Holding

The Supreme Court held that the State Financial Corporation’s sale was not liable to be interfered with as it had substantially complied with the Mahesh Chandra guidelines and there was no statutory violation or unfairness.

Summary

The Karnataka State Financial Corporation (KSFC) had extended loans to a rubber manufacturing company (Respondent No.1) which defaulted, leading KSFC to take over the unit under Section 29 of the State Financial Corporations Act, 1951 and initiate its sale. After several advertisements, offers were received: the highest monetary offer came from Respondent No.2 (Rs 25 lakhs) but KSFC accepted lower offers from M/s Prime Inputs and M/s Shakti Rubbers because they proposed quicker payment, payment of electricity dues, larger down‑payment and earnest money. Respondents No.1 and No.2 challenged the sale before the Karnataka High Court, which quashed the sale and directed KSFC to comply with the Mahesh Chandra guidelines (directions 2, 3, 4). KSFC appealed, arguing that it had substantially complied with those guidelines and that the High Court’s interference was unwarranted. The Supreme Court held that KSFC’s actions were in conformity with the guidelines, there was no statutory violation or unfairness, and the High Court could not act as an appellate body under Article 226. Consequently, the appeal was allowed, the High Court judgments were set aside and the writ petition dismissed with costs.

Issues considered

Whether the Karnataka High Court was justified in interfering with the sale of the unit by the State Financial Corporation under Section 29 of the State Financial Corporations Act, 1951.
Whether the State Financial Corporation complied with the directions (2, 3, 4) laid down in Mahesh Chandra v. U.P. Financial Corporation.
Whether accepting a lower monetary offer over a higher one amounts to an unreasonable or unfair act by the State Financial Corporation.
What is the scope of judicial review under Article 226 of the Constitution in matters concerning the exercise of powers by a State Financial Corporation.

Legislation cited

Constitution of Indias. Article 226
State Financial Corporations Act, 1951s. 29

Subjects

State Financial CorporationSection 29sale of unitjudicial reviewArticle 226Mahesh Chandra guidelinesunfairnesswrit petitionhigh court interference

Judgment

A KARNATAKA STATE FINANCIAL CORPORATION t ·'

v.
MICRO CAST RUBBER AND ALLIED PRODUCTS
(P) LTD. AND ORS.

JUNE 3, 1996
B
[S.C. AGRAWAL AND G.T. NANAVATI, JJ.]

State Financial Corporations Act, 1951-Section 29-Sale of unit cy
State Financial Corporation-Wiit petition before High Court challenging the
c sale-Wiit Petition dismissed with direction to the Corporation to comply with
cc1tain Directions-In the facts of the case, the Directions held as con1plied
with, hence act of the C01poration not liable to be inte1fered with.

Constitution of India, 1950-Article 226-Judicial revie1v-Scope
of-Sale by State Financial Corporations u/s 29 of State Financial Cmpora-
·D tion Act, 1951-No statuto1y violation or unfair action by the C01pora·
tion-lnte1ference of High Cou~Hetd, inte1ference unjustified, since judicial
review pennitted only when Corporation violates statutes or acts unfair--
!)~While exercising its jurisdiction U!A 226, the High Court does not sit as

E
an appellate authority over the acts and deeds of the Co1poration.
....
Appellant, a State Financial Corporation, extended financial help to
Respondent No. 1 (a company, registered under Companies Act) for
setting up a unit for manufacture of rubber and lik" products. Respon-
dent-1 failed to pay the loan, due to loss incurred by it. Appellant re-
scheduled the payment of loan and sanctioned further loan, and still
F
further extended rehabilitation assistance under RSR Scheme of IDBI and
sanctioned loan, treating the unit as sick unit. lnspite of all the facilities,
respondent-1 defaulted in payment of the loans.

