Case: Ashok Mahajan Vs. State Of U.P.

4. One M/s Denin Leathers Limited (hereinafter referred to as the borrower) had taken term loan of Rs.40 lacs from Pradeshiya Industrial and Investment Corporation, Uttar Pradesh Limited (in short PICUP) and had mortgaged its immovable properties to secure the loan. Initially the borrower had commenced its business as a private limited company in 1979 but subsequently in the year 1995 it was converted to a Public Limited Company. While the borrower becomes a public limited company, appellants name was included as a Director. On 7.7.1998 a recovery certificate was issued in respect of one Sanjay Mahajan who was one of the guarantors in respect of the loan. According to the appellant due to continued losses the financial condition of the company was bad and added to the financial problems in the year 1999 because of a devastating fire, assets of the company were destroyed. On 2.2.2002 recovery certificate was issued against the guarantors, namely, Keshav Ram Mahajan, Sanjay Mahajan and Smt. Juli Mahajan. On 25.7.2002 the house and household articles of the appellant were attached by the District Authorities by an order to the effect that dues amounted to nearly Rs.1.24 crores plus interest plus 10% collection charges. Appellant made a representation to the authorities stating that he was not a guarantor though coercive steps were taken against him. The appellant was arrested on 24.11.2002. The recovery certificate was issued on 24.4.2002, as the appellant subsequently learnt in the name of the appellant as well as Keshav Mahajan, Ajay Mahajan and Sanjay Mahajan. Auction proceedings in respect of property took place on 21.4.2003 under the Uttar Pradesh Public Moneys (Recovery of Dues Act) 1972 (in short the Act). The date for fresh auction was fixed on 22.5.2003 under Section 4 of the Act as well as under several other statutes. Appellant filed the writ petition on the ground that under the Act the recovery could not have been made. The High Court with reference to terms of guarantee rejected the stand and held that the Collector was entitled to recover the amount as arrears of land revenue under Section 279(1)(b) of the Uttar Pradesh Zamindari Abolition Act, 1950 (in short the Zamindari Act).

Court's reasoning:
6. He submitted that by virtue of these provisions, the 1st Respondent cannot proceed against the Appellant/guarantor until the 1st Respondent has first sold the property of the principal-debtor which had been mortgaged in their favour. He points out that on 22nd July, 1996 action under Section 29 of the State Financial Corporation Act, 1951 had been initiated and physical possession taken. He points out that thereafter on 12.02.1996 a One Time Settlement was arrived at by the 1st Respondent with the 4th Respondent. He points out that thereafter the property was handed back to the 1st Respondent. He submits that, therefore, the 1st Respondent is not entitled to proceed against the Appellant7. Mr. Bhalla admits the above mentioned facts. He, however, submits that the company committed defaults and, therefore, the One Time Settlement failed. He submitted that earlier attempts to sell the properties of the 4th Respondent Company yielded no result as no offers were received. He submitted that action under Section 29 has again been initiated against the 4th Respondent Company. He submitted that as the 4th Respondent Company has committed defaults and it has not been possible to recovery by sale of property, action has been taken against the guarantor for recovery of the amount8. In our view, the above set out provisions of the U.P. Act are very clear. Action against the guarantor cannot be taken until the property of the principal-debtor is firs sold off. As the Appellant has not sold the property of the principal-debtor, the action against the Appellant cannot be sustained. We, therefore, set aside the Recovery Notice."It would be appropriate to direct the High Court to re-consider the matter in the light of the observations quoted above, keeping in view the factual scenario of the present case