Ravi Printers vs Karnataka State Financial Corporation and others

K. Shivashankar Bhat, J.—The petitioner has challenged the notice dated July 4/20, 1988 (annexure A), whereby the Karnataka state Financial Corporation (hereinafter referred to as "the Corporation") in exercise of its power u/s 29 of the State financial Corporation Act, 1951 (hereinafter referred to as "the Act"), proceeded to recover a sum of Rs. 48,473. The said order declares that the assets of the industrial concern of the petitioner are vested with the Corporation and two officers of the Corporation are authorised to take possession of the said assets, Annexure B, Mahazar, under which possession was taken by the said authorised persons is dated July 21, 1988;it is also challenged in this writ petition. The further prayer is for a direction to hand over the assets to the petitioner and also for a declaration that section 29 of the Act is illegal and void.

The petitioner took over the industrial concern from the previous owners. Admittedly the petitioner-concern has obtained a loan from the Corporation. A perusal of the annexures filed by the petitioner shows that there were several demands made against the petitioner Annexure C is dated August 13, 1985, which says that an amount of about Rs.60,000 was due to the Corporation from the petitioner and that the petitioner has consistently failed in clearing the dues. There was another notice dated September 3, 1988, vide annexure D towards the current dues issued by the Corporation. Similarly, there was another notice dated October 4, 1988, vide annexure E under which the petitioner was notified of the amount outstanding as Rs. 55,460.17. The petitioner sent a reply to this notice on November 2,1988, in which the petitioner asserts that he had made payments of sum of nearly Rs. 40,000 out of the initial sum of Rs. 43,000 which was due from the previous owner. Thereafter, the petitioner asserted that the demand in respect of the sum of Rs. 55,460.17 was not correct, but nowhere in the said reply has the petitioner stated the actual amount due to the Corporation and no statement of accounts has been given in the said reply. I am, of the view that the reply is too general nd vague to merit any consideration.

Thereafter, the Corporation issued one more demand notice on November 20, 1988, claiming a sum of Rs.45,338.17, vide annexure G. Thus, it is clear that even after an order was made u/s 29 of the Act, the petitioner was given ample opportunity to clear the dues and repeated notices were issued, but the petitioner did not respond in any reasonable manner. Consequently in December, 1988, there was a publication in the newspaper notifying sale of the petitioner''s concern. At this stage, the petitioner approached this court by filing a writ petition on January 25 1989, this court directed the petitioner to deposit a sum of Rs.20,000 as part payment within two weeks from the said date. There was also a direction to remove the seal and restore possession to the petitioner forthwith. The petitioner failed to consequently, on March 1, 1989, the earlier direction was recalled by this court. The writ petition was being adjourned from time to time thereafter.

The following two grounds are urged before me by learned counsel for the petitioner ;

(i) that section 29 of the Act is unconstitutional and void ; and

(ii) that the Corporation has failed to determine the amount due from the petitioner in the light of the explanation offered by the petitioner.

Regarding the second contention, I am of the view that the same has rejected in the light of the documents produced by the petitioner and referred to by me already. The stand of the petitioner about the payments made by the petitioner has been throughout vague and indefinite. The petitioner has not given any statement of account which, according to him, reflects the real amount outstanding as due from him. There is nothing a doubt the accuracy of the figure in the demand notices issued by the Corporation in the absence of any specific error being pointed out by the petitioner.

Section 29 of the Act empowers the Corporation to seize the hypothecated assets for the recovery of the amount outstanding. I am not able to appreciate as to how the said provisions could be declared as unconstitutional. Similar is the position even under the provisions of the Transfer of Property Act. Section 69 of the Transfer of Property Act enables a mortgagee to sell or concur in selling the mortgaged property, or any part thereof, in the cases falling within the purview of the said provision. The three categories are :

(a) where the mortgage is an English mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Muhammadan or Buddhist or a member of any other race, sect, tribe or class from time to time specified in this behalf by the State Government in the Official Gazette ;

(b) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed, and the mortgagee is the Government ;

(c) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed, and the mortgaged property or any part thereof was on the date of the execution of the mortgage deed, situate within the towns of Calcutta Madras, Bombay, or in any other town or area which the State Government may, by notification in the Official Gazette, specify in this behalf.

