Sri M Narayana vs The Karnataka State Financial ...
2021 Latest Caselaw 256 Kant

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     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 6TH DAY OF JANUARY 2021

                        PRESENT

         THE HON'BLE MR. JUSTICE ALOK ARADHE

                          AND

     THE HON'BLE MR.JUSTICE NATARAJ RANGASWAMY

            W.A. NO.620 OF 2009 (GM-KSFC)
BETWEEN:

1.     SRI. M. NARAYANA
       S/O LATE MUNISHAMAPPA
       AGED ABOUT 80 YEARS
       R/AT. NO.177/1, 2ND MAIN
       2ND CROSS, BOVIPALYA
       MAHALAKSHMIPURAM
       BANGALORE-560086.

2.   M/S. PRECISION ENGINEERING WORKS
     A PARTNERSHIP FIRM HAVING ITS
     OFFICE AT NO.177/1, 2ND MAIN
     2ND CROSS, BOVIPALYA
     MAHALAKSHMIPURAM
     BANGALORE-560086
     REP. BY ITS PARTNER
     SRI. M. NARAYANA.
                                   ... APPELLANTS
(BY MR. K. SUMAN, ADV.)

AND:

1.     THE KARNATAKA STATE FINANCIAL CORPORATION
       NO.1/1, THIMMAIAH ROAD
       VASANTH NAGAR, BANGALORE-560052
       BY ITS GENERAL MANAGER.
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2.   DEPUTY GENERAL MANAGER
     KARNATAKA STATE FINANCIAL CORPORATION
     RAJAJINAGAR BRANCH, NO.197
     I FLOOR, 2ND STAGE
     WEST OF CHORD ROAD
     BANGALORE-560086.

3.   ASSISTANT GENERAL MANAGER
     KARNATAKA STATE FINANCIAL CORPORATION
     RAJAJINAGAR BRANCH
     NO.197, I FLOOR, 2ND STAGE
     WEST OF CHORD ROAD
     BANGALORE-560086.

4.   SMT. A. LAKSHMI RAVI KUMAR
     AGED ABOUT 29 YEARS
     D/O SRI. P. RAVIKUMAR
     R/AT. GOWRAV NAGAR
     PUTTENAHALLI, J.P. NAGAR
     7TH PHASE, BANGALORE-560078.

5.   SMT. BHUVANESHWARI
     AGED ABOUT 38 YEARS
     W/O SRI. PRAVEEN KUMAR
     R/AT. NO.4/1, 15TH MAIN
     J.C. NAGAR, KURUBARAHALLI
     BANGALORE-560059.
                                     ... RESPONDENTS
(BY MR. GURURAJ JOSHI, ADV FOR R1 TO R3
    MR. M.R. RAJAGOPAL, ADV., FOR R5
V/O DTD 06.02.2013 SERVICE OF NOTICE
TO R4 IS HELD SUFFICIENT)
                          ---
     THIS W.A. IS FILED UNDER SECTION 4 OF THE
KARNATAKA HIGH COURT ACT, PRAYING TO SET ASIDE THE
ORDER PASSED IN THE WRIT PETITION NO.16643/2005
DATED 28/01/2009.
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    THIS W.A. COMING ON FOR HEARING, THIS DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                          JUDGMENT

This intra court appeal under Section 4 of the

Karnataka High Court Act, 1961 (hereinafter referred to

as 'the Act', for short) has been filed by the appellants

against judgment dated 28.01.2009 passed by the

learned Single Judge.

2. Facts leading to filing of this appeal briefly

stated are that some time in the year 1998 the

Appellant No.1 started an establishment under the name

and style of Precision Engineering Works namely

Appellant No.2 by entering into a partnership with his

two sons. The appellants approached the Karnataka

State Financial Corporation (hereinafter referred to as

the 'corporation' for short) seeking financial assistance.

