Rayum Leather (P) Limited vs Haryana Financial Corporation

Sanjay Kishan Kaul, C.J.—The petitioner company was set up in the year 1991 and purchased plot measuring 1165 sq. mts. at 14, Industrial Area, Phase-I, Panchkula, to carry on the business of synthetic leather. The petitioner applied for and was sanctioned a loan of Rs. 38.25 lacs, the first installment of which was stated to have been released on 1.2.1991. Simultaneously, the State of Haryana is stated to have sanctioned a subsidy of Rs. 11.25 lacs which was, however, not released, but in terms of an adjustment of the subsidy amount proceeds, the loan amount of Rs. 8.83 lacs is stated to have been so adjusted in March, 1996. The petitioner-Company appears to have not been a successful venture and there appears to have been default from its inception which resulted unit of the petitioner being taken over on 7.8.1995. Of course, the petitioner blames the respondent-Corporation for various actions and inactions, but that is not relevant for our purpose. This unit was restored to the petitioner on 30.10.1995, but possession was once again taken on 3.7.1996. The action of such taking over of possession was in exercise of power u/s 29 of the State Financial Corporation Act (hereinafter referred to as ''the said Act''). Ultimately, the unit was put to public auction on 18.10.1996 when the highest bid received was Rs. 36.35 lacs. The highest bidder deposited the earnest money of Rs. 9.09 lacs, but it is alleged by the petitioner that with mala fide intent instead of confirming the auction or forfeiting the amount, the amount received as earnest money was refunded to the highest bidder. The ostensible reason for the respondent for doing so is stated to be the possibility of getting better value from the sale of unit, but rather than that happening, the unit was ultimately sold on 31.3.1998 for a sum of Rs. 31.50 lacs.

The aforesaid did not square up the liabilities of the petitioner with the result that a threat was held out of sale of the house of the guarantor which compelled the petitioner to file Civil Writ Petition No. 3421 of 1999 and this writ petition was disposed of on 3.12.2001 holding that the respondent-Corporation was in error in not selling the unit at the time when the enhanced bid of Rs. 36.35 lacs was received with the result that there was loss of Rs. 5 lacs and this amount was directed to be reduced from the amount due from the petitioner with a direction to the Chief Secretary, Haryana, to hold an inquiry for fixing liability upon the officer who was responsible for the loss. The said writ petition was disposed of with the following directions:-

i) The Corporation should furnish a fresh statement of account to the petitioners by calculating the amount due from them including the interest after excluding a sum of Rs. 5 lacs.

ii) The petitioners be given option to repay the entire amount including the interest, in accordance with one go scheme or to pay in installments. This exercise shall be undertaken and completed within 2 months from today.

iii) If the petitioners agree to pay under one-go scheme and pay the amount by the specified date, then the corporative shall release the collateral security.

iv) If the petitioners decide to pay in installments, then they shall pay the amount on the due dates. In that even, the collateral security be released after received the full amount.

v) If the petitioners commit any default in the payment of installments, then the Corporation shall be free to dispose of the mortgaged house without any restraint.

vi) No civil Court shall entertain the petitioners prayer for grant of stay or injunction against the proceedings which the Corporation may take the realisation of its dues in accordance with this order.

vii) The Chief Secretary, Haryana, should order an independent enquiry into the circumstances leading to the sale of the unit of petitioner No. 1 Rs. 31.35 lacs as against the highest bid of Rs. 36.25 lacs given in the auction held in October 1996 and action for recovery may be taken against the officers who may be found responsible for having caused loss to the Corporation by accepting the bid which was less by Rs. 5 lacs as compared to the previous bid.

The respondent-Corporation, however, did not take any steps in pursuance to the aforesaid directions and thus, the petitioner called upon them, vide communication dated 7.4.2002, to do the needful, but was informed by the respondent-Corporation on 12.4.2002 that the Corporation had assailed that order in a SLP (SLP). On 16.7.2002, the Corporation informed that the Hon''ble Supreme Court had dismissed the SLP and the Board of Directors had approved the case of the petitioner for One Time Settlement (OTS) by raising a demand of Rs. 26,12,846/- with further interest from 1.3.2002. This liability was disputed by the petitioner, vide communication dated 19.8.2002, informing that their liability was only Rs. 2,81,520/- as on 18.10.1996.

The controversy required to be examined in the present petition begins with a policy of respondent-Corporation known as ''Policy for Compromise Settlement of Chronic Non-Performing Assets (NPAs) of Haryana Financial Corporation, 2003 (hereinafter referred to as "the said Policy) which came into force on 16.6.2003. The petitioner was addressed a communication to facilitate the petitioner availing of benefits under the said Policy. The letter was issued in the form of Annexure-P-2 which is necessary to be reproduced because most aspects arose from the said letter:-

Subject:- Compromise Settlement of Chronic Non Performing Assets (NPAs) of Haryana Financial Corporation

Dear

The Haryana Financial Corporation, considering the difficulties faced by their loanees/account holders, has come out with a scheme known as "Compromise Settlement of Chronic Non Performing Assets (NPAs) of Haryana Financial Corporation", which you may find beneficial generally and in particular for improving the position of your account with us.

