MAHESH CHANDRA

REGIONAL MANAGER, U.P. FINANCIAL CORPORATl()N AND

ORS.

FEBRUARY 12, 1992

[K. RAMASWAMY AND R.M. SAHA!, JJ.]

State Fi11a11cial Corporations Act, 1951:

C Sectio11 29'-Utta; Pradesh State Fi11a11cial Corporation-Loan to in- ;.c .c dustrial concenr-Defa11/t i11 payment of loan-Power of Corporation to take possession and sell the mortgaged property-Guidelines for exercising powers

t111der section 29 issued.

Financial Corporation-Loan to industrial concern against hypothe- D cated property-Default in payment of loan by debtoi-Corporation's refusal to release hypotheca to debtor for private sale for repayment of debt-Taking possession of property by Corporatio11 a11d sale by invitation of tenders

without 11oticc or oppon11nity to debtoi-Corporation's action held contrary to Section 24.--Sale held vitiated a11d 11ot binding on debtor-Held Corpora-

E tion is an instnunentality of State-It is bound to act fairly and reasonably in selling the property of debtor-Section 29 does .not exclude principles of nat1lral justice.

Section 24--State Fi11ancia/ Corporation are extended amis of Welfare Stat<-Thcir approach should be public orie11ted-Board should discharge its F ft111ctio11s 011 business principles.

Words and Phrases.

'Business'-Meaning of.

The appellant was owner of two plots. In one of the plots a rice mill G was constructed by the partnership in which he was a managing partner.

For taking a loan he hypothecated the mill andthe plots with U.P.

Financial Corporation which sanctioned a loan of Rs. 4,28,000, but disbursed only Rs. 3,78,660 to him. Due to non-cooperation of other partners, lack of working capital and failure of the Financial Corporation to release H the balance loan the mill landed into a rough weather. Consequently 616

MAHESH CHANDRA v. REGIONAL MANAGER 617

defaults were committed in repayment of loan. The appellant requested A the Corporation to release the vacant hypothecated plot to enable him to negotiate for private sale to pay off his debt and also stated that he was ready and willing to pay the outstanding amount of Rs. 5,03,165 towards principal and interest in full satisfaction under "one time settlement scheme". The Corporatien rejected his request and exercising its power under section 29 of the State Financial Corporations Act, 1951 took possession of the hypotheca, invited tenders for its sale and without giving

any notice or, opportunity to the appellant accepted the tender of Rs. 2,55,000 given by respondents 3 to 5 •. Pursuant to the sale the 3rd respondent took . possession of the property and invested a large sums for the improvement of the mill. The appellant filed a writ petition in the High C Court which was dismissed. Against the decision of the High Court the appellant filed an appeal in this Court.

Allowing the appeal, this Court,

HELD : 1. Section 29 of the State Financial Corporations Act confers D. very wide power on the Corporation to ensure prompt payment by arming it with effective measure to realise the arrears. Every wide power, the exercise of which has far reaching repercussion, has inherent limitation on it. It should be exercised to effectuate the purpose of the Act. [629D-E]

1.1. The Corporation has been given statutory right to take over possession and management of the defaulting unit or hypotheca or both including the right to sell and realise the loan or advance due from the unit or debtor. The Corporation is an instrumentality of the State. The Corporation or its employees or officers are bound to act reasonably and fairly in dealing With the property of the debtor. The exercise of the power or discretin in its dealing would be subject to the same constitutional or public law limitation as the Government. The Corporation also equally must conform its action with the same standard that meet the test. of justness, fairness, reason.ableness and relevance. [628Gf!l

G Kasntri/al Laxmi Reddy v. State of J & K, [1980] 3 S.C.R. 1338, referred to.

1.2. Sub-section 4 of section 29 treats the Corporation "to be a trustee" of the debtor or person claiming title through him •. It saddles the Corporation or the officer concerned with inbuilt duties, responsibilities H

A and obligations towards the debtor in dealing with the property and entails him to act as a prudent and reasonable man standing in the shoes of the owner. Therefore, when the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell or further mortgage etc., the Corporation or its officers or

employees stand in the shoes of the debtor as trustee and the property cestue que trust. They are bound to exercise their power in good faith in selling or dealing with the property of the debtor as an ordinary prudent man would exercise in the management of his own affairs to preserve and protect his own estate. Their acts should be reasonable, just and fair which must meet the eye and lhe offer accepted must be competitive and every attempt should be made to secure as maximum price as possible to liquidate the liabilities incurred by the industrial concern or the debtor under the Act. [630G-H, 631C, 632C-D]

N. Suryanarayan Iyer's Indian Tmst Act, 3rd Edn. 1987 page 275; Kerr 011Receivers,17th Edn., page 208; Ha/sbury's Law of E11gla11d, 4th Edn. Vol. 39, para 919, referred to.


SCR 1079; Lakshma11asami Gou11der v. C.I. T. Selvama11i & Ors., (1991) 2 SCALE 956, referred to.

1.3. It is not mandatory as a matter of law, to observe the prcess of taking over strictly. Defaults in payment of loan may attract Section 29.

F But that alone is insufficient either to assume possession or to sell the property. Neither should be resorted to unless it is imperative. Even though no rules appear to have been framed nor any guideline framed by the Corporation was placed, yet the basic philosophy enshrined in Section 24 has to be kept in mind. Rationale of action and motive in exercise of it G has to be judged in the light of it. Lack of reasonableness or even fairness at either of the two stages render the take over and transfer inv'llid.

