1986 (4) TMI 358 - HC - Companies Law

Third-party sureties liable for loan default on mortgaged property under Financial Corporations Act

Thressiamma Varghese Versus Kerala State Financial

The court held that the Corporation could proceed against the mortgaged property of third-party sureties under Section 31 of the State Financial ... - Issues Involved:1. Jurisdiction of the District Judge under Section 31 of the State Financial Corporations Act.2. Applicability of Sections 31 and 32 to co-mortgagors or guarantors.3. Legislative intent and statutory interpretation of the Act.4. Procedural fairness and notice requirements under Section 32.5. Comparison with judicial precedents and other statutory provisions.Issue-wise Detailed Analysis:1. Jurisdiction of the District Judge under Section 31 of the State Financial Corporations Act:The primary issue was whether the District Judge has jurisdiction to proceed against the properties of co-mortgagors or guarantors in proceedings initiated under Section 31 of the State Financial Corporations Act. The court noted that Section 31 enables the Financial Corporation to apply to the District Judge for reliefs such as the sale of property pledged or mortgaged as security for the loan. The provision does not distinguish between property belonging to the industrial concern and property mortgaged by third-party sureties. The jurisdiction is conferred on the District Judge within whose limits the industrial concern carries on business, emphasizing the focus on the industrial concern but not excluding third-party properties.2. Applicability of Sections 31 and 32 to co-mortgagors or guarantors:The appellant contended that Sections 31 and 32 create a special jurisdiction only for the industrial concern, not for co-mortgagors or guarantors. The court rejected this argument, stating that the Act's provisions, including Section 29, do not restrict the Corporation's rights to proceed only against the industrial concern's property. The Act envisages that the Corporation can seek an order for the sale of mortgaged property, including that belonging to third-party sureties. The court emphasized that the statutory scheme allows for the expeditious recovery of loans, which would be hindered if the Corporation had to resort to civil suits for third-party properties.3. Legislative intent and statutory interpretation of the Act:The court examined the legislative intent behind the State Financial Corporations Act, which aims to provide medium and long-term credit to industrial undertakings and ensure the expeditious recovery of loans. The Act's provisions override inconsistent laws and provide additional remedies beyond those in the Transfer of Property Act or the Code of Civil Procedure. The court highlighted that the Act's purpose is to facilitate industrial development by ensuring quick loan recovery, which supports the inclusion of third-party properties within its ambit.4. Procedural fairness and notice requirements under Section 32:The appellant argued that the absence of a specific provision for issuing notice to third-party sureties in Section 32 indicates that such sureties cannot be proceeded against. The court disagreed, stating that the audi alteram partem rule (the right to be heard) is implied in the provision. The District Judge is expected to issue notice to the concerned parties, including third-party sureties, to ensure procedural fairness. The court noted that in the present case, the District Judge had issued notice to the appellant, ensuring compliance with natural justice principles.5. Comparison with judicial precedents and other statutory provisions:The court referred to judicial precedents, including the Full Bench decision of the Allahabad High Court in Munnalal v. U.P. Financial Corporation, which held a contrary view. However, the court preferred the earlier Division Bench decision of the Allahabad High Court, which supported the Corporation's right to proceed against third-party properties. The court also cited the Supreme Court's observations in Director of Industries, U.P. v. Deep Chand, emphasizing the need for expeditious recovery of public funds advanced as loans.Conclusion:The court concluded that the Corporation could proceed against the mortgaged property of third-party sureties in an application before the District Judge under Section 31. The duty to issue notice to the surety is implied to ensure procedural fairness. The appeal was dismissed, and the order of the District Judge was upheld, allowing the Corporation to recover the loan amount from the properties mortgaged by the co-mortgagors, including the appellant. The court emphasized that the statutory scheme aims to facilitate quick loan recovery to support industrial development and public interest.