IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CWP No.5397 of 2003 Date of Decision: 18.10.2006 Paramjit Singh Ahuja …Petitioner versus Punjab State Financial Industrial Development Corporation Limited and others …Respondents CORAM:- HON'BLE MR. JUSTICE JASBIR SINGH HON'BLE MR. JUSTICE PRITAM PAL HON'BLE MR. JUSTICE VINOD K.SHARMA Present: Shri I.S.Ratta, Advocate for the petitioner Shri Kamal Sehgal, Advocate for Haryana Financial Corporation Shri Arun Walia, Advocate for PSIDC Shri S.S.Brar, Advocate for respondent No.6 Jasbir Singh, J. This writ petition was filed by the petitioner, on receipt of a notice under Section 29 of the State Financial Corporation Act, 1951 (in short the Act), vide which, respondent No.1 – Punjab State Industrial Development Corporation Ltd. (in short the creditor), intended to take possession of residential house of the petitioner, which was mortgaged as a security by him (by depositing original title deed), to secure the loan, disbursed by the creditor to M/s Noor Papers Ltd. – respondent No.2. (Name of respondent No.2 was deleted from array of parties vide order dated 10.1.2005). In this writ petition, it is case of the petitioner that as he has ceased to be a Director of the Company, security furnished by him cannot be CWP No.5397 of 2003 - 2 - encashed by the creditor and further that it is not open to the creditor to take over possession of the property of the petitioner and realise the same under Section 29 of the Act, as that provision can be invoked only against the industrial concern, to whom the loan was disbursed by the creditor. When this writ petition came up for hearing before a Division Bench of this Court on 7.4.2003, after noting following contentions of counsel for the petitioner, notice of motion was issued:- “Inter-alia contends that principal borrower, i.e. M/s Noor Papers Limited has not been proceeded under Section 29 of the Punjab State Financial Corporation Act, 1951 nor the new guarantors have been issued notice under Section 29 of the Act aforesaid. The petitioner, who is no more guarantor has instead been proceeded with for taking in possession of his residential house at Tarn Taran.” After notice, written statement was filed by respondent No.1, the creditor, wherein averments made by the petitioner were controverted and it was said that he was one of the promoter Directors of the industrial concern, on whose behalf, the petitioner had stood as a guarantor/ surety for repayment of the loan and to secure the loan he had furnished his personal guarantee and also deposited original title deeds of the property, in dispute, with the creditor. It has further been said that the petitioner, of his own, voluntarily, resigned as a director of the company i.e. principal debtor. Request of the company, to release the security, furnished by the petitioner, was not accepted, as the alternative security being offered, was not acceptable to the creditor. It was further said that the security given by the petitioner was never released and further that after notice, the petitioner had handed over vacant possession of the property, in dispute, to the creditor, of CWP No.5397 of 2003 - 3 - his own and had signed a note, handing over possession of the said property. It was further said that it is open to the creditor to have recourse to the provisions of Section 29 of the Act as liability of the petitioner is co- extensive with that of the principal debtor, so keeping in view the agreement dated 27.11.1996, giving his personal irrevocable continuing guarantee by the petitioner and deed of guarantee, coupled with deposit of original title deeds with the creditor, action under Section 29 of the Act is justified and it is not necessary, first to proceed against the principal debtor and then realise the amount from the surety. When this matter came up for hearing before a Division Bench of this Court, counsel for the petitioner placed reliance upon a Division Bench judgment of the Karnataka High Court in N.Narasimahaiah v. Karnataka State Financial Corporation, 2003(2) ISJ (Banking) 594 and also on the ratio of Full Bench judgment of Allahabad High Court in Munnalal Gupta v. Uttar Pradesh financial Corporation and another, AIR 1975 Allahabad 416 and a Division Bench judgment of the Kerala High Court in Joseph v. Kerala Financial Corpn., 1990 ISJ (Banking) 110, to say that it is not open to the creditor, to proceed against the surety, by invoking the provisions of Section 29 of the Act. In the alternative, it was said that even if action under Section 29 of the Act is permissible, after taking over the possession, the property can be disposed of only by having recourse to the provisions of Section 31 of the Act or by availing remedy provided under general law i.e. by filing a civil suit. As against this, counsel for the respondent – creditor placed reliance upon the ratio of the judgment of Orissa High Court in Miss K.T.Sulochana Nair v. Managing Director, Orissa State Financial Corporation and others, AIR 1992 Orissa 157, two judgments of this Court CWP No.5397 of 2003 - 4 - in Surjit Singh v. Haryana Financial Corporation and others, 1(1999) BC 86 and in Jasbir Kaur and another v. Punjab State Industrial Development Corporation Ltd., Chandigarh and