Karnataka High Court
Sri. S. Nagaraja vs Karnataka State Finance Corporation on 2 May, 2025
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 2nd DAY OF MAY, 2025
PRESENT
THE HON'BLE MR JUSTICE V KAMESWAR RAO
AND
THE HON'BLE MR JUSTICE T.M.NADAF
COMMERCIAL APPEAL NO.118 OF 2021
BETWEEN:
1 . SRI. S.NAGARAJA
AGED ABOUT 58 YEARS,
R/AT NO.66/1, 15TH A CROSS,
6TH MAIN, MALLESWARAM,
BENGALURU - 560 003.
PRESENT ADDRESS
NO.604, DR.RAJ KUMAR ROAD
(NEAR IDBI BANK)
2ND BLOCK, RAJAJINAGAR,
BENGALURU - 560 010.
2 . SMT. B.M.PRATHIBHA
AGED ABOUT 58 YEARS,
R/AT NO.66/1, 15TH A CROSS,
6TH MAIN, MALLESWARAM,
BENGALURU-560 003.
PRESENT ADDRESS
NO.604, DR. RAJ KUMAR ROAD
(NEAR IDBI BANK)
2ND BLOCK, RAJAJINAGAR,
BENGALURU - 560 010.
... APPELLANTS
(BY SRI. S NAGARAJA AND
SMT. B.M.PRATHIBA, PARTIES-IN-PERSON)
2
AND
1. KARNATAKA STATE FINANCE CORPORATION
A BODY CORPORATE FORMED AND
ESTABLISHED UNDER S.F.C. ACT AND
HAVING ITS CORPORATE OFFICE
AT NO.1/1, THIMMAIAH ROAD,
BENGALURU - 560 052.
REPRESENTED BY
MANAGER (LEGAL) (RECOVERY II)
2. M/S VISHWAROOPA VISIONS PVT. LTD.,
HAVING ITS REGD.,
OFFICE AT T-5, 3RD FLOOR,
SWASTIK MAHANANDI ARCADE,
NO.401/3, S.C.ROAD,
BENGALURU - 560 020.
3. SRI. B.S.UMESH
MAJOR R/O NO.53,
PIPELINE ROAD,
MALLESWARAM,
BENGALURU - 560 003.
4. SMT. S.HEMALATHA
W/O BASAVARAJAIAH,
MAJOR,
R/O GANDHINAGAR,
BANGALORE ROAD,
CHALLAKERE.
5. SMT. SHUBHA
W/O B.S.UMESH,
MAJOR,
R/O NO.53,
PIPELINE MAIN ROAD,
MALLESWARAM,
BENGALURU - 560 003.
6. SRI. B.S.MAHESH
S/O. SHANTHAVEERAIAH,
MAJOR,
R/O NO.53,
PIPELINE MAIN ROAD,
MALLESWARAM,
BENGALURU - 560 003
3
7. SRI. A. BASAVARAJAIAH
S/O PARRAPPA,
MAJOR,
R/O GANDHINAGAR,
BANGALORE ROAD,
CHALLAKERE - 577 522.
8. B.S.SHANKAR
S/O SHANTHAVEERAIAH,
MAJOR,
R/O NO.53,
PIPELINE MAIN ROAD,
MALLESWARAM,
BENGALURU - 560 003
... RESPONDENTS
(BY SRI. P.S.MALIPATIL, ADVOCATE FOR R1;
VIDE ORDER DATED 02.12.2021, RESPONDENT NOS.2 TO 8 ARE
DELETED FROM CAUSE TITLE)
THIS APPEAL IS FILED UNDER SECTION 13(1A) OF COMMERCIAL
COURTS ACT, 2015 AND R/W SECTION 31 & 32 OF SFC ACT, 1951
PRAYING TO SET ASIDE THE JUDGMENT AND DECREE DATED 18/03/2021
IN THE COURT OF THE LXXXIII ADDITIONAL CITY CIVIL AND SESSIONS
JUDGE AT BENGALURU IN COM. MISC NO.279/2004 PASSED AGAINST
APPELLANT NO.1 AND 2 OF THIS APPEAL (THE RESPONDENT NOS.2 & 4
OF THE CASE COM.MISC 279/2004) VIDE ANNEXURE-A, ETC
THIS APPEAL HAVING BEEN HEARD AND RESERVED FOR JUDGMENT
ON 21.03.2025 AND COMING ON FOR 'PRONOUNCEMENT OF JUDGMENT'
THIS DAY, T.M. NADAF J., PRONOUNCED THE FOLLOWING:
CORAM: HON'BLE MR. JUSTICE V KAMESWAR RAO
AND
HON'BLE MR. JUSTICE T.M.NADAF
4
CAV JUDGMENT
( PER: THE HON'BLE MR JUSTICE T.M.NADAF )
This appeal is by appellants / respondent nos.2 and 4 before
the trial court, calling in question the judgment and decree dated
18.03.2021, in COM.MISC NO.279/2004, passed by the LXXXIII
Additional City Civil And Sessions Judge, Bengaluru, only against
the appellants herein (respondents Nos.2 and 4) and also to allow
the counter claim of appellant No.1.
