SM 1 901.WP.1269.11 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 1269 OF 2011
1. Shivprakash Seth ]
2. Vikas Seth ]
3. Anuradha Shiv Prakash Seth ]
4. Vibha Pradeep Anand ]
all of Mumbai, Indian Inhabitants, ]
residing at 19, Usha Kiran, ]
Carmichael Road, Mumbai - 4900 026. ] ....Petitioners Versus
1. State of Maharashtra. ]
2. SICOM Limited, a Government ]
Company incorporated under the ]
Companies Act, 1956 (Act of 1 of ]
1956) and having its Registered ]
Office at "Nirmal", 1st Floor, ]
Nariman Point, Mumbai - 400 023. ]
3. The Debts Recovery Appellate ]
Tribunal, Mumbai being a statutory ]
tribunal constituted under the ]
provisions of Recovery of Debts ]
Due to Banks and Financial ]
Institutions Act, 1993 situate at ]
Scindia House (6th Floor), Ballard ]
Pier Road, Ballard Estate, ]
Mumbai 400 038. ]
4. The Debts Recovery Tribunal, II, ]
Mumbai being a statutory tribunal ]
constituted under the provisions of ]
the Recovery of Debts Due to Banks ]
and Financial Institutions Act, 1993 ]
situate at Scindia House (5th Floor), ]
Ballard Pier Road, Ballard Estate, ]
SM 2 901.WP.1269.11 Mumbai - 400 038. ] ....Respondents ____________
Mr. Aspi Chinoy, Sr. Advocate with Mr. Percy Ghandy and Mr. S. A. K. Najam-Es-Sani i/b Maneksha & Sethna for the Petitioner. Mr. J . S. Saluja, AGP for the Respondent No.1-State. Mr. V. R. Dhond with Mr. Ajit Shukla, Ms Nina Kapadia and Mr. Manish Acharya i/b Pandya Gandhi & Co. for the Respondent No.2.
CORAM: DR. D. Y. CHANDRACHUD &
A. A. SAYED, J.J.
DATED : AUGUST 25, 2011.
ORAL JUDGMENT: (Per Dy. D. Y. Chandrachud, J.)
In these proceedings under Article 226 of the Constitution, the Petitioners have challenged orders passed by the Debts Recovery Appellate Tribunal on 26 April 2010 and 21 March 2011 and an order passed by the Debts Recovery Tribunal on 8 October 2009.
2. A company by the name of Seth Woollens Private Limited obtained a loan from the Second Respondent, a body constituted under the State Financial Corporations Act, 1951. The Petitioners were guarantors in respect of the loan advanced by the Second Respondent to the Company. On 28 November 1986, the Second Respondent instituted a Summary Suit under Order SM 3 901.WP.1269.11 XXXVII of the Code of Civil Procedure, 1908 against the Petitioners on the basis of the guarantees executed by the Petitioners. On 25 April 1996, the Second Respondent issued a notice under Section 29 of the State Financial Corporations Act, 1951 ('the Act') to the Company; and took over possession of the mortgaged assets on 25 May 1996. The Second Respondent proceeded to sell the assets of the company in order to recover its dues. The Summary Suit instituted in this Court was transferred to the Debts Recovery Tribunal upon the enactment of the Recovery of Debts Due to Banks and Financial Act, 1993.
3. The Petitioners filed an application before the Debts Recovery Tribunal on 29 June 2009 for dismissal of the Original Application which stood transferred to the Tribunal. The contention of the Petitioners was that in view of the decisions of the Supreme Court in A. P. State Financial Corporation V/s. M/s. Gar Re-Rolling Mills and another1 and in Karnataka State Financial Corporation V/s. N. Narsimahaiah and others2, the application filed by the Second Respondent before the Tribunal was liable to be dismissed since the Corporation had already espoused its remedy under Section 29 of the State Financial 1 (1994) 2 SCC 647
2 (2008) 5SCC 176
SM 4 901.WP.1269.11 Corporations Act, 1951. The Tribunal dismissed the application by an order dated 8 October 2009 observing that the action initiated under Section 29 had reached its logical conclusion and outstandings were still due and payable to the Second Respondent. The Tribunal held that the Judgment of the Supreme Court in Gar Re-Rolling (Supra) did not hold that the outstandings that remained after proceedings under Section 29 had been concluded would stand extinguished. Consequently, the Tribunal was of the view that the action initiated by the Corporation for the recovery of the remaining dues before the Tribunal was maintainable.
