Kamal Lalchand Chugh vs Gujarat State Financial Corporation and Others

Jayant Patel, J.—Rule. Mr. Shelat, learned Counsel waives service of notice of Rule. With the consent of the learned Counsel appearing for both the sides, the matter is finally heard.

The short facts of the case appears to be that the petitioner stood as the surety to the transaction of the loan by Gujarat State Financial Corporation (hereinafter referred to as ''GSFC'' for short) with M/s. Raghunath Silk Mills Pvt. Ltd. (hereinafter referred to as ''Principal Borrower''). As per the respondent Corporation, since the Principal Borrower did not pay the amount, the actions were taken by the respondent Corporation against the Principal Borrower for realisation of the money, but at the same time, simultaneously, since the petitioner stood as the surety and the property of Shop No. Z-2202 Surat was also mortgaged with the respondent Corporation as collateral security, the Corporation proceeded against the said property of the petitioner. It appears that the possession has been taken over by the Corporation in purported exercise of the power u/s 29 of the State Financial Corporation Act (hereinafter referred to as ''the Act'' for short) and the Corporation was desirous to dispose of the said property of the petitioner and at that stage, the petitioner has preferred the present petition, contending, inter alia, that the petitioner was entitled to redeem the mortgage by payment of the price of the shop, etc. The additional development in the present case is that pending the petition, the Corporation has invited offer for disposal of the property of the principal borrower afresh and higher amount is to be realised by the Corporation from the property of the principal borrower. Therefore, it was submitted that on behalf of the petitioner that the liability of the surety may not arise in the event the Corporation is in a position to recover the full outstanding amount from the principal borrower or its properties.

Heard Mr.Kanabar, learned Counsel appearing for the petitioner as well as Mr. Shelat, learned Counsel appearing for the respondent Corporation.

On the aspect as to whether the Corporation has power u/s 29 of the Act against the properties of the guarantor/surety or not, the question came to be considered by this Court in Special Civil Application No. 15898 of 2007 decided on 11.9.2008. It was, inter alia, observed by this Court as under:

The only question to be considered in the present petitions is as to whether it is open to the respondent No. 1 Corporation to invoke power u/s 29 of the State Financial Corporation Act against the property of the guarantor or not.

Heard Ms. Mehta learned Counsel for the petitioner and Mr. Munshaw learned Counsel for the respondent.

As such the issue is covered by the decision of the Apex Court in case of Karnataka State Financial Corporation Vs. N. Narasimahaiah and Others, . Wherein the conclusion inter alia recorded at paragraph No. 37 as under:

The legislative intent, in our opinion, is manifest. The intentions of Parliament in enacting Section 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. Parliament intended to provide an additional remedy for recovery of the amount in favour of the Corporation by proceeding against a surety only in terms of Section 31 of the Act and not u/s 29 thereof.

The aforesaid shows that the highest Court of land has observed that power u/s 29 of the Act is not available to the State Financial Corporation against the property of the guarantor, and if it is desirous to take possession of the property of the guarantor, it has to resort proceedings u/s 31 of the Act and only by intervention of the Court, the possession can be taken.

In view of the aforesaid, answer to the question has to be negatived, and the powers u/s 29 of the Act are not available to the respondent Corporation against the property of the petitioner, who are admittedly guarantor.

As in the impugned notice the respondent Corporation has also threatened for action u/s 29 of the Act, such would not be available to the respondent.

As in the said case the possession of the property was not taken over, the Court ultimately declared the action in contemplation of the exercise of power u/s 29 of the Act as illegal, leaving it to the Corporation for resorting to the proceedings u/s 31 of the Act for recovery of the amount.

However, in the present case, it appears that the possession of the property is already taken over. It further appears that prior to the filing of the petition, the petitioner had shown willingness to deposit an amount of Rs. 20,50,000/- (Rupees twenty lac fifty thousand only) with the respondent Corporation for getting back the possession of the property in question.

I would have considered the matter further for directing the handing over of the possession of the property by GSFC to the petitioner in the event the petitioner had shown willingness to deposit the amount of Rs. 20,50,000/- as communicated to the Corporation, however, Mr. Kanabar, learned Counsel for the petitioner, under the instructions of his client, declared before the Court that the petitioner, in view of the subsequent development that the Corporation has received higher amount from the property of the principal borrower, the petitioner would like to wait till the said process is completed. He further submitted that in any event further action by the Corporation u/s 29 may not be available for sale of the property, and for such purpose the Corporation may be relegated to the remedy u/s 31 of the Act as per the above referred decision of this Court, which is based on the decision of the Apex Court.

Mr. Shelat, learned Counsel appearing for the respondent Corporation is not in a position to show any distinguishing circumstances for such purpose.

In view of the aforesaid, as the possession of the property is already taken over by the Corporation, the Corporation may continue to hold the property until the realisation of the money is finalized from the principal borrower and if the Corporation is in a position to recover the full outstanding amount from the properties of the principal borrower, naturally there will not be any liability of the petitioner as surety and consequently the Corporation will be required to return the property to the petitioner, who stood as the surety. However, if any amount is remaining outstanding after exhausting the properties of the principal borrower and the Corporation is desirous to recover the amount from the property of the petitioner, who stood as the surety, it would be required for the Corporation to resort to the proceedings u/s 31 of the Act before the District Court and at that stage, the petitioner, if desirous, may raise contentions as available in law. In any event, the power u/s 29 of the Act for disposal of the property of the petitioner by the Corporation would not be available.

Under the circumstances, the petition is allowed to the aforesaid extent. Rule partly made absolute. No order as to costs.