[630F, 629H, 630A-B]

1.4. In the instant case, the Corporation was guilty of not acting in accordance with law either at the stage of take over or in transferring the H unit. ( 6308]

MAHESH CHANDRA v. REGIONAL MANAGER 619 ,..,

1.5. The attitude adopted by the Corporation was contrary to the A spirit and scheme of section 24 of the Act. Section 24 of the Act requires the Board to discharge its function on business principles, due regard being had to the. interest of industry, commerce and general public. Instead of agreeing to receive five lacs in lump-sum as offered by the appellant it opted for two lacs filly thousands tendered by the purchaser that too in B four yearly instalments. It was neither business principle, nor in the interest of commerce and industry, nor good of general public. This solicitous attitute, at the expense of the appellant, appears to be unjust

/ and unfair and no reasonable prudent owner would accept such an offer. ··-" [626C, 625F; 626A-B; 635G; 636A] c

1.6. Section 29 does not exclude the application of the principles of' natural justice. Before accepting the tender of the third respondent, an opportunity should have been given to the appellant as to why such an offer of the third respondent be not accepted. No bonafide actions have been taken or attempted by the Corporation. The sale of the property is D vitiated by unjust and unreasonable act on the part of the Corporation and is liable to be set aside. The appellant is not bound by the sale or the subsequent acts of the purchasers claiming through them.

[636A, C-D, F]

The Corporation should immediately resume possession of the E

hypotheca sold. It will be open to the appellant to pay the entire liability and have the hypotheca redeemed as per contract. If the appellant fails to do so, the Corporation can sell the same in open auction, after giving wide publicity in the press. [636G, 637A]

~ F •

2. The financial corporations under the State Financial Corporalions Act were visualised not as a profit earning concerns but an extended arm of a welfare state to harness business potential of the country to benefit the common man. They deal with public money for public benefit.

Their approach has to be public oriented, helpful to the loanee, without G loss to the Corporation. Endeavour should be to adjust and accommodate as business considerations require the sick unit to function for benefit, both of the general public and the Corporation. The Corporation, there fore, should honour their comn~.itments of releasing entire loan timely

~ except for very good reasons whi, ch should be intimated before hand to enable the unit holder to comply with shortcoming if any. In the absence H

A of colllpletion of it, the proceedings for recovery under section 29 may not be justified. (625F-G, 6300-F]

3. The following necessary directions are issued to be observed by the Financial Corporations while exercising power under section 29:-

B (A) Every endeavour should be made, to make the unit viable and be

put on working condition. If it becomes unworkable.

(B) Sale of a unit should always be made by public auction.

(C) Valuation of a unit for purposes of determining adequacy of offer or for determining if bid offered was adequate, should always be intimated to the unit holder to enable him to file objection if any as he is vitally interested in getting the maximum price.

(D) If tenders are invited then the highest price on which tender is to be accepted must be intimated to the unit holder.

(E) If unit holder is willing to offer the sale price, as the tenderer, then he should be offered same facility and unit should be transferred to him. And the arrears remaining thereafter should he rescheduled to be recovered in instalments with interest after the payment oflast instalment fixed under the agreemententered into as a result of tendered amount.

If he brings third parties with higher offer it would be tested and

ma~· be accepted.

(F) Sale by private negotiation should be permitted only in very large concerns where investment runs in very high amount for which ordinary buyer may not be available or the industry itself may be of such nature that by normal buyers may not be available. But before taking such steps there should be advertisements not only in daily newspapers but business magazines and papers.

(G) Request of the unit holder to release any part of the property on which the concern is not standing of which he is the owner should normally be granted on c, ondition that sale proceeds shall be deposited in loan account. [634H, 635A-G)

4. 'Business' is a word of wide import. It has no definite meaning. A Its perceptions differ from private to public sector or from institutional financing to commercial banking. [ 625F]

5. The law consists of body and soul. The letter of the law is the body and the sense and reason of its is the soul quia ratio legis est enima 'tegis. B In other words, like a nut the letter of the law represents the shell and sense and the purpose of its Kernal. The law intends to serve the purpose.

Justice is both the cause and effect, the origin and the legitimate end of law. One will receive no benefit from the law, if the ratio and the letter of

_JO( law defeats its purpose. [ 629C] c

6. In legislations enacted for general benefit and common good the responsibility is far graver. It demands purposeful approach. The exercise of discretion should be objective. Test of reasonableness is more strict. The public functionaries should be duty conscious rather than power charged.

Its actions and decisions which touch the common man have to be tested on the touchstone of fairness and justice. That which is not fair and just D

is unreasonable. And what is unreasonable is arbitrary. An arbitrary action is ultra vires. It does not become bona fide and in good faith merely because no personal gain or bnefit to the person exercising discretion should be established. An action is ma/a fide if it is contrary to the purpose for which it was authorised to be exercised. Dishonesty in discharge of duty E vitiates the action without anything more. An action is bad even without proof of motive of dishonesty, if the authority is found to have acted contrary to reason. [629E-H)

""'

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4503 of F 1990 . • From the Judgment and Order dated 5.2.1990 of the Allahabad High Court in Chi! Misc. Writ Petition No. 13916 of 1987.

