Holding

A reduction of the State’s shareholding below 50% does not affect the status of an institution as a State Financial Corporation once it has been notified under Section 46 of the Act; consequently, SI Com remained an SFC and could invoke Section 29.

Summary

Mis. Amar Alcohol Ltd. obtained a Rs.90‑lakh loan from SI Com Ltd., a State Financial Corporation (SFC) originally 100% owned by the Maharashtra Government. After the government reduced its share to 49%, the borrower defaulted and SI Com invoked Section 29 of the State Financial Corporations Act, 1951 to take possession and auction the mortgaged assets. The borrower challenged the auction, arguing that SI Com ceased to be an SFC after the share reduction and thus could not rely on Section 29. The High Court held SI Com remained an SFC, a decision appealed to the Supreme Court. The Supreme Court affirmed that a reduction of state shareholding below 50% does not strip an institution of its status as a State Financial Corporation when it has been notified as such under Section 46, and therefore SI Com was entitled to exercise powers under Section 29. The Court also dismissed the borrower's ancillary claims regarding account details and auction price, finding no material to support them. The appeal was dismissed.

Issues considered

Whether SI Com Ltd. ceased to be a State Financial Corporation under the State Financial Corporations Act, 1951 after the Maharashtra Government reduced its shareholding to 49%.
Whether Section 29 of the Act could be invoked by SI Com for the takeover and auction of the mortgaged assets.
Whether the borrower’s objections regarding lack of account details and adequacy of auction price merit relief.

Legislation cited

State Financial Corporations Act, 1951s. 29, s. 46

Subjects

State Financial CorporationSection 29loan recoverymortgageauctionshareholding reductiondisinvestmentfinancial corporation statusState Financial Corporations Act 1951

Judgment

MIS. AMAR ALCOHOLI LTD. A
v.
SI COM LTD. AND ANR.

NOVEMBER 8, 2005

[ASHOK BHAN AND AL TAMAS KABIR, JJ.] B

State Financial Corporation- Recove1y of Debts-State Financial
Corporation Act 1951, secTions 2'9,46-Appellant taking loan from
Respondent, a financial corporation with 100% share holding by State C
Government-Subsequently, share of state government reducing to 49'Ycr-
Appe//ant failing to repay the ~oan-Respondent taking actual possession of
mortgaged property for auction invoking its powers under section 29-
Appel/ant filing writ petition contending that respondent ceased to be a
financial corporation due to reduction in state's share to 49% and hence
could not invoke section 29-High Court dismissing the writ petition-On D
appeal-Held, Respondent continued to be a financial corporation despite
reduction in state's share to 49% since it has been established by State
Government-Therefore entitled to invoke section 29 for recovery of debt.

Appellant company took a loan ofRs.90 lakhs in 1994 from Respondent,
a financial corporation with 100% shares owned' by the State Government. E
Subsequently, the state holding in respondent company was reduced to 49%.
Appellant company started defaulting in payment right from July 1996. After
giving ~everal opportunities to the appellant to pay up the amount due and
outstanding, Respondent took over the possession of the assets mortgaged
with it invoking its power under section 29 of the State Financial Corporation F
Act 1951. Assets were later sold by public auction. Appellant field a writ
petition in the High Court challenging taking over the possession and auction
of his assets by the respondent pleading, inter alia, that provisions of section
29 of the Act were not applicable to the respondent as it ceases to be a financial
corporation after the reduction of shares of the State Government to 49%
only. The High Court dismissing the petition hold that respondent was a G
financial corporation. Hence this appeal.

Dismissing the appeal, the court

HELD: I. Under Section 46 of the Act the Central (;overnment by a
31 II
32 SUPREME COURT REPORTS [2005) SUPP. 5 S.C.R.

A notification in the official Gazette is empowered to direct that all or any of
the provisions of the Act shall, subject to such exceptions and restrictions as
may be specified, apply to any institution established by a State·Government
which has for its object the financing of industrial concerns,' and on the
issuance of such notification the institution shall be deemed to be "a Financial
B Corporation" established by the Government within the meaning of the Act. .., .·
' 138-C-DI
\
2. The first respondent was established by the State Government with
the object of developing the industries and financing industrial concerns in
the State. The Central Government had extended the provisions of Sections
C 29 of the Act to the first respondent. Thus, the first respondent would be
covered by the expression "an institution established by a State Government"
offering range of services including the object of financing industrial concerns
in the State of Maharashtra. It would thus be a financial corporation covered
under the Act. Section 29 enables the first respondent to take over the assets
of the delinquent borrowers. As the appellant had failed to discharge its
D liability in spite of several opportunities afforded to it the first respondent
was fully justified in taking over the assets of the appellant in exercise of its
powers under Section 29 of the Act. 136-F; 38-B)

