1985 (2) TMI 312 - HC - Companies Law

Court quashes order, deems actions illegal, directs return of possession upon deposit.

Kharavela Industries Pvt. Ltd. Versus Orissa State Financial

The Court quashed the order dated 27-1-1984 and deemed all subsequent actions, including the sale and possession transfer, illegal. The Corporation was ... - Issues Involved:1. Arbitrariness and bad faith of the Corporation.2. Violation of principles of natural justice.3. Validity of actions taken under Section 29 of the State Financial Corporations Act, 1951.4. Consideration of payments made by the petitioner.5. Validity of the sale process and possession transfer to Orissa Ceramic Industries Limited.6. Allegations of collusion between the Corporation and Orissa Ceramic Industries Limited.Issue-wise Detailed Analysis:1. Arbitrariness and Bad Faith of the Corporation:The petitioner alleged that the Corporation acted arbitrarily and in bad faith with the motivated object of bestowing undue favor on Orissa Ceramic Industries Limited. The petitioner contended that the Corporation's actions were designed to unfairly benefit the opposite party. However, the Court found that the allegations of arbitrariness and bad faith were not substantiated with sufficient evidence. The Court emphasized that the burden of establishing mala fides is very heavy and must be proved with a high degree of credibility. Consequently, the Court rejected the petitioner's contention of arbitrariness and bad faith.2. Violation of Principles of Natural Justice:The petitioner argued that the Corporation's actions violated the principles of natural justice as no notice was given before taking action under Section 29 of the Act. The Court acknowledged the importance of natural justice, stating, 'The rules of natural justice must apply to an enquiry made against the misconduct of a student in a University examination.' The Court concluded that while the order dated 6-1-1984 complied with natural justice principles, the subsequent order dated 27-1-1984 did not. The Corporation failed to consider payments made after 6-1-1984 and did not provide a reasonable opportunity for the petitioner to present their case. Thus, the order dated 27-1-1984 was set aside for violating natural justice principles.3. Validity of Actions Taken Under Section 29 of the State Financial Corporations Act, 1951:The Corporation's action of taking over the industrial concern under Section 29 of the Act was challenged by the petitioner. The Court noted that the Corporation must consider all relevant factors, including payments made by the entrepreneur, before exercising its extraordinary power under Section 29. The Court found that the Corporation did not consider payments made after 6-1-1984 and the adjustment of the subsidy amount before taking action on 27-1-1984. As a result, the Court held that the Corporation's decision to take over the industrial concern on 27-1-1984 was vitiated and set aside the order.4. Consideration of Payments Made by the Petitioner:The petitioner asserted that payments made by the Company should be adjusted first towards the principal and not towards interest. The Court referred to the loan agreement and the normal rule that payments should first be applied towards satisfaction of interest. The Court cited Meghraj v. Mst. Bayabai, AIR 1970 SC 161, and rejected the petitioner's submission, stating that the payments made by the debtor are to be applied first towards interest and then towards the principal.5. Validity of the Sale Process and Possession Transfer to Orissa Ceramic Industries Limited:The Court examined the sale process and found that the Corporation acted with 'uncanny haste' in selling the industrial concern. The sale notice was published on 28-1-1984, with tenders to be submitted by 31-1-1984, and the sale fixed for 1-2-1984. The Court held that the Corporation failed to take appropriate steps to obtain the maximum price for the industry, resulting in a sale process that was vitiated. Consequently, the possession of the industrial concern by Orissa Ceramic Industries Limited was deemed unauthorized.6. Allegations of Collusion Between the Corporation and Orissa Ceramic Industries Limited:The petitioner alleged collusion between the Corporation and Orissa Ceramic Industries Limited. The Court found no evidence to support the allegation of collusion. The Court reiterated that allegations of mala fides require a high degree of proof, which the petitioner failed to provide. As a result, the Court rejected the assertion of collusion between the Corporation and Orissa Ceramic Industries Limited.Conclusion:The Court quashed the order dated 27-1-1984 and held that all subsequent actions, including the sale and possession transfer, were illegal and inoperative. The Court directed the Corporation to return possession of the industrial concern to the petitioner upon the deposit of Rs. 4 lakhs within one month. The writ petition O.J.C. No. 427 of 1984 was allowed with costs, and O.J.C. No. 340 of 1984 was disposed of accordingly.