Holding

The sale of the unit to Vinpack was valid and the High Court's order to redo the sale was set aside as the corporation acted bona fide under Section 29.

Summary

Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC) invoked its power under Section 29 of the State Financial Corporation Act, 1951 to take over a defaulting borrower, Cavalet India Ltd., and sold the unit to Vinpack Ltd. The borrower challenged the sale as void and illegal, and a Single Judge allowed the borrower a chance to match the offer, which the borrower failed to do. The Karnataka High Court Division Bench directed KSIIDC to redo the entire sale process, giving the borrower another opportunity for a better offer. On appeal, the Supreme Court held that KSIIDC acted bona fide, the sale to Vinpack was valid, and the High Court could not act as an appellate authority over the corporation’s exercise of statutory power absent a statutory violation or unfairness. Consequently, the Court set aside the High Court’s order and allowed the appeal, affirming the corporation’s right to recover its dues under Section 29.

Issues considered

The legality of KSIIDC's sale of the borrower's unit under Section 29 of the State Financial Corporation Act, 1951.
Whether the High Court could direct a fresh sale process, effectively acting as an appellate authority over the corporation's actions.
The scope of judicial review of financial corporation actions under Article 226 of the Constitution.
Whether the borrower’s failure to comply with the Single Judge’s directions validates the sale.
The applicability of the doctrine of fairness and the requirement to secure the best price in sale of public property.

Legislation cited

State Financial Corporation Act, 1951s. 29

Subjects

Section 29State Financial Corporation Actjudicial reviewwrit jurisdictionfairness doctrinesale of assetsdefaultindustrial financeadministrative law

Judgment

KARNA T AKA STA TE INDUSTRIAL INVESTMENT AND A
DEVELOPMENT CORPORATION LTD.
v.
MIS CA VALET INDIA LTD. AND ORS.

MARCH 30, 2005

[Y.K. SABHARWAL AND TARUN CHATTERJEE, JJ.]

State Financial Corporation Act, 1951 :

Object and purpose of-Discussed c
Section 29-Borrower-Default in repayment-Right of Corporation to
sell property of the borrower-Held: If inspite ofgiving an opportunity to pay
debts, the borrower fails, then Corporation can exercise the right to sell its
property to third party since the object of the Act is to obtain the best price D
by maximum public participation-On facts, Borrower was given fair chance
to either bring better offer or a one time settlement, but borrower failed to so,
hence sale to third party not void, illegal and contrary to Section 29.

Administrative law :

Judicial review-Adjudication by Financial Corporation-Interference
E
with-Scope and ambit of-Held: High Court while exercising writ jurisdiction
cannot sit as an appellate authority over the acts and deeds of- the
Corporation-Action of Financial Corporation not to be intetfered with unless
same is unfair or malajide-Constitution of India-Article 226.
F
Respondent-borrower defaulted in repaying the loan amount.
Appellant-Corporation (KSIIDC) passed an order under Section 29 of the
State Financial Corporation Act, 1951 for taking over the unit of borrower
for recovery of its due and issued advertisement, inviting offers for sale
of the unit. Sale was finalized in favour of one Vin pack Ltd. The borrower
filed Writ Petition before the High Court challenging the sale as void, G
illegal and contrary to Section 29 of the Act. Thereafter, borrower sought
to bring prospective purchasers but failed to bring any concrete 'better
offer. Borrower then offered to purchase the unit on the same terms on
which KSIIDC had agreed to sell the unit to Vinpack Ltd.
1183 H
1184 SUPREME COURT REPORTS [2005] 2 S.C.R.

A Single Judge issued directions that the sale effected by KSIIDC to T
the Vinpack Ltd. would be set aside if the borrower deposits the same
amount in instalments. Borrower failed to avail the opportunity and •.
KSIIDC sold the unit to the Vinpack Ltd. On appeal, Division Bench
directed KSIIDC to undertake the entire process of selling of the unit again
B by giving an opportunity to borrower. to bring better offer. Hence the
present appeal by the KSIIDC and the Vinpack Ltd.

