# MAHESH CHANDRA v. REGIONAL MANAGER, U.P. FINANCIAL CORPORATl()N AND ORS

- **Citation:** [1992] 1 S.C.R. 616
- **Court:** Supreme Court of India
- **Decided:** 1992-02-12
- **Case number:** Writ Petition No. 13916 of 1987
- **Bench:** K. Ramaswamy, R.M. Saha!
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mahesh-chandra-v-regional-manager-u-p-financial-corporatl-n-and-ors-11474
- **Pages:** 22

## Headnote

State Fi11a11cial Corporations Act, 1951:
•
C
Sectio11 29'-Utta; Pradesh State Fi11a11cial Corporation-Loan to in-
;.c .c
dustrial concenr-Defa11/t i11 payment of loan-Power of Corporation to take
possession and sell the mortgaged property-Guidelines for exercising powers
t111der section 29 issued.
Financial Corporation-Loan to industrial concern against hypotheD cated property-Default in payment of loan by debtoi-Corporation's refusal
to release hypotheca to debtor for private sale for repayment of debt-Taking
possession of property by Corporatio11 a11d sale by invitation of tenders
without 11oticc or oppon11nity to debtoi-Corporation's action held contrary
to Section 24.--Sale held vitiated a11d 11ot binding on debtor-Held CorporaE
tion is an instnunentality of State-It is bound to act fairly and reasonably in
selling the property of debtor-Section 29 does .not exclude principles of
nat1lral justice.
Section 24--State Fi11ancia/ Corporation are extended amis of Welfare
Stat<-Thcir approach should be public orie11ted-Board should discharge· its
F ft111ctio11s 011 business principles.
Words and Phrases.
'Business'-Meaning of.
The appellant was owner of two plots. In one of the plots a rice mill
G was constructed by the partnership in which he was a managing partner.
For taking a loan he hypothecated the mill and- the plots with U.P.
Financial Corporation which sanctioned a loan of Rs. 4,28,000, but disbursed only Rs. 3,78,660 to him. Due to non-cooperation of other partners,
lack of working capital and failure of the Financial Corporation to release
H the balance loan the mill landed into a rough weather. Consequently
616
MAHESH CHANDRA v. REGIONAL MANAGER
617
defaults were committed in repayment of loan. The appellant requested A
the Corporation to release the vacant hypothecated plot to enable him to
negotiate for private sale to pay off his debt and also stated that he was
ready and willing to pay the outstanding amount of Rs. 5,03,165 towards
principal and interest in full satisfaction under "one time settlement
scheme". The Corporatien rejected his request and exercising its power
under section 29 of the State Financial Corporations Act, 1951 took
possession of the hypotheca, invited tenders for its sale and without giving
B
any notice or, opportunity to the appellant accepted the tender of Rs.
2,55,000 given by respondents 3 to 5 •. Pursuant to the sale the 3rd respondent took . possession of the property and invested a large sums for the
improvement of the mill. The appellant filed a writ petition in the High C
Court which was dismissed. Against the decision of the High Court the
appellant filed an appeal in this Court.
Allowing the appeal, this Court,
HELD : 1. Section 29 of the State Financial Corporations Act confers D.
very wide power on the Corporation to ensure prompt payment by arming
it with effective measure to realise the arrears. Every wide power, the
exercise of which has far reaching repercussion, has inherent limitation
on it. It should be exercised to effectuate the purpose of the Act. [629D-E]
1.1. The Corporation has been given statutory right to take over
possession and management of the defaulting unit or hypotheca or both
including the right to sell and realise the loan or advance due from the
unit or debtor. The Corporation is an instrumentality of the State. The
Corporation or its employees or officers are bound to act reasonably and ·
fairly in dealing With the property of the debtor. The exercise of the power
or discreti~n in· its dealing would be subject to the same constitutional or
public law limitation as the Government. The Corporation also equally
must conform its action with the same standard that meet the test. of
justness, fairness, reason.ableness and relevance. [628G·f!l
E
F.
.
G
Kasntri/al Laxmi Reddy v. State of J & K, [1980] 3 S.C.R. 1338,
referred to.
1.2. Sub-section 4 of section 29 treats the Corporation "to be a
trustee" of the debtor or person claiming title through him •. It

## Text

_Characters 0–39,817 of 54,052. This is a partial read: ask again with offset=39817 for what follows._

A
B
MAHESH CHANDRA
v.
REGIONAL MANAGER, U.P. FINANCIAL CORPORATl()N AND
ORS.
FEBRUARY 12, 1992
[K. RAMASWAMY AND R.M. SAHA!, JJ.]
State Fi11a11cial Corporations Act, 1951:
•
C
Sectio11 29'-Utta; Pradesh State Fi11a11cial Corporation-Loan to in-
;.c .c
dustrial concenr-Defa11/t i11 payment of loan-Power of Corporation to take
possession and sell the mortgaged property-Guidelines for exercising powers
t111der section 29 issued.