2. Com.Misc.No.279/2004 registered on the application filed
by respondent No.1 - Karnataka State Finance Corporation
('Corporation' for short) under Sections-31(1) and 32(2) of the
State Financial Corporations Act, 1951 ('SFC Act' for short) for
recovery of Rs.1,63,28,999/- as on 10.12.2003 from respondent
No.2, M/s. Vishwaroopa Visions Private Limited, with future interest
at 22.5% per annum, compounded at quarterly rests till realisation
of the entire amount and to pass orders, to enforce liabilities of the
appellants and respondent Nos.3 to 8 as guarantors to pay
Rs.1,63,28,999/- due from respondent No.2, as on 10.12.2003
payable with future interest at 21.5% compounded at quarterly rest
till the payment of the entire amount; also for confirmation of
prohibitory order of injunction in respect of petition Schedule Nos.I,
II and III properties and such other relief and cost.
3. The trial court by a judgment and decree dated
18.03.2021, allowed the Misc. Application in part along with cost as
follows:
"It is declared that the respondent No.1 is due in a sum of
Rs.1,63,28,999/-(One Crore Sixty three lakhs twenty eight
thousand Nine Hundred Ninety Nine) (as on 10.12.2003)
with future interest @ 22.5% per annum compounded at
quarterly rests.
The respondent No.2 to 9 being guarantors are jointly and
severally liable to pay Rs.1,63,28,999/-(One Crore Sixty
three lakhs twenty eight thousand Nine Hundred Ninety
Nine) (as on 10.12.2003) with future interest @21.5% per
annum compounded at quarterly rests till the date of
realization.
The prayer of Petitioner Corporation with respect to
confirmation of order of injunction dated 31.03.2004 is
hereby dismissed.
The set off and counter claim made by respondent No.2 is
hereby dismissed.
The office is hereby directed to send a copy of the
judgment to the petitioner through email as per Order XX
Rule 1 CPC as amended by Section 16 of Commercial
Courts Act, 2015."
4. The parties will be referred to as per their ranking before
the trial court for easy reference.
FACTS OF THE CASE:
5. That Karnataka State Financial Corporation is established
by the Government of Karnataka for the State of Karnataka u/s 3 of
the S.F.C. Act and is carrying on its functions specified in section 25
r/w section 24 of the Act. The Corporation is the only statutory
public financial institution established in the State of Karnataka with
an object of rendering financial assistance to institutions established
in the State of Karnataka and is wholly owned by the State
Government. The money advanced and lent to the Industrial
concerns are in the nature of public money collected by way of
refinance loans from the Industrial Development Bank of India and
other Central Public Financial Institutions, in addition to money
made available by the State Government and also raised by way of
debentures, public deposits. The Corporation has to deal with these
funds on business principles, with due regard being had to the
interest of industry and the general public as envisaged in Section-
24 of the Act and for this purpose and in accordance with the
required financial discipline. The financial Corporation discharges
public duty while disbursing loans as well as while recovering the
same for recycling. The petitioner is an institution established under
an enactment passed by the Parliament as State Financial
Corporation Act, 1951. Further the petitioner has been declared as a
public financial institution u/s 4(A) of the Companies Act The
petitioner, being a deemed bank, is maintaining ledger accounts
and bankers book, with evidence Act having been made applicable,
the accounts are being maintained in due course of business and on
commercial line.
6. That the 1st respondent, is a private limited company
formed and incorporated under the Companies Act, 1956 and
having its office at No. T - 5, 3rd Floor, Swastik Mahanandi Arcade,
No. 401/3, S.C.Road, Bangalore-560020.
7. The first respondent approached the corporation to set
up a medium scale industry to engage itself in film processing. The
unit to be located at the registered office of the first respondent.
After deliberation, considering the application of the first
respondent, the petitioner-corporation sanctioned a sum of Rs.45
lakhs as per the sanction communication letter dated 05.09.1996,
issued in No.AGM/A&DM-2/TA/2445/HD-169, in accordance with the
terms and conditions mentioned therein. The first respondent
executed a loan agreement dated 25.10.1996 agreeing and
undertaking to repay the amount of Rs.45 lakhs with 25 quarterly
installments. As per the loan agreement, respondent No.1 had
agreed to pay the installment at 21% per annum, with a rider, to
pay enhanced interest at 22.5% per annum, in case of default on
the defaulted installments, the same shall carry additional 1.5%
interest i.e., 22.5% per annum. The interest to be paid compounded
at quarterly rest. As per the sanction communication, the
respondent No.1 also executed a hypothecation deed dated
25.10.1996, hypothecating its effects mentioned in the schedule to
the petition. Respondent Nos.2 to 9 have executed a guarantee
deed dated 25.10.1996 agreeing and undertaking to pay the loan
installment of respondent No.1, in case of its default along with
interest at 21.5% p.a., interest compounded at quarterly rest.
