Bihar State Financial
Corpn. Vs. M/S. Chhotanagpur Minerals and Ors.  INSC 2141 (12 December
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7253 OF 2008 [Arising
out of SLP (Civil) No. 9411 of 2006] Bihar State Financial Corporation
...Appellant Versus M/s. Chhotanagpur Minerals and Ors. ...
S.B. SINHA, J :
is a Corporation constituted under the State Financial Corporations Act, 1951
(for short "the Act"). Respondent No. 1 intended to set up a factory
in the Industrial Area, Kokar in the town of Ranchi. It, on or about 5.11.1976,
for the aforementioned purpose, sought for and was granted loan by the
appellant for a sum of Rs. 3.36 lakhs.
agreement was entered into by and between the parties, in terms whereof, the
respondent no. 1 mortgaged the properties described in Schedules `A', `B' and
`C' thereof in favour of the appellant - Corporation, viz., the lease hold
right over a piece of land admeasuring 0.56 acres at Village Kokar.
terms of the said deed of mortgage, the plaintiff was required to liquidate the
aforementioned amount of loan in fourteen instalments. The interest payable
thereupon was 14.25 per cent per annum payable every six months. Indisputably,
the plaintiff refunded a sum of Rs. 1,32,000/- out of the total sum received
from the appellant, viz., Rs. 3,34,300/-. The plaintiff installed machineries
upon construction of buildings over the plot. The factory started operation
from the month of November, 1978. However, admittedly the factory was closed in
March, 1982 for one reason or the other.
alia on the premise that the plaintiff failed and/ or neglected to pay amount
of loan in the manner specified, a proceeding in terms of Sections 29 and 30 of
the Act was initiated by the appellant on or about 3 7.12.1981. Advertisements
were issued for selling the factory on 16.12.1982 and 12.01.1983. However, no
bid was received pursuant thereto and in furtherance thereof.
decision was taken to sell the said properties in favour of one Shri Atma Lal
Agrawal, respondent No. 2 herein. Plaintiff was not informed thereabout.
According to the plaintiff, the said sale was conducted in a hush-hush manner.
In disposing of the said property, the appellant did not keep in mind the
interest of the plaintiff at all. The factory premises was handed over to the
respondent No. 2 for which an inventory was prepared on 16.02.1983 which is to
the following effect:
MACHINERY (1) 312 (3-Roller) Raymond Mill Plant for Veeorope drive but without
Motor and started complete with and Air-classifier.
(2) Jaw crusher -
without Motor (3) Blower 1 No.
without Motor 1 No.
installation with starter & switch..."
in the said factory, the plaintiff had other properties which were not the
subject matter of mortgage. It is furthermore not in 4 dispute that the
plaintiff had taken a working capital loan for a sum of Rs. 1,60,000/- from the
State Bank of India, Respondent No. 3 herein. Various immovable properties
including liquid assets and stock were hypothecated in its favour. The purchaser
allegedly utilised the said materials. Plaintiff thereafter filed a suit being
Money Suit No. 9 of 1984 in the Court of Subordinate Judge - IV Ranchi wherein
originally the following reliefs were prayed for:
"A. That a
decree for the payment of a sum of Rs. 1,87,635.24 (One lac eight, seven
thousand six hundred thirty five and twenty four paise) by way of damages as
detailed in Schedule "A" of the plaint be passed against the
defendant no. 1 & 2."
the plaint was later on amended and the following relief was added:
"A decree for a
sum of Rs. 1,86,934.46 paise be passed against the defendant No. 1 being the
wrongful and deliberate loss caused to the plaintiff as specified in Schedule
"B", "C" and "D" of the plaint."
in its written statement inter alia contended that it had exercised its power
bona fide in terms of Sections 29 and 30 of the Act. It furthermore contended
that despite service of notice upon the Bank the movable properties having not
been removed from the factory premises, the appellant was not liable to pay any
learned Trial Judge, having regard to the pleadings of the parties, inter alia
framed the following issues:
"1. Has the
plaintiff any valid cause of action for the suit?
2. Is the suit as
framed maintainable under the law?
3. Is the suit bad
U/s 46(b) of the State Financial Corporation Act?
4. Have the
defendants taken and removed the movable properties which were not mortgaged to
the corporation illegally and unauthorisedly?
5. Is the sale
conducted by the Corporation defendant no. 1 in favour of defendant no. 2
bonafide and legal one?
6. Whether the
plaintiff is entitled to damages for valuing the mortgaged properties by the
7. Whether plaintiff
is entitled for decree as prayed for?