R.K. Jain, P.N. Lekhi, P.K. Jain, S. Markandcya, Ms. C. Markandeya G and M.K. Garg for the appearing parties.

The Judgment of.the Court was delivered by

K. RAMASWAMY, J. The appellant, Managing Partner of Mis Shiva .,.

Rice Mill situated at Nagina, Distt. Bijnor in Uttar Pradesh, o\vned two H

~ A plots bearing Nos. 208 and 220/2 admeasuring 18 and 8 Bishwas respectively purchased under a single sale deed. In plot No. 208 in an extent of 2,100 sq. yards abutting Highway, near Railway Goods Shed and one furlong to the Railway Station, a strategic location of importance, the rice mill was constructed by the partnership firm. The plot bearing No. 220/2

B remained vacant and was not even valued as an asset of the partnership firm while hypothecating the rice mill to the U.P. Financial Corporation for short 'the Corporation'. A loan of Rs. 4,28,000, was sanctioned in 1979 and Rs. 3,70,660 was alone disbursed in 1980 which was repayable in eleven annual instalments upto 1991. The appellant repaid a sum of Rs. 9000 in c December, 1981. Non-cooperation of the other partners and lack of working capital, due to failure to release the balance loan, landed the running mill into rough weather and defaults in payment were committed. While finding that interest was getting mounted, the appellant wrote repeated letters to the Corporation requesting to release plot No. 220 so as to enable

D him to negotiate for private sale of it along with his two more plots to pay off the debt. It is his case that, pursuant to his letter dated December 22, 1983, on oral promise to release the plot; he paid a sum of Rs. 65,000 and was received by the corporation. He also promised to pay Rs. 50,000. The Corporation did not release it. According to him, in his letter dated February 10, 1986, Annexure 6, as on March 31, 1986 the simple interest E payable was Rs. 1,93,670, the principal amount was Rs. 3,70,660 and expenses was Rs. 3,835. After deducting Rs. 65,000 towards arrears of interest, the outstanding was Rs. 5,03,165 and he was ready and willing to pay the same in full satisfaction under "one time settlement scheme", provided compound interest is waived. The record also shows that in a

,;• F meeting held in September, 1985 a decision to release the plot appears to have been reached by the corporation and the Regional Manager was asked to be contacted. Ultimately, the Corporation did not acceed to that request bm had taken possession of the hypotheca and got valued at Rs. 3,28,717.97 and published for sale inviting tenders. It is necessary to point G out at this juncture that as per the plan filed on record which is not disputed that (a) Plot No. 221 faces the road, Plot No. 220 is in the middle and 219 is in the end towards north. They are contiguous. (b) The appeal- !ant in his letter submitted that the mill could not run due to lack of running capital and non-cooperation of other partners; and (c) Sketch plan clearly

'A H shows that plots Nos. 219 and 221 could be used to carve out housing plots

,...., MARESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 623

only if 220 was released, and that might have fetched good price to enable A the appellant tci clear off the arrears. Yet it was not accepted, because according to the affidavit of the corporation the appellant could have sold other two plots. Several letters written by the appellant, thus, received no response. Instead recovery proceedings were initiated.

Ac£ording to the purchasers, though the Corporation did not assert, that no response was avoked from public for several tenders called for. The last date to receive the tender in question was January 13, 1987. Deshbandhu Agarwal, the third respondent, per self, his wife (since died) and his son, respondents Nos. 4 & 5, submitted the tender on March 25, 1987

for a sum of Rs. 2,00,000 which was on negotiation accepted at Rs. 2,55,000.. C The Corporation agreed to receive 25% of the consideration, namely, Rs. 63,750 as initial payment and the balance consideration in four years in equal half yearly instalments. Before accepting the tender no notice nor an opportunity in this regard was given to the appellant. The appellant, therefore, filed the writ petition in the Allahabad High Court which was D dismissed by judgment dated February 9, 1990. This appeal under Art. 136 of the Constitution arises against that judgment.

When the matter came up for hearing, this Court suggested to the parties to have the matter settled amicably. They had taken sufficient time.

The purchasers reported that they entered into an agreement to sell plot E No. 220, and the purchaser declined to rescind the contract with a threat to file a suit for specific performance. They offered to pay Rs. 40,000 said to be the consideration therein but the appellant declined to accept the same. The Corporation though filed an exhaustive counter affidavit, did not deny the offer made by the appellant in his letter dated February 10, 1986.

F When we enquired, the counsel for the Corporation, on instruction, stated that they had informed the appellant that his proposal was not acceptable to the Corporation, but no material has been placed on record of such communication. It was stated that as on the date of the sale a sum of Rs. 8,61,969.57 was due from the appellant towards principal and interest @ 18%. The break-up has been given in a separate statement filed by the G counsel. Thus the proposed settlement had been fissled out.

Mahatma Gandhiji, the father of the nation, in Swaraj at page 92, stated that, "from the very beginning it has been my firm belief that agriculture provides the only unfailing and perennial support to the people H

A of this country. India lives in villages". Villagers are poor and most of them are qnemployed or underemployed who need productivity which would add.to the wealth of the nation. This vast human resources and man power remain idle, since majority own little or marginal land holdings out depend on agriculture as their livelihood. Cottage, agro-based or medium in- B dustries in rural areas give them economic status to the owner, employment potential for sustenance to the workmen and fair price to the producer.

