Holding

The High Court exceeded its jurisdiction; its order was set aside, and the corporation is entitled to enforce its Section 29 powers to recover the loan.

Summary

U.P. Financial Corporation (U.P.F.C.) granted a loan of Rs. 29.70 lakhs to Gem Cap (India) Pvt. Ltd., which soon became a sick unit and defaulted on repayments. U.P.F.C. issued a notice under Section 29 of the State Financial Corporations Act, 1951 to take over the unit for recovery of Rs. 38.57 lakhs, prompting the company to file a writ petition under Article 226 in the Allahabad High Court. The High Court directed the corporation to rehabilitate the concern and restore possession, effectively restraining the corporation from exercising its statutory power. On appeal, the Supreme Court held that the High Court had exceeded its jurisdiction by acting as an appellate authority over the corporation's administrative action and that the doctrine of fairness does not compel the corporation to revive every sick industry. The Court affirmed that the corporation’s right to recover its dues under the Act remains intact and set aside the High Court order. Consequently, the appeal was allowed and the corporation was permitted to proceed with recovery measures.

Issues considered

The scope of Article 226 jurisdiction: can a High Court act as an appellate authority over the actions of a State Financial Corporation?
Whether the doctrine of fairness obliges a State Financial Corporation to revive a sick industrial unit despite default.
Whether the corporation's action under Section 29 of the State Financial Corporations Act, 1951 is unreasonable or unlawful.
The extent of judicial review over administrative actions of a statutory corporation.

Legislation cited

Constitution of Indias. Article 12, s. Article 226
State Financial Corporations Act, 1951s. 29

Subjects

State Financial CorporationSection 29loan recoveryadministrative lawdoctrine of fairnessjudicial reviewArticle 226unreasonable actionpublic funds

Judgment

U.P. FINANCIAL CORPORATION A
' v.
GEM CAP (INDIA) PVT. LTD. AND ORS.

MARCH 2, 1993

(KULDIP SINGH AND B.P. JEEVAN REDDY, JJ.) B

- ).
State Financial Corporations Act, 1951:

Section 29. Company-Loan by Corporatiolt-Default in payment of
loan by Debtor-Company-Proceedings by Corporation for recovery of C
amount due- Validity of-Corporation's obligation to Act fairly-Extent
of-Held obligation to act fairly does not extend to revive and resurrect every
sick industry-Fairness required of Corporation cannot be carried to the extent
of disabling it from recovering what is due to Corporation.

Constitution of India, 1950: Article 226.

High Court-Jurisdiction-Limitation on exercise of-Review of action
of adiminstrative authorities-High Coun cannot act as an appellate autho-
rity.

Article 12-State--Financial Corporation is instrumentality of state. E
Administrative Law:

Judicial Review of Administrative action-Scope of.

Doctrine of fairness. F
The respondent-Company obtained loan from the appellant-Finan-
cial Corporation. Soon after obtaining the loan it ceased to. operate and
was declared a sick unit. Consequently, it did not make any repayment of
loan as stipulated in the agreement and the hypothecation deeds. There-
after, the appellant-Corporation issued notice under section 29 of the State G
Financial Corporations Act, 1951 for taking over the respondent's unit for
recovery of the amount due - Rs.38.57 lakhs. The respondent-Company
filed a writ petition in the Allahabad High Court questioning the
>- appellant's action. The High Court allowed the petition and directed (1)
expeditious rehabilitation of the concern and (2) to restore back the H
149
150 SUPREME COURT REPORTS . [1993J 2 S.C.R.

A possession or the unit to the respondent-Company. Against the judgment
of the High Court the Financial Corporation filed an appeal In this Court.

