Rajni Industries vs U.P.Financial Corporation,Kanpur and Others

K.C. Bhargava, J.—On 13396 we have delivered the operative portion of the judgment for reasons to be recorded later on. Now we propose to give reasons for orders. The petitioner has prayed for commanding the opp. parties to disburse the additional term loan and working capital loan, which has been cancelled by letter dated 31595 contained in Annexure1 .

The facts stated in brief are that a term loan was granted to the petitioner in the year 1990. Thereafter the petitioner applied for additional term loan on 20121991, which was registered after a lapse of six months i.e. on 1661992. Dilatory tactics of the U.P.F.C. officials thereafter continued and the petitioner was being harassed. The petitioner had to make 15 representations to the U.P.F.C. requesting them to sanction the additional term loan expeditiously. One of such letters is contained in Annexure2, which is dated 2681992. Thereafter when nothing was done by the UPFC, the petitioner had to write to ''Udyog Bandhu'' on 13101992, which is an organization created by the State Government to settle the grievances of the industrialists under the Chairmanship of the Chief Minister. A photostat copy of the complaint made to Udyog Bandhu is Annexure3. Even inspite of these efforts nothing was done by the U.P.F. C. and in the meantime the interest, over dues etc. were mounted. Thereafter the petitioner had to approach his Excellency, the Governor of U.P. by letter dated 13893. He also wrote a letter to the Chief Secretary, Government of Uttar Pradesh on 28893 and a letter to the Chairman, Udyog Bandhu on 7993. Photostat copies of these letters are contained in Annexure Nos. 4,5 and 6 to the writ petition. The application was accepted by the U.P.F.C. on 821994 i.e. after about 2, 1/2 years under the ''single window Scheme''. A photostat copy of the letter sanctioning additional term loan and working capital loan is contained in Annexure7 and photostat copy of the loan agreement is contained in Annexure8 to the writ petition.

After these loans were sanctioned the petitioner placed order for purchase of machinery with, M/s. Kolsite Machine Fabrics Ltd., Bombay and for another machine orders were placed to M/s. Super Engineering Works, Kanpur. The opp. party No. 1 started causing hindrance and through letter dated 221094 asked the petitioner to change the supplier for purpose of machines. Thereafter the petitioner suggested the name of M/s. Sharma Industrial Corporation through letter dated 51294. The Regional Office of the UPFC kept mum for about four months and then permitted the change of supplier to M/s. Sharma Industrial Corporation, Delhi. The UPFC imposed a condition to the effect that the petitioner would provide an additional security/collateral security to cover the over dues to the satisfaction of the Regional Manager, UPFC vide letter contained in Annexure11. The petitioner requested the opp. parties to remove the condition of providing additional security/collateral security while granting permission to change the supplier for purchase of machine. It was brought to the notice of the opp. Parties that the petitioner firm was almost ready for production and only machines were to be procured to start production, which could not be done on account of the delay caused by the opp. parties, but these requests went unheeded. Thereafter the opp. parties cancelled the additional term loan and working capital loan on 31595 in an arbitrary, unfair and unreasonable manner ignoring the events which took place in the last three years.

The petitioner tried to persuade the UPFC for reviving the cancelled term loan and working capital loan, but to no effect. When the additional term loan and working capital loan was cancelled, the opposite parties had already disbursed about 80% of the loan. This unilateral act of cancelling the working capital loan despite taking collateral security and third party guarantee in respect of a project which is almost ready for production is, therefore, unfair, unreasonable, arbitrary and illegal. Acting on the promise of the UPFC to provide funds, the petitioner firm proceeded with their object and in the process suffered further liabilities to implement and execute the same. The principle of promissory estoppel is fully applicable and the UPFC is estopped from backing out of its obligation arising from its own commitments.

The petitioner had invested 100% of his share of margin money as per the stipulations of letter No. 2068 dated 8294, which is Annexure8 to the petition. The petitioner had invested about 4.60 lacs from his own resources, Rs. 1.33 lacs was raised as unsecured loan from relations and friends and Rs. 2.27 lacs as the integrated margin of the District Industry Centre, Sultanpur. In this way, the total investment made by the petitioner comes to Rs. 8.20 lacs. This much investment was made before the first disbursement of the additional term loan was made.