another, AIR 2002 Punjab and Haryana 74, to contend, to the contrary. Ratio of the judgments relied upon by counsel for the respondent- creditor is in direct conflict with the ratio of the judgments relied upon by counsel for the petitioner, as referred to above. By noticing the same and also taking note of the fact that when judgment was passed by a Division Bench of this Court in Jasbir Kaur’s case (supra), provision of Clause (aa) of sub-section 1 of Section 31 of the Act, was neither considered nor referred to. The Division Bench of this Court on 5.7.2006, framed the following question of law for consideration:- “Whether in terms of Section 29 of the State Financial Corporation Act, 1951, the Financial Corporation could take over the possession and/ or management of the property of the surety secured in favour of the Corporation and could direct the sale or lease of the property of the surety mortgaged/ hypothecated to the Corporation?” It was also felt necessary that it would be appropriate to constitute a Full Bench so that the matter may be heard and the dispute be authoritatively decided in one way or the other. On request made to Hon’ble the Acting Chief Justice, this Full Bench was constituted. Counsel for the parties heard. Shri I.S.Ratta, Advocate, who has put in appearance on behalf of the petitioner, by referring to the provisions of Section 29 of the Act, has vehemently contended that the action under that provision is possible only against the industrial concern/ principal debtor and not against the surety. CWP No.5397 of 2003 - 5 - To say so, reference was made to sub-section (1) of Section 29 of the Act, wherein it has been mentioned that when any ‘industrial concern’ failed to discharge its liability towards the financial corporation, under an agreement, it is open to the corporation to take over the management or possession or both of the industrial concern and also with a right, to transfer by way of lease, sale and otherwise the mortgaged and hypothecated properties, of the industrial concern, in favour of the financial corporation. To support his contention, he has argued that after taking action under Section 29(1), only the industrial concern, can be burdened with further liability towards expenses incurred by the State Financial Corporation, towards costs incurred, in managing and selling etc. of the said property. By saying so, Shri Ratta has tried to demonstrate that as the word ‘surety’ has nowhere been mentioned in Section 29 of the Act, it is not open to the creditor/ financial corporation to proceed against the surety and to take over possession of the mortgaged/ hypothecated property by him, in favour of the creditor. To support his contention, he has placed reliance upon ratio of the judgments in N.Narasimahaiah’s case (supra), Munnalal Gupta’s case (supra), Joseph’s case (supra), Thressiamma Varghese v. State Financial Corporation and others, AIR 1986 Kerala 222, and also M/s Kaveri Meat Export Co. Ltd. Cochin v. The Kerala Financial Corporation, Thiruvananthapuram, All India Banking Law Judgments 1996(2) 321. He prayed that question of law framed, be answered in favour of the petitioner. Shri Kamal Sehgal, Advocate, who has put in appearance on behalf of the respondent – Corporation/ creditor stated that the provisions of Section 29 of the Act can be invoked, not only against the industrial concern, but also against the guarantor/ surety. By bifurcating the provision of sub-section 1 of Section 29, in two parts, he has stated that the former CWP No.5397 of 2003 - 6 - part deals with the industrial concern only and the latter deals with the both i.e. property hypothecated/ mortgaged by the industrial concern and also by a surety. He further argued that the provisions of Section 32G of the Act are similar to the latter part of sub-section 29 of the Act and while interpreting those provisions, the Hon’ble Supreme Court in Delhi Financial Corporation and another v. Rajiv Anand and others, (2004) 11 Supreme Court Cases 625, has held that no doubt name of the surety is not mentioned in Section 32G of the Act, however, remedy under that Section is available to recover the amount, due to the financial corporation and as such, remedy is not restricted only against the industrial concern, it also includes the surety as well. He has further placed reliance upon ratio of the judgments in Jasbir Kaur’s case (supra), Surjit Singh’s case (supra), K.T.Sulochana Nair’s case (supra), Thressiamma Varghese’s case (supra), a Division Bench judgment of Bombay High Court in Padma Prafulla Shirke and another v. Maharashtra State Financial Corporation, Mumbai, 2003(3) Mh.L.J. 496, Uttar Pradesh Financial Corporation v. M/s Garlon Polyfeb Industries and others, AIR 2001 Allahabad 286. Further, to support his contention that it is not necessary for the creditor to proceed first against the industrial concern and then to proceed against the surety, Shri Sehgal has placed reliance upon ratio of the Full Bench of this Court in Haryana Financial Corporation Ltd., Chandigarh v. Bags and Cartons and another, AIR 1997 Punjab and Haryana 176). Before we proceed further to deal with respective arguments raised by counsel for the parties, it is necessary to look into, as to what was the purpose of