TMI Blog2004 (5) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... g of all kinds of grains and wheat products. The flour mill is the main asset of the company. It is located in Katihar, Bihar. On 16.5.1988, a term loan of ₹ 90 lacs was taken by the said company from BICICO, a State Financial Corporation within the meaning of the State Financial Corporation Act, 1951 (hereinafter referred to as the 1951 Act ) and a charge was registered under the Companies Act, 1956. At this stage, it is important to mention that Central Bank of India had advanced working capital of ₹ 1.40 crores to the company and therefore, had a second charge on the plant and machinery of the company. On 20.10.1993, an agreement was approved by the share-holder of the company in terms of which three directors belonging to Jeloka group resigned and three nominees of the Jain group were inducted. Under the said agreement, 50% of the paid up capital was transferred to Jain group, which deployed ₹ 1.24 crores in the company. Accordingly, the appellant became a share-holder of the company. In January, 2001, Central Bank of India instituted case no.2 of 2001 against the company and its directors for recovery of its dues amounting to ₹ 1.47 crores and for enfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the public notice dated 22.2.2002, tenders were to be submitted by 21.3.2002 and the offers were to be opened on 22.3.2002 yet the assets came to be handed over by respondent no.2 to respondent no.4 on 19.3.2002. Secondly, respondent no.4 made downright payment of ₹ 28.85 lacs on 19.3.2002. An amount of ₹ 26 lacs was paid by demand drafts dated 9.3.2002. According to the learned counsel, the said date of the demand drafts shows that prior to the commencement of the tender process and prior to the impugned sale agreement, a decision was taken by respondent no.2 to hand over and sell the assets of the company to respondent no.4. There was no valuation of the assets prior to acceptance of the bid. Thirdly, under the said sale notice, matching offers were required to be called for from the directors/promoters/guarantors of the company. This was never done. Without inviting matching offers, the assets were handed over to respondent no.4. Fourthly, despite repayment of dues amounting to ₹ 28.85 lacs by the appellant on 22.3.2002, respondent no.2 failed to return the assets to the company and arbitrarily appropriated the payment towards dues recoverable by respondent no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment as alleged. Having withdrawn from the auction, it was urged, the appellant was not entitled to challenge the sale notice, the method of sale as well as the agreement dated 26.4.2002. Learned counsel for respondent next contended that the appellant had come to court with unclean hands. In this connection, it was submitted, on the basis of the correspondence, that the appellant wanted to purchase the assets in his own name for ₹ 28.85 lacs and that he had never offered to clear the dues of respondent no.2 or Central Bank of India. In this connection, reliance was placed on the undated letter (Annexure R.2/4). For the aforestated reasons, it was submitted that the civil appeal deserves to be dismissed. Mr. Gupta, learned senior counsel appearing on behalf of respondent no.4 submitted that the company became sick by January, 2001 as the appellant had failed to bring in funds to reduce the debts of the company. He submitted that on 22.2.2002, the public notice for auction was issued. Therefore, respondent no.3 approached respondent no.4 to take over the assets of the company for ₹ 28.85 lacs along with the amounts due and payable to Central Bank of India. Consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nducting a sale and that it was open to respondent no.2 to manage the property in any manner during the pendency of sale. In the circumstances, it was submitted that there was no violation of section 29(4) of the 1951 Act. It was contended that in the present case, at no point of time, was there any challenge to the procedure adopted by respondent no.2 prior to the sale notice. In the circumstances, the appellant cannot be permitted to question the sale notice or the method of sale. Lastly, it was urged that the first charge in favour of respondent no.2 was not subject matter of proceedings before the Debts Recovery Tribunal and, therefore, it was not open to Debts Recovery Tribunal to adversely comment on the sale under section 29 of the 1951 Act. In conclusion, it was contended that the impugned sale did not violate sections 29 and 30 of the 1951 Act and that respondent no.2 - corporation had acted fairly, reasonably and in accordance with law and consequently, no interference was called for under Article 136 of the Constitution. Before dealing with the arguments, we may notice the provisions of section 29 of the 1951 Act, section 100 of Transfer of Property Act and the concep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.J.S. Business Enterprises (P) Ltd. v. State of Bihar Ors. reported in [2004 (3) Scale 374], the Division Bench of this Court, to which one of us (Ruma Pal, J.) was a party, while setting aside the impugned sale, observed that: 17. It is axiomatic that the statutory powers vested in the State Financial Corporation under the State Financial Corporation Act, must be exercised bonafide. The presumption that public officials will discharge their duties honestly and in accordance with the law may be rebutted by establishing circumstances which reasonably probablize the abuse of that power. In such event it is for the concerned officer to explain the circumstances which are set up against him. If there is no credible explanation forthcoming the Court can assume that the impugned action was improper [See: M/s Pannalal Binjraj Ors. v. Union of India Ors. AIR 1957 SC 397, 409]. Doubtless some of the restrictions placed on State Financial Corporations exercising their powers under Section 29 of the State Financial Corporation Act, as prescribed in Mahesh Chandra v. Regional Manager, U.P. Financial Corpn. 