for the purpose of establishing a modern rice mill at Kovuluwada village, Bogapuram Mandal, Vizianagaram District. The SFC sanctioned a sum of Rs.5,90,000/- on 16-3-1993. Out of the sanctioned amount, an amount of Rs.4,91,000/- was released on 8-1- 1994, nearly after ten months of sanction, towards loan after completion of formalities, namely, obtaining primary security of 50 cents of land owned by the petitioner for establishing rice mill and collateral security by the third respondent ie., 4 acres of land owned by the petitioner’s mother Vidyavathi. The amount of loan was repayable in 11 half-yearly instalments. The petitioner could not run the rice mill soon due to lack of power supply and the procedural delays that have taken place from the Electricity Department. Ultimately, the mill was started in the month of December, 1995. On petitioner failing to comply with the repayment schedule, a recall-cum- sale notice was issued, which was duly acknowledged by the petitioner on 29-11-1995. Further, the petitioner was called upon to regularize the loan account before 15-12-1995 notifying that on failure to regularize it, action would be taken by SFC. By the recall-cum-sale notice dt. 10-7-1997, the petitioner was called upon to clear off arrears on or before 19-7-1997. On his failure to comply with the same, assets were duly seized on 22-7-1997 and advertised for sale on 26-7-1997. Questioning the same, the petitioner filed WP No.17882/1997, in which this court directed the petitioner to pay a sum of Rs.2 lakhs within a period of one month from the date of passing of the order. On his failure to comply with the same, SFC proceeded to conduct the sale upon receiving three offers in a sum of Rs.3 lakhs; Rs.3.90 lakhs and Rs.2.25 lakhs. The second offerer enhanced his offer to Rs.6,90,000/-, which was duly approved by SFC by issuing a sale letter dt. 19-12-1997. Before the purchaser paying the down payment, the petitioner paid a sum of Rs.1.5 lakhs on 27-12-1997 towards outstanding arrears in a sum of Rs.6,68,030/- as on 31-12-1997. In view of the part payment, sale proceedings have been cancelled and the unit was released in favour of the petitioner. 3. While matter stood thus, the Corporation evolved a scheme of One Time Settlement (OTS) to its borrowers on 29-11-2002, to which, the petitioner submitted an application to avail the benefit and he was required to pay a sum of Rs.93,000/- representing 15% of the probable amount, which was paid by him. Accepting the proposal, an order was passed on 20-12-2002, basing on the minutes of the Corporation dt. 30-11-2002, to the effect that the loan account of the petitioner shall stand closed, if an amount of Rs.6,15,000/- is paid. The terms of the OTS were, out of the crystallized amount, 35% ie., 2,15,250/- shall be paid on or before 31-3-2003 and the balance amount shall be paid on or before 30-11-2003 with further interest from 1-11-2002. As the petitioner did not adhere to the terms and conditions of OTS, the order dt. 20-12-2002 giving the OTS offer was recalled on 23-10-2003 and the same was informed to the petitioner calling upon him to pay a sum of Rs.14,24,908/-. As the petitioner failed to pay the demanded amount, assets of the mill were seized including primary and collateral securities on 1-12-2003, and sale notice was issued on 5-2-2004 keeping the offer open for 90 days including primary security and collateral security. Pursuant to the advertisement, SFC received an offer in a sum of Rs.2,86,000/- for the primary security and Rs.2 lakhs for the collateral security, totalling to Rs.4,86,000/-. As the offer received was low, the same was rejected and a fresh sale notice dt.13-7-2004 was published in the newspapers on 15-7-2004. On issuing that advertisement, SFC by its letter dt. 15-7-2004 called upon the petitioner to procure and scan for buyers by enclosing a copy of the sale advertisement. The SFC sent a letter to one Ch. Sivaji Reddy, who had evinced interest earlier to purchase the assets. The offer made by Badam Nageswara Rao, the third respondent, for primary security at Rs.3.49 lakhs and Rs.2 lakhs for the collateral security was displayed on the notice board on 9-9-2004 for a period of seven days and thereafter the sale was finalized in his favour. Meanwhile, WP No.20203/2004 was filed and this court by order dt.4-11-2004 in WPMP No.26452/2004 stayed all further proceedings. The SFC which took possession of the property confirmed the sale in favour of the purchaser on 10-11-2004 for a sale consideration of Rs.2,00,000/- towards the property offered as security by the mother of the petitioner and possession of the property including the mill was duly handed over to the purchaser ie., R-3 on 9-8-2005 on vacation of stay granted by this court earlier on 4-11-2004. The property was also duly registered in favour of the third respondent on 14-8-2005. Questioning the sale of property, offered as collateral security, WP No.24645/2005 was filed by one Sekhamahanthi Surya Rao, who claims to be the purchaser of the property to an extent of Ac.9-02 cents including the collateral security offered by the petitioner in WP No.20203/2004 and his mother, 5th respondent in WP No.24645/2005, under registered sale deeds dt. 9-10-98 and 20-3- 99. 