Holding

The recovery notice is set aside because action against the guarantor cannot be taken under the Uttar Pradesh Act until the principal debtor's property is sold, although the proceedings are not barred by the later notification.

Summary

The State Industrial & Investment Corporation of U.P. Ltd. issued a recovery notice under the Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972 against Pawan Kumar Jain, who was a guarantor of a loan advanced to a fourth respondent company. Jain challenged the notice, arguing that after a Central Government notification the corporation became a "financial institution" under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and therefore could only proceed under that Act, and that action against a guarantor could not be taken until the principal debtor's mortgaged property was sold. The Supreme Court held that because the recovery notice was issued before the notification, the proceedings under the U.P. Act were not barred and did not have to be transferred to the Debt Recovery Tribunal. However, the Court observed that the U.P. Act expressly prohibits action against a guarantor until the principal debtor's property is sold, which had not occurred, and consequently set aside the recovery notice. The Court clarified that the corporation may still pursue the guarantor before the Debt Recovery Tribunal in accordance with the principles laid down in Unique Butyle Tube Industries case.

Issues considered

Whether the recovery notice issued under the Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972 is barred by the subsequent Central Government notification designating the corporation as a financial institution under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
Whether action against a guarantor can be initiated under the Uttar Pradesh Act before the sale of the principal debtor's mortgaged property.

Legislation cited

Recovery of Debts Due to Banks and Financial Institutions Act, 1993s. 2(b), s. 3
State Financial Corporation Act, 1951s. 29
Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972s. 3, s. 4

Subjects

Recovery noticeGuarantorLoan defaultU.P. Public Moneys ActDebt Recovery ActDebt Recovery TribunalSale of mortgaged propertyFinancial institution

Judgment

PAWAN KUMAR JAIN A
v.
THE PRADESHIYA INDUSTRIAL AND INVESTMENT
CORPORATION OF U.P. LTD. AND ORS.
I.'

AUGUST 11, 2004
B
[S.N. VARIAVA AND ARJJIT PASAYAT, JJ.]

Uttar ,n.-adesh Public Moneys (Recovery ofDues) Act, 1972; Sections
3 and 4/Recovery of Debts Due to Bankers and Financial institutions Act,
1993: Sections 2(b) and 3 : C
Recovery of loan by State Industrial & Investment Corporation-
Issuance ofRecovery Notice against guarantor-Challenge to-Writ Petition
and Review Petition dismissed by High Court-On appeal, Held: Since
Recovery Notice issued by the Corporation under the U.P. Act prior to D
issuing of a notification by Central Government enabling State Financial
Institutions recovery of debt as per Debts Recovery Act-Action initiated
by the Corporation for recovery of debts as per provisions of the U.P. Act
would not be barred-Hence, the matter not required to be transferred to
Debt Recovery Tribunal -Since property of the principal-debtor not sold
off by the Corporation, issuance of recovery notice against guarantor not E
justified-Hence, Recovery Notice set aside-State Financial Corporation
Act, 1951-Section 29.

Respondent No. I-State Financial & Investment Corporation
issued a Recovery Notice against appellant-guarantor in terms ofUttar F
Pradesh Public Moneys (Recovery of Dues) Act, 1972. Appellant
challenged it before the High Court. High Court dismissed the writ
petition and Review petition as well. Hence the present appeals.

It was contended by the appellant-guarantor that Respondent
No. I, State Industrial & Investment Corporation, could make recovery G
of debts as per provisions of the Recovery of debts Due to Banks and
Financial Institutions Act after the issuance of a Notification by the
Central Government to the effect and thus the Recovery Notice issued
by the Corporation under the U.P. Act required to be quashed; that
the Corporation could not proceed against him until the property of H
447
448 SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A the principal-debtor was sold off; and that since a one time settlement
had been arrived at between the Corporation and the principal-debtor
and possession of the property was taken over by the Corporation, the
Corporation could not proceed against him.

Respondent No. I-Corporation submitted that since Recovery
B Notice under the U.P. Act was much earlier to the Notification,
proceedings under the U.P. Act are not barred; that since the principal-
debtor had committed defaults and recovery of loan by sale of the
property of the principal-debtor was not possible, action has been
initiated against the guarantor for recovery of the amount; and that
C action under Section 29 of the Financial Corporation Act has already
been initiated against the principal-debtor.