framing the Act and constitution of the State Financial Corporations. A reading of the objects and reasons, originally framed and subsequently amended, indicates that the Act was passed by the Parliament CWP No.5397 of 2003 - 7 - with a view to encourage small and medium scale industries, by giving them financial assistance in the shape of loans etc. To safeguard interest of the State Financial Corporations, it was envisaged that the loan amount can be recovered within a period, not exceeding 20 years from the date when loan was disbursed. The Scheme of the Act clearly envisages that the State Financial Corporations, under the Act are virtually instrumentalities of the State, (refer to U.P.Financial Corporation v. Gem Cap (India) Pvt. Ltd.and others, (1993) 2 Supreme Court Cases 299). At the same time, these Corporations are not like ordinary banks and money lenders. The lending of amount by these corporations is with a purpose i.e. for the promotion of small and medium industries in the State. However, at the same time, it has to be kept in mind that relationship between the corporations and the borrower is that of a creditor and debtor. It cannot be visualized that after advancing the loan amount, the Corporation is supposed to forget the same and go out of the business. Loan amount advanced, has to be recovered, so that it can be disbursed to other needy industrial concerns. The Act further envisages that while realising the amount, due to the Corporation, it is supposed to proceed as per the provisions of law. In this Act, an attempt has been made to strike a balance, so far as the rights of the industrial concern to get the loan and also rights of the corporation to recover the same, is concerned. Brief reference to the provisions of the Act is necessary to be made at this stage. Chapter I contains definitions of various terms used in this Act. Chapter II pertains to the incorporation of the State Financial Corporations, their capital and management. Chapter III deals with powers and duties of the Board. Section 25 in this Chapter mentions the business, which a Financial Corporation, may transact. Section 26 prescribes the CWP No.5397 of 2003 - 8 - limit of accommodation, which can be given by the Financial Corporation to the industrial concern. Section 27 give powers to the Financial Corporations to impose conditions, while granting accommodation to any industrial concern, with a view to protect its interest and also to ensure that the loan amount disbursed by it, be put to the best use by the borrower, under these provisions, the Corporation even has the power to appoint its nominee(s), in the Board of Directors of the Company, if need be. Sections 29 to Section 32 in Chapter III contains the provisions, by invoking which, the Financial Corporation, in case of default in repayment, can recover the amount alongwith interest, disbursed by it to any industrial concern etc. When management of an industrial concern is taken over by the Financial Corporation, Section 32A gives power to it, to appoint its nominee to the Board of Directors. Sections 32B to Section 32F are not very relevant so far the present dispute is concerned. Section 32G in Chapter III envisages that recovery of amount, due to the Financial Corporation can be recovered, as arrears of land revenue. Chapter IV of the Act deals with investment of funds, accounts and audit etc. Chapter V contains the miscellaneous provisions. Before we make a detail analysis of provisions of Sections 29, 31 and 32G of the Act, it is necessary to discuss the rights and liabilities of a guarantor/ a surety vis-à-vis the principal debtor and also qua the creditor. Section 126 of the Indian Contract Act, 1872 (in short the Contract Act) states that a contract of guarantee is a contract, to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee CWP No.5397 of 2003 - 9 - may be either oral or in writing. Section 127 of the Contract Act envisages that anything done or any promise made for benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. Section 128 of the Contract Act lays down that liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided in the contract. Chapter VIII of the Contract Act give some rights to the principal debtor and also to the surety which are mentioned in Sections 133 to 143 of the Contract Act. Except those rights and also limit of the liability, as may be mentioned in the guarantee deed, the surety is liable to compensate the creditor, in case of default committed by the principal debtor. It is not open to the surety to say that his position is different from that of the principal debtor. The only remedy(s) available to the surety is, as mentioned in Sections 133 to 143 of the Contract Act or as may be mentioned under the guarantee deed. The provisions of Section 128 of the Contract Act came up for consideration before the Hon’ble Supreme Court in State Bank of India v. M/s Ind/ export Regd., AIR 1992 SC 1740. To exactly understand the status of a surety, it will be useful to reproduce paragraph Nos.14 to 18 of the said judgment, which reads as under:- “14. In Pollock and Mulla on Indian Contract and Specific Relief Act, Tenth Edition, at page 728 it is observed thus: “Co-extensive – Surety’s liability is co-extensive with