Holding

The corporation may realise its dues under Sections 29 and 31 of the 1951 Act, but it must do so fairly and reasonably; the High Court’s dismissal was incorrect and the case is remitted for fresh adjudication.

Summary

Mis. Everest Wools Pvt. Ltd. obtained a loan from the U.P. State Financial Corporation and later sought additional financing from the Pradeshiya Industrial and Investment of U.P. Ltd. (PICUP). The Corporation alleged that the company had purchased second‑hand plant from another financed unit in breach of contract, recalled the loan and, under Section 29 of the U.P. State Financial Corporation Act, 1951, took possession of the company's assets. The company filed writ petitions challenging the corporation’s possession, the invocation of personal guarantees of its directors, and the recovery certificates issued under the U.P. Public Moneys (Recovery of Dues) Act, 1972. The High Court dismissed the petitions. On appeal, the Supreme Court held that although the corporation is statutorily empowered to recover dues, it must exercise its power fairly and reasonably as a ‘State’ under Article 12 and 14 of the Constitution; the High Court’s order was erroneous. Consequently, the appeals were allowed and the matter remitted to the High Court for fresh consideration.

Issues considered

The legality and fairness of the corporation's exercise of power under Section 29 of the U.P. State Financial Corporation Act, 1951 to take possession of a running concern without taking over its management.
Whether the corporation could invoke the personal guarantees of the company’s directors for loan recovery under the 1951 Act and the U.P. Public Moneys (Recovery of Dues) Act, 1972.
Whether the High Court erred in dismissing the writ petitions challenging the recovery certificates and possession.
Whether the corporation acted on extraneous consideration by recalling the loan on an alleged breach that was later found to be incorrect.

Legislation cited

Constitution of Indias. Article 12, s. Article 14
Indian Contract Act, 1872s. 151

Subjects

loan recoverystatutory authorityfairnessSection 29possession of assetspersonal guaranteeArticle 14bailmenttrusteesale of assetswrit petition

Judgment

~
MIS. EVEREST WOOLS PVT. LTD. AND ORS. A
I v.
U.P. FINANCIAL CORPORATION AND ORS.

DECEMBER 14, 2007
B
(S.B. SINHA AND HARJIT SINGH BEDI, JJ.]
< ...
U.P. State Financial Corporation Act, 1951; Ss.29 and 31/UP.
Public Moneys (Recovery of Dues) Act, 1972:
c
Recovery of loan-A company took loan from State Financial
Corporation and later ji·om another State Undertaking-Issuance of
Notice to company by the Corporation to explain as to why it took
loan from the State Undertaking and purchased second handplant and
machinery in breach ofcontract-In exercise ofpower u/s. 29of1972
D
Act, assets of company taken over by the Corporation and the State
Undertaking invoking guarantees executed by Managing Director of
Company-Challenge to-Dismissed by High Court-On appeal,
Held: Statutory power to realize dues conferred on Corporation, a
statutory authority/State in terms ofArticle 12 of the Constitution-
E
It has to act fairly and reasonably-Taking over possession of an
ongoing concern without taking over the Management would be
termed as sale ofthe Unit-Supreme Court is not aware as to whether
any steps in regard to sale of the Unit had been taken by the
.... Corporation-Hence, in the interest ofjustice, matter remitted to High
-.- Court for consideration afresh-Constitution ofIndia, 1950-Articles F
12 & 14-Indian Contract Act, 1872-Contract-Breach of

Corporation/State-Duty of-Contract-Terms-Breach of-
Discussed.

Words and Phrases:
G

t 'Fairness '-Meaning of in the context of Section 29 of the U.P.
State Financial Corporation Act, 1951.

857 H
858 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

A Appellant-Company took loan from Respondent-Corporation.
The Company also applied for grant ofloan to respondent No.3, the
Pradeshiyalndustrial and Investment ofU.P. Ltd. (PICUP). A notice
was issued by the Corporation on the premise that the company had
purchased second-hand plants and machinery worth Rs.6.75 lacs
B from one of their financed units and obtained financial assistance
from PICUP in breach of terms ofloan. An explanation, pursuant
thereto, was submitted by the company. However, entire loan was
recalled by the Corporation on the premise that the company had
committed defaults in paying the instalments. The Corporation, in
C exercise of its powers under Section 29 of the U.P. State Financial
Corporation Act, has taken over possession of the assets of the
company. First Information Report was also lodged in respect of the
purported purchase of second-hand plant and machinery by the
company. On enquiry, the allegations against the company were not
D found to be correct; whereafter a request was made by the company
to the Corporation as also PI CUP for handing over the possession
of the unit to it as also for waiver of interest etc. PICUP, however,
invoked the guarantees executed by the Directors of the company.
A recovery proceeding was also initiated. The Company and its
E Managing Director filed writ petitions for directions to the
Corporation to quash the personal recovery certificates for recovery
of loan and also for recovery of the Unit. The petitions were
dismissed by the High Court. Hence the present appeals.