The father of the nation laid, therefore, emphasis to establish cottage industries, "to utilize the idle hours of the nation and bring work to the

people in their homes, particularly when they had no other work to do".

C He further stated, "l want the dumb millions of our land to be healthy. 1

want them to grow spiritually. If we feel the need of the machine we certainly will have them. Every machine that helps an individual has a place". But he emphasised only on such industries which would be, "self. sufficient, self-reliant and free from exploitation": The founding fathers of the Constitution in Art. 43 directed that, "the State .shall endeavour to D promote cottage industries on an individual and cooperative basis in rural

area~". Without social progress and economic development, democracy and freedom would not take firm roots. Without social stability, it would be •• i, mpossible to achieve .economic development. Without economic develop met)!. there would be no social progress and without social progress it E would be impossible for the people to take the destiny in their own hands

in. a democracy. Our Constitution, therefore, accepted mixed ecorromy as the base and the economic policy and planning echo regeneration of social and economic justice. Articles 38 and 39 aim in that pursuit that the ownership and control of the material resources of the community are so F distributed as best to subserve the common good and that the inequalities in income should be minimised. Facilities and opportunities should be provided to eliminate inequalities in status and opportunity among the individual and groups of people. Our Bharat needs simultaneously greater progress by building industries with modern iechnological advances on all G fronts and should create greater employment opportunities. To accelerate economic development the fiscal resollrces, human resources, their abilities and experli'c need harness. In the mixed economy the public undertakings as \Veil as private sector need nccCS$ary assistance and encouragement. The growth of th:c private sector should not be stifled, cribbed or cabined. The H bureaucracy should adopt. positive approach to stimulate production and

MARESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 625

productivity in every sector of economy so as to increase the size ofthe A national cake.

Finance is the most important catalyst. The State of Uttar Pradesh constituted the Corporation under s.3 of the State Financial Corporation Act 1951, Act 63 of 1951, for short, 'the Act' which came into force from

October 31, 1951. To promote industrialisation in the States by encouraging small entrepreneurs to participate in economic growth of the country by giving them financial assistance for setting up medium and small scale industries. Section 25{1 )(g) of the Act provides that the Corporation may grant loans or advances to an industrial concern (rice mill is an industrial concern) repayable within a period not exceeding 20 years from the date the loan was granted. Although the activity has multiplied, capital has grown, field of operation has been widened but the disturbing state of affairs, which at times, surfaces, is complete lack of awareness of principles

-on which these institutions are required to function. More distressing is unreasonable attitude adopted, often, by the Corporation while exercising .D power under s.29 to take over possession of the unit for default, in repayment of loan. Evil is still greater in transferring the unit as more often the owner stands financially ruined the Corporation too does not gain much but the transferee comes out, either with a working unit or a unit ready to go at throw away price, in easy instalments giving rise to strong apprehensions that everything did not proceed reasonably and fairly.

Corporations deal with public money fur public benefit. The approach has to be public oriented, helpful to the loanee, without loss to the corporation. Section 24 of the Act itself required the Board "to discharge

., • its function on business principles, due regard being had to the interest of F r • industry, commerce and general public". Business' is a word of wide import. It has no definite meaning. Its perceptions differ from private to public sector or from institutional financing to commercial banking. The

. financial corporations under the Act were visualised not as a profit earning concerns but an extended arm of a welfare state to harness busine; s potential of the country to benefit the common man.

The release of plot No. 220 for private sale along with other unemcumbered two plots would haw fetched the necessary amount to pay off

the debt. Even .the offer to receive Rs. 5,00,000 in full quids would have salvaged the problem. Any prudent businessman with least acumen would . H

A have agreed to the proposal of the release of the plot for sake ef recovering its debts. Instead of agreeing to receive five lacks in lump sum, it opted for two lacs fifty thousands, that too in four yearly instalments. It was neither business principle, nor in the interest of commerce and industry, nor good of general public. Any reasonable approach, which of course is not only

desirable but necessary, while dealing with such matters, would have immediately demonstrated that the Corporation by such step of releasing the plot, which was of no consequence to it, was going to gain and perpetuated the objectives of the Act. Instead it adopted an attitude which was contrary to the spirit and scheme of s. 24 of the Act. Did the Corporation gain from its ultimate decision of taking over possession and transferring the unit ?

Total loan disbursed was Rs. 3,78,660. The appellant paid in all Rs. 74,000 and if it is added to the amount paid by the appellant, it comes to Rs. 3,29,000 only. Whereas the appellant was willing to pay Rs. 5,00,000 and odd in 1986 over and above the amount which he had paid, if plot No. 220 was released or one time payment scheme was accepted. Similar offer was D accepted in relation to mill at Meerut. It did not get back the interest. Even what it disbursed was the borrowed public money. Of course, the transferee got a mill with project cost estimated at 6 lacks and odd in 1980 at Rs.2,55,000 in 1986 when the value must have gone up instead of going down.

E There is a theorem that the economic self, interest and profit motive induce entrepreneurs to reallocate resources among activities until they get the same (approximately, if not exactly in practise) rate of return from different lines of activity. No body would like to lose money. No body would like to miss an opportunity to make profit or to lose his money either.