The corporation sanctioned a loan of Rs.13 Lakhs in the

year 1998 and the machineries were supplied to the

appellant No.2, which were found to be defective and of

substandard quality. The appellants were therefore not

in a position to manufacture the product to the

satisfaction their customers and were not in a position to

repay the loans availed of by them from the corporation.

On 23.12.1998 the appellants paid a sum of

Rs.1,00,000/- however the officers of the Corporation in

the year 1999 locked the factory/ unit of the appellants.

Between a period from 23.03.1999 to 23.03.2001

appellants paid a sum of Rs.2,95,000/- to the

Corporation. Sometime in July 2001, the Corporation

locked the establishment of the appellant No.2 in

exercise of powers under Section 29 of the State

Financial Corporation Act, 1951 (hereinafter referred to

as '1951 Act' for short).

3. The Corporation by a communication dated

26.11.2001 intimated the appellants regarding the sale

of machineries under Section 29 of the 1951 Act. It is

the case of the appellants that till January/February, the

Appellant No.2 had paid a total sum of Rs.14,82,000/-.

Thereafter, the Corporation sent a notice dated

16.02.2002 to the appellants in which it was stated that

after appropriating the sale proceeds of the machineries,

still an amount of Rs.13,17,000/- was due and payable

by the appellants. Thereafter, by another notice dated

21.08.2002 the appellants were informed that the

Corporation intends to sell the residential house viz., the

scheduled property which was offered as a collateral

security by the appellant No.1 for availing of the loan.

Thereafter by another notice dated 03.03.2003 the

appellants were informed about the publication of the

sale notice in daily newspaper namely, Vijaya Karnataka

on 02.03.2003. The appellant No.1 filed objection dated

26.06.2004 to the sale notification in which it was

pointed out that a suit for partition namely O.S.

No.10729/1993 was pending before the City civil court,

Bangalore in respect of the schedule property.

Thereafter, another notice was sent to the appellants on

30.09.2004 by which sale notice published in Vijaya

Karnataka dated 29.09.2004 was published. However,

the Corporation sold the property through a registered

sale deed dated 05.10.2005 to Respondent No.4.

4. Thereafter the appellants filed a writ petition

before the learned single judge in which a writ of

mandamus was sought to settle the account of the

appellants under the One Time Settlement Scheme was

sought and alternatively the relief of quashment of sale

deed dated 05.10.2005 was also sought on the ground

that the Corporation has no authority in law to sell the

collateral security furnished by the appellant No.1 in

exercise of the powers under Section 29 of the 1951 Act.

The learned single judge, however, vide impugned

judgment dated 28.01.2009 inter alia held that the

appellants have not established that the Corporation has

not acted either unfairly or unreasonably and that there

is any statutory violation by the Corporation in invoking

its jurisdiction under Section 29 of the 1951 Act.

Accordingly, the writ petition preferred by the appellants

was dismissed.

5. Thereupon the appellants filed writ appeal

viz., W.A.No.620/2009, the division bench of this court

vide judgment dated 04.06.2009 inter alia held that the

appellants did not place any material on record to show

that the same has not been held in accordance with the

provisions of Section 89 of the Act. It was further held

that the action of the Corporation in invoking the powers

under Section 29 of the Act cannot be said to be

malafide, unfair and unreasonable. In the result, the

appeal was dismissed. Since, the appeal was decided by

the division bench in the absence of the counsel for the

appellants thereupon the appellants filed a review

petition viz., R.P.No.317/2009 which was allowed vide

order dated 16.07.2012 and W.A.No.620/2009 was

restored.

6. Thereafter, the aforesaid writ appeal was

decided by division bench of this court vide order dated

08.04.2013 and it was inter alia held that in view of law

laid down by the Supreme Court in 'KARNATAKA

STATE FNIANCIAL CORPORATION VS.