8. As respondent No.1 has failed to pay any loan
installment as per the security documents, the
petitioner/corporation issued a Notice under Section-30 of the
S.F.C. Act, recalling the entire loan and a copy of the said notice
was endorsed to the guarantors. Neither the first respondent nor
respondent Nos.2 to 9 have complied with the terms of the notice.
The petitioner-corporation exercising its power under Section-29 of
S.F.C. Act, passed an order to take over the primary assets of
respondent No.1. However, the respondent No.1 without the
permission of the petitioner-corporation shifted the hypothecated
assets and thereafter the same were identified and taken over. As
the properties of respondent No.1 taken over could not fetch dues
from respondent No.1, the petitioner-corporation invoked the
guarantee deed dated 25.10.1996, against the respondent Nos.2 to
9 and issued notice to the said respondents. Except respondent
Nos.5 and 8, none have replied to the same. The notices issued to
respondent Nos.2, 3, 4, 6, 7 and 9 were returned unserved.
9. As per the guarantee deed, respondent Nos.2 to 9 being
the guarantors have undertaken to clear the entire installment in
default of respondent No.1. The clause as contained in the
guarantee deed is extracted as follows:
"The guarantee herein contained shall be enforceable
against the guarantors, on intimation in writing sent to the
firm by the Corporation that a default or breach of has
occurred shall be treated as final and conclusive proof as to
the facts stated therein. The guarantee herein container
shall be continuing one for all amount that may from time
to time become due and payable and remain unpaid. The
guarantee shall be continuing guarantee and shall be
binding and operative until repayment in full of all the
moneys due is realized."
10. As there is a failure on the part of the respondent Nos.2
to 9 to make good the installments, the petitioner filed a
miscellaneous application before the City Civil Judge, Bengaluru in
Misc.No.279/2004, for the following reliefs:
"a) Pass an a order determining that surn of Rs.
1,63,28,999/- is due from the 1st respondent as on
10.12.2003 payable with future rate of interest at 22.5%
p.a. on a said sum. The future interest is required to be
payable on the footing of compound interest at quarterly rest
till the entire amount is realised.
b) Pass an order enforcing the liabilities of respondents 2 to
9 as guarantors and direct the respondents 2 to 9 to jointly
and severally pay a sum of Rs.1,63,28,999/-due from the
15th respondent as on 10.12.2003 payable with future rate
of interest at 21.5% p.a. on the said sum. The future
interest is required to be payable on the footing of
compound interest at quarterly rest till the entire amount is
realised.
c) Confirm the prohibitory order of injunction issued respect
of petition schedule property;
d) Pass such other order or orders as this Hon'ble Court
deems it fit and appropriate in the facts and circumstances
of the case including cost of this petition."
11. Pursuant to the notice, issued, the respondent Nos.1, 6,
7 and 9, though have been served, remained absent and were
placed ex-parte. Respondent No.2 (appellant No.1) appeared in
person. Respondent Nos.3, 4, 5 and 8 appeared through their
respective counsel. Except respondent Nos.2 and 3, none have filed
the written statement.
12. The respondent No.2 in the written statement admitted
sanction of loan amount to the tune of Rs.45 lakhs at the request of
respondent No.1; the mode of payment and the respondent Nos.2
to 9 as guarantors for the loan. It was pleaded that they have
invested a sum of Rs.12 lakhs towards installation of equipment,
paid to the equipment supplier on the instructions of the corporation
as required for pre-inspection of unit before sanction of loan.
Respondent No.2 has taken a specific contention that the loan
amount was disbursed in seven installments spread over to a period
of 1½ years i.e., on 07.11.1996, 07.11.1996, 07.11.1996,
15.12.1996, 31.12.1996, 31.12.1996, 24.02.1997, 15.03.1997,
10.06.1997, 10.02.1998 and 27.03.1998. Out of total sanctioned
amount of Rs.45 lakhs, Rs.36.318 lakhs was directly paid to
equipment supplier, and Rs.1.892 lakhs towards the captioned unit.
Insurance premium also paid by KSFC. However, the entire loan
amount was not released.
13. The petitioner-corporation had disbursed only a sum of
Rs.37,91,000/- towards the project. It advised to utilize the balance
loan amount by getting it released for the project. In the year 1998,
Corporation has released a sum of Rs.6.79 lakhs and adjusted
towards interest, on the consent letter issued by the appellant and
others. Respondent No.2 further asserts that the petitioner
voluntarily adjusted the balance amount towards loan account to
the tune of Rs.6,79,411/- on 24.03.1998 and Rs.29,589/- on
26.03.1998. Finally, the file was moved to recovery department for
recovery on 24.04.1998. In these circumstances, the Unit became
sick. The respondent No.3 resigned from the Directorship of the
company and also filed Form No.32 on 30.08.2000. Respondent
Nos.2 and 4 were called by the petitioner on 31.10.2000, to appear
before default review committee on 08.11.2000, with all promoters,
guarantors and collateral security owners on the default which
amount was quantified as Rs.54.62 lakhs.