Financial Corporation-Loan to industrial concern against hypotheD cated property-Default in payment of loan by debtoi-Corporation's refusal
to release hypotheca to debtor for private sale for repayment of debt-Taking
possession of property by Corporatio11 a11d sale by invitation of tenders
without 11oticc or oppon11nity to debtoi-Corporation's action held contrary
to Section 24.--Sale held vitiated a11d 11ot binding on debtor-Held CorporaE
tion is an instnunentality of State-It is bound to act fairly and reasonably in
selling the property of debtor-Section 29 does .not exclude principles of
nat1lral justice.
Section 24--State Fi11ancia/ Corporation are extended amis of Welfare
Stat<-Thcir approach should be public orie11ted-Board should discharge· its
F ft111ctio11s 011 business principles.
Words and Phrases.
'Business'-Meaning of.
The appellant was owner of two plots. In one of the plots a rice mill
G was constructed by the partnership in which he was a managing partner.
For taking a loan he hypothecated the mill and- the plots with U.P.
Financial Corporation which sanctioned a loan of Rs. 4,28,000, but disbursed only Rs. 3,78,660 to him. Due to non-cooperation of other partners,
lack of working capital and failure of the Financial Corporation to release
H the balance loan the mill landed into a rough weather. Consequently
616
MAHESH CHANDRA v. REGIONAL MANAGER
617
defaults were committed in repayment of loan. The appellant requested A
the Corporation to release the vacant hypothecated plot to enable him to
negotiate for private sale to pay off his debt and also stated that he was
ready and willing to pay the outstanding amount of Rs. 5,03,165 towards
principal and interest in full satisfaction under "one time settlement
scheme". The Corporatien rejected his request and exercising its power
under section 29 of the State Financial Corporations Act, 1951 took
possession of the hypotheca, invited tenders for its sale and without giving
B
any notice or, opportunity to the appellant accepted the tender of Rs.
2,55,000 given by respondents 3 to 5 •. Pursuant to the sale the 3rd respondent took . possession of the property and invested a large sums for the
improvement of the mill. The appellant filed a writ petition in the High C
Court which was dismissed. Against the decision of the High Court the
appellant filed an appeal in this Court.
Allowing the appeal, this Court,
HELD : 1. Section 29 of the State Financial Corporations Act confers D.
very wide power on the Corporation to ensure prompt payment by arming
it with effective measure to realise the arrears. Every wide power, the
exercise of which has far reaching repercussion, has inherent limitation
on it. It should be exercised to effectuate the purpose of the Act. [629D-E]
1.1. The Corporation has been given statutory right to take over
possession and management of the defaulting unit or hypotheca or both
including the right to sell and realise the loan or advance due from the
unit or debtor. The Corporation is an instrumentality of the State. The
Corporation or its employees or officers are bound to act reasonably and ·
fairly in dealing With the property of the debtor. The exercise of the power
or discreti~n in· its dealing would be subject to the same constitutional or
public law limitation as the Government. The Corporation also equally
must conform its action with the same standard that meet the test. of
justness, fairness, reason.ableness and relevance. [628G·f!l
E
F.
.
G
Kasntri/al Laxmi Reddy v. State of J & K, [1980] 3 S.C.R. 1338,
referred to.
1.2. Sub-section 4 of section 29 treats the Corporation "to be a
trustee" of the debtor or person claiming title through him •. It saddles the
Corporation or the officer concerned with inbuilt duties, responsibilities H
618
SUPREME COURT REPORTS
[1992] 1 S.C.R.
A and obligations towards the debtor in dealing with the property and entails
him to act as a prudent and reasonable man standing in the shoes of the
owner. Therefore, when the property of the debtor stands transferred to
the Corporation for management or possession thereof which includes
right to sell or further mortgage etc., the Corporation or its officers or
B
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D
employees stand in the shoes of the debtor as trustee and the property
cestue que trust. They are bound to exercise their power in good faith in
selling or dealing with the property of the debtor as an ordinary prudent
man would exercise in the management of his own affairs to preserve and
protect his own estate. Their acts should be reasonable, just and fair which
must meet the eye and lhe offer accepted must be competitive and every
attempt should be made to secure as maximum price as possible to
liquidate the liabilities incurred by the industrial concern or the debtor
under the Act. [630G-H, 631C, 632C-D]
N. Suryanarayan Iyer's Indian Tmst Act, 3rd Edn. 1987 page 275; Kerr
011Receivers,17th Edn., page 208; Ha/sbury's Law of E11gla11d, 4th Edn. Vol.
39, para 919, referred to.