3. By mere reduction in its stake to below 50%, SICOM would not cease
to be a State Finance Corporation. The first respondent is a finance corporation
E covered by the Act and reduction in the shareholdings of the State of
Maharashtra below 50% shall not make any difference to the status of the
first respondent, i.e. being a financial corporation. 139-C-D]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5502 of2004.

F From the Judgment and Order dated I 0.10.2003 of the Bombay High
Court at Nagpur Bench in W.P. No. 153 of2003.

Ashok A. Desai, Manish Pitale and Chandershekhar Ashri for the
Appellant.

G Dushyant Dave, Jay Savla and Ms. Reena Bagga for the Respondent
No. I.

Shekhar Napahade and Shivaji M. Jadhav for the Respondent No. 2.

V.N. Raghupathy for State of Maharashtra.

H The Judgment of the Court was delivered by
AMAR ALCOHOLI LTD. v. SICOM LTD. [BHAN, J.] 33
BHAN, J. The final judgment and order dated I0th of October, 2003, A
passed by the High Court of Judicature at Bombay, Nagpur Bench at Nagpur
in Writ Petition No. 153 of 12003 dismissing the writ petition filed by the
appellant, is under challenge in the instant appeal. By the impugned order, the
High Court has declined the prayer of the appellant to quash the auction of
,•
the properties including the plants and machinery of the appellant, which B
were mortgaged in favour of SICOM Limited (the first respondent herein).

The short question that arises for our consideration in this appeal is,
whether SICOM (the first respondent) is a State Financial Corporation within
the meaning of and governed by the State Financial Corporations Act, 1951
(for short "the Act")? C
To appreciate the question, it would be necessary to state the facts
giving rise to the present appeal, which are in brief, as follows:

The first respondent, fonnerly known as "The State Industrial Investment
Corporation of Maharashtra Limited" (SIICOM), is a company established D
under the provisions of the Indian Companies Act, 1956, by the Government
of Maharashtra in the year 1966, with l 00 per cent shares being owned by
the State Government, with an object of development of industries and
financing the industrial undertakings in the State of Maharashtra.

The appellant company mainly engaged in the transport business, E
approached the first respondent to get a loan for setting up a unit to
manufacture grain based alcohol with installed capacity of 5000 Kilo Litres
annually. The appellant was sanctioned a term loan of Rs.90 lakhs in august,
1994 in consortium with IREDA {Rs. 65 lakhs) and Oriental Bank of Commerce
(Rs. 35 lakhs). Commercial production of the appellant's unit which was
scheduled to begin in April 1995 could commence only in July 1996. On F
account of such delay of over one year in commencing production, the
appellant company started defaulting in payment right from July 1996 itself.
Several opportunities were given to the appellant to pay up the amount due
and outstanding. On the failure of the appellant to pay up the same, the first
respondent sent a demand notice dated 23rd March, 1999 to the appellant G
stating that a sum of Rs.19,91,783 be paid by the 31st of March, 1999.
Pursuant to the demand notice issued by the first respondent, certain
payments were made by the appellant. However, the appellant again defaulted
.. in payment of instalments and, as on 14th December, 2000, a sum of Rs.97 ,57,695
(principal amount + the interest accrued thereon) became due and payable.
As many as 16 cheques issued by the appellant-company bearing different H
34 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A dates amounting to Rs.36.81 lakhs were dishonoured on presentation.
~
Owing to the continuous defaults. and non-payment of instalments and
interest on time, the first respondent issued a take over notice on 8th January,
200 I stating therein that in case the appellant fails to clear the outstanding
dues of Rs.97,57,695 on or before the 25th of January, 200 I, the first respondent ,
~·

