2002 (7) TMI 741 - HC - Companies Law

Court upholds UP Financial Corp's right to pursue personal guarantees despite Section 29 invocation

The court held that the UP Financial Corporation could proceed against personal guarantees despite invoking Section 29 of the State Financial Corporation ... Rights of Financial Corporation in case of default Issues Involved:1. Whether the UP Financial Corporation, having invoked Section 29 of the State Financial Corporation Act and taken possession of the unit, is precluded from resorting to personal guarantees against the petitioner and other guarantors.2. Whether the UP Financial Corporation acted justly and fairly in proceeding against the guarantors while keeping the assets of the company in its possession.3. Whether the UP Financial Corporation is entitled to charge compound interest on the loan after taking possession of the unit.4. Whether recovery should first be made against the mortgaged property of the petitioner before proceeding against other personal properties.Issue-wise Detailed Analysis:1. Invocation of Personal Guarantees:The petitioner contended that the UP Financial Corporation, having invoked Section 29 and taken possession of the unit, should not proceed against personal guarantees. The court rejected this contention, citing the Supreme Court's decision in *State Bank of India v. Indexport Registered* which held that the liability of the guarantor is co-extensive with that of the principal debtor. The court emphasized that the creditor can proceed against the guarantor without first exhausting remedies against the principal debtor. The UP Financial Corporation's action was deemed permissible even after taking possession of the company's unit under Section 29.2. Fairness in Proceeding Against Guarantors:The petitioner argued that the UP Financial Corporation should not proceed against guarantors while keeping the company's assets. The court noted that fairness and justice must be evaluated based on the facts and circumstances of each case. The court found that the petitioner and other directors/guarantors did not make efforts to repay the loan, and the unit's sale could not take place due to hurdles created by them. Therefore, the UP Financial Corporation's action was not deemed unfair or unjust.3. Charging Compound Interest:The petitioner contended that the UP Financial Corporation should not charge compound interest after taking possession of the unit. The court rejected this contention, stating that the liability for interest is dependent on the loan agreement terms. Interest would continue to accrue in accordance with the agreement until the loan is repaid, regardless of the possession status of the unit.4. Recovery Against Mortgaged Property:The petitioner argued that recovery should first be made against the mortgaged property before proceeding against other personal properties. The court directed the tehsildar to determine whether any personal property of the petitioner had been mortgaged. If mortgaged, recovery should first be made against such property, and only thereafter against other personal properties, provided the Collector issues a certificate as per Section 4(2)(b) of the UP Public Moneys (Recovery of Dues) Act, 1972. The tehsildar was instructed to decide this within one month, and recovery proceedings against the petitioner were stayed until then.Conclusion:The court allowed the writ petition to the extent of directing the tehsildar to determine the mortgage status of the petitioner's personal property and proceed accordingly. The court emphasized that the UP Financial Corporation's actions were legally permissible and not unfair or unjust. The decision underscores the co-extensive liability of guarantors and the creditor's right to choose the remedy.