Disposing of the appeals, the Court

D HELD : I.I. Since the action was initiated by the State Industrial
& Investment Corporation prior issuance of Notification by the
Central Government for recovery of debts as per provisions of the
Debts Recovery Act, proceedings under the U.P. Act would not be
barred and would not stand transferred to the Tribunal. (450-A, BJ

E 1.2. In terms of the provisions of the U.P. Act, action against the
guarantor cannot be taken until the property of the principal-debtor is
first sold off. Since Corporation has not sold the property of the principal-
debtor, action against the Appellant cannot be sustained. Hence, the
Recovery Notice is set aside. However, Corporation may proceed against
F the Appellant before the Debtor Recovery Tribunal in accordance with
principles laid down in Unique Butyle Tube's case. (453-B, C, DJ

Unique Butyle Industries (P) Ltd. v. U.P. Financial Corporation &
Ors., [2003) 2 SCC 455, relied on.

G CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 3636-
3637 of 1998.
..
From the Judgment and Order dated 1.9.97 - 6.11.97 of the Allahabad
High Court in C.M.W.P. No. 28391 and C.M. Application No. 69541 of
H 1997.
P.K. JAIN '· PRADESHIYA INDUSTRIAL & INVESTMENT CORPN. OF UP LTD. [VARIAVA, J.] 449

V.A. Mohta, Rakesh K. Khanna, Neeraj Sharma, Shashank Shekkar A
and Surya Kant for the Appellant.

Aarohi Bhalla and Ms. Sujat~ Kurdukar for the Respondent No. 1.

Ms. Shobha Dixit, Rajeev Kumar Dubey and Kamlendra Mishra for B
the Respondent Nos. 2 & 3.

The Judgment of the Court was delivered by

S.N. VARIAVA, J. : These Appeals are against the Order of the
Allahabad High Court dated 01.09.1997 by which Appellant's Writ C
Petition has been dismissed and the Order dated 06.11.1997 by which the
Review Petition has been dismissed.

Briefly stated the facts are as follows.

The 1st Respondent had advanced monies to the 4th Respondent. The D
Appellant stood guarantor in respect of the said loan as at that time he was
a Director of the 4th Respondent-Company. By the Writ Petition, the
Appellant challenged the Recovery Notice issued against him under the
Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972. The High
Court has dismissed the Writ Petition and the Review Petition. E
Mr. Mohta submitted that the Central Government has issued a
Notification specifying 1st Respondent-Corporation as a Financial Institu-
tion within the meaning of the term as defined in Section 2(h) of the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 F
(hereinafter referred to as the "Debt Recovery Act"). He submitted that
such an Institution can only proceed in the manner laid down in the Debt
Recovery Act. He submitted that it is not open to give a go-by to the
provision of the Debt Recovery Act and use the machinery under the U.P.
Public Moneys (Recovery of Dues) Act, 1972 (hereinafter called the "U.P.
Act"). For this reason the Notice is bad and requires to be quashed. In G
support of his submission, he relied upon the case in Unique Butyle Tube
Industries (P) Ltd v. U P. Financial Corporation & Ors., [2003] 2 SCC
455. In this case, it has been held that a Financial Institution within the
meaning of that term in the Debt Recovery Act cannot proceed under the
U. P. Act. H
450 SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A This authority would have been binding upon us. However, in reply
Mr. Bhalla pointed out that in respect of the I st Respondent-Institution the
Notification by the Central Government has only been issued on 24.01.2004,
whereas the Recovery Certificate is of a much earlier date. He submitted
that, therefore, in this case the proceedings under the U. P. Act are not
B barred. He pointed out that under Section 31 of the Debt Recovery Act,
it is only suit or proceeding pending before any Court, which stand
transferred to the Tribunal established under that Act. In our view, Mr.
Bhalla is right. As the action was initiated prior to the Notification being
issued by the Central Government, the action would not be barred and
would not stand transferred to the Tribunal.
c
Mr. Mohta then relied upon Sections 3 and 4 of the U. P. Act, which
read as follows:-

"3. Recovery of certain dues as arrears of land revenue.-{!)
D Where any person is party-

(a) to any agreement relating to a loan, advance or grant given
to him or relating to credit in respect of, or relating to hire-
purchase of goods sold to him by the State Government or the
Corporation, by way of financial ass:stance; or
E
(b) to any agreement relating to a loan, advance or grant given
to him or relating to credit in respect of, or relating to hire-
purchase of goods sold to him, by a banking company or a
Government company, as the case may be, under a State-
F sponsored scheme; or

(c) to any agreement relating to a guarantee given by the State
Government or the Corporation in respect of a loan raised by an
industrial concern; or

G (d) to any agreement providing that any money payable there-
under to the State Government shall be recoverable as arrears of
land revenue; and such person-

