Supreme Court of India

GAJRAJ JAINversusSTATE OF BIHAR AND ORS.

Citation: 2004 INSC 380
Decided: 7 May 2004
Disposal: Leave Granted & Allowed
Bench: RUMA PAL

Holding

BICICO acted ultra vires by failing to obtain the best possible price and by not realizing sale proceeds, thereby breaching Sections 29(1) and 29(4) of the State Financial Corporation Act, 1951, and the sale agreement is set aside.

Summary

The appellant, Gajraj Jain, a director of Mis Katihar Flour Mills, challenged the sale of the company's flour mill assets by Bihar State Credit and Investment Corporation Ltd (BICICO) to Stichworth Exports Pvt Ltd. BICICO, as the first charge holder under the State Financial Corporation Act, 1951, had taken possession of the assets and entered into a sale agreement without obtaining a market valuation or securing the best possible price, and without realizing sale proceeds as required by Section 29. The Supreme Court held that BICICO acted ultra vires, breaching Sections 29(1) and 29(4) of the Act, and that the sale agreement was invalid. The Court set aside the High Court's order, directed the return of the amount appropriated to a third party, and ordered restoration of possession of the assets to the company. The appeal was allowed.

Issues considered

Whether BICICO, as the first charge holder, complied with Section 29 of the State Financial Corporation Act, 1951 in selling the mortgaged assets.
Whether the sale agreement with Stichworth Exports was ultra vires and in breach of Sections 29(1) and 29(4).
Whether the corporation failed to obtain the best possible price and acted unreasonably.
Whether the equity of redemption under Section 69 of the Transfer of Property Act was extinguished by the mere agreement of sale.
Whether the distinction between a charge and a mortgage affects the corporation's powers under the Act.

Legislation cited

Companies Act, 1956
State Financial Corporation Act, 1951s. 29
Transfer of Property Act, 1882s. 100, s. 69

Subjects

State Financial Corporation ActSection 29charge vs mortgagebest possible pricepublic auctioncollusionultra viresequity of redemptionsale of secured assetsfinancial corporation

Judgment

GAJRAJ JAIN A
v.
STATE OF BIHAR AND ORS.

MAY 7, 2004
B
[RUMA PAL AND S.H. KAPADIA, JJ.]

State Financial Corporation Act, 1951; Section 29 :

Recovery of loan/advance taken by a company from State Financial
Corporation and a Bank-Default in repayment-Petition for recovery of C
dues filed by the Bank-Issuance of notice by the Corporation for sale of
assets by auction to realize its dues-Payment of dues lo the Corporation
by a Director of the company-Corporation did not return the assets and
misappropriated the amount-However, it entered into an agreement of
sale of the assets with a financier on payment of its dues and on making D
promise to pay dues of the Bank-Challenge to-Dismissed by the High
Court-On appeal, Held: Corporation had entered into an agreement for
sale without ascertaining the market value of the assets-It failed to take
proper steps to secure best price of the assets-Since sale consideration
was not realized in full, the Corporation neither complied with the E
provisions of the Act nor has it protected the interest of the Bank-Since
the Corporation did not return the assets to the Company even after
liquidation of the dues and returned the tender money, the Corporation
intended to sell the assets to the financier for extraneous considerations
and thus acted arbitrarily-Hence, the agreement for transferring assets F
to the financier set aside-Amount paid by the Company which was
appropriated by the Corporation has to be taken to the account of the
Company-Dues of the Corporation shall stand repaid-District Judge
directed to restore possession of the assets to the Company and suggest
recovery in case of short fall, if any-Corporation directed to return back
the amount received from the financier-Directions issued-Transfer of G
Property Act, 1882; Sections 69-100.

'Charge' and 'mortgage '-Distinction between-Discussed.

Words and Phrases : H
677
678 SUPREME COURT REPORTS (2004] SUPP. 2 S.C.R.
A 'Best possible price '-Meaning of in the context of State Financial
Corporation Act, 1951.

'Equity of redemption '-Meaning of in the context of Section 69 of
the Transfer of Property Act.
B
A Flour Mill promoted by a Group of promoters took a term loan
from Bihar State Credit and Investment Corporation Limited (BICICO).
Central Bank of India also advanced certain amount to the Company,
Later, an agreement was approved by shareholders of the Company
C whereby 50% of the paid up capital was transferred to another Groups
of promoters. Appellant became a shareholder/Director of the Company.
The Company defaulted in re-payment of the dues. The Bank instituted
a case against the company for recovery of its dues and BICICO-
respondent No. 2 served a notice under Sections 29 and 30 of the State
Financial Corporation Act, 1951 for recovery of its dues by way of sale
D by auction and issued a sale notice for auction of the Flour Mill thereto.
First group of promoter had introduced a financier-respondent No. 4,
to respondent No. 2. Respondent No. 2 took possession of the assets of
the Company and transferred them to respondent No. 4 on payment
of its dues and on promising to pay dues of the Bank. In the meanwhile,
E one of the Directors of the Company made payment of entire dues of
respondent No. 2. Howe,·er, responuent No. 2 had entered into an
agreement with respondent No. 4 for sale of the assets. Aggrieved,
appellant-Director of the company challenged the validity of the
agreement on the ground of collusion between respondent Nos. 2, 3 and
F 4, which was dismissed and thereafter the appeal was also dismissed
by the High Court.