On October 23, 1990, the appellant took over the unit u/s 29 of State
G Financial Corporations Act, and took steps for its sale. The Unit was
evaluated for Rs. 28 Iakhs. In response to the advertisement, on August 5,
1991, oilers were received. Offer of 'C' for Rs. 24 Lakbs was the highest.
The offer was approved by the board of appellant, but it was decided that
the communication of the approval would be made after October 15, 1991,
H so as to give opportunity to respondent-1 to bring any other higher offer.
40 ., .
- .. KARNATAKASfATEFINAi~CIALCORPN. i: M!CROCASTRUBBERANDAJ.UED PDTS. (P) LTD.

Respondent-I brought no offer. It indicated that it would submit proposal
41

A
for revival of the unit, but it failed to come up with any concrete proposal.
In the meantime, 'C' had also withdra\vn its oiler. Appellant issued fresh
advertisement for sale on August 25, 1992. Pursuant thereto, three offers
were received, i.e. by 'C' for Rs. 23 lakhs for the land, building and
machinery, by 'P' for Rs. 18 Iakhs for land and building only and, by 'S' B
for 6 Lakhs for plant and machinery only. In the joint meeting of offerers
respondent-was also invited and a tentative decision to accept the offers
of 'P' and 'S' was taken. Respondent·l was given 15 days time to make
payment and submit proposal for revival of the unit. Respondent-1 sought
further time of 15 days i.e. till December 15, 1992. On January 4, 1993,
respondent-2 submitted offer of Rs. 25 Lakhs for the entire unit.
c
The proposals of 'P', 'S' and respondent-2 were considered and it
was decided to accept the proposals of 'P' and 'S' ,since it \\-'as higher than
the offer of respondent-2, because they envisaged to pay the dues to
Electricity Board themselves; their time for payment was shorter; their D
do"n payment was higher; and they were to deposit the earnest money
while respondent-2 was not to pay the same.

Agreement was made.to sell the entire unit to 'P' and 'S'. Respon-
dents-1 & 2 tiled Writ Petition before High Court challenging the sale.
E
Single Judge allowed the petition, quashing all the proceedings subsequent
to receipt of the tenders pursuant to public notice and appellant was
directed to observe the directions 2, 3, 4 in Para 22 of the judgment in
Mahesh Chandra's case, the directions being that the unit should be
evaluated; the highest price on tender to be accepted and to be intimated
to the unit holder; and to provide facility to unit holder to pay sale price F
as tenderer and to test the third party brought by unit holder. Appellant
• filed Writ Appeal which was dismissed .

In appeal to this Court, the appellant contended that in the facts and
circumstances of the case, the directions in Mahesh Chandra's case have G
been substantially complied with. Respondent· 1, contended that his offer
was much higher than the offers by 'P' and 'S' and that he also offered to
pay Rs. 10 lakhs in addition to Rs. 25 Lakhs to Canara Bank in final
settlement of dues of respondent-1 to the bank.

Allowing the appeal, this Court H
42 SUPREME COURT REPORTS [1996] SUPP. 3 S.C.R.

A HELD: 1.1. The action of the State Financial Corporation is not liable
to be intertered with if it has acted broadly in consonance with the
guidelines contained in Para 22 of'Mahesh Chandra's case. In the facts and
circu1nstances of this case, the directions Nos. 2, 3 and_ 4 in those guidelines
have been substantially complied with by the appellant. There was com-
pliance with direction No. 2 in as n111rh as before issuing the first adverltise-
B ment for sale of the unit in March, 1981, the unit had been evaluated at Rs.
28 Lakhs. Keeping in view the various offers, it cannot be said that the said
evaluation was improper. Directions Nos. 3 and 4 were also fulfilled in as
much as Respondent No. 1 \\-'as made aware of the various offers, and
respondent No. 1 was given sullicient opportunity to submit proposal for
C revival of the unit or to obtain higher offers. [46-H, 47-A-C]

1.2. The offer of payment of Rs. 10 Lakhs by respondent No. 2: to
Canara bank does not enhance the value of the said ofl'er, because the
liability of Respondent No. I towards Canara Bank is secured by second
D charge on the land, plant and machinery that was being sold by the
appellant. The said sale by the appellant WdS subject to the said charge.
Every purchaser was bound to discharge the said liability. [47-G-H]