B would take over the possession of the hypothecated and mortgaged assets
on 31st of January. 200 I at I 0.00 A.M. Subsequently due to negotiations
between the parties, the first respondent. vide its letter dated 6th February,
200 I, deferred the take over of the assets of the appellant company to 20th
February, 200 I. The appellant-Company was asked to pay Rs.19.81 lakhs by
c the 15th of February, 2001, failing which the mortgaged assets will be taken
over by the first respondent on 20th of February, 2001. The appellant issued
12 post-dated cheques amounting to 19.81 lakhs. On receipt of those cheques,
the take over action was again deferred. Out of those 12 cheques issued in
favour of the !st respondent, four cheques were dishonoured on presentation.
The appellant's limit was once again extended till 20th of August, 2001 to
D enable it to make good the outstanding payments, failing which the assets
were to be taken over by the first respondent. The arrears were not cleared
and finally owing to continued defaults on the part of the appellant-company,
the first respondent took over the possession of the assets mortgaged with
it invoking its powers under Section 29 of the State Financial Corporation Act,
1951 (for short "the Act") and took the actual possession thereof on 23rd of
E
October, 200 l.

In order to recover the arrears, it was decided to put the mortgaged
property to auction. The advertisement for sale of the property was published
on 23~d of November, 2001 in response to which the only offer ofRs.261 lakhs
F was received which was rejected on the ground that the offer for purchase
was below the disposal value estimated by the Government Approved Valuer.
Soon thereafter, the appellant approached the first respondent in January,
2002 for One Time Settlement (OTS). The proposal put forth by the appellant
was accepted by the first respondent vide its letter dated 6th February, 2002
for OTS at Rs.95 lakhs. The appellant issued a cheque of Rs.20 lakhs towards
G OTS which was dishonoured on presentation. However, the said amount of
Rs. 20 lakhs was subsequently paid by the appellant company. The balance
sum ofRs.75 lakhs which was payable by the appellant on or before the 28th
of February, 2002, as per the terms of the OTS, ~emained unpaid. To clear the
balance payment, the last date for payment of the said amount of Rs. 75 lakhs
H was extended thrice by the first respondent, the last one being the 28th

"-
~-
AMAR ALCOHOL! LTD. v. SICOM LTD. [BHAN, J.] 35

March, 2002. Not being able to clear the dues, the appellant again requested A
for extension of time till 15th of April, 2002 for clearing the outstanding dues,
which was not agreed to. The appellant was informed by the first respondent
that it shall be taking steps to safeguard its interest including auctioning the
assets in possession of the first respondent by identifying the interested
buyers. As the appellant failed to make the payment as per the terms of the
OTS within the stipulated period, the OTS was cancelled on 9th of April, 2002. B
After cancellation of OTS, the unit of the appellant was advertised for
sale for the second time on 8th of June, 2002. The highest offer of Rs.376
lakhs was received in the auction and the same was approved by the first
respondent. The appellant vide its letter of 2nd of July, 2002 .was given an C
opportunity to match the offer or give better offer to c!ear dues of Rs. I 00.94
lakhs existing as on 30th of June, 2002 on or before 18th of July, 2002. Needful
was not done. On 6th of August, 2002, another opportunity was given to the
appellant, as a special case, to make the aforesaid payment by the 18th of
August, 2002. There being no better offer, the auction price of Rs.376 lakhs
was accepted but, however the party who had given the offer ofRs.376 lakhs D
did not pay the balance purchase consideration.

Due to failure of the second auction also, the first respondent decided
to re-auction it for the third time and advertisement was published in the
newspapers on 30th October, 2002. Mis. Karan Distilleries Pvt. Ltd., which E
offered the highest bid in response to the said advertisement, is the 2nd
respondent in this appeal. It offered Rs.225 lakhs which, after negotiations,
was finally increased to Rs.320 lakhs, which was accepted by the first
respondent. The appellant and its promoter were given a chance to match/
improve upon the offer made by the 2nd respondent. As there was no
counter-offer received from the appellant despite giving them chance, the first F
respondent proceeded with the sale of the assets to recover its dues. On
receipt of the entire consideration, the first respondent handed over the
physical possession of the assets of the appellant to the 2nd respondent and
also executed Deed of conveyance in their favour.

Aggrieved by the order of auctioning, the appellant filed writ petition G
in the High Court seeking, inter alia, stay of the auction proceedings for sale
of the unit by the first respondent. The High Court by way of_ interim relief,
stayed the proceedings subject to the appellant's depositing a sum of Rs. 50
lakhs on or before 21st of March, 2003, failing which the stay was to stand
vacated automatically without any further reference to the Court. The appellant H
36 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A could deposit only half of the amount ordered by the High Court and thus
failed to comply with the direction. As the compliance with the order of the
High Court was a condition precedent to the interim order, the stay stood
vacated automatically. After filing of the writ petition, the appellant filed an
additional affidavit before the High Court submitting that the provisions of
B Section 29 of the Act were not applicable to the first respondent as it ceases
to be a financial corporation after the reduction of shares of the Govt. of
Maharashtra to 49% only.