Hence the Present appeal.

Allowing the appeal, the Court
G
HELD: 1.1. There is a difference between a charge and mortgage.
In the case of a charge under Section I 00 of the Transfer of Property
Act, there is no transfer of interest in the property. A charge is not a
jus in rem. It is jus ad rem. It creates a right of payment out of the
H property/fund charged with the debt or out of proceeds of the
G. JAIN v. STATE 679
.,
realization of such property, a phrase used in Section 29(1) of the State A
Financial Corporation Act. A charge as defined under Section 100 of
T.P. Act may be enforced by sale. 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. [690-G-H; 691-A, DJ
B
( CPC by Mu/la (15th Edition) page 2420, referred to.

1.2. Section 29(1) of the Act contemplates a sale for distribution
of sale proceeds and not a sale for distribution of property charged
with the debt. It also implies that the first charge holder must act in C
a manner which protects not only its own interest but also the interest
of the subsequent charge holder and the mortgagor. This in turn
implies that the first charge holder is bound to obtain the best possible
price for the mortgaged assets and the best possible price must, in the
context, mean the fair market value. [691-E-FJ
D
Rajah Kishendatt Ram v. Rajah Mumtaz Ali Khan, Vol. VI, Indian
Appeals 145 (PC), relied on.

2. In the instant case, the Corporation entered into an agreement
for sale of the assets with respondent No. 4 without ascertaining the E
market value and realizing the sale proceeds for distribution in breach
of sub-sections (1) and (4) of Section 29 of the Act. The assets were
agreed to be sold for certain amount merely by adding the Corporation
dues and the claim of the Bank. Even this sale consideration was not
realized in full. The Corporation accepted downright payment of F
certain amount in settleme11t of its own dues and the balance sum was
received by it in the form of a promise to it by respondent No. 4 to
pay the dues of the Baiik, which was not even a party of the
arrangement. There is no sale for distribution of sale proceeds in terms
of Section 29(1) of the Act, There is no realization of the property,
charged with debt, in terms of sub-sections (1) and (4) of Section 29 G
of the Act. The interest of the Bank and the mortgagor is totally
defeated by the impugned arrangement between respondents No. 2 and
4. The word "realization of the property pledged, mortgaged,
hypothecated" presupposes realization of sale proceeds and application/
appropriation thereof to liquidate the dues of the paramount charge- H
680 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A holder and from the surplus payment to persons(s) entitled thereto. It
is for this reason that the best possible price has got to be tried for
under Section 29 of the Act. Hence, in the circumstances, the impugned
agreement of sale as well as the transfer of assets in favour of
respondent No. 4 are in breach of Section 29(1) and Section 29(4) of
B the 1951 Act. [692-A-B-C, F-G-H; 693-AI
MC. Chacko v. The State Bank of Travancore, Trivandrum, [19691
2 SCC 343 and Subbu Chetti v. Arunachalam Chettiar, AIR (1930)
Madras 382, relied on.

c Law and Practice of Income Tax by Kanga and Palkhiwala Vllth
Edition, p. 47; Mulla and Pullock on Contract Act, XII Edition, p. 106
and Law of Mortgage by Ghose p. 127, referred to.

2.2. Reasonableness is to be tested against the dominant
D consideration to secure the best price. Value or prke is fixed by the
market. If the object of Section 29 of the Act is to obtain the best
possible price then the Corporation ought to have called for the
valuation report. This has not been done. There is no inventory of
assets produced before this Court. The mortgaged assets of the
E company could be sold on itemized basis or as a whole whichever is
found on valuation to be more profitable. If publicity and maximum
participation is to be attained then the bidders should know the details
of the assets (or itemized value). In the absence of the proper
mechanism the auction sale becomes only a pretence. Further, the
F Corporation must have valued the assets at the time of granting
advance to the company. At that time, it must have valued the assets.
No such report has been produced that the price of the assets is pegged
to the dues of the Corporation and the Bank. The assets were agreed
to be sold to respondent No. 4 not for the market price but against
repayment of dues of the Corporation plus a promise to discharge the
G liability of the Bank. Therefore, the Corporation had not acted
reasonably. It has not taken any steps to secure the best price. In fact
it has failed to protect the interest of the Bank, which was 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
H proceeds, if any. Even assuming for the sake of argument, that there

-
G. JAIN v. STATE 681
were no offers except the offer ofrespondent No. 4, no reason has been A
given why respondenf No. 2 did not insist for downright payment of
entire value of the assets. (693-C-D-E-F-G-H; 694-A)

