Case: Punjab Financial Corp Vs. M/S.Surya Auto Industries

3. On an application made by the respondent for grant of loan for setting up an industrial unit in District Gurdaspur (Punjab), the appellant-Corporation sanctioned a term loan of Rs. 24.25. For securing repayment of the loan, the respondent mortgaged immovable properties in favour of the appellant-Corporation. As per the terms of agreement executed between the parties, the respondent was required to repay the loan together with interest on specified dates but it failed to adhere to the time schedule and a sum of Rs. 2.70 lacs only was deposited till 2002. Therefore, after issuing notice under Section 29 of the Act, the appellant-Corporation took possession of the unit. This action was followed by notices dated 2.12.2002, 3.3.2003, 30.5.2003 and 29.8.2003, whereby the respondent was repeatedly called called upon to pay the outstanding dues. The respondent not only ignored the notices but also failed to avail the concession offered by the appellant-Corporation vide letter dated 10.9.2004 to reduce the rate of interest and reschedule the payment of the outstanding dues. The attitude of non-cooperation adopted by the respondent in the matter of repayment of loan and interest forced the appellant-Corporation to issue notice dated 26.6.2007 under Section 29 of the Act for taking over collateral security.  4. The respondent challenged the threatened take over of collateral security in W.P. No. 11932/2007 by contending that action taken by the appellant-Corporation is contrary to the provisions of the Act, rules of natural justice and the law laid down in Central Bank of India v. Ravindra (2002) 1 SCC 367  and Aravali Pipes v. Haryana Financial Corporation (2001)2 All India Banking Law Judgments 516. The respondent also made a grievance that the officers of the appellant-Corporation had deliberately disposed of the machinery for a paltry sum of Rs. 5 lacs and this had the effect of destroying the unit. In the counter affidavit filed on behalf of the appellant-Corporation, it was pleaded that action under Section 29 of the Act was necessitated because the writ petitioner failed to abide by the terms of the loan agreement and mortgage. It was further pleaded that even though the appellant-Corporation offered to reduce the rate of interest and reschedule the payment of outstanding dues, the respondent did not avail the same. Not only this, the respondent failed to take benefit of the schemes notified on 3.1.2005 and 18.3.2005 for restoration of the unit on payment of the principal amount along with 10% of the outstanding interest.  5. On the pleadings of the parties, the High Court formulated the following question:"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."6. The Division Bench of the High Court then stated the principle that as per the contract between the parties, the 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, but observed that being a public authority, the Corporation is duty bound to act fairly; that the power to take possession of the mortgaged property cannot be exercised without any responsibility and that the Corporation is bound to take further steps within reasonable time and if it does not do so, the debtor will not only stand deprived of mortgaged property without any purpose resulting in loss of earning and possibility of repayment by raising money against the property. The Division Bench then held that as the appellant-Corporation is not shown to have taken any steps for a period of six years after taking over the unit and no explanation has been offered for this, it neither charge interest at the contractual rate nor can it proceed against any other property till the earlier taken over property is disposed of. The Division Bench also referred to the judgment of this Court in Central Bank of India v. Ravindra (supra) and held that the Corporation is not entitled to compound penal interest. The conclusions recorded by the High Court and operative part of the impugned order read as under:"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 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 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 Honble Supreme Court and where no steps are being taken after taking over of the unit."

Reasoning:
We are, therefore, of the view that this is not a matter where the High Court should have stepped in and substituted its judgment for the judgment of the Corporation which should be deemed to know its interests better whatever the sympathies the Court had for the prosperity of the Company. In matters commercial, the courts should not risk their judgments for the judgments of the bodies to whom that task is assigned."16. In our view, the appellant-Corporation had acted in a most reasonable and fair manner and the High Court was not justified in nullifying the second notice issued under Section 29 of the Act by assuming that the appellant-Corporation had not taken effective steps for realization of its dues in furtherance of first notice. Unfortunately, the High Court ignored that the respondent had not only adopted a recalcitrant attitude in the matter of payment of the outstanding dues, but also failed to avail the concessions offered by the appellant-Corporation by reducing the rate of interest and rescheduling the payment of outstanding dues and did not take benefit of the schemes notified by the appellant-Corporation for restoration of unit on payment of the principal amount with a 10% outstanding interest17. The High Court also committed serious error in declaring that he appellant-Corporation will be entitled to charge simple interest at the rate of 10% w.e.f. 1.4.2003 i.e., after expiry of six months from the date of taking over of the unit. Undisputedly, the respondent had not challenged the terms of loan agreement. Therefore, the High Court could not have suo motu altered terms of agreement and directed the appellant to make fresh calculation of the outstanding dues and allowed the respondent to pay the amount as per fresh demand by selling the mortgaged property. This approach of the High Court is ex facie contrary to the law laid down in U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd. (supra) and Haryana Financial Corporation v. Jagdamba Oil Mills (supra)18. The direction given by the High Court for review of pending cases in the light of judgment of this Court in Central Bank of India v. Ravindra (supra) is also unsustainable because, as mentioned above, the High Court was not called upon to examine the legality or otherwise of the terms of agreement entered into between the appellant-Corporation and respondent under which the latter was obliged to pay interest at the particular rate with periodical rests. Moreover, conclusion No. 3 contained in para 55 of that judgment clearly postulates that stipulations incorporated in the contract entered into and binding on the parties shall govern their substantive rights and obligations in the matter of recovery and payment of interest