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TMI Blog2003 (3) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... 85 (for short 'SICA') to the Board for Industrial and Financial Reconstruction (BIFR) on 29-12-1998 which was registered as case No. 361 of 1998. By order dated 26-5-1999, the BIFR declared the said company as a sick company and appointed the State Bank of India as operating agency and directed the operating agency to formulate the rehabilitation scheme with certain directions. The said company submitted reha- bilitation proposal to operating agency on 31-8-1999 which was not ac- cepted and later on revised rehabilitation scheme was submitted by the said company on 18-2-2000. In the meanwhile, by notice dated 21-1-2000, the respondent MSFC called upon the first petitioner to pay the due amount outstanding against the said company for which collateral secu- rity was furnished by her by way of mortgaging residential house at 4/26, Artistic Village, Sector VIII, New Mumbai. The first petitioner was in- formed that failing which MSFC shall take possession of the said residential house and dispose of the same pursuant to the power vested in it under section 29 of the State Financial Corporations Act, 1951 (for short Act of 1951). The petitioners apprehend that MSFC may also take action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bench judgment of this court in Anil Ishwardas Sharma v. Maharashtra State Financial Corporation in Writ Petition No. 3184 of 2002, dated 1-7-2002. In response to the second contention, the learned counsel for MSFC submitted that when section 22 was ame- nded to include within the perview of claims of recovery of money, the legislature used the expression 'suit' and not 'proceedings' and the inten- tion was to confine the bar under the section to suits for recovery of money against the industrial concern and the guarantor. He urged that the proceedings under section 29 of the Act of 1951 cannot be said to be barred against guarantor even if the proceedings in respect of the sick industrial company are pending before the BIFR or AAIFR. Mr. Setalwad in this connection placed reliance upon Lloyd Insulations (India) Ltd. v. Cement Corpn. of India Ltd. [2001] 105 Comp. Cas. 7291 (Delhi) and P.S. Shrinivasan v. Mukesh Babu Financial Services Ltd. [2001] 106 Comp. Cas. 597 (Bom.). 5. We shall deal with the first contention first. Section 29 of the Act of 1951 reads thus- "29. Rights of Financial Corporation in case of default.-(1) Where any industrial concern, which is under a liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial concern otherwise fails to comply with the terms of its agreement with the Financial Corporation. Section 29 also confers right on the Financial Corporation in case of default in addition to the right to take over management or possession or both of the industrial concern, the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. The expression, "right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned" is wide enough to include sale and realisation of the property mortgaged by the surety or guarantor. This power is not restricted to the property belonging to industrial concern alone. By enacting section 29, the Legislature has taken great care in ensuring speedy recovery of loans advanced by Financial Corporation. Section 29 is attracted whenever there is default by a borrowing industrial concern. Power conferred under section 29 is comprehensive which includes the power to take over the management or possession of industrial concern and/or also power to transfer by way of lease or sale and realise the property pledged, mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to read into section 29 a restriction to the effect that the right conferred on the Corporation thereunder is restricted to the right to proceed only against property belonging to the industrial concern and mortgaged to the Corporation. The provision would apply to property not belonging to the industrial concern but nevertheless mortgaged by the owners of the assets to the Corporation, as guarantee or security." (p. 227) 8. The Kerala High Court, thus, held that the composite reading of sections 29, 31 and 32, leave no manner of doubt that the property secured and not belonging to industrial concern but belonging to a third party surety or guarantor also could be proceeded against thereunder. 9. The Division Bench of Orissa High Court through G.B. Patnaik, J. (as he then was) in Ms. K.T. Sulochana Nair's case (supra) held that Financial Corporation can take possession of the property mortgaged by the guarantor under section 29(1) of the Act of 1951. The question for consideration before the Division Bench of Orissa High Court was whether the right conferred in Financial Corporation under section 29 of the Act of 1951 extends over the property mortgaged with the Corporation by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, in our considered opinion, will not apply to an action under section 29 of the Act. In fact, in the aforesaid decision, their Lordships also observed that there is no conflict between the two provisions contained in sections 29 and 31 inasmuch as the right of the Corporation under section 29 in general to proceed against the mortgaged property remains intact but could be enforced not by the speedy remedy provided for in section 31 but by taking recourse to the general law. In other words, though the Corporation can take possession of the mortgaged property of a guarantor under section 29 of the Act but cannot sale the same by taking recourse to the power conferred under section 31 of the Act and, on the other hand, can only sale by following the ordinary law contained in the Transfer of Property Act and the Code of Civil Procedure. But at the same time there cannot be any fetter on the power of corporation under section 29 to take possession of the property of the surety also. In this view of the matter, we do not find any infirmity in the letter of the Corporation, annexed as Annexure 7, and the Full Bench decision of the Allahabad High Court, on which Mr. Palit relied upon, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained against the surety though the principal has not been sued." 15. In Chitty on Contracts, 24th Edition, Volume 2 at page 1031, paragraph 4831 it is stated as under : "Conditions precedent to surety prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor." "16. In Halsbury's Laws of England, Fourth Edition, Vol. 20, paragraph 159 at page 87 it has been observed that "It is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated for." 17. In Hukumchand Insurance Co. Ltd. v. Bank of Baroda AIR 1977 Kar. 204 a Division Bench of the High Court of Karnataka had an occasion to consider the question of liability of the surety vis-a-vis the principal debtor. Venkatchaliah, J. (as His Lordship then was) observed : [Para 12] "The question as to the liability of the surety, its extent and the manner of its enforcement have to be decided on first principles as to the nature and incidents of suretyship. The liability of a principal debtor and the liability of a surety which is co-extensiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding dues" was illegal. The Punjab and Haryana High Court held that the provisions of section 29 can be invoked by State Financial Corporation to take over the property of the industrial concern as well as that of the surety or a guarantor. In para 20 of the report, the Division Bench of Punjab and Haryana High Court held thus- "20. Thus, the first contention raised by the learned counsel for the petitioners is rejected. It is held that the provisions of section 29 can be invoked by a State Financial Corporation to take over the property of the industrial concern as well as that of the surety or a Guarantor. Since the petitioners had admittedly mortgaged their property, the action of the Corporation in ordering the taking over of the two houses was absolutely legal and valid." (p. 78) 12. Incidentally, we may note that before the Kerala High Court as well as Orissa High Court, the Full Bench decision of the Allahabad High Court in Munnalal Gupta v. Uttar Pradesh Financial Corpn. AIR 1975 All. 416 was cited but the Kerala High Court expressed its respectful disagreement with a view taken by the Full Bench of Allahabad High Court in Munnalal Gupta's case (supra) and the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst a third party surety. For these reasons, with great respect we are unable to follow the view taken in the latter decision of the Allahabad High Court.' 