2. The High Court was not justified in interfering with the action of
the appellant in accepting the offers of 'P' and 'S' for the sale of tlie u1nit
......
E
of respondent No. 1. While exercising its jurisdiction under Article 226 of
the Constitution, the High Court does not sit as an appellate authority
over the acts and deeds of the Stale Financial Corporation. In the matter
of a sale by the State Financial Corporation in exercise of the power
conferred on it under Section 29 of the Act, the scope of judicial review is
F confined to two situations, namely, (1) there is a statutory violation on the
part of the State Financial Corporation, or (2) where the State Financial
Corporation acts unfairly, i.e. unreasonably. It has nut been pointed 01t1t
that there is any statutory violation on the part of the appellant iin
accepting the offers of "M/s. 'P'" and "l\f/s. 'S'" and in rejecting the offers
G of respondent No. 2. Nor can it be said that the action of the appellant in
not accepting the offers of respondent No. 2 and accepting the offers of
"M/s. 'P'" and "M/s. 'S'" was unfair or unreasonable. [48-B-F]

Mahesh Chandra v. Regional Manager, U.P. Financial Co1poration &
H Others, [1993] 2 sec 279, referred to.
KARNATAKA~lAlEFlN. CORPN. "M!CROCA..rRUBBERANOALLlED PDTS.(P) LTD. fS.C.AGRA.WAL,J.] 43

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8989 of A
1996.

From the Judgment and Order dated 15.2.94 of the Karnataka High
Court in W.A No. 3297/93.

S. Ravindra Bhat for the Appellant. B
P. Mahale, Rajesh Mahale and P.K Manohar for the Respondents.

The Judgment of the Court was delivered by

• S.C. AGRAWAL, J. Special Leave granted.
c
The Karnataka State Financial Corporation, appellant herein, is a
State Financial Corporation established under the provisions of the State
Financial Corporations Act, 195l(hereinafter referred to as 'the Act').
Respondent No. l, a company registered under the Companies Act, set up
a unit for the manufacture of rubber and like products. The appellant D
extended finance to the tune of Rs. 14.15 lakhs to respondent No. l on
March 21, 1981. In Aogust 1981 the unit of respondent No. 1 commenced
production but from its very inception it continued to incur losses. In order
to make the unit viable the appellant, on December 14, 1981. re-scheduled
the payment of the loan. A further sum of Rs. 1.65 lakhs was sanctioned
in March 1984 for the purpose of purchasing a Diesel Generating Set. On E
October 10, 1986 the appellant extended rehabilitation assistance under the
RSR Scheme of IDBI and treating the unit as a sick unit sanctioned a
further amount of Rs. 3.93 lakhs. Inspite of these facilities respondent No.
1 continued to make default in pa)•ment of instalments for repayment of
the loan. On October 23, 1990 the appellant took over the possession of F
the unit of respondent No. 1 in exercise of the powers conferred on it under
Section 29 of the Act. Thereafter the appellant took steps for sale of the
unit and for that purpose a number of advertisements were issued inviting
offers. No suitable offer was received in response to the first two adver-
tisements. In response to third advertisement issued in August 1991, five G
offers were received. Out of them, the offer of Shri P.K. Joseph on behalf
of M/s Chemtech Industries for a sum of Rs. 24 lakhs was the highest and
the Board of the appellant approved the said offer and decided that the
communication for acceptance of the offer should be sent only after
October 15, 1991 so as to give an opportunity to respondent No. 1 to bring
any other offer for a higher amount. Respondent No. 1 did not bring any H
44 SUPREME COURT REPORTS 11996] SUPP. 3 S.C.R.

