HON'BLE SHRI G.S.SINGHVI, THE CHIEF JUSTICE AND HON'BLE SHRI JUSTICE C.V. NAGARJUNA REDDY WRIT APPEAL No.872 OF 2006 Between: M/s. Chetana Laminates Pvt. Ltd., Uppal, Hyderabad. ..... Appellant AND The State Financial Corporation, Rep. by its General Manager, Ranga Reddy (East) Branch & others .....Respondents :: J U D G M E N T :: Counsel for the appellant : Shri P. Thirumala Rao Counsel for respondent Nos.2 and 3 : Shri P. Gangaiah Naidu, Senior Advocate assisted by Shri K. Rama Mohan 18th October, 2006 Per G.S.SINGHVI, C.J. The ambit and reach of the Court’s power to interfere with the action taken by the public financial corporations established under the State Financial Corporations Act, 1951 (for short, ‘the Act’) to recover their dues has become subject matter of several decisions by the Supreme Court, some of which are – Mahesh Chandra v. Regional Manager, U.P.F.C.,[1] U.P. Financial Corpn. v. Gem Cap (India) Pvt. Ltd.[2], U.P. Financial Corporation v. Naini Oxygen and Acetylene Gas Ltd.[3], Karnataka State Financial Corporation v. Micro Cast Rubber and Allied Products Private Ltd.[4], Haryana Financial Corporation v. Jagdamba Oil Mills[5], Gajraj Jain v. State of Bihar[6], Karnataka State Industrial Investment and Development Corporation v. Cavalet India Ltd.[7]. In Mahesh Chandra’s case, a Division Bench of the Supreme Court after noticing the object underlying the Act, namely, to promote industrialization in the States by encouraging small entrepreneurs to participate in economic growth of the country by giving them financial assistance for setting up medium and small scale industries and taking cognizance of the fact that the power conferred on the corporation under Section 29 is very wide, held that the sale of the assets of the borrower should be resorted to rarely and that the exercise undertaken for this purpose should be bona fide. Paragraph 21 of the judgment, which reflects this view of the Supreme Court, reads as under: “The sale by public auction or tender or private negotiation should be bona fide action. First is universally recognised to be the best and most fair method. It is expected to fetch best competitive price and is beyond reproach. Second should be resorted to rarely only if first is an impossibility. Generally tenders would be calling quotations to execute public work or to award contracts etc. And third should always be avoided as it cannot withstand public gaze. It casts reflection on Corporation and its officials and is against social and public interest. In case transfer cannot be effected by public auction and it is necessary to resort to sale by tender it is both fair and necessary to inform the unit holder, if unit has been got valued for purposes of transfer of the estimated value for sale as he is as much interested as the Corporation. Sale of public property by calling tenders escape attention of many an intending participant. Every endeavour should, therefore, be made to give wide publicity and to get the maximum price. Bureaucracy feels that accountability is an impediment to efficient discharge of the duty. Accountability is no more and no less than, the concept of accountability of a private concern to their shareholders. There is a distinction between prying into details of day-to-day administration and of the legitimate actions or resultant consequences thereof. To enthuse efficiency into administration, a balance between accountability and autonomy of action of management in public enterprises should be carefully maintained. Over-emphasis on either would impinge upon public efficiency. But undermining the accountability would give immunity or carte blanche power to deal with the public property or of the debtor at whim or vagary. Whether the public authority acted bona fide and in the best interest as prudent owner in the given facts would do, be gauged from impugned action and attending circumstances. The authority should justify the action assailed on the touchstone of justness, fairness, reasonableness and as a reasonable prudent owner.” The Division Bench of the Supreme Court then proceeded to give the following directions: “Every endeavour should be made, to make the unit viable and be put in working condition. If it becomes unworkable: (1) Sale of a unit should always be made by public auction. (2) Valuation of a unit for purposes of determining adequacy of offer or for determining if bid offered was adequate, should always be intimated to the unit holder to enable him to file objection if any as he is vitally interested in getting the maximum price. (3) If tenders are invited then the highest price on which tender is to be accepted must be intimated to the unit holder. (4)(a) If unit holder is willing to offer the sale price, as the tenderer, then he should be offered same facility and unit should be transferred to him. And the arrears remaining thereafter should be rescheduled to be recovered in instalments with interest