Karnataka State Financial Corporation vs Cengal Castings

Rathnakala, J.—This Miscellaneous First Appeal is filed by the Karnataka State Financial Corporation (hereinafter called as ''the Corporation''), being aggrieved by the order dated 24.04.2010, passed by the Principal District Judge, Shimoga, on his file in Misc. No. 3/2004.

By the impugned order, the petition filed by the Corporation under Sections 31(1)(a) and 31(1)(aa) of the State Financial Corporation Act, 1951 (hereinafter called as ''the Act'') has been dismissed.

The fact is:

"The Corporation filed a petition under Sections 31(1)(a) and 31(1)(aa) of the Act, with a prayer to sell the mortgaged properties and enforce the liability of the respondent Nos. 2 to 9 as sureties and for a further direction to them to pay a sum of Rs. 21,45,725/- along with current and future interest at the interest at the rate of 16.5% p.a."

On presentation of the petition, respondent Nos. 1, 2, 5 and 9 remained absent, respondent Nos. 3, 4 and 8 were placed exparte and respondent Nos. 6 and 7 contested the petition.

The case of the petitioner was:

"The Corporation in furtherance of it''s object to render financial assistance to the small scale industries and their development is lending loans to the deserving small scale industries. The first respondent is a registered firm and respondent Nos. 2 to 9 are its partners. One D. Nagaraj was previously a partner of the firm. Previously the name of the firm was ''Ferros Castings'' and on its reconstitution, the name was changed to ''M/s. Cengal Castings''. On the request of the firm, the Corporation sanctioned a Term Loan of Rs. 4,10,000/- and Bridge Loan of Rs. 70,000/- in the year 1985-86 and an additional loan of Rs. 2,85,000/- in the year 1989. A sum of Rs. 7,36,000/- was sanctioned in the year 1992; D.G. Set loan of Rs. 4,12,000 was sanctioned in the year 1996. Respondent Nos. 6 and 7 were the guarantors to D.G. Set Loan of Rs. 4,12,000/-. They have executed the Deed of Guarantee on 25.05.1996. Though the first respondent initially made certain repayments, subsequently became defaulter. On the request of the firm, the loan was rescheduled. A sum of Rs. 2,85,000/- was sanctioned on 18.01.1990; respondent Nos. 2 to 9 stood guarantors to the loan amount. Again the firm defaulted in spite of repeated reminders and demands the loan is not repaid. Now, the amount totally due to the tune of Rs. 21,53,725/- towards principal, interest, legal and other charges. Hence, the petition."

Respondent Nos. 6 and 7 though denied other loans sanctioned, admitted the loan of Rs. 4,12,000/- sanctioned as D.G. Set loan to the first respondent in the year 1996 for which they stood guarantors; they also expressed their ignorance about the re-schedulement of the outstanding loan and funding interest under RSR Package etc. Their contention was, deliberately respondent Nos. 3 and 8 failed to repay the amount though they had means and capacity; these respondent had issued notice to their advocates on 04.12.1998 calling upon the Corporation to discharge them from suretyship and take suitable action to recover the outstanding amount. No action was taken in the year 1999. Respondent Nos. 6 and 7 requested the Corporation to recover the outstanding amount by securing the secured assets / machinery but no action is taken. Hence, they are not liable to pay the balance amount.

Subsequently, the prayer was restricted by the Corporation only for the enforcement of the liability of the surety under Section 31(1)(aa) of the Act. After recording the evidence and after hearing both the parties, the learned District Judge dismissed the petition resting on his reason that the Corporation has invoked Sections 29 and also 31 of the Act and simultaneously, opined that it is not admissible under law and the evidence led was insufficient to determine the outstanding balance amount in respect of each loan.

Sri Gururaj Joshi, learned Counsel for the appellant submits, Corporation had filed the petition invoking the provisions under Section 32(9) of the Act. But the trial Court inadvertently presumed on its own that the petition is filed invoking Sections 29 and 31(1)(aa) of the Act and thereby, dismissed the petition. Though there was no contest by the respondents other than respondent Nos. 6 and 7, the petition is dismissed for unconcerned reasons.

When a petition under Section 31(1)(aa) of the Act is presented before the Court, the procedure contemplated is as per 32(1A) of the Act. Accordingly, the District Judge will issue a show cause notice to the surety calling upon him to show why his liability should not be enforced. If no cause is shown, the District Judge would proceed under Sub-section (4A) of Section 32 of the Act and order enforcement of liability of surety. In the case on hand, the Court below presumed that the Corporation has involved both Sections 29 and 31 of the Act simultaneously, which is not admissible under law and dismissed the suit against the sureties, who had opted out of the proceedings, which is patently illegal order and the matter requires reconsideration.

For the benefit of facility of reference, let us have the statutory provisions under which discussions are made today. Section 31 of the Act, reads thus:

"31. Special provisions for enforcement of claims by Financial Corporation.--

(1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any installment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate repayment of any loan or advance under section 30 and the industrial concern fails to make such repayment, then, without prejudice to the provisions of section 29 of this Act and of section 69 of the Transfer of Property Act, 1882 (4 of 1882)] any officer of the Financial Corporation, generally or specially authorised by the Board in this behalf, may apply to the district judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs, namely:--

(a) for an order for the sale of the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation as security for the loan or advance; or

(aa) for enforcing the liability of any Surety; or

(b) for transferring the management of the industrial concern to the Financial Corporation; or

(c) for an ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without the permission of the Board, where such removal is apprehended."

When there was no contest at all from the respondent Nos. 2 to 5, 8 and 9, there was no other option for the District Judge under Section 32(9) of the Act except to enforce the liability as contemplated under Section 32(9) of the Act, though the Corporation had filed the petition under Section 31(a) and also 31(1)(aa) of the Act. Since the relief claimed under Section 31(a) of the Act was not pressed, the trial Judge was only obliged to examine the relief claimed under Section 31(1)(aa) of the Act. In view of the procedure contemplated under Section 32 in respect of the applications filed under Section 31, after issuing a notice, the District Judge shall call upon the surety to show cause why his liability should not be enforced. Since no cause shown by respondents except respondent Nos. 6 and 7, he was obliged only to enforce the liability of the surety without going further and the entire order of the Court below is misconceived, liable to be set aside and the matter needs to be remanded for reconsideration.

Accordingly, the appeal is allowed.

The impugned order passed by the Principal District Judge, on his file in Misc. No. 3/2004, dated 24.04.2010, is set aside.

The matter is remanded to the trial Court for reconsideration and disposal in accordance with law in the light of the observation made supra, as expeditiously as possible within an outer limit of six months from the date of receipt of case records.

All the contentions are left open for both parties.

Office to transmit the records forthwith.