that of the principal debtor. A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the CWP No.5397 of 2003 - 10 - principal debtor before suing the surety, and a suit may be maintained against the surety though the principal debtor has not been sued.” 15. In Chitty on Contracts, 24th Edition, Volume 2 at page 1031, paragraph 4831 it is stated as under: “Conditions precedent to surety prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor.” 16. In Halsbury’s Laws of England, Fourth Edition, Vol.20, paragraph 159 at page 87 it has been observed that “it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to issue him, although solvent, unless this is expressly stipulated for.” 17. In Hukumchand Insurance Co. Ltd. vs. Bank of Baroda, AIR 1977 Karnataka 204, a Division Bench of the High Court of Karnataka had an occasion to consider them question of liability of the surety vis-à-vis the principal debtor. Venkatchalia, J (as His Lordship then was) observed: (Para 12) “The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety which is co-extensive with that of the former are really separate liabilities although arising out of the same transaction. Notwithstanding the fact that they may stem from the same CWP No.5397 of 2003 - 11 - transaction, the two liabilities are distinct. The liability of the surety does not also, in all cases, arise simultaneously.” 18. It will be noticed that the guarantor alone could have been sued, without even suing the principal debtor, so long as the creditor satisfies the Court that the principal debtor is in default.” View extracted above, was followed by a Division Bench of Allahabad High Court in the case of M/s Garlon Polyfeb Industries and others (supra). In view of established law, as referred to above, there is not even a slightest doubt that the creditor is entitled to recover the amount from the surety, in case any default is committed by the principal borrower, even without initiating proceedings against the latter. The liability of the surety is co-extensive with that of the principal borrower subject to the provisions of the Contract Act and also anything mentioned, to the contrary, in the guarantee deed. Now to decide the present controversy, we will refer to the provisions of Sections 29, 31, 32G of the Act, which read thus:- “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 repayment of any loan or advance or any instalment thereof or in meeting its obligations 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 CWP No.5397 of 2003 - 12 - 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) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had, with respect to the original goods. (4) Where any action has been taken against an industrial concern under the provisions of sub-section (1), all costs, charges and expenses which in the opinion of the financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto. (5) Where the Financial Corporation has taken any action against an industrial concern under, the provisions of sub- section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purpose of suits by or CWP No.5397 of 2003 - 13 - against the concern, and shall sue and be sued in the name of the concern. 31. Special provisions for enforcement of claims by Financial Corporation.- (1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligatins in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate repayment of any loan or advance under section 30 and the industrial concern fails to make such repayment, then, without prejudice to the provisions of section 29 of this Act and of Section 69 of the Transfer of Property Act, 1882 (4 of 1882) any officer of the Financial Corporation, generally or specially authorized by the Board in this behalf, may apply to the district judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs, namely:- “(a) for an order for the sale of the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation as security for the loan or advance; or (aa) for enforcing the liability of any surety; or (b) for transferring the management of the industrial concern to the Financial Corporation; or (c ) for an ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant CWP No.5397 of 2003 - 14 - or equipment from the premises of the industrial concern without the permission of the Board, where such removal is apprehended. (2) An application under sub-section (1) shall state the nature and extent of the liability of the industrial concern to the Financial Corporation, the ground on which it is made and such other particulars as may be prescribed. 32G. Recovery of amounts due to the Financial corporation as an arrear of land revenue.- Where any amount is due to the Financial Corporation in respect of any accommodation granted by it to any industrial concern, the Financial Corporation or any person authorized by it in writing in this behalf, may, without prejudice to any other mode of recovery, make an application to the State Government for the recovery of the amount due to it, and if the State Government or such authority, as that Government may specify in this behalf, is satisfied, after following such procedure as may be prescribed, that any amount is so due, it may issue a certificate for that amount to the Collector, and the Collector