Allo\\ing the appeal and setting aside the order of tile High Court,
this Court,

B HELD : l. It is true that the appellant-Corporation which is an
instrumentality of the State created under the State Financial Corpora-
tions Act, 1951 is uot like an ordinary money- lender or a Bank which lends
money. It is a lender mth a purpose - the purpose being promoting the
small and medium industries. At the same time, it is necessary to keep
C certain basic facts in 'iew. The relationship beiween the Corporation and
the borrower is that of creditor and debtor. the Corporation is not sup-
posed to give loans once and go out of business. It bas also to recover them
so that it can give fresh loans to others. Corporations too borrow monies
from Government or other finandal corporations and they too have to pay
interest thereon. No doubt it has to act within the four comers of the Act
D and in furtherance of the object underlying the Act. But this factor cannot
be carried to the extent of obligating the Corporation to revive and
resurrect every sick industry irrespective of the cost lnvoh\!d.
(1S6H, 157A-C, F]
Promoting industrillsatlon at the cost of public funds does not serve
E the public interest; it merely amounts to transferring public money to
private account. 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 honour the commitments undertaken by
him, the Corporation alone cannot be shackled band and foot in the name of
F fairness.Faimess is not a one way street, • more particularly i11 mailers like the
present one. The fairness required of it must be tempered - nay, determined
in the light of all these circumstances. In the instant case the respondents
have no intention of repaying any part of the debt. They were merely putting
forward one or other ploy to keep the Corporation at hay. (1570-F)

G Mahesh Chandra v. Regional Mo11oger, U.P. Financial Corporatio11 &
Ors., (1992) 2 J.T•. 326, held inapplicable.

2. In a matter between the corporation and its debtor, a mt court
has no say except in two situations : (1) the•-e is a statu,tory violati?n on
H the part of the Corporation or (2) where the Corporation acts. unfafrly i.e.
FINANCIAL CORPN. v. GEM CAP (INDIA) 151

unreasonably. The High Court exercising its jurisdiction under Article 226 A
of the Constitution cannot sit as an Appellate Authority over the acts and
deeds of the Corporation and seek to correct them. Doctrine of fairness,
evolved in administrative law was not supposed to convert the writ courts
into appellate authorities over administrative authorities. The constraints·
self-imposed undoubtedly • of writ jurisdiction still remain. Ignoring them
would lead to confusion and uncertainty. The jurisdiction may become
B
rudderless. [157G-H, 158A)

2.1. The obligation to act fairly on the part of the administrative
authorities was evolved to ensure the Rule of law and to prevent failure of
justice. This doctrine is complementary to the principle of natural justice C
which the Quasi-Judicial Authorities are bound to observe. It is true that
the distinction between a quasi-judicial and the administrative action has
become thin. But even so the extent of judicial scrntiny/judicial review in
the case of administrative action cannot be larger than in the case of
quasi-judicial action. If the High Court cannot sit as an appellate authority
over the decisions and orders of quasi- judicial authorities it follows D
equally that it cannot do so in the case of administrative authorities. The
Court cannot substitute its judgment for the judgment of administrative
authorities in such cases. Only when the action of the administrative
authority is so unfair or unreasonable that no reasonable person would
r have taken that action, can the Court intervenes. [158C-F] E

A.K Kraipak & Ors. v. U11io11 of India & Ors., A.I.R. 1970 S.C. 150;
Secretary of State for Education v. Tameside Metropolitan Borough Council,
1977 A.C. 1014 andAssociated Provi11cia/ Picture Houses Ltd., v. Wednesbury
Corporation, (1948) 1 K.B. 223, relied on.
F
.~ 3. While passing the impngned order the High Court has not kept
in mind the well-recognised limitations of its jurisdiction under Article 226
of the Constitution. While reviewing the admi_nistrative action it was not
justified in acting as an appellate court. [153D,159C]
G
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 830of1993.

From the Judgment and Order dated 6.4.87 of the Allahabad High
Court in Civil Misc. W.P. No. 20544 of 1986.