(i) makes any default in repayment of the loan or advance or ~·

H any instalment thereof; or
P.K. JAIN v. PRADESHIYA !NDUSTRJAL & INVESTMENT CORPN. Of U.P. LTD. [VARlAVA. J.] 45 J

(ii) having become liable under the conditions of the grant to A
refund the grant or any portion thereof, makes any default
in the refund of such grant or portion or any instalment
thereof; or

(iii) otherwise fails to comply with the terms of the agreement,- B
then, in the case of State Government, such officer as may
be authorized in that behalf by the State Government by
notification in the official Gazette, and in the case of the
Corporation or a Government company the Managing Direc-
tor thereof, and in the case of a banking company, the local
agent thereof, by whatever name called, may send a certifi- C
cate to the Collector, mentioning the sum due from such
person and requesting that such sum together with costs of
the proceedings be recov~red as if it were an arrear of land
revenue.
D
(2) The Collector on receiving the certificate shall proceed to
recover the amount stated therein as an arrear of land revenue.

(3) No suit for the recovery of any sum due as aforesaid shall lie
in the civil court against any person referred to in sub-section (I).
E
4. Savings. - (I) Nothing in section 3, shall-

(a) affect any interest of the State Government, the Corporation,
a Government company or any banking company, in any
property created by any mortgage, charge, pledge or other F
encumbrance; or

(b) bar a suit or affect any other right or remedy against any
person other than a person referred to in that section, in
respect of a contract of indemnity or guarantee entered into
a relation to an agreement referred to in that section or in G
respect of any interest referred to in clause (a).

.. (2) Where the property of any person referred to in Section 3 is
subject to any mortgage, charge, pledge or other encumbrance in
favour of the State Government, the Corporation, a Government H
!OP''

452 SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A company or banking company, then-

(a) in every case of a pledge of goods, proceedings shall first
be taken for sale of the thing pledged, and if the proceeds
of such sale are less than the sum due, then proceedings shall
be taken for recovery of the balance as if it were an arrear
B of land revenue :

Provided that where the State Government is of opinion that it is
necessary so to do for safeguarding the recovery of the sum due
to it or to the Corporation, Government company or banking
C company, as the case may be, it may for reasons to be recorded,
direct proceedings to be taken for recovery of the sum due, as if
it were an arrear of land revenue before or at the same time as
proceedings are taken for sale of the thing pledged;

(b) in every case of a mortgage, charge or other encumbrance
D on immovable property, such property or, as the case may
be, the interest of the defaulter therein, shall first be sold in
proceedings for recovery of the sum due from that person
as if it were an arrear of land revenue, and any other
proceeding may be taken thereafter only if the Collector
E certifies that there is no prospect of realization of the entire
sum due through the first mentioned process within a
reasonable time."

He submitted that by virtue of these provisions, the !st Respondent
F cannot proceed against the Appellant/guarantor until the !st Respondent
has first sold the property of the principal-debtor which had been mort-
gaged in their favour. He points out that on 22nd July, 1996 action under
Section 29 of the State Financial Corporation Act, 1951 had been initiated
and physical possession taken. He points out that thereafter on 12.02.1996
a One Time Settlement was arrived at by the I st Respondent with the 4th
G Respondent. He points out that thereafter the property was handed back
to the I st Respondent. He submits that, therefore, the !st Respondent is
not entitled to proceed against the Appellant.

Mr. Bhalla admits the above mentioned facts. He, however, submits
H that the company committed defaults and, therefore, the One Time
PK JAIN"· PRADESHIYA INDUSTRIAL & INVESTMENT CORPN. OF U.P. LTD. [VARIAVA, J.) 453

Settlement failed. He submitted that earlier attempts to sell the properties A
of the 4th Respondent Company yielded no result as no offers were
received. He submitted that action under Section 29 has again been
initiated against the 4th Respondent Company. He submitted that as the
4th Respondent Company has committed defaults and it has not been
possible to recovery by sale of property, action has been taken against the B
guarantor for recovery of the amount.

In our view, the above set out provisions of the U. P. Act are very
clear. Action against the guarantor cannot be taken until the property of
the principal-debtor is first sold off. As the Appellant has not sold the
property of the principal-debtor, the action against the Appellant cannot C
be sustained. We, therefore, set aside the Recovery Notice.

We, however, clarify that it will be open to the 1st Respondent to
proceed against the Appellant before the Debt Recovery Tribunal in
accordance with principles laid down in Unique Butyle Tube's case (supra). D

The Appeals stand disposed of accordingly. There will be no order
as to costs.

S.K.S. Appeals disposed of.

-