Allowing the appeal, the Court

HELD : 1. Since the borrower faile~ to comply with the directions
C of the Single Judge, the action of KSIIDC to sell the unit in favour of ·
Vinpack was valid and legal. (1196-B]

2.1. The High Court while exercising its jurisdiction under Article
226 of the Constitution does not sit as an appellate authority over the acts
and deeds of the financial corporation and seek to correct them. The
D Doctrine of fairness does not convert the writ courts into appellate
authorities over administrative authorities. (1193-D-El

2.2. In a matter between the corporation and its debtor, a writ court
has no say except when there is a statutory violation on the part of the
Corporation or where the Corporation acts unfairly i.e., unreasonably.
E Unless the action of the Financial Corporation is ma/a fide, even a wrong
decision taken by it is not open to challenge.. [1193-E-F]

2.3. In a sale of public property, the dominant consideration is to
secure the best price for the property to be sold and this could be achieved
only when there is maximum public participation in the process of sale
F and everybody has an opportunity of making an offer. The Financial
Corporation is always expected to try and realize the maximum sale price
by selling the assets by following a procedure which is transparent and
acceptable, after due publicity, wherever possible and if any reason is
indicated or cause shown for the default, the same has to be considered
G in its proper perspective and a conscious decision has to be taken as to
whether action under Section 29 of the Act is called for. [1194-A-B-CJ

2.4. Fairness cannot be a one-way street. The fairness required of
the Financial Corporations cannot be carried to the extent of disabling
them from recovering what is due to them. While not insisting upon the
H borrower to honour the commitments undertaken by him, the Financial
KARNATAKA STATE !NOUS. INVEST. AND DEV. CORPN. LTD. v. CAVALET !NOIA LTD. ) J85

Corporation alone cannot be shackled hand and foot in the name of A
fairness. (1194-D-EI

U.P. Financial Corporation v. Gem Cap (India) Pvt. ltd and Ors.,
(199312 SCC 299 and Haryana Financial Corporation and Anr. v.Jagdamba
Oil Mills and Anr., (2002) 3 SCC 496, relied on.
B
Mahesh Chandra v. Regional Manager, U.P. Financial Corporation and
Ors., (199312 SCC 279; U.P. Financial Corporation and Ors. v. Naini Oxygen
& Acetylene Gas ltd and Anr., 119951 2 SCC 754; Chairman and Managing
Director, S!PCOT, Madras and Ors. v. Contromix Pvt. Ltd and Anr., (1995]
4 SCC 595; Karnataka State Financial Corporation v. Micro Cast Rubber & C
Allied Products (P) Ltd and Ors., 11996) 5 SCC 65 and S.J.S. Business
·. Enterprises (P) Ltd. v. State of Bihar and Ors., (2004) 7 SCC 166, referred
to.

2.5. In the instant case KSIIDC acted in a bona fide manner. The
procedure followed by KSI JDC to dispose of the assets of the borrower to D
realize the dues cannot be held to be unreasonable or unfair. The sale was
conducted by issuing advertisements in the newspapers. Steps were taken
to secure the best price. The question before the High Court was nnly about
the validity of sale to Vinpack and the plea of the respondent was that
the unit was sold at ridiculously low price. The Single Judge gave
reasonable opportunity to the borrower to pay the same amount as payable E
by Vinpack failing which the unit was directed to be sold to Vinpack after
specified date. The borrower failed to comply with the order of the Single
Judge or seek extension of time and also did not challenge it in writ appeal.
11194-G-H; 1195-AI

3. The legislative intent in enacting the statute was to promote F,
industrialization of the States by encouraging small and medium industries
by giving financial assistance in the shape of loans and advances, repayable
within a stipulated period. Though the Corporation is not like an ordinary
moneylender or a .bank which lends money, there is purpose in its lending
i.e. to promote small and medium industries. The relationship between the G
Corporation and the borrower is that of a creditor and debtor. A
Corporation is not supposed to give loan and then to write if off as a bad
debt and ultimately to go out of business. It has to recover the amounts
due so that fresh loans can be given. In that way industrialization, which
the intended object, can be promoted. It certainly is not and cannot be
H
.,,_
1186 SUPREME COURT REPORTS [2005] 2 S.C.R.