A offer. But, in the meanwhile, Shri P.K. Joseph withdrew his offer on
November 30, 1991. Thereafter respondent No. 1 indicated that it would
'
'

submit a proposal for the revival of the unit but it failed to come up with
any concrete proposal. Therefore, a fresh advertisement for the sale of the
unit was issued on August 25, 1992. In response to the said advertisement,
three offers were received. One offer was of Mis. Chemtech Industries for
B
Rs. 23 lakh for land, building and machinery. The second offer was of Mis.
Prime Inputs (India) Ltd. for a sum of Rs. 18 lakhs in respect of land and
building only and the third offer was of Mis. Shakti Rubbers for Rs. 6 lakhs
for plant and machinery only. A joint meeting of the offerers was held on
September 28, 1992. Respondent No. 1 was also invited. After considering
c the said offers, a tentative decision was taken to accept the offers submitted
by Mis. Prime Inputs (India) Ltd. and M/s. Shakti Rubbers. Respondent
No. 1 sent a letter dated October 21,1992 seeking 15 days time to make
payment and submit a proposal for revival of the unit. By letter dated
November 12, 1992, further time was sought by respondent No. 1 till
D December 15, 1992. On January 4, 1993, an offer was submitted by respon-
dent No. 2 to purchase the entire unit including land, building, plants,
furnishings and fixtures for Rs. 25 lakhs. The said proposal of respondent
No. 2 as well as the offers received earlier were considered by the Board
of the appellant and it was decided to accept the offers of Mis. Prime
· Inputs (India) Ltd. and Mis Shakti Rubbers. On January 25, 1993, agree-
E ment was entered for the sale of entire unit to them. Thereafter, respon-
dents Nos. 1 and 2 filed the writ petition (CWC 3591 of 1993) in the
Karnataka High Court which has given rise to this appeal. The said writ
petition of respondents Nos. 1 and 2 was allowed by the learned single
Judge of the High Court by judgment dated August 11, 1993 whereby all
F proceedings subsequent to receipt of tenders pursuant to public notice
were quashed and the appellant was directed to observe the directions Nos.
2, 3 and 4 contained in paragraph 22 of the judgment of this Court in
Mahesh Chandra v. Regional Manager, UP. Financial Corporation and
Others, [1993] 2 SCC 279. Writ Appeal No. 3297 of 1993 filed by the
appellant against the said judgment of learned single Judge was dismissed
G by the Division Bench of the High Court by judgment dated February 15,
1994. Hence this Appeal.

As indicated earlier, the learned single Judge, while allowing the writ
petition filed by respondents Nos. 1 and 2, has directed the appellant to
H observe directions Nos. 2, 3 and 4 contained in paragraph 22 in th<:
KARNATAKASTA'IEF1N. CORPN. v. MICROCA'iTRUBBERAi\DALUED PD1'5. (P) LTD. [".C.AGRA\VALJ.] 45

judgment of Mahesh Chandra v. Regional Manager; U.P. Financial Corpora- A
lion & Ors., (supra). The said directions are as follows :

"(2) 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. B

(3) II tenders are invited then the highest price on which tender
is to be accepted must be intimated to the unit holder.

(4) (a) If unit holder is willing to offer the sale price, as the
tenderer, then he should be offered same facility and unit should
c
be transferred to him. And the arrears remaining thereafter should
be rescheduled to be recovered in instalments with interest after
the payment of last instalment fixed under the agreement entered
into as a result of tendered amount.
D
(b) If he brings third parties with higher offer it would be tested
and may be accepted." (p.297)

Shri S. Ravindra Bhat, the learned counsel appearing for the appel-
lant, has submitted that in the facts of the present case the said directions
had been substantially complied with by the appellant. In this regard, the E
submission of the learned counsel is that a number of efforts were made
to sell the unit of respondent No. 1 by issuing advertisements from time to
time but no suitable offer was received in response to the first two adver-
tisements that were issued in 1991 and the offer for a sum of Rs. 24 lakhs
made by Shri P.K. Joseph on behalf of M/s. Chemtech Industries which
was received in response to the third advertisement in 1991 was withdrawn F
by him on November 30, 1991. Thereafter, respondent No. 1 was given an
opportunity to bring a better offer or to submit a proposal for revival but
it failed to do so and, therefore, a fresh advertisement for sale of the unit
was issued on August 25, 1992. In response to the said advertisement, three
offers were received and offers submitted by Mis Prime Inputs (India) Ltd. G
. for land and building and Mis. Shakti Rubbers for plant and machinery
were found to be better than that submitted by M/s. Chemtech Industries.
When the matter was under consideration, respondent No. 2 made an offer
on January 4, 1993. The learned counsel has submitted that the said offer
of respondent no. 2 was considered by the appellant and it was found that
it was not better than the offers received from Mis Prime Inputs (India) H
46 SUPREME COURT REPORTS [1996} SUPP. 3 S.C.R.