F Resources allocation in a market economy, thus, primarily is a matter of relative priority to different activities. The very process of economic growth implies continuous reallocation of resources to generate income to plough it back and earn profit. One of the major causes to incur loss is the erosion of working capital fund which affects the day-to-day working of the unit.

Unless working capital is provided for, the industry is bound to get closed G due to accumulated losses year after year. The terms of loans are mainly to repay immediately after disbursement with commercial rate of interest together with annual on half yearly rests. Unless the unit starts generating internal resources and earn profit, running the unit on industrial concern itself becomes difficult and the ability to repay principal or interest get H impeded. The result, therefore, is that it would commit default or breach

• ••

-9':'

of contract by default attracting penal interest for the period in default.

The industrial concern or unit, thereby, would be further burdened with additional cost of interest, panel interest and interest over interest. With the result they cannot come out from the red, nor generate internal resources. Many a time the corporation takes over possession and sell thereof. The genuine and enthusiastic entrepreneur with no previous business xperience would get exposed to this hazard (the pretenders to make quick money would maintain concerted conduits and. the officers too would be solicitious to them). Therefore, the Corporation as a policy of wise investment should map out payment schedule in disbursing the loan to see

c that the unit starts functioning and its working capital is maintained. It is common knowledge that due to apathy or indifference or for reasons best known or hidden that the disbursements would be delayed resulting in delay in completion of the project or to start working or loss of running capital, which would give cause for default in payment of the instalments; accumulation of the liabilities and the ultimate closure of the unit or the industiral concern, defeating the objectives of the Act and the Constitution. D

This case demonstrates that in spite' of reminding the corporation that due to lack of working capital, the appellant was unable to run the mill. The corporation did not release the balance loan and no explanation came forth. Dr. Malcolm S. Adiseshaiah, the noted Economist, in his 'The Why, What and Whither of the Public Sector Enterprise at page 42 under the caption 'Problem of Loss-Making Units in the Public Sector, Erosion of Working Capital and its Results' stated that, "[ was informed that the best course would be to get money as loan and not as equity. Anyhow we have to run the industry, margin money was provided as loan on the same terms and conditions regarding interest and repayment. So, on this question also, rethinking is needed. Since margin money has to come from the owner, nd since the Government is the owner of the public sector, it should consider margin money released as equity". At page 43 it is stated that, "a drastic change in policy is needed to make those units viable and

to enable them to stand on their own legs. The rehabilitation programme is going on (we do not call it "modernisation'', though in the government G the term "modernisation" is used) .... For losing concerns, even the payment of interest adds to their woes in finding necessary working capital .... by way of equity, so that these units are able to overcome the difficulty and • start standing on their own legs". With regard to the problems with the bank at pages 45 and 46 it was slated thus: ''If the banks take a helpful H

62S SuPREME COURT REPORTS (19'.J2J 1 s.c.R.

A attitude in normally sanctioning the respective limits as announced by the committee for working capit1!1. it will be quite helpful for the public sector:.... may be even for the private sector''.

Thus a heltiing attitude on the part of the Corporation to constantly monitor the working of the industrial concern or units (it may even charge B the overhead expenses on this account) would subserve the purpose of the loan, object f the Act, and the constitutional objective of economic justice to the needy. , Equally employment and better working conditions to the workmen are assured and the unit gets stablised and starts yielding returns for repayment of principal amount and interest payable thereon. The facts C in this case do demonstrate that noncooperation by the partners and depletion of working capital are causes to close the mill and the consequential default in the payment of the principal amount and the interest accrued thereon. The corporation acted indifferently.

Let us turn to s. 29" for the scheme of dealing with taken over sick D unit. Section 29 (1) o(the Act says that if an industrial concern makes any default in repayment of any loan or advances or any instalment thereof, the Corporation shall have the right to take over the management or possession or both of the industrial concern as well as the right to tr:,.isfer by way of lease or sale and realise the debt from the property pleuged, mortgaged, E or assigned to the Corporation. ·

. Sub-sec. 4 postulates that in the absence of any contract to the contrary, the amount received "be laid by" the corporation "in trust" firstly in the payment of cost, charges and the expenses and secondly in discharge of the debt due to the Corporation and the residue, 'if any, shall be paid to F the defaulter or the persons entitled thereto.

The Corporation has been given statutory right to take over possession and management of the defaulting unit or hypotheca or both including the right to sell and realise the loan or advance due frqm the unit or debtor.

The Corporation is an instrumentality of the State. The Corporation or its G employees or officers are bound to act reasonably and fairly in dealing with the property of the debtor. The exercise of the power or discretion in its dealing would be subject to the same constitutional or public law limitation as the government. The Corporation also equally must conform its action with the same standard that meet the test of justness, fairness, reasonable- • H ness and relevance. In Kasturi/a/ Laxmi Reddy v. State of!. & K., [ 1980] 3

--<

...

SCR 1338, this Court held that when any Government's action fails to A satisfy the test of reasonableness and public interests are found to be wanting in quality of reasonableness or lacking in the quality of public interest, it would be liable to be struck down as invalid. It must follow as a necessary corollary, that the Government cannot act in a manner which would benefit a private party at the cost of the State; such an action would B not be both unreasonable and contrary to public interest •

The law consists of body and soul. The letter of the law is the body and the sense and reason of its is the soul, quia ratio /egis est enima legis.