after the payment of last installment fixed under the agreement entered into as a result of tendered amount. (b) If he brings third parties with higher offer it would be tested and may be accepted. (5) Sale by private negotiation should be permitted only in very large concerns where investment runs in very huge amount for which ordinary buyer may not be available or the industry itself may be of such nature that by (sic many) normal buyers may not be available. But before taking such steps there should be advertisements not only in daily newspapers but business magazines and papers. (6) Request of the unit holder to release any part of the property on which the concern is not standing of which he is the owner should normally be granted on condition that sale proceeds shall be deposited in loan account.” The above noted judgment was distinguished in U.P. Financial Corpn. v. Gem Cap (India) Pvt. Ltd. (supra) and it was held: “A Financial Corporation like the appellant is an instrumentality of the State created under the Act. It 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 one way street, more particularly in matters like the present one. The corporations too borrow monies from 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.” The view expressed in the second judgment found its echo in U.P. Financial Corpn. v. Naini Oxygen & Acetylene Gas Ltd. (supra), Karnataka State Financial Corporation v. Micro Cast Rubber & Allied Products (P) Ltd. (supra) and Haryana Financial Corpn. v. Jagadamba Oil Mills (supra). In the last mentioned judgment, a three Judges Bench of the Supreme Court referred to various judicial precedents including the judgments to which reference has been made hereinabove and held: “………….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. As was observed by this Court in U.P. Financial Corpn. v. Naini Oxygen & Acetylene Gas Ltd. in commercial matters the courts should not risk their judgments for the judgments of the bodies to whom that task is assigned. As was rightly observed by this Court in Karnataka State Financial Corpn. v. Micro Cast Rubber & Allied Products (P) Ltd. in the matter of action by the Corporation in exercise of the powers conferred on it under Section 29 of the Act, the scope of judicial review is confined to two circumstances i.e. (a) where there is statutory violation on the part of State Financial Corporation, or (b) where State Financial Corporation acts unfairly i.e. unreasonably. While exercising its jurisdiction under Article 226 of the Constitution of India, 1950 (in short “the Constitution”), the High Court does not sit as an Appellate Authority over the acts and deeds of the Corporation. Similarly, the courts other than the High Courts are not to interfere with action under Section 29 of the Act unless the aforesaid two situations exist.” The three Judge Bench specifically referred to Mahesh Chandra’s case (supra) and virtually over-ruled the same by recording the following observations: “The view in Mahesh Chandra case appears to have been too widely expressed without taking note of the ground realities and the intended objects of the statute. If the guidelines as indicated are to be strictly followed, it would be giving premium to a dishonest borrower. It would not further the interest of any Corporation and consequently of the industrial undertakings intending to avail financial assistance. It would only provide an unwarranted opportunity to the defaulter (in most cases chronic and deliberate) to stall recovery proceedings. It is not to be understood that in every case the Corporations shall take recourse to action under Section 29. Procedure to be followed, needless to say, has to be observed. 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. The view expressed in U.P. Financial Corpn. v. Gem Cap (India) (P) Ltd. (1993) 2 SCC 299 appears to be more in line with the legislative intent. Indulgence shown to chronic defaulter would amount to flogging a dead horse without any conceivable result being expected. As the facts in the present case show, not even a minimal portion of the principal amount has been repaid. That is a factor which should not have been lost sight of by the courts below. It is one thing to assist the borrower who has intention to repay, but is prevented by insurmountable difficulties in meeting the commitments. That has to be established by adducing material. In the case at hand factual aspects have not even been dealt with, and solely relying on the decision in Mahesh Chandra case the matter has been decided.” In Karnataka State Industrial Investment and Development Corporation v. Cavalet India Ltd. (supra), the Supreme Court reiterated the law laid down in Haryana Financial Corporation v. M/s.Jagadamba Oil Mills and culled out the following principles: “ 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 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 decision 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.” We