The High Court dismissed the writ petition holding that the first
respondent was a financial corporation and it had been notified as such by
C the Central Government in exercise of its powers under Section 46 of the Act.
It was further held that reduction of shareholdings below 50% of the Govt.
of Maharashtra would not make any difference to the status of the first
respondent being a financial corporation. The other two submissions, viz, (i)
that the true and correct accounts of the outstanding dues were not furnished
to the appellant and, therefore, the attachment and sale of the appellant's
D property was not justified; and (ii) that it was sold at inadequate price, were
rejected by the High Court, holding that no material has been placed before
the Court to substantiate aforesaid contentions. ·

Aggrieved against the dismissal of its writ petition, the appellant has
filed the present appeal by grant of special leave.
E
Counsel for the parties have been heard.

It is not in dispute that the first respondent was established by the
State Government with the object of developing the industries and financing
industrial concerns in the State. It is also not in dispute that the Central
F Government had extended the provisions of Section 29 of the Act to the first
respondent. Thus, the first respondent would be covered by the expression
"an institution established by a State Government" offering range of services
including the object of financing industrial concerns in the State of
Maharashtra. It would thus be a financial corporation covered under the Act.
G
Section 46 of the Act confers the power on the Central Government to
extend the provisions of the Act "to any institution established by a State
Government'. Section 46 of the Act reads as under:
.
"46. Power to apply Act to certain financial institutions in existence
H at commencement of Act -(1) The Central government may, by
AMAR ALCOHOLI LTD. v. SICOM LTD. [BHAN, J.] 37
notification in the official Gazette, direct that all or any of the provisions A
of this Act shall, subject to such exceptions and restrictions as may
be specified, apply to any institution established by a State Government
which has for its object the financing of industrial concerns, and on
the issue of such notification, the institution shall be deemed to be
a Financial Corporation established by the State Government for the
State within the meaning of this Act and the provisions of this Act B
shall become applicable thereto according to the tenor of the
notification.

Provided that no notification shall be issued under this sub-section
in respect of any institution unless a request is made in that behalf C
by the State Government concerned.

(2) Any notification issued under sub-section ( 1) may suspend the
/ operation of any enactment applicable to any such i9stitution
immediately before the issue of the notification."

In the year 1986 a request was made to the Central Government by the D
Government of Maharashtra to extend the provisions of Sections 27, 29, 30,
31, 32A to 32F, 41, 4IA, 42 and 44 of the Act to the first respondent. The
Central Government accepted the request of the Government of Maharashtra
and the provisions of the afore-mentioned sections were extended to the first
respondent vide notification No. F.No.5(9)/86-IF-II dated 11th December, 1986. E
Government of Maharashtra vide the Govt. Resolution bearing No. IDL/
1093/(8928)/IND-8 dated 3rd October, 1994 decided:

(a) to have a public participation in the capital structure of the first
respondent in accordance with the new _industrial policy framed by the F
Government of Maharashtra in the year 1983;

(b) to hold only 49% of the share capital by the Government;

(c) to give by private placement 26% of the capital to the selected
finanCial institutions and banks;
G
(d) to offer 2% capital out of the said 26%, to the employees of the
said company in consonance with the policy framed by the Government
of India; and

(e) to offer the balance 25% to the public through public issue.
H.
38 SUPREME COURT REPORTS (2005] SUPP. 5 S.C.R.

A It would be seen from the above that provisions of Section 29 and other
provisions of the Act were made applicable to the first respondent by the
Central Government by virtue of the powers vested in it under Section 46 of
the Act. Section 29 enables the first respondent to take over the assets of
the delinquent borrowers. As the appellant had failed to discharge its liability
B in spite of several opportunities afforded to it, as has been enumerated in the
for_egoing paragraphs, in our view, the first respondent was fully justified in
taking over the assets of the appellant in exercise of its powers under Section
29 of the Act.

