SCA/20433/2006 1/22 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 20433 of 2006 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ====================================== CIMKON LABORATORIES - Petitioner(s) Versus GUJARAT STATE FINANCIAL CORPORATION - Respondent(s) ====================================== Appearance : MR MIHIR JOSHI LD.SR.COUNSEL WITH MS ANUSHREE KAPADIA for Petitioner(s) : 1, MR RD DAVE for Respondent(s) : 1, ====================================== CORAM : HONOURABLE MR.JUSTICE M.R. SHAH Date : 11/12/2008 ORAL JUDGMENT 1. RULE. 2. Mr.R.D. Dave, learned advocate waives the service of SCA/20433/2006 2/22 JUDGMENT notice of admission on behalf of the respondent. 3. With the consent of the learned advocates appearing on behalf of respective parties, present petition is taken up for final hearing today. 4. By way of this petition under Article 227 of the Constitution of India, the petitioner – original plaintiff has prayed for appropriate writ, order and/or directions quashing and setting aside the order dtd.18/4/2006 passed by the learned Chamber Judge of the City Civil Court at Ahmedabad below application Ex.32 in Civil Suit No. 3320 of 2001 dismissing the application of the petitioner for interim injunction by holding that the respondent is entitled to take over the possession of the property of the petitioner and to sell it in exercise of the powers under sec.29 of the State Financial Corporation Act (“SFC Act” for short). 5. It is the case on behalf of the petitioner that the petitioner is a Partnership Firm and Mr.Surendra K.Kapadia and Mr.Prashit S.Kapadia are its partners and the said Firm is the owner of the disputed property. That the partners of the Partnership Firm were the Directors in one Titan Pharmaceuticals Pvt. Ltd (“the Company” for short) which had availed financial assistance from the SCA/20433/2006 3/22 JUDGMENT respondent – GSFC and for that purpose the partners of the petitioner firm had executed a joint and several guarantee in favour of the GSFC on 29/8/1993 and an equitable mortgage of the subject property was executed. It is the case on behalf of the petitioner that thereafter on 1/4/1999 and 7/7/1999, the aforesaid partners resigned as Directors from the Company and on the same day new directors were appointed and on 14/7/1999 a Memorandum of Undertaking (“MOU” for short) was executed by which the new directors became wholly liable in respect of the dues of the respondent GSFC. It is the case on behalf of the petitioner even the partners informed the GSFC that they had resigned as directors of the Company and new directors had taken over the liability of the dues of the respondent under the aforesaid MOU and asking for release of the partners as guarantors and release of the subject property. That thereafter on account of the non-payment of its dues by the Company, the respondent took possession of the property of the Company on 15/3/2000 in exercise of its powers under sec.29 of the State Financial Corporation Act and the respondent GSFC issued notice dtd.7/7/2000 calling upon the partners of the petitioner. Thereafter the SCA/20433/2006 4/22 JUDGMENT respondent issued notice dtd.20/1/2001 calling upon the partners to pay the dues of the Company failing which the subject property would be taken over and therefore the petitioner plaintiff filed the Civil Suit No. 1007 of 2001 in the City Civil Court at Ahmedabad against the GSFC and New Directors seeking a direction to the new directors to fulfill their liability towards the respondent in view of the MOU. 6. It is the case on behalf of the petitioner that the GSFC forcibly and illegally took the possession of the suit property on 26/6/2001 in exercise of the powers under sec.29 of the SFC Act, which was objected to the petitioner. Thereafter, the petitioner had instituted the said Civil Suit No. 3320 of 2001 seeking recovery of the possession of the suit property under sec.6 of the Specific Relief Act, 1963. In the said suit, the petitioner submitted application for interim injunction restraining the respondent from selling the disputed property of the Partners of the Partnership Firm, which came to be dismissed for non-prosecution. Thereafter, certain payments were made. It is the case on behalf of the petitioner that there was variance of the terms between the respondent GSFC and the company pursuant to SCA/20433/2006 5/22 JUDGMENT which the respondent GSFC agreed to return the possession of the property of the company. Thus, according to the petitioner, respondent GSFC released the security, however, the