have prefaced disposal of this appeal by noticing the relevant judicial precedents because the question which arises for determination in this appeal filed against order dated 4-7-2006 passed by the learned Single Judge in Writ Petition No.23102 of 2005 is whether the action of Andhra Pradesh State Financial Corporation (for short, ‘the Corporation’) to sell the industrial unit – M/s.Acro Industries, C-18/1, IDA, Uppal, Hyderabad for realization of its dues is arbitrary and vitiated due to violation of the rules of natural justice. For deciding the aforementioned question, we have taken the facts from the pleadings of the writ petition and additional affidavits filed in this appeal. These are: i) On an application made by the appellant, the Corporation, vide its letter dated 4th June, 1999, sanctioned loan of Rs.52.60 lakhs subject to the terms and conditions specified in the accompanying annexure. ii) For securing repayment of the loan, Sri S.Gnaneshwara Rao, father of the Managing Director of the appellant company mortgaged his property situated at IDA, Uppal, Hyderabad. iii) On 17-9-1999, the Corporation disbursed a sum of Rs.33.43 lakhs. Later on, additional amount was disbursed making a total of Rs.49.14 lakhs. iv) In terms of the agreement executed between the parties, the appellant was required to commence repayment of loan with effect from 1-9-2000. v) On account of the appellant’s failure to repay the instalments of loan together with interest, the Corporation sent notices dated 17-2-2001, 8-6-2001 and 17-8-2001 requiring the appellant to clear the outstanding dues with an indication that failure to repay the amount on or before the specified date may result in initiation of action under Section 29 of the State Financial Corporations Act, 1951 (for short, ‘the Act’). vi) In the meanwhile, vide letter dated 31-3-2001, the Corporation cancelled the un-availed term loan of Rs.3,45,840/- and re-fixed the loan instalments. In terms of that letter, the appellant was to repay the entire loan in 29 quarterly instalments (first 28 instalments of Rs.1,69,500/- and the last instalment of Rs.1,68,160/-). vii) The representative of the appellant gave cheque dated 27-9-2001 drawn on Andhra Bank, SBI, Uppal for a sum of Rs.2,00,000/-, but the same was dishonoured. Consequently, the Corporation issued notice dated 12-10-2001, whereby the appellant was informed that its action amounted to an offence under the Negotiable Instruments Act, 1881 (for short, ‘the N.I.Act’). viii) After about six months, the appellant sent letter dated 16-5-2002 to the Corporation conveying that due to lack of working capital, the unit set up by it had not been working well and, on that account, the dues of the Corporation could not be paid. The appellant requested the Corporation to sanction working capital term loan and simultaneously promised to clear the dues of interest amounting to Rs.9.94 lakhs by the end of December, 2002 in monthly instalments. ix) The Corporation, vide its letter dated July 1, 2002, informed the appellant that it had no objection to sanction the working capital term loan, provided the conduct of affairs by the promoters is satisfactory. x) Vide letter dated 11-7-2002, the Corporation informed the appellant that it should adhere to the schedule of payment of interest. O n 28-8-2002, the Corporation advised the appellant to clear the arrears of Rs.12,36,018/- towards interest. Similar communication was sent to the appellant on 8-9-2002. xi) Vide letter dated 26-12-2002, the Corporation informed Sri S.Gnaneshwara Rao of M/s.Acro Industries, Plot No.C-11, IDA, Uppal, who, as mentioned above, mortgaged his property as collateral security for repayment of loan advanced to the appellant that the latter has failed to repay the instalments of principal amount and interest. Sri S.Gnaneshwara Rao was advised to impress upon the borrower to clear the arrears of Rs.14,56,939/- with an indication that non- payment of the dues may result in taking of action for sale of security under Section 29 of the Act. xii) The Corporation sent further communications d a t e d 13-6-2003,30-6-2003 and 7-8-2003 to the appellant for repayment of the loan. xiii) In the meanwhile, the unit of the appellant was seized on 7-3-2003. However, on a promise made by the Managing Director of the appellant to pay the dues, the seizure was lifted on 27-3-2003. Notwithstanding this, the appellant did not clear the outstanding dues forcing the Corporation to recall the entire loan. xiv) On 27-8-2003, the Managing Director of the Company, Sri S.G. Prashanth Kumar submitted one Demand Draft for Rs.2,00,000/- and eight post-dated cheques of Rs.1,00,000/- each with an undertaking that if any cheque is dishonoured, then the unit may be seized without further notice. This is evinced from the following extract of letter dated 27-8-2003: “Further, we would like to inform to you that we have entered into job