2003 (3) TMI 605 - HC - Companies Law

Summary

Issues Involved:
1. Whether Section 29 of the State Financial Corporations Act, 1951 (SFC Act) empowers a State Financial Corporation (SFC) to take possession of the property mortgaged by a surety.
2. Whether a State Financial Corporation should first proceed against the borrower (industrial concern) before enforcing the liability of the surety.
3. Whether a State Financial Corporation can lease or sell the property secured by the surety under Section 29 without the intervention of the Court.

Issue-wise Detailed Analysis:

Re: Issue 1 - Power to Take Possession of Surety's Property Under Section 29:
The petitioners contended that Section 29 of the SFC Act does not empower a State Financial Corporation to take possession of the property mortgaged by a surety. They argued that the section explicitly grants the right to take over the management or possession of the borrower industrial concern, but does not extend this right to the property of the surety. The Court upheld this contention, stating that the language of Section 29 is clear and unambiguous, and does not mention the surety's property. The Court emphasized that any attempt to take possession of a surety's property without express statutory authority would violate Article 300A of the Constitution of India. The Court also noted that if the Legislature had intended to include the surety's property under Section 29, it would have amended the section accordingly. The Court dissented from the views expressed in the decisions of the Orissa High Court and the Punjab and Haryana High Court, which had held that the power to take possession under Section 29 extends to the property mortgaged by a surety.

Re: Issue 2 - Proceeding Against Borrower Before Surety:
The petitioners argued that the State Financial Corporation should first proceed against the borrower and only if it is unable to recover the amount from the borrower, it can proceed against the surety. The Court rejected this contention, citing Section 128 of the Indian Contract Act, which states that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract. The Court noted that the surety can be proceeded against without first proceeding against the principal debtor. The Court referred to the Supreme Court decisions in Bank of Bihar Ltd. v. Dr. Damodar Prasad and State Bank of India v. Indexport Registered, which held that the guarantor could be sued without suing the principal debtor, and the liability of the surety is immediate.

Re: Issue 3 - Power to Lease or Sell Surety's Property Under Section 29:
The petitioners contended that the power to transfer by way of lease or sale and realize the property under Section 29 should be interpreted as applying only to the property of the industrial concern and not to the property of the surety. The Court agreed with this contention, stating that the power of sale and lease under Section 29(1) is intended to be exercised only in regard to the assets of the industrial concern. The Court noted that the use of the term "as well as" in Section 29(1) indicates that the right to transfer by way of lease or sale and realize the property is with reference to the property of the industrial concern, the management and/or possession of which has been taken over by the Corporation. The Court held that Section 29(1) does not empower a Financial Corporation to sell or lease the property secured by a surety in its favor. The Court referred to the decision of the Supreme Court in AP State Financial Corpn. v. Gar Re-rolling Mills, which indicated that the power under Section 29 can be used only against the principal debtor and not against sureties.

Conclusion:
The Court concluded that the remedy of the Financial Corporation against the property of the surety lies either under Section 31 of the SFC Act or by having recourse to the civil court, and not under Section 29. The Court quashed the impugned orders passed by the Karnataka State Financial Corporation authorizing its officers to take possession of the properties of the petitioners under Section 29. The Court directed the Karnataka State Financial Corporation not to proceed against the property of the surety under Section 29. Each party was directed to bear their respective costs.