4. The Petitioners thereupon filed an Appeal. By a judgment dated 26 April 2010, the Debts Recovery Appellate Tribunal held that a State Financial Corporation has to opt either to proceed under Section 29 or under Section 31 and that simultaneous action under both the sections cannot be initiated. The Appellate Tribunal was of the view that one proceeding would have to be abandoned. In the circumstances, the Appellate Tribunal held that since the proceedings under Section 29 were continuing, the Original Application had to be stayed until the proceedings under Section 29 came to a logical SM 5 901.WP.1269.11 conclusion or were abandoned. The operative order passed by the Debts Recovery Appellate Tribunal was in the following terms: "The Appeal is allowed and the order under Appeal is set aside. Proceedings in O.A. No. 78/2006 shall remain in abeyance until the proceedings under Section 29 of the SFC Act are concluded or abandoned by the Respondent."
5. The Second Respondent, thereupon, moved an application before the Tribunal on 29 June 2010 for the resumption of proceedings in the Original Application on the ground that the proceedings under Section 29 stood concluded and in terms of the directions of the Appellate Tribunal, the original proceedings before the Tribunal would have to be continued. The Petitioners filed a miscellaneous application for clarification of the order of the Debts Recovery Appellate Tribunal dated 26 April 2010 and subsequently, a review application for review of the order of the Appellate Tribunal.
6. The application for review has been dismissed by the Debts Recovery Appellate Tribunal by its impugned order dated 21 March 2011. The Appellate Tribunal noted that on 29 June 2010 the Second Respondent had filed an application before the Tribunal recording that the proceedings under Section 29 had SM 6 901.WP.1269.11 been concluded against the principal borrower. All the dues of the Second Respondent had not been settled by the principal borrower and it was for this reason that the Second Respondent had approached the Tribunal with an application to proceed with the Original Application, since the balance of the dues were to be realized from the guarantors. The Debts Recovery Appellate Tribunal upon adverting to the law laid down by the Supreme Court in Gar Re-Rolling and Karnataka State Financial Corporation (Supra) held that there was no substance in the contention of the Petitioners. The Debts Recovery Appellate Tribunal observed that if the submission was accepted, that would mean that the balance dues, if any, of the Second Respondent cannot be realised from the guarantors.
7. Counsel appearing on behalf of the Petitioners submitted that (I) In A. P. State Financial Corporation V/s. M/s. Gar Re- Rolling (Supra), the Supreme Court held that the State Financial Corporation is entitled to take recourse to the remedy available to it under Section 29 even after having obtained an order or a decree after invoking the provisions of Section 31 but without executing that decree or order; (ii) The Judgment in Gar Re- Rolling holds that though the Corporation has two remedies SM 7 901.WP.1269.11 available to it under Section 29 and Section 31 respectively and the choice for availing of a remedy is with the Financial Corporation alone. At the same time, the Corporation cannot simultaneously initiate and take recourse to the remedy available under Section 29 unless it gives up abandons or withdraws the proceedings under Section 31 at whatever the stage those proceedings may be, (iii) The proceedings which were initiated by way of a Summary Suit in this Court, which was transferred to the Debts Recovery Tribunal, were akin to those under Section 31 of the State Financial Corporations Act, 1951; (iv) Hence, the Corporation having been initiated proceedings under Section 29 must be deemed to have been up the given proceedings before the Debts Recovery Tribunal.