A called upon to pump in more money to revive and resurrect each and every
sick industrial unit irrespective of the cost involved. Financial Corporation
cannot wait indefinitely to recover its dues. (1195-E-H; 1196-AJ ..,...
.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2062 of2002.

B Fro111 the Judgment and Order dated 11.4.2000 of the Karnataka High
Court in W.A. No. 1746 of 1999.

L.N. Rao, Ms. Hetu Arora, Sharan Dev Singh Thakur and Naveen R.
Nath wi~h him for the Appellant in C.A. No. 2062/02 and Respondent No.
2 in C.A. No. 2063/2002.
c
V.R. Reddy, E.C. Vidya Sagar, K. Lingaraja, B.K. Choudhary, with
him for the Appellant in C.A. No. 2063/2002.

Krishnan Venugopa1, Amit Dhingra, N. Khetty, Prasad Vijayakumar,
Rahul Prasanna Dave for the Respondent Nos. 1-2 in C.A. No. 2062/02 and
D Respondent Nos. 3-4 in C.A. No. 2063/2002. ~

Anil K. Mishra, A. Rohen Singh and Sanjay R. Hegde for the State of
Kamataka and Respondent No. 4 in C.A. No. 2062/2002.

The Judgment of the Court was delivered by
E
Y.K. SABHARWAL, J. The question that arises for consideration in
these matters is whether Karnataka State Industrial Investment and
Development Corporation (for short, 'KSIIDC') acted in a bona fide manner

F
in sale of the properties of the borrower exercising its right under Section 29
of State Financial Corporation Act, 1951 (for short, 'the Act').
--
'

The appeals have been preferred by KSIIDC as well as M/S Vinpack
Investments Pvt ~td., the purchaser (for short 'Vinpack') against the judgment
and order of the Division Bench of the Kamataka High Court directing KSIIDC
to undertake the entire sale process once again and give opportunity to
G respondent No. 1 to bring better offer for the properties.

Respondent No. 1, MIS Cavalet Industries Ltd. (for short, 'the borrower'}
borrowed a sum of Rs. 116.30 lakhs from KSIIDC as per the sanction letter
dated 22nd April, 1991. The borrower committed defaults in payment of the
installments and, therefore, KSIIDC on 30th March, 1995 passed an order
H under Section 29 of the Act for taking o_ver the unit of the borrower for
KARNATAKA STATE INDUS. INVEST. AND DEV. CORPN LTD.'' CAVALET INDIA LTD. [SABHAR\VAL. IJJ 187
~
I
recovery of its dues. However, KSllDC did not implement that order. Th,ere A
was considerable correspondence between KSIIDC and the borrower, in regard
to the offers of some third parties, who were proposing either to purchase the
unit or enter into some working arrangement with the borrower to run the
unit. The efforts of the borrower to enter in to arrangement with third parties
to work the unit did not yield any result. The borrower also did not c\ear the
dues and, therefore, KSIIDC passed another order dated 30th October, l 996
B
under Section 29 of the Act for taking over the unit to recover a sum of Rs.
98,36,636 which was due as on 24th May, 1996 and in pursuance of the
order, possession of the unit was taken over on 14th November, 1996.

KSIIDC between January and December, 1997, viz., a period of about
one year issued three advertisements for sale of the unit. Suffice it to note
c
that out of all offers, ultimately Vinpack, after negotiating increased its offer
to Rs. 171 lakhs which was accepted by KSIIDC by its letter dated 8th
October, 1998.