S. Markandeya for the Appellant H
152 SUPREME COURT REPORTS (1993] 2 S.CR.

A Pankaj Kalra for the Respondents.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. The appeal is directed against the judg-
ment and order of a Division Bench of the Allahabad High Court allowing
B Writ Petition 20544 of 1986 with certain directions. The first respondent- ~
Gem Cap (India) Pvt. Ud. is a private limited company. Second respond-
ment is its Managing Director. At the request of the respondents, the
appellant, U.P. Financial Corporation, sanctioned a loan of Rs. 29.70 lakhs.
The terms and conditions of loan and the manner of repayment of theloan
C are contained in the agreement arid hypothecation deeds executed in 1981.
Suffice it to note that loan was repayable in certain specified instalments
alongwith interest. A sum of Rs. 26, 29, 578 was released to the respon- '(
dents. The first respondent went into production in December 1982. Within
a few months i.e., in March 1983 its operations ceased. By an order dated _
February 21, 1984 the first respondent-unit was declared a sick unit. The
D respondents did not make any repayment as stipulated in the agreement
and hypothecation deeds whereupon the Corporation took steps to take
over the unit under Section 29 of the State Financial Corporations Act,
1951 for recovering an amount of Rs. 38.57 lakhs due to it by that date -
vide notice dated July 10, 1984. Then started a series of Writ Petitions by
E the respondents, all designed .to stall the appellant from taking over and/or Y
recovering the amount due to it. It is not necessary to trace the course of
the several writ petitions except the one from which the present appeal
arises.

Writ Petition 20544 of 1986 was filed questioning the taking over of
F the first respondent-unit by the appellant~Corporation under Section 29 of
the Act and for a direction to the appellant to reschedule the repayment
of debt in accordance with the earlier orders of the High Court. The writ
petition has been allowed with the following directions :

"(1) Having regard to the discussion made above we direct
G
the U.P. Financial Corporation :-

(1) to consider expeditiously the resolution dated
29.1.1986 aimed at the rehabilitation of the industrial
concern in question in the light of the feasibility report of
H the U .P. Industrial Consultants Ltd. the Fmancial aid
FINANCIAL CORPN. v. GEM CAP (INDIA) [JEEV AN REDDY, J.] 153

forthcoming from the Bank of Baroda and other financial A
institutions and the reports of the managing director of
the corporation dated 18.12.85 and 29.1.1986;

(2) to restore hack possession of the unit to the petition
No. 1 forthwith.
~-
B
The notice dated 11.6.1986 issued by the Corporation
under Section 29 of the State Financial Corporation Act,
1951 shall, however, remain alive it being· open to the
Corporation to proceed further in pursuance thereof in
case the rehabilitation deal is given a fair trial but does
not bear fruit.
c
The petition is allowed accordingly with no order, how-
ever, as to costs."

With great respect to the Learned Judges who allowed the writ D
petition we feel constrained to say this : a reading of the judgment shows
that they have not kept in mind the well-recognised limitations of their
jurisdiction under Article 226 of the Constitution. The judgment reads as
If they were setting as an Appellate Authority over the appellate-Corpora-
tion. Not a single provision of law is said to have been violated. The
exclusive concern of the court appears to be to revive and resurrect the E
respondent-Company, with the aid of public funds, without giving any
thought to the interest of public financial institutions. The approach is :
"the Corpor~fion is supposed to act in the best interest of the industrial
concern with the object primarily to promote and advance the industrial
activity wit11out, of course, undue involvement or risk of its financial F
commitment 5 ........ It needs no emphasis to say that the Corporation is
conceived 3$ Regional Development Bank with the principal object to
accelerate -the industrial growth in the State by providing financial assis-
tance mainJy to small and smaller of the medium scale industries. The
approach has to be business like in conformity with the declared policy of G
the State Govt If the unit is potentially viable or such as may be capable
of being rehahilitated, it would deserve being administered proper treat-
ment and not lead to its liquidation." Here wa' a company which drew
substantial puhlic funds and became sick within three months of its going
into production. One of the main reasons for its sickness appears to be the
inter-necine fight between the two groups controlling the Company. The H
154 SUPREME COURT REPORTS [1993) 2 S.C.R.