Appellants contended that the provisions of Section 29 of the
F 1951 Act have been misused in the instant case; that the action, on
.
the part of the respondents, in recalling the loan and in taking over
possession of the running unit was neither fair nor reasonable; and
that taking recourse to invocation of the personal guarantees of the
Directors of the Company for recovery of the loan amount was totally
G illegal.
Respondents submitted that in terms of the provisions of the
1951 Act as also U.P. Public Moneys (Recovery of Dues) Act, they
were not only entitled to take possession of the properties under
H Section 29 of the 1951 Act but were also entitled to invoke the
M/S.EVERESTWOOLSPVT.LTD. v. U.P.FINANCIAL 859
CORPORATION
.. guarantees furnished by the Directors of the company; that A
possession of the respondents in relation to the plant and machinery
was that of a 'bailee' and as it has not been alleged that proper care
thereof had not been taken as envisaged under Section 151 of the
Indian Contract Act, 1872, the respondents are not liable to
reimburse the appellants for the loss of articles; and that even for B
the said purpose only a suit would be maintainable and not a writ
application.
,.
Allowing the appeals, the Court
HELD:l.1. The High Court was not correct in passing the c
impugned order. The Corporation, no doubt, is entitled to realize its
dues, but it must be borne in mind that it had been conferred with a
special statutory power in terms of Section 29 and 31 of the U.P. State
Financial Corporation Act therefor. Such a power in the Corporation
was conferred by an Act of Parliament, inter alia, keeping in view D
the fact that it being a statutory authority and, thus, being a 'State'
r within the meaning of Article 12 of the Constitution oflndia, will act
fairly and reasonably. [Para 15] (865-G-H; 866-A]
1.2. Power under Section 29 of the 1951 Act empowers the
Corporation to take recourse to either take over the possession of E
the plant and machinery; take over. management of an on going
concern; and sell the property pledged, mortgaged, hypothecated
or assigned to it. When it takes over possession of the plant and
.. machinery in exercise of its statutory power, apart from its obligation
as a 'bailee', it also acts as a 'trustee'. Its action otherwise must be F
fair and reasonable. [Para 16] [866-C-E]
1.3. It is true that fairness cannot be a one way street, but then
whereas the Corporation indisputably has a right to realize its dues,
it must act strictly in terms of the statutory and constitutional G
Scheme. If it acts unfairly, it fails the system. While it exercised its
~ enormous statutory power, it is expected perform its duties also. Such
a duty is envisaged not only under the law but also under Article 14
of the Constitution oflndia. [Para 16] [866-E-F]
H
860 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

A 2.1. The entire loan was recalled by the Corporation not only +
because the appellants were defaulters but also on the allegation that
they had purchased second hand plant and machinery from another
fmancial institution in breach of the contract, which having been found
to be wholly incorrect, it must be held that it had acted on extraneous
B consideration. So far as the PI CUP is concerned, it was bound to act
in terms of the provisions of the U.P. Public Moneys (Recovery of
Dues) Act. Whether it did so, is a question which should have been
gone into by the High Court. [Para 15) [866-B-C) ' ..
C 2.2. A person aggrieved by the action of the State must have
an effective remedy. The purpose of taking over possession and that
too of an on-going concern, without taking over the Management,
would be to sell the unit. [Para 16) [866-F-G]