respondent GSFC continued to recover the amount from the subject property of the petitioner and therefore, the petitioner moved an application for injunction restraining the respondent GSFC from disposing of the property by taking out Notice of Motion dtd.18/8/2005. The said application for injunction came to be rejected by the learned Chamber Judge, City Civil Court at Ahmedabad by the impugned order dtd.18/4/2006 by holding that the GSFC had powers under sec.29 of the SFC Act and to have possession of the disputed property and sell it. That being aggrieved by and dissatisfied with the same, the petitioner preferred Appeal From Order before this Court being Appeal From Order No.141 of 2006. However, the same was not maintainable as the suit was filed under sec.6 of the Specific Relief Act and therefore, the present Special Civil Application is filed. 7. Ms.Anushree Kapadia, learned advocate appearing on behalf of the petitioner has vehemently submitted that as the property in question sought to be auctioned in SCA/20433/2006 6/22 JUDGMENT exercise of the powers under sec.29 of the SFC Act is not a property of the industrial concern who has taken the financial assistance, the respondent GSFC has no authority to take possession and sell the said property of the petitioner guarantor in exercise of the powers under sec.29 of the SFC Act. Ms.Kapadia has heavily relied upon the recent decision of the Hon'ble Supreme Court in the case of Karnataka State Financial Corporation vs. N.Narasimaharaj & Ors., reported in (2008) 5 SCC 176. It is submitted that while interpreting secs.29 and 31 of the SFC Act and the powers of the Financial Institution u/s.29 of the Act, the the Hon'ble Supreme Court has specifically held that sec.29 of the Act nowhere states that the Corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it. It is submitted that as held by the Hon'ble Supreme Court, right of the Financial Corporation in terms of Sec.29 of the Act must be exercised only on a defaulting party and there cannot be any default as envisaged in sec.29 by a surety or guarantor. It is submitted that as held by the Hon'ble Supreme Court in the said decision only powers available to the Financial Corporation to recover the amount due from the surety SCA/20433/2006 7/22 JUDGMENT and/or guarantor is under sec.31 of the Act, as sec.31 takes within its sweep both, property of the industrial concern as well as that of the surety. Therefore, it is submitted that exercise of the powers by the respondent Corporation to auction the properties of the petitioner as a guarantor is absolutely illegal and contrary to the law laid down by the Hon'ble Supreme Court in the said decision. Therefore, it is submitted that the respondent GSFC has no authority to sell the disputed properties under sec.29 of the SFC Act. 7.1. It is also further submitted that even the respondent GSFC had permitted the principal borrower from discharging their liability and returned the properties to the principal borrower and therefore the respondent GSFC could not have initiated any action against the guarantors much less could not have taken possession of the properties of the guarantors in satisfaction of the debt which had already reconstructed or settled in part by the parties. 7.2. It is also further submitted that the mortgage deed was to secure the due payment of the loan taken by the principal SCA/20433/2006 8/22 JUDGMENT borrower and the liability of the guarantor could not extend beyond the liability of the principal borrower and the petitioner being guarantor is not liable to pay any amount and the liability of the petitioner would not continue. Therefore, it is submitted that the learned Chamber Judge has committed an error in dismissing the Notice of Motion by not restraining the respondent GSFC from auctioning the properties in question in exercise of the powers under Sec.29 of the SFC Act. Submitting accordingly it is requested to allow present Special Civil Application. 