Tentative relevant details obtained, in case of your account, are as given below:-

Your attention is invited to the provisions of this policy which could be procured alongwith the relevant application form from any branch offices of HFC on payment of its cost i.e. Rs. 100/-. You are requested to go through the provisions of the policy carefully and acquaint yourself with the provisions.

Tentatively, it appears that as per the application of the policy pertaining to this account, the account is likely to be settled at Rs. 45.03 lac (subject to final calculations and establishment of eligibility of settlement in terms of policies of HFC) being the total amount outstanding as on the date the account became doubtful. If you want to take the benefit of this policy, you are required to make the application in the prescribed proforma, alongwith a bank draft of Rs. 0.51 lac (being Rs. 5000/- 10% of the outstanding principal as on 15.06.2003) so as to reach the concerned branch officer or the H.O. on or before 5 O'' clock on 14-08-2003.

Please note that all the indicated details and calculations are tentative and indicative alone and the final details and calculations shall be worked out only after a request in the prescribed proforma, alongwith requisite fee/deposit it received. The final details may, therefore, be at minor/substantive variation to the one indicated in this letter.

Further any settlement under this policy shall be subjected to all the provisions contained in the policy and the consequence thereof.

Please note that this opportunity is being given to you for taking the benefit of the scheme and it should not be construed to be a commitment of any nature on the part of the Corporation.

if default is committed in payment of any installment or interest thereon under the scheme or in the performance or observance of any other condition or provisions of the scheme, the Corporation will be constrained to withdraw the benefit allowed under the scheme. In such an event, you shall be liable to pay all the dues in terms of the loan agreement without prejudice to the Corporation''s right to initiate recovery proceedings for recovery of its due under the provisions of various laws including relevant provisions of the SFCs Act and other terms and conditions as contained in the loan agreement/mortgage deed including taking over possession of mortgaged properties.

Yours Sincerely (S.N. Roy) IAS Managing Director

The aforesaid letter has to be appreciated in the context of the policy itself. In terms of the said policy, the definition clause of the ''relevant date'' reads as under:-

(I) "relevant date" with reference to an account means the date on which the account was last categorized as "doubtful account'' and has continuously remained either as such or as a combination of ''doubtful'' and ''loss'' account since that date; and"

As to how the base amount has to be worked out has been set out in Clause 4 as under:-

(A) NPAs classified as ''doubtful'' as on 31st March, 2000.- For the NPAs classified as doubtful as on 31st March, 2000 the base amount in respect of compromise settlement under this policy would be 100% of the outstanding balance in the account as on the relevant date;

Provided that in lease finance accounts, the outstanding balance on the relevant date shall be the amount of rentals overdue alongwith the penal interest and expenses etc. outstanding on the relevant date plus amount of principal due as pet capital recovery method on the relevant date;

If the communication addressed to the petitioner is analyzed in the context of the aforesaid definitions, it would show that the relevant date which has been defined to mean the date on which the account was last categorized as ''default account'' has been stated to be 1.9.1994, an undisputed position. The principal amount outstanding as on that date was Rs. 35.23 lacs and if interest was included, it was Rs. 45.03 lacs. Since the unit of the petitioner had been sold for Rs. 31.51 lacs, the principal amount outstanding as on 15.6.2003 has been taken as Rs. 4.59 lacs by deducting the amount realized from the principal amount. However, if all interest which was liable to be debited as per the original loan agreement is taken into account, the outstanding would have accumulated despite crediting the value of sale unit to Rs. 67.29 lacs as on 15.6.2003. Since in terms of the policy, the settlement amount had to be 100% of the outstanding balance when the account was declared as a doubtful account, the question of interest being paid post the account being doubtful did not arise insofar as the policy was concerned. This is the reason why the principal amount shown has been stated to be Rs. 4.59 lacs. In order for the petitioner to avail of the benefit of the policy, he was required to pay 10% of the principal amount which has been stated in the said letter to be Rs. 0.51 lacs inclusive of Rs. 5,000/- as processing charges. No doubt, this calculation is stated to be tentative and indicative, but it has simultaneously been observed that the final details may have some ''minor/substantive variation''.

The petitioner, in order to avail of this policy, sent a communication dated 11.8.2003 enclosing a cheque of Rs. 51,000/- and also submitted the relevant application. However, on 4.11.2003, the petitioner was informed that the case of the petitioner could not be processed under the 2003 Policy because the settlement amount comes to more than the amount outstanding in the loan account. On our query, learned counsel for respondent-Corporation has explained the position to imply that infact the issue arose out of what was perceived to be a wrong calculation as per Annexure-P-2 because the proceeds realized from the sale of the assets were first adjusted against principal amount while it ought to have been adjusted against the miscellaneous expenses and interest and thereafter against the principal amount.