2.3. For taking recourse to sale of the unit and in a case ofthis
D nature where the possession of the plant and machinery had been
taken of an on-going concern, an extra care on the part of the
authorities of the Financial Corporation was expected. This Court
does not know whether immediate steps for sale of the properties
had been taken or not. [Para 17] [866-H; 867-A]
E 2.4. This Court is also not aware whether PICUP invoked
personal guarantees of the Directors in contravention of the 1972
Act. The controversy between the parties in regard to the theft of
the properties and the valuation thereof also noticed. This Court does
not know if any step had been taken by the Corporation against the
F officials or the security guards who were found to be responsible
therefor, and also even not aware as to whether a criminal case had
been initiated in that behalf or not. Therefore, keeping in view the
aforementioned factual matrix, this Court is of the opinion that
interest of justice would be met if the matters are remitted to the
G High Court for its consideration afresh. As technicalities may come
in the way of the High Court for grant of proper reliefs in favour of
the appellants, in the event they are found entitled thereto, the liberty
is granted to them to amend writ petitions suitably. Parties may also
bring on records subsequent events by filing additional affidavits.
H In the peculiar facts and circumstances of the case, the High Court
M/S.EVERESTWOOLSPVT.LTD. v. U.P.FINANCIAL 861
CORPORATION [SINHA, J.]
+
is requested to consider all aspects of the inatter and pass A
appropriate order(s) as it may seem fit and proper.
[Paras 18, 19 and 20] [867-B-F)
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2707-
2708 of 2003.
B
From the Judgment and final Order dated 29.9.1999 of the High
·< ..._
Court of Judicature at Allahabad in C.M.W.P. Nos. 34059/1999 and
41848/1999.
S.K. Verma for the Appellants.
c
Shrish Kumar Misra, Aarohi Bhalla, Sunil Kumar Singh and Sujata
Kurdukar for the Respondents.
The Judgment of the Court was delivered by
S.B. SINHA, J. 1. Application of Section 29 of the State Financial D
Corporations Act, 1951 ('the 1951 Act') vis-a-vis the Uttar Pradesh
Public Moneys (Recovery of Dues) Act, 1972 ('the 1972 Act') is in
question in these appeals which arise out of a common judgment and order
dated 29th September, 1999 passed by a Division Bench of the High
Court of Judicature at Allahabad in Civil Misc. Writ Petition Nos. 41848 E
and 34059 of 1999.
2. Before embarking on the questions raised at the bar, we may
-. ., notice the basic fact of the matter.
3. Mis. Everest Wools Pvt. Ltd. of which Pradeep Kumar Agrawal F
is a Managing Director took loan from the U.P. State Financial
Corporation (Corporation). The company applied for re-scheduling of the
loan and the same was granted. Appellant company intended to expand
their unit. It applied for grant of loan to the respondent No.3, the
Pradeshiya Industrial and Investment ofU.P. Ltd. (PICUP). Rs. 47 lacs G
j> was sanctioned by it. A sum of Rs. 41.60 lakhs was disbursed to it by
March, 1992. Some other amount was also disbursed by way of State
Capital Investment Subsidy by the Government.
4. Inter alia on the premise that the appellant-company had
H
862 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

+
A purchased some·plants and machinery worth Rs.6.75 lacs from one of
their financed units namely Mis. Uttrakhand Woolen Yam Udyog Pvt. Ltd.
and obtained financial assistance from PI CUP, a notice was issued by U.P.
State Financial Corporation to the appellant asking for its response thereto
failing which it was threatened that action under Section 29 of the 1951
B Act would be taken. An explanation, pursuant thereto, was submitted.
However, entire loan was recalled inter alia on the premise that the
company had committed defaults in paying the instalments. Some letters
were exchanged between the parties. However, it appears that PICUP
authorized U.P. State Financial Corporation to act as its agent as both of
C them are premium financial institutions of the State ofU.P. A representation
was again made by the appellants before the Financial Corporation for
adjusting the over-due amount which was not acceded to. In exercise of
its powers under Section 29 of the 1951 Act possession of the assets of
the appellant company was taken over by the U.P. State Financial
D Corporation. A First Information Report was also lodged in respect of
the purported purchase of plant and machinery by the appellant company
from Mis. Uttrakhand Woolen Yarn Udyog Pvt. Ltd. On enquiry, the
allegations against the appellant company were not found to be correct;
whereafter a request was made by the appellant company to the Financial
E Corporation as also PICUP for handing over the possession of the unit
to it as also for waiver of interest etc. PI CUP, however, invoked the
guarantees executed by the Directors of the appellant company. A
recovery citation was ·also issued.
5. However, in the meantime some machinery parts were found to
F be missing, although security guards had been posted in the said factory.
Valuation thereof was made and a sum ofRs.45,000/- was credited to
the account of the appellant-company. Again some theft took place.
6. Two writ petitions were filed, one by the company and three
G others, including Vinod Kumar Agrawal, (CMWP No. 34059of1999)
and the other by Vinod Kumar Agrawal (CMWP No. 41849of1999).
In the said writ petitions following reliefs were prayed for :-
"JN CMWP No. 3405911999.
a. to issue a writ, order or direction in the nature of certiorari
H
M/S.EVERESTWOOLSPVT.LTD. v. U.P.FINANCIAL 863
CORPORATION [SINHA, J.]
quashing the impugned personal recovery certificate dated A
31.07 .1999 (Annexure 12) passed by respondent No. I.
b. to issue a writ, order or direction in the nature of mandamus
restraining the respondents from recovering the loan from the
petitioners in pursuance of impugned personal recovery
certificates dated 31. 07 .1999 (Annexure 12). B
., c. to issue a writ, order or direction in nature of ad interim
"" mandamus staying operation of the impugned recovery citation
dated 31.07.1999 (Annexure 12) issued by respondent no.5
against the petitioners. c
d. to issue a writ, order or direction in the nature of mandamus
directing the respondent not to take any coercive methods
against the petitioners such as arrest, attachment/sale of their
moveable and immoveable properties.
e. to issue any other suitable order or directions as this Hon'ble D
r Court may deem fit and proper in the circumstances of the
case.
f to award cost of this petition."
IN CMWP No. 4184811999 E