In the counteraffidavit filed on behalf of the opposite party No. 1, it is alleged that the sanction of additional term loan was cancelled only when it has been observed that the petitioner is unable to comply with the terms and conditions of the sanction letter dated 7/8294 and several reminders were sent to the petitioner for clearing the outstanding dues as per the revised repayment schedule. It is admitted that 80% of the sanctioned additional term loan was disbursed to the petitioner firm only after satisfying the integrity and soundness of the plant and machine supplier. The balance 20% additional term loan, which was sanctioned for the purposes of supporting machineries, could not be released only because of the plant supplier proposed by the petitioner viz., M/s Super Engineering Works, Kanpur, was not found upto the mark and was also held to be doubtful. It is further alleged that apart from the heavy over dues, for which he was advised to provide sufficient collateral security to prove his bona fide, he failed to provide the same and as such it was not possible to release the remaining additional term loan to the petitioner. The decision to cancel the undisbursed amount, was taken by the corporation after looking into the facts of the case and the over dues which has mounted in the meantime. The petitioner firm''s financial resources are very poor since sanction of original term loan of Rs. 3.30 lacs, but just to encourage him he was provided financial assistance by the corporation. It is also alleged that the petitioner exercised undue influence to get the loan sanctioned by the corporation and ultimately succeeded in his aim. The registration of the petitioner''s case was made on 2321993 when the petitioner''s application was received and not in the year 1992. The loan was sanctioned to the petitioner without any delay. It is wrong to say that additional term loan of the petitioner was finalised by the respondent at the initiation of ''Udyog Bandhu''. The petitioner was not in a position to run the unit from his own resources and as such it was deemed proper to provide loan under the ''Single Window Scheme''. On account of the petitioner''s own mala fide intention he could not avail the same within the stipulated period. It is further alleged that disbursement for one machine which was purchased from M/s. Kolsite Bombay, was released within no time because it was a reputed supplier. The balance amount was not released because on enquiry it was found that the supplier chosen by the petitioner is not a reputed one having no proper workshop and the petitioner was advised to procure machinery from reputed supplier. After a long gap, the petitioner submitted quotations from one M/s. Sharma Industrial Corporation which was approved by the respondent and the matter was not delayed at the end of the respondent. The condition of additional security/collateral security was imposed because of the inability of the petitioner to clear the dues of the respondentcorporation. The decision for cancelling the additional term loan was taken only due to the lapse on the part of the petitioner himself. The petitioner firstly introduced a fake supplier and later on did not clear the over dues after the facility of reschedulement was allowed to him. It cannot be said that the additional term loan was cancelled unilaterally and in an arbitrary, unfair and unreasonable manner. The main machinery was financed by the corporation and the petitioner had full opportunity to avail the loan for working capital from any of the banker, because it was not possible to revive the cancelled loan when heavy overdues were lying against the petitioner and the petitioner also failed to clear the overdues of the corporation as per the revised repayment schedule. The petitioner also failed to avail the same within the time provided. As per the agreement the revised repayment schedule was rescheduled and the petitioner firm had to start repayment w.e.f. 15594. Till 151195 four instalments have fallen due and not a single penny was forthcoming from the side of the petitioner and in terms of the agreement it was agreed between the parties that it would be lawful for the corporation to suspend or cancel further advance loan to be paid if the borrower breaches any term and condition of the agreement. Thus, the respondent cancelled 20% of the additional term loan and the working capital loan on the basis of these facts. It shows that the petitionerfirm was sick and could not start project within a period of four years.

In the rejoinderaffidavit the petitioner has stated that it is wrong to say that there has been any delay in implementation of the project from the side of the petitioner. As the entire loan was not disbursed, it was not open to the respondents to allege that the project has not been completed. If the entire loan was released, the project would have started working. It is further alleged that in the agreement itself no time was prescribed for completion of the project. The sanction of loan was cancelled after one year and three months'' time of the grant of additional term loan. The repayment schedule of the principal amount given to the petitioner was to start from 1551995 and cancellation of loan was done on 3051995. No instalment fell due prior to 1551995. Clause 2, subclause (5) of the agreement will not be applicable in this case.

We have heard learned Counsel for the parties at length.

According to the learned Counsel for the petitioner the delay which has occurred in disbursement of additional term loan, was on the part of the respondent No. 1. He has further argued that the cancellation of sanction of additional term loan and working capital loan has been made on the ground which was not provided in the agreement. According to him in the agreement it is nowhere provided that project would be completed within a particular period, while these loans have been cancelled on the ground that the project has not been completed within time. According to the learned Counsel for the respondents, the additional term loan and working capital loan have been cancelled on the ground that the petitioner failed to pay the instalment within the time due. Now we have to consider the rival claim put forward by the parties.

