2009 (12) TMI 1061 - SC - Indian Laws

Supreme Court Overturns High Court, Upholds Corporation's Actions in Loan Recovery Under State Financial Corporations Act.

The SC allowed the appeal, overturning the HC's decision, and dismissed the Respondent's writ petition. The SC found that the Appellant-corporation acted ... - Issues Involved:1. Legality of the action taken under Section 29 of the State Financial Corporations Act, 1951.2. Obligation of the financial corporation to act fairly and within a reasonable time.3. Legality of charging compound penal interest.4. Judicial review of the corporation's actions and the High Court's intervention in contractual terms.Issue-wise Detailed Analysis:1. Legality of the action taken under Section 29 of the State Financial Corporations Act, 1951:The Supreme Court examined whether the Punjab and Haryana High Court was correct in quashing the action taken by the Appellant-corporation under Section 29 of the State Financial Corporations Act, 1951. The Respondent had defaulted on the repayment of a term loan, leading the Appellant-corporation to take possession of the unit and issue multiple notices for payment. The High Court had declared the action unfair and unreasonable, but the Supreme Court found that the Respondent had failed to discharge its repayment obligations and did not respond to notices or avail concessions offered by the corporation. Therefore, the Supreme Court held that the Appellant-corporation acted reasonably and fairly, and the High Court's decision to nullify the notice was incorrect.2. Obligation of the financial corporation to act fairly and within a reasonable time:The High Court had formulated the question of whether the corporation, after invoking Section 29, could retain the property indefinitely while continuing to charge interest and penal interest without limit. It concluded that the corporation must act fairly and within a reasonable time. However, the Supreme Court noted that the corporation had indeed acted fairly by issuing multiple notices and offering concessions to the Respondent. The Supreme Court emphasized that the corporation's primary duty is to recover loans to provide financial assistance to others, and it cannot be expected to flounder public money for promoting private interests.3. Legality of charging compound penal interest:The High Court referred to the judgment in Central Bank of India v. Ravindra and held that the corporation could not compound penal interest. The Supreme Court, however, found that the High Court was not called upon to examine the legality of the terms of the loan agreement, which the Respondent had not challenged. The Supreme Court noted that the terms of the agreement, which included the rate of interest and compounding, were binding on the parties.4. Judicial review of the corporation's actions and the High Court's intervention in contractual terms:The Supreme Court reiterated that judicial review of the corporation's actions is limited to cases of statutory violation or actions that are arbitrary, unreasonable, or unfair. The High Court had erred in altering the terms of the loan agreement suo motu and directing the corporation to make fresh calculations and allow the Respondent to pay the recalculated amount by selling the mortgaged property. The Supreme Court emphasized that the courts should not interfere with the corporation's decisions unless there is evidence of mala fide actions or statutory violations.Conclusion:The Supreme Court allowed the appeal, set aside the impugned order of the High Court, and dismissed the writ petition filed by the Respondent. The Supreme Court found that the Appellant-corporation had acted reasonably and fairly, and the High Court's intervention in the contractual terms and its direction for reviewing pending cases were legally unsustainable.