IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Civil Writ Petition No.17165 of 2009 Date of decision:20.05.2010 Sanjiv K. Goel son of Shri K.P.Goel, R/o 137, Sector 4, Mansa Devi Complex, Panchkula. ....Petitioner versus Punjab Financial Corporation through its Managing Director, 95-98, Bank Square, Sector 17-B, Chandigarh and another. ...Respondents CORAM: HON’BLE MR. JUSTICE K. KANNAN ---- Present: Mr.Sanjiv Bansal, Advocate, for the petitioner. Mr. Jai Brar, Advocate, for respondents 1 and 2. ---- 1. Whether reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to the reporters or not ? Yes 3. Whether the judgment should be reported in the digest ? Yes ---- K.Kannan, J. I. The petitioner’s grievance 1. The above writ petition presents the grievance of Ex- Director of a debtor Company, which had lost its property of land and machinery in an action for sale through auction by the Punjab Finance Corporation in exercise of its power under Section 29 of the State Financial Corporations Act, for monies due and payable to the Financial Corporation. The action is now being taken by the Financial Corporation by resort to Section 32-G of the State Financial Corporation Act against Civil Writ Petition No.17165 of 2009 - 2 - the petitioner, who admittedly had given a letter of personal guarantee to the Corporation. The grievance of the petitioner is founded on two contentions: (i) the petitioner has ceased to be a Director of the Company even as early as on 22.12.1998 which was duly filed with the Registrar of Companies in Form 32 and no action could be taken against the petitioner under Section 32G of the State Financial Corporation Act; (ii) the properties had been sold for recovery of an initial loan of Rs.8.25 lacs advanced to the Company and the State Financial Corporation appropriated Rs.68,000/- recovered by sale of part of the machineries on 22.11.2006 and Rs.22.06 lacs by sale of the property of the Company on 25.01.2007. The Company itself had earlier taken possession of the property on 06.09.2000 and the recovery notice which was issued under Section 32-G purports to be the balance of amount due from the Company with interest at 26% as per the sale agreement and the bond of guarantee executed by the petitioner. The contention of the learned counsel appearing on behalf of the petitioner was that after the property was taken possession by the Company in the year 2000, it had no right to levy interest on the original loan since it had the benefit of the property which was secured for the loan and the demand made at Rs.21,76,863/- was, therefore, not tenable. II. Liability on personal guarantee could be enforced without reference to his status as resigned director 2. As regards the first contention that the petitioner had resigned from the Company even before the auction sale and, therefore, he would not be liable, it is not legally tenable since the document of personal guarantee has no relation to his status as a Director and it is Civil Writ Petition No.17165 of 2009 - 3 - independent of the same. The fact that the petitioner has resigned is irrelevant so long as the debt remains due. If, as per the calculation of the creditor-Corporation, the debt due by the Company has not been discharged, the liability of the petitioner under the personal guarantee would survive, no matter that he has ceased to be the Director. The first objection is, therefore, rejected. III. Extent of interest in the security and right of enforcement by the financial institution under the State Finance Corporation Act (a) Examination of the meaning ‘accommodation’ in Section 32 G of the State Finance Corporation Act. 3. The second objection, is that the State Financial Corporation has no power to invoke Section 32G of the State Financial Corporation Act treating the debt as due, in spite of sale of property in the year 2007 by working out interest even from the period 06.09.2000 when the property was taken possession by the State Financial Corporation till the date of payment. The contention is rested on the language of Section 32G itself, which, according to the learned counsel for the petitioner, enables the Financial Corporation to recover the amount only if it is in respect of “any accommodation granted by it to any industrial concern”. The learned counsel would read this expression to mean situations where the Company has the benefit of continuance of possession of the premises and if it was dispossessed by virtue of the powers exercised under Section 32, then the Financial Corporation shall not be entitled to invoke Section 32G. 4. In order to understand the contention raised by the petitioner, it becomes necessary to examine the entire scheme of Civil Writ Petition No.17165 of 2009 - 4 - recovery provided under the State Finance Corporation Act. Section 29 of the State Financial Corporation Act addresses the rights of Financial Corporation, in case of default by a borrower industrial concern which includes the right to take over the management or possession or both of the industrial concern as well as the right to transfer by way of lease or sale and realize the property pledged, mortgaged, hypothecated or assigned. Section 29(5) creates a fiction that when a Financial Corporation takes any action against an industrial concern by taking over of management or possession, it shall be deemed to be the owner of such concern for the purposes of suits by or against the concern. Section 31 empowers the Financial