U.P.
Financial Corporation Vs. Gem Cap (India) Pvt. Ltd. & Ors [1993] INSC 111 (2 March 1993)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Kuldip Singh (J)
CITATION:
1993 AIR 1435 1993 SCR (2) 149 1993 SCC (2) 299 JT 1993 (2) 226 1993 SCALE
(1)747
ACT:
State
Financial Corporations Act, 1951:
Section
29. Company--Loan by Corporation-Default in payment of loan by
Debtor-Company-Proceedings by Corporation for recovery of amount due- Validity
of-Corporation's obligation to Act fairly extent of-Held obligation to act
fairly does not extend to revive and resurrect every sick industry- Fairness
required of Corporation cannot be carried to the extent of disabling it from
recovering what is due to Corporation.
Constitution
of India, 1950. Article 226 High Court-Jurisdiction-Limitation
on exercise of-Review of action of administrative authorities-High Court cannot
act as an appellate authority.
Article
12-State-Financial Corporation is instrumentality of state.
Administrative
Law.
Judicial
Review of Administrative action-Scope of. Doctrine of fairness.
HEAD NOTE:
The
respondent-Company obtained loan from the appellant- Financial Corporation.
Soon after obtaining the loan it ceased to, operate and was declared a sick
unit.
Consequently,
it did not make any repayment of loan as stipulated in the agreement and the
hypothecation deeds.
Thereafter,
the appellant-Corporation issued notice under section 29 of the State Financial
Corporations Act, 1951 for taking over the respondent's unit for recovery of
the amount due Rs.38.57 lakhs. Ile respondent-Company filed a writ petition in
the Allahabad High Court questioning the appellant's action. Ile High Court
allowed the petition and directed (1) expeditious rehabilitation of the concern
and (2) to restore back the 150 possession of the unit to the
respondent-Company. Against the judgment of the High Court the Financial
Corporation riled an appeal in this Court.
Allowing
the appeal and setting aside the order of the High Court, this Court,
HELD :
1. It
is true that the appellant-Corporation which Is an instrumentality of the State
created under the State Financial Corporations Act, 1951 is not like an
ordinary money- lender or a Bank which lends money. It is a lender with a
purpose the purpose being promoting the small and medium industries. At the
same time, It is necessary to keep certain basic facts In view. The
relationship between the Corporation and the borrower is that of creditor and
debtor. the Corporation is not supposed to give loans once and go out of business.
It has also to recover them so that it can give fresh loans to others.
Corporations too borrow monies from Government or other financial corporations
and they too have to pay interest thereon. No doubt it has to act within the
four corners of the Act and in furtherance of the object underlying the Act.
But this factor cannot be carried to the extent of obligating the Corporation
to revive and resurrect every sick industry irrespective of the cost involved.
[156H,
157A-C,F,] Promoting industrilisation at the cost of public funds does not
serve the public interest; it merely amounts to transferring public money to
private account. The fairness required of the Corporation cannot be carried to
the extent of disabling it from recovering what Is due to it. While not
insisting upon the borrower to honour the commitments undertaken by him, the
Corporation alone cannot be shackled band and foot in the name of fairness.
Fairness is not a one way street more particularly in matters like the present
one. The fairness required of it must be tempered nay, determined in the light
of all these circumstances. In the instant case the respondents have no
intention of repaying any part of the debt.They were merely putting forward one
or other ploy to keep the Corporation at bay.
[157D-F]
Mahesh Chandra v. Regional Manager, U.P. Financial Corporation Ors., (1992) 2
J.T.. 326, held Inapplicable.
2. In
a matter between the corporation and Its debtor, a writ court has no say except
in two situations :
(1) there
is a statutory violation on the part of the Corporation or
(2) where
the Corporation acts unfairly i.e. 151 unreasonably.
The
High Court exercising its jurisdiction under Article 226 of the Constitution
cannot sit as an Appellate Authority over the acts and deeds of the Corporation
and seek to correct them. Doctrine of fairness. evolved in administrative law
was not supposed to convert the writ courts into appellate authorities over
administrative authorities. The constraints self-imposed undoubtedly of writ
jurisdiction still remain. Ignoring them would lead to confusion and
uncertainty. The jurisdiction way become rudderless. [157G-H, 158A]
2.1.
