TaxTMI 
TaxTMI 
TaxTMI 
1989 (12) TMI 356
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....e property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. 2. The petitioners have, therefore, challenged the constitutional validity of section 29(1) of the Act, and, in the alternative, the action threatened or taken under that provision. Section 29(1) of the Act reads as under : "29(1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concern, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation." 3. Learned counsel appearing for the petitioners have contended that this provision is unreasonable, drastic, arbitrary, violative of the principles of natural justice and fair play; the Corporation behaves as a judge, in its....
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....f industrial growth with no profit motive. It utilises its funds for helping industrial concerns to come up and recycle the recoveries and funds for the same purpose and any delay or impediment in the recovery would affect the working of the Corporation in helping the new industrial concerns to start and grow. It is with a view to promote quick credit for the purpose of industrial growth and for speedy recovery of the dues that special privileges have been conferred upon the Corporation. It is submitted that section 29 of the Act is not a remedy but merely a right and an extension of the principle of section 69 of the Transfer of Property Act with a view to help industrial growth of medium and small scale industries. It is submitted that section 69 of the Transfer of Property Act enables the mortgagee if it is a Government, or even a private mortgagee in a metropolitan city to take direct action of taking possession and effecting sale without the intervention of the court and the validity of that provision has been upheld long back by the Madras High Court. It is further submitted that the same right is given to the statutory corporation which has been specially created to advance ....
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....ent, Reserve Bank, Development Bank or other financial institutions recognised in this behalf by the State Government. The general superintendence, direction and management of the affairs and business of the Financial Corporation vest in the board of directors (section 9) consisting of four directors nominated by the State Government, one director nominated by the Reserve Bank, two directors nominated by the Development Bank, three directors one of whom represents scheduled banks, another representing co-operative banks and the third representing the remaining financial institutions, one directly elected in the prescribed manner from amongst other parties or shareholders and the managing director is to be appointed by the State Government in consultation with and after obtaining the advice of the Development Bank and except in the case of first appointment, also with the board (section 10). The chairman of the board is also to be nominated by the State Government after considering the recommendations of the board (section 15). The executive committee consists of the managing director and four other directors elected by the nominated directors (section 18). This executive committee ....
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....rules or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of association of an industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act, shall be in addition to and not in derogation of any other law for the time being applicable to an industrial concern. 8. The Statement of Objects and Reasons for enacting this law states that it was intended to provide medium and long-term credit to industrial under takings which fall outside the normal activity of the commercial banks. The State Financial Corporation being controlled and guaranteed by the Government was, therefore, constituted as a special statutory agency to advance loans to deserving industrial undertakings. While providing incentives to start industrial undertakings, the recoveries from the concerns have to be ensured and, therefore, it was specifically mentioned that the Corporation has been given privileges in the matter of enforcement of its claims against its dues. 9. Section 29(1)which we have quoted....
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....to an application for attachment of property in execution of a decree at a stage posterior to the passing of the decree. It is too late in the day to contend that the proceeding commenced upon such an application is a suit for the recovery of the dues of the Corporation within the meaning of sub-section (4) of section 3 of the Recovery Act and that it would abate under section 7 upon the commencement of the Recovery Act." As far as the question of dues of the Corporation is concerned, the entries in the books are evidence of the agues in view of section 44 of the Act which provides that : "The Financial Corporation shall be deemed to be a bank for the purposes of the Banker's Books Evidence Act, 1891." 12. Therefore, the entries in the books of the Corporation are evidence of the outstanding dues and non-payments thereof by the party. Regarding the principles of natural justice or fair play, we will be discussing the same at a later stage but once those dues are duly ascertained, the only question is of its recovery or execution of the decree and exercising the right of a secured creditor. Under section 58 of the Transfer of Property Act, a mortgagee has a r....
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....t; 14. It would, thus, be clear that when the Corporation decides to resort to section 29 of the Act and takes any action under that section, it is not entering upon any adjudicatory or quasi-judicial function. It is a decision by a party to the agreement as to what kind of steps for speedy recovery should be taken and whether the assistance of the court is necessary. Just as a mortgagee under section 69 of the Transfer of Property Act can take a decision to proceed under section 69 and if he finds any difficulty in proceeding without the assistance of the court, he my take a decision to go to a court of law. But it is the decision of a party to the agreement and at that stage, no quasi judicial function is involved. Similarly, when the Corporation takes an administrative decision as to the course of action to be taken and followed it is not exercising any quasi-judicial function. 15. Even if it is not a quasi-judicial function and merely an administrative function, does it mean that it can proceed without giving any opportunity of hearing and observing the minimum principles of natural justice or fair play ? In the case of A. K. Kraipak v. Union of India, AIR 1970 SC 150, the Su....