Corporation to apply to a District Judge within whose limits the property is situate for an order of sale of property mortgaged and for further restraint order. Section 32 and Sections 32A to G deal with procedures for recoveries. Section 32 deals with the procedure for sale of the property by a District Judge. Section 32-A empowers the Financial Corporation to appoint Directors or Administrators of an industrial concern when management is taken over. In this case, admittedly the property had been taken over by the Financial Corporation in the year 2000. The effect of take over notification under Section 32-A is set through Section 32B which vacates the directorship of industrial concern and vests the management and control wholly in the hands of Financial Corporation. Section 33C deals with powers and duties of Directors and Administrators after the Corporation is taken over under Section 32A. Section 32D provides for immunity against the claim for compensation for termination of contract or action against Civil Writ Petition No.17165 of 2009 - 5 - Managing Director for taking over of the management under Section 32A. Section 32E vacates the powers of the shareholders to give effect to any terms of memorandum or articles of association to nominate or appoint any person to be a Director or to pass any resolution in any meeting or take up any action in winding up of the Company. Section 32F bars any action for dissolution or partition of the industrial concern, if it is not a Company defined under the Companies Act. We are dealing with a Company and, therefore, there is no scope for application of this particular provision. Sector 32G is the provision which is applied and it is necessary to reproduce that section. Sector 32G reads as follows:- “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 shall proceed to recover that amount in the same manner as an arrear of land revenue.” 5. The expression, ‘in respect of any accommodation granted by it to industrial concern’ has nothing to do with grant of possession in relation to industrial concern. On the other hand, the accommodation that it talks about is the financial accommodation that gives rise to the Civil Writ Petition No.17165 of 2009 - 6 - claim by the State Finance Corporation for recovery of monies. The financial accommodation must be understood in the context of the words preceding the same namely, 'where any amount is due to the Financial Corporation'. P.Ramanatha Aiyar’s Advanced Law Lexicon, 3rd Edition, Book 1, defines the term, ‘accommodation’ to mean, “the act of accommodating; in mercantile language, is used for a loan of money, pecuniary aid in an emergency, money loan either directly or by standing surety for the repayment of sums advanced by another. It also signifies a friendly agreement or composition of differences; Money that is lent to someone for a brief period (Banking)”. It therefore, addresses merely an occasion where an amount is recoverable and when the Financial Corporation is authorized to apply to the State Government for recovery of the amount due to it. The expression ‘accommodation’ is also used in the same sense in section 27 of the Act, while dealing with the power to impose conditions for accommodation. The matter that has to be seen is whether there exists any subsisting liability by the Company or the Director for recovery before Section 32G is put to action. Section 32G becomes operative in cases where the assets of the industrial concern which it takes over under Section 32 or 32A are not sufficient to discharge its liability. This can be done only under the terms of the contract. There is no dispute about the fact that in this case, the industrial concern had obtained a loan and it had failed to make the payment. Proceedings for recovery by sale of the property were taken initially by taking over possession in the manner laid down under Section 29. To that extent also, there is no dispute. The amount due in favour of Civil Writ Petition No.17165 of 2009 - 7 - the Financial Corporation could be calculated only by reference to the terms of the contract and how the Financial Corporation could appropriate the proceeds of the sale for the debt over to it. There is no doubt that the Corporation is entitled to collect interest at 26% p.a. as per the terms of the contract. (b) Entitlement to collect interest during the period when the creditor takes possession of the security and before sale. 6. The primary remedies of the secured creditor, apart from an action on the debtor's personal covenant for payment (if any) are possession, sale, appointment of a receiver, foreclosure and appropriation, in the case of financial collateral (See, Roy Goode, Commercial Law (3rd edn, 2004, Lexis Nexis at p. 637). In our case, we are concerned with the rights and duties of the creditor when exercising the remedy of possession. The issue still is whether the Financial Corporation is entitled to load interest even after it obtains possession of the property of the industrial concern. The learned counsel refers to the decision of Hon'ble Supreme Court in Subhari Papers (P) Limited Versus Haryana Financial Corporation-1998(1)RCR (Civil) 747 that dealt with a case where the Court found that the Corporation was not jus- tified in taking possession of the property. The Court gave liberty to the Financial Corporation to take fresh proceedings for the non-payment and wiped out interest for the period when the Financial Corporation took