IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) MONDAY, THE ELEVENTH DAY OF AUGUST TWO THOUSAND AND EIGHT PRESENT THE HON'BLE MR JUSTICE V.ESWARAIAH WRIT PETITION No.21284 of 2001 Between: P.Laxmamma, W/o. Simhadri, R/o. 1-4-249/154/14/2, Bechirag Madhavaram Shivar, Suryapet, Nalgonda District. ..... PETITIONER AND 1 The Maharastra State Financial Corporation, Rep. by its Managing Director, Mumbai, Maharastra State. 2 The Maharastra State Financial Corporation Rep. by its Divisional Manager, Divisional Office, S.P. College Compound, Tilak Road, Pune. 3 M/s. Gowted Dyestuffs Private Limited, Rep. by its Managing Director, Sri. Mushtag Mohazir, 1-2-385/1A/ Gaganmahal Road, Domalaguda, Hyderabad. 4 M. Rajamallu, S/o. Simhadri, Plot No.11/2, Anthrolikar Nagar, Mogi Road, Sholapur. .....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 to issue an order or direction, more particularly one in the nature of Writ of Mandamus, declaring the action of the 2nd Respondent in issuing notice dated 2.1.2001 for taking possession under sec.29 of the State Financial Corporation Act of the Petitioner's residential house, is illegal, arbitrary and violative of principles of natural justice and consequently the same may be quashed and pass Counsel for the Petitioner:MR.KURITIBHASKARA RAO Counsel for the Respondent No.: . The Court made the following : THE HON'BLE MR JUSTICE V.ESWARAIAH WRIT PETITION No.21284 of 2001 ORDER: Petitioner questions the notice issued by the 2nd respondent, dated 02-01-2001. It is the case of the petitioner that the 2nd respondent issued notice, dated 02-01-2001, stating that respondents 1 and 2 sanctioned term loan of Rs.94.60 lakhs in favour of M/s.Glowtex Dyestuffs Private Limited-3rd respondent and the 3rd respondent deposited title deeds of the petitioner by creating equitable mortgage relating to the residential house of the petitioner in Sy.No.280 bearing House No.1-4-249/154/14/2 situated at Bachirag Madhavaram Shivar, Suryapet, Nalgonda District. It is further stated that the 3rd respondent failed to pay the amount and the entire amount due and payable is Rs.1,46,90,336.50 ps. as on 03-10-2000 and the said amount is sought to be recovered from the petitioner and, therefore, the petitioner was called upon to pay the said amount, failing which, the Corporation will take possession of the residential house of the petitioner, which was mortgaged in favour of respondents 1 and 2 as collateral security, in exercise of its power under Section 29 of the State Financial Corporations Act, 1951 (for short “the Act”). Questioning the said notice, dated 02-01-2001, the petitioner earlier filed W.P.No.729 of 2001 before this court and obtained stay of dispossession of the petitioner from the residential house in question. As the names of respondents 1 and 2 were not properly described in the cause title, the said writ petition was dismissed as withdrawn on 24-08-2001 with a liberty to file fresh writ petition and therefore, the present writ petition has been filed. Petitioner questions the action of the 4th respondent, who is the son of the petitioner, who made use of the title deeds of the property of the petitioner, though she never agreed to stand as a surety by depositing her title deeds as collateral security. It is stated that action of respondents 1 and 2 in proceeding against the property of the petitioner is illegal and arbitrary. A counter has been filed stating that term loan of Rs.78.90 lakhs was sanctioned in the year 1994 and an additional loan of Rs.15.70 lakhs was also sanctioned in the year 1996 on execution of necessary legal documents by the 3rd respondent, but it failed to pay its loan amount. It is further stated that the residential house in Sy.No.280 bearing House No.1-4-249/154/14/2 situated at Bachirag Madhavaram Shivar, Suryapet, Nalgonda District, belongs to the petitioner and the said property was kept as collateral security by depositing her title deeds at the 2nd respondent’s office stating that the said property was given as collateral security for the loan sanctioned in favour of the 3rd respondent. The 4th respondent is the son of the petitioner. Since loan amount was not paid by the 3rd respondent, under Section 29 of the Act, the Corporation initiated action to take possession of the property of the petitioner as well as the industrial concern of the 3rd respondent. The allegation of the petitioner that she has not signed any documents giving her property as collateral security has been denied and stated that the petitioner has signed the papers before a Notary and when the 3rd respondent failed to make payment, the petitioner is making allegation against the 4th