Mis. S.J.S. Business Enterprises (P) Ltd. v. State of Bihar & Ors.,
(2004) 3 Scale 374. B

3.1. The circumstances of the case indicate collusion between
respondent No.2 Corporation, respondent No.3 and respondent No. 4.
The take over of assets was ordered on 18.3.2002, the assets were handed
over to respondent No. 4 against down payment of Rs. 28.85 lacs by way
of demand drafts. Under Section 29(1) of the Act, the Corporation is C
entitled to sell or lease the assets in order to realize the pledged/
hypothecated or mortgaged property. There is no explanation as to how
respondent No. 4 could have drawn demand drafts in favour of
Corporation on 9.3.2002 when their offer to purchase was on I 7/19.3.2002.
It is alleged on behalf of respondent No. 4 that they were given the assets D
with a specific understanding ofreturn of property if a higher offer was
received in the auction. No such understanding was recited in the minutes
of the tender committee nor in the recitals in the impugned agreement
dated 25.4.2002. No resolution/minutes of the Board of Directors of the
Corporation were found in that regard. Under Section 69 ofT.P. Act, E
equity ofredemption existed in favour of the company. A mere agreement
for sale of assets cannot extinguish the equity ofredemption; it is only on
execution of conveyance that the mortgagor's right of redemption will
be extinguished. (694-C-D-E-F-G)

Transfer of Property Act by Mui/a, p. 794, referred to.
F

3.2. In the present case, there is no conveyance and, therefore, on
21.3.2002 when appellant paid Rs. 28.85 lacs to the Corporation
representing its full dues, there was complete liquidation of the dues
of the Corporation and yet the Corporation did not return the assets G
to the Company and arbitrarily and for extraneous reasons adjusted
the said amount to the account of another Mill. Thus, the Corporation
intended to sell the assets only to respondent No. 4 for a paltry amount
of Rs. 28.85 lacs. No reasons has been given by the Corporation as to
why it did not insist on the full payment of Rs. 198.85 lacs. Though, H
682 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A the appellant had cleared the dues of the Corporation on 2113/2002,
before opening of tenders on 22.3.2002, and yet the Corporation did
not return the assets to company. Even the render 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
B withdrawn- from the auction and therefore the offer of respondent No.
4 was accepted. However, when the appellant had cleared the dues of
the Corporation, the company had a right to redeem the assets. The
Corporation was required to act in accordance with Section 29 of the
1951 Act and not unreasonably. In this connection, it may be pointed
C out that under the public notice inviting tenders, the Corporation was
obliged to call for matching offers from the directors/promoters/
guarantors. The Corporation did not call for such offers as its object
was to keep out all counter-offers. That the impugned agreement has
been entered into without any consideration in favour of the Bank.
Thus, respondent No. 2-Corporation has misused its authority and
D power in breach of law by taking into account extraneous matters and
by ignoring relevant matters which has rendered all its acts ultra-vires.
(694-GH; 695-C-D-E-F-G-H; 696-AJ

Narandas Karsondas v. S.A. Kamtam & Anr., AIR (1977) SC 774
E and Express Newspapers Pvt. Limited & Ors. v. Union of India & Ors.,
AIR (1986) SC 872, relied on.

4. In the circumstances of the case, agreement dated 26.4.2002 is
set side; respondent No. 2-Corporation is directed to transfer Rs. 28.85
lacs to the account of Mis. Katihar Flour Mills (P) Ltd. consequent
F upon such appropriation, the loan taken by the said company shall
stand repaid. The District Judge is directed to restore possession of the
assets to Mis. Katihar Flour Mills (P) Ltd. and to draw-up an inventory
of the assets. In case of shortfall, it would be open to Mis. Katihar Flour
Mills (P) Ltd. to take such steps as they may be advised. The
G Corporation is directed to return the amount paid to it by respondent
No. 4. [696-B-C-DJ

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3063 of
2004.

H From the Judgment and Order dated 12.9.2002 of the Patna High

•
'
G. JAIN V. STATE [KAPADIA, J.] 683

Court in L.P.A. No. 980 of 2002. A
With C.P. No. 101/2003 in C.A. No. 3063 of 2004.

Mukul Rohtagi, Additional Solicitor General, Harish N. Salve, Gopal
Subramaniam, Jaideep Gupta, G.K. Banerjee, Gopal Jain, R.N. Karanjawala, B
Ankur Chawla, Amit Mahajan, Ms. Meenakshi Grover, Mrs. Manik
Karanjawala, Ms. Indra Sawhney, Rana Mukherjee, Siddhartha Gautam,
Mrs. Sarla Chandra, S.B. Upadhyay, Sanjay Sen and Ms. Nandini Gore,
for the appearing parties.

The Judgment of the Court was delivered by c
KAPADIA, J. : Leave granted.