possession of the property till the date when it re-delivered the property to the Company. The decision cannot be taken as laying down any law that a mortgagee in possession is not entitled to interest. It should only be taken as confined to the facts of the case, where the Court held that Civil Writ Petition No.17165 of 2009 - 8 - the action of taking possession was itself found to be unjustified. In a recent case decided by the Hon’ble Supreme Court in Haryana State Financial Corporation Versus M/s Surya Auto Industries Ltd, 2010 (1) RCR (Civil) 205 arising out of Civil Appeal No 7910 of 2009 dated 1st December 2009, while setting aside a decision of the High Court disallowing the contract rate of interest for the period when the Financial Corporation took possession of the property, it held that when the contract terms as to interest itself was not in challenge, the High Court could not have suo motu altered the rights and obligations of parties. It must be noticed that the provisions of the State Finance Corporation Act that allows the Corporation to take possession of the assets of the industrial concern does not debar it from claiming interest. Since the transaction involves the security interest in immovable property, the provisions under the Transfer of Property Act would be instructive to discern the rights and duties of the mortgagee who gains possession of the security. Section 72 of the TP Act reads as follows:- 72. Rights of mortgagee in possession A mortgagee may spend such money as is necessary— (a) for the preservation of the mortgaged property from destruction, forfeiture or sale; (b) for supporting the mortgagor’s title to the property; (c) for making his own title thereto good against the mortgagor; and (d) when the mortgaged property is a renewable lease- hold, for the renewal of the lease; and may, in the absence of a contract to the contrary, add such money to the principal money, at the rate of interest Civil Writ Petition No.17165 of 2009 - 9 - payable on the principal, and, where no such rate is fixed, at the rate of nine per cent per annum: Provided that the expenditure of money by the mortgagee under clause (b) or clause (c) shall not be deemed to be necessary unless the mortgagor has been called and has failed to take proper and timely step to preserve the property or to support the title. (underlining mine) Where the property is by its nature insurable, the mortgagee may also, in the absence of a contract to the contrary, insure and keep insured against loss or damage by fire the whole or any part of such property; and the premiums paid for any such insurance shall be added to the principal money with interest at the same rate as is payable on the principal money or, where no such rate is fixed, at the rate of nine per cent per annum. But the amount of such insurance shall not exceed the amount specified in this behalf in the mortgage-deed or (if, no such amount is therein specified), two-thirds of the amount that would be required in case of total destruction to reinstate the property insured. Nothing in this section shall be deemed to authorize the mortgagee to insure when an insurance of the property is kept up by or on behalf of the mortgagor to the amount in which the mortgagee is hereby authorized to insure. This section specifically provides that the mortgagee in possession is entitled to levy interest. In the light of the provisions of the State Financial Corporation Act and the Transfer of Property Act, there is no scope for a contention that by the creditor taking possession of the property, he forfeits his right to claim interest. Civil Writ Petition No.17165 of 2009 - 10 - (c) The liability of the creditor- mortgagee in possession 7. The State Finance Corporation Act that provides for a right to possession of the mortgage interest does not spell out the duties, except to state in a general way through section 24 that the general duty of the Board shall be to act on business principles, due regard being had by it to the interests of industry, commerce and the general public. Section 25 details powers and duties of the Board and Sections 29 to 32 deal with right to possession and sale. Again, to read the provisions of the Transfer of Property Act complementarily to adjudge the duties of the mortgagee in possession, the following provisions would be instructive:- 76. Liabilities of mortgagee in possession.—When, during the continuance of the mortgagee the mortgagee takes possession of the mortgaged property,— (a) he must manage the property as a person of ordinary prudence would manage it if it were his own; (b) he must use his best endeavours to collect the rents and profits thereof; (c) he must, in the absence of a contract to the contrary, out of the income of the property, pay the Government revenue, all other charges of a public nature and all rent accruing due in respect thereof during such possession, and any arrears of rent in default of payment of which the property may be summarily sold; (d) he must, in the absence of a contract to the contrary, make such necessary repairs of the property as he can pay for out of rents and profits thereof after deducting from such rents and profits, the payments mentioned in clause (c) and the interest on the principal money; (e) he must not commit any act which is destructive or permanently injurious to the property; Civil Writ Petition No.17165 of 2009 - 11 - (f) where he has insured the whole or any part of the property