8. The petition is opposed by Mr.R.D. Dave, learned advocate appearing on behalf of the respondent GSFC and Affidavit-in-reply is also filed by the petitioner GSFC. It is submitted in the reply that in the present case, the petitioner has given collateral security creating equitable mortgage by depositing Title Deed of the property for repayment of the loan taken by the principal borrower namely Titan Pharmaceuticals Pvt. Ltd. and therefore, the petitioner cannot claim discharge as guarantor so as to restrain the GSFC from taking legal action under sec.29 of the SFC Act against the property which has been SCA/20433/2006 9/22 JUDGMENT mortgaged to GSFC. It is further submitted and it is specifically denied that the GSFC had discharged the principal borrower and returned the property of the Company. It is submitted that, in fact, primary security namely land, building, plant and machinery of the borrower were to be auctioned by advertisement and the original Tender Committee of the GSFC ultimately accepted offer of Rs.8,51,000 on 19/9/2006 by M/s. Triflex Ink Pvt. Ltd. and the entire amount has been paid by the purchaser and the said property of the principal debtor / borrower has been handed over to the purchaser. It is submitted that merely granting some time for repayment earlier and in process thereof, if the possession of assets of the principal borrower was returned by GSFC, it will not absolve the liability of the petitioner in respect of collateral security upon which mortgage has been created in favour of the GSFC by the petitioner. It is submitted that eve after selling the properties of principal borrower, an amount of Rs.31,54,780 is due and payable, which is sought to be recovered from the suit property which was been mortgaged by way of collateral property in exercise of the powers under sec.29 of the SFC Act and therefore, it cannot be said that the action of the respondent GSFC SCA/20433/2006 10/22 JUDGMENT is illegal and/or arbitrary and/or de-hors the provisions of the SFC Act and therefore, it is submitted that the learned Chamber Judge has rightly dismissed the Notice of Motion and rightly refused to grant injunction as prayed for restraining the respondent GSFC from auctioning he properties under sec.29 of the SFC Act. 9. Mr.R.D. Dave, learned advocate appearing on behalf of the respondent GSFC has further submitted that Sec.29 of the SFC Act is in two parts and second part of sec.29 of the SFC Act is with respect to taking over the mortgaged property and sale of the mortgaged / hypothecated and charged property and it does not refer to the mortgaged properties and sale of the mortgaged, hypothecated and charged properties by the “Industrial Concern” It is submitted that the second part is with respect to all the mortgaged properties and sale of the mortgaged, hypothecated and charged property. Therefore, it is submitted that it is within the authority of the respondent GSFC to take possession of the properties mortgaged by the guarantors / surety also. It is also further submitted that Sec.29 of the Act confers two independent rights viz. taking over the mortgaged properties and sale of the SCA/20433/2006 11/22 JUDGMENT mortgaged/hypothecated and charged property. The first part of sec.29 of the Act covers taking over the possession and/or management of the mortgaged property of the “Industrial Concern” and second part of sec.29 covers sale of the properties mortgaged irrespective of the fact as to whether the same belongs to the industrial concern or not. It is further submitted that sec.29 having taken within its umbrage security and/or legislative independent of speedy recovery of the dues, the same includes the power to take possession of the mortgage property of the guarantor also being incidental to main power and/or implide power of the Corporation. It is further submitted that so far as sec.31 of the Act is concerned, it confers the same powers on the Corporation with an additional remedy. It is submitted that on fair reading of secs.29 and 31 of the SFC Act, it can be said that the rights concerned under sec.31 of the Act are additional and independent right conferred in favour of the respondent GSFC, but the same cannot be said to be alternate to sec.29 of the Act. It is further submitted that to take a contrary view would be against the legislative intent of speedy recovery of the dues, as whenever the powers under sec.31 of the SFC Act are SCA/20433/2006 12/22 JUDGMENT invoked, there will be lengthy proceedings before the Courts. It is submitted that the special statutory power having been conferred on the corporation so as to enable it to recover its debts, as it serves much larger economic interest of the country and therefore, Secs.29 and 31 of the Act should be interpreted in such a meaning which would help it to achieve the said purpose. Therefore, it is submitted that it is ultimately upon the corporation to invoke powers under secs.29 or 31 of the Act to recover its debts at the earliest. Therefore, it is requested to dismiss present Special Civil Application, permitting the respondent GSFC to realise the loan amount by selling / auctioning the properties in question mortgaged by the petitioner as a collateral security. 