The question in this civil appeal by special leave is whether Bihar
State Industrial Credit and Investment Corporation Limited (hereinafter D
referred to as "BICICO") acted malajide and in breach of section 29 of
the State Financial Corporation Act, 1951 by transferring the assets of the
debtor company on 19.3.2002 and executing the agreement dated 26.4.2002
with Mis Stichworth Exports Pvt. Ltd. (respondent no. 4).
E
The facts giving rise to this appeal are as follows:

In 1982, a company by the name Mis Katihar Flour Mills (P) Ltd.
was incorporated to take over the assets and business of a partnership firm
Mis Katihar Flour Mills, a business conducted by Jeloka group. The said F
company was promoted by Gopi Krishna Jeloka (since deceased), Binod
Jeloka and Pradeep Jeloka (since deceased). The company is engaged in
the business of manufacturing, processing, buying and selling 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 Rs.
90 lacs was taken by the said company from BICICO, a State Financial G
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 oflndia had advanced working capital of Rs. 1.40 crores
to the company and therefore, had a second charge on the plant and H
684 SUPREME COURT REPORTS [2004) SUPP. 2 S.C.R.

A 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 Rs. 1.24 crores in the company.
B Accordingly, the appellant became a share-holder of the company. In
January, 2001, Central Bank oflndia instituted case no. 2 of2001 against
the company and its directors for recovery of its dues amounting to Rs.
1.47 crores and for enforcement of security. On 2.2.2002, BICICO-
respondent no. 2 gave notice under sections 29 and 30 of the 1951 Act for
C recovery of its dues of Rs. 28.85 lacs. On 22.2.2002, respondent no. 2
issued a sale notice for auction of the flour-mill at Katihar in Bihar. Under
the said notice, the last date for submitting tenders was 21.3 .2002. The
tenders were to be opened on 22.3 .2002. On 17 .3 .2002, the Jeloka Group
wrote a letter to respondent no. 2 that the company has approached a
financier M/s Stichworth Exports Pvt. Ltd. who was willing to pay the dues
D of respondent no. 2 against transfer of the assets of the company in their
favour. By a take over notice dated 18.3.2002, respondent no. 2 took
possession of the assets of the company. The possession receipt was signed
by respondent no. 3. On 19.3.2002, Mis Stichworth Exports Pvt. Ltd.,
respondent no. 4, wrote a letter to respondent no. 2 offering to acquire the
E assets of the company for Rs. 28.85 lacs plus the dues of Central Bank of
India amounting to Rs. 1.70 crores. On the same day, respondent no. 4
made a down payment of Rs. 28.85 lacs and the assets were handed over
by respondent no. 2 to respondent no. 4. On 20.3.2002, the appellant herein
met the law officer of respondent no. 2. Pursuant to the sale notice dated
F 22.2.2002, the appellant submits his tender on 21.3.2002. He deposits
Rs. l lac as earnest money. On 22.3.2002, he pays Rs. 28.85 lacs
representing the entire dues of respondent no. 2. Despite payment of the
full dues by the appellant, respondent no. 2 enters into agreement of sale
of assets in favour of respondent no. 4. Aggrieved, appellant moves the
High Court on 21.5 .2002 under Article 226 of the Constitution inter a/ia
G challenging the validity of the agreement on the ground of collusion
between respondents no. 2, 3 and 4. On 22.5.2002, respondent no. 2 returns
the earnest money paid by the appellant alleging that he has withdrawn his
tender. The appeal therefrom was also dismissed on 3.9.2002. Hence, the
appellant, representing the Jain group, has come before this Court in appeal
H by special leave.
G. JAIN v. STATE [KAPADIA, J.] 685

Mr. Harish Salve, learned senior counsel appearing on behalf of the A
appellant submitted that the impugned agreement dated 26.4.2002 was
collusive, arbitrary and contrary to section 29 of the said Act. In this
connection, learned counsel relied upon the following circumstances:
Firstly, under 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 B
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
Rs. 28.85 lacs on 19.3.2002. An amount of Rs. 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 C
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 D
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 Rs. 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. 2 E
from Mis Aditya Flour Mills Ltd. Fifthly, the earnest money amounting
to Rs. I lac came to be returned to the appellant, after he had filed a writ
petition, without any demand from him. It was submitted that the earnest
money was refunded in order to enable respondent no. 2 to contend that
the appellant has withdrawn his offer and, therefore, the corporation have
agreed to sell the assets to respondent no. 4. Lastly, the sale agreement F
dated 26.4.2002 was entered into in order to defeat the decree which was
likely to be passed by the Debts Recovery Tribunal in the suit filed by the
Central Bank of India for recovery of its dues. For aforestated reasons, it
was submitted that the sale transaction was collusive, arbitrary and bad in
law. That the said transaction was a result of collusion between respondents G
no. 2, 3 and 4. On the legality of the sale, it was submitted that under section
29(4) of the 1951 Act, respondent no. 2 was duty bound to sell the assets
and appropriate the sale proceeds in the first instance to the paramount
charge of the corporation and the balance, if any, was required to be held
in trust for Central Bank of India, which had the second charge on the H
686 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A assets. It was submitted that the impugned sale was in breach of section
29(4) of the said Act and was, therefore, liable to be set aside.