(i) issue a writ, order or direction in the nature of certiorari
quashing the impugned recovery citation dated 31.07.99
(Annexure No.14) passed by the respondent no. I.
"" (ii) issue a writ, order, direction in the nature of mandamus F
restraining the respondent from recovering the loan from the
petitioner in pursuance of impugned personal recovery citation
dated 31.07.99 (Annexure 14).
(Iii) issue a writ, order or direction in nature of ad interim
mandamus staying operation of the impugned recovery citation G
=..
.. dated 31.07.99 issued by the respondent no.4 against the
petitioner.
(iv) issue a writ, order or direction in the nature of mandamus
directing the respondent not to take any coercive method H
864 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

A against the petitioner such as arrest, attachment/sale of their
I
moveable and immoveable properties.
(v) issue any other suitable writ, order or directions as this Hon'ble
Court may deem fit and proper in the circumstances of the
case.
B
(vi) issue writ, order or direction in the nature of mandamus
directing the respondents Nos. I and 2 to hand over the
physical possession of the unit as per the conditions of
30.11.98.
C (vii) Award cost of this petition to the petitioner against the
respondents."
7. Whereas in the former only direction for stay of recovery
proceedings was prayed for but in the writ petition filed by Vinod Kumar
D Agrawal recovery of possession of the unit was also prayed for.
8. By reason of the impugned judgment, a Division Bench of the
High Court, without going into the questions involved therein, inter alia,
on a finding that the appellants had been trying to evade payment of the
amounts under the personal guarantee bonds, which had been invoked
E by the PICUP, the recovery proceedings initiated by it cannot be stopped,
dismissed the writ petition.
9. During the pendency of the appeals before this Court, an
advertisement for sale of the unit was issued by the U.P. State Financial
F Corporation. An order of stay was passed on 15th November, 2002 by
this Court restraining the respondent for finalizing the sale. By an order
dated 31st March, 2003, on an oral prayer made on behalf of the
appellants, this Court directed the respondents to permit the to have
inspection of the plant and machinery and take photographs thereof,
pursuant whereto an inspection was made and it was found as of fact
G that not only some plants and machinery were missing but the plant and
machinery were also not being maintained.
10. In its order dated 23rd ApPil, 2007, this Court noticed that an
inventory of the plants and machinery had been prepared at the time when
H possession of properties belonging to the appellants had been taken over.
M/S.EVERESTWOOLSPVT.LTD. v. U.P.FINANCIAL 865
CORPORATION [SINHA,J.]
Having regard to the interest of the parties, a fresh inventory was directed A
to be made by a judicial officer, who was to be nominated by the District
Judge, Dehradun. One Mr. Manish Mishra, 1st Additional Civil Judge
(Senior Division), Dehradun was nominated for the said purpose, He
submitted his report which speaks for itself.
B
11. The Corporation, however, contended that value of the
. .. machinery missing would be of not much significance.
12. Submission of Mr. S.K. Vem1a, learned counsel appearing on
behalf of the appellants, is that the provisions of Section 29 of the 1951
Act have been misused in the instant case. It was contended that the action, C
on the part of the respondents, in recalling the loan and in taking over
possession of the running unit was neither fair nor reasonable. Taking
recourse to invocation of the personal guarantees of the Directors of the
Company for recovery of the loan amount was, it was urged, totally illegal.
13. Mr. Shrish Kumar Misra, learned counsel appearing on behalf D
of the Corporation and Mr. Aarohi Bhalla, learned counsel appearing for
PICUP, on the other hand, would submit that in terms of the provisions
of the 1951 Act as also 1972 Act, they were not only entitled to take
possession of the properties under Section 29 of the 1951 Act but were
also entitled to invoke the guarantees furnished by the Directors of the E
company. It was submitted that possession of the respondents in relation
to the plant and machinery was that of a 'bailee' and as it has not been
alleged that proper care thereof had not been taken as envisaged under
Section 151 of the Indian Contract Act, 1872, the respondents are not
liable to reimburse the appellants for the loss of articles. According to F
the learned counsel, even for the said purpose only a suit would be
maintainable and not a writ application.
14. In view of the order proposed to be passed by us, we do not
intend to deal with all the rival contentions of the parties. G
15. The High Court, in our opinion, was not correct in passing the
impugned order. The Corporation, no doubt, is entitled to realize its dues,
but it must be borne in mind that it had been conferred with a special
statutory power in terms of Section 29 and 31 of the Act of 1951 therefor.
H
866 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.
4