The obligation to act fairly on the part of the administrative authorities was
evolved to ensure the Rule of law and to prevent failure of justice. This
doctrine is complementary to the principle of natural justice which the
Quasi-judicial Authorities are bound to observe. It is true that the
distinction between a quasi-judicial and the administrative action has become
thin. But even so the extent of judicial scrutiny/judicial review in the case
of administrative action cannot be larger than in the case of quasi-judicial
action. If the High Court cannot sit as an appellate authority over the
decisions and orders of quasi- judicial authorities it follows equally that it
cannot do so in the case of administrative authorities. The Court cannot
substitute its judgment for the judgment of administrative authorities in such
cases. Only when the action of the administrative authority is so unfair or
unreasonable that no reasonable person would have taken that action, can the
Court intervenes. [158C-F] A.K Kraipak & Ors. v. Union of India & Ors.,
A.I.R. 1970 S.C. 150; Secretary of State for Education v. Talimeside
Metropolitan Borough Council, 1977 A.C. 1014 and Associated Provincial Picture
Houses Ltd., v. Wednesbury Corporation, (1948) 1 K.B. 223, relied on.
3.
While passing the impugned order the High Court has not kept in mind the well-recognised
limitations of its jurisdiction under Article 226 of the Constitution. While
reviewing the administrative action it was not justified in acting as an
appellate court. [153D,159C]
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 830 of 1993.
From
the Judgment and Order dated 6.4.87 of the Allahabad High Court in Civil Misc.
W.P. No. 20544 of 1986.
S. Markandeya
for the Appellant 152 Pankaj Kalra for the Respondents.
The
Judgment of the Court was delivered by B.P. JEEVAN REDDY, J. The appeal is
directed against the judgment and order of a Division Bench of the Allahabad
High Court allowing Writ Petition 20544 of 1986 with certain directions. The
first respondent Gem Cap (India) Pvt.
Ltd.
is a
private limited company. Second respondment is its Managing Director. At the
request of the respondents, the appellant, U.P. Financial Corporation,
sanctioned a loan of Rs. 29.70 lakhs. The terms and conditions of loan and the
manner of repayment of the loan are contained in the agreement and
hypothecation deeds executed in 1981. Suffice it to note that loan was
repayable in certain specified instalments alongwith interest. A sum of Rs. 26,
29, 578 was released to the respondents. The first respondent went into
production in December 1982. Within a few months i.e., in March 1983 its
operations ceased. By an order dated February 21, 1984 the first respondent-unit was
declared a sick unit. The respondents did not make any repayment as stipulated
in the agreement and hypothecation deeds whereupon the Corporation took steps
to take over the unit under Section 29 of the State Financial Corporations Act,
1951 for recovering an amount of Rs. 38.57 lakhs due to it by that date vide
notice dated July 10,
1984. Then started a
series of Writ Petitions by the respondents, all designed to stall the
appellant from taking over and/or recovering the amount due to it. It is not
necessary to trace the course of the several writ petitions except the one from
which the present appeal arises.
Writ
Petition 20544 of 1986 was filed questioning the taking over of the first
respondent-unit by the appellant- Corporation under Section 29 of the Act and
for a direction to the appellant to reschedule the repayment of debt in
accordance with the earlier orders of the High Court. The writ petition has
been allowed with the following directions :
"(1)
Having regard to the discussion made above we direct the U.P. Financial Corporation
:- (1) to consider expeditiously the resolution dated 29.1.1986aimed at the
rehabilitation of the industrial concern in question in the light of the
feasibility report of the U.P. Industrial Consultants Ltd. the Financial aid
153 forthcoming from the Bank of Baroda and other financial institutions and
the reports of the managing director of the corporation dated 18.12.85 and
29.1.1986;
(2) to
restore back possession of the unit to the petition No. 1 forthwith.