Per contra, Mr. Gopal Subramaniam, learned senior counsel
appearing on behalf of respondent no. 3 submitted that there was no merit
B in this appeal. He contended that one of the terms of the sale notice was
that the auction purchaser has to liquidate the dues of Central Bank oflndia.
It was pointed out that respondent no. 2 corporation had handed over the
assets of the company to respondent no. 4 who had promised to !epay the
dues of the company to Central Bank of India. That the said pro1'lise was
incorporated in the impugned sale agreement dated 26.4.2002. In the
C circumstances, it was urged that respondent no. 2 had acted fairly, properly,
reasonably and in accordance with the provisions of section 29(4) of the
said 1951 Act. In this connection, it was also urged that the appellant had
withdrawn his offer on 22.3.2002 and after almost one month i.e. on
26.4.2002, the impugned sale agreement came to be exec~ted by respondent
D no. 2 in favour of respondent no. 4 and consequently, there was no
collusion, illegality or arbitrariness in execution of the agreement 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
E 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 Rs. 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
F 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, 200 I as the
appellant had failed to bring in funds to reduce the debts of the company.
G 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 Rs. 28.85 lacs along with the amounts due and
payable to Central Bank oflndia. Consequently, on 17.3.2002, the Jeloka
Group informed respondent no. 2 that an investor was ready and willing
H to purchase the assets of the company for Rs. 28.85 lacs plus the dues of
G. JAIN v. STATE [KAPADIA, J.] 687
Central Bank of India. On 19.3.2002, accordingly, respondent no. 4 A
informed respondent no. 2 that it was prepared to buy the assets with the
promise to liquidate the dues of the company to Central Bank of India.
Along with the letter, respondent no. 4 paid Rs. 28.85 lacs, against which
respondent no. 2 handed over the assets of the company to the purchaser,
. subject to the understanding that in the event of a buyer being found by B
tender process the assets would be returned to respondent no. 2.

Learned counsel for the respondent next contended that the appellant
made two offers on 21.3.2002. By the first offer, appellant offered to buy
the assets of the company in his own name for Rs. 1.40 crores, which offer C
was withdrawn on the same day, followed by the second offer to buy the
said assets for Rs. 28.85 lacs. On the same date, there was one more offer
from Shri P.K. Jain, which was also withdrawn. In,the circumstances, the
Tender Committee recorded that since both the offers were withdrawn, the
highest offer was from respondent no. 4 and consequently, on 26.4.2002,
the impugned agreement came to be in favour of respondent no. 4 who D
undertook to discharge the liabilities of the company to Central Bank of
India, which had a second charge on the said assets. In the present case,
it was submitted that all requisite steps for sale were adequately taken. It
was contended that the adequate notice of sale was given; that the offer
was kept open for one month; that the bids were received pursuant to the E
tender; and when the bids were withdrawn, the auction had failed and in
the circumstances, it cannot be suggested that the auction was not properly
conducted or that respondent no. 2 did not take steps to obtain the best
possible price for the assets or that respondent no. 2 acted unreasonably
in selling the assets to respondent no. 4.
F
Learned counsel for respondent no. 4 submitted that mere fact that
the possession was handed over to respondent no. 4 on 19.3.2002 did not
affect the validity of the public auction. In this connection, reliance was
placed on section 29 of 195 I Act. It was submitted that after taking
possession, respondent no. 2 was entitled to deal with the property without G
conducting 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 195 I
Act. It was contended that in the present case, at no point oftime, was there
any challenge to the procedure adopted by respondent no. 2 prior to the H
688 SUPREME COURT REPORTS [2004) SUPP. 2 S.C.R.

A 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 adver~ely comment on the sale under
B 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.

c Before dealing with the arguments, we may notice the provisions of
section 29 of the 1951 Act, section I 00 of Transfer of Property Act and
the concept of best possible price which is dominant consideration for the
sale under section 29 of the 1951 Act. We quote herein below section 29
of the 1951 Act: -
D
"29. Rights of Financial Corporation in case of default.--{1)
Where any industrial concern, which is under a liability to the
Financial Corporation under an agreement, makes any default in
repayment of any loan or advance or any instalment thereof or in
E meeting its obligations in relation to any guarantee given by the
Corporation or otherwise fails to comply with the terms of its
agreement with the Financial Corporation, the Financial
Corporation shall have the right to take over the management or
possession or both of the industrial concerns, as well as the right
to transfer by way oflease or sale and realise the property pledged,
F mortgaged, hypothecated or assigned to the Financial Corporation.