A unit was closed. It was not paying a single pie in repayment of the loan -
neither the principal nor the interest. Already a huge amount was due to
the appellant. There was no prospect of its recovery. And yet other
financial corporations were being asked by the court, four years after its
closure, to sink more money into the sick unit. Though a passing reference
is made to the financial risk of appellant. this concern was not translated
B into appropriate directions. The Corporation was not allowed to sell the
unit when it wanted to in 1984-85. Now, it is difficult to sell it, because it
has been lying closed for about 8 years and more. The machinery must have
become junk. While the Company could not be revived, the appellant-cor-
poration now stands to lose more than a crore of rupees - all publice money
c - in this one instance.

To continue the factual narration against the judgment of the
Allahabad High Court aforesaid (dated April 6, 1987) the appellant filed
this appeal and on May 8, 1987 this Court while issuing notice on the SLP
directed stay of operation of the judgment of the High court. After the
D respondments filed a counter affidavit this Court made the following order
on September 18, 1987 :

"Stay made absolute with the direction that there shall be
no sale of the industrial "unit. Hearing expedited. To be
E heard alongwith Civil Appeal No. 568 of 1987."

The S.L.P. could not be heard finally though it was posted for hearing
on certain dates. On November 13, 1991, the counsel for the respondents
made an offer which is recorded in the order of that date. It reads :
-
F "This matter is adjourned for 11.12.91. Mr. Shanti
Bhushan, Sr. Adv., suggests that in view of the lapse of
time of more than 5 years the position has changed and
the Corporation should now consider the feasibility of
taking over the assets in liquidation of the dues by making
an assessment and consider relieving the directors from
G their personal responsibilities to the corporation and the
other creditors."

The subsequent order dated December 12, 1991, however, shows that
the appellant-corporation refused to bite the bait. The amount due to it
H had risen to over a crore of rupees by now. Whereupon, this Court passed
J;INANCIAL CORPN. v. GEM CAP (INDIA) [JEEVAN REDDY, J.] 155

the following order : A
"The appellant in consultation with the other creditors is
permitted to put-up the industrial undertaking of the first-
respondent for sale. It may do so either by public auction
or by inviting tenders or by an combination of both. It may
proceed to do so within a period of two months from B
today. While permitting the appellant to take steps.for the
sale, we make it clear that before accepting the offers, the
appellant should obtain prior permission of this Court.

List this matter after 10 weeks, i.e., in the first week of
March, 92."
c
r- It is not clear as to why the unit could not be sold. On March 13,
1992, this Court passed the following further order.

"We have heard learned counsel on both sides. D
Apart from the merits of the issues raised, it appears to
us that the present impasse is to nobody's advantage. The
dispute has to be resolved in some meaningful way. We
.accordingly direct the respondent-Company and Sri K.P.
Chaturvedi, who claims to be in-charge of the affairs of E
the Company, to confirm in writing to the petitioner-Cor-
poration within three weeks from today that they uncon-
ditionally agree to settle the claims of the. Financial
Corporation at a figure which would represent the prin-
cipal amount - said to be Rs. 26.30 lacs - and interest F
thereon from the inception al 13.5% per year with half
yearly rests calculated upto 25.7.1986.

If such an offer is made, the Financial Corporation will
assess the merit and acceptability of that offer ;md take
within six weeks thereafter, an appropriate decision in- G
cluding the manner in which and the period over which
the payment should be completed, and if the Financial
Corporation agrees to grant time for payment, the rate of
interest for the deferred period. The decision taken by the
Corporation will be placed before this Court. H
156 SUPREME COURT REPORTS [1993] 2 S.C.R.