Annexure1 is a letter dated 3151995 issued by opp. party No. 3 to the petitionerfirm intimating him that he has failed to complete the project in time, hence the competent authority of the corporation has cancelled the balance undisbursed loan of Rs. 1,55,800 and working capital loan of Rs. 3.85 lacs. It was also decided that the petitioner would complete the project by 30th June, 1995 from his own resources, failing which strict recovery proceedings will be initiated against him. Copy of the agreement is also on record as Annexure8. A perusal of this agreement does not indicate that any time was fixed within which the petitioner was to complete the constructions of the unit. Learned Counsel for respondent No. 1 could not point out any clause in which this condition has been incorporated, moreover the time is not of essence in such matters as many events fall in between the start of the project and completion of the same. In the present case as admitted between the parties, the petitioner proposed two suppliers of machinery to the opp. party No. 1, out of which one was accepted by opp. party No. 1 and the machinery was purchased from that very supplier. With regard to other supplier, viz., M/s. Super Engineering Works, Kanpur an objection was raised by opp. party No. 1 about the reliability of the manufacturer and an intimation was sent to the petitioner to change the supplier. Thereafter the petitioner suggested the name of M/s. Sharma Industrial Corporation. This was accepted by opp. party No. 1. But according to the petitioner, the opp. party. No. 1 took four months'' time to accept M/s Sharma Industrial Corporation, Delhi as the new supplier. Annexure11 is the copy of the letter dated 29395 addressed by opp. party No. 3 to the petitioner intimating him that his request dated 3195 for change of supplier has been approved. Therefore, we find that for change of supplier a period of about three months has been consumed for which it cannot be said that the petitioner is to be blamed. Opp. party No. 1 must have disbursed loans to various industries and it must have maintained a list of reputed suppliers, hence it could have intimated the petitioner the names of suppliers for purchase of machinery in the very beginning. Therefore, the time taken in changing the supplier cannot be said to be a lapse or fault on the part of the petitioner and these facts must have been taken into consideration by the opp. party No. 1 while taking decision to cancel the sanction of additional term loan and working capital loan.

As already indicated in the earlier part of the judgment, the respondent No. 1 has not cancelled the sanction of additional term loan and working capital loan on the ground of delay in making payment of instalment. This new plea was been taken in the counteraffidavit after coming to know of the fault that the ground on which sanction of additional term loan and working capital loan has been cancelled, was not available in view of the terms of agreement. Hence, this new plea cannot be accepted by this Court as the letter through which the cancellation has been done, is quite clear and no ambiguity exists in interpretation of this letter.

Learned Counsel for the petitioner has placed reliance on the case of Mahesh Chandra v. Regional Manager, UPFC & others, (1993) 2 SCC 279, wherein it has been held that the finance is the most important catalyst. The State Financial Corporation Act, 1951 was passed to promote industrialisation in the State 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. The loans or advances granted to an industrial concern shall be repayable within a period not exceeding 20 years from the date the loan was granted. It was further observed that Corporations deal with Public money for public benefit. The approach has to be public oriented, helpful to the loanee, without loss to the Corporation. The financial corporations under the Act were visualised not as profit earning concerns but an extended arm of a welfare State to harness business potential of the country to benefit the common man. One of the major causes for incurring loss is the erosion of working capital fund which affects the daytoday working of the unit. Unless working capital is provided for, the industry is bound to close down 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 or half yearly rests. It was further observed that unless the unit starts generating internal resources and earning profit, running the unit or industrial concern itself becomes difficult and the ability to repay principal or interest get impeded. It was further observed that the corporation as a policy of wise investment should map out payment schedule in disbursing the loan to see that the unit starts functioning and its working capital is maintained. It is common knowledge that due to apathy or in difference or for reasons best known or hidden, the disbursements are 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 industrial concern, defeating the objectives of the Act and the Constitution.

In the present case it will be seen that the petitioner reminded the corporation that due to lack of working capital, the petitioner was unable to run the unit and the additional term loan and working capital loan should be released. There is a need of working capital in the last stage when the industrial unit is about to start production and if no working capital is forthcoming in its infancy stage then it is impossible for the industrial unit to start working.

In the same case (supra) in para 13 it was held that the corporation or its officers are bound to act reasonably and fairly in dealing with the property of the debtor. The corporation also equally must conform its action with the same standard that meets the test of justness, fairness, reasonableness and relevance. If any Government''s action fails to satisfy the test of reasonableness and public interests are found to be wanting in the quality of reasonableness or lacking in the quality of public interest, it would be liable to be struck down as invalid. In para 15, it has been observed as under:

"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 that the appellant stood pressed on one hand 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 shortcomings, if any."

The petitioner has also placed reliance on the case of Bharat Explosives Ltd. v. The Pradeshiya Industrial & Investment Corporation of U.P. & others, AIR 1994 A, 123. It was observed in that case that at the time when the petitioner unit was at the threshold of its career the corporation refused to extend additional term loan, although agreed to earlier And instead issued recovery notices and threatened to take action under Section 29 of the Act. It was further observed that the delay was on account of the reasons beyond the control of the petitioner company. Hence to level a charge of tradiness on their part was not proper. In the present case also, the delay which occurred in the implementation of the project was on account of the change of the supplier and other factors which have been narrated in the petition duly supported by the evidence on record.