In other words, like a nut the letter of the law represents the shell and sense and the purpose of its Kernal. The law intends to serve the purpose. C Justice is both the cause and effect, the origin and the legitimate end of law. One will receive no hc.nefit from the law, if the ratio and the letter of law defeats its purpose.

Section 29 confers very wide power of the Corporation to ensure D prompt payment by arming it with effective measure to realise the arrears.

But the simplicity of the language is not an in.dex of the enormous power stored in it. From notice to pay the arrears, it extends to taking over management and even possession with a fight to transfer it by sale. Every wide power, the exercise of which has far reaching repen;\lssinn, has inherent limitation on it. It should be exercised to effectuate the purpose E of the Act. In legislations enacted for general benefit and common good the responsibility is far graver. It demands purposefol approach. The exercise ofdiscretion should be objective. Test of reasonableness is more strict. The public functionaries should be duty conscious rather than power charged. Its actions and decisions which touch the common man have to F be tested on the touchstone of fairness and justice. That which is not fair . and just is unreasonable. And what is unreasonable is arbitrary. An ar~

bitrary action is ultra vires. It does not become bona fide and in good faith merely because no personal gain or benefit to the person eercising discretion should be established. An action is ma/a fide if it is contrary to the purpose for which it was authorised to be exercised. Dishonesty in dis- G charge of duty vitiates the action without anything more. An action is bad even without proof of motive of dishonesty, if the authority is found to have acted contrary to reason. Power under section 29 of the Act to take possession of a defaulting unit and transfer it by sale requires the authority to act cautiously, honestly, fairly and reasonably. Default in payment of loan H

A may attract section 29. But that alone. is insufficient either to assu!'le possession or to sell the property. Neither should be resorted to unless it is imperative. Even though no rules appear to have been framed nor any guideline framed by the Corporation was placed, yet the basic philosophy enshrined in section 24 has to be kept in mind. Rationale of action and

. D

motive in exercise of it has to be judged in the light of it. Lack of reasonableness or even fairness at either of the two stages renders the take over and transfer invalid. Unfortunately the Corporation was guilty of not acting in accordance with law either at the stage of take over or in transferring the unit. Admittedly the entire loan was not disbursed. Need of the capital in the last stages cannot be doubted. If the Corporation refused to release the amount at a time when the unit is nearing completion or is ready to start functioning, then it falls short of capital and it is bound to land itself in trouble. This is what happened in this case. The partners did not cooperate and the Corporation without any explanation refused to release the full amount. Result was the appellant stood pressed on one

hnd from absence of capital and on the other by recovery proceedings .

The Corporation, therefore, should honour their commitments of releasing entire loan timely except for very good reasons which should be intimated beforehand to enable the unit holder to comply with shortcoming if any.

In its absence of its completion, the proceedings for recovery under section 29 may not be justified. Similarly various situations may arise which may hamper start of the unit - delay in electric supply or delayed delivery of machinery vital for the functioning of the unit. Such difficulties do require rescheduling of payment of instalment because, if the unit, for reasons beyond the control of unit hilder, could not start, then how will the amount be repaid. Endeavour should be to adjust and accommodate as business considerations require the unit to function for benefit, both, of the general public and the Corporation. It is not mandatory, as a matter of law, to observe the process of taking over strictly. But if there is no option left out and the unit is taken over then its transfer require not only sincere effort but to act reasonable and fairly.

Equally Sub-section 4 of s.29 treated the Corporation "to be a trustee" of the debtor or person claiming title through him. It saddles the Corporation or the officer concerned with inbuilt duties, responsibilities and obligations towards the debtor in dealing with the property and entails him to act as a prudent and reasonable man standing in the shoes of the w H owner. According to Prof. Issac, a noted author on Trusts, trusteeship has

become a readily available tool for everyday purpose of organisation A financing, risk shifting, credit operations, settling disputes and liquidation of business affairs. Maitland, the other renowned writer on Equity, observed that one of the exploits of equity; the largest and the most important, is the innovation and development of the trust. Thus, !rust has been and is being applied for all purposes mentioned by Prof. Issac and many others B as device to accomplish different purposes. Trusteeship is an institution of eiasticity and generality. The broad base of the concept of property or its management vested in one person and obligation imposed for its enjoyment by others is accepted in Hindu jurisprudence. Therefore, when the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell or further mortgage etc., the C Corporation or its officers or employees stands in the shoes of the debtor as trustee and the property cestue que trust. In N. Surya11araya11 Iyer's llldia11 Trust Act, Third Edition, 1987 at page 275 in s. 37 it is stated that, "Where the trustee is empowered to sell any trust property ... by public auction or private contract and either at one time or at several times ...... " . D the duty of trustee is to obtain the best price. He should, therefore, use reasonable diligence in inviting competition to that end. Where a contract of sale has been entered into bona fide by a trustee the court will not allow it to be rescinded or invalidated because another purchaser comes forward with a higher price. It would, however, be improper for the trustee to contract in circumstances of haste and improvidence. Where in a trust for E sale and payment of creditors the trustee sold at a gross under valuation showing a preference to one of the creditors, he was held guilty, of breach of trust. If the purchaser is privy of the fraud the property iiself i:an be recovered from him."

