Telangana High Court

G. Mallesh Another, vs Cheruku Swamy 2 Ors., on 4 February, 2022

Bench: Satish Chandra Sharma, Abhinand Kumar Shavili

  THE HON'BLE THE CHIEF JUSTICE SATISH CHANDRA SHARMA
                                       AND
       THE HON'BLE SRI JUSTICE ABHINAND KUMAR SHAVILI


                   WRIT APPEAL No.168 of 2009

JUDGMENT:    (Per the Hon'ble the Chief Justice Satish Chandra Sharma)




       The present writ appeal is arising out of order dated

22.10.2008 passed in W.P.No.3733 of 2008 by the learned

Single Judge.


       The undisputed facts of the case reveal that a

partnership firm by name Sai Durga Tube Wells availed

financial assistance for a sum of Rs.25 lakhs from the A.P.

State Financial Corporation (for short, "the Corporation"), 2nd

respondent in the writ petition, on 25.01.2001 and the writ

petitioner, Cheruku Swamy, offered his plot bearing No.8 in

Sy.No.268 as collateral security. As the barrower failed to pay

the loan amount, the Corporation initiated action under

Section 29 of the State Financial Corporation Act, 1951 (for

short, "the Act"). The plot was sold by the Corporation in

favour of one G. Mallesh, respondent No.3 in the writ petition,

on 01.02.2008. The writ petitioner came up before this Court

stating that the property worth Rs.60 lakhs was sold away

only for Rs.27.50 lakhs and the Corporation could not have

been proceeded against the surety under Section 29 of the

Act.

Reliance was placed upon the judgment of the Hon'ble

Supreme Court in the case of Karnataka State Financial

Corporation vs. K. Narasimhaiah and others1 and it was

argued that the Corporation can proceed only against the

surety in terms of Section 31 of the Act and not under Section

29. Sections 29 and 31 of the Act 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 instalment 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 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.

2008 (4) SCALE 473

31. Special provisions for enforcement of claims by Financial Corporation.-- (1) Where an industrial concern, in breach of any agreement, make any default in repayment of any loan or advance or any instalment 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 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, [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 authorised 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 [Financial Corporation] as security for the loan or advance; or

(aa) for enforcing the liability of any surety; or

(b) for transferring the management of the industrial concern to the Financial Corporation; or

(c) for an ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without the permission of the Board, where such removal is apprehended.

(2) An application under sub-section (1) shall state the nature and extent of the liability of the industrial concern to the Financial Corporation, the ground on which it is made and such other particulars as may be prescribed."

The Hon'ble Supreme Court in the case of Karnataka

State Financial Corporation (supra), after taking into

account the aforesaid statutory provisions of law, has held as

under:

"(14) Sec.29 of the Act nowhere states that the corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it. The right of the financial corporation in terms of Sec.29 of the Act must be exercised only on a defaulting party. There cannot be any default as is envisaged in Sec.29 by a surety or a guarantor. The liabilities of a surety or the guarantor to repay the loan of the principal debtor arises only when a default is made by the latter.

(15) The words "as well as" in our opinion play a significant role. It confers two different rights but such rights are to be enforced against the same person, viz., the industrial concern.

... ... ... It is true that sub-section (1) of Sec.29 speaks of guarantee. But such a guarantee is meant to be furnished by the Corporation in favour of a third party for the benefit of the industrial concern. It does not speak about a surety or guarantee given in favour of the corporation for the benefit of the industrial concern.

(27) The legislative intent, in our opinion, is manifest. The intention of the Parliament in enacting Sections 29 and 31 of the Act was not similar. Whereas Sec.29 of the Act consists of the property of the industrial concern, Sec.31 takes within its sweep both the property of the industrial concern and as that of the surety. None of the provisions control each other. The Parliament intended to provide an additional remedy for recovery of the amount in favour of the corporation by proceeding against a surety only in terms of Sec.31 of the Act and not under Section 29 thereof."

In the light of the judgment delivered by the Hon'ble

Supreme Court, this Court is of the considered opinion that

the learned Single Judge was justified in declaring the sale of

the property as illegal, being contrary to the provisions of the

Act and being contrary to the law laid down by the Hon'ble

Supreme Court and therefore, this Court does not find any

reason to interfere with the order passed by the learned

Single Judge.

Accordingly, the writ appeal is dismissed.

Learned counsel for the appellants has argued before

this Court at this stage that the Corporation be directed to

refund the amount to the appellants, if not already refunded.