IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) TUESDAY, THE SECOND DAY OF DECEMBER TWO THOUSAND AND EIGHT PRESENT THE HON'BLE MR JUSTICE L.NARASIMHA REDDY WRIT PETITION NO : 20487 of 2001 Between: Sri Venkateshwara Rice Mill Rep. by Managing Partner, Sri. K.Narender Reddy, Addakal Village & Mandal, Mahaboobnagar District, R/o. Addakal, Mahaboobnagar Dist. ..... PETITIONER AND 1 The Andhra Pradesh State Financial Corporation Chirag Ali Lane, Abids, Hyderabad. 2 The Branch Manager, A.P.State Financial Corporation, 1-7-57/6, Ayyapp Complex, Police Head Quarters, Mahabubnagar. 3 A.Venkateshwara Reddy s/o A.Bicha Reddy R/o 1-10-141,Shashabgutta, Mahabubnagar. 4 Ch.Pattabhi Seetharama Rao (Branch Manager) s/o Seetharamaiah A.P.State Financial Corporation Mahabubnagar. .....RESPONDENT(S) Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the affidavit filed herein the High Court will be pleased to issue Writ order or direction more particularly one in the nature of Writ of "Mandamus" declaring the action of the Respondent-1 & 2 herein in putting the petitioner unit for sale and also sale of the unit in favour of the 3rd respondent as illegal, arbitrary, contrary to section 29 of State Financial Corporation Act, contrary to principles of natural justice and contrary to the dicta laid down in Mahesh Chandra's Case and set aside the sale of the petitioner unit in favour of the 3rd Respondent as being vitiated by fraud and direct the respondent 1 and 2 to restore the unit to the petitioner's firm in the interest of justice Counsel for the Petitioner: MR.MEHERCHAND NOORI Counsel for the Respondents: Sri Y.N. Lohitha The Court made the following : ORDER: The petitioner is a rice mill established in Addakal Village of Mahabubnagar District. It approached the Andhra Pradesh State Financial Corporation, the first respondent for financial assistance. A sum of Rs.6,30,000/- was sanctioned on 08-01-1993 and the same was released. The petitioner was required to repay the amount in regular instalments. Up to March, 1999, the petitioner is said to have paid a sum of Rs.9,40,700/- and the mill was also functional. On 01-02-2000, the 1st respondent, exercising its power under Section 29 of the State Financial Corporations Act, 1951 (for short, ‘the Act’) seized the mill on the ground that certain instalments were not paid. An advertisement was issued on 18-02-2000 proposing to sell the mill. Three offers were received namely Rs.10,15,000/- by one Sri Kalwa Sreenivasulu on loan basis, Rs.13,20,000/- by one Sri T. Shiva Reddy on outright sale basis and Rs.14,50,000/- on loan basis by the 3rd respondent. The offer made by the 3rd respondent was accepted. However, before the formalities were completed, the petitioner came forward with an offer to pay a sum of Rs.2,00,000/-, cash of Rs.50,000/- was paid and a cheque for Rs.1,50,000/- was issued. In view of this development, the 1st respondent cancelled the entire process including the bid received from the 3rd respondent. The cheque issued for Rs.1,50,000/- was said to have been dishonoured. The 1st respondent resumed the auction process by issuing a fresh notification on 20-06-2000. The lone bid was received from the 3rd respondent for a sum of Rs.10,20,000/- which was accepted and the sale deed was executed. Sri T. Shiva Reddy, one of the tenderers who offered to purchase the property for Rs.13,20,000/- on outright sale basis, filed Writ Petition No. 24587 of 2000. He pleaded that his offer which is better than the other two was not accepted for extraneous considerations. He pleaded that the 1st respondent wanted some how or the other to convey the property to the 3rd respondent. That writ petition was however dismissed. The present writ petition is filed challenging the sale of the unit by the 1st respondent in favour of the 3rd respondent. Apart from pleading that the 1st respondent did not honour its obligation to ensure that the property fetches proper price, the petitioner has alleged malafides against the then Manager who is impleaded by name as the 4th respondent. It is alleged that the 4th respondent was corrupt so much so, that he was trapped by the Anti Corruption Bureau, and was consequently dismissed from service. The 1st respondent filed a counter affidavit denying the allegations of the petitioner. The circumstances that lead to conducting of auctions of the property in February and June, 2000 are mentioned. It is stated that the sale in pursuance of the advertisement dated 18-02-2000 could not be proceeded with, on account of the offer made by the petitioner and the sale in favour of the 3rd respondent is not vitiated in any manner. Sri Mehanchand Noori, learned counsel for the petitioner submits that the very exercise of power under Section 29 of the Act is malafide inasmuch as the mill was seized without making any formal demand for payment of the arrears. He contends that the 4th respondent had an evil eye on the unit and that he made every possible effort to knock away the same at a throwaway price. Learned counsel submits that the mill was valued at Rs.11,89,000/-, it fetched bids which are higher than that amount and still respondent Nos. 1 and 4 have sold it at a cheaper price by pleading lame excuses. He placed reliance upon the judgments rendered by the Supreme Court in Karnataka State Financial Corporation vs. N. Narasimahaiah[1] and Gajraj Jain v. State of Bihar[2]. Sri Y.V. Ravi Prasad, learned counsel for the 1st respondent on the other hand submits that the petitioner was given every possible opportunity to pay the arrears and it was only when it committed default of huge amount, that the unit was brought to sale. He contends that the sale, that was halfway through in pursuance of advertisement dated 18-02-2000 was given up on account of the offer made by the petitioner and in the subsequent sale, the 3rd respondent alone offered his bid. He relies upon the judgment of the Supreme Court in Karnataka State Industrial Investment and Development Corporation Limited vs. Cavalet India Limited[3]. Up to March 1999, the petitioner paid a sum of Rs.9,40,700/- to the 1st respondent as against the loan of Rs.6,30,000/- borrowed on 08-01-1993. The mill was functional till February, 2000 when it was seized by the 1st