(2) Any transfer of property made by the Financial
Corporation, in exercise of its powers under sub-section (I), shall
vest in the transferee all rights in or to the property transferred
G as if the transfer had been made by the owner of the property.

(3) The Financial Corporation shall have the same rights
and powers with respect to goods manufactured or produced
wholly or partly from goods forming part of the security held by
H it as it had with respect to the original goods.
G. JAIN v. STATE [KAPADIA, J.] 689

(4) Where any action has been taken against an industrial A
concern u_nder the provisions of sub-section ( 1), all costs, charges
and expenses which in the opinion of the Financial Corporation
have been properly incurred by it as incidental thereto shall be
recoverable from the industrial concern and the money which is
received by it shall, in the absence of any contract to the contrary, B
be held by it in trust to be applied firstly, in payment of such costs,
charges and expenses and, secondly, in discharge of the debt due
to the Financial Corporation, and the residue of the money so
received shall be paid to the person entitled thereto.

(5) Where the Financial Corporation has taken any C
action against an industrial concern under the provisions of sub-
section ( 1), the Financial Corporation shall be deemed to be
the owner of such concern, for the purposes of suits by or
against the concern, and shall sue and be sued in the name of the
concern." D

The above section has been interpreted by this Court in several
matters. In the case of Mis 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 E
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 F
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 cre.dible explanation forthcoming the
Court can assume that the impugned action was improper [See: G
Mis 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, UP. Financial Corpn., [1993] 2 H
690 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A sec 279, are no longer in place in view of the subsequent decision
in Haryana Financial State Corporation v. Jagdamba Oils Mills.
However, in over-ruling the decision in Mahesh Chandra, this
Court has affinned the view taken in Chairman and Managing
Director; SIPCOT, Madras v. Contromix Pvt. Ltd., [1995] 4 SCC
595 and said that in the matter of sale under section 29, the State
B
Financial Corporation must act in accordance with the statute and
must not act unfairly i.e. unreasonably. If they do their action can
be called into question under Article 226. Reasonableness is to be
tested against the dominant consideration to secure the best price
for the property to be sold. "This can only be achieved when there
c is a maximum participation in the process of sale and everybody
has an opportunity of making an offer. Public auction after
adequate publicity ensures participation of every person who is
interesting in purchasing the property and generally secures the
best price''.
D
18. Adequate publicity to ensure maximum participation of
bidders in turn requires that a fair and practical period of time
must be given to purchasers to effectively participate in the sale.
Unless the subject matter of sale is of such a nature which requires
E immediate disposal, an opportunity must be given to the possible
purchaser who is required to purchase the property on 'As is
where is basis' to inspect it and to give a considered offer with
the necessary financial support to deposit the earnest money and
pay the offered amount, if required."

F In the light of the aforestated judgment of this Court, the issue which
arises for determination is -- whether respondent no. 2 corporation acted
reasonably and in accordance with section 29 of the 1951 Act in transferring
the assets of the company on 19 .3 .2002 and in entering into agreement for
sale with respondent no. 4 on 26.4.2002. As stated above, respondent no.
G 2 corporation had a paramount first charge on the assets of the flour mill
whereas the Central Bank of India had the second charge thereon. There
is a difference between a charge and mortgage. In the case of a charge
under section 100 of the T.P. Act, there is no transfer of interest in the
property. A charge is not a jus in rem. It is jus ad rem. It creates a right
H of payment out of the property/fund charged with the debt or out of
G. JAIN v. STATE [KAPADIA, J.] 691

proceeds of the realisation of such property, a phrase used in section 29(1) A
of the 1951 Act. A charge as defined under section 100 ofT.P. Act may
be enforced by sale (See: CPC by Mui/a (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.
B
Under section 29(1) of the 1951 Act, where any industrial concern
under a liability to the financial corporation makes any default)n repayment
of loan, the corporation is empowered to take over possession of thj<
. 1 ........ 1 •••

industrial concern and realize the property pledged, mortgaged, hypothecated
or assigned to the corporation. Under section 29(4), all costs, charges and C
expenses incurred by the corporatioµ as:ii'icidental 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 D
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 surplus sale proceeds and after satisfying his own charge he holds
the surplus for the subsequent encumbrancers and ultimately for the
mortgagor (See: Rajah Kishendatt Ram v. Rajah Mumtaz Ali Khan reported E
in (Vol. VI Indian Appeals 145 (PC)]. Section 29(1) contemplates,
therefore, a sale for distribution of sale proceeds and not a sale for
distribution of property charged with the debt. It also implies that the first
charge holder must act in a manner which protects not only its own interest
but also the interest of the subsequent charge holder and the mortgagor. F
This in tum implies that the first charge holder is bound to obtain the best
possible price for the mortgaged assets and the best possible price must,
in the context, mean the fair market value.