Fertiliser Corporation Kamgar U11io11 (Regd.) Sindri & Ors. v. Union of
India & Ors., [1981] 2 S.C.R. 52; Ram & Shyam Co. v. State of Haryana,
[1985] Supp. 1S.C.R.541; Sachina11d Pandey v.State of West Bengal, [1987]
E 2. S.C.R. 223; Haji T.M. Hassan v. Kera/a Fi11ancial Corporation, [1988] l
SCR 1079; Lakshma11asami Gou11der v. C.I. T. Selvama11i & Ors., (1991) 2
SCALE 956, referred to.
1.3. It is not mandatory as a matter of law, to observe the pr~cess of
taking over strictly. Defaults in payment of loan may attract Section 29.
F
But that alone is insufficient either to assume possession or to sell the
property. Neither should be resorted to unless it is imperative. Even
though no rules appear to have been framed nor any guideline framed by
the Corporation was placed, yet the basic philosophy enshrined in Section
24 has to be kept in mind. Rationale of action and motive in exercise of it
G has to be judged in the light of it. Lack of reasonableness or even fairness
at either of the two stages render the take over and transfer inv'llid.
[630F, 629H, 630A-B]
1.4. In the instant case, the Corporation was guilty of not acting in
accordance with law either at the stage of take over or in transferring the
H unit. ( 6308]
MAHESH CHANDRA v. REGIONAL MANAGER
619
,..,
1.5. The attitude adopted by the Corporation was contrary to the A
spirit and scheme of section 24 of the Act. Section 24 of the Act requires
the Board to discharge its function on business principles, due regard
being had to the. interest of industry, commerce and general public. Instead
of agreeing to receive five lacs in lump-sum as offered by the appellant it
opted for two lacs filly thousands tendered by the purchaser that too in
B
four yearly instalments. It was neither business principle, nor in the
interest of commerce and industry, nor good of general public. This
solicitous attitute, at the expense of the appellant, appears to be unjust
/
and unfair and no reasonable prudent owner would accept such an offer.
··-"
[626C, 625F; 626A-B; 635G; 636A] c
1.6. Section 29 does not exclude the application of the principles of'
natural justice. Before accepting the tender of the third respondent, an
opportunity should have been given to the appellant as to why such an
offer of the third respondent be not accepted. No bonafide actions have
been taken or attempted by the Corporation. The sale of the property is D
vitiated by unjust and unreasonable act on the part of the Corporation
and is liable to be set aside. The appellant is not bound by the sale or the
subsequent acts of the purchasers claiming through them.
[636A, C-D, F]
The Corporation should immediately resume· possession of the E
hypotheca sold. It will be open to the appellant to pay the entire liability
and have the hypotheca redeemed as per contract. If the appellant fails to
do so, the Corporation can sell the same in open auction, after giving wide
publicity in the press. [636G, 637A]
~
F
•
2. The financial corporations under the State Financial Corporalions Act were visualised not as a profit earning concerns but an extended
arm of a welfare state to harness business potential of the country to
benefit the common man. They deal with public money for public benefit.
Their approach has to be public oriented, helpful to the loanee, without G
loss to the Corporation. Endeavour should be to adjust and accommodate
as business considerations require the sick unit to function for benefit,
both of the general public and the Corporation. The Corporation, there·
fore, should honour their comn~.itments of releasing entire loan timely
~
except for very good reasons whi,ch should be intimated before hand to
enable the unit holder to comply with shortcoming if any. In the absence H
620
SUPREME COURT REPORTS
[1992] 1 S.C.R.
A
of colllpletion of it, the proceedings for recovery under section 29 may not
be justified. (625F-G, 6300-F]
3. The following necessary directions are issued to be observed by
the Financial Corporations while exercising power under section 29:-
B
(A) Every endeavour should be made, to make the unit viable and be
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E
F
G
H
put on working condition. If it becomes unworkable.
(B) Sale of a unit should always be made by public auction.
(C) Valuation of a unit for purposes of determining adequacy of offer
or for determining if bid offered was adequate, should always ·be
intimated to the unit holder to enable him to file objection if any
as he is vitally interested in getting the maximum price.
(D) If tenders are invited then the highest price on which tender is to
be accepted must be intimated to the unit holder.
(E) If unit holder is willing to offer the sale price,as the tenderer, then
he should be offered same facility and unit should be transferred
to him. And the arrears remaining thereafter should he rescheduled to be recovered in instalments with interest after the
payment oflast instalment fixed under the agreemententered into
as a result of tendered amount.
If he brings third parties with higher offer it would be tested and
ma~· be accepted.
(F) Sale by private negotiation should be permitted only in very large
concerns where investment runs in very high amount for which
ordinary buyer may not be available or the industry itself may be
of such nature that by normal buyers may not be available. But
before taking such steps there should be advertisements not only
in daily newspapers but business magazines and papers.