14. The appellants have attended the meeting and after
deliberation, the Chairperson / Executive Director suggested the
committee to accept the pay Rs.6 lakhs as full and final settlement.
A Notice was issued to respondent no.2 for payment of overdues.
The petitioner-corporation had sold the residential property of the
respondent No .2 towards the due amount. The balance amount
was shown as Rs.24 lakhs. Though they tried to revive the Unit to
working condition with the available limits, but due to unavoidable
circumstances at that time, they could not succeed. They were
issued a show cause notice by the corporation. On 14.09.2002, a
publication was made in the newspaper. A complaint was also
lodged with Sheshadripuram Police Station alleging that the board
of directors fled away with the loan amount, and calling upon the
Police to take action against the three directors under Sections -
406, 417, 424, and 420 of IPC, with the hypothecated m/c list and
the details of loan dispersed. FIR No.344/2002 was registered on
11.09.2022. Police made inspection and issued a notice to appear in
the Police Station. The copies of a correspondence made were
handed over to the investigation officer (police) on the same day.
15. The appellants were compelled to approach the trial
court. Though the respondent No.2 had filed a counter claim in the
written statement, he did not furnished any details of the counter-
claim; he has not stated anything regarding the cause of action to
file the counter claim. The prayer sought was not clear.
16. Respondent No.3 in his written statement asserted that
the claim petition filed by the petitioner-corporation is not
maintainable against him. However, he admitted availing the loan of
Rs.45 lakhs by respondent No.1-company. It is his specific case that
the entire activities of the respondent-company were carried out by
the respondent Nos.2 and 4. Respondent No.2 was the Managing
Director of the respondent -company. Though the petitioner has
sanctioned loan for Rs.45 lakhs for the purpose of acquiring full
processing unit, the contribution by the petitioner was only 65% of
the total amount. The 35% of contribution was by the first
respondent i.e., to the tune of 12 lakh i.e., for the purpose of
processing unit. The loan advanced was directly paid to the
manufacturer/supplier of the processing unit, vide cheque/DD. It
was his specific case that he was not interested to proceed further
in the affairs of the company as such, he resigned from Directorship
w.e.f. 30.08.2000 by submitting Form no.32 before the Registrar Of
Companies. This aspect was also brought to the notice of the
petitioner-corporation vide letter dated 24.08.2001.
17. It was his case that the petitioner-corporation auctioned
the hypothecated goods and appropriated a sum of Rs.25 lakhs. The
petitioner-corporation recovered the entire loan amount and the
first respondent is not liable to pay the amount to the petitioner-
corporation. He has further stated that he has not signed any
personal guarantee deed or any other loan document. All the
transactions are done by respondent nos.2 and 4. The property
shown in Schedule-I and II are not the properties of respondent
Nos.3, 7 and 9. The properties in Schedule-I and II belong to
Nanjamma, who has no connection with the loan transaction
advanced by the petitioner-corporation. The properties shown in
schedule-I and II are not the personal properties of respondent
Nos.3, 7 and 9. The petitioner-corporation has no locus standi to
proceed against the properties shown in Schedule nos.I and II. He
has further contended that the claim made by the corporation is
barred by law and hit by Article - 137 of Limitation Act, as the
corporation has not filed the application under Section-31(1) of SFC
Act, within 3 years from the date on which the respondent No.2 has
committed default. It is his further case that he has not executed
any loan document agreeing to pay interest at 21% p.a., with a
further rider to pay interest of at 22% per annum. The loan amount
and interest amount had already been appropriated by the
corporation by selling the hypothecated property as collateral
security. He has not received any notice as claimed by the
petitioner under Section-30 of SFC Act and there is no cause of
action to file the petition and sought the dismissal of the claim
petition.
18. The trial court subsequent to the completion of the
pleadings, framed the following points for determination:
"(1) Whether the Petitioner Corporation proves that it is
entitled to recover Rs.1,63,28,999/- as on 10.12.2003
payable with future interest @ 22.5% per annum from
respondent No.1 ?
(2) Whether the Petitioner Corporation proves that it is
entitled to recover Rs.1,63,28,999/- from 1" respondent as
on 10.12.2003 payable with future interest @ 21.5% per
annum from respondent No.2 to 9?
(3) Whether the Petitioner Corporation is entitled for the
relief of confirmation of prohibitory order of temporary
injunction dated 31.03.2004 prohibiting respondents No.3,
7 & 9 from alienating the properties mentioned in petition
schedule I & II and prohibiting respondents No.2 & 5 from
alienating the property mentioned in petition schedule III?