1993 (2) SCC 279, are no longer in place in view of the subsequent decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 100 of T.P. Act may be enforced by sale [See: CPC by Mulla (15th Edition) page 2420]. We have discussed the concept of charge as it has a direct bearing on the interpretation of section 29 of the 1951 Act. Under section 29(1) of the 1951 Act, where any industrial concern under a liability to the financial corporation makes any default in repayment of loan, the corporation is empowered to take over possession of the industrial concern and realize the property pledged, mortgaged, hypothecated or assigned to the corporation. Under section 29(4), all costs, charges and expenses incurred by the corporation as incidental to such realization of the property pledged, hypothecated or mortgaged shall be recovered firstly from the industrial concern and the balance shall be paid to the person entitled thereto. As stated above, a charge consists in the right of a creditor to receive the payment out of the proceeds of the realization of property or fund charged with the debt. A bare reading of sub- sections (1) (4) of section 29 shows that it is similar to section 69 of T.P. Act under which it is stipulated that a mortgagee exercising the power of sale is a trustee of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not enough to charge the property/fund with the debt. Further, according to Mulla and Pullock on Contract Act (XII Edition page 106), contracting parties may confer rights or benefits upon a third party in the form of promise to pay but the third party on whom such right or benefit is conferred by the contract cannot sue under it. Lastly, as stated above, a charge cannot be enforced against a bonafide purchaser for value (See: Law of Mortgage by Ghose page 127). In the case of Subbu Chetti v. Arunachalam Chettiar reported in [AIR 1930 Madras 382], it has been held that when a person transfers property to another and stipulates for payment by the purchaser to a third person, a suit by such person to enforce the stipulation will not lie. In the present case, there is no sale for distribution of sale proceeds in terms of section 29(1). There is no realisation of the property, charged with debt, in terms of sub-sections (1) and (4) of section 29 of the Act. The interest of Central Bank of India and the mortgagor is totally defeated by the impugned arrangement between respondents no.2 and 4. The words realisation of the property pledged, mortgaged, hypothecated presupposes reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epayment of dues of the corporation plus a promise to discharge the liability of Central Bank of India. Therefore, the corporation, respondent no.2, has not acted reasonably. It has not taken any steps to secure the best price. In fact it has failed to protect the interest of Central Bank of India, which is having the second charge on the assets transferred to respondent no.4 as well as the mortgagor which would be entitled to the balance of the sale proceeds, if any. It was contended that as the bids were withdrawn, the offer of respondent no.4 was accepted. Even assuming for the sake of argument, that there were no offers except the offer of respondent no.4, it shows that value of the assets was ₹ 198.85 lacs [i.e. ₹ 28.85 lacs + ₹ 170 lacs). No reason has been given why respondent no.2 did not insist of downright payment of ₹ 198.85 lacs. In addition to the vitiating circumstances enumerated above, we find that under the public notice dated 22.2.2002, tenders were invited. They were to be submitted by 21.3.2002. Under the said notice, the tenders were to be opened on 22.3.2002. The takeover of assets is on 18.3.2002. However, on 19.3.2002, the corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets only to respondent no.4 for a paltry amount of ₹ 28.85 lacs. It has been repeatedly urged before us, on behalf of respondent no.4, that the assets in question were not worth ₹ 10 crores as alleged by the appellant. Even if we assume that respondent no.4 is right in its submission, even then, in terms of the offer of respondent no.4, the property was worth ₹ 198 lacs. But the corporation handed over the assets and agreed to sell them against down payment of ₹ 28.85 lacs. No reason has been given by the corporation as to why it did not insist on the full payment of ₹ 198.85 lacs. Be that as it may, the appellant herein cleared the dues of the corporation on 21.3.2002, before opening of tenders on 22.3.2002, and yet the corporation did not return the assets to the company. Even the tender money deposited by the appellant was returned without any demand from the appellant so that it could be argued by the corporation that the appellant had withdrawn from the auction and therefore the offer of respondent no.4 was accepted. In fact, the document at page 186 shows that appellant refused to collect the earnest money and, therefore, the amount was kept ..... 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