10.Ms.Kapadia, learned advocate appearing on behalf of the petitioner, under the instruction of his client, has made a statement at bar that the petitioner is not inviting any observation on merits with respect to the right of the GSFC to auction the mortgaged properties and to realise the amount from the mortgaged properties, which is alleged to have been put as collateral security by the petitioner and has submitted that the petitioner is SCA/20433/2006 13/22 JUDGMENT restricting the challenge to the action of the GSFC under sec.29 of the SFC Act and to auction the said property in exercise of the powers under sec.29 of the SFC Act. Therefore, the submission on behalf of the petitioner is that the GSFC can exercise powers under sec.29 of the SFC Act, only with respect to the property of the “Industrial Concern” and not with respect to the property of the guarantor which might have been mortgaged by way of collateral security. 11.Heard the learned advocates appearing on behalf of the respective parties. 12.It is required to be noted that the suit property of the petitioner was sought to be auctioned by the GSFC in exercise of the powers under sec.29 of the SFC Act. It is not in dispute that the suit property has been mortgaged as collateral security with the GSFC by the partners of the petitioner as guarantors. It is an admitted position that the suit property is not the property of the “Industrial Concern” who has taken the loan/ financial assistance and therefore, the short question which is posed for consideration of this Court is whether can GSFC auction the property and/or initiate proceedings under sec.29 of the SFC Act with respect to the property not belonging SCA/20433/2006 14/22 JUDGMENT to the “Industrial Concern” which has taken the financial assistance/loan and for the properties mortgaged with GSFC by the guarantor/surety. 13.Sec.29 of the SFC Act confers right upon the financial Corporation to take over the management or possession of the i”Industrial Concern” and sell it and realise the amount out of the said properties. As per sec.29 of the SFC Act where any “Industrial Concern” which is under a liability to pay to the Financial Corporation under an agreement makes any default in repayment of any loan or finance 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 the agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the “Industrial Concern” as well as right to transfer by way of lease or sell and realise the property pledged. 14.Identical question came to be considered by the Hon'ble Supreme Court in the case of Karnataka State Financial Corporation (supra) and the Hon'ble Supreme Court has considered secs.29 and 31 of the SFC Act and the issue with regard to right of the State Financial SCA/20433/2006 15/22 JUDGMENT Corporation u/s.29 in case of default in repayment of loan and the Hon'ble Supreme Court has also considered the dispute whether the financial corporation can sell / auction the properties of the guarantors mortgaged and put as a collateral security, in exercise of the powers under sec.29 of the Act. Considering the aforesaid decision, it appears that the learned advocate appearing on behalf of the financial corporation made all the submissions in favour of sec.29 of the SFC Act and right of the financial corporation to sell or auction and/or take possession of the mortgage property of the guarantor and has made all the submissions which are made by Mr.Dave, learned advocate appearing on behalf of the respondent GSFC, referred to hereinabove, and all the aforesaid submissions have been considered by the Hon'ble Supreme Court in the aforesaid decision and on interpreting sec.29 of the SFC Act read with sec.31 of the SFC Act, the Hon'ble Supreme Court has observed and held in para 19, 20, 21, 22, 31, 32, 33 and 37 as under:- “19. The heading of Section 29 of the Act states "Rights of financial corporation in case of default". The default contemplated thereby is of the SCA/20433/2006 16/22 JUDGMENT industrial concern. Such default would create a liability on the industrial concern. Such a liability would arise when the industrial concern makes any default in repayment of any loan or advance or any instalment thereof under the agreement. It may also arise when it fails to meet its obligation(s) in relation to any guarantee given by the corporation. If it otherwise fails to comply with the terms of the agreement with the financial corporation, also the same provisions would apply. In the eventualities contemplated under Section 29 of the Act, the corporation shall have the right to take over the management or possession or both of the industrial concern. The provision does not stop there. It confers an additional right as the words "as well as" is used which confers a right on the corporation to transfer by way of lease or sale and realize the property pledged, mortgaged, hypothetical or assigned to the corporation. 