The borrower filed the writ petition on 4th November, 1998 for declaring D
the sale as void, illegal and contrary to Section 29 of the Act. On 18th
November, 1998, the borrower filed an application for directions to keep the
premises open as some prospective purchasers desired to inspect the unit.',
The application was allowed and KSIIDC was directed to keep the premises
open during the period directed by the High Court.
E
The borrower did not bring any concrete better offer. An affidavit was,
however, filed by the borrower offering to purchase the unit on the same ·
terms on which KSIIDC had agreed to sell the unit to Vinpack. Though ·

- KSIIDC did not accept the offer, but the learned Single Judge by judgment ,
dated 29th January, 1999, on consideration of factual and legal position, held
that since there was non-compliance of the guidelines laid down in Mahesh ·
F
Chandra v. Regional Manager, UP. Financial Corporation and Ors., [1993]
2 sec 279, the borrower was entitled to an opportunity to make an offer on
the same terms on which KSIIDC had finalized the same with Vinpack. The
learned Single Judge issued directions fixing the sale price at Rs. 171 lakhs.
The first installment of Rs. 30.50 lakhs was to be paid on or before 20th G
February, 1999. The borrower was also given liberty to bring a third party
making a better offer. It was further held that if the borrower failed to bring
a better offer or agree to buy the unit or if the first installment is not made
to KSIIDC on or before 20th February, 1999, KSIIDC would be at liberty to
proceed with the sale in favour of Vinpack. The borrower failed to avail the
H
1188 SUPREME COURT REPORTS [2005) 2 S.C.R.

A opportunity granted in the judgment of the learned Single Judge. Therefore,
KSIIDC sold the unit to Vinpack on 25th Febr~ary, 1999.

Subsequently, on 26th February, 1999, the borrower filed the Writ
Appeal challenging the order of the learned Single Judge. The Division Bench
by judgment under appeal, inter alia, held that the learned Single Judge, after t
B coming to the conclusion that the guidelines provided in Mahesh Chadra's
•
case were not followed, was not right in directing KSIIDC to make an offer
on the same terms on which it had finalized the sale of the property to
Vinpack and, therefore, KSIIDC was directed to undertake the entire process
of selling of.the unit again by following the guidelines enumerated in Mahesh
C Chandra and by giving an opportunity to the borrower to bring better offer.

Learned counsel appearing for KSIIDC submits that a fair chance was
given to the borrower to either bring a better offer or a one time settlement,
but the borrower failed to do so; the KSIIDC was considerate and sympathetic
towards the borrower and having passed an order on 30th March, 1995 under
D Section 29 of the Act, it was not implemented, in view of the fact that the
borrower was negotiating with third parties to enter in to arrangements to
work the unit; the guide lines laid down in Mahesh Chandra have been
overruled and in any case, the borrower was given by learned Single Judge
same offer on which unit was sold to Vinpack, further directing that on
borrower's failure to pay in the stipulated period, KSIIDC could sell the unit
E to Vinpack. The borrower neither complied with the directions of learned
Single Judge nor obtained any stay or extension of time and, in fact, filed the
appeal after expiry of the period granted by learned Single' Judge and, thus,
by its conduct the buyer could not challenge the sale made to Vinpack which
was made as a result of failure of the borrower.
F
Learned counsel appearing for Vinpack-the purchaser also submits that
since the borrower failed to comply with the order of the learned Single
Judge, KSIIDC rightly sold the unit to it and, thus, third party interest was
created even before the filing of the writ appeal. No interim order was granted
by the Court during the pendency of the writ appeal preventing the
G confirmation of sale in favour of Vinpack. The counsel also submits that
substantial investments have been made after purchase of the unit by the
purchaser and hundreds of workers are working in the unit. It is submitted
that the order of the learned Single Judge was passed on the undertaking filed
by the borrower to purchase the unit on the same terms as offered by Vinpack
H and having failed to comply with the order, sale was confirmed in favour of
KARNATAKA STATE INDUS. INVEST. AND DEV. CORrN. LTD. 1·. CAVALET INDIA LTD. [SABHARWAL lJJ J 89
...-' Vinpack. A
Supporting the impugned judgment, learned counsel appearing for the
borrower submits that KSIIDC is under an obligation to consider the reasons
for default and when there are genuine reasons for default, it should cooperate
with the borrower by rescheduling the repayment of loan. It has been further
submitted that the manner of disposing the unit shows that there was no B
transparency or fairness and efforts were not made to secure the best price
and that the terms and conditions for borrower to purchase were more onerous.