8. To what relief or
reliefs, if any, the plaintiff is entitled?"
6 The learned Trial
Manager B.B. Singh has admitted in his evidence that nobody was present on
behalf of plaintiff at the time of preparation of inventory vide para 13 and 15
and it falsified the written statement of defendant no. 2 about presence of
Pradeep Modi at the time of preparation of inventory. The documentary and oral
evidences of plaintiff and defendants fully support that inventory Ext. B is
not a reliable document at all and has not been correctly and impartially
prepared and it is incomplete.
The defendant no. 2
had purchased the mortgaged assets of plaintiff only vide Ext. 7/4 and hence
defendant no. 1 and defendant no. 2 committed a wrong in taking possession of
raw materials, finished goods, spares etc. on 16.2.83 which were not subject
matter of sale to defendant no. 2 and on those account defendant no. 1 and 2
are liable to pay damages to the plaintiff as claimed by plaintiff. Thus, issue
no. 4 is decided in favour of plaintiff against defendant no. 1 and defendant
It was furthermore
plaintiff is not entitled to decree against bank defendant No. 3. The plaintiff
is also entitled for interest at a rate of 13% per annum pendente lite and
future till realization. Thus, it is ordered that the suit be and the same is
decreed for a sum of Rs. 1,87,635.24 p (One lac eight, seven thousand six
hundred thirty five and twenty four paise) for claim of relief no. A on contest
against defendant no. 1 and against defendant no. 2 with 7 cost also with
interest at a rate of 12% per annum pendente lite and future till realization.
The plaintiff may recover the aforesaid amount jointly or severally from
defendant no. 1 and defendant no. 2.
The suit is decreed
for a sum of Rs. 1,85,934.46 (One Lack Eighty Six Thousand Nine Hundred Thirty
Four and paise forty six only) for claim in relief no. A-1, on contest against
defendant no. 1 with cost along with interest at a rate of 12% per annum
pendente lite and future till realization. The suit for claim of relief no. A-1
is dismissed against defendant no. 2. The suit is dismissed exparte against
defendant no. 3."
by and dissatisfied with the said judgment and decree, the appellant preferred
an appeal before the High Court. By reason of the impugned judgment, the said
appeal has been dismissed.
High Court in its judgment framed the following three points for consideration:
appellant removed the movable properties not mortgaged to the Corporation
illegally or unauthorisedly? Whether the sale conducted by the Corporation,
defendant - appellant, in favour of the defendant no. 2 bonafide and legal one,
and whether plaintiff - 8 respondent is entitled to damages for undervaluing
the mortgaged properties by the defendants? The High Court held that the
appellant broke open the door of the factory in absence of any representative
of the plaintiff. Inventory of the articles was also prepared without any representative
of the plaintiff. The inventory list of machineries which were in the factory
premises was handed over to the defendant No. 2. The plea of the appellant that
there was no movable property in the factory premises was disbelieved.
Indisputably, the properties which were hypothecated to the State Bank of
India, respondent No. 3 were also lifted without any information to the State
Bank of India.
The first point was,
thus, determined in favour of the plaintiff - respondent No. 1. As regards
points No. 2 and 3, the High Court opined:
"31. A plea has
been taken on behalf of the appellant Atma Ram who has filed F.A. No. 22 of
1994 against the judgment and decree of the learned court below that he is not
at fault, rather he is at loss on account of the fact that prior to the sale of
the factory, some machines had been removed from the factory just before the
take over of the factory. But question is that before purchase of the factory
by him, he entered into 9 negotiation with the Branch Manager of Bihar State
Financial Corporation Ranchi and had agreed to purchase the factory at the
price agreed upon in between him and the Branch Manager and before purchase, it
cannot be believed that he purchased the factory without going through the
premises of the factory. Further, he did not appear or take part in the tender
that was opened at the head office of Bihar State Financial Corporation and
Bihar State Financial Corporation also when no tender was filed, should have
re-issued the tender and from the evidence of the Branch Manager, defendant No.