4. It was the contention of the petitioner in WP No.20203/2004 that when the rice mill was put to sale, SFC received an offer for Rs.4,86,000/- and the same was rejected by the SFC and after rejection a fresh sale notification was published on 15-7-2004. Further, the second respondent gave unbelievable statement specifying arrears at Rs.16,20,658/- when the principal amount received by the petitioner is only Rs.4,90,000/- and had already paid more than Rs.9 lakhs. Though the petitioner was not interested to sell the property pursuant to the publication of sale notice on 15-7-2004, the authorities of SFC forcibly took possession of the property without following due process of law. Several intending buyers came forward to purchase the property. The value of the land, upon which rice mill is constructed, is about Rs.1,50,000/-; the value of the building would costs Rs.5 lakhs, the value of the machinery was worth about Rs.5 lakhs, which comes to about Rs.12 lakhs but the property was sold for Rs.3.5 lakhs. Immediately, he addressed a letter on 24-10-2004 and explained that there are people to buy the property for more than Rs.5.5 lakhs, but the second respondent in collusion with the third respondent finalized the sale, which is arbitrary and illegal. 5. The contention of the petitioner in WP No.24645/2005 was that he purchased Ac.5-00 out of Ac.9-02 cents in RS Nos.156 and 77 in patta No.350 from the petitioner in WP No.20203/2004 and Ac.4-02 cents from the mother of the petitioner in WP No.20203/2004 and her daughter under registered sale deeds dt. 9-10-1998 and 20-3-1999 respectively. He also filed OS No.476/2000 before the Court of Principal District Munsif and obtained interim injunction against one of his vendors. When he came to know about first respondent putting the property purchased by him for sale inviting tenders, he made an enquiry and came to know that fourth respondent ie., the petitioner in WP No.20203/2004 availed the loan from the SFC. The SFC authorities cannot put to sale the property purchased by him by recourse to Sec.29 of the Act. Hence, entire action is without jurisdiction and same is liable to be set aside. 6. A counter-affidavit has been filed by the SFC in WP No.20203/2004 stating that when the Corporation received an offer in a sum of Rs.6.30 lakhs way back in the year 1998 the assets were new and the machinery was in running condition, but now the building of the rice mill was in a dilapidated condition and machinery was practically worn out and the Corporation failed to receive any offer for the last four notices published after 1998. The offer received for primary assets was Rs.3.49 lakhs and Rs.2 lakhs for collateral security and the same was displayed on the notice board continuously for a period of 7 days, and after finalization, the property was delivered in favour of the purchaser and the same was registered. 7. A learned single Judge of this court by two separate orders allowed both the writ petitions holding that when the third respondent himself offered a sum of Rs.6,30,000/- in the month of December, 1997, when the mill was put to sale, but in August, 2004, he made an offer of Rs.3,49,000/- for the same unit when the estimate was for Rs.5,75,000/- after allowing depreciation for every item. The offer made by the third respondent was no way nearer to the estimated value of the mill. It is not as if the first respondent did not receive any further bids within 90 days. The deal was finalized half way through. No effort was made to conduct public auction on any specified date. The amount offered by the third respondent is almost half of what he offered in 1997, which is far below than the estimated value, which would impinge upon the reasonableness of the effort made by the first respondent. The SFC used its extra-ordinary power conferred under Section 29 of the Act not only to hoodwink the petitioner but also to help the third respondent out of the way. The action of the first respondent smacks of arbitrariness, unreasonableness and gross misuse of power under Section 29 of the Act and holding so set aside the sale of the mill and also the property offered as collateral security by following the judgment of the Supreme Court in KARNATAKA STATE FINANCIAL CORPORATION V. N. NARASIMHAIAH AND OTHERS[1]. 8. Aggrieved by the judgment passed in WP No.20203/2004, the auction purchaser of the mill filed WA No.32/2009, whereas SFC filed WA NO.33/2009. Aggrieved by the judgment passed in WP No.24645/2005, SFC filed WA No.295/2009. The auction purchaser has not chosen to prefer any appeal against the judgment passed in WP No.24645/2005. 