(G) Request of the unit holder to release any part of the property on
which the concern is not standing of which he is the owner should
normally be granted on c,ondition that sale proceeds shall be
deposited in loan account. [634H, 635A-G)
MAHESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 621
,,,.:
4. 'Business' is a word of wide import. It has no definite meaning. A
Its perceptions differ from private to public sector or from institutional
financing to commercial banking. [ 625F]
5. The law consists of body and soul. The letter of the law is the body
and the sense and reason of its is the soul quia ratio legis est enima 'tegis. B
In other words, like a nut the letter of the law represents the shell and
sense and the purpose of its Kernal. The law intends to serve the purpose.
Justice is both the cause and effect, the origin and the legitimate end of
law. One will receive no benefit from the law, if the ratio and the letter of
_JO(
law defeats its purpose. [ 629C]
c
6. In legislations enacted for general benefit and common good the
responsibility is far graver. It demands purposeful approach. The exercise
of discretion should be objective. Test of reasonableness is more strict. The
public functionaries should be duty conscious rather than power charged.
Its actions and decisions which touch the common man have to be tested
on the touchstone of fairness and justice. That which is not fair and just D
is unreasonable. And what is unreasonable is arbitrary. An arbitrary
action is ultra vires. It does not become bona fide and in good faith merely
because no personal gain or b~nefit to the person exercising discretion
should be established. An action is ma/a fide if it is contrary to the purpose
for which it was authorised to be exercised. Dishonesty in discharge of duty E
vitiates the action without anything more. An action is bad even without
proof of motive of dishonesty, if the authority is found to have acted
contrary to reason. [629E-H)
""'
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4503 of
F
1990 .
•
From the Judgment and Order dated 5.2.1990 of the Allahabad High
Court in Chi! Misc. Writ Petition No. 13916 of 1987.
R.K. Jain, P.N. Lekhi, P.K. Jain, S. Markandcya, Ms. C. Markandeya G
and M.K. Garg for the appearing parties.
~
The Judgment of.the Court was delivered by
K. RAMASWAMY, J. The appellant, Managing Partner of Mis Shiva
.,.
Rice Mill situated at Nagina, Distt. Bijnor in Uttar Pradesh, o\vned two H
622
SUPREME COURT REPORTS
[1992] 1 S.C.R.
~
A
plots bearing Nos. 208 and 220/2 admeasuring 18 and 8 Bishwas respectively purchased under a single sale deed. In plot No. 208 in an extent of
2,100 sq. yards abutting Highway, near Railway Goods Shed and one
furlong to the Railway Station, a strategic location of importance, the rice
mill was constructed by the partnership firm. The plot bearing No. 220/2
B remained vacant and was not even valued as an asset of the partnership
firm while hypothecating the rice mill to the U.P. Financial Corporation
for short 'the Corporation'. A loan of Rs. 4,28,000, was sanctioned in 1979
and Rs. 3,70,660 was alone disbursed in 1980 which was repayable in eleven
annual instalments upto 1991. The appellant repaid a sum of Rs. 9000 in
c December, 1981. Non-cooperation of the other partners and lack of working capital, due to failure to release the balance loan, landed the running
mill into rough weather and defaults in payment were committed. While
finding that interest was getting mounted, the appellant wrote repeated
letters to the Corporation requesting to release plot No. 220 so as to enable
D
him to negotiate for private sale of it along with his two more plots to pay
off the debt. It is his case that, pursuant to his letter dated December 22,
1983, on oral promise to release the plot; he paid a sum of Rs. 65,000 and
was received by the corporation. He also promised to pay Rs. 50,000. The
Corporation did not release it. According to him, in his letter dated
February 10, 1986, Annexure 6, as on Ma·rch 31, 1986 the simple interest
E payable was Rs. 1,93,670, the principal amount was Rs. 3,70,660 and
expenses was Rs. 3,835. After deducting Rs. 65,000 towards arrears of
interest, the outstanding was Rs. 5,03,165 and he was ready and willing to
pay the same in full satisfaction under "one time settlement scheme",
provided compound interest is waived. The record also shows that in a
,;•
F
meeting held in September, 1985 a decision to release the plot appears to
have been reached by the corporation and the Regional Manager was
asked to be contacted. Ultimately, the Corporation did not acceed to that
request bm had taken possession of the hypotheca and got valued at Rs.
3,28,717.97 and published for sale inviting tenders. It is necessary to point
G out at this juncture that as per the plan filed on record which is not
disputed that (a) Plot No. 221 faces the road, Plot No. 220 is in the middle
and 219 is in the end towards north. They are contiguous. (b) The appeal-
!ant in his letter submitted that the mill could not run due to lack of running
capital and non-cooperation of other partners; and (c) Sketch plan clearly
'A
H shows that plots Nos. 219 and 221 could be used to carve out housing plots
,....,
MARESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 623
only if 220 was released, and that might have fetched good price to enable A
the appellant tci clear off the arrears. Yet it was not accepted, because
according to the affidavit of the corporation the appellant could have sold
other two plots. Several letters written by the appellant, thus, received no
response. Instead recovery proceedings were initiated.
