IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. C.W.P. No.11932 of 2007 Date of decision: 21.11.2008 Surya Auto Industries. -----Petitioner Vs. Punjab Financial Corporation. -----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON'BLE MR JUSTICE L.N. MITTAL Present:- Mr. Vishal Aggarwal, Advocate for the petitioner. Mr. G.S. Gill, Advocate for the respondent. ----- JUDGMENT: 1. This petition seeks quashing of notice Annexure P-8 dated 26.6.2007 under Section 29 of the State Financial Corporations Act, 1951 (for short, “the Act”) and also for setting aside action of taking over of possession of the petitioner’s unit in the year 2002. 2. Case of the petitioner is that it was sanctioned a loan of Rs.24.25 lacs on 7.11.1996 but total amount disbursed was only Rs.20.95 lacs in instalments from 30.9.1997 to April, 1999. The C.W.P. No.11932 of 2007 amount was to be repaid in monthly instalments of Rs.30,000/- each. However, the petitioner defaulted in repayment. This led the respondent Punjab Financial Corporation to take over the unit of the petitioner under Section 29 of the Act on 23.9.2002 vide Annexure P-1. The unit comprised of land measuring 3 kanal and 2 marlas at Pathankot, alongwith the machinery. The unit of the petitioner was engaged in the manufacture of Leaf Springs. According to the petitioner, the value of the unit was Rs.53 lac. 3. On 26.6.2007, the respondent issued notice, Annexure P- 8, to take over the collateral security i.e. house of 6 marlas, a plot of 20 marlas and land measuring 174 marlas. 4. Main grievance in the petition is that after taking over the machinery and factory premises of the petitioner on 23.9.2002, which were of much higher value than the amount of outstanding loan, the respondent-Corporation did not take any further steps for a period of more than six years. Thus, on account of inaction of the respondent Corporation, the stock and machinery deteriorated and liability has risen from Rs.30 lac to Rs.116.61 lac, as per impugned notice, for which the petitioner could not be held responsible. 5. Further grievance put forward in the writ petition is that even though it has been clearly laid down by the Hon’ble Supreme Court in Central Bank of India v. Ravindra AIR 2001 SC 3095 that 2 C.W.P. No.11932 of 2007 penal interest cannot be capitalized, the Corporation in violation of the said law, continues to compound the penal interest to inflate its demands. 6. In the reply filed by the respondent-Corporation, it has not been disputed that out of the loan of Rs.24.25 lac sanctioned, the total amount disbursed to the petitioner from 30.9.1997 to April, 1999 was only Rs.20.95 lac and for default in paying the instalments, the unit of the petitioner was taken over on 23.9.2002. 7. As regards inaction, in reply to paras 30 to 37 of the writ petition, only reply given is as under:- “ 30 to 37. That the contents of Paras 30 to 37 of the writ petition are wrong and denied. It is submitted that the correct position has already been explained in the foregoing paragraphs. The same may be read as part of this paragraph as the same are not being reproduced for the sake of brevity. It is further clarified that the answering respondent is custodian of public money and is well within is rights to recover the default amount from the Petitioner as per the provisions of the State Financial Corporation Act.” 8. Though there is reference to foregoing paras, in the foregoing paras, there is no explanation to any action which may have been taken after taking over the property. 3 C.W.P. No.11932 of 2007 9. Thus, question for consideration is whether after invoking power under Section 29 of the Act, the respondent Corporation has absolute power of retaining the property without taking any steps and to continue to charge the interest and penal interest, without any limit. 10. There is no dispute that as per the contract between the parties, debtor is liable to pay interest till the principal amount is repaid and there is statutory power to take over the mortgaged property and thereafter also, interest continues to run. 11. It cannot be disputed that the respondent Corporation being a public authority, has to act fairly and statutory power to take possession of the mortgaged property, cannot be exercised without any responsibility. The Corporation is bound to take further steps within reasonable time. If for number of years, the property taken over is not disposed of and no steps whatsoever are taken, the question will arise whether the action of the Corporation is fair and reasonable and if not, what is the remedy of the debtor. 