8. On the other hand, it has been urged on behalf of the Second Respondent that (i) The decision of the Supreme Court in Gar Re-Rolling was based on facts prior to 21 August 1985 when the provisions of Section 31 (aa) were introduced so as to enable a a State Financial Corporation to enforce the liability of any surety; (ii) The law laid down by the Supreme Court is to the effect that when a State Financial Corporation chooses to move against an industrial concern, it has a choice of a remedy under Section 29 or SM 8 901.WP.1269.11 Section 31 and even if it has espoused the remedy under Section 31, it cannot take recourse to the remedy under Section 29, unless it abandons or withdraws from the proceedings under Section 31; (iii) However, Section 29 does not empower the Corporation to take steps against the gaurantor. Consequently, there is no question of the Corporation being required to elect a remedy under Section 29 or Section 31 when it moves against the surety under Section 31 (1) (aa); (iv) It is open to the State Financial Corporation as in the present case, to initiate steps against the industrial concern under Section 29 and after those proceedings come to a logical conclusion, to recover the balance dues that remain to be recovered from the surety under Section 31. As a matter of fact, the liability of a surety is coextensive with that of the principal borrower; (v) The proceedings which have been instituted before the Debts Recovery Tribunal cannot be regarded as proceedings under Section 31 or even akin to those undear Section 31 since it is a settled principle of law that proceedings under Section 31 are not akin to a suit nor do they result in a decree or order of a Civil Court.
The rival submissions would now fall for determination.
9. Section 29 of the State Financial Corporations Act, 1951 SM 9 901.WP.1269.11 provides that where any industrial concern, which is under a liability to a Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any installment thereof or in meeting its obligations in relation to any guaranty 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. A the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned is given to the Financial Corporation.
10. Section 29 does not empower the Financial Corporation to move against a surety. This has been settled by the law laid down by the Supreme Court. Section 29 empowers the Financial Corporation to take recourse to its rights in the manner indicated in the provision without the intervention of the Court. On the other hand, Section 31 empowers the Corporation to apply to the District Judge, within whose limits the industrial concern carries on the whole or a substantial part of its business, for one or more of the reliefs spelt out in that section, namely: (1) An order for the sale of property pledged, mortgaged, hypothecated or assigned to SM 10 901.WP.1269.11 the Financial Corporation as security for the loan or advance; (2) For enforcing the liability of any surety; (3) For transferring the management of the industrial concern to the Financial Corporation; (4) For an ad-interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without permission. The Financial Corporation can move the District Judge under Section 31, where an industrial concern has made any default in the repayment of a loan or advance, or breach of any agreement, or has failed to meet 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 or where the Financial Corporation requires the industrial concern to make immediate repayment of a loan or advance which the industrial concern has failed to repay. The action under Section 31 is without prejudice to the provisions of Section 29 of the Act and Section 69 of the Transfer of Property Act, 1882.
11. The provisions of Section 31 were amended by Amending Act 43 of 1985, with effect from 29 August 1985 so as to empower the Corporation to enforce the liability of any surety. A provision SM 11 901.WP.1269.11 to that effect was introduced in clause (aa) of Section 31. The net result, therefore is, where a Financial Corporation seeks to enforce the liability of a surety, a remedy is available to it under Section 31 (1) (aa).