A Such a power in the Corporation was conferred by an Act of Parliament,
inter alia, keeping in view the fact that it being a statutory authority and,
thus, being a 'State' within the meaning of Article 12 of the Constitution
oflndia, will act fairly and reasonably. The entire loan was recalled not
only because the appellants were defaulters but also on the allegation that
B they had purchased second hand plant and machinery from another financial
institution in breach of the contract, which having been found to be wholly
;.
incorrect, it must be held that it had acted on extraneous consideration.
So far as the PICUP is concerned, it was bound to act in terms of the
provisions of the 1972 Act. Whether it did so, is a question which should
c have been gone into by the High Court.
16. Power under Section 29 of the 1951 Act empowers the
Corporation to take recourse to either :-
(1) take over the possession of the plant and machinery ;
D (2) take over management of an on going concern ; and
(3) sell the property pledged, mortgaged, hypothecated or
assigned to it.
When it talces over possession of the plant and machinery in exercise
E of its statutory power, apart from its obligation as a 'bailee', it also acts ,._
as a 'trustee'. Its action otherwise must be fair and reasonable. It is true
that fairness cannot be a one way street, but then whereas the Corporation
indisputably has a right to realize its dues, it must act strictly in terms of
the statutory and constitutional Scheme. Ifit acts unfairly, it fails the system. ..;.
y
F While it exercised its enormous statutory power, it is expected perform
its duties also. Such a duty is envisaged not only under the law but also
under Article 14 of the Constitution of India. A person aggrieved by the
action of the State must have an effective remedy. The purpose oftalcing
over possession and that too of an on-going concern, without talcing over
G the Management, would be to sell the unit. A buyer may like to purchase
the on-going concern. If the plant and machinery are kept in order and in
a working condition they would fetch one price but ifthe machinery are
" ,,.
stolen or allowed to rust, the same would not.
17. For taking recourse to sale of the unit and in a case of this nature
H
M/S.EVERESTWOOLSPVT.LTD. v. U.P.FINANCIAL 867
CORPORATION [SINHA, J.]
where the possession of the plant and machinery had been taken of an A
on-going concern, an extra care on the part of the authorities of the
Financial Corporation was expected. We do not know whether immediate
steps for sale of the properties had been taken or not. It is stated that
some advertisements were issued, but why a running concern could not
be sold is a matter which requires a deeper scrutiny. B
18. We are also not aware whether PICUP invoked personal
guarantees of the Directors in contravention of the 1972 Act. We have
noticed the controversy between the parties in regard to the theft of the
properties and the valuation thereof. We do not know if any step had
been taken by the Corporation against the officials or the security guards C
who were found to be responsible therefor. We are even not aware as to
whether a criminal case had been initiated in that behalf or not.
19. We, therefore, keeping in view the aforementioned factual matrix,
are of the opinion that interest of justice would be met if the impugned D
judgment is set aside and the matters are remitted to the High Court for
its consideration afresh. As technicalities may come in the way of the High
Court for grant of proper reliefs in favour of the appellants, in the event
they are found entitled thereto, we grant liberty to them to amend writ
petitions suitably. Parties may bring on records subsequent events also E
by filing additional affidavits.
20. In the peculiar facts and circumstances of the case, the High
Court is requested to consider all aspects of the matter and pass
appropriate order(s) as it may seem fit and proper.
F
21. For the aforementioned purpose subsequent events should also
be taken into consideration including the report of the learned Civil Judge
and the replies filed thereagainst. As the matter is pending for a long time,
the High Court may consider the desirability of the disposal of the same
as expeditiously as possible. G
22. The appeals are allowed on the aforesaid terms. However,
keeping in view the facts and circumstances of the case, there shall be no
order as to costs.
S.K.S. Appeals allowed. H