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....of Kerala, AIR 1969 SC 198, the rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the frame work of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for the purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case." 16. In the case of Chairman, Board of Mining Examination and Chief Inspector of Mines v. Ramjee, AIR 1977 SC 965, the Supreme Court had occasion to consider the nature and scope of the principles of natural justice. It observed as under (page 969) : "Natural justice is no unruly horse, no lurking land mine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential procession propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be compl....
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.... the appellant had actually abandoned his post of duty for an exceedingly long period without sufficient grounds for his absence is so glaring that giving him further opportunity to disprove what he practically admits could serve no useful purpose." 18. In the case of Sukhwinder Pal Bipan Kumar v. state of Punjab, AIR 1982 SC 65, the provisions of the Punjab Foodgrains Dealers Licensing and Price Control Order, 1978, giving power to suspend licences for a period of 90 days without giving any opportunity was upheld as a measure of social control and public interest. 19. The case of Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corporation is a direct case under section 29 of the State Financial Corporations Act. In para 6, it was held that the Corporation cannot be forced to take recourse to section 31 and it is open to the Corporation to take recourse to section 29 of the Act and section 31 is expressly without prejudice to the provisions of section 29. The Division Bench of the Orissa High Court further came to the conclusion that a reading of section 29 of the Act does not exclude application of the principles of natural justice. But whether in a given case, the....
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....rtunity to explain, replay or comply with the same. After considering the response, if any, from the party, it is open to the Corporation to arrive at its own decision. The party may point out in reply about the default position and/or may offer substantial part payment and offer reschedulement of repayment supported by its financial working and cash flow for the past period as well as as projected in future. If the Corporation is satisfied that the debtor has been bona fide, trustworthy and creditworthy and because of genuine difficulties, it wants reasonable reschedulement after substantial part payment, the Corporation will consider the same in accordance with its policy of encouraging and assisting the industrial growth of viable industrial units and if the Corporation is of the opinion that the industrial unit does not fulfill its policy requirement, the Corporation may proceed further under section 29 in accordance with law, and, in that case, it would be acting fairly, reasonably and in accordance with the principles of natural justice and not arbitrarily. As stated earlier in the Supreme Court judgments, the principles of natural justice in administrative decisions are the ....
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....tribute any personal bias to them so that the provision of section 29 is unreasonable on that count. Really speaking, they are not even judging their own cause. They are taking an administrative decision as to what course of action of action should be taken in case of default. It is their duty and section 29 enables them to make effective recovery by providing a speedy procedure. This procedure is analogous to section 69 of the Transfer of Property Act. 23. In the case of Organic Chemical Industries v. Union of India [1979] 55 FJR 283; AIR 1979 SC 1803, the Supreme Court considered the validity of section 14B of the Employees' Provident Funds and Miscellaneous provisions Act, 1952. There, the order of the Provident Fund Commissioner imposing damages was not subjected to appeal. In that case, the Supreme Court observed that absence of guidelines or appeal is a desirable corrective, but not an indispensable imperative and, therefore, the section was not held to be bad and it was observed that if the order passed by the officer is bad, it can be challenged under the writ jurisdiction. 24. In the case of V. Narasimhachariar v. Egmore Benefit Society, Third Branch Ltd., AIR 1955 M....
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....pt up what happens is the mortgagees who are citizens of the Union of India like the mortgagors, only come to enforce their rights under the contract entered into between them. article 14 can obviously have no application. There is no discrimination looked at from any point of denial of equal protection. Therefore, the point taken under article 14 of the Constitution fails. Point (b), viz., that the power of the mortgagee to sell offends article 19(1)(f) of the constitution, has no substance. The ideology behind this right is that of individualism and private property. It means that a man is free to acquire any property including means of production either by inheritance, personal earnings or by other lawful means, to hold it as his own and dispose of it limited only by the exigencies of public welfare. "Dispose of" means (a) to determine the fate of, to exercise a power of control over, to fix the condition, employment, etc., to direct or assign for a use; (b) to exercise finally one's power of control over, to pass over into the control of someone else by selling, to get rid of. Hold means to possess the property, to enjoy the benefits which are ordinarily attached ....