The sale of the unit has been effected by KSIIDC in favour of Vin pack
under directions of learned Single Judge, having regard to its right of sale C
under Section 29 of the Act. Section 29 gives a right to Financial Corporation
inter alia to sell the assets of the industrial concern and realize the property
pledged, mortgaged, hypothecated or assigned to Financial Corporation. This
right accrues when the industrial concern, which is under a liability to Financial
Corporation under an agreement, makes any default in repayment of any loan
or advance or any installment thereof or in meeting its obligations as envisaged D
in Section 29 of the Act. Section 29(1) gives Financial Corporation in the
event of default the right to take over the management or possession or both
and thereafter deal with the property.

- The sale was set aside by the High Court relying upon the interpretation
placed on Section 29 by this Court in Mahesh Chandra's case (supra). The
subsequent line of cases have distinguished the decision in Mahesh Chandra's
E
case.

In U.P. Financial Corporation v. Gein Cap (India) Pvt. Ltd. and Ors.,
[1993) 2 SCC 299, it was held the High Court while exercising its jurisdiction
under Article 226 of the Constitution cannot sit as an appellate authority over F
the acts and deeds of the corporation and seek to correct them and that the
Doctrine of fairness, evolved in administrative law was not supposed to convert
the writ courts into appeHate authorities over administrative authorities. On
the facts of the case it was held that the borrower had no intention of repaying
any part of the debt and was merely putting forward one or other reason to G
keep the corporation at bay. While striking down the directions issued by the
High Court, this Court held that the High Court had not kept in mind the well
recognised limitations of their jurisdiction under Article 226 of the Constitution
and acted as an appellate authority over the actions of the financial corporation,
in a matter where not a single provision of law was violated. The comt
observed that the "financial corporations were not sitting on King Solomon's H
1190 SUPREME COURT REPORTS [2005) 2 S.C.R.

A mines, but they too borrow monies from Government or other financial f"'
i

corporations and they also have to pay interest thereon''. The court observed
that "fairness is not a one way street and the fairness required of the
corporation cannot be carried to the extent of disabling it from recovering
what is due to it. While not insisting upon the borrower to honor the
commitments undertaken by him, the corporation alone cannot be shackled
B hand and foot in the name of fairness". The court pointed out that in a matter
between the corporation and its debtor, a writ court has no say except in two ¢
situations : (1) there is a statutory violation on the part of the corporation or
(2) where the corporation acts unfairly i.e., unreasonably. Mahesh Chandra
was distinguished noticing that it was a case where the debtor was anxious
C to pay off the debt and had been taking several steps to discharge his obligation
and on the facts of that particular case it was found that the corporation was
acting unreasonably.

In U. P. Financial Corporation and Ors. v. Naini Oxygen & Acetylene
Gas Ltd. and Anr, [1995] 2 SCC 754, this Court held that it was not a matter
D for the Courts to decide as to whether the financial corporation should invest
in the defaulting unit, to revive or to rehabilitate it and whether even after
such investment the unit would be viable or whether the financial corporation
should realise its loan from the sale of the assets of the Company. The Court

-
observed that a Corporation being an independent autonomous statutory body
E having its own constitution and rules to abide by, and functions and obligations
to discharge, in the discharge of its functions, it is free to act according to
its own right. The views it forms and the decisions it takes would be on the
basis of the information in its possession and the advice it receives and
according to its own perspective and calculations. In such a situation, more
so in commercial matters, the courts should not risk their judgments for the
F judgments of the bodies to which that task is assigned. The Court further held
that, "Unless its action is malafide, even a wrong decision taken by it is not
open to challenge. It is not for the courts or a third party to substitute its
decision, however more prudent, commercial or businesslike it may be, for
the decision of the Corporation. Hence, whatever the wisdom (or the lack of
G it) of the conduct of the Corporation, the same cannot be assailed for making
the Corporation liable."