The
notice dated 11.6.1986 issued by the Corporation under Section 29 of the State
Financial Corporation Act, 1951 shall, however, remain alive it being open to
the Corporation to proceed further in pursuance thereof in case the
rehabilitation deal is given a fair trial but does not bear fruit.
The
petition is allowed accordingly with no order, however, as to costs." With
great respect to the Learned Judges who allowed the writ petition we feel
constrained to say this : a reading of the judgment shows that they have not
kept in mind the well- recognised limitations of their jurisdiction under
Article 226 of the Constitution. The judgment reads as If they were setting as
an Appellate Authority over the appellate- Corporation. Not a single provision
of law is said to have been violated. The exclusive concern of the court
appears to be to revive and resurrect the respondent-Company, with the aid of
public funds, without giving any thought to the interest of public financial
institutions. The approach is : "the Corporafion is supposed to act in the
best interest of the industrial concern with the object primarily to promote
and advance the industrial activity without, of course, undue involvement or
risk of its financial commitment's........ It needs no emphasis to say that the
Corporation is conceived '.Regional Development Bank with the principal object
to accelerate the industrial growth in the State by providing financial
assistance mainly to small and smaller of the medium scale industries. The
approach has to be business like in conformity with the declared policy of the
State Govt. If the unit is potentially viable or such as maY be capable of
being rehabilitated, it would deserve being administered proper treatment and
not lead to its liquidation." Here was a company which drew substantial
public funds and became sick within three months of its going into production.
One of the main reasons for its sickness appears to be the inter-necine fight
between the two groups controlling the Company. The 154 unit was closed. It was
not paying a single pie in repayment of the loan neither the principal nor the
interest. Already a huge amount was due to the appellant.
There
was no prospect of its recovery. And yet other financial corporations were
being asked by the court, four years after its closure, to sink more money into
the sick unit. Though a passing reference is made to the financial risk of
appellant. this concern was not translated into appropriate directions. The
Corporation was not allowed to sell the unit when it wanted to in 1984-85. Now,
it is difficult to sell it, because it has been lying closed for about 8 years
and more. The machinery must have become junk. While the Company could not be
revived, the appellant-corporation now stands to lose more than a crore of
rupees all public money in this one instance.
To
continue the factual narration against the judgment of the Allahabad High Court
aforesaid (dated April
6, 1987) the appellant
filed this appeal and on May
8, 1987 this Court
while issuing notice on the SLP directed stay of operation of the judgment of
the High court. After the respondents filed a counter affidavit this Court made
the following order on September
18, 1987 :
"Stay
made absolute with the direction that there shall be no sale of the industrial
unit.
Hearing
expedited. To be heard alongwith Civil Appeal No. 568 of 1987." The S.L.P.
could not be heard finally though it was posted for hearing on certain dates.
On November 13, 1991, the counsel for the respondents
made an offer which is recorded in the order of that date. It reads "This
matter is adjourned for 11.12.91. Mr. Shanti Bhushan, Sr. Adv., suggests that
in view of the lapse of time of more than 5 years the position has changed and
the Corporation should now consider the feasibility of taking over the assets
in liquidation of the dues by making an assessment and consider relieving the
directors from their personal responsibilities to the corporation and the other
creditors." The subsequent order dated December 12, 1991, however, shows
that the appellant-corporation refused to bite the bait.
The
amount due to it had risen to over a crore of rupees by now. Whereupon, this
Court passed 155 the following order :
"The
appellant in consultation with the other creditors is permitted to put-up the
industrial undertaking of the firstrespondent for sale. It may do so either by
public auction or by inviting tenders or by an combination of both. It may
proceed to do so within a period of two months from today.
While
permitting the appellant to take steps for the sale, we make it clear that
before accepting the offers, the appellant should obtain prior permission of
this Court.
List
this matter after 10 weeks, i.e., in the first week of March, 92." It is
clear as to why the unit could not be sold . On March 13, 1992, this Court
passed the following further order:
"We
have heard learned counsel on both sides.