M.NARASIMHAIAH', (2008) 5 SCC 176, the property

offered by the guarantor as a security cannot be sold in

public auction under Section 29 of the State Financial

Corporation Act. The division bench accordingly set aside

the order passed by the learned Single Judge and the

sale deed executed by KSFC in favour of respondent

No.4 dated 05.10.2005 was declared null and void. The

subsequent sale deed executed by respondent No.4 in

favour of respondent No.5 dated 24.03.2010 was also

declared null and void. However, the Corporation was

granted the liberty to take action to recover the loan in

accordance with law. Accordingly, the appeal was

allowed. Being aggrieved, the respondent No.5 viz.,

auction purchaser filed Special Leave Petition before the

Supreme Court The Supreme Court by an order dated

29.01.2015 inter alia held that the question which needs

to be determined is whether the appellant No.1 is the

principal borrower or the guarantor. It was further held

that since, this court has held that appellant No.1 is a

principal borrower, therefore, the leave to appeal was

declined. However, liberty was granted to the auction

purchaser to file a review petition. In the light of

aforesaid order passed by the Supreme Court , the

review petition filed by auction purchaser was allowed

by division bench of this court vide order dated

05.04.2019 and W.A.No.620/2009 was restored to file.

In the aforesaid factual background, this appeal has

come up for hearing before us.

7. Learned counsel for the appellant submitted

that the appellant No.1 had offered its property as

collateral security and therefore, the purported exercise

of powers under Section 29 of the 1951 Act, the

collateral security furnished by the appellant No.1 could

not have been sold by the Corporation in view of law laid

down by Supreme Court in 'KARNATAKA STATE

FNIANCIAL CORPORATION VS. M.NARASIMHAIAH',

(2008) 5 SCC 176. Our attention has also been invited

to paragraph 37 of the aforesaid decision and it has

been contended that scope and ambit of Sections 29 and

31 of the Act is not similar. It is also pointed out that

Section 29 consists of property of industrial concern,

whereas, Section 31 takes within its sweep both the

property of the industrial concern as that of the surety

and both the provisions are independent of each other

and the parliament has provided 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 in terms of Section 29 of the Act.

However, the learned Single Judge has failed to

appreciate the aforesaid aspect of the matter. It is also

submitted that Corporation has accepted the judgment

of the division bench and did not prefer any Special

Leave Petition. It is also pointed out that the subsequent

purchaser has no locus to raise any objection.

8. On the other hand, learned counsel for the

respondent Nos.1 to 3 has invited our attention to the

reliefs sought in the petition and has submitted that new

ground cannot be urged in an appeal and therefore, if its

is the case of the appellants that the submission made

by it have not been dealt with by the learned Single

Judge, the appellants should approach the learned

Single Judge by filing a review or in the alternative, the

matter be remitted to learned Single Judge for decision

afresh in accordance with law.

9. On the other hand, learned counsel for

respondent No.5 submitted that in fact, the appellant

No.1 is the principal borrower. It is pointed out that

appellant No.2 is a partnership firm which is not a

juristic person. It is further submitted that decision of

the Supreme Court in the case of M.Narasimaiah and

Others supra does not apply to the fact situation of the

case as in the aforesaid decision, the Supreme Court

dealt with a case of a company, which is a separate and

legal entity and was dealing with the liability of the

Director of the company, whereas, the instant case, is a

case of a partnership firm. It is also submitted that

appellant No.1 is a borrower as well as guarantor.

Reference has also been made to Section 126 of the

Indian Contract Act, 1872. It is also submitted that

respondent No.4 had deposited a sum of Rs.8 Lakhs

with Corporation and respondent No.4 is not contesting

the proceedings, therefore, alternatively in case, the

sale is held to be invalid, the Corporation should be

directed to refund a sum of Rs.8 Lakhs to respondent

No.5.

10. We have considered the submissions made

by learned counsel for the parties and have perused the

record. The pivotal question, which arises for

consideration in this appeal is whether the property

which was mortgaged by the appellant No.1 by deposit

of title deeds as partner of the firm, in favour of the

Corporation could have been sold by the Corporation in

exercise of powers under Section 29 of the 1956 Act.