The sale may be either by public auction.or private contract. In either F

case the trustee has to keep in mind that he must obtain the most advantegous price. Kerr on Receivers 17th Edition, t page 208 stated that "a receiver, however, is not expected any more than a trustee or an executor to take more care of their property entrusted to him than he would have as a reasonably prudent man of business". In Halsbury's Law of England, G 4th Edition, Vol. 39, at para 919 it is stated that the "receiver will be compelled to show thai he has acted with perfect regularity and. has used such degree of prudence as would be expected from a private individual

i~ relation to his own affairs". The trustee or a receiver is, therefore, duty bound to protect and preserve the property in his possession and the H

A standard .or conduct expected or him, in dealing with the property or sale thereor, is as a prudent owner would exercise in dealing. with his own property or estate. The degree of care expected of him in handling property taken possession of is measured by the degree of care expected of a person acting as trustee, executors or 85$ignees. The object and endeavour B should alsp be to secure maximum advantage or price in a sale of the property in lots or as whole, as exigencies warrant.

The Corporation or its officers or servants as trustee are bound to exercise their po\Ver in good faith in selling or dealing with the property of the debtor a5 an ordinary prudent man would exercise in the manage- C ment of his own affairs to preserve and protect his own estate. Therefore, the acts of the officer or servant of the corporation should be reasonable, just and fair which must meet the eye and the offer accepted must be of competitive and every attempt should be made to secure as maximum price as possible to liquidate the liabilities incurred by the industrial concern or D the debtor under the Act.

lnFerti/iser Corporatio11 Kamg<ir U11iol1 (Regd.), Sill(iri & Ors. v. U11io11

.· of1ttdia & Ors., (1981) 2 S.C.R. 52, this court clearly said that, "we want to

m.ake it clear that we clo not doubt the bolla fides of the Authorities, but E as far as possible sales of public property, when the intention is to get the best price, ought to take place publicly. the vendors are not necessarily bound to accept the highest or any other offer, but the public at least get satisfied that the Government has put all its cards on the table.' In Ram & Slryam Co. v. Stare of Ha1ya11a, (1985) Supp. 1 S.C.R. 541 this court held

that unilateral offer summarily made, not correlated to any reserve price made by the forth respondent after making full settlement in the matter was accepted without giving an opportunity to the appellant to raise the bid, as also inadequacy of his bid, it was held that the State failed to discharge its administrative functions fairly and unfair treatment was meted out to the appellant violating the principles of fair play in action. In Sac/1i11a11d Pa11dy v. Stale of West Be11gal, [1987) 2 S.C.R. 223 this court held that :-

" On a consideration of the relevant cases cited at the bar the following proposition may be taken as well established; State owned or public owned property is not to be dealt with at the

-.

absolute discretion of the executive. Certain precepts and prin- A ciples have to be observed. Public opinion is the paramount consideration. One of the methods of securing the public interest, when it is considered necessary to dispose of a property, is to sell the property by public auction or by inviting tenders.

Though that is the ordinary rule, it is not an invariable rule.

There may be situations . where there are compelling reasons necessitating departure from the rule but then the reasons for the departure must be rati.onal and should not be suggestive of discrimination. Appearance of public justice is as important as doing justice. Nothing should be done which gives an appearance of bias, jobbery or nepotism.'

In Haji T.M. Hassan v. Kera/a Fi11a11cial Corporation, (1988) 1 S.C.R. 1079 this court further held thus:-

"The public property owned by the State or by any instrumen- D tality of the state should be generally sold by public auction or by inviting tenders. This court has been insisting upon that rule, not only to get the highest price for the property but also to ensure fairness in the activities of the state and public authorities. They should undoubtedly act fairly. There actions should be legitimate. There dealings should be above board. E There transactions should be without aversion or affection.

Nothing should be suggestive of discrimination. Nothing should be done by them which gives an impression of bias, favourtism or nepotism. Ordinarily these factors would be absent if the matter is brought to public auction or sale by tenders." F

In Lakshma1tasami Go111tder v. C.l.T., Selvama1ti & Ors., (1991] 2 SCALE 956 this court, by a bench to which one of us (K. Ramaswamy, J. was a member) in the context of sale of debtor's property for recovery of the Government dues, held that sale officer has statutory duty and the responsibility to have the date and place of sale mentioned in the notice G and given due publication in terms of the Act and the Rules. Public Auction is one of the mode of sale intending .to get highest competitive price ior the property. Public auction also ensures fairness in actions of the public authorities or the sales officers who should act fairly, objectively and kindly. Their actions should be legitimate. Their dealing should be free H

634 SUPREME CQ{jRT REPORTS


A from suspicion. The fair and objective public auction would relieve the public authorities or sale officers from the charge of bias, favourtism, nepotism or else beset with suspicious feathers and of their non-accountability.

The sale by public auction or tender or private negotiation should be bona fide action. First is universally recognised to be !tie best and most fair method. It is expected to fetch best competitive price and is beyond reproach. Second would be resorted to-rarely only if first is an impossibility.