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....authority acting under such section is bad, it can always be challenged in writ jurisdiction and the other party is not without any remedy. The board consisting of high officials takes a decision under section 29 of the Act. That decision is required to be taken fairly and after giving a notice of reasonable time and an opportunity to explain and reply to the same; thereafter acting fairly if the authority takes any action, the section does not become bad on any of the counts suggested in this petition that there is no appeal provided or that the Corporation is a judge in its own cause. Once the principles of fair play are read into the provision, there is no unreasonableness, arbitrariness or other infirmity in section 29 and, therefore, section 29 cannot be said to be violative of articles 14, 19, 21 and 300A of the Constitution of India on the ground of unreasonableness and arbitrariness. 27. The argument of unreasonableness is based more on apprehension than on reality and is merely in the abstract. Section 29 has to be read in a reasonable manner and in a proper perspective. Every legislation has a perspective which has to be read into every provision of the Act. Every provis....
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.... observed that the import, content and scope of article 14 of the Constitution has been deliberately considered and explained in numerous decisions of the Supreme Court and to summarise the principles or rather the rules of guidance would be sufficient. The Supreme Court also considered the application of those rules to the provisions of the impugned enactment. The following are the rules as summarized in the headnote : "(1) If the statute itself or the rules made under it applied unequally to persons or things similarly situated, it would be an instance of a direct violation of the constitutional guarantee and the provision of the statute or the rule in question would have to be struck down. (2) The enactment or the rule might not in terms enact a discriminatory rule of law but might enable an unequal or discriminatory treatment to be accorded to persons or things similarly situated. This would happen when the Legislature vests a discretion in an authority be it the Government or an administrative official acting either as an executive officer or even in a quasi-judicial capacity by a legislation which does not lay down any policy or disclose any tangible or intelligible ....
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....on in such cases would not be parallel to the tests to be applied for determining the validity of rules made under statutes which enable the rule making authority to enact subsidiary legislation 'to carry out the purposes of the Act'. The criteria to be applied to determine the validity of such rules could be appropriately applied to determine the validity of the action under the provisions like the one dealt with under the last two heads." In view of this judgment of the Supreme Court, these rules are required to be applied to the present case. According to the petitioners, the Act enables unequal and discriminatory treatment to the defaulters similarly situated because the Legislature has vested discretion in the Corporation without laying down any policy and disclosing any tangible or intangible purpose and, therefore, the authority has been clothed with arbitrary power enabling it to discriminate. In such circumstances, section 29 will be "bad as violative of article 14 of the Constitution". 31. According to the respondents, the Legislature has laid down the policy of speedy recovery and indicated the time of action which would serve as a guidance to th....
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....iminatory law. In para 10, the Calcutta High Court found that no principle or policy or guidance was laid down. 35. On behalf of the respondents, strong reliance has been placed on the judgment of the Supreme Court in the case of Maganlal Chhagganlal (p.) Ltd. v. Municipal Corporation of Greater Bombay, AIR 1974 SC 2009. In that case, the Bench of seven judges of the Supreme Court summarised the propositions in para 15 on the same line as in the case of Jyoti Pershad, AIR 1961 SC 1602 and observed as follows (in para 16) : "The statute itself in the two classes of cases before us clearly lays down the purpose behind them, that is that premises belonging to the Corporation and the Government should be subject to speedy procedure in the matter of evicting unauthorised persons occupying them. This is a sufficient guidance for the authorities on whom the power has been conferred. With such an indication clearly given in the statutes one expects the officers concerned to avail themselves of the procedures prescribed by the Acts and not resort to the dilatory procedure of the ordinary civil court. Even normally, one cannot imagine an officer having the choice of two procedures, o....
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....n, both can be resorted to, at the potion of the authorities recovering the amount unless the statute in express words lays down that one remedy is to the exclusion of the other. Another case, Ram Sarup v. Union of India, AIR 1965 SC 247, was also considered wherein the question arose as to whether the power under section 125 of the Army Act which empowered the officer either to try a case by court martial or by an Ordinary Court or by a Criminal Court, was left entirely within his discretion without any guidance, and was violative of article 14 of the Constitution. The Supreme Court held that (at page 1592 of 1979 AIR) : "the choice as to which court should try the accused is left to the responsible military officers under whom the accused is serving and these officers were to be guided by consideration of the exigencies of the service, maintenance of discipline in the army, speedier trial, the nature of the offence and the person against whom the offence is committed. When power is conferred on high and responsible officers they are expected to act with caution and impartiality while discharging their duties and the circumstances under which they will choose either of the re....