A Ltd. and Mis Shakli Rubbers for the following reasons:
•
(a) The offers of Mis. Prime Inputs (India) Ltd. and Mis. Shakti
Rubbers envi5"gcd payment of dues of the Karnataka Electricity
Board by the offerers, whereas lhe offer of respondent No. 2
proposed the said dues to be paid by the appellant;
B
(b) There was shorter time for payment of consideration in the
offers of Mis Prime Inputs (India) Ltd. and Mis Shakti Rubbers
inas1nuch as the entire consideration \Vas payable wilhin ~ years,
whereas offer of respondent No. 2 was a conditional offer and
C payment was to be completed in 5 years after initial commence-
ment of production;

( c) In the case of Mis. Prime Jn puts (India) Ltd. and Mis. Shakti
Rubbers, down payment of 25% amounting to Rs. 6 lakhs was
made. In the case of respondent No. 2, only Rs. 2 lakhs was offered,
D and

(d) In the case of respondent No. 2, no earnest money was paid.
All other parties deposited earnest money.

The appellant, therefore, did not accept the offer of respondent No. 2 and
E accepted the offers of Mis Prime Inputs (India) Ltd. and Mis. Shakti
Rubbers. It is urged that the High Court was not justified in interfering
with the said decision of the appellant.

Shri P. Mahale, the learned counsel appearing for respondent No. 1,
F has submitted that the offer of respondent No. 2 was much higher than the
offers made by Mis. Prime Inputs (India) Ltd. and M/s Shakti Rubbers
inasmuch as respondent No. 2 had also offered to pay a sum of Rs. 10 lakhs
to Canara Bank in final settlement of dues of respondent No. 1 to the said
Bank which had a second charge on the land, building and machinery and
G that this amount of Rs. 10 lakhs is in addition to Rs. 25 lakhs to be paid
to the appellant.

The directions contained in paragraph 22 of the judgment in Mahesh
Chandra v. Regional Manage1; U.P. Financial C01poration & 01~. (supra)
are in the nature of guidelines for the exercise of the po\ver under Section
H 29 of the Act. The action of the State Financial Corporation is not liable
•