In the present case, it is not in dispute that the assets of the flour mill G
were charged. The first charge was in favour of the corporation; whereas
the second was in favour of Central Bank ofindia. Under section 29( 1),
the corporation while enforcing the first charge was required to put the
assets charged with the debt to sale and apply the sale proceeds in the
manner stated in section 29(4). But before doing so, it is imperative to have H
692 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A the assets proposed to be sold, valued. In breach of sub-sections (I) and
(4) of section 29, after putting the assets to sale by public auction the
corporation enters into an agreement for sale of the assets with respondent
no. 4 without ascertaining the market value and realising the sale proceeds
for distribution. The assets are agreed to be sold for Rs. 198.85 lacs merely
B by adding the corporation dues and the claim of the Central Bank oflndia.
Even this sale consideration is not realised in full. The corporation accepts
downright payment of Rs. 28.85 lacs (its own dues) and the balance of Rs.
170 lacs is received by it in the form of a promise to it by respondent no.
4 to pay the dues of Central Bank of India, which is not even a party of
C the arrangement. According to Law and Practice of Income Tax by Kanga
and Palkhiwala [Vllth Edition page 47), a promise to pay the debt at a
future date is no realization. In the case of MC. Chacko v. The State Bank
of Travancore, Trivandrum, [1969) 2 SCC 343, it has been held by this
Court, that a mere undertaking to discharge an obligation or liability of the
D debtor may at the highest amount to indemnity, however, 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
E contract cannot sue under it. Lastly, as stated above, a charge cannot be
enforced against a bonajide purchaser for value (See: Law ofMortgage 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
F lie. In the present case, there is no sale for distribution of sale proceeds
in terms of section 29( I). There is no realisation of the property, charged
with debt, in terms of sub-sections (!)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
G "realisation of the property pledged, mortgaged, hypothecated" presupposes
realisation of sale proceeds and application/appropriation thereof to liquidate
the dues of the paramount charge-holder and from the surplus payment to
person(s) entitled thereto. It is for this reason that the best possible price
has got to be tried for under section 29 of the Act. In the circumstances,
H we hold that the impugned agreement of sale as well as the transfer of assets
G. JAIN v. STATE [KAPADIA, J.] 693

in favour of respondent no. 4 are in breach of section 29(1) and section A
29(4) of ;he1951 Act.

In the present case, it has been urged that absence of valuation report
and the reserve bid does not vitiate the sale. We do not find merit in this
argument. In the case of Mis S.JS. Business Enterprises (P) Ltd. (supra), B
it has been held that the financial corporation, in the matter of sale under
section 29, must act in accordance with the statute and must not act
unreasonably. In this case, the corporation fails on both the counts. It has
neither complied with the provisions of sub-sections (I) and (4) of section
29, nor has it acted fairly. The test of reasonableness has been laid down
in the above judgment in which it is held that reasonableness is to be tested C
against the dominant consideration to secure the best price. Value or price
is fixed by the market. In the case of going concern, one has to value the
assets shown in the balance sheet (Valuation of Real Property by S. Datta
page 198). In our view, if the object of section 29 of the Act is to obtain
the best possible price then the corporation ought to have called for the D
valuation report. This has not been done. There is no inventory of assets
produced before us. The mortgaged assets of the company could be sold
on itemized basis or as a whole whichever is found on valuation to be more
profitable. No particulars in that regard have been produced before us. If
publicity and maximum participation is to be attained then the bidders E
should know the details of the assets (or itemized value). In the absence
of the proper mechanism the auction sale becomes only a pretence. Further,
in this case, the corporation advanced Rs. 90 lacs to the company. At that
time, it must have valued the assets. No such report has been produced.
Lastly, in this case, the price of the assets is pegged to the dues of the F
corporation and the Central Bank oflndia. The assets are agreed to be sold
to respondent no. 4 not for the market price but against repayment 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 oflndia, which is having G
the secdnd 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 H
694 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A value of the assets was Rs. 198.85 lacs [i.e. Rs. 28.85 lacs+ Rs. 170 lacs).
No reason has been given why respondent no. 2 did not insist of downright
payment of Rs. 198.85 lacs.