Reliance has been placed on behalf of the appellants on

the decision of the Supreme Court in M.Narasimaiah and

Others supra and it has been contended that in view of

the aforesaid decision of the Supreme Court, the

property, which was offered by appellant No.1 as

collateral security could not have been sold. It is

pertinent to mention here that in M.Narasimaiah and

Others supra, the Supreme Court has held that property

of a surety who may or may not be the Director of the

Company is not an industrial concern. Therefore, the

property furnished by the surety cannot be sold by

invoking the powers under Section 29 of the 1956 Act.

However, it is pertinent to mention here that the

aforesaid decision of the Supreme Court was relied upon

subsequently by the same bench of the Supreme Court

in 'M/S ORMI TEXTILES & ANR. VS. STATE OF U.P.

& ORS.', (2008) 5 SCC 194 while dealing with the

issue of sale of property under Section 29 of the 1956

Act in respect of the property mortgaged by the

partnership firm, by the Corporation and held that in

exercise of powers under Section 29 of the 1956 Act, the

property mortgaged by the partnership firm can be sold

in exercise of powers under Section 29 of the 1956 Act.

The aforesaid interpretation by the same bench of the

Supreme Court in respect of the previous judgment

delivered by the same bench binds us. The Supreme

Court in the aforesaid decision by following the law laid

down in M.Narasimaiah and Others supra has reiterated

principle that Section 29 of the 1956 Act deals with

property of industrial concern, whereas, Section 31

takes within its sweep both the property of the industrial

concern as well as that of surety and both the provisions

are independent of each other. It has further been held

that parliament has provided an additional remedy for

recovery of the amount in favour of the Corporation by

proceeding against a surety only in terms of Section 31

and not under Section 29 of the 1956 Act.

11. However, in the instant case, the partner viz.,

appellant No.1 has created an equitable mortgage in

favour of the Corporation by deposit of title deeds. It is

trite law that partnership firm under the Partnership Act,

1932 is not a distinct legal entity apart from partners

constituting it and equally in law the firm as such has no

separate rights of its own in the partnership assets.

However, the property of a partner becomes the

property of the partnership only if it is brought to the

common stock. [See: (1969) 3 SCC 555]. The partner of

a firm even though under Section 25 of the Indian

Partnership Act may be jointly and severally liable for

the acts of the firm. However, under Section 29 of the

1956 Act he is not an industrial concern. Therefore, the

property of the partner in respect of which an equitable

mortgage was created by deposit of title deeds in favour

of Corporation for security of the loan sanctioned to the

partnership firm cannot be sold in exercise of powers

under Section 29 of the 1956 Act. Therefore, in view of

law laid down by the Supreme Court in M.Narasimaiah

and Others supra and M/S Ormi Textiles & Anr. supra,

the action of the Corporation in selling the property of

the appellant No.1 by public auction in exercise of

powers under Section 29 of the 1956 Act cannot be

sustained in the eye of law. It is well settled in law that

this court in exercise of powers under Article 226 of the

Constitution of India can set at naught a sale deed,

which has been executed in contravention of the law.

[See: 'SATYAPAL ANAND VS. STATE OF M.P. AND

OTHERS', (2016) 10 SCC 767]. In the result, the sale

deed dated 05.10.2005 executed by respondent No.1

and 2 in favour of respondent No.4 is declared as null

and void. Consequently, the sale deed executed by

respondent No.4 in favour of respondent No.5 dated

24.03.2010 is also held as null and void. However, the

Corporation is granted the liberty to take action for

recovery of the amount of loan from the appellants in

accordance with the law. The Corporation is further

directed to refund the sale consideration as well as

expenses incurred by respondent No.4 in getting the

sale deed registered in her favour to respondent No.4.

However, liberty is also granted to respondent No.5 to

recover the sale consideration from respondent No.4.

In view of preceding analysis, the impugned

judgment dated 28.01.2009 is hereby quashed. In the

result, the appeal is allowed.

Sd/-

JUDGE

Sd/-

JUDGE

SS