9. Sri M.S. Ramchandra Rao, learned Standing Counsel for SFC submitted that as per minutes of the meeting of the committee constituted on recovery matters held on 30-11-2002, 35% of the accepted amount of Rs.6,15,000/- ie., Rs.2,15,2510/- shall be paid on or before 31-3-2003 and the balance shall be paid on or before 30-11-2003 with further interest from 1-11- 2002, but as the petitioner failed to pay the same, the Corporation by its letter dt. 17-6-2003 informed the petitioner that if the petitioner failed to turn up and close the loan account by paying OTS agreed amount, they would proceed against collateral security for realization of balance outstanding amount. Later on receipt of the said letter, the petitioner himself addressed a letter to the Corporation on 24-7-2003 while admitting bouncing of cheques offered payment of Rs.30,000/- by 31st July, 2003. In view of the same, OTS payment offer was cancelled on 23-10-2003 and therefore, the finding recorded by the learned single Judge that OTS proposal given was cancelled by the SFC without notice and opportunity is incorrect. In the sale advertisement inviting sealed tenders, it was mentioned that the offer will be valid for 90 days. On receipt of offer, by notice dt. 9-9-2004, it was informed that in case no tenders are received higher than the satisfactory offer for the unit within a week from the said date, the Corporation shall proceed with the offer so received and confirm the sale. The dominant consideration in issuing sale notice is to secure the best price for the property to be sold and the public auction is not the only mode to secure the best price and it could be done by inviting tenders. Once the procedure followed is transparent and acceptable, the same shall not be the subject matter of judicial review. In support of the said submission, he placed reliance on the judgment of the Supreme Court in KARNATAKA STATE INDUSTRIAL INVESTMENT & DEVELOPMENT CORPORATION LTD., V. CAVALET INDIA LTD[2]. He further contended that the sale advertisement prescribing 90 days is only to keep the offer open but the same is not mandatory but before expiry of 90 days, the Corporation is at liberty to finalise the sale on receiving best offer and the learned Judge is not right in observing that Corporation has necessarily to wait for expiration of 90 days and finalise the sale after 90 days only. He lastly contended that offer received in the month of December, 1997 from the purchaser for Rs.6,30,000/- is for both, primary security as well as collateral security. As the machinery was not in use from 1997 till the date of auction, ie., nearly 7 years, entire machinery has been damaged apart from the same the building was in a dilapidated condition. In view of the same, the offer received in the year 2004 for both properties is nearer to the offer made in the year 1997 ie.,3,49,000/-. Unless any statutory provision has been violated resulting in prejudice to the borrower or where proceedings/action is shown to be wholly arbitrary, unreasonable and unfair, the same cannot be the subject matter of judicial review. In support of the said contention, he placed reliance on the judgment of the Supreme Court i n PUNJAB FINANCIAL CORPORATION V. SURYA AUTO INDUSTRIES[3]. He fairly conceded that in view of the judgment of the Supreme Court in N. NARASIMHAIAH (1 supra), the Corporation cannot sell the property offered as collateral security in exercise of power conferred under Sec. 29 of the Act, and therefore the Corporation may be permitted to proceed with the mortgaged property under ordinary law of contract before the appropriate forum and WA No.295/2010 may be disposed of granting that liberty to the Corporation. 10. Sri D. Prakash Reddy, learned Senior Counsel for the auction purchaser contended that the appellant-third party was put in possession of the property much before filing of the writ petition and the writ petitioner failed to disclose the true facts and on borrower’s failure to comply with the conditional order passed in WP No.17882/1997, SFC proceeded to conduct sale and delivered the possession of the property to the third party and on confirmation of sale the purchaser paid Rs.5,49,000/-. After purchase of the property, he spent Rs.66,000/- for digging the bore well; Rs.5,000/- for raising the platform around the bore well; Rs.65,000/- for erecting fencing of cement poles with barbed wire; Rs.1,00,000/- for the repairs carried out so far to the machinery; Rs.45,000/- for repairs of electrical fixtures; and apart from the same he entered into an agreement with the farmers for supply of grain by paying Rs.1,80,000/- towards advance to the farmers. Further, the petitioner suppressed the fact of mortgaging the property with A. Nageswara Rao, who filed OS No.125/2001 and Smt. G. Mani. In view of the same, the petitioner is not entitled to any discretionary relief from this court as the sale notice was issued to him, and he failed to pay the amount demanded and sale was finalized in his favour and since last seven years, he is running the mill by spending huge amount. He fairly conceded that in view of the law declared by the Supreme Court that the property offered as collateral security cannot be sold in exercise of power under Sec. 29 of the SFC Act, and the third party purchaser has not filed any writ appeal questioning the judgment in WP No.24645/2005 that the said sale of collateral security is in violation of Sec.29. 