Apart
from the merits of the issues raised, it appears to us that the present impasse
is to nobody's advantage. The dispute has to be resolved in some meaningful
way. We accordingly direct the respondent-Company and Sri K.P. Chaturvedi, who
claims to be in- charge of the affairs of the Company, to confirm in writing to
the petitioner-Cor- poration within three weeks from today that they
unconditionally agree to settle the claims of the. Financial Corporation at a
figure which would represent the principal amount said to be Rs. 26.30 lacs and
interest thereon from the inception at 13.5% per year with half yearly rests
calculated up to 25.7.1986.
If
such an offer is made, the Financial Corporation will assess the merit and
acceptability of that offer and take within six weeks thereafter, an
appropriate decision including the manner in which and the period over which
the payment should be completed, and if the Financial Corporation agrees to
grant time for payment, the rate of interest for the deferred period. The
decision taken by the Corporation will be placed before this Court.
156
If, however, any offer, as indicated above, is not communicated by the company
or Sri Chaturvedi within a period of three weeks from today, then the Financial
Corporation shall be at liberty to initiate, with notice to the respondents,
steps for the sale by public auction of the subjectmatter of the security in
its favour and to treat and hold the proceeds of sale as substituted security
in the place of the subject-matter of the security, subject to the final result
of this S.L.P. Call this matter in the 3rd week of May, 1992." Pursuant to
the said order the second respondent, Managing Director of the first
respondent-Company merely wrote a letter addressed to the
appellant-Corporation, to the following effect :
"We,
herewith, attach a photo copy of the captioned order which is self explicit.
We,
however, unconditionally agree to abide with the directions given to us by the Hon'ble
Supreme Court.
Further,
as the Corporation is aware that the Unit (Company) as well as The Registered
Office of the Company, both are in possession of the Corporation, we shall feel
obliged if you kindly communicate your views to us at the below given
address." It is evident that the letter written by the second respondent
is not in terms of the order to this Court dated March 13, 1992. No figure is
mentioned-nor is it mentioned as to how and in what manner the said huge debt
is sought to be repaid by the respondents. Evidently, the appellant- corporation
could not pay any heed to such a letter. When the matter came before this Court
the second respondent appeared in-person stating that he has discharged his
advocate and that he will argue the matter himself. The matter again came up
before us on 19.2.1993 when we heard the appellant's counsel and the second
respondent in-person.
We
allowed the appeal stating that the reasons would follow.
There
are the reasons for the order.
It is
true that the appellant Corporation is an instrumentality of the 157 State
created under the State Finance Corporation Act, 1951.
The
said Act was made by the Parliament with a view to promote industrialisation of
the States by encouraging small and medium industries by giving financial
assistance in the shape of loans and advances, repayable within a period not
exceeding 20 years from the date of loan. We agree that the Corporation is not
like an ordinary money-lender or a Bank which lends money. It is a lender with
a purpose the purpose being promoting the small and medium industries. At the
same time, it is necessary to keep certain basic facts in view. The
relationship between the Corporation and the borrower is that of creditor and
debtor. The corporation is not supposed to give loans once and go out of
business. It has also to recover them so that it can give fresh loans to
others. The Corporation no doubt has to act within the four corners of the Act
and in furtherance of the object underlying the Act. But this factor cannot be
carried to the extent of obligating the Corporation to revive and resurrect
every sick industry irrespective of the cost involved. Promoting industrialisation
at the cost of public funds does not serve the public interest; it merely
amounts to transferring public money to private account. The fairness required
of the Corporation cannot be carried to the extent of disabling it from recovering
what is due to it. While not insisting upon the borrower to honour the
commitments undertaken by him, the Corporation alone cannot be shackled hand
and foot in the name of fairness. Fairness is not a one way street, mote
particularly it? matters like the present one. The above narration of facts
shows that the respondents have no intention of repaying any part of the debt.
They are merely putting forward one or other ploy to keep the Corporation at
bay. Approaching the Courts through successive writ petitions is but a part of
this game.