12. Now, it is in this context that it becomes necessary to advert to the decision of the Supreme Court in A.P. State Financial Corporation V/s. Gar Re-Rolling Mills. The issue which arose before the Supreme Court was whether a State Financial Corporation set up under Section 3 of the Act is entitled to take recourse to the remedy available to it under Section 29, even after having obtained an order or a decree after invoking the provisions of Section 31 but without executing that decree or order. The Supreme Court had before it two Civil Appeals. In the first of those appeals, upon a default by the borrower, the Corporation initiated proceedings under Section 31 before the District Judge in 1969 which were allowed. The borrower had filed an Appeal before the High Court while the Corporation has also filed cross objections. A Division Bench of the High Court dismissed the Appeal of the borrower and allowed the cross appeal of the Corporation in regard to the rate of interest. The Corporation moved the City Civil Court to enforce the personal SM 12 901.WP.1269.11 liability of the First Respondent and his guarantor and the suit was decreed by that Court. The Corporation was, however, not able to enjoy the fruits of its decree as the Respondent shifted his place of business and could not be traced. To face this situation, the Corporation proceeded to take action under Section 29. In the second Civil Appeal, proceedings under Section 31 were initiated in 1977. A default was committed by the borrower in the repayment of a loan, following which the provisions of Section 29 were invoked by the Financial Corporation. In the meantime, a suit was filed by the First Respondent in the Civil Court. The corporation was permitted to effect a sale under Section 29, subject to condition. The sale could not go through and in view thereof, the Corporation initiated proceedings under Section 31 before the District Judge. Now, it is in this background, that the Supreme Court dealt with the question as to whether it is open to a State Financial Corporation to seek recourse to its remedies under Section 29 even after invoking the provisions of Section 31 albeit without executing a decree or order that had been obtained. The Supreme Court held as follows:
"On a conjoint reading of Sections 29 and 31 of the Act, it appears to us that in case of default in repayment of loan or any instalment or any advance or breach of an agreement, the Corporation has two remedies available to it SM 13 901.WP.1269.11 against the defaulting industrial concern, one under Section 29 and another under Section 31 of the Act. The choice for availing the remedy under Section 29 or Section 31 of the Act is that of the Financial Corporation alone and the defaulting concern has no say whatsoever in the matter, as to which remedy should be taken recourse to by
the Corporation against it for effecting the recovery. The expression "without prejudice to the provisions of Section 29 of this Act' as appearing in Section 31 of the Act clearly demonstrates that the Legislature did not intend to confine the Corporation to take recourse to only a particular remedy against the defaulting industrial concern for recovery of the amount due to it. It left the choice to the Corporation to act in the first instance under Section 31 of the Act and save its rights and remedies under Section 29 of the Act to be availed at a later stage, with the sole object of enabling the Corporation to recover its dues."
13. The Supreme Court, however, held that where the Corporation had taken recourse to Section 31 and had obtained an order from the Court, it would ordinarily and invariably have to seek its enforcement in the manner provided by Section 32 of the Act, which provisions are aimed to act in aid of the orders obtained under Section 31. The Financial Corporation could not simultaneously initiate and take recourse to the remedy available to it under Section 29 of the Act unless it gives up, abandons or withdraws the proceedings under Section 31 at whatever stage these proceedings may be. In other words, the Supreme Court SM 14 901.WP.1269.11 ruled that the Corporation cannot pursue two remedies at the same time. The Supreme Court noted that the claim of the Corporation in an application under Section 31 is not a monetary claim in respect of its dues to be investigated, though it may become necessary to specify the amount for the purpose of determining how the security should be attached or sold. But the investigation of the claim does not involve the raising of all such contentions as are permissible in a money suit. The substantive relief under Section 31 (1) was held to be something in the nature of an application for attachment of property for execution of a decree before judgment. As regards the doctrine of election, the judgment of the Supreme Court holds that when two remedies are available for the same relief in a case, the party to whom those remedies are available has an option to elect either of them, but that doctrine would not apply to cases where the ambit and scope of the two remedies is essentially different. In that context, the Supreme Court observed thus:
"In our opinion the Corporation can initially take recourse to Section 31 of the Act but withdraw or abandon it at any stage and take recourse to the provisions of Section 29 of the Act, which Section deals with not only the rights but also provides a self-contained remedy to the Corporation for recovery of its dues. If the Corporation chooses to take recourse to the remedy available under Section 31 of the Act and pursues the same to the logical SM 15 901.WP.1269.11 conclusion and obtains an order or decree, it may
thereafter execute the order or decree, in the manner provided by Section 32(7) and (8) of the
Act. The Corporation, however, may withdraw or
abandon the proceedings at that stage and take recourse to the provisions of Section 29 of the Act."
