Pawan Kumar Jain Vs. The
Pradeshiya Industrial & Investment Corporation of U.P  Insc 447 (11 August
S. N. Variava & Arijit
Pasayat S. N. Variava, J.
These Appeals are against the Order of the Allahabad High Court dated
01.09.1997 by which Appellant's Writ Petition has been dismissed and the Order
dated 06.11.1997 by which the Review Petition has been dismissed.
Briefly stated the facts are as follows.
The 1st Respondent had advanced monies to the 4th Respondent.
The Appellant stood guarantor in respect of the said loan as at that time he
was a Director of the 4th Respondent-Company. By the Writ Petition, the
Appellant challenged the Recovery Notice issued against him under the Uttar
Pradesh Public Moneys (Recovery of Dues) Act, 1972. The High Court has
dismissed the Writ Petition and the Review Petition.
Mr. Mohta submitted that the Central Government has issued a Notification
specifying 1st Respondent-Corporation as a Financial Institution within the
meaning of the term as defined in Section 2(h) of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (hereinafter referred to as the
"Debt Recovery Act"). He submitted that such an Institution can only
proceed in the manner laid down in the Debt Recovery Act. He submitted that it
is not open to give a go-by to the provision of the Debt Recovery Act and use
the machinery under the U.P. Public Moneys (Recovery of Dues) Act, 1972
(hereinafter called the "U.P. Act"). For this reason the Notice is
bad and requires to be quashed. In support of his submission, he relied upon
the case in Unique Butyle Tube 2 SCC 455]. In this case, it has been held that
a Financial Institution within the meaning of that term in the Debt Recovery
Act cannot proceed under the U. P. Act.
This authority would have been binding upon us. However, in reply Mr. Bhalla
pointed out that in respect of the 1st Respondent- Institution the Notification
by the Central Government has only been issued on 24.01.2004, whereas the
Recovery Certificate is of a much earlier date. He submitted that, therefore,
in this case the proceedings under the U. P. Act are not barred. He pointed out
that under Section 31 of the Debt Recovery Act, it is only suit or proceeding
pending before any Court, which stand transferred to the Tribunal established
under that Act. In our view, Mr. Bhalla is right. As the action was initiated
prior to the Notification being issued by the Central Government, the action
would not be barred and would not stand transferred to the Tribunal.
Mr. Mohta then relied upon Sections 3 and 4 of the U. P. Act, which read as
follows:- "3. Recovery of certain dues as arrears of land revenue.(1)
Where any person is party (a) to any agreement relating to a loan, advance or
grant given to him or relating to credit in respect of, or relating to hire-
purchase of goods sold to him by the State Government or the Corporation, by
way of financial assistance; or (b) to any agreement relating to a loan,
advance or grant given to him or relating to credit in respect of, or relating
to hire- purchase of goods sold to him, by a banking company or a Government
company, as the case may be, under a State-sponsored scheme; or (c) to any
agreement relating to a guarantee given by the State Government or the
Corporation in respect of a loan raised by an industrial concern; or (d) to any
agreement providing that any money payable thereunder to the State Government
shall be recoverable as arrears of land revenue; and such person (i) makes any
default in repayment of the loan or advance or any instalment thereof; or (ii)
having become liable under the conditions of the grant to refund the grant or
any portion thereof, makes any default in the refund of such grant or portion
or any instalment thereof; or (iii) otherwise fails to comply with the terms of
the agreement,-- then, in the case of State Government, such officer as may be
authorized in that behalf by the State Government by notification in the
official Gazette, and in the case of the Corporation or a Government company
the Managing Director thereof, and in the case of a banking company, the local
agent thereof, by whatever name called, may send a certificate to the
Collector, mentioning the sum due from such person and requesting that such sum
together with costs of the proceedings be recovered as if it were an arrear of
(2) The Collector on receiving the certificate shall proceed to recover the
amount stated therein as an arrear of land revenue.
(3) No suit for the recovery of any sum due as aforesaid shall lie in the
civil court against any person referred to in sub-section (1).
4. Savings.(1) Nothing in section 3, shall (a) affect any interest of the
State Government, the Corporation, a Government company or any banking company,
in any property created by any mortgage, charge, pledge or other encumbrance;
or (b) bar a suit or affect any other right or remedy against any person other
than a person referred to in that section, in respect of a contract of
indemnity or guarantee entered into a relation to an agreement referred to in
that section or in respect of any interest referred to in clause (a).
(2) Where the property of any person referred to in Section 3 is subject to
any mortgage, charge, pledge or other encumbrance in favour of the State
Government, the Corporation, a Government company or banking company,then (a)
in every case of a pledge of goods, proceedings shall first be taken for sale
of the thing pledged, and if the proceeds of such sale are less than the sum
due, then proceedings shall be taken for recovery of the balance as if it were
an arrear of land revenue :
Provided that where the State Government is of opinion that it is necessary
so to do for safeguarding the recovery of the sum due to it or to the
Corporation, Government company or banking company, as the case may be, it may
for reasons to be recorded, direct proceedings to be taken for recovery of the
sum due, as if it were an arrear of land revenue before or at the same time as
proceedings are taken for sale of the thing pledged;
(b) in every case of a mortgage, charge or other encumbrance on immovable
property, such property or, as the case may be, the interest of the defaulter
therein, shall first be sold in proceedings for recovery of the sum due from
that person as if it were an arrear of land revenue, and any other proceeding
may be taken thereafter only if the Collector certifies that there is no
prospect of realization of the entire sum due through the first mentioned
process within a reasonable time." He submitted that by virtue of these
provisions, the 1st Respondent cannot proceed against the Appellant/guarantor
until the 1st Respondent has first sold the property of the principal-debtor
which had been mortgaged in their favour. He points out that on 22nd July, 1996 action under Section 29 of the State Financial Corporation Act, 1951 had
been initiated and physical possession taken. He points out that thereafter on
12.02.1996 a One Time Settlement was arrived at by the 1st Respondent with the
4th Respondent. He points out that thereafter the property was handed back to
the 1st Respondent. He submits that, therefore, the 1st Respondent is not
entitled to proceed against the Appellant.
Mr. Bhalla admits the above mentioned facts. He, however, submits that the
company committed defaults and, therefore, the One Time Settlement failed. He
submitted that earlier attempts to sell the properties of the 4th Respondent
Company yielded no result as no offers were received. He submitted that action
under Section 29 has again been initiated against the 4th Respondent Company.
He submitted that as the 4th Respondent Company has committed defaults and it
has not been possible to recovery by sale of property, action has been taken
against the guarantor for recovery of the amount.
In our view, the above set out provisions of the U. P. Act are very clear.
Action against the guarantor cannot be taken until the property of the
principal-debtor is first sold off. As the Appellant has not sold the property
of the principal-debtor, the action against the Appellant cannot be sustained.
We, therefore, set aside the Recovery Notice.
We, however, clarify that it will be open to the 1st Respondent to proceed
against the Appellant before the Debt Recovery Tribunal in accordance with
principles laid down in Unique Butyle Tube's case (supra).
The Appeals stand disposed of accordingly. There will be no order as to