13. The Orissa High Court while explaining the judgment of Munnalal Gupta's case (supra) given by the Full Bench of Allahabad High Court observed that there is no conflict between the two provisions contained in sections 29 and 31 inasmuch as the right of the Financial Corporation under section 29 in general to proceed against the mortgaged property remains intact but could be enforced not by the speedy remedy provided for in section 31 but by taking recourse to the general law. The Orissa High Court observed that there cannot be any fetter on the power of the Financial Corporation under section 29 to take possession of the property of the surety also. In our view also, once it is held that section 29 confers a right upon the Financial Corporation to take over the management of industrial concern or realise the mortgaged property by way of lease or sale, then apparently such right given to the Corporation under section 29 extends to the property of surety also, we hardly find any justification in holding that such a right ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a receiver in respect thereof [and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority. (2) Where the management of the sick industrial company is taken over or changed [in pursuance of any scheme sanctioned under section 18] notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law- (a)it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company; (b)no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board. (3) [Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period] of consideration of any scheme under section 18 or where any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote that by Act 12 of 1994 in section 22(1) of SICA, the expression "and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company" was inserted. The unamended provision of section 22 came up for consideration before the Supreme Court in Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. [1993] 2 SCC 144. The question before the Apex Court was whether in a case where an industrial concern makes any default in repayment of any loan or advance or any instalment thereof or otherwise fails to meet its obligations under the terms of any agreement with the Financial Corporation, such as the State Industrial & Investment Corporation of Maharashtra Ltd. (respondent therein), can the latter take recourse to sections 29 and/or 31 of the Act of 1951 notwithstanding the bar of section 22 of SICA. Dealing with this question, the Supreme Court in paras 9, 11, 12 and 14, observed thus- "9. Having reached the conclusion that both the 1951 Act and the 1985 Act are special statutes dealing with different situations the former providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich reads as under : 'Any proceedings in court of justice...by which property of debtor is seized and diverted from his general creditors... This term includes all proceedings authorised or sanctioned by law, and brought or instituted in a court of justice or legal tribunal, for the acquiring of a right or the enforcement of a remedy.' Even this definition does not militate against the view we are inclined to take. In the first place action under section 29 of the 1951 Act is to seize the property of the defaulting industrial concern and to appropriate it for satisfying the debt. It gets diverted from the general body of creditors. The Corporation is fully empowered to dispose it of to a third party and pass a clear marketable title. All this case can be done by the Corporation without the need to go to a Court or Tribunal or any other recovery agency. The Corporation is itself permitted to play that role. In substance the Corporation is playing the same role. From the point of view of quality and character the remedy is the same as in execution or distress proceedings. Therefore, even if one goes by the said meaning and understands the term proceedings in the light of the objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which inter alia failed to meet their financial obligations. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be banks or State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large industries are generally financed by banks and statutory corporations created specially for that purpose and if they are permitted to resort to independent action in total disregard of the pending inquiry under sections 15 to 19 of the 1985 Act the entire exercise under the said provisions would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of the sick industrial concern by the simple device of the Financial Corporation resorting to section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending under section 16/17 or an appeal is pending under section 25 of the 1985 Act there should be cessation of the coercive activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeding against the guarantor of industrial concern either for recovery of amount by way of suit or any mode whatsoever. By Act 12 of 1994 section 22 has been amended and in respect of industrial company, where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 is pending, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or proceeded with, save and except the permission of BIFR or the appellate authority as the case may be. What is additionally barred by the amended provision of section 22 is the suit for recovery of money or for enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company. The proceedings under section 29 of the Act of 1951 against the guarantor or surety of the industrial company cannot be said to be barred under section 22 of SICA since such proceedings are not suit as the expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered view, the expression 'suit' occurring in section 22 after amendment by Act 12 of 1994 cannot be given wider meaning to comprehend all legal proceedings. The suit ordinarily means and must be taken to mean and unless context otherwise so permits in civil proceeding instituted by presentation of plaint. Again, the proceeding which does not commence with the plaint or where claim is not in respect of dispute ordinarily triable in civil court, it could not be regarded as suit unless context demands otherwise. By way of amendment, the Legislature has deliberately in contradistinction to the expression 'proceedings' already occurring in section 22, has used the expression 'suit' insofar as claim for recovery of money is concerned. The Legislature had in mind that as far as winding up, execution, distress are concerned, no proceedings of this nature shall lie or be proceeded with against industrial company except with the consent of the Board or the appellate authority, as the case may be. By amendment the claim or recovery of money by way of suit has also been barred. When the Legislature in the same provision uses two expressions, obviously, it has the distinction of two expr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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