The Supreme court held that the remedy available to the Corporation under Section 29 to realise its dues in the manner prescribed therein is wider in scope than the limited reliefs available to it under Section 31 of the Act and is not controlled by Section 31 of the Act. Further, the legislature clearly intended to preserve the rights of the Corporation under Section 29 of the Act, by expressly stating under Section 31 that its recourse to action under that Section was without prejudice to the provisions of Section 29. However, what alone is not desirable or permitted is a simultaneous recourse to both remedies by the Corporation and not that it cannot withdraw or abandon the proceedings initiated under Section 31 at any stage and then take recourse to the provisions of Section 29. Any interpretation which frustrates the rights of the Corporation to recovery of its dues must be eschewed. The Supreme Court observed as follows:
"Where, the defaulting party fails to honour the order or decree of the court made under Section 31 of the Act, it has neither any legal nor even a moral right to object to the Corporation from taking recourse to the provisions of Section 29 of the Act SM 16 901.WP.1269.11 only on the ground that it has obtained a proper relief under Section 31 of the Act which relief it does not wish to pursue any further. Indeed, if the order of the court issued under Section 31 of the Act has been fully complied and honoured with by the defaulting concern, no occasion would
arise for the Corporation to invoke the provisions of Section 29 of the Act. However, to hold that since the Corporation has initially taken action under Section 31 of the Act and obtained an order/decree from the court, the Corporation is prohibited from invoking the provisions of Section 29 of the Act, notwithstanding the fact that the defaulting concern has not honoured the court's order or decree made under Section 31 of the Act, would
amount to putting premium of the activities of the defaulting concern aimed at frustrating the order/ decree of the court and depriving the Corporation
of recovering its legitimate dues and thereby rendering the expression "without prejudice to ..." occurring in Section 31 otiose. Courts do not favour such a course."
14. Counsel appearing on behalf of the Petitioners submits that the decision in Gar Re-Rolling would mandate that since the Corporation had in the present case initiated proceedings under Section 29, it must be deemed to have been given up its remedy before the Debts Recovery Tribunal on the ground that it is akin Section 31. The submission cannot be accepted for more than one reason. Firstly what the decision in Gar Re-Rolling prescribes is that the State Financial Corporation cannot execute an order under Section 31 of the Act and yet simultaneously take recourse SM 17 901.WP.1269.11 to proceedings under Section 29 for the same relief. As we noted earlier, Section 29 does not provide a remedy to the Corporation against a guarantor. That remedy is available under Section 31 (1)(aa). Hence, it is impossible to accept the view that the Corporation upon moving against the industrial concern under Section 29 is foreclosed from initiating steps against the guarantor under Section 31(1)(aa). In the present case, for instance, the Corporation had initiated steps against the industrial concern under Section 29. Those proceedings resulted in a shortfall in the recovery of dues owing to the Corporation. The Corporation has moved the Debts Recovery Tribunal for the recovery of the dues that remain outstanding after the proceedings under Section 29 have been brought to a conclusion. The Corporation is entitled to do so. But, secondly, what is fundamental is the fact that what the Supreme Court prohibited is a State Financial Corporation moving against the defaulting industrial concern simultaneously both under Section 29 and Section 31. The remedy under Section 29 is not available against the surety. There can be no bar against the Corporation initiating steps under Section 31 (1) (aa) against the surety or guarantor. The liability of the guarantor is coextensive with that of the principal borrower under Section 128 of the Contract Act. Finally, and in any event, proceedings before the SM 18 901.WP.1269.11 Debts Recovery Tribunal are not proceedings under Section 31 nor can they be regarded as being proceedings akin to Section 31.