Ac£ording to the purchasers, though the Corporation did not assert,
that no response was avoked from public for several tenders called for. The
last date to receive the tender in question was January 13, 1987. Deshbandhu Agarwal, the third respondent, per self, his wife (since died) and
his son, respondents Nos. 4 & 5, submitted the tender on March 25, 1987
B
for a sum of Rs. 2,00,000 which was on negotiation accepted at Rs. 2,55,000.. C
The Corporation agreed to receive 25% of the consideration, namely, Rs.
63,750 as initial payment and the balance consideration in four years in
equal half yearly instalments. Before accepting the tender no notice nor an
opportunity in this regard was given to the appellant. The appellant,
therefore, filed the writ petition in the Allahabad High Court which was D
dismissed by judgment dated February 9, 1990. This appeal under Art. 136
of the Constitution arises against that judgment.
When the matter came up for hearing, this Court suggested to the
parties to have the matter settled amicably. They had taken sufficient time.
The purchasers reported that they entered into an agreement to sell plot E
No. 220, and the purchaser declined to rescind the contract with a threat
to file a suit for specific performance. They offered to pay Rs. 40,000 said
to be the consideration therein but the appellant declined to accept the
same. The Corporation though filed an exhaustive counter affidavit, did not
deny the offer made by the appellant in his letter dated February 10, 1986.
F
When we enquired, the counsel for the Corporation, on instruction, stated
that they had informed the appellant that his proposal was not acceptable
to the Corporation, but no material has been placed on record of such
communication. It was stated that as on the date of the sale a sum of Rs.
8,61,969.57 was due from the appellant towards principal and interest @
18%. The break-up has been given in a separate statement filed by the G
counsel. Thus the proposed settlement had been fissled out.
Mahatma Gandhiji, the father of the nation, in Swaraj at page 92,
stated that, "from the very beginning it has been my firm belief that
agriculture provides the only unfailing and perennial support to the people H
624
SUPREME COURT REPORTS
(1992) 1 S.C.R.
A
of this country. India lives in villages". Villagers are poor and most of them
are qnemployed or underemployed who need productivity which would
add.to the wealth of the nation. This vast human resources and man power
remain idle, since majority own little or marginal land holdings out depend
on agriculture as their livelihood. Cottage, agro-based or medium inB dustries in rural areas give them economic status to the owner, employment
potential for sustenance to the workmen and fair price to the producer.
The father of the nation laid, therefore, emphasis to establish cottage
industries, "to utilize the idle hours of the nation and bring work to the
people in their homes, particularly when they had no other work to do".
C He further stated, "l want the dumb millions of our land to be healthy. 1
want them to grow spiritually. If we feel the need of the machine we
certainly will have them. Every machine that helps an individual has a
place". But he emphasised only on such industries which would be, "self.
sufficient, self-reliant and free from exploitation": The founding fathers of
the Constitution in Art. 43 directed that, "the State .shall endeavour to
D ·promote cottage industries on an individual and cooperative basis in rural
area~". Without social progress and economic development, democracy and
freedom would not take firm roots. Without social stability, it would be
••
i,mpossible to achieve .economic development. Without economic develop·
met)!. there would be no social progress and without social progress it
E would be impossible for the people to take the destiny in their own hands
in. a democracy. Our Constitution, therefore, accepted mixed ecorromy as
the base and the economic policy and planning echo regeneration of social
and economic justice. Articles 38 and 39 aim in that pursuit that the
ownership and control of the material resources of the community are so
F
distributed as best to subserve the common good and that the inequalities
in income should be minimised. Facilities and opportunities should be
provided to eliminate inequalities in status and opportunity among the
individual and groups of people. Our Bharat needs simultaneously greater
progress by building industries with modern iechnological advances on all
G
fronts and should create greater employment opportunities. To accelerate
economic development the fiscal resollrces, human resources, their abilities
and experli'c need harness. In the mixed economy the public undertakings
as \Veil as private sector need nccCS$ary assistance and encouragement. The
growth of th:c private sector should not be stifled, cribbed or cabined. The
H
bureaucracy should adopt. positive approach to stimulate production and
MARESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 625
productivity in every sector of economy so as to increase the size ofthe A
national cake.