Another
circumstance. These Corporation are not sitting on King Solomon's mines. They
too borrow monies from Government or other'financial corporation. They too have
to pay interest thereon. The fairness required of it must be tempered nay,
determined, in the light of all these circumstances. Indeed, in a matter
between the Corporation and its debtor, a writ court has no say except in two situation
: (1) there is a statutory violation on the part of the Corporation or (21)
Where the Corporation acts unfairly i.e., unreasonably. While the former does
not present any difficulty, the latter needs a little reiteration of its
precise meaning. What does acting unfairly or unreasonably mean? Does it mean
that the High Court exercising its jurisdiction under Article 226 of the
Constitution can sit as an Appellate Authority over the acts and deeds of the
corporation and seek 158 to correct them ? Surely, it cannot be. That is not
the function of the High Court under Article 226. Doctrine of fairness, evolved
in administrative law was not supposed to convert the writ courts into
appellate authorities over administrative authorities. The constraints
self-imposed undoubtedly of writ jurisdiction still remain. Ignoring them would
lead to confusion and uncertainty. The jurisdiction may become rudderless.
The
obligation to act fairly on the part of the administrative authorities was
evolved to ensure the Rule of Law and to prevent failure of justice. This
doctrine is complementary to the principles of natural justice which the
Quasi-Judicial Authorities are bound to observe. It is true that the
distinction between a quasi-judicial and the administrative action has become
thin, as pointed out by this Court as far back as 1970 in A.K. Kraipak &
Ors. v. Union of India & Ors., AIR 1970 S.C.
150. Even so the extent of judicial scrutiny/judicial review in the case of
administrative action cannot be larger than in the case of quasi-judicial
action. If the High Court cannot sit as an appellate authority over the
decisions and orders of quasi- judicial authorities it follows equally that it
cannot do so in the case of administrative authorities. In the matter of
administrative action, it is well known, more than one choice is available to
the administrative authorities; they have a certain amount of discretion
available to them. They have "a right to choose between more than one
possible course of action upon which there is room for reasonable people to
hold differing opinions as to which is to be preferred' (Lord Diplock in
Secretary of State for Education v. Tameside Metropolitan Borough Counsel, 1977
AC 1014 at 1064). The Court cannot substitute its judgment for the judgment of
administrative authorities in such cases. Only when the action of the
administrative authority is so unfair or unreasonable that no reasonable person
would have taken that action, can the Court intervene. To quote the classic
passage from the judgment of Lord Greene MR in Associated Provincial Picture
Houses Ltd. v. Wednesbury Corporation, (1948) 1 KB at 229.
"It
is true the discretion must be exercised reasonably. Now what does than mean ?
Lawyers familiar with the phraseology commonly used in relation to exercise of
statutory discretions often use the word "unreasonable" in a rather
comprehensive sense. It has frequently been used and is frequently used as a
general description of the 159 things that must not be done. For instance, a
person entrusted with the discretion must, so to speak, direct himself properly
in law. He must call his own attention to the matters which he is bound to
consider. He must exclude from his consideration matters which are irrelevant
to what he has to consider. If he does not obey those rules, he may truly be
said, and often is said, to be acting 'unreasonably'. Similarly, there may be
something so absurd that no sensible person could ever dream that it lay within
the powers of the authority.' While this is not the occasion to examine the
content and contours of the doctrine of fairness, it is enough to reiterate for
the purpose of this case that the power of the High Court while reviewing the
administrative action is not that of an appellate court. The judgment under
appeal precisely does that and for that reason is liable to be and is herewith
set aside.
On
behalf of the appellant reliance has been placed upon the decision of this
court in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation &
Ors., (1992) 2 J.T. 326. We have perused the decision. That was a case where
the debtor was anxious to pay off the debt and had been taking several steps to
discharge his obligation. On the facts of that particular 'case it was found
that the corporation was acting reasonably. In that context certain
observations were made. The decision also deals with the procedure to be
adopted by the Corporation while selling the units taken over under Section 29.
That aspect is not relevant in this case. We are, therefore, of the opinion
that the said decision is of no help to the appellant herein.
The
appeal is accordingly allowed. The respondents shall pay the .costs of the
appellant assessed at Rs. 10,000 consolidated.
T.N.A.
Appeal allowed.
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