against loss or damage by fire, he must, in case of such loss or damage, apply any money which he actually receives under the policy, or so much thereof as may be necessary, in reinstating the property, or, if the mortgagor so directs, in reduction or discharge of the mortgage- money; (g) he must keep clear, full and accurate accounts of all sums received and spent by him as mortgagee, and at any time during the continuance of the mortgage, give the mortgagor, at his request and cost, true copies of such accounts and of the vouchers by which they are supported; (h) his receipts from the mortgaged property, or, where such property is personally occupied by him, a fair occupation-rent in respect thereof, shall, after deducting the expenses properly incurred for the management of the property and the collection of rents and profits and the other expenses mentioned in clauses (c) and (d), and interest thereon, be debited against him in reduction of the amount (if any), from time to time due to him on account of interest. . . . . . . . . . and, so far as such receipts exceed any interest due, in reduction or discharge of the mortgage- money; the surplus, if any, shall be paid to the mortgagor; 77. Receipts in lieu of interest.— Nothing in Section 76, clauses (b), (d), (g) and (h), applies to cases where there is a contract between the mortgagee and the mortgagor that the receipts from the mortgaged property shall, so long as the mortgagee is in possession of the property, be taken in lieu of interest on the principal money, or in lieu of such interest and defined portions of the principal. 8. The right to be in possession creates an obligation to account for the profits and rent, except in cases of usufructuary Civil Writ Petition No.17165 of 2009 - 12 - mortgagee who, under the terms of the debt instrument, becomes entitled to receipts from the mortgaged property in lieu of interest. The duty of Financial Corporation gives a corresponding right to the debtor to be credited with the profits and earnings of the security interest to the extent of actual benefit that accrues by its possession. In other words, reading together some of the relevant provisions, the Financial Corporation is liable to account for profits and rent from the business and property of the debtor, which it earns by following sound business principles (see section of 24 of SFC Act), but shall not engage in prohibited business (see section 28 of SFC Act) and manage the property as a person of ordinary prudence. Consequently, when the Corporation takes possession, it is to be expected that it does not commit acts of waste and if it does, shall be accountable to the debtor. In a claim for recovery of money by the corporation, this duty shall extend to answering a counter claim for profits and rent earned by it and also become answerable to the extent of damage or loss caused by its conduct. (d) Duty cast on the Financial Corporation leads to examination of reasonableness of its conduct in an action by it for recovery against the debtor. 9. If the right to enforcement of the security comes with its trappings for examination of its duty towards the borrower for the period when it was in possession, it becomes certainly relevant to examine whether the action in bringing the property to sale is within reasonable time; whether the property was properly preserved against being wasted; whether due care was taken, etc. While examining the vires of SARFAESI Act in Mardia Chemicals v Union of India (2004) 4 SCC Civil Writ Petition No.17165 of 2009 - 13 - 311 in the context of duties of a secured creditor who has a right to possession and sale of the secured assets, held: "Arguments have been advanced as to how far principles of lender's liability are applicable. Whatever be the position, however, it cannot be denied that the financial institutions namely, the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and the financing companies/institutions are not free to ignore performance of their part of the obligation as a party to the contract. They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American courts, in view of the facts and circumstances and the terms of the contract and other details relating to those matter, that may or may not strictly apply, nonetheless even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of concept of lender's liability. It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defence deficiencies on the part of the banks and financial institutions." 10. What was said of a financial institution under SARFAESI Act is equally applicable of a financial corporation under the SFC Act. From the point of view of ‘fairness approach’ in lending, a greater primacy for borrower’s rights as expressed in Mahesh Chandra Versus Civil Writ Petition No.17165 of 2009 - 14 - Regional Manager, U.P. Financial Corporation, was subsequently watered down through subsequent decisions till it was ultimately found to have not laid down the law correctly. There have been a gradual application of ‘hands-off approach’ by the Courts starting from U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd (1993)2 SCC 299 , later in U.P. Financial Corporation v. Naini Oxygen & amp; Acetylene Gas Ltd. (1995) 2 SCC 754, and still later in Karnataka State Financial Corporation v. Micro Cast Rubber & amp; Allied Products (P) Ltd. (1996) 5 SCC 65, where the Hon’ble Supreme Court held that “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