(4) What Order?"
19. The corporation to prove its case examined its Manager-
Sri.Shashi Kantha as PW-1 and produced 16 documents and marked
the same as Exhibits-P1 to 16. Respondent No.2 - Sri.S.Nagaraja
was examined as RW-1 and has produced three documents and
marked the same as Exhibits-R1 to R3. Respondent No.3 -
Sri.Umesh was examined as RW-2 and produced three documents
and marked the same as Exhibits-R4 to R6.
20. The trial court on appreciation of pleadings, oral and
documentary evidence allowed the application filed by the
corporation and recorded its reasons, at paragraph Nos. 65 to 71 of
its order, which we reproduce as under:
65. On a careful consideration of materials available on
record, it is evident that the petitioner corporation has
sanctioned loan of Rs.45,00,000/- to the respondent
company as per the terms and conditions incorporated in
sanction letter dated 05.09.1996/Ex.P.2. Ex.P.5 statement of
accounts, the averments of respondent No.2 and 3 in their
respective objection statements and evidence makes it
amply clear that the 1" respondent company has failed to
repay the loan installments as per the terms and conditions
of sanction letter. The Petitioner Corporation has issued
statutory notice before initiating the present proceedings. It
is significant to note that the respondent No.2 or other
respondents have not denied the veracity of statement of
accounts/ Ex.P.5. As per the statement of accounts/Ex.P.5
the 1 respondent company is in due of Rs.1,63,28,999/- as
on 10.12.2003 i.e. Rs.45,00,000/-towards principal sum;
Rs.1,17,59,293/-towards interest; Rs. 69,706/-towards
other debits.
66. The respondent No.3 is contending that he has not
executed deed of guarantee. The respondent No.2 is
contending that he is not liable to pay the dues of 1"
respondent company, as the 1" respondent company is a
separate juristic person and he was only a director of the
company and it is he who has invested in the company.
67. The petitioner has exhibited Ex.P.3 deed of guarantee
dated 25.10.1996 exhibited by respondents No.2 to 9. The
Respondent No2/RW1 in his EPOSEA examination has
admitted that they have executed loan agreement,
hypothecation deed, guarantee deed and mortgage deed to
secure the loan from Petitioner Corporation. The respondents
No.2 to 9 have subscribed their signatures to all the
covenants of deed of guarantee. They have agreed in clear
terms in case of default committed by 1 respondent
company in payment of principal amount or interest or
commitment charges or other moneys; they shall indemnify
the petitioner for such loss or charges. They have clearly
agreed that the corporation shall be entitled to act as if the
guarantors were the principal debtors to the corporation for
all payments and covenants guaranteed by them and the
guarantee shall be continuing one for all amounts advanced
including the interim payments or the amounts to be
advanced by the corporation by way of interim payment or
payments or otherwise out of the said principal sum has also
for all the interest, cost and other charges or expenses that
may from time to time become due and payable and remain
unpaid to the corporation. The respondents No.2 to 9 have
also agreed that the guarantee offered by them shall not be
revoked or affected by the death/dissolution or insolvency or
cessation or termination of office of directors or any one or
more of the guarantors but shall continued to be binding and
operative in respect of liabilities which has arisen up to the
date of death/insolvency or dissolution or cessation or
termination of office as director as the case may be as well
as to the liabilities which may arise thereafter in all respects
and all purposes until repayment of all monies due to the
corporation as aforesaid.
68. The respondents have not denied the Ex.P.3 Deed of
Guarantee in the cross-examination of PW.1. Though the
respondent No.3 has established that he has resigned as
director from 1" respondent company w.e.f., 31.08.2000,
the RW.1 & 2 have not placed any materials on record to
show that the Petitioner Corporation has released
respondent No.3 from his liability as a guarantor. The
respondents No.2 to 9 having executed deed of
guarantee/Ex.P.3 are bound by the terms and conditions
enshrined therein unless the Petitioner Corporation extends
concession. The covenants of Ex.P.3 make it clear that the
guarantors are held liable as principal debtor in case of
default committed by 1" respondent company. The liability of
a guarantor is co-extensive with the liability of principal
debtor. The respondents No.2 to 9 cannot escape their
liability as guarantors to satisfy the dues payable by 1"
respondent company to the Petitioner Corporation. The
respondents No.2 to 9 are bound by the terms and
conditions incorporated in sanction letter/Ex.P.2, deed of
guarantee/Ex.P.3 and as such they are liable to pay the dues
of 1" respondent company in the capacity of guarantors.
69. The Petitioner Corporation is seeking the confirmation of
prohibitory order of injunction dated 31.03.2004 passed
against respondent No.3, 7 & 9 in respect of petition
schedule I & II properties and respondent No.2 & 5 in
respect of petition schedule III.