Finance is the most important catalyst. The State of Uttar Pradesh
constituted the Corporation under s.3 of the State Financial Corporation
Act 1951, Act 63 of 1951, for short, 'the Act' which came into force from
October 31, 1951. To promote industrialisation in the States by encouraging
small entrepreneurs to participate in economic growth of the country by
giving them financial assistance for setting up medium and small scale
industries. Section 25{1 )(g) of the Act provides that the Corporation may
grant loans or advances to an industrial concern (rice mill is an industrial
concern) repayable within a period not exceeding 20 years from the date
the loan was granted. Although the activity has multiplied, capital has
grown, field of operation has been widened but the disturbing state of
affairs, which at times, surfaces, is complete lack of awareness of principles
B
c
-on which these institutions are required to function. More distressing is
unreasonable attitude adopted, often, by the Corporation while exercising .D
power under s.29 to take over possession of the unit for default, in
repayment of loan. Evil is still greater in transferring the unit as more often
the owner stands financially ruined the Corporation too does not gain much
but the transferee comes out, either with a working unit or a unit ready to
go at throw away price, in easy instalments giving rise to strong apprehensions that everything did not proceed reasonably and fairly.
Corporations deal with public money fur public benefit. The approach has to be public oriented, helpful to the loanee, without loss to the
corporation. Section 24 of the Act itself required the Board "to discharge
E
., •
its function on business principles, due regard being had to the interest of F
r •
industry, commerce and general public". ·Business' is a word of wide
import. It has no definite meaning. Its perceptions differ from private to
public sector or from institutional financing to commercial banking. The
•
. financial corporations under the Act were visualised not as a profit earning
concerns but an extended arm of a welfare state to harness busine;s
potential of the country to benefit the common man.
The release of plot No. 220 for private sale along with other unemcumbered two plots would haw fetched the necessary amount to pay off
G
the debt. Even .the offer to receive Rs. 5,00,000 in full quids would have
salvaged the problem. Any prudent businessman with least acumen would . H
626
SUPREME COURT REPORTS
[1992] 1 S.C.R.
A have agreed to the proposal of the release of the plot for sake ef recovering
its debts. Instead of agreeing to receive five lacks in lump sum, it opted for
two lacs fifty thousands, that too in four yearly instalments. It was neither
business principle, nor in the interest of commerce and industry, nor good
of general public. Any reasonable approach, which of course is not only
B
c
desirable but necessary, while dealing with such matters, would have immediately demonstrated that the Corporation by such step of releasing the
plot, which was of no consequence to it, was going to gain and perpetuated
the objectives of the Act. Instead it adopted an attitude which was contrary
to the spirit and scheme of s. 24 of the Act. Did the Corporation gain from
its· ultimate decision of taking over possession and transferring the unit ?
Total loan disbursed was Rs. 3,78,660. The appellant paid in all Rs. 74,000
and if it is added to the amount paid by the appellant, it comes to Rs.
3,29,000 only. Whereas the appellant was willing to pay Rs. 5,00,000 and
odd in 1986 over and above the amount which he had paid, if plot No. 220
was released or one time payment scheme was accepted. Similar offer was
D accepted in relation to mill at Meerut. It did not get back the interest. Even
what it disbursed was the borrowed public money. Of course, the transferee
got a mill with project cost estimated at 6 lacks and odd in 1980 at
Rs.2,55,000 in 1986 when the value must have gone up instead of going
down.
E
There is a theorem that the economic self,interest and profit motive
· induce entrepreneurs to reallocate resources among activities until they get
the same (approximately, if not exactly in practise) rate of return from
different lines of activity. No body would like to lose money. No body would
like to miss an opportunity to make profit or to lose his money either.
F
Resources allocation in a market economy, thus, primarily is a matter of
relative priority to different activities. The very process of economic growth
implies continuous reallocation of resources to generate income to plough
it back and earn profit. One of the major causes to incur loss is the erosion
of working capital fund which affects the day-to-day working of the unit.
Unless working capital is provided for, the industry is bound to get closed
G
due to accumulated losses year after year. The terms of loans are mainly
to repay immediately after disbursement with commercial rate of interest
together with annual on half yearly rests. Unless the unit starts generating
internal resources and earn profit, running the unit on industrial concern
itself becomes difficult and the ability to repay principal or interest get
H
impeded. The result, therefore, is that it would commit default or breach
• ••
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MAHESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 627
of contract by default attracting penal interest for the period in default.