Under Section 46 of the Act the Central Government by a notification
C in the official Gazette is empowered to direct that all or any of the provisions
of the Act shall, subject to such exceptions and restrictions as may be
specified, apply to any institution established by a State Government which
has for its object the financing of industrial concerns, and on the issuance
of s~h notification the institution shall be deemed to be "a Financial
Corporation" established by the Government within the meaning of the Act.
D It is not disputed that Respondent No. 1 had been established by the State
Government with the object of financing industries and the Central Government
.had issued the notification under Section 46 confering the powers to be
exercised under various sections of the Act including Section 29. As a matter
of fact, Annexure A, annexed with the additional affidavit filed by the appellant
E on 9. I 0 .03 itself suggests beyond doubt that respondent no. I was established
in the year 1996 by the Government of Maharashtra as a I 00% Government
owned company with the objective of industrialising of backward areas of the
State of Maharashtra. Thus, respondent no. I would be covered by the
expression "any institution established by a State Government" offering range
of services. This apart the Central Government in the year 2003, i.e., even
F subsequent to the disinvestment of equity up to 51 per cent held by the
Government of Maharashtra, at the request of the Government of Maharashtra
by virtue of its power under Section 46 (I) of the Act, has made the provisions
of Section 32 G of the Act, applicable to the first respondent vide notific~tion
dated 16th of September, 2003. This also shows that Respondent No. l is
G being treated by the State of Maharashtra as well as Central Government as
the financial Corporation within the meaning of the Act.

The principal contention advanced by Mr. Ashok A. Desai, the learned
senior counsel appearing on behalf of the appellant, is that consequent to the
reduction of stakes of the Govt. of Maharashtra in the first respondent and
H consequent to the change in its nomenclature, the first respondent had
AMAR ALCOHOL! LTD. v. SI COM LTD. [BHAN, J.] 39
ceased to have the status of a State Financial Corporation under the Act. We A
are unable to accept this contention.

In the facts and circumstances enumerated herein above, it is crystal
clear that the first respondent was originally established as, and even as of
date continues to be, a company established by the Government of
Maharashtra. It may be mentioned that the State of Maharashtra being the B
single largest shareholder has retained the overall control over the management
of the first respondent by retaining the right to nominate its Directors by
virtue of the Amended Article l8(a) of the Articles of Association of the
Companies.

By mere reduction in its stakes to below 50 per cent, SICOM (the first C
respondent) would not cease to be a State Finance Corporation in view of the
fact that it has been established by the State of Maharashtra for financing
industrial concerns and that it had been so notified by the Central Government
in exercise of its powers under Section 46 of the Act. The first respondent
is a finance corporation covered by the Act and reduction in the shareholdings D
of the State of Maharashtra below 50 per cent shall not make any difference
to the status of the first respondent, i.e, being a financial corporation.

The other two points which had been raised in the writ petition regarding
the non-supply of details of the outstanding amount due and the inadequacy
of the sale consideration were rejected by the High Court by observing that E
no material had been placed before the Court to substantiate them. The
learned counsel sought to contend before us too, that the auction proceedings
are liable to be set aside because the details of outstanding amount was not
furnished to the appellant and that the mortgaged property had been sold for
inadequate consideration. There is no material placed before us to substantiate F
these two contentions. The allegations made are vague, particularly when the
appellant was afforded suitable opportunities to match the bid/offer and it did
not tum up, and cannot be ascertained from any admitted data. The same are
rejected.

It was admitted before the High Court that outstanding amount had G
been recovered from the sale of the appellant's property. In view of this, .the
High Court had permitted the appellant to withdraw the sum of Rs.25 lakhs
deposited by the appellant in pursuance to the interim order of the High
Court. This direction of the High Court holds good and does not call for any
interference.
H
40 SUPREME COURT REPORTS (2005] SUPP. 5 S.C.R.

A Lastly, the counsel for the appellant contended that the first respondent
be directed to return the balance amount. if any. after adjusting the outstandin,g
amount due from the appellant.

The counsel for respondents, in all fairness. concedes that if there is
any balance amount, the same shall be paid back to the appellant. The
B appellant would be at liberty to move appropriate application before the first
respondent. If such an application is filed. the first respondent shall take a
decision thereon within a period of two months from the date of the receipt
of such application and, in case there is any excess amount after adjusting
the amount due from the appellant out of the sale proceeds of the mortgaged
.C ·property of the appellant-company, the same shall be returned to the appellant
forthwith.

For the foregoing reasons, the appeal stands dismissed. However, there
shall be no order as to costs.

D K.G. Appeal dismissed.

•