11. Sri E. Manohar, learned Senior Counsel appearing for R- 1/borrower in WA No.32/2009 while supporting the order under appeal contended that sale conducted is contrary to the terms and conditions of the sale notice, wherein it was stated that offer was kept open for 90 days. R-3’s bid was received and accepted on 20-9-2004 and on receipt of the amount on 8-10-2004, possession was delivered to him on 20-10-2004 and interim order was passed on 4-11-2004 directing the petitioner to deposit the amount and the said amount has been deposited on 16-11-2004. When the Corporation is bound by the terms and conditions of advertisement of sale, they cannot sell the property before closure of the offer. The value arrived at by the Corporation itself is more than the offer received, and therefore the sale of the property at a lower price than the value estimated is nothing but conferring boon to the third respondent. In view of the same, the learned single Judge rightly set aside the sale, which does not call for any interference. In support of the said submission, reliance is placed on the judgment of the Supreme Court in RAMANA DAYARAM SHETTY Vs INTERNATIONAL AIRPORT AUTHORITY OF INDIA[4] 12. Section 29 of the Act authorizes the SFC to take possession of the mortgaged property when the loanee commits default in repayment of the outstanding loan amount. 13. The controversy with regard to the recourse undertaken by the State Financial Corporations in the light of Section 29 of the Act was the subject matter of consideration in several matters, but now the said controversy set at rest by the three-Judge Bench of the Supreme Court in HARYANA FINANCIAL CORPORATION V. JAGDAMBA OIL MILLS[5]. 14. In JAGDAMBA OIL MILLS (5 supra), a three-Judge Bench of the Supreme Court after elaborately considering the object of establishing Financial Corporations in paras 7 and 13 and after referring to its earlier judgments in MAHESH CHANDRA V. U.P. FINANCIAL CORPORATION[6]; U.P. FINANCIAL CORPORATION V. GEM CAP (INDIA) (P) LTD[7] while approving the view taken in GEM CAP (7 supra) held that “the subsequent decisions in GEM CAP (7 supra), U.P. FINANCIAL CORPORATION V. NAINI OXYGEN & ACETYLENE GAS LTD[8] and KARNATAKA STATE FINANCIAL COPRORATION V. MICRO CAST RUBBER & ALLIED PRODUCTS (P) LTD.,[9] run counter to the view expressed in MAHESH CHANDRA case (6). In our opinion, the issuance of the said guidelines in MAHESH CHANDRA case (6 supra) are contrary to the letter and the intent of Section 29. In our view, the said observations in MAHESH CHANDRA case (6 supra) do not lay down the correct law and the said decision is overruled.” 15. In CAVALET INDIA LTD., (2 supra), the Supreme Court after referring to its earlier judgments, as aforementioned, namely, JAGDAMBA OIL MILLS (5 supra);. MICRO CAST RUBBER & ALLIED PRODUCTS (P) LTD (9 supra); NAINI OXYGEN & ACETYLENE GAS LTD (8) supra; GEM CAP (7 supra); MAHESH CHANDRA (6 supra) and also judgment in S.J.S. BUSINESS ENTERPRISES (P) LTD., V. STATE OF BIHAR[10], wherein it was held that the reasonableness of the action of the Financial Corporation under Sec. 29 of the Act should be tested against the dominant consideration to secure the best price, enumerated the following legal principles that emerge from the various judgments: (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. (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 is 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 businesslike 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 adapted. (vii) The financial corporation is always expected to try and realize 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 decision has to be taken as to whether action under Section 29 of the Act is called for. Thereafter, the modalities for disposal of 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. 16. In SURYA AUTO INDUSTRIES (3 supra), the Supreme Court after referring to its earlier judgments, on the subject, and after interpreting Sec. 29 of the Act, held that once the Corporation had acted in a most reasonable and fair manner, the High Court was not justified in nullifying the action undertaken by the Corporation and the High Court cannot ignore the borrower adopting a recalcitrant attitude in the matter of payment of the outstanding dues, but also failing to avail the concessions offered by the Corporation by reducing the rate of interest and rescheduling the payment of outstanding dues and did not take benefit of the schemes notified by the Corporation, for restoration of unit on payment of the principal amount with a 10% outstanding interest. It was further held that the proceedings initiated by the Corporation and action taken for recovery of the outstanding dues cannot be nullified by the courts except when such action is found to be in violation of any statutory provision resulting in prejudice to the borrower or where such proceeding/action is shown to be wholly arbitrary, unreasonable and unfair. The court cannot sit as an appellate authority over the action of the corporation and substitute its decision for the one taken by the Corporation 17. In the cases on hand, though the loan was released on 8-1- 1994, the mill was started in the month of December, 1995, nearly one year eleven months after availing loan. As the petitioner failed to comply with the repayment schedule, a recall-cum-sale notice was issued, which was duly acknowledged by the petitioner on 29-11- 1995. The petitioner was called upon to regularize the loan account before 15-12-1995 specifically notifying that failure to regularize the loan account, action would be taken by the