respondent by invoking its power under Section 29 of the Act. Hardly, within weeks, an advertisement was issued proposing to sell the unit. Before that, the value of the property was assessed to be Rs.11,89,000/-. Three bids were received in the auction namely Rs.10,15,000/-; Rs.13,20,000/- and Rs.14,50,000/-. The last of the offers made by the 3rd respondent which was on loan basis was accepted. On the ground that the petitioner made an offer to pay a sum of Rs.2,00,000/-, the offer of the 3rd respondent is said to have been rejected. The 1st respondent resumed its efforts to sell the property on the ground that the cheque for Rs.1,50,000/- issued on behalf of the petitioner was dishonoured. The sale took place on 20-06-2000. The 3rd respondent alone submitted his tender for a sum of Rs.10,20,000/- and the same was accepted. Extraordinary powers are conferred upon the state financial corporations to straightaway proceed to sell the units bypassing the regular procedure of approaching the Courts. Time and again, the Hon’ble Supreme Court held that such an extraordinary power is coupled with the duty to ensure that the sale of a unit under Section 29 of the Act fetches the maximum price. In Gajraj Jain’s case (2 supra), it was observed that the best possible price has got to be tried for under Section 29 of the Act. A sale which was found to have fetched inadequate price was set aside. In the same judgment, it was observed that an obligation rests upon the corporation to get the property valued, and to fix what is knows as ‘reserve bid’. This principle was reiterated by the Supreme Court in N. Narasimahaiah’s case (1 supra). Even according to the 1st respondent, the value of the property was Rs.11,89,000/-. It is not as if that no bidder was prepared to offer this price. Out of the three offers received in response to advertisement dated 18-02-2000, two were for an higher amount. The 3rd respondent himself offered Rs.14,50,000/-, may be, on loan basis. Another person by name Sri Shiva Reddy was prepared to purchase it for Rs.13,20,000/- on outright sale basis. When such fabulous offers were received, there was no justification for the 1st respondent to discontinue the same. In case, the petitioner came forward with an offer to repay the amount, efforts could have been made to examine the bonafides of the offer, even while keeping the sale process alive. It is not as if months have elapsed. As a matter of fact, Sri Shiva Reddy who offered to purchase the mill at Rs.13,20,000/- was so anxious that he filed a writ petition before this Court. The then Manager who is impleaded as the 4th respondent appears to have been very keen to see that the property is knocked away at as low a price as possible. He was instrumental in rejecting the bids received in pursuance of advertisement dated 18-02-2000. Within four months, the sale was affected for the second time. The only bid received from the 3rd respondent was for a sum of Rs.10,20,000/-. Any sensible person, much less a statutory agency like the 1st respondent would not have accepted such a bid from the very person who made an offer for Rs.14,50,000/- just four months ago. Further, the other gentleman who offered Rs.13,20,000/- was very much prepared to purchase the mill. Notwithstanding these circumstances, respondent Nos. 1 and 4 have accepted the bid of the 3rd respondent for a sum of Rs.10,20,000/-. It appears that they were waiting for such a situation. The acts and omissions on the part of respondent Nos. 1 and 4 that lead to sale of the mill at a price less than the assessed value of the property, particularly when others were prepared to purchase it for higher price is nothing but malafide, and the result of a capricious and unreasonable exercise of power. The 4th respondent who was made a party by name did not choose to file a counter affidavit. The averments of the petitioner that the 4th respondent was corrupt, was caught red handed by the Anti Corruption Bureau, and was subsequently dismissed remain unrebutted. The 1st respondent has also admitted that the 4th respondent was dismissed from service on disciplinary grounds. When the whole exercise was undertaken by a person of such a character and background, it is but natural that it is prone to be an illegal exercise tainted with malafides. Learned counsel for the 1st respondent relies upon the judgment of the Supreme Court in Karnataka State Industrial Investment and Development Corporation Limited’s case (3 supra). The Hon’ble Supreme Court discussed several precedents pertaining to the limits on powers of High Court under Article 226 while examining the sales affected in exercise of power under Section 29 of the Act. In para 19, the discussion was summed up as under: “(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 action 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. From a perusal of this, it becomes clear that an exercise under Section 29 of the Act can be said to be reasonable only when its dominant consideration is to secure the best price. The efforts of respondent Nos. 1 and 4 were exactly in the opposite direction. Their action is not only unfair and unreasonable as mentioned in sub-para (ii), but also malafide as indicated in sub-para (iv) of para 9 of the judgment of the Supreme Court. Therefore, the capricious and malafide exercise of power on the part of the 1st respondent virtually reached its pinackle when they have withheld even the excess amount that was received over and above the amount due from the petitioner. This Court is left with no alternative except to set aside the sale of the mill owned by the petitioner in favour of the 3rd respondent. The writ petition is accordingly allowed with costs of Rs.5,000/- against the 4th respondent and the sale is set aside. The 3rd respondent shall be under obligation to pay the damages to the petitioner for use and occupation of the property and the same shall be assessed in case the petitioner files a suit for that purpose. In case, the suit for damages is filed by the petitioner within six months from today, it shall be maintained as having been presented within limitation. L.NARASIMHA REDDY, J 02-12-2008 ks LR Copy to be marked [1] 2008 (4) SCALE 473 [2] (2004) 7 SCC 151 [3] (2005) 4 SCC 456