1 obtained permission from the head office at Patna for approval of sale and in
course of time, sale was approved. While deciding issue no. 2, it was found
that Bihar State Financial Corporation did not conduct sale in proper manner
and did not fetch proper price for the factory worth which the factory was in
possession of defendant no. 1 and, therefore, the question of removal of
articles from the factory premises by the plaintiff - respondent does not
arise, although an F.I.R. to that effect has been lodged against the plaintiff
- respondent and a case in this connection is said to be pending. But the sale
which was conducted by the defendant No. 1 appellant was not conduct in a
proper way and there was collusion in between the defendant no. 1 and defendant
no. 2, so ignoring all the norms, the sale was conducted and as such, both
defendant no. 1 and defendant no. 2 are liable, and, therefore, the learned
court below gave a finding against the defendant no. 2 holding the defendant
no. 1 - appellant of F.A. No. 531 of 1993 responsible for the loss of the
property as described in Schedule - A of the plaint. So far as relief A-1 was
concerned, defendant no. 1 - appellant has been held responsible."
Letters Patent Appeal preferred thereagainst before a Division Bench of the
High Court has been dismissed as being not maintainable.
M.P. Jha, learned counsel appearing on behalf of the appellant, would contend
that the courts below committed a serious illegality in passing the impugned
judgments insofar as they failed to take into consideration the letters issued
by the appellant to the defandant No. 3 - Bank for taking away the movable
properties and in that view of the matter the appellant cannot be said to be
guilty of any negligence.
The learned counsel
pointed out that damages awarded by the learned Trial Court on two counts, as
would appear from prayers A and A-1 of the plaint are not maintainable. He,
however, fairly conceded that the decree passed in respect of prayer A-1 stands
learned counsel on behalf of the respondents, on the other hand, would support
the impugned judgment.
29 and 30 of the Act read as under: 11 "29. Rights of Financial
Corporation in case of default - (1) Where any 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 in relation to any guarantee 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, as well as the
right to transfer by way of lease or sale and realise the property pledged,
mortgaged, hypothecated or assigned to the Financial Corporation.
(2) Any transfer of
property made by the Financial Corporation, in exercise of its powers under
Sub- section (1), shall vest in the transferee all rights in or to the property
transferred as if the transfer had been made by the owner of the property.
(3) The Financial
Corporation shall have the same rights and powers with respect to goods
manufactured or produced wholly or partly from goods forming part of the
security held by it as it had with respect to the original goods.
(4) Where any action
has been taken against an industrial concern under the provisions of Sub-
section (1), all costs, charges and expenses which in the opinion of the
Financial Corporation have been properly incurred by it as incidental thereto
shall be recoverable from the industrial concern and the money which is
received by it shall, in the absence of any contract to the contrary, be held
by it in trust to be applied firstly, in payment of such costs, charges, and
expenses and, secondly, in discharge of the debt due to the Financial
Corporation and the residue of the money so received shall be paid to the
person entitled thereto.
12 (5) Where the
Financial Corporation has taken any action against an industrial concern under
the provisions of sub-section (1), the Financial Corporation shall be deemed to
be the owner of such concern, for the purposes of suits by or against the
concern, and shall sue and sued in the name of the concern.
30. Power to call for
repayment before agreed period. Notwithstanding anything in any agreement to
the contrary, the Financial Corporation may, by notice in writing, require any
industrial concern to which it has granted any loan or advance to discharge
forthwith in full its liabilities to the Financial Corporation,-- (a) if it
appears to the Board that false or misleading information in any material
particular was given by the industrial concern in its application for the loan
or advance; or (b) if the industrial concern has failed to comply with the
terms of its contract with the Financial Corporation in the matter of the loan
or (c) if there is a
reasonable apprehension that the industrial concern is unable to pay its debts
or that proceedings for liquidation may be commenced in respect thereof; or (d)
if the property pledged, mortgaged, hypothecated or assigned to the Financial
Corporation as security for the loan or advance is not insured and kept insured
by the industrial concern to the satisfaction of the Financial Corporation or
depreciates in value to such an extent that, in the opinion of the Board,
further security to the satisfaction of the Board should be given and such
security is not given; or (e) if, without the permission of the Board, any
machinery, plant or other equipment, whether forming part of the security or
otherwise, is removed from the premises of the industrial concern without being
replaced; or 13 (f) if for any reason it is necessary to protect the interests
of the Financial Corporation."
bare perusal of the aforementioned provisions would clearly go to show that the
statutory power vested in the Corporation must be exercised only in respect of
the properties which were mortgaged. This aspect of the matter has been
considered by this Court in Ormi Textiles and Another v.
State of Uttar
Pradesh and Others [(2008) 5 SCC 194], holding:
"15. For the purpose
of invoking Section 29 of the Act, the borrower must have a liability to the
Corporation under an agreement. It must make a default in repayment of any loan
or advance, etc.