work agreement for converting 14 lakhs meters @ 0.22 ps/mtr, which will enable us to generate nearly Rs.3.20 lakhs. Any of the cheque is dishonoured, you may seize the unit without any further notice.” xv) However, cheque dated 10-9-2003 of Rs.1,00,000/- given by the Managing Director of the appellant was dishonoured by the State Bank of India. This compelled the Corporation to again warn the appellant not to issue such cheques, else action will be initiated under the N.I. Act. xvi) The Corporation sent further communications dated 2-6-2004 and 4-8-2004 to the appellant for repayment of loan, but the latter failed to clear the dues. xvii) The representative of the appellant attended the recovery review meeting held on 30-10-2003 and promised to pay Rs.4,00,000/- in two instalments of Rs.2,00,000/- each by 7-11-2003 and 15-11-2003 and clear the balance by November, 2003, but no tangible effort was made for payment of the dues. A similar promise made by the appellant’s representative on 14-6- 2004 also proved abortive. xviii) In August, 2004, the Corporation advertised the collateral security offered by Sri S.Gnaneshwara Rao for sale. Simultaneously, letter dated 5-8-2004 was addressed to the appellant and Sri S.Gnaneshwara Rao to bring bidders who could offer to purchase the property. It, however, appears that the sale of the collateral security did not materialize because of the representations dated Nil (received on 9-8-2004 by the Corporation) and 17-8-2004 made by the Managing Director of the appellant for One Time Settlement. xix) In response to the aforementioned representations, the Corporation advised the representative of the appellant to attend the meeting organised for One Time Settlement, but he did not avail the opportunity. Therefore, the Corporation again advertised the collateral security for sale. xx) With a view to frustrate the action initiated by the Corporation, the appellant’s representative again sent letter dated 14-10-2005 to the Managing Director of the Corporation for One Time Settlement. The same was rejected by the Corporation and vide letter dated 20-10-2005, the appellant was informed that the collateral security had been sold for a sum of Rs.91 lakhs and the sale has been confirmed. xxi) The appellant challenged the sale of the collateral security by filing writ petition under Article 226 of the Constitution, which was registered as Writ Petition No.23102 of 2005. In the writ petition, the appellant did not implead the highest bidders i.e., respondent Nos.2 and 3 as party respondents. xxii) By an order dated 7-11-2005, the learned Single Judge allowed the writ petition and quashed the sale of the collateral security on the ground of violation of the rules of natural justice. xxiii) Respondent Nos.2 and 3 challenged the order of the learned Single Judge in Writ Appeal No.2299 of 2005, which was allowed by the Division Bench on 22-2-2006 with an observation that the order under challenge is vitiated due to violation of the rules of natural justice inasmuch as respondent No.1 (appellant herein) had deliberately omitted to implead the purchasers as party respondents. The Division Bench remanded the case to the Single Bench for fresh adjudication with liberty to the writ petitioner (appellant herein) to implead the purchasers as party respondents.” In the affidavit filed in support of the writ petition, Sri S.G. Prashanth Kumar, Managing Director of the appellant did not dispute the facts relating to sanction and disbursement of the loan by the Corporation and his failure to repay the instalments (principal as well as interest). He also did not deny the receipt of various notices issued by the Corporation and the fact that two of the cheques issued by him were dishonoured by the concerned banks. He, however, questioned the sale of the collateral security by asserting that the action of the Corporation is vitiated due to violation of the rules of natural justice and arbitrary exercise of power. He pleaded that the Corporation had not given sufficient notice regarding the proposed sale and, on that account, he could neither make effort for repayment of the outstanding dues nor bring a buyer who could give a better offer. Another plea taken by him was that during the pendency of his request for One Time Settlement, the Corporation was not at all justified in putting the collateral security to sale. In the counter filed on behalf of the Corporation in the form of affidavit of Sri E.Chengalrayulu, Assistant General Manager, it was averred that despite repeated opportunities, the petitioner (appellant herein) failed to repay the instalments of loan with interest necessitating initiation of action under Section 29 of the Act. It was further averred that notices were given from time to time to the petitioner to clear the dues and participate in the sale proceedings, but no effort was made by the latter to repay the instalments of loan or bring a buyer who could give