The power given u/s 29 of the Act is substantially the same as the power created by section 69 of the Transfer of Property Act. Therefore, the vesting of such a power on the statutory corporation cannot be declared as unconstitutional. The charge created by the debtor in favor of the creditor creates an interest in the creditor and the power of sale is nothing but an aspect of the interest created by such a charge. Intervention of the court is only to prevent any unilateral arbitrary action on the part of the creditor in the case of a private individual. However, in the case of instrumentalities of the State, there is always a presumption that the power would be exercised reasonably and objectively. It is in this background that section 69(1)(b) of the Transfer of Property Act vests such a power in the Government whenever the Government is a mortgagee. Similarly, the Parliament though it fit to confer such a power on the statutory corporation created under the Act to exercise the power of sale as and when occasion requires the resorting to such a provision by the Corporation. However, it is necessary to remember that, if the Corporation acts arbitrarily or unreasonably, the debtor is entitled to approach the court against a particular action taken by the Corporation. In such a situation, the petitioner will have to establish that the action taken by the Corporation is patently arbitrary, unreasonable or unjust, which would nullify the action of the State and its instrumentalities. Let me elaborate further.

The respondent-Corporation is controlled under the powers of the State Financial Corporations Act, 1951 (for short, "the Act"). As the Statement of Objects and Reasons for the Act states, the Corporation is set up in order to provide medium and long-term credit to industrial undertakings. The Corporation is established by the State Government and at least 75% of its shares are held by the State Government. In discharging its functions, the board of directors are to act on business principles, due regard being had by it to the interests of industry, commerce and the general public. Section 25 of the Act enunciates the business which the Corporation may transact and section 27 prohibits certain classes or kinds of business. Sections 29 30 and 31 provide for the recovery or recalling of the amounts due to the Corporation by virtue of the loans advanced by it. Section 29, which is under challenge here, reads thus :

"29(1). Where any industrial concern, which is under a liability to the Financial Corporation under an 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, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concern, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.

(2) Any transfer of property made by the Financial Corporation, in exercise of its powers under sub-section (1), shall vest in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property.

(3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods.

(4) Where any action has been taken against an industrial concern under the provisions of sub-section (1), all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto.

(5) Where the Financial Corporation has taken any action against an industrial concern under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of the concern."

There can be no two opinions about the funds of the Corporation being public funds that are to be administered by the board of directors who have no personal interest in the business of the Corporation. The constitution, functions and administration of the Corporation are statutory and the object of the establishment is to facilitate an ameliorative scheme to assist industrial undertakings which fall outside the normal activities of commercial banks. Being an instrumentality of the Government, it is expected of the Corporation to act reasonably and un arbitrarily in every sphere of its activities. There is always a presumption that the governmental action (which includes actions of instrumentalities of the State) is reasonable and in public interest (vide Kasturi Lal Lakshmi Reddy, Represented by its Partner Shri Kasturi Lal, Jammu and Others Vs. State of Jammu and Kashmir and Another,

Condition precedent for invoking section 29 is the committal of default by the borrower (or the guarantor/surety). The contention of the petitioner is that the Corporation cannot be the sole judge as to this jurisdictional fact, and that there should be an independent determination of the said question, by a third forum. This contention cannot be accepted. Here, to recover the outstanding, after determining the existence of the default, is a power vested in a statutory Corporation which is an instrumentality of the State ; conferment of such a power by itself cannot be held to be unreasonable or arbitrary.

If powers vested in the Revenue Officer to recover the alleged arrears of land revenue or the power to assess and recover various kinds of taxes and impose penalties could be vested in the governmental authorities, there is no reason why a statutory Corporation cannot be trusted to exercise the power to determine the question of default and recover the same.

In contracts with the Government, powers are usually conferred contractually, for arbitration by one of the officers of the same department, which is a party to the contract, to examine the question as to breach of contract and award damages ; such arbitration clauses are enforced as valid. u/s 29 of the Act, the statute itself creates a power to determine and then enforce the claim.

It was contended that the effect of an abuse by the officers of the Corporation of the power u/s 29 could be quite drastic. Any statutory power, if abused, causes injury. The safeguard lies in reading into the power certain limitations as to the procedure with an expectation that the officers of the Corporation would always act fairly and reasonably.

The exercise of the powers u/s 29 results in replacing the borrower''s proprietary interests. Therefore, the principles of natural justice and requirements of fair-play are to be read into the said provision as part of the procedure while exercising the power. It is imperative that the Corporation should issue a show-cause notice demanding the arrears, and if the borrower demands an account on valid and definite grounds, a statement of accounts is to be furnished to the borrower. To save time, it may be advisable for the Corporation to annex a statement of accounts to the show-cause notice (unless such a statement had already been furnished) so that the borrower may admit the same or furnish his explanation against the demands of the Corporation. If a plausible and reasonable explanation is offered by the borrower, the Corporation or its officers shall consider the same and, thereafter, depending upon the decision, issue a notice of demand, to precede the drastic action of take- over and sale u/s 29.