70. In schedule I & II the Petitioner Corporation has shown
residential houses as the properties belonging to
respondents No.3, 7 & 9. In schedule III the Petitioner
Corporation has shown agricultural land as the property
belonging to respondent No.2 & 5. The Petitioner
Corporation is aware of the fact that one Smt.Nanjamma,
mother of Respondent No:3 made an unsuccessful attempt
to come on record claiming that she is the owner of Petition
Schedule I and II properties. The Petitioner Corporation has
not chosen to make an inquiry regarding the title of petition
schedule property. The Petitioner Corporation has not made
any attempts to exhibit any documents of title or revenue
records or encumbrance certificates to show that the
respondent 3, 7 & 9 are the owners of petition schedule I &
II properties; and respondent No.2 & 5 are the owners of
petition schedule III property. In the absence of any
materials to hold that the respondent 3, 7 & 9 are the
owners of petition schedule I & II properties; and respondent
No.2 & 5 are the owners of petition schedule III property,
the prohibitory order dated 31.03.2004 cannot be confirmed.
The petitioner is not entitled for the said relief.
71. The respondent No.3 is contending that the petition is
barred by limitation. He is contending that the petitioner
ought to have filed the petition within three years from the
date on which the industrial concern commits default, as per
Article 137 of Limitation Act. A perusal of Ex.P/5 statement
of accounts show that the respondent No.1 has paid
10.05.2002 and Rs.2,00,000/- on 10.08.2002
Rs.10,00,000/- on 10.09.2002, Rs.2,00,000/- on
10.11.2002. The petitioner corporation has duly credited all
these payments to the loan account of 1" respondent
company. This petition was filed on 27.03.2004, Even after
the filing of the petition, the 1" respondent company has
paid a sum of Rs.30,000/- on 27.07.2004. Thus, it is clear
that the Petitioner Corporation has filed the petition within
three years from the last date of payment made by the 1"
respondent company. Hence, the petition is filed well within
the period of limitation.
21. The City Civil Judge, Bengaluru, passed an order,
determining a sum of Rs.1,63,28,999/- as due and payable by the
first respondent-company as on 10.12.2003, with future interest at
21.5% per annum, compounded at quarterly rest till the date of
realization.
22. Assailing the order supra, passed by the trial court
respondent Nos.2 and 4 are in appeal calling in question, judgment
with a limited prayer to set-aside the order only against the
appellants and to allow the counter claim filed by appellant No.1.
23. We have heard Sri.Nagaraja, party-in-person appearing
for himself and on behalf of appellant No.2 Smt.B.M.Prathiba and
Sri.M.Malipatil, learned counsel for the respondent - corporation.
24. Sri.Nagaraja, reiterated the defense taken before the
trial court. He has also taken shelter under the provisions of the
Indian Contract Act, 1872, especially, Sections-54, 62 and 73, to
contend as per the letter of sanction the corporation sanctioned a
sum of Rs.45 lakhs as loan, however, it has released only a sum of
Rs.37,91,000/- in a span of one and half year. Though the
corporation had released a further sum of Rs.6,79,411/- the same
was adjusted towards the interest. The delay in releasing the
installment has caused the equipment supplier to take back certain
equipments resulting in the Unit becoming sick. Though they have
appraised the corporation regarding the delay in payment and the
hardship are facing resulting in the set back to the unit which has
become sick. The corporation has not considered the case of the
petitioner. Due to the delay in release of the payment, they have to
face financial difficulties resulting in non-payment of installments,
which resulted in the corporation exercising its power under
Section-29 of SFC Act, thereby auctioning the hypothecated
equipments, in the list and also out of the list. He has also
submitted that he has sold his residential property and paid the
amount to the corporation. He further argues that, it is the
corporation which is responsible for closing down of the company
leaving the appellants with all financial difficulties.
25. To buttress his arguments, he has relied on the following
judgments:
1. KSFC V/s N. Narasimiah reported in AIR 2008 SC
1797.
2. Utam Prasad Guptha V/s Orrisa State Financial
corporation and others reported in AIR 2010 ORI 3;
3. Jai Laxmi Salts Works Pvt Ltd. V/s State of Gujurat,
reported in 1994 SCC (4) 1, JT 1994 (3) 492
4. Canara Bank and others V/s Standard Charted Bank
and others reported in (2004) S.C.C 12
26. Refuting the submissions of the party-in-person, Sri. Mali
Patil, learned counsel appearing for the respondent- corporation,
vehemently submits that the trial court on proper appreciation of
the material on record, pleadings and evidence allowed the claim
petition and granted the reliefs (though rejected the prayer for
confirmation of the order of injunction dated 31.03.2004), is a well-
considered and reasoned order which does not calls for any
interference at the hands of this Court.