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.... the stringent step of prosecution is considered not necessary. The option is with the Commissioner and if he thinks levy of penalty would achieve the purpose of collection of the tax he can have recourse to the provisions of section 22(4A). Before levying a penalty under section 22(4A), the Commissioner shall give reasonable opportunity of being heard as to why the penalty should not be levied. Reading the two provisions harmoniously, we are of the view that discretion is given to the Commissioner to resort to one of the two remedies as the facts of the case may require. In graver cases, he will be justified in taking the drastic remedy and resorting to prosecution in the Criminal Court if he is satisfied that such a course is necessary for the collection of the tax expeditiously. If the discretion if not properly exercised the court may be justified in interfering in such cases but the law cannot be held to be invalid. In the present case, we have no doubt, it is a grave case of failure to pay the tax as repeated reminders went unheeded. The Commissioner on the facts is fully justified in coming to the consolation that resort to prosecution is necessary. On a consideration of the....
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....Government and makes a hostile discrimination. An officer authorised by the State Government to issue the certificate is expected ordinarily to avail himself of the speedier remedy provided under the statute. The Act which is passed with the object of providing a speedier remedy itself provides sufficient guidance to the officer concerned as to when he should resort to the remedy provided by it." 39. Thus, the object of a speedier remedy and recovery is held to be a sufficient guideline especially when the power is conferred on the State agency which is not an ordinary banker and the public dues are to be recovered expeditiously so that fresh advances may be made from the same. The Supreme Court noticed that there was no express provision in the Act laying down the guideline. Yet, section 3 was not struck down on the ground that the object of providing speedier remedy itself provides a sufficient guideline to the officer concerned as to when he shall resort to that remedy. 40. In the case of Chandra Bhavan Boarding and Lodging, Bangalore v. State of Mysore [1970] 38 FJR SC 1, 8; AIR 1970 SC 2042, 2048, the challenge was on the ground that two different procedures were availa....
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....edies of section 31 under the State Financial Corporations Act and section 3(1) of the Gujarat Public Money Recovery of Dues Act. The Division Bench of this court held that both the provisions were akin to execution proceedings and, therefore, they do not confer two competing powers, one displacing the other. It was held that the Corporation has only one power, namely, the power to take steps akin to the execution of a decree and that power may be exercised in either or even both of the two modes in certain cases and the discretion is left with the competent authority to resort to either or both of the said remedies. Therefore, neither of the remedies is barred or is violative of article 14 of the Constitution of India. Same reasoning applies to section 29 also. 43. From the aforesaid decisions, it can be easily seen that the mere existence of different options to the authority is not violative of article 14 of the Constitution. It is to be seen whether these options are guided by any policy. The policy is obvious from the enactment and its object. A special privilege and right has been conferred on the Corporation to effect speedy recovery and the guiding principle is speedy reco....
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.... and principle available from the statute in this regard. Therefore, section 29 is not violative of article 14 of the Constitution. 46. Same view has also been taken by the Division Bench of the Kerala High Court in the case of K. Surendranathan v. Kerala Financial Corporation, AIR 1988 Ker 330 [1991] 70 Comp Cas 801. It is summarised in head note "A" which reads as follows : "It is not the law that there can be only one remedy available for recovery of loans, advances, etc., from defaulters, namely, recourse through the Ordinary Courts of land. Any statute may in appropriate cases provide for more that one remedy against the same defaulter for recovery of the dues or it may be that relief for recovery is provided in different enactments. Special remedies may be available in favour of or against particular classes of persons. When these two statutory remedies are available against the same defaulter, the power so conferred under the statute is not arbitrary where there are guidelines to control the discretion to be exercised. Thus, guidelines need not necessarily be specifically enumerated in the very section or provision conferring those powers. The guidelines ca....