In addition to the vitiating circumstances enumerated above, we find
B 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 take over of assets is on 18.3.2002.
However, on 19.3.2002, the corporation hands over the assets to respondent
ilo. 4 against down payment of Rs. 28.85 lacs plus promise to the
C corporation that the purchaser undertakes to pay the dues of Central Bank
of India. A part of the amount of Rs. 28.85 lacs was paid by demand drafts
dated 9.3.2002. These circumstances indicate collusion between respondent
no. 2 corporation, respondent 3 and respondent no. 4. The take over of
assets is ordered on 18.3.2002 and on 19.3.2002, the assets are handed over
to respondent no. 4 against down payment of Rs. 28.85 lacs in demand
D drafts dated 9.3.2002. Under section 29(1) of the Act, the corporation is
entitled to sell or lease the assets in order to realise the pledged/
hypothecated or mortgaged property. Under what colour of title were the
assets handed over to respondent no. 4 on 19.3.2002? Was it under sale,
lease or repayment of loan? There is no explanation as to how respondent
E no. 4 could have drawn demand drafts in favour of corporation on 9.3.2002
when their offer to purchase was on 17119.3.2002. It is alleged on behalf
of respondent no. 4 that they were given the assets with a specific
understanding of return of property if a higher offer was received in the
auction. No such understanding is recited in the minutes of the tender
F committee nor in the recitals in the impugned agreement dated 26.4.2002.
We do not find any resolution/minutes of the Board of Directors of the
corporation in that regard. In the agreement dated 26.4.2002, it has been·
recited that Rs. 90 lacs were advanced as loan in 1988 by corporation to
the company against equitable mortgage of land and assets. Under section
69 ofT.P. Act, equity of redemption existed in favour of the company. A
G mere agreement for sale ofassets cannot extinguish the equity of redemption;
it is only on execution of conveyance that the mortgagor's right of
redemption will be extinguished. [See: T.P. Act by Mui/a page 794]. In the
present case, till today there is no conveyance and, therefore, on 21.3 .2002
when appellant herein paid Rs. 28.85 lacs to the corporation representing
H its full dues, there was complete liquidation of the dues of the corporation
G. JAIN v. STATE [KAPADIA, J.] 695

and yet the corporation did not return the assets to the company and A
arbitrarily and for extraneous reasons adjusted the said amount to the
account of Mis Aditya Flour Mills. The reason is obvious. The corporation
intended to sell the assets only to respondent no. 4 for a paltry amount of
Rs. 28.85 lacs. It has been repeatedly urged before us, on behalf of
respondent no. 4, that the assets in question were not worth Rs. I 0 crores B
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 ofrespondent no. 4, the
property was worth Rs. 198 lacs. But the corporation handed over the assets
and agreed to sell them against down payment of Rs. 28.85 lacs. No reason
has been given by the corporation as to why it did not insist on the full C
payment of Rs. 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 D
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 by the corporation in a separate account. Lastly, in the
case of Narandas Karsondas v. S. A. Kamtam & Anr. reported in AIR
(I 977) SC 774, it has been held that putting of property to auction does E
not extinguish the right of redemption. Therefore, on 21.3.2002, the
company had a right to redeem the assets. It was submitted that the
appellant intended to buy the assets in his own name. We do not find merit
in this argument. The record shows that the appellant as the director of the
company offered to clear the dues of the corporation for which he insisted F
on the return of the title deeds (transfer papers) ofM/s Katihar Flour Mills.
In any event, in this case, we are concerned with the conduct of the
corporation which was required to act in accordance with section 29 of the
1951 Act and not unreasonably. In this connection, it may further be
pointed out that under the public notice inviting tenders, the corporation G
was obliged to call for matching offers from the directors/promoters/
guarantors. The corporation did not call for such offers as its object was
to keep out all counter-offers. Lastly, we are satisfied that the impugned
agreement dated 26.4.2002 has been entered into without any consideration
in favour of Central Bank oflndia. In conclusion, we may state that in the H
696 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A present case, respondent no. 2 corporation has misused its authority and
power in breach of law by taking into account extraneous matters and by
ignoring relevant matters which has rendered all its acts ultra-vires. [See:
Express Newspapers Pvt. Limited & Ors. v. Union of India & Ors., AIR
(1986) SC 872 para 118].
B
In the circumstances, we set aside the impugned judgment and order
of the High Court and grant to the appellant the reliefs claimed by him in
the writ petition. We hereby set aside the agreement dated 26.4.2002 and
we direct respondent no. 2 - corporation to transfer Rs. 28.85 lacs, wrongly
C appropriated to the account of Mis Aditya Flour Mills, to the account of
Mis Katihar Flour Mills (P) Ltd. Consequent upon such appropriation, the
loan taken by the said company shall stand repaid. We further direct the
concerned District Judge to restore possession of the assets (handed over
by respondent no. 2-corporation to respondent no. 4-company on 19.3.2002)
to Mis Katihar Flour Mills (P) Ltd. In this connection, the District Judge
D is directed to draw-up an inventory of the assets. In case of shortfall, it
would be open to Mis Katihar Flour Mills (P) Ltd. to take such steps as
they may be advised. Consequent upon our setting-aside the agreement
dated 26.4.2002, we direct the corporation to return the amount paid to it
by re5pondent no. 4 on 19.3.2002.
E
Appeal is accordingly allowed, with no orc!ers as to costs.

In the facts and circumstances of the case, no order is required to be
passed in contempt petition No. IO I of 2003.

F
S.K.S. Appeal allowed.

Search Indian case law

Ask in plain English, not just keywords. 25,000 AI words free, no card.

Try "State Financial Corporation Act"Sign in to search