27. Having heard the parties-in-person and the learned
counsel for respondent - corporation and on perusal of the material
placed on record, the only point that would arise for our
consideration in this appeal is:
"Whether the trial court is right in granting reliefs Nos.1
and 2 claimed by the respondent-corporation / in the
alternative whether the order passed by the trial court
suffers from any perversity or legal infirmity, which calls
for interference at the hands of this Court?
28. Our answer to the above point for consideration is in
Negative for the following reasons:
ANALYSIS :
29. After careful examination of the records, the undisputed
facts in the case, which we have noticed, are as under:
i. Sanction of Rs.45 lakhs by the corporation vide sanction
letter at Exhibit-P2.
ii. The deed of guarantee executed by the appellants and
other respondents in the claim petition agreeing to settle or
indemnify on demand by the corporation to pay the entire
principal sum, along with interest on default by the first
respondent - company.
iii. Default committed by respondent No.1 - company in
payment of loan installments.
30. We have noticed from records that, except appellants
none of the other respondents - guarantors including the
respondent No.1 - company have challenged the claim of the
corporation, granted by the trial court.
31. Before adverting to the case of the parties, it is very
appropriate to extract the provisions as contemplated in Sections-
29, 30, 31(1)(a)(aa), 32(1), (3), (4), (4A) and 6 of the State
Financial Corporation Act, 1951, which are reproduced as under:
"29. Rights of Financial Corporation in case of default.--
(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 1 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 2 right to take over the management or
possession or both of the industrial concerns, as well as
the 3 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 4*** under sub-
section (1), shall vest in the transferee all rights in or to
the property transferred 5 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, 8 charges and expenses which in the
opinion of the Financial Corporation have been properly
incurred] by it 9 [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 by 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.
30. Power To Call For Repayment Before Agreed Period-
Notwithstanding anything in any agreement to the
contrary, the Financial Corporation may, by notice in
writing, require any industrial concern to which it has
granted any loan or advance to discharge forthwith in full
its liabilities to the Financial Corporation,--
(a) if it appears to the Board that false or misleading
information in any material particular was given by the
industrial concern in its application for the loan or
advance; or
(b) if the industrial concern has failed to comply with the
terms of its contract with the Financial Corporation in the
matter of the loan or advance; or
(c) if there is a reasonable apprehension that the
industrial concern is unable to pay its debts or that
proceedings for liquidation may be commenced in
respect thereof; or
(d) if the property pledged, mortgaged, hypothecated or
assigned to the Financial Corporation as security for the
loan or advance is not insured and kept insured by the
industrial concern to the satisfaction of the Financial
Corporation or depreciates in value to such an extent
that, in the opinion of the Board, further security to the
satisfaction of the Board should be given and such
security is not given; or
(e) if, without the permission of the Board, any
machinery, plant or other equipment, whether forming
part of the security or otherwise, is removed from the
premises of the industrial concern without being
replaced; or
(f) if for any reason it is necessary to protect the
interests of the Financial Corporation.
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 1 [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, 2
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 authorized 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 3 [Financial
Corporation] as security for the loan or advance; or
(aa) for enforcing the liability of any surety; or
32. Procedure of district judge in respect of applications
under section 31.--(1) When the application is for the
reliefs mentioned in clauses (a) and (c) of sub-section
(1) of section 31, the district judge shall pass an ad
interim order attaching the security, or so much of the
property of the industrial concern as would on being sold
realise in his estimate an amount equivalent in value of
the outstanding liability of the industrial concern to the
Financial Corporation, together with the costs of the
proceedings taken under section 31, with or without an
ad interim injunction restraining the industrial concern
from transferring or removing its machinery, plant or
equipment.
1(A) When the application is for the relief mentioned in
clause (aa) of sub section 31, the district judge shall
issue a notice calling upon the surety to show cause on a
date to be specified in the notice why his liability should
not be enforced.
(2) xxx
(3) Before passing any order under sub-section (1) or
sub-section (2) 1 [or issuing a notice under sub-section
(1A)] the district judge may, if he thinks fit, examine the
officer making the application.
(4) At the same time as he passes an order under sub-
section (1), the district judge shall issue to the industrial
concern or to the owner of the security attached a notice
accompanied by copies of the order, the application and
the evidence, if any, recorded by him calling upon it or
him to show cause on a date to be specified in the notice
why the ad interim order of attachment should not be
made absolute or the injunction confirmed.
(4A) If no cause is shown on or before the date specified
in the notice under sub-section (1A) the district judge
shall forthwith order the enforcement of the liability of
the surety. (5) xxx
(6) if cause is shown, the district judge shall proceed to
investigate the claim of the financial corporation in
accordance with the provisions contained in the code of
civil procedure, 1908 (5 of 1908) insofar as such
provisions may be applies thereto.
