1975 (5) TMI 91 - HC - Companies Law

Surety not liable under Section 31 of Financial Corporations Act; recovery limited to borrower's property.

Munnalal Gupta Versus Uttar Pradesh Financial

The court concluded that a surety cannot be proceeded against under Section 31 of the State Financial Corporations Act, 1951. The court emphasized that ... - Issues Involved:1. Maintainability of an application under Section 31 of the State Financial Corporations Act, 1951 against a surety.2. Rights of the Financial Corporation under Sections 29, 31, and 32 of the Act.3. Interpretation of the term 'borrower' and its applicability to a surety.Detailed Analysis:1. Maintainability of an application under Section 31 of the State Financial Corporations Act, 1951 against a surety:The primary issue was whether the Financial Corporation could proceed against the property of a surety under Section 31 of the Act. The court noted that Section 31 provides a speedy and summary mode of recovery by making an application to the District Judge for reliefs such as the sale of mortgaged property. However, the court concluded that this section is confined to actions against the borrower industrial concern and its property. The court stated:> 'The District Judge can 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 to the outstanding liability of the industrial concern to the Financial Corporation.'The court emphasized that the reliefs under Section 31 are directed against the borrower and its property, not against the property of a surety.2. Rights of the Financial Corporation under Sections 29, 31, and 32 of the Act:The court examined the rights conferred upon the Financial Corporation under these sections. Section 29 allows the Corporation to take over the management of the industrial concern and realize the mortgaged property. Section 31 provides a special procedure for enforcement of claims, and Section 32 outlines the procedure the District Judge must follow. The court observed:> 'Section 29 defines the general right of the Corporation in cases of default and Section 31 provides for a speedy and summary remedy.'The court clarified that while Section 29 allows the Corporation to proceed against the property of a surety, this right must be enforced through the ordinary legal mechanisms provided in the Transfer of Property Act and the Code of Civil Procedure, not through the summary procedure under Section 31.3. Interpretation of the term 'borrower' and its applicability to a surety:The court discussed whether the term 'borrower' could include a surety. The Advocate-General argued that any party to the loan agreement, including a surety, should be considered a borrower. However, the court disagreed, stating:> 'A borrower is obviously a person who borrows and it cannot include the surety who guarantees or secures the loan.'The court highlighted that the agreement itself distinguished between the borrower and the surety, and this distinction was maintained throughout the document. The court further noted:> 'The preamble of the agreement describes the industrial concern as borrower and describes Munna Lal as the 'mortgagor' who has mortgaged his property in security of the loan.'The court concluded that the statutory provisions of Sections 31 and 32 do not permit the inclusion of a surety within the term 'borrower' for the purposes of the summary procedure.Conclusion:The court answered the referred question in the negative, stating:> 'The appellant Munna Lal, who mortgaged his property as surety to the Financial Corporation, could not be proceeded against under Section 31 of the Act.'The case was remitted to the Division Bench for disposal in light of this interpretation.