Generally tenders should be calling quotation to execute public work or to award contracts etc. And third should always be avoided as it cannot withstand public gaze. It casts reflectiDn on Corporation and its officials and is against social and public interest. In case transfer cannot be effected by public auction and it is necessary to resort to sale by tender it is both fair and necessary to inform the unit holder, if unit has been got valued for purposes or transfer of the estimated value for sale as he is as much D interested as the Corporation. Sale of public property by calling tenders escape attention of many an intending participants. Every endeavour should, therefore, be made to give wide publicity and to get the maximum price. Bureaucracy feels that accountability is an impediment to efficient discharge of the duty. Accountability is no more and no less than, the E concept of accountability of a private concern to their shareholders. There is a distinction between prying into details of <lay to day administration and of the legitimate actions or resultant consequences thereof. To enthuse efficiency into administration, a balance between accountability and autonomy of action of management in public enterprises should be care-

F fully maintained. Over emphasis on either would impinge upon public efficiency. But undermining the accountability would give immunity or carte blanche power to deal with the public property or of the debtor at whim or vagary. Whether the public authority acted bona fide and in the best interest as prudent owner in the given facts would do, be gauged from impugned action and attending circumstances. The authority should justify G the action assailed on the touchstone of justness, fairness, reasonableness and as a reasonable prudent owner.

Keeping these various factors giving rise to conflicting interest the following directions are necessary to be issued to be observed by the H Corporation while exercising power under s. 29:

Every endeavour should be made, to make the unit viable and be put A on working condition. If it becomes unworkable:

(1) Sale of a unit should always be made by public auction.

(2) Valuation of a unit for purposes of determining adequacy of offer or for datermining if bid offered was adequate, should alwaxs be intimated B to the unit holder to enable him to file objection if any as he is vitally interested in getting the maximum price.

(3) If tenders are invited then the highest price on which tender is to be accepted must be intimated to the unit holder.

( 4)(a) If unit holder is willing io offer the sale price, as the tenderer, then he should be offered same facility and unit should be transferred to him. And the arrears remaining thereafter should be rescheduled to be recovered in instalments with interest after the payment of last instalment ftxed under the agreement entered into as a result of tendered amount.

(b) If he brings third parties with higher offer it would be tested and may be accepted.

(5) Sale by private negotiation should be permitted only in very large E concerns where investmeni runs in very huge amount for which ordinary buyer may not be available or the industry itself may be or such nature that by normal buyers may not be available. But before taking such steps there should be advertisements not only in daily newspapers but business magazines and papers. ¥ F "'

(6) Request of the unit holder to release any part of the property on which the concern is not standing of which he is the owner should normally be granted on condition that sale proceeds shall be deposited in loan account.

"In the light of the above guidelines it becomes clear that though G tenders were invited the 3rd respondent alone had given the tender for a sum of Rs. 2 lacs. On negotiation it was said to have been raised to Rs. 2,55,000. But deferred payments, on initial deposit of 25% and balance payment within four years of half yearly instalments, were given. This solicitous attitude, at the expense of the appellant, appears to be unjust H '

A and unfair and no reasonable prudent owner would accept such an offer.

The appellant himself, long prior to sale, offered to pay Rs. 5 lacs and odd in full quids. Section 29 does not exclude the application of the principles of natural justice. It is not a straight jacket formula. It depends on facts in each case. Nothing prevented the Corporation to have given the appellant B a chance for payment thereof at reasonable instalments with interest thereon. Nothing prevented ihem to release the open site, the subject of mortgage on condition that the entire sale price of the plots should be paid to discharge the liability and it be a condition in the sale deed itself. Before accepting the tender of the third respondent, an opportunity should have been given to the appellant as to why such an offer of the third respondent C be not accepted. The appellant would have come forward to give his own offer or brought third parties with higher offers. No such bona fide actions have been taken or attempted by the Corporation. Thus the acts smacked of bona fides or responsibility or reasonableness as an ordinary prudent businessman/trustee/owner acting in or dealing with such trust. Thus the D sale of the property is vitiated by unjust and unreasonable act on the part of the Corporation or its officers or employees and is liable to be set aside.

The possession given to the respondents 3 to 5 or L:.Rs. of the respondent is illegal and immediately be resumed by the Corporation. The third respondent claimed to have improved the mill or entered into an E agreement of sale of open plot No. 220/2 with third parties. But this is subject to litigation attracting the doctrine of !is pendens under s. 52 of the Transfer of Property Act. The appellant, therefore, is not bound by the sale or the subsequent acts of the purchasers/persons claiming through them. . One of the objections raised by the purchasers is that the appellant is one F of five partners and the others did not object to the sale. This is no ground to deny the relief to the appellant when injustice stares at the face. The sale is accordingly set aside. The Corporation should immediately resume possession of the hypotheca sold. It is open to the appellant to pay the entire liability and have the hypotheca redeemed as per contract. If it not possible, the respondent shall release plot No. 220 to enable the appellant G to do plotting along with plot Nos. 219 and 221. The release shall be made within four weeks from the date of the receipt of the copy of this order or .

is produced before the respondent. The release shall be subject to payment of the entire sale price to the loan account. The respondent shall grant six months' time from the daie of release to the appellant to pay the entire H arrears outstanding towards the loan; If he fails to do so, the Corporation

I ,

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y ,..

is directed to sell the same in open auction, after giving wide publicily in . A the press and by beat of drum/microphone in the town and neighbouring area. The transferee would be entitled, if. available at law, lo proceed against the Corporation, for such reliefs as is open to them in law. for damages.

The appeal is accordingly allowed. The writ of certiorari is issued B quashing the sale. Mandamus is issued to the first respondent to immediately resume possession of the hypotheca and implement the directions contained. in the judgment. The parties would bear their own. costs. .

T.N.A. Appeal aUowed.