32. In view of the undisputed facts as stated above, the only
aspect which is required to be considered to answer the question
framed by us, is as to whether the trial court has committed any
error while appreciating the materials on record or in the
alternative, whether there is any perversity in the judgment of the
trial court, which would call for any interference by this Court. As
the sanction of loan, deed of guarantee are admitted, there is
nothing more required for the corporation to prove. However, the
corporation led the evidence of its Manager and produced the
documents to discharge its burden. The enquiry under Section-31 of
SFC Act is summary in nature. A conjoint reading of Sections-31
and 32 of the SFC Act, manifests that the proceedings under the Act
are akin to the execution proceedings. The investigation which is
indeed required is summary in nature and not a full-fledged civil
trial. In proceedings under Section-31 of the SFC Act, the evidence
which is required to be looked into are the documents executed by
the parties in support, such as loan agreement, guarantee deed,
hypothecation deed. The other aspect which is required to be
considered is whether any default has been committed by the
person to whom the loan was advanced and on default, whether the
notice, required to be issued to the borrowers, guarantors invoking
the guarantee deed executed has been issued and whether there is
any compliance to the said notice by the borrowers, guarantors?
33. In the case on hand, the petitioner-corporation has
discharged its burden by examining its Manager and producing
relevant documents marked at Exhibits-P1 to 16. Though the
appellants have taken several contentions before the trial court, in
view of discharge of burden by the corporation and the categorical
admission of the loan in the written statement as well as in the
cross-examination by the appellant No.2, we see no infirmities in
the judgment/order passed by the trial court.
34. So far as the contentions of the appellant on the
provisions of Sections-54, 63 and 72 of the Indian Contract Act, is
concerned no such pleadings are found in the written statement
before the trial court. However, the same was advanced in the
arguments before this Court. The allegations against the corporation
primarily were that the reason for the default in payment is owing
to delay in disbursement of the loan, which caused the unit to
become sick is liable to be rejected. We say so because the
appellants have not taken any action against such delayed
payments as alleged in the written statement. They have not
produced any document in that regard to show that they have taken
and agitated the grievance of belated release of loan amount with
the Corporation. They kept quiet which amounts to acquiescence.
They cannot be permitted to walk out and make allegations against
the corporation. The corporation is a statutory body lending a
helping hand to the industries upcoming by investing the public
money and cannot be found fault with for making claim against the
defaulting company and the persons who have guaranteed for, in
case of default by the company.
35. So far as the judgments relied on by the appellant No.1
- party-in-person, they are all distinguishable even on facts and
applicability of law. The first judgment that is in the case of KSFC
vs. N.Narasimiah stated supra, it is a case wherein the financial
corporation has invoked powers under Section - 29 of SFC Act,
wherein the Hon'ble Apex Court has clearly held that the powers
under Section-29 of SFC Act to be invoked only against the
defaulting industrial concerns and not against the surety of the
guarantors. In the case on hand, the application is filed under
Sections-31(1) and 32 of the SFC Act, which we have already
reproduced above which contemplates, especially, in Section-
31(1)(aa) of SFC Act for enforcing of liability against any surety.
Even in the judgment referred supra at para No.22 the Hon'ble
Apex Court has considered the provision of Section-31 of SFC Act to
be invoked for the liability against the surety.
36. In the second judgment i.e., in the case of Uttam
Prasad Guptha vs. Orissa State Financial Corporation referred
supra, it is a case wherein the provisions of Sections-29 and 30 of
SFC Act, are invoked and against the OTS, the facts of the case on
hand is otherwise. Hence, the said judgment is of no avail. So far as
the judgment of the Hon'ble Apex Court in the case of Jai Laxmi
Salts Works Private Limited, supra which deals with the tortuous
liability and negligence on the part of Stage Government in
maintaining a statutory duty which resulted in damage to the
parties suffered. The case on hand is not involving a tortuous
liability and it is a financial transaction between the financial
corporation and industry concerned, for repayment of the same,
which is guaranteed by the appellants and other respondents in
default by respondent No1 - Company. So also, the judgment of the
Hon'ble Apex Court in the case of Canara Bank and others V/s
Standard Charted supra regarding material attention without
mutual consent by all parties is of the no avail, as the facts in the
said case is totally different and as such not applicable in the case
on hand and of no avail to the appellants.
37. Having considered the entire case and on reappreciation
of the material placed on record, we hold that the learned District
Judge has rightly appreciated the evidence and materials on record
and passed a well reasoned order, which we have extracted above,
within the parameters of the provisions contemplated under
Sections-31 and 32 of the SFC Act. We find no infirmities, which
require any interference at our hands, in view of the same, the
point is answered against the appellants and in the consequence,
the appeal fails and liable to be dismissed, as devoid of merit,
accordingly.
38. For the above reasons, we pass the following:
ORDER
i. Appeal is dismissed as devoid of merit.
ii. In the facts and circumstances of the case, there is no
order as to cost.
Sd/-
(V KAMESWAR RAO)
JUDGE
Sd/-
(T.M.NADAF)
JUDGE
JJ
CT: BRS