The nature of the inquiry would depend upon the nature of the explanation. In case a vague and evasive reply is sent by the borrower, the question of any further enquiry may not arise. A mere assertion of having made the payments without any details and particulars of the payments will only be a case of vague denial of the liability of the part of the borrower. When the borrowing is admitted and its terms are matters of record, payments by the borrower also should be within his knowledge and hence, he cannot procrastinate the proceedings, by just denying his liability or sending an evasive reply. Principles of natural justice and fair-play in action are not terms of precise definitions ; their concept and amplitude depend on the entire circumstances of the case. The borrower is as much bound to act fairly and in consonance with equity and justice, as the Corporation. Therefore, the validity of the exercise of the power u/s 29 of the Act by the Corporation has to be adjudged in a particular case in the background of its own facts. The observations of the Supreme Court in State of Uttar Pradesh Vs. Om Prakash Gupta, regarding the scope of the principles of natural justice, are equally relevant here; it was said, at page 683, that the principles of natural justice are not embodied principles ; "what principles of natural justice should be applied in a particular case depends on the facts and circumstances of the case. All that the courts have to see is whether the non-observance of any of those principles in a given case is likely to have resulted in deflecting the course of justice."

To the same effect are the observation in K.L. Tripathi Vs. State Bank of India and Others, It is stated:

"It is true that all actions against a party which involve penal or adverse consequences must be in accordance with the principles of natural justice but whether any particular principle of natural justice would be applicable to a particular situation or the question whether there has been any infraction of the application of the question whether there has been any infraction of the application of that principle has to be judged in the light of facts and circumstances of each particular case. The basic requirement is that there must be fair play in action and the decision must be arrived at in a just and objective manner with regard to the relevance of the materials and reasons. We must reiterate again that the rules of natural justice are flexible and cannot be put on any rigid formula."

In the recent decision, Dwarkadas Marfatia and Sons Vs. Board of Trustees of the Port of Bombay, , the requirement of fair play, un arbitrariness and reasonableness are insisted upon even when the State acts in pursuance of a contractual power; these requirement control and guide the power so that misuse of the power could be prevented. Further, the affected party has always the protection of the judicial power, against any abuse of the statutory power u/s 29 of the Act.

An analogous situation was the subject of the decision of this Supreme Court in Director of Industries, U.P. and Others Vs. Deep Chand Agarwal, where it was held:

"The Act is passed with the object of providing a speedier remedy to the State Government to realize the loans advanced by it or by the Uttar Pradesh Financial Corporation. The State Government while advancing loans does not act as an ordinary banker with a view to earning interest. Ordinarily, it advances loans in order to assist the people financially in establishing an industry in the State or for the development of agriculture, animal husbandry and for such other purposes which would advance the economic well-being of the people. The amount so advanced are repayable in easy installments with interest which would ordinarily be lower than the rate of interest payable on loans advanced by banking institutions which are run on commercial lines. The loans are advanced from out of funds of the State in which all the people of the State are vitally interested. Moneys advanced by the State Government have got to be recovered expeditiously so that fresh advance may be made to other who have not yet received financial assistance from the State Government. If the State Government should resort to a remedy by way of a suit on the mortgage deeds or bonds executed in its favour, the realization of the amounts due to the Government is bound to be delayed resulting in non- availability of sufficient funds in the hands of the State Government for advancing fresh loans. It is with the object of a avoiding the usual delay involved in the disposal of suits in civil court and providing for an expeditious remedy, the Act has been enacted."

Again at page 805 :

"It is not every fancied possibility of discrimination but the real risk of discrimination that we must take into account. This is not one of those cases where discrimination is writ large on the face of the statute. Discrimination may be possible but is very improbable And if there is discrimination in actual practice , this court is not powerless."

Consequently, I reject the attack against the validity of section 29.

I have already held that the petitioner took an evasive stand against the repeat notices issued by the Corporation ; hence it is not possible to grant him any specific relief in this writ petition. However, it is still open to the petitioner to place appropriate material before the respondent-Corporation and persuade the Corporation to grant him equitable relief in case the unit in question has not been sold so far. If a workable arrangement could be arrived at, even at this stage, there is no reason as to why the Corporation should refuse to consider the same.

Consequently, this writ petition fails and is dismissed.