2007 (5) TMI 685 - HC - Indian Laws

Summary

Issues Involved:
1. Power of the Corporation under Section 29 of the State Financial Corporation Act, 1951.
2. Requirement of proper notice to the guarantor before taking possession of mortgaged property.
3. Legality of the public notice for auction/sale of the mortgaged property without prior notice to the guarantor.
4. Liability of the guarantor in relation to the borrower's default.

Detailed Analysis:

1. Power of the Corporation under Section 29 of the State Financial Corporation Act, 1951:
The central issue was whether the Corporation could take possession of the mortgaged property of the guarantor under Section 29 of the SFC Act, 1951, without issuing proper notice. The petitioner argued that Section 29 only empowers the Corporation to act against the borrower, not the guarantor. The Corporation contended that it has the right to take over and sell the mortgaged property of both the borrower and the guarantor if the borrower defaults.

2. Requirement of proper notice to the guarantor before taking possession of mortgaged property:
The Court emphasized the importance of issuing proper notice to the guarantor before taking any action on the mortgaged property. The petitioner claimed that no notice was given before the Corporation attempted to take possession of the property. The Court referred to the principles of natural justice and fair play, which necessitate informing the guarantor of the intended actions and providing an opportunity to fulfill the obligations.

3. Legality of the public notice for auction/sale of the mortgaged property without prior notice to the guarantor:
The Court found the public notice for auction/sale of the mortgaged property without prior notice to the guarantor to be unjust, unreasonable, and arbitrary. The Corporation's action was deemed violative of the principles of natural justice, as the guarantor was not given a fair chance to repay the loan or address the default before the public notice was issued.

4. Liability of the guarantor in relation to the borrower's default:
The Court discussed the difference between a surety and a guarantor, noting that a guarantor's liability is secondary and contingent upon the default of the borrower. The guarantor is only liable when the borrower fails to repay the loan. The Court cited the Black Law Dictionary to highlight that a guarantor's contract is a separate undertaking from the borrower's contract. The Court also referred to various judgments, including the Full Bench decision of the Allahabad High Court in Munna Lal Gupta v. U.P. Financial Corporation, and the Supreme Court's ruling in Delhi Financial Corporation v. Rajiv Anand, to support its findings.

Conclusion:
The Court concluded that the Corporation's actions were unfair, unjust, unreasonable, and arbitrary. The impugned letter dated 23-12-1997 and the public notice dated 8-5-1998 were set aside and quashed. The Corporation was directed to restore possession of the mortgaged property to the petitioner and proceed de novo in accordance with the law for the realization of its dues.