15. The view which we have taken is consistent with the subsequent judgment of the Supreme Court in Karnataka State Financial Corporation V/s. N. Narsimahaiah and others (Supra). In the case before the Supreme Court, the Financial Corporation had granted a financial facility to the principal borrower. The Respondents who were Directors of the Company, had executed Deeds of Guarantee to secure repayment/redemption by the company to the Corporation of certain non-convertible debentures. The company had also executed a deed of hypothecation while a collateral security agreement was executed in respect of certain residential properties, which had been mortgaged. The industrial concern committed a default, whereupon, the Corporation exercised its powers under Section 29 and directed that possession of the properties of the guarantors be taken over. The High Court set aside the action of the Corporation in taking over the possession of the properties of the guarantors under Section 29. The Supreme Court held that Section 29 "nowhere states that the Corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it". In other words, the right of the SM 19 901.WP.1269.11 Financial Corporation under Section 29, it was held, must be exercised only against a defaulting party and there cannot be any default as envisaged by surety or guarantor. The Supreme Court noted that clause (aa) of Sub-Section 1 of Section 31 was introduced by the Amending Act, 1985 and that prior thereto even Section 31 cannot have been taken recourse to against the surety. In the context, the Supreme held as follows:
"The legislative intent, in our opinion, is manifest. The intention of Parliament in enacting Sections 29 and 31 of the Act was not similar. Whereas Section 29 of the Act consists of the property of the industrial concern, Section 31 takes within its sweep both the property of the industrial concern and that of the surety. None of the provisions control each other. Parliament intended to provide an additional remedy for recovery of the amount in favour of the Corporation by proceeding against a surety only in terms of Section 31 of the Act and not under Section 29 thereof."
The Supreme Court clarified that after the enforcement of Section 32G of the Act which provides for the recovery of amounts due, as arrears of land revenue, a Corporation has four remedies: (i) To file a suit; (ii) To take recourse to Section 29; (iii) To take recourse to Section 31; and (iv) To take recourse to 32G. The submission, which has been urged on behalf of the Petitioners is that, in the judgment in Karnataka State Financial Corporation (Supra), the Supreme Court cited with approval the earlier decision in Gar Re-rolling and that, therefore, it must necessary SM 20 901.WP.1269.11 follow that, a Corporation having initiated steps under Section 29 cannot pursue proceedings under Section 31. That is not a correct reading of the decision of the Supreme Court. As a matter of fact, the Supreme Court in the observations noted above, clearly held that neither Section 29 nor Section 31 control each other. Section 31 provides for a remedy against a surety or guarantor, which is not available under Section 29.
16. Once, we have come to the conclusion that, a remedy against the surety or guarantor is available under Section 31 but not under Section 29, following the law laid down by the Supreme Court, it is clear that there to no merit in the contention urged on behalf of the Petitioners. The Corporation proceeded against the principal borrower, namely, the industrial concern under Section 29. The Corporation was entitled to proceed against the guarantors under Section 31(1)(aa) for enforcement of its rights under the guarantees executed by them. Their liability was coextensive with that of the principal borrower. The remedy which is available under Section 31(1)(aa) in respect of the guarantee executed by the guarantors was not available to the Corporation under Section 29. Hence, there is no question of the Corporation having proceeded simultaneously under Section 29 SM 21 901.WP.1269.11 and Section 31 against the same person.
17. For these reasons, we find that there is no merit in the submissions of the Petitioner. The Petition shall stand dismissed.
18. On the conclusion of the judgment, Counsel appearing on behalf of the Petitioners seeks a direction by this Court to stay the proceedings before the Debts Recovery Tribunal for a period of four weeks. We do not find reason or justification to interdict further proceedings before the Debts Recovery Tribunal. We, therefore, reject the request.
(A. A. SAYED, J.) (DR. D. Y. CHANDRACHUD, J.)