In Chairman and Managing Director, S/PCOT, Madras and Ors. v. ---
Contromix Pvt. Ltd. and Anr., [1995] 4 SCC 595, the financial corporation
after taking over the unit ofthe defaulting borrower under Section 29 of the
H Act issued advertisement inviting offers for sale of the mortgaged assets. An

r
KARNATAKA STATE INDUS. INVEST. AND DEV. CORPN. LTD.'" CA VALET INDIA LTD. [SABHARWAL. JJ) ) 9J

intending purchaser made a offer, and after further negotiations the offer was A·
revised. The revised offer was accepted by the financial corporation and the
sale was finalized. A writ petition was filed by the borrower challenging the
sale, on the ground that the market value of the assets was more than the sale
price and the guidelines laid down Mahesh Chandra have not been followed.
The writ petition was allowed and it was held that the said sale was not
conducted in accordance with the guidelines laid down in Mahesh Chandra B
inasmuch as (i) the sale was not held by auction and was held by inviting
tenders follo"'.ed by negotiations; (ii) the price for which the properties were
sold was low; and (iii) before accepting the offer, no intimation was given
to the borrower so as to enable it to make a higher offer. Directions were
issued to the effect that the sale effected by the financial corporation shall C
stand set aside if the borrower deposits, in installments, the sale price as
agreed between the financial corporation and the intending purchaser. It was
further directed that in the event of the non-payment of any one of the
amounts on or before the specified dates the said sale shall stand validated.
However, the borrower did not comply with the directions and preferred a
Writ Appeal against the judgment of the learned Single Judge. In the said D
appeal it was held that instead of imposing conditions on the borrower for
setting aside the sale by tender even though the said sale was found illegal
and opposed to the judgment in Mahesh Chandra, the learned Single Judge
ought to have set aside the sale straight away without imposing any conditions.
The court directed the appellants to put up the unit for sale afresh by giving E
reasonable time to the borrower to repay the amount which had become due.
Feeling aggrieved, the financial corporation approached the Supreme Court
by preferring an appeal.

Allowing the appeal this Court held that in the matter of sale of public
property, the dominant consideration is to secure the best price for the property F
to be sold and this can be achieved only when there is maximum public
participation in the process of sale and everybody has an opportunity of
making an offer. It was further held that public auction is not the only mode
to obtain the best price and it could be done by inviting tenders, by giving
wide publicity so as to get the maximum price. On facts, it was held that G
through negotiations, the financial corporation was able to secure a revised
offer which was more than the price at which the unit had been valued and
the borrower had sufficient opportunity, to secure an offer higher, but was
not able to bring any higher offer. As regards the valuation of the unit the
Court observed that, the value of the plant and machinery could have fallen
on account of its being used or due to the same getting outdated and if the H
1192 SUPREME COURT REPORTS [2005] 2 S.C.R.

A value of the unit was higher than the sale price it would have been possible
for the borrower to obtain a better offer and his failure to do so negatives ttle
inference that the sale price was low. The court also observed that, the failure
on the part of the financial corporation to give intimation to the borrower
before accepting the offer made by the purchaser was of little consequence
B in the facts of the case because the borrower had sufficient opportunity to
obtain a higher offer, but he has failed to do so.

In Karnataka State Financial Corporation v. Micro Cast Rubber &
Allied Products (P) Ltd. and Ors., [1996] 5 SCC 65, the issue was whether
the financial corporation was wrong in rejecting the offer given by the borrower
C which, after proper evaluation, was considered lower than the offer made by
the purchasers. This Court, while upholding the action of the financial
corporation, held that the guidelines contained in Mahesh Chandra are in the
nature of guidelines for the exercise of the power under Section 29 of the Act
and the action of the State Financial Corporation should not be interfered
with if it has acted broadly in consonance with those guidelines. The Court
D reiterated the law laid down in Gem Cap as regards the scope of judicial
review in matters of sale by the State Financial Corporation in exercise of the
power conferred on it under Section n 29 of the Act.

In Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills
and Anr., [2000] 3 SCC 496, a Three Judge Bench, while over ruling the
E decision in Mahesh Chandra held that it was contrary to the letter and intent
of Section 29 of the Act and observed th.at the views expressed in that case
were too wide and did not take note of the ground realities and the intended
objects of the statute and if the guidelines as indicated were to be strictly
followed, it would be giving premium to a dishonest borrower. The views
F would not further the interest of any Corporation and consequently of the
industrial undertakings intending to avail financial assistance and would only
provide an unwarranted opportunity to the defaulter, in most cases chronic
and deliberate, to stall recovery proceedings. Further, the court observed that
"it is one thing to assist the borrower who has intention to repay, but is ;
prevented by insurmountable difficulties in meeting the commitments. That
G has to be established by adducing material". The Court found that the
guidelines issued in Mahesh Chandra placed unnecessary restrictions on the
exercise of power by Financial Corporation contained in Section 29 of th(':
Act by requiring the defaulting unit-holder to be ·associated or consulted at
every stage in the sale of the property. The court felt that the procedure
H indicated in M~hesh Chandra would lead to further delay in realization of the
93
KARNATAKA STATE INDUS. INVEST. AND DEV. CORPN. LTD. 1·. CAVALET INDIA LTD. [SABHARWAL. lJJ J

dues by the financial Corporation by sale of assets. The Court held that it was A
always expected that the Corporation would try and realize the r:rnximum
sale price by selling the assets by following a procedure which is transparent
and acceptable, after due publicity, wherever possible and if any reason is
indicated or cause shown for the default, the same has to be considered in its
proper perspective and a conscious decision has to be taken as to whether B
action under Section 29 of the Act is called for. Thereafter; the modalities for
disposal of seized unit have to be worked out. The Court approved the view
expressed in Gem Cap and found it to be more in line with the legislative
intent behind enacting the Act.

Recently in S.J.S Business Enterprises (P) LTD. v. State of Bhiar and C
Ors., [2004] 7 SCC 166, while reiterating the aforestated legal position, it
was held that reasonableness of the action of financial corporation under
Section 29 of the Act should be tested against the dominant consideration to
secure the best price.

From the aforesaid, the legal principles that emerge are : D
(i) The High Court while exercising its jurisdiction under Article
226 of the Constitution does not sit as an appellate authority
over the acts and deeds of the financial corporation and seek to
correct them. The Doctrine of fairness does not convert the writ
courts into appellate authorities over administrative authorities. E
(ii) In a matter between the corporation and its debtor, a writ court
has no say except in two situations;

(a) there is a statutory violation on the part of the corporati.m
or
F
(b) where the corporation acts unfairly i.e., unreasonably.

(iii) In commercial matters, the courts should not risk their judgments
for the judgments of the bodies to which that task is assigned.

(iv) Unless the action of the financial corporation is ma/a fide, even G
a wrong decision taken by it is not open to challenge. It is not
for the courts or a third party to substitute its decision, however
more prudent, commercial or businesslike it may be, for the
decision of the financial corporation. Hence, whatever the
wisdom (or the lack of it) of the conduct of the corporation, the
same cannot be assailed for making the corporation liable. H
l 194 SUPREME COURT REPORTS [2005] 2 S.C.R.

A (v) In the matter of sale of public property, the dominant
consideration is to secure the best price for the property to be
r
sold and this could be achieved only when there is maximum
public participation in the process of sale and everybc;,>dy has an
opportunity of making an offer.

B (vi) Public auction is not the only mode to secure the best price by
inviting maximum public participation, tender and negotiation
could also be adapted ..
(vii) The financial corporation is always expected to try and realize
the maximum sale price by selling the assets by following a
c procedure which is transparent and acceptable, after due publicity,
wherever possible and if any reason is indicated or cause shown
for the default, the same has to be considered in its proper
perspective and a conscious decision has to be taken as to whether
action under Section 29 of the Act is called for. Thereafter, the
modalities for disposal of seized unit have to be worked out.
D
(viii) Fairness cannot be a one-way street. The fairness required of
the financial corporations cannot be carried to the extent of
disabling them from recovering what is due to them. While not
insisting upon the borrower to honour the commitments
undertaken by him, the financial corporation alone cannot be
E shackled hand and foot in the name of fairness.
(ix) Reasonableness is to be tested against the dominant consideration
to secure the best price.