The industrial concern or unit, thereby, would be further burdened with
additional cost of interest, panel interest and interest over interest. With
the result they cannot come out from the red, nor generate internal
resources. Many a time the corporation takes over possession and sell
thereof. The genuine and enthusiastic entrepreneur with no previous business ~xperience would get exposed to this hazard (the pretenders to make
quick money would maintain concerted conduits and. the officers too would
be solicitious to them). Therefore, the Corporation as a policy of wise
investment should map out payment schedule in disbursing the loan to see
A
B
c
that the unit starts functioning and its working capital is maintained. It is
common knowledge that due to apathy or indifference or for reasons best
known or hidden that the disbursements would be delayed resulting in
delay in completion of the project or to start working or loss of running
capital, which would give cause for default in payment of the instalments;
accumulation of the liabilities and the ultimate closure of the unit or the
industiral concern, defeating the objectives of the Act and the Constitution. D
This case demonstrates that in spite' of reminding the corporation
that due to lack of working capital, the appellant was unable to run the
mill. The corporation did not release the balance loan and no explanation
came forth. Dr. Malcolm S. Adiseshaiah, the noted Economist, in his 'The
Why, What and Whither of the Public Sector Enterprise at page 42 under
the caption 'Problem of Loss-Making Units in the Public Sector, Erosion
of Working Capital and its Results' stated that, "[ was informed that the
best course would be to get money as loan and not as equity. Anyhow we
have to run the industry, margin money was provided as loan on the same
terms and conditions regarding interest and repayment. So, on this question also, rethinking is needed. Since margin money has to come from the
owner, ~nd since the Government is the owner of the public sector, it
should consider margin money released as equity". At page 43 it is stated
that, "a drastic change in policy is needed to make those units viable and
E
F
to enable them to stand on their own legs. The rehabilitation programme
is going on (we do not call it "modernisation'', though in the government G
the term "modernisation" is used) .... For losing concerns, even the payment
of interest adds to their woes in finding necessary working capital .... by
way of equity, so that these units are able to overcome the difficulty and
•
start standing on their own legs". With regard to the problems with the
bank at pages 45 and 46 it was slated thus: ''If the banks take a helpful
H
62S
SuPREME COURT REPORTS
(19'.J2J 1 s.c.R.
A
attitude in normally sanctioning the respective limits as announced by the
committee for working capit1!1. it will be quite helpful for the public
sector:.... may be even for the private sector''.
Thus a heltiing attitude on the part of the Corporation to constantly
monitor the working of the industrial concern or units (it may even charge
B the overhead expenses on this account) would subserve the purpose of the
loan, object ~f the Act, and the constitutional objective of economic justice
to the needy. ,Equally employment and better working conditions to the
workmen are assured and the unit gets stablised and starts yielding returns
for repayment of principal amount and interest payable thereon. The facts
C in this case do demonstrate that non- cooperation by the partners and
depletion of working capital are causes to close the mill and the consequential default in the· payment of the principal amount and the interest
accrued thereon. The corporation acted indifferently.
Let us turn to s. 29" for the scheme of dealing with taken over sick
D
unit. Section 29 (1) o(the Act says that if an industrial concern makes any
default in repayment of any loan or advances or any instalment thereof, the
Corporation shall have the right to take over the management or possession
or both of the industrial concern as well as the right to tr:,.isfer by way of
lease or sale and realise the debt from the property pleuged, mortgaged,
E or assigned to the Corporation. ·
. Sub-sec. 4 postulates that in the absence of any contract to the
contrary, the amount received "be laid by" the corporation "in trust" firstly
in the payment of cost, charges and the expenses and secondly in discharge
of the debt due to the Corporation and the residue, 'if any, shall be paid to
F
the defaulter or the persons entitled thereto.
The Corporation has been given statutory right to take over possession and management of the defaulting unit or hypotheca or both including
the right to sell and realise the loan or advance due frqm the unit or debtor.
The Corporation is an instrumentality of the State. The Corporation or its
G employees or officers are bound to act reasonably and fairly in dealing with
the property of the debtor. The exercise of the power or discretion in its·
dealing would be subject to the same constitutional or public law limitation
as the government. The Corporation also equally must conform its action
with the same standard that meet the test of justness, fairness, reasonable-
•
H
ness and relevance. In Kasturi/a/ Laxmi Reddy v. State of!. & K., [ 1980] 3
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r
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MAHESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 629
SCR 1338, this Court held that when any Government's action fails to A
satisfy the test of reasonableness and public interests are found to be
wanting in quality of reasonableness or lacking in the quality of public
interest, it would be liable to be struck down as invalid. It must follow as
a necessary corollary, that the Government cannot act in a manner which
would benefit a private party at the cost of the State; such an action would B
not be both unreasonable and contrary to public interest
•
The law consists of body and soul. The letter of the law is the body
and the sense and reason of its is the soul, quia ratio /egis est enima legis.
In other words, like a nut the letter of the law represents the shell and
sense and the purpose of its Kernal. The law intends to serve the purpose. C
Justice is both the cause and effect, the origin and the legitimate end of
law. One will receive no hc.nefit from the law, if the ratio and the letter of
law defeats its purpose.
Section 29 confers very wide power of the Corporation to ensure D
prompt payment by arming it with effective measure to realise the arrears.