KARNATAKA STA1E FJN. CORPN. ~- MICRO CAST RUBBER AND ALLIED POTS. (P) LID. [S.C. AGRA\\1ALJ.J 47

to be interfered with if it has acted broadly in consonance with these A
guidelines. In the facts and circumstances of this case, we arc of the opinion
that the directions Nos. 2, 3 and 4 in these guidelines had been substantially
cornplied with by the appellant. There was compliance with direction No.
2 inasmuch as before issuing the first advertisement for sale of the unit in
March 1981 the unit had been evaluated at Rs. 28 lakhs. Keeping in view B
the various offers that have been received, it cannot be said that the said
evaluation was improper. Directions Nos. 3 and 4 were also fulfilled
inasmuch· as respondent No. 1 was made aware of the various offers that
had been received in response to the advertisements that were issued from
time to time and respondent No. 1 was given sufficient opportunity to C
submit proposal for revival of the unit or to obtain higher offers. The only
question is whether in accepting the offers of Mis. Prime Inputs (India)
Ltd. and Mis Shakti Rubbers the appellant has rejected the higher offer of
respondent No. 2."As pointed out earlier, the offer made by respondent
No. 2 was not accepted by the appellant for the reasons that on proper
evaluation it was found that it could not be regarded higher than that made D
by Mis Prime Inputs (India) Ltd. and Mis. Shakti Rubbers because it was
found that the offer made by respondent No. 2 envisaged the payment of
dues to the Karnataka Electricity Board by the appellant, whereas the
offers made by Mis Prime Inputs (India) Ltd. and Mis. Shakti Rubbers
envisaged payment of such dues by the offerers. It was also found that there E
was shorter time for payment of consideration in the offers of Mis Prime
Inputs (India) Ltd. and Mis. Shakti Rubbers inasmuch as under the said
offers the entire consideration is payable within 4 years, whereas in offer
of respondent No. 2 the payment is to be completed in 5 years after initial
commencement of production. Furthermore, it was found that in offers of
F
Mis Prim~ Inputs (India) Ltd. and Mis. Shakti Rubbers, down payment of
25%, amounting to Rs. 6 lakhs, was being made, while in case of respon-
dent No. 2 only Rs. 2 lakhs was offered. Moreover, in the offer of respon-
dent No. 2 no earnest money was to be paid, while earnest money was to
be deposited by other offerers. As regards the undertaking by respondent
No. 2 to pay Rs. 10 lakhs to Canara Bank in frnal settlement of the dues G
of respondent No. 1, it may be stated that the said liability towards Canara
Bank is secured by second charge on the land, plant and machinery that
was being sold by the appellant. The said sale by the appellant was subject
to the said charge. Every purchaser was bound to discharge the said
liability of the Canara Bank and the offer of payment of Rs. 10 lakhs by H
•

48 SUPREME COURT REPORTS [1996] SUPP. 3 S.C.R.

A respondent No. 2 to Canara Bank does not, therefore, enhance the value •
of the said offer.

Jn the matter of a sale by the State Financial Corporation in exercise
of the power conferred on it under Section 29 of the Act the scope of
judicial review is confined to two situations, namely, (l) there.is a statutory
B violation on the part of the State Financial Corporation, or (2) whe:re the
State Financial Corporation acts unfairly, i.e., unreasonably. While exercis-
ing its jurisdiction under Article 226 of the Constitution, the High Court
does not sit as an appellate authority over the acts and deeds of the State
Financial Corporation. See : U.P. Financial C01poratio11 v. Gem Cap (India)
C Pvt. Ltd. and Others, [1993] 2 SCC 299 at p. 306. It has not been pointed
out that there is any statutory violation on the part of the appellant in
accepting the offers of Mis. Prime Inputs (India) Ltd. and Mis. Shakti
Rubbers and in rejecting the offer of respondent No. 2. Nor can it be said
that the action of the appellant in not accepting the offer of respondent
No. 2 and accepting the offers of Mis. Prime Inputs (India) Ltd. and Mis.
D Shakti Rubbers was unfair or unreasonable. The High Court was, there-
fore, not justified in interfering with the action of the appellant in acce.pting
the offc.r~ of Mis. Prime Inputs (India) Ltd. and Mis. Shakti Rubbers for
the sale of the unit of respondent No. 1. The writ petition filed by respon·
dents Nos. 1 and 2 is, therefore, liable to be dismissed.
E
During the pendency of this appeal in this Court, respondent No. 1
had placed before the Court an offer made by Mis. Sunny Brooks to
purchase the unit for Rs. 28 lakhs. The said offer cannot be said to be
substantially higher than the offers made by Mis. Prime Inputs (India) Ltd.
· . and Mis Shakti Rubbers in September 1992 so to justify interference with
F the sale by the appellant in favour of the said offers. We are, therefore, not
inclined to uphold that impugned judgment of the High Court in view of
the said offer.

In the result, the appeal is allowed, the impugned judgment of the
G Division Bench of the High Court dated February 15, 1994 as well as the
judgment of the learned single Judge dated August 11, 1993 are set aside
and writ petition filed by respondents Nos. 1 and 2 is dismissed with costs.

K.K.T. Appeal allowed.