A If, however, any offer, as indicated above, is not Communi-
cated by the company or Sri Chaturvedi within a period
of three weeks from today, then the Financial Corporation
shall be at liberty to initiate, with notice to the respon-
dents, steps for the sale by public auction of the subject-
matter of the security in its favour and to treat and hold
B the proceeds of sale as substituted security in the place of
the subject-matter of the secutity, subject to the final result
of this S.L.P. Call this matter in the 3rd week of May,
1992."

c Pursuant to the said order the second respondent, Managing Direc-
tor of the first respondent-Company merely wrote a letter addressed to the
appellant-Corporation, to the following effect :

"We, herewith, attach a photo copy of the captioned order
which is self explicii.
D
We, however, unconditionally agree to abide with the
directions given to us by the Hon'ble Supreme Court.

Further, as the Corporation is aware that the Unit (Com-
pany) as well as The Registered Office of the Company,
E
both are in possession of the Corporation, we shall feel
obliged if you kindly communicate your views to us at the
below given address."

It is evident that the letter written by the second respondent is not
F in terms of the order to this Court dated March 13, 1992. No figure is
mentioned-nor is it mentioned as to how and in what manner the said huge
debt is sought to be repaid by the respondents. Evidently, the appellant-
corporation could not pay any heed to such a letter. When the matter came
before this Court the second respondent appeared in-person stating that
G he has discharged his advocate and that he will argue the matter himself.
The matter again came up before us on 19.2.1993 when we heard the
appellant's counsel and the second respondent in-person. We allowed the
appeal stating that the reasons would follow. There are the reasons for the
order.

H It is true that the appellant Corporation is an instrumentality of the
l'INANCIAL CORPN. v. GEM CAP (INDIA) [JEEVAN REDDY, J.] 157

State created under the State Finance Corporation Act, 1951. The said Act A
was made by the Parliament with a view to promote industrialisation of the
States by encouraging small and medium industries by giving financial
assistance in the shape of loans and advances, repayable within a period
not exceeding 20 years from the date of loan. We agree that the Corpora-
tion is not like an ordinary money-lender or a Bank which lends money. It
B
is a lender with a purpose - the purpose being promoting the small and
medium industries. At the same time, it is necessary to keep certain basic
facts in view. The relationship between the Corporation and the borrower
is that of creditor and debtor. The corporation is not supposed to give loans
once and go out of business. It has also to recover them so that it can give
fresh loans to others. The Corporation no doubt has to act within the four C
corners of the Act and in furtherance of the object underlying the Act. But
this factor cannot be carried to the extent of obligating the Corporation to
revive and resurrect every sick industry irrespective of the cost involved.
Promoting industrialisation at the cost of public funds does not serve the
public interest; it merely amounts to transferring public money to private D
account. 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 honour the commitments undertaken ·by him, the
Corporation alone cannot be shackled hand and foot in the name of
fairness. Faimess is not a one way stree~ -more particularly in matters like
the present one. The above narration of facts shows that the respondents E
have no intention of repaying any part of the debt. They are merely putting
forward one or other ploy to keep the Corporation at bay. Approaching
the Courts through successive writ petitions is but a part of this game.
Another circumstance. These Corporation are not sitting on King
Solomon's mines. They too borrow monies from Government or other F
financial corporation. They too have to pay interest thereon. The fairness
required of it must be tempered - nay, determined, in the light of all these
circumstances. Indeed, in a matter between the Corporation and its debtor,
a writ court has no say except in two situation : (1) there is a statutory
violation on the part of the Corporation or (2) where the Corporation acts
unfairly i.e., unreasonably. While the former does not present any difficulty, G
,h~ latter needs a little reiteration of its precise meaning. What does acting
).
unfairly or unreasonably mean? Does it mean that the High Court exercis-
ing its jurisdiction under Article 226 of the Constitution can sit as an
Appellate Authority over the acts and deeds of the corporation and seek
H
158 SUPREME COURT REPORTS [1993] 2 S.C.R.