True, the exercise of the right by a financial corporation under Section
p 29 of the Act should be fair and reasonable. Ultimately, whether the action
of the financial corporation is bona fide or not would depend on the facts and
circumstances of each case.

The examination of the facts, in the light of the aforenoted legal
principles reveals that KSI IDC acted in a bona fide manner. The procedure
G followed by KSIIDC to dispose of the assets of the borrower to realize the
dues cannot be held to be unreasonable or unfair. The sale was conducted by
issuing advertisements in the newspapers. Steps were taken to secure the best
price. The question before the High Court was only about the validity of sale
to Vinpack and the plea of the borrower was that the unit was sold at
ridiculously low price. The learned Single Judge gave reasonable opportunity
H 10 the borrower to pay the san1e amount as payable by Yinpack failing which
KARNATAKA STATE INDUS. INVEST. AND DEV. CORPN LTD. 1·. CA VALET INDIA LTD. [SABHARWAL. J.JJ f 95

unit was directed to be sold to Vinpack after specified date. The borrower A
failed to comply with the order of the learned Single Judge or seek extension
of time and also did not challenge it in writ appeal within time specified in
the order of learned Single Judge. Under these circumstances, the unit was
sold to Vinpack and the possession handed over to it. The Division Bench,
after holding that the procedure adapted was not in conformity with the B
guidelines enumerated in Mahesh Chandra's case did not examine the effect
of offer given to the borrower and not availed by him resulting the sale in
favour of Vinpack. In this view, the approach of the Division Bench cannot
be sustained. Further, the subsequent line of cases distinguishing Mahesh
Chandra and the decision in the case of Jagdamba Oil Mills (supra) which
overmled Mahesh Chandra have already been noticed hereinbefore. C
The submission about the genuine reason of the borrower for de.fault
and about non-cooperation ofKSIIDC is not rescheduling loan, are not relevant
at this stage as the main issue urged before the High Court was about validity
of sale. That apart, it does appear from the facts that KSIIDC had been .
considerate and sympathetic towards the borrower and gave it ample D
opportunities. KSIIDC after passing an order under Section 29 of the Act, did
not implement it for the considerable time. The correspondence that followed
between KSIIDC and the borrower shows that sufficient opportunity was
given to th~ borrower to enter into arrangement with third parties to work the
unit. It was ~nly when the borrower failed to enter into arrangements with the · E
third parties or repay the amount, steps were taken to realize the dues. In this
regard, the object enacting section 29 of the Act has to kept in mind. As was
observed in Gem Cap and Jagdamba Oil Mills, the legislative intent in enacting
the statute was to promote industrialization of the States by encouraging
small and medium industries by giving financial assistance in the shape of
loans and advances, repayable within a stipulated period. Though the F
Corporation is not like an ordinary moneylender or a bank which lends money,
there is purpose in its lending i.e. to promote small and medium industries.
The relationship between the Corporation and the borrower is that of a creditor
and debtor. That basic feature cannot be lost sight of. A Corporation is not
supposed to give loan and then to write it off as a bad debt and ultimately G
to go out of business. It has to recover the amounts due so that fresh loans
can be given. In that way industrialization, which is the intended object, can
be promoted. It certainly is not and cannot be called upon to pump in more
money to revive and resurrect each and every sick industrial unit irrespective
of the cost involved. That would be throwing good money after bad money.
As observed in Gem Cap promoting industrialization do.es not serve public H
1196 SUPREME COURT REPORTS [2005) 2 S.C.R.

A interest if it is at the cost of public funds. It may amount to transferring
public money to private account. Further, Financial Corporation cannot wait
indefinitely to recover its dues.

Having regard to the facts of the case and the legal principles above
noted, the impugned judgment directing KSIIDC to redo the entire sale process
B cannot be sustained. Therefore, the impugned judgment is set aside and it is
held that on failure of the borrower to comply with the directions of the
Single Judge, the action of KSIIDC to sell the unit in favour of Vinpack was
valid and legal. The appeals are accordingly allowed.

C D.G. Appeal allowed.

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