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1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court were: - Whether the classification of defaulter promoters into two categories under the BSFC One Time Settlement (OTS) Scheme, based on whether action under Section 29 of the State Financial Corporation Act, 1951 had been taken and whether an attempt to transfer assets had failed, was reasonable and had a rational nexus with the object of the scheme. - Whether the exclusion or onerous treatment of the second category of promoters (those against whom action under Section 29 was taken and an abortive attempt to transfer assets was made) violated Article 14 of the Constitution, which guarantees equality before law and prohibits arbitrary classification. - The interpretation and application of Section 29 of the State Financial Corporation Act, 1951, particularly regarding ownership rights of promoters over assets during and after attempts at transfer by the Corporation. - Whether the requirement for defaulter promoters in the second category to pay retention money in addition to settlement amounts under the OTS Scheme was legally sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Classification of Defaulter Promoters under the OTS Scheme Relevant legal framework and precedents: The classification was challenged under Article 14 of the Constitution, which demands that any classification must have an intelligible differentia and a rational nexus with the object sought to be achieved. The BSFC OTS Scheme classified promoters into two categories: (i) those against whom no action under Section 29 was taken or no transfer attempt was made, and (ii) those against whom action under Section 29 was taken and an abortive attempt to transfer assets was made. Court's interpretation and reasoning: The Court examined the object of the OTS Scheme, which was to reduce Non Performing Assets (NPA) and enhance recovery from existing debtors. The Court found that the classification did not have a rational nexus with this object. The distinction was based on whether the Corporation had made an abortive attempt to transfer assets, which was not attributable to the promoter but rather to the purchaser's failure to complete the transaction. Key evidence and findings: The scheme initially excluded the second category from the OTS Scheme but was later amended to include them with the additional condition of paying retention money corresponding to the failed transfer attempts. The Court noted that promoters in the second category remained owners of the assets since the transfer had not been completed, and their rights were not extinguished. Application of law to facts: The Court applied the principle of equality under Article 14 and found that the classification was arbitrary and discriminatory without any reasonable basis linked to the scheme's objective. The failure of purchasers to deposit initial consideration money or complete the transfer could not be used to impose additional burdens on promoters who retained ownership rights. Treatment of competing arguments: The Corporation argued that the classification was justified because the failed transfer attempts increased the Corporation's costs and complicated recovery efforts. The Court rejected this, holding that the promoter's rights remained unchanged by the abortive transfer attempts and that it was unfair to penalize promoters for purchasers' defaults. Conclusion: The classification violated Article 14 and was unsustainable. Issue 2: Interpretation of Section 29 of the State Financial Corporation Act, 1951 Relevant legal framework: Section 29 grants the Financial Corporation the right to take over management or possession of industrial concerns on default and to transfer assets by lease or sale to recover dues. Sub-section (2) clarifies that transfer vests full rights in the transferee as if the transfer was made by the owner. Sub-section (4) mandates that costs incurred in transfer are recoverable from the industrial concern and must be paid before dues are discharged. Court's interpretation and reasoning: The Court emphasized that ownership rights remain with the promoter until the transfer is completed. The Corporation's power to transfer is a statutory authority to realize dues but does not extinguish the promoter's proprietary rights until effective transfer. Thus, abortive attempts at transfer do not alter ownership or worsen the promoter's position. Key evidence and findings: The Court noted that the statutory scheme envisages the Corporation acting as an agent authorized to transfer the debtor's assets, not as an owner. The promoter retains ownership and the right to redeem the property by paying the sale price before transfer concludes. Application of law to facts: Since the promoters in the second category retained ownership due to failure of transfer, they could not be treated differently or penalized under the OTS Scheme. The statutory right to redeem the property before sale completion protects their interests. Treatment of competing arguments: The Corporation contended that the failed transfer attempts justified additional retention money payments. The Court held that this was not supported by the statutory framework and that the promoter's rights remained intact. Conclusion: The statutory scheme protects promoter ownership until transfer completion, and abortive transfer attempts do not justify discriminatory treatment. Issue 3: Legality of the Retention Money Requirement Relevant legal framework: The amended OTS Scheme required promoters in the second category to pay retention money corresponding to the initial deposit that purchasers failed to pay during abortive transfer attempts. Court's interpretation and reasoning: The Court found that this requirement imposed an additional financial burden on promoters for reasons unrelated to their conduct. Since the promoters had retained ownership and their rights were not extinguished, there was no basis to demand retention money as a condition for OTS eligibility. Key evidence and findings: The Court observed that the failure of purchasers to complete transactions was the cause of continued NPAs, not the promoters' default. The scheme did not provide any rationale connecting this classification or retention money requirement to recovery objectives. Application of law to facts: The Court applied the principle of non-arbitrariness and equality, concluding that the retention money condition was unreasonable and discriminatory. Treatment of competing arguments: The Corporation argued that retention money was necessary to compensate for costs and losses due to failed transfers. The Court rejected this as insufficient to justify discrimination against promoters who remained owners. Conclusion: The retention money condition was arbitrary and violative of Article 14. 3. SIGNIFICANT HOLDINGS - "Merely by taking action under Section 29 of the Act the Corporation does not become owner of the property nor in any sense the ownership rights in assets vesting in the promoters extinguish. Corporation is only authorized by law to effect transfer of such assets for recovery of its dues." - "Until the transfer actually takes effect, the proprietary rights continues to vest in the promoters and that right is not defeated even if the Corporation has made abortive attempt to transfer the property by any of the methods envisaged under the provisions." - "Classification based on such ground can hardly have any nexus to object sought to be achieved viz recovery of dues from NPA of debtor promoter who continued to be owner of assets pledged, secured or assigned as security with the Corporation." - "No distinction can be made for classifying defaulter promoter who continued to be owner of assets when OTS Scheme is introduced for the reason not attributable to such promoter for failure of attempts to sale, but which is attributable to default of purchaser or reasons not attributable to promoter." - The Court concluded that the classification of defaulter promoters into two categories for differential treatment under the OTS Scheme, based on abortive transfer attempts by the Corporation, was violative of Article 14 of the Constitution and unsustainable.
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