A to correct them ? Surely, it cannot be. That is not the function of the High
Court under Article 226. Doctrine of fairness, evolved in administrative law
was not supposed to convert the writ courts into appellate authorities over
administrative authorities. The constraints - self-imposed undoubtedly - of
writ jurisdiction still remain. Ignoring them would lead to confusion and
ljllcertainty. The jurisdiction may become rudderless.
B
The obligation to act fairly on the part of the administrative autho-
rities was evolved to ensure the Rule of Law and to prevent failure of
justice. This doctrine is complementary to the principles of natural justice
which the Quasi-Judicial Authorities are bound to observe. It is true that
C the distinction between a quasi-judicial and the administrative action has
become thin, as pointed out by this Court as far back as 1970 in A.K '
Kraipak & Ors. v. Union of India & Ors., AIR 1970 S.C. 150. Even so the
extent of judicial scrutiny/judicial review in the case of administrative
action cannot be larger than in the case of quasi-judicial action. If the High
D Court cannot sit as an appellate authority over the decisions and orders of
quasi- judicial authorities it follows equally that it cannot do so in the case
of administrative authorities. In the matter of administrative action, it is
well - known, more than one choice is available to the administrative
authorities; they have a certain amount of discretion available to them.
They have "a right to choose between mole than one possible course of
E action upon which there is room for reasonable people to hold differing
opinions a~ to which is to be preferred" (Lord Diplock in Secretary of State
for Education v. Tameside Metropolitan Borough Counsel, 1977 AC 1014 at
1064). The Court cannot substitute its judgment for the judgment of
administrative authorities in such cases. Only when the action of the
F administrative authority is so unfair or unreasonable that no reasonable
person would have taken that action, can the Court intervene. To quote
the classic passage from the judgment of Lord Greene MR in Associated
Provincial Picture Houses Ltd. v. Wednesbury Corporation, (1948) 1 KB at
229.

G "It is true the discretion must be exercised reasonably.
· Now what does than mean ? Lawyers familiar with the
phraseology commonly used in relation to exercise of
statutory discretions often use the word "unreasonable" in
a rather comprehensive sense. It has{requently been used
H and is frequently used as a general description of the
F1NANCIAL CORPN. v. GEM CAP (INDIA) [JEEVAN REDDY, J.] 159

things that must not be done. For instance, a person A
entrusted with the discretion must, so to speak, direct
himself properly in law. He must call his own attention to
the matters which he is bound to consider. He must
exclude from his consideration matters which are ir-
relevant to what he has to consider. If he does not obey
those rules, 'he may truly be said, and often is said, to be
B
acting "unreasonably". Similarly, there may be something
so absurd that no sensible person could ever dream that
it lay within the powers of the authority."

While thi~ is nol the occasion to examine the content and contours C
of the doctrine of fairness, it is enough to reiterate for the purpose of this
case that the power of the High Court while reviewing the administrative
action is not that of an appellate court. The judgment under appeal
precisely does that and for that reason is liable to be and is herewith set
aside.
D
On behalf of the appellant reliance has been placed upon the
decision of this court in Mahesh Chandra v. Regional MQJlager, U.P. FinQJl-
cial Corporation & Ors., (1992) 2 J.T. 326. We have perused the decision.
That was a case where the debtor was anxious to pay off the debt and had
been taking several steps to discharge his obligation. On the facts of that
particular case it was found that the corporation was acting reasonably. In
E
that context certain observations were made. The decision also deals with
the procedure to be adopted by the Corporation while selling ·the units
• taken over under Section 29. That aspect is not relevant in this case. We

- are, therefore, of the opinion that the said decision is of no help to the
appellant herein. F
The appeal is accordingly allowed. The respondents shall pay the
.costs of the appellant. assessed at Rs. 10,000 consolidated.

T.N.A. Appeal allowed.