In the course of hearing of the matter on 7.8.2013, we noticed that the real question which thus, arose for consideration was as to whether the respondent-Corporation could change its accounting mode by applying the sale proceeds of mortgaged properties to miscellaneous expenses, interest and then the principal amount as per the mortgage deed after having applied it to the settlement of the principal amount first and on that basis having proposed a settlement to the petitioner, vide letter Annexure-P-2. This was moreso as the petitioner acting on Annexure-P-2 had sent 10% of the amount. We are informed that despite the calculations being tentative and final details having the possibility of including minor/substantive variation, what the respondent-Corporation seeking to do was to change the very basic principle of accounting as applicable to the case of the petitioner. The respondent-Corporation in their wisdom has applied the sale proceeds to first settlement of the principal amount and having proposed the settlement on that basis could not thus, be permitted to withdraw from that position adopting a different accounting methodology and thus, claiming the amount on a totally different principle.

However, in order to put at rest the controversy, learned counsel for respondent-Corporation stated that there was a subsequent Scheme of 2011 and if the petitioner''s case is examined under the scheme, the fundamental issue would remain the same. However, on the next date, it was informed that the same was not a feasible proposition. It was simultaneously pleaded on behalf of respondent-Corporation that even if Annexure-P-2 was assumed to be correct, further interest would be chargeable on account of passage of time as full amount has not been paid to them and only 10% was paid. We observed that if this was so, then the respondent-Corporation can, at best, charge normal rate of interest charged by the banks on the balance amount without penal interest as it is the respondent-Corporation which has prolonged the matter. The calculations were thereafter furnished accordingly on the next date of 11.10.2013, but there was a huge differential in the amounts with the result we were called upon to go through the manner of accounting sought to be applied by the respondent-Corporation.

In nutshell, the submission of the learned counsel for respondent is that the outstanding principal amount of the petitioner is Rs. 45.03 lacs which is what the petitioner is required to pay under the settlement terms. Effectively it has been pleaded that for purpose of availing of the OTS, the amount credited to the account of the petitioner by reason of the sale of its assets is not a material fact. Thus, if the unit of the petitioner had not been sold, the amount payable would be Rs. 45.03 lacs and even if the unit is sold for Rs. 31.51 lacs, still the amount would be the same for a closure to be put to the account of the petitioner! We may also notice that there was also an endeavour made on the last date of hearing to canvas a proposition that if credit was given to the account of the petitioner of the sale proceeds, it no more remained doubtful account and should thus, be treated to have become initially doubtful on 1.9.1994 and thereafter again on 1.9.2000 with the result that the base amount worked out had to be on another basis of the NPA classified as sub standard subsequent to 31.3.2000.

We find both the aforesaid submissions unacceptable. The scheme provided as to when the account was last categorized as doubtful account. It is the own case of the respondent-Corporation that the relevant date was 1.9.1994 and even the subsequent notings placed oil record do not dispute this position. Thus, there is no question of the account being treated as doubtful from 1.9.2000 (after 31.3.2000) once again while intermittently being treated as doubtful. This is clearly an afterthought.

As far as the other proposition today sought to be advanced by learned counsel for respondent-Corporation is concerned, the interpretation sought to be put-forth would result in what we may categorize as absurdity i.e. a person who pays something in between is to be at par with somebody who does not pay anything in between. This is so as once account was categorized as doubtful on 1.9.1994, the submission of the respondent-Corporation is that the amount crystallized would be payable irrespective of whether somebody has paid anything after that date or not upto the date of the scheme. If we may see this is another endeavour somehow to deny the benefit of the policy in a logical manner to the petitioner. It is thus, clear to us that having worked out the doubtful account of Rs. 45.03 lacs as on 1.9.1994, the amount of Rs. 31.51 lacs would have to be credited to this account to work out the balance amount which in the own understanding of the respondent-Corporation has been specified in Annexure-P-2 at Rs. 4.59 lacs, out of which Rs. 46,000/- stands paid (Rs. 51,000/- minus Rs. 5,000/- processing charges paid under cover of letter dated 11.8.2003 Annexure-P-13).

Now, coming to the balance outstanding which was required to be paid by the petitioner, it would be Rs. 4.08 lacs and the delay has occurred on account of the fault of the respondent-Corporation, but since this amount has been enjoyed by the petitioner, the normal interest would be leviable without any penal interest or compound interest. Under this scheme as per clause (k), the policy rate of interest has been specified as 12% applicable to Small Scale Industrial Sector of the petitioner. We may, however, notice that as per subsequent Policy of 2005, it is 10.5%. Since the respondent-Corporation is at fault, it would be fair to impose the interest from 16.6.2003 (the date specified under the Policy) at 12% per annum and from 1.7.2005 at 10.5% per annum simple interest upto the date of payment. There are certain amounts admittedly paid after the relevant date, for which credit has to be given making interest chargeable on reducing balance. Thus, the respondent-Corporation will work out the amount due with the statement of account in terms aforesaid and supply the same to the petitioner within a period of 15 days from today.

The petitioner will make the payment within one month after receipt of intimation by the respondent-Bank. The petition accordingly stands allowed in the aforesaid terms, leaving the parties to bear their own costs.