respondent, who is no other than her son and the Director of the 3rd respondent company. It is not in dispute that the property of the petitioner has not been sold by the bank, as the so called offer said to have been received was rejected on the ground that it may fetch more sale price. The question that arises for consideration is as to whether respondents 1 and 2 can proceed against the petitioner, being a surety holder, under Section 29 of the Act. While interpreting Sections 29 and 31 of the Act and dealing with the question as to whether the Corporation can proceed against the Directors of the Company, who executed deeds of guarantee agreeing to guarantee repayment/redemption by the Company to the Corporation, the Division Bench of the Karnataka High Court in W.P.No.32709 of 2000 and batch, dated 26-03-2003, held that the order passed by the Karnataka State Financial Corporation under Section 29 of the Act authorizing its officers to take possession of the properties of the collateral security holders/surety holders is illegal and it cannot proceed against the property of the surety, mortgaged/hypothecated in its favour under Section 29 of the Act. Aggrieved by the same, the Karnataka State Financial Corporation carried the matter before the Apex Court and the Apex Court in KARNATAKA STATE FINANCIAL CORPORATION Vs. N.NARASIMAHAIAH AND OTHERS[1] held as follows:- “The heading of Section 29 of the Act states “Rights of financial corporation in case of default”. The default contemplated thereby is of the 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. 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 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. 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. The legislative object and intent 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’. The provisions of Section 128 of the Indian Contract Act must also be kept in mind. It is only by reason thereof, subject to course to the contract by the parties thereto, the liability of a surety is mode coextensive with the liability of the principal debtor. Banking practice may enable a financial corporation to ask for a collateral security. Such security, we would assume, may be furnished by the Directors of a Company but furnishing of such security or guarantee is not confined to the Directors or employees or their close relatives. They may be outsiders also. The rights and liabilities of a surety and the principal borrower are different and distinct. Apart from the defences available to a principal borrower under the provisions of the Indian Contract Act, a surety or a guarantor is entitled to take additional defence. Such additional defence may be taken by the guarantor not only against the corporation but also against the principal debtor. He, in a given situation, would be entitled to show that the contract of guarantee has come to a not. Ordinarily, therefore, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction. In the absence of any express provision in the statute, a person being in lawful possession cannot be deprived thereof by reason of default on the part of a principal borrower….. ” “…. 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 amount in favour of the Corporation by proceeding against the surety only in terms of Section 31 of the Act and not under Section 29 thereof….” It is further held by the Apex Court that though the Corporation has four remedies against the borrower i.e., (i) to file a suit; (ii) to take recourse to Section 29; (iii) to take recourse to Section 31; and (iv) to take recourse to Section 32G of the Act, insofar as the property of the surety holder is concerned, the Karnataka High Court has rightly held against the Corporation that it cannot proceed against the property of the surety, mortgaged/hypothecated in favour of the Karnataka State Financial Corporation, under Section 29 of the Act. As the issue involved in the case on hand is squarely covered by the principles laid down by the Apex Court in the aforesaid judgment, I am of the opinion that the action of respondents 1 and 2 in proceeding against the petitioner under Section 29 of the Act is illegal and unsustainable. Accordingly, the writ petition is allowed setting aside the impugned notice insofar proceeding against the petitioner being a surety holder, keeping it open for respondents 1 and 2 to proceed against the 3rd respondent industrial concern and also to proceed against the petitioner under Section 31 of the Act. There shall be no order as to costs. __________ 11-08-2008 Prv ..... REGISTRAR // TRUE COPY // SECTION OFFICER To 1.2CCs to 2.2CD copies Form-NIC-OGS/WP{PRASAD} [1] 2008(4) SCALE 473