2002 (1) TMI 1266 - SC - Companies Law

Whether action under Section 29 of the Act is called for? Held that - Section 29 gives a right to the Financial Corporation inter alia to sell the assets of the industrial concern and realize the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. This right accrues when the 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 as envisaged in Section 29 of the Act. Section 29(1) gives the Financial Corporation in the event of default the right to take over the management or possession or both and thereafter deal with the property. As learned counsel for the respondents during the course of hearing submitted that unit is in the possession of the Corporation. They will make effort to make payment of the amount due to the Corporation, if a reasonable time is granted. Though their stand has always been different, and the Corporation opposes the prayer, we grant the prayer in the peculiar circumstances of the case. To test the bona fides of the respondents, we direct that the Corporation shall intimate the respondents within a month from to-day upto date amount due. Within six months from the date of such intimation, the respondents shall repay the amount in full. In case of failure to make the payment, it shall be open to the Corporation to dispose of the seized unit in accordance with law in such manner as would bring in the highest price. The appeal is allowed to the extent indicated above.

Issues Involved:
1. Legitimacy of the Corporation's action under Section 29 of The State Financial Corporation Act, 1951.
2. Applicability and correctness of the Mahesh Chandra case guidelines.
3. Fiduciary relationship between the Corporation and the borrower.
4. Judicial review of administrative actions by financial corporations.
5. Fairness in the process of auctioning seized units.

Issue-wise Detailed Analysis:

1. Legitimacy of the Corporation's Action Under Section 29 of The State Financial Corporation Act, 1951:
The Corporation initiated action under Section 29 of the Act due to the respondent's chronic default in repayment of the loan. The Corporation took possession of the respondent's unit after recalling the loan under Section 30 of the Act. The Supreme Court emphasized that Section 29 gives the Financial Corporation the right to sell the assets of the industrial concern and realize the property pledged, mortgaged, hypothecated, or assigned to it. This right accrues when the industrial concern defaults in repayment or meeting its obligations.

2. Applicability and Correctness of the Mahesh Chandra Case Guidelines:
The lower courts relied on the Mahesh Chandra case, which issued guidelines requiring the defaulting unit holder to be associated or consulted at every stage in the sale of the property. The Supreme Court found that the guidelines in Mahesh Chandra's case placed unnecessary restrictions on the exercise of power by the Financial Corporation under Section 29. The Court observed that the guidelines did not lay down the correct law and overruled the Mahesh Chandra decision, favoring the principles stated in the Gem Cap case, which aligned more with the legislative intent.

3. Fiduciary Relationship Between the Corporation and the Borrower:
The respondents argued that the Corporation and the borrower unit have a fiduciary relationship, likening the Corporation to a trustee. The Supreme Court clarified that while the Corporation is expected to act fairly, it is essentially a creditor, and the relationship between the Corporation and the borrower is that of creditor and debtor. The Corporation's primary duty is to recover the amounts due to enable further lending and promote industrialization.

4. Judicial Review of Administrative Actions by Financial Corporations:
The Supreme Court reiterated that the scope of judicial review in commercial matters is limited. Courts should not act as appellate authorities over the decisions of financial corporations unless there is a statutory violation or the Corporation acts unreasonably. The Court emphasized that administrative authorities have discretion and their decisions should not be substituted by judicial judgment unless the action is so unreasonable that no sensible person would have taken it.

5. Fairness in the Process of Auctioning Seized Units:
The Court noted that fairness required of Corporations does not mean disabling them from recovering dues. The Corporation must ensure that the sale of seized units is transparent and fetches the highest price, but it is not obligated to follow the restrictive guidelines set by Mahesh Chandra's case. The Court highlighted that public auction after adequate publicity generally secures the best price, but other methods like inviting tenders may be used if public auction is not feasible.

Conclusion:
The Supreme Court allowed the appeal to the extent that the respondents were given a final opportunity to repay the amount due within six months from the date of intimation by the Corporation. If the respondents fail to make the payment, the Corporation is permitted to dispose of the seized unit in accordance with law to secure the highest price. The judgment emphasized the need for financial corporations to recover dues to continue their role in promoting industrialization, while also ensuring fairness in their actions.

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