The Corporation in
such a situation shall inter alia have the right to take over the management or
possession or both of the industrial concerns. This power is in addition to the
power of the right to transfer by way of lease or sale and realize the property
pledged, mortgaged, hypothecated or assigned to the Corporation. The right to
transfer by way of lease or sale, however, is not an independent right. Only in
case of default, such a right can be exercised. We must keep in mind that the
powers contained in two parts of Section 29 of the Act are separate and
distinct. The power to take over the management is ordinarily exercised when
the concern is an ongoing one. But, when a power is conferred to sell the
property unilaterally, the same must have a nexus with the mortgaged property.
The power to sale cannot be read in isolation. It can also realize the
mortgaged property which would mean that when a property had been sold, only
the mortgaged property can be 14 realized and not any other property which was
not the subject matter of mortgage. What can be transferred by the mortgagee
even in terms of the provisions of the Transfer of Property Act is the property
which was the subject matter of mortgage and not any other. A power to take
over the management or possession is a statutory power. As and when the debt is
realized, the Corporation would be bound to handover the management or
possession of the property, as the case may be, back to the industrial
16. A mortgagee can
have a right to sell a property even under the contract. The same must
necessarily mean that the property to be sold is the one over which he has the
right, title and interest.
A sale without any
right would be a nullity.
17. For proper
construction of the provisions of the Act, we may notice the provisions of
Section 31 thereof. It provides for an additional remedy.
Whereas Section 29
confers a power to sale the property unilaterally, Section 31 provides inter
alia for the same power only through the intervention of the court.
18. Clause (a) of
Sub-section (1) of Section 31 of the Act categorically states that the
jurisdiction of the District Judge can be invoked for order of sale of the
mortgaged or assigned property in favour of the Corporation. Clause (b) thereof
provides for transferring the management of the industrial concern. Clauses
(aa) and (c) of Sub- section (1) of Section 31 of the Act provide for
additional remedies. When an application is filed in terms of Section 31 of the
Act, the procedures laid down in Sub-section (1A) of Section 32 of the Act are
required to be followed. A further 15 additional remedy has been provided to a
Financial Corporation in terms of Section 32G of the Act."
that view of the matter, there cannot be any doubt whatsoever that the
appellant did not have any right to sell any property which was not the subject
matter of the deed of mortgage. Any action taken in that behalf must be held to
be wholly illegal and without jurisdiction. Appellant, therefore, was liable
for payment of damages as had been opined by the courts below.
may, furthermore notice that the appellant has not placed before us the amended
plaint. Whereas prayer A relates to Schedule A, prayer A-1 relates to Schedules
B, C and D appended to the plaint. We have not been informed as to what these
Schedules were about. Schedule `A' appended to the plaint, however, reads as
1. As per stocks
statement Rs. 1,30, 161.64 submitted to State Bank of India, Main Branch Court
Compound, Ranchi on 31.3.1982
2. Cost of 10,808 MT
of coal Rs. 45, 393.60 Tar Pitch @ Rs. 4200/- PMT 16
3. Cost of 190 bags
of Pilla Rs. 3,800.00 Miiti @ Rs. 20/- per bag
4. Cost of 1.5 MT of
Graphite Rs. 1,500.00 powder @ Rs. 1,000/- PMT
5. Cost of 4000 Nos.
1st Class Rs. 1,280.00 bricks @ Rs. 320/- 1000 Nos.
6. Cost of channels
Angles etc. Rs. 2,500.00 500 Kg. @ Rs. 5,000/- PMT
7. Cost of 1.5 MT
Iron Nails @ Rs. 3,000.00 2,000/- PMT Total: Rs. 1,87,635.24 p"
is accepted at the bar that the aforementioned movable properties stood
mortgaged in favour of the respondent No. 3. It has furthermore not been denied
or disputed that the respondent No. 3 - Bank had not initiated any action for
realisation of its dues. Probably, it could not do so because of the pendency
of the instant case and one of the claims made by the plaintiff was also
directed against the Bank.
therefore, with a view to do complete justice between the parties, are of the
opinion that the movable properties hypothecated to the bank having not been
realized and as it was permissible for it to remove the same, the decretal
amount in regard to prayer A should be held to be payable to the State Bank of
India - the respondent No. 3. We direct accordingly. The decretal amount may be
paid by the appellant to the respondent No. 3 17 together with interest as
directed by the courts below within six months from date failing which it will
be open to the bank to execute the decree.
appeal is dismissed with aforementioned directions. However, in the facts and
circumstances of the case, there shall be no order as to costs.