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 SCA/20433/2006 17/22 JUDGMENT 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. 21. The words "as well as" in our opinion play a significant role. It confers two different rights but such rights are to be enforced against the same person, viz., the industrial concern. Submission of the learned senior counsel that the second part of Section 29 having not referred to 'industrial concern', any property pledged, mortgaged, hypothecated or assigned to the financial corporation can be sold, in our opinion cannot be accepted. It is true that sub-section (1) of Section 29 speaks of guarantee. But such a guarantee is meant to be furnished by the Corporation in favour of a third party for the benefit of the industrial concern. It does not speak about a surety or guarantee given in favour of the corporation for the benefit of the industrial concern. 22. The legislative object and intent SCA/20433/2006 18/22 JUDGMENT becomes furthermore clear as in terms of Sub-section (4) of Section 29 of the Act only when a property is sold, the manner in which the sale proceeds is to be appropriated has categorically been provided therein. It is significant to notice that sub-section (4) of Section 29 of the Act which lays down appropriation of the sale proceeds only refers to 'industrial concern' and not a 'surety' or 'guarantor'. 23. .... 24. .... 25. .... 26. .... 27. .... 28. .... 29. .... 30. .... 31. Section 31 of the Act provides for a special provision. It, apart from the default on the part of the industrial concern, can be invoked where the financial corporation requires an industrial concern to make immediate repayment of loan or advance in terms of Section 30 if and when such requirement is not met. The aforementioned provision could be resorted to by the Corporation, without prejudice, to its rights under the provisions of Section 29 as also Section 69 of the Transfer of SCA/20433/2006 19/22 JUDGMENT Property Act and for the said purpose it is required to apply to the District Judge having appropriate jurisdiction. 32. Section 31 of the Act provides for the reliefs which may be sought for by the Corporation strictly in terms thereof. Clause (aa) of sub-section (1) of Section 31 of the Act provides for a final relief. It does not speak of any interlocutory order. Clause (aa), as noticed hereinbefore, has been inserted by Act No. 43 of 1985. Thus, prior thereto even Section 31 could not have been taken recourse to against a surety. Such a relief, if prayed for, would also lead to grant of a final relief and not an interlocutory one. 33. Similarly, clause (b) of Sub-section (1) of Section 31 of the Act also provides for a final relief. Only clause (c) of Sub- section (1) of Section 31 of the Act empowers the District Judge in the event any application is filed by the Corporation to pass an ad interim injunction. The very fact that Section 31 uses the terminology "without prejudice" to the provisions of Section 29 of the Act and/ or Section 69 of the Transfer of Property Act, it clearly postulates an SCA/20433/2006 20/22 JUDGMENT additional relief. What can be done by invoking Section 29 of the Act can inter alia be done by invoking Section 31 thereof also but therefor a different procedure has to be adopted. Section 31 also provides for a relief against a surety and not confined to the industrial concern alone. Sub-section (2) of Section 31 also refers to industrial concern and not the surety. The legislative intent, therefore, to our mind, is clear and unambiguous.” 34. .... 35. .... 36. .... 37. The legislative intent, in our opinion, is manifest. The intention of the Parliament in enacting Sections 29 and 31 of the Act was not similar. Whereas Section 29 of the Act consists of the property of the industrial concern, Section 31 takes within its sweep both the property of the industrial concern and as that of the surety. None of the provisions control each other. The Parliament intended to provide an additional remedy for recovery of the SCA/20433/2006 21/22 JUDGMENT amount in favour of the Corporation by proceeding against a surety only in terms of Section 31