In the case of Gujarat State Financial Corporation v. M/s. Lotus Hotels Pvt. Ltd. AIR 1983 SC, 848, which is a case of promissory estoppel, it was held that the corporation did not disburse the loan in terms of the agreement entered into between the parties and ultimately after a lapse of time the Board resolved to disburse the loan to the company. If there was some delay in execution of the project, it cannot be said that the fault was of the industrial unit. It was further held that acting on the solemn undertaking, the company proceeded to undertake and execute the project. The agreement to advance the loan was entered into in performance of the statutory duty cast on the corporation by the statute under which is was created and set up. On the basis of these promises contained in documents, the respondent incurred expenses, suffered liabilities to set up. If the loan was not forthcoming the respondent may not have undertaken such a huge project. In the backdrop of the incontrovertible fact situation, the principle of promissory estoppel applied. The principle of promissory estoppel would certainly stop the corporation from backing out of its obligation arising from a solemn promise made by it to the respondent.

On behalf of opposite party No. 1, reliance has been placed on U.P Financial Corporation v. Naini Oxygen and Acetylene Gas Ltd. & another, (1995) 2 SCC, 754 : 1995 (1) LBESR 121 (SC). The Hon''ble Supreme Court in para 21 held that unless its action is mala fide, even a wrong decision taken by the corporation is not open to challenge. In that case the company had made persistent defaults in repayment of loan instalment, with the result that recovery certificate had to be issued against it under Section 3 of the U.P. Public Moneys (Recovery of Dues) Act. In that case the then management had mismanaged the company and the company had to file a company petition seeking its removal. The nondischarge of the liabilities of the company was on account of the said fraudulent practices of the management and the dues of the company mounted to several lacs. In that case the corporation had to take over its industrial establishment under Section 29 of the Act. Even in the report of I.R.B.I. it was mentioned that the industrial unit could be made only marginally viable provided another Rs. one crore were invested in it and the loan instalments were rescheduled. It is very difficult for the unit to revive because the machinery had to remain idle for about 7 years and the machinery had become rusty and value of the machinery had gone down considerably. On these facts the Court declined to interfere in the matter. The facts of that case is entirely different from the facts of the present case. In the present case the petitioner was consistently making effort to revive the factory on receipt of additional term loan and working capital loan and no mismanagement is alleged to have taken place from the side of the petitioner.

The next case relied upon by the opposite party No. 1 is U.P. Financial Corporation v. GMECAP (India) Pvt. Ltd. & others, (1993) 2 SCC 299. In that case it was observed that the principal object of the corporation is to accelerate the industrial growth in the State by providing financial assistance mainly to small and smaller of the medium scale industries. The approach has to be business like in conformity with the declared policy of the State Government. If the unit is potentially viable or such as may be capable of being rehabilitated, it would deserve being administered proper treatment and not lead to its liquidation. In that case the company had drawn substantial public funds and became sick after three months of its going into production. One of the main reasons for its sickness appears to be internecine fight between the two groups controlling the company and the unit was closed. It was not paying a single pie in repayment of the loan, neither the principal nor the interest and already a huge amount was due against the petitioner. There was no prospect of its recovery. Thus, on these facts the Court declined to interfere in that case. Para 10 of the judgment deals with the purpose of loan by the Financial Corporation and it has been explained in detail. The Corporation has to act within the four corners of the Act and in furtherance of the object underlying the Act. But this factor cannot be carried to the extent of obligating the corporation to revive and resurrect every sick industry irrespective of the cost involved. It was further held that the Court can intervene in two cases (i) if there is a statutory violation on the part of the corporation, or (ii) whether the corporation acts unfairly and unreasonably. The facts of that case are entirely different from the facts of the present case. In the present case, the unit has not started production and the delay which has resulted in nonproduction cannot be said to be on the part of the petitioner.

Thus, after considering the entire facts of the case of Court comes to the conclusion that the sanction of additional term loan and working capital loan could not have been cancelled in an arbitrary manner by opp. party No. 1 through letter dated 315 1995 contained in Annexure1. Therefore, this Annexure1 is to be ignored and the opp. party No. 1 is to be directed to release the sanctioned additional term loan and working capital loan so that the petitioner unit may become functioning.

The writ petition is allowed. The order dated 31595 contained in Annexure1 is quashed. The opposite parties are hereby directed to disburse the remaining amount of the sanctioned additional term loan within a period of 15 days from today and thereafter to resettle the schedule of repayment of all term loans disbursed to the petitioner, in consultation with the petitioner within thirty days of the disbursement of the remaining amount.

Reasons pronounced today.