12. We are of the view that the Corporation is under statutory obligation, which arises from the nature of power conferred, to proceed further in reasonable time (which may depend on facts of individual cases) and if it does not do so, the debtor will not only stand deprived of mortgaged property without any purpose resulting 4 C.W.P. No.11932 of 2007 in loss of earning and possibility of repayment by raising money against the property, best price may not be available. Sale of a unit as a going concern may fetch better price. Maintenance of property may involve costs. Liability may continue to rise. Obviously, the Corporation has to be held responsible for adverse consequences which may follow. No one can take advantage of its own wrong. Corporation cannot continue to claim contractual interest and may be liable for damages. Borrower may be entitled to claim right to pay reasonable simple interest and rescheduling of payment and seek injunction against further coercive steps. 13. The object of invoking power under Section 29 of the Act is to enable the respondent to recover the public money, at the earliest, by getting best possible price and if possible, by selling the unit as a running unit. Exercise of the said power by ignoring the responsibility with which the said power is coupled, will not be a part of fair procedure and the petitioner could not be saddled with the rising liability of interest and expenses of maintenance of the property, except for reasonable period during which the Corporation may take steps. 14. In the present case, for a period of six years, neither any step is shown to have been taken nor any explanation whatsoever furnished. In these circumstances, Corporation has to remedy the 5 C.W.P. No.11932 of 2007 wrong done to the petitioner by its inaction. We do not go into question of damages which the petitioner is said to be pursuing in civil court but hold that Corporation cannot charge interest at contractual rate after reasonable time of taking over nor proceed against any other property till earlier taken over property is disposed of. The petitioner is also entitled to an opportunity to repay within reasonable time. 15. Thus, we answer the question posed in para 9 to the effect that the Corporation does not have absolute right to retain the property taken over under Section 29 of the Act without taking any steps in reasonable time to dispose of the same. If it does so, the Corporation will lose right to recover contractual rate of interest and may at best be entitled to simple interest at reasonable rate. The Corporation may also be held liable to such amount of damages as may be determined in appropriate proceedings. The borrower may also be entitled to seek fresh opportunity to repay the amount within reasonable time. 16. In view of law laid down by the Hon’ble Supreme Court in Ravindra (supra) , the Corporation is not entitled to compound penal interest. In the said judgment, it has also been observed that where initiation of proceedings is delayed, resulting in loss to the borrower, the Court may take this fact into account in exercising its 6 C.W.P. No.11932 of 2007 discretion of awarding interest. Discretion could also be exercised where component of interest was disproportionate to the component of the principal sum actually advanced. Though, the said judgment has been rendered in the context of a suit by a bank, Court’s discretion in the matter of interest can also be exercised where a public body does not act fairly and there is a failure of its duty causing loss to a borrower. As already observed, the object of conferring power on the Corporation to take over property under Section 29 of the Act is to enable the Corporation to quickly realise the best possible amount. Reference may be made to Andhra Pradesh state Financial Corporation v. M/s GAR Re-Rolling Mills and another, AIR 1994 SC 2151. If the said power is exercised without any responsibility and no steps are taken within reasonable time, the Court may, to advance interest of justice, set aside contractual rate of interest and mould the relief to meet the situation. In doing so, the Court will be enforcing the fundamental rights under Articles 14 and 21 of the Constitution. 17. In The State Financial corporation and another v. M/s Jagdamba Oil Mills and another, AIR 2002 SC 834, it was observed in para 10 that approach of Corporation has to be public oriented. The Corporation was to act fairly. Of course, fairness could not be one way street. If however, action was so unfair or 7 C.W.P. No.11932 of 2007 unreasonable that no reasonable person would have taken such action, the Court could intervene. 18. In Gajraj Jain v. State of Bihar and others, AIR 2004 SC 3392, reiterating earlier view in M/s SJS Business Enterprises (P) Limited v. State of Bihar, (2004) 7 SCC 166, the Hon’ble Supreme Court observed that statutory power vested in the Corporation must be exercised bonafide but its action may be held to be improper having regard to circumstances on record. Reasonableness of the action could be tested on the anvil of consideration to secure the best price for the property sold. In para 12, it was observed that mortgagee exercising the power of sale was in the nature of trustee of the surplus sale proceeds and must act in a manner which protects not only its own interest but also interest of the mortgagor. In para 14, it was observed that object of section 29 was to obtain best possible price. 