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....R 1984 Ker 194 relied on." 47. Further, there is some difference between the provisions of section 29 and 31. Although the condition precedent for initiating the action is the same under both the provisions, viz., default in payment of the outstanding dues or breach of agreement under section 31, the court can give specified reliefs only, namely :- (a) sale of the property; or (b) transferring the management of the industrial concern to the Financial Corporation; or (c) ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment. 48. The court sale will be an auction sale where the terms and conditions would be of a certain set patter only. The concerns and the properties which are required to be sold are the industrial concerns of medium and small size worth lakhs of rupees and capable of being run on economic and viable basis, if the conditions of payments can be moulded in accordance with the policy of the Financial Corporation, which cannot be done in the case of a court sale. Moreover, in a court sale, it is not easy to find purchasers as compared to a sale and negotiations by the Corporation. The cour....
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....whether the authority has acted fairly. If the authority has acted unfairly, such act of the authority can be challenged, but the section cannot be said to be unreasonable and the aggrieved party can challenge the action of the authority at any appropriate stage before or after the action is taken and there is no person left without a remedy before the judicial forum. Even though section 29 and 31 cannot be said to be two remedies to the authority, the discretion is a property guided discretion. Promotion of quick credit was recognised to be a necessity of commerce even before the industrial revolution had effectively spread in India a hundred years ago. With the present necessity to quick industrial growth and the necessities of the modern times, the necessity of promotion of quick credit has become more and more acute as also its recovery. If quick recovery is not assured, the creditor would be slow in giving and would thus hinder the industrial growth. Therefore, quick credit and quick recovery is the keystone of modern industrial growth and it is because of such statutory provision and assurance that it has been possible to extent credit to industrial concerns and effect recove....
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....dity of Section 29(1)of the State Financial Corporations Act on the ground of articles 14, 19, 21 and 300A of the Constitution. 51. As regards the individual facts of each petition, it is to be noted that it is an admitted position that a substantial amount is due and outstanding in each of the petitions to the Corporation. Even though notices have been given in all cases, substantial amounts still remain outstanding. Even though these petitions are pending since long and there was sufficient time and opportunity to make the payment, unfortunately the petitioners have failed to avail of the same. In view of the fact that in almost all cases only advertisement for sale has been issued and no further action has been taken or in some cases, only notice under section 29 has been issued, there is no substantial question which requires to be considered in these matters. As we have already come to the conclusion that section 29 is a valid piece of legislation and in reply to the notice under section 29, it is open to the industrial concern to explain and pay. In some of the cases, interim relief has been granted unconditionally. In some cases, it is conditionally on payment of some amoun....
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....price at present. 52. In one matter, i.e., in Special Civil Applications Nos. 3070 of 1986 and 6482 of 1987, sale is already effected. That will be considered separately. In Special Civil Application No. 3086 of 1986, possession has been taken and sale has been stayed on condition of depositing ₹ 50,000. That also will be considered separately. In the rest of the matters, there is not much to be considered separately. However, some points were raised in some of these matters, such as : (i) That the Corporation had not advanced the full amount of loan sanctioned and the remaining amount of the loan was not paid and was cancelled and, therefore, there is breach of promise by the Corporation and the Corporation is estoppel by promissory estoppel from recovering the amounts already advanced. (ii) That the unit is a sick unit and the Corporation is under a duty to help revival of such sick unit and, therefore, the recovery cannot be enforced. (iii) That the Corporation is under a duty to rehabilitate and not to kill industrial units by coercive recovery. (iv) That the running unit should not be forced to be closed down by enforcing recovery under section 29. 53. All the....
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....ese cases, most of the industries are closed. Even those which are running are not making payments of their dues to the Corporation. In these circumstances, it cannot be said that there is any case made out for restraining the Corporation from proceeding under section 29. In many of these cases, the debtors had made offers of reschedulement. The Corporation did not accept those offers because the payments were not reasonably substantial and the reschedulement period was beyond reasonable length and instalments were not proper and they were on the lower side. Even so, the debtors did not make the payments even according to their own offer of reschedulement. This shows lack of bona fide on the part of the debtors. During the course of the hearing the Corporation had offered reschedulement to the debtors who had paid 30 per cent of the outstanding dues and the balance payment by instalments within a period of 2 to 3 years. Quite a few of the industrial units availed of that opportunity and settled the matter and withdrew the petitions. The cases which have remained are of such industrial units which are unable to pay or do not want to pay and yet want to restrain recovery. 54. Natura....