But the simplicity of the language is not an in.dex of the enormous power
stored in it. From notice to pay the arrears, it extends to taking over ·
management and even possession with a fight to transfer it by sale. Every
wide power, the exercise of which has far reaching repen;\lssinn, has
inherent limitation on it. It should be exercised to effectuate the purpose E
of the Act. In legislations enacted for ·general benefit and common good
the responsibility is far graver. It demands purposefol approach. The
exercise ofdiscretion should be objective. Test of reasonableness is more
strict. The public functionaries should be duty conscious rather than power·
charged. Its actions and decisions which touch the common man have to F
be tested on the touchstone of fairness and justice. That which is not fair
. and just is unreasonable. And what is unreasonable is arbitrary. An ar~
bitrary action is ultra vires. It does not become bona fide and in good faith
merely because no personal gain or benefit to the person e~ercising discretion should be established. An action is ma/a fide if it is contrary to the
purpose for which it was authorised to be exercised. Dishonesty in dis- G
charge of duty vitiates the action without anything more. An action is bad
even without proof of motive of dishonesty, if the authority is found to have
acted contrary to reason. Power under section 29 of the Act to take
possession of a defaulting unit and transfer it by sale requires the authority
to act cautiously, honestly, fairly and reasonably. Default in payment of loan H
630
SUPREME COURT REPORTS
[1992] 1 S.C.R.
A
may attract section 29. But that alone. is insufficient either to assu!'le
possession or to sell the property. Neither should be resorted to unless it
is imperative. Even though no rules appear to have been framed nor any
guideline framed by the Corporation was placed, yet the basic philosophy
enshrined in section 24 has to be kept in mind. Rationale of action and
B
c
. D
E
F
G
motive in exercise of it has to be judged in the light of it. Lack of
reasonableness or even fairness at either of the two stages renders the take
over and transfer invalid. Unfortunately the Corporation was guilty of not
acting in accordance with law either at the stage of take over or in
transferring the unit. Admittedly the entire loan was not disbursed. Need
of the capital in the last stages cannot be doubted. If the Corporation
refused to release the amount at a time when the unit is nearing completion
or is ready to start functioning, then it falls short of capital and it is bound
to land itself in trouble. This is what happened in this case. The partners
did not cooperate and the Corporation without any explanation refused to
release the full amount. Result was the appellant stood pressed on one
h~nd from absence of capital and on the other by recovery proceedings .
The Corporation, therefore, should honour their commitments of releasing
entire loan timely except for very good reasons which should be intimated
beforehand to enable the unit holder to comply with shortcoming if any.
In its absence of its completion, the proceedings for recovery under section
29 may not be justified. Similarly various situations may arise which may
hamper start of the unit -
delay in electric supply or delayed delivery of
machinery vital for the functioning of the unit. Such difficulties do require
rescheduling of payment of instalment because, if the unit, for reasons
beyond the control of unit h~ilder, could not start, then how will the amount
be repaid. Endeavour should be to adjust and accommodate as business
considerations require the unit to function for benefit, both, of the general
public and the Corporation. It is not mandatory, as a matter of law, to
observe the process of taking over strictly. But if there is no option left out
and the unit is taken over then its transfer require not only sincere effort
but to act reasonable and fairly.
Equally Sub-section 4 of s.29 treated the Corporation "to be a
trustee" of the debtor or person claiming title through him. It saddles the
Corporation or the officer concerned with inbuilt duties, responsibilities
and obligations towards the debtor in dealing with the property and entails
him to act as a prudent and reasonable man standing in the shoes of the
w
H
owner. According to Prof. Issac, a noted author on Trusts, trusteeship has
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MAHESH CHANDRA v. REGIONAL MANAGER [RAMASWAMY, J.] 631
become a readily available tool for everyday purpose of organisation A
financing, risk shifting, credit operations, settling disputes and liquidation
of business affairs. Maitland, the other renowned writer on· Equity, observed that one of the exploits of equity; the largest and the most important,
is the innovation and development of the trust. Thus, !rust has been and is
being applied for all purposes mentioned by Prof. Issac and many others B
as device to accomplish different purposes. Trusteeship is an institution of
eiasticity and generality. The broad base of the concept of property or its
management vested in one person and obligation imposed for its enjoyment
by others is accepted in Hindu jurisprudence. Therefore, when the property of the debtor stands transferred to the Corporation for management or
possession thereof which includes right to sell or further mortgage etc., the C
Corporation or its officers or employees stands in the shoes of the ·debtor
as trustee and the property cestue que trust. In N. Surya11araya11 Iyer's
llldia11 Trust Act, Third Edition, 1987 at page 275 in s. 37 it is stated that,
"Where the trustee is empowered to sell any trust property ... by public
auction or private contract and either at one time or at several times ...... " . D
the duty of trustee is to obtain the best price. He should, therefore, use
reasonable diligence in inviting competition to that end. Where a contract
of sale has been entered into bona fide by a trustee the court will not allow
it to be rescinded or invalidated because another purchaser comes forward
with a higher price. It would, however, be improper for the trustee to
contract in circumstances of haste and improvidence.