19. In Karnataka State Financial Corporation v. N.Narasimahaiah and others, (2008) 5 SCC 176, in para 40, it was observed that right of property, though not Fundamental right, was a Constitutional right and a human right. The Court cannot construe a provision depriving a person of his right to property by leaning in favour of deprivation. 8 C.W.P. No.11932 of 2007 20. In Smt. Maneka Gandhi v. Union of India AIR 1978 SC 97, it was observed:- “56. Now, the question immediately arises as to what is the requirement of Article 14: What is the content and reach of the great equalising principle enunciated in this article? There can be no doubt that it is a founding faith of the Constitution. It is indeed the pillar on which rests securely the foundation of our democratic republic. And, therefore, it must not be subjected to a narrow, pedantic or lexicographic approach. No attempt should be made to truncate its all-embracing scope and meaning, for to do so would be to violate its activist magnitude. Equality is a dynamic concept with many aspects and dimensions and it cannot be imprisoned within traditional and doctrinaire limits. We must reiterate here what was pointed out by the majority in E. P. Royappa v. State of Tamil Nadu (1974) 2 SCR 348: (AIR 1974 SCS 555) namely, that "from a positivistic point of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic, while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14". Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non- 9 C.W.P. No.11932 of 2007 arbitrariness pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. It must be 'right and just and fair" and not arbitrary, fanciful or oppressive; otherwise, it would be no procedure at all and the requirement of Article 21 would not be satisfied.” 21. From the above discussion, it can certainly be held that though, power of the Corporation to take over property under section 29 is absolute, exercise of the said power is coupled with duty to act fairly and to take prompt steps to get best price. It cannot take advantage of its own wrongful inaction. The Corporation is in the position of a trustee and taking of steps is necessary not only to safeguard its own rights but also rights of the debtor. 22. We may make it clear that while moulding the relief, the conduct of the petitioner has also to be taken into account. In the present case, the petitioner filed the writ petition in the year 2007 though its unit was taken over in the year 2002 and no further steps were taken. 23. In view of above discussion, our conclusions are as under:- (i) Taking over of unit under Section 29 of the Act casts an obligation on the Financial Corporation to proceed against 10 C.W.P. No.11932 of 2007 the property taken over within reasonable time. Failure to do so, will be violation of concept of fair procedure under Articles 14 and 21 of the Constitution; (ii) If the Court reaches a conclusion that action of the Corporation is unfair, the Court may, to effectuate the right of the borrower, set aside the demand for contractual rate of interest and substitute the same for a reasonable rate of interest, without prejudice to the remedy of the borrower to claim damages in appropriate proceedings. The Court may also direct giving of a fresh opportunity to the borrower to pay the recalculated amount and restrain the Corporation from proceeding against other assets of the borrower. 24. Accordingly, we allow this petition and apart from setting aside compounding of penal interest, declare that from 1.4.2003 i.e. after expiry of period of six months from the date of taking over of unit of the petitioner, the Corporation will be entitled to simple interest @ 10%. The Corporation is directed to make fresh calculation accordingly within one month from the date of receipt of a copy of this order. We further direct the Corporation to allow the petitioner to pay the amount as per fresh demand, if necessary, by selling the mortgaged property which has been taken over, subject to 11 C.W.P. No.11932 of 2007 the payment being made directly to the Corporation to the extent of its dues. We also restrain the Corporation from giving effect to its notice Annexure P-8 of taking over other properties till the unit already taken over is disposed of. The Corporation may also review all pending cases where penal interest has been compounded in violation of law laid down by the Hon’ble Supreme Court and where no steps are being taken after taking over of the unit. 25. The petition is disposed of. ( ADARSH KUMAR GOEL ) JUDGE November 21, 2008 ( L. N. MITTAL ) ashwani/gs JUDGE 12