IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7910  OF 2009  (Arising out of S.L.P. (C) No.2600 of 2009)

Punjab Financial Corporation     ....Appellant

Versus

M/s. Surya Auto Industries  ....Respondent

J U D G M E N T

G.S. Singhvi, J.

1. Leave granted.

2. This is an appeal for setting aside order dated 21.11.2008 passed by  

the Punjab and Haryana High Court whereby it  allowed the writ  petition  

filed  by  the  respondent,  quashed  the  action  taken  by  the  appellant-

Corporation under Section 29 of the State Financial Corporations Act, 1951  

(for short, ‘the Act’) for recovery of its dues and also directed review of all  

pending cases in which penal interest has been compounded.  

3. On an application made by the respondent for grant of loan for setting  

up  an  industrial  unit  in  District  Gurdaspur  (Punjab),  the  appellant-

Corporation sanctioned a term loan of Rs.24.25 lacs. For securing repayment  

of the loan, the respondent mortgaged immovable properties in favour of the  

appellant-Corporation.  As per the terms of agreement executed between the  

parties, the respondent was required to repay the loan together with interest  

on specified dates but it failed to adhere to the time schedule and a sum of  

Rs.2.70 lacs only was deposited till 2002.  Therefore, after issuing notice  

under Section 29 of the Act, the appellant-Corporation took possession of  

the unit.   This action was followed by notices dated 2.12.2002, 3.3.2003,  

30.5.2003  and  29.8.2003,  whereby  the  respondent  was  repeatedly  called  

upon to pay the outstanding dues.   The respondent  not  only ignored the  

notices  but  also  failed  to  avail  the  concession  offered  by  the  appellant-

Corporation vide letter  dated 10.9.2004 to reduce the rate of interest  and  

reschedule  the  payment  of  the  outstanding  dues.   The  attitude  of  non-

cooperation adopted by the respondent in the matter of repayment of loan  

and interest forced the appellant-Corporation to issue notice dated 26.6.2007  

under Section 29 of the Act for taking over collateral security.

2

4. The  respondent  challenged  the  threatened  take  over  of  collateral  

security  in  W.P.  No.11932/2007  by  contending  that  action  taken  by  the  

appellant-Corporation  is  contrary  to  the  provisions  of  the  Act,  rules  of  

natural justice and the law laid down in Central Bank of India v. Ravindra  

(2002) 1 SCC 367 and Aravali Pipes v. Haryana Financial Corporation  

(2001) 2 All India Banking Law Judgments 516.  The respondent also made  

a grievance that the officers of the appellant-Corporation had deliberately  

disposed of the machinery for a paltry sum of Rs.5 lacs and this had the  

effect of destroying the unit.   In the counter affidavit filed on behalf of the  

appellant-Corporation, it was pleaded that action under Section 29 of the Act  

was necessitated because the writ petitioner failed to abide by the terms of  

the loan agreement and mortgage.  It was further pleaded that even though  

the  appellant-Corporation  offered  to  reduce  the  rate  of  interest  and  

reschedule the payment of outstanding dues, the respondent did not avail the  

same.  Not only this, the respondent failed to take benefit of the schemes  

notified on 3.1.2005 and 18.3.2005 for restoration of the unit on payment of  

the principal amount along with 10% of the outstanding interest.       

5. On  the  pleadings  of  the  parties,  the  High  Court  formulated  the  

following question:

3

“Whether after invoking power under Section 29 of the Act, the  respondent  Corporation  has  absolute  power  of  retaining  the  property without taking any steps and to continue to charge the  interest and penal interest, without any limit.”

6. The Division Bench of the High Court then stated the principle that as  

per the contract between the parties, the debtor is liable to pay interest till the  

principal  amount  is  repaid  and there  is  statutory  power  to  take  over  the  

mortgaged  property  and  thereafter  also,  interest  continues  to  run,  but  

observed that being a public authority, the Corporation is duty bound to act  

fairly; that the power to take possession of the mortgaged property cannot be  

exercised without any responsibility and that the Corporation is bound to  

take further steps within reasonable time and if it does not do so, the debtor  

will  not  only stand deprived of  mortgaged property  without  any purpose  

resulting in loss of earning and possibility of repayment by raising money  

against the property.  The Division Bench then held that as the appellant-

Corporation is not shown to have taken any steps for a period of six years  

after taking over the unit and no explanation has been offered for this, it  

neither charge interest at the contractual rate nor can it proceed against any  

other  property  till  the  earlier  taken  over  property  is  disposed  of.   The  

Division Bench also referred to the judgment of this Court in Central Bank  

of India v. Ravindra (supra) and held that the Corporation is not entitled to  

4

compound penal interest.  The conclusions recorded by the High Court and  

operative part of the impugned order read as under:

“23. In  view  of  above  discussion,  our  conclusions  are  as  under:-

(i) Taking over of unit under Section 29 of the Act casts an  obligation on the Financial Corporation to proceed against the  property taken over within reasonable time.  Failure to do so,  will be violation of concept of fair procedure under Articles 14  and 21 of the Constitution.

(ii) If  the  Court  reaches  a  conclusion  that  action  of  the  Corporation is unfair, the Court may, to effectuate the right of  the  borrower,  set  aside  the  demand  for  contractual  rate  of  interest and substitute the same for a reasonable rate of interest,  without  prejudice  to  the  remedy  of  the  borrower  to  claim  damages in appropriate proceedings.  The Court may also direct  giving  of  a  fresh  opportunity  to  the  borrower  to  pay  the  recalculated  amount  and  restrain  the  Corporation  from  proceeding against other assets of the borrower.

24. Accordingly,  we  allow  this  petition  and  apart  from  setting aside compounding of penal interest, declare that from  1.4.2003 i.e. after expiry of period of six months from the date  of taking over of unit of the petitioner, the Corporation will be  entitled to simple interest @ 10%.  The Corporation is directed  to make fresh calculation accordingly within one month from  the date of receipt of a copy of this order.  We further direct the  Corporation to allow the petitioner to pay the amount as per  fresh demand, if necessary, by selling the mortgaged property  which has been taken over, subject to the payment being made  directly to the Corporation to the extent of its dues.  We also  restrain  the  Corporation  from  giving  effect  to  its  notice  Annexure  P-8  of  taking  over  other  properties  till  the  unit  already taken over is disposed of.  The Corporation may also  review  all  pending  cases  where  penal  interest  has  been  compounded  in  violation  of  law  laid  down  by  the  Hon’ble  

5

Supreme Court and where no steps are being taken after taking  over of the unit.”

7. We have heard Shri  T.S.  Doabia,  learned senior counsel  appearing  

for the appellant and scrutinized the records.  The appellant-Corporation was  

established under Section 3 of the Act.  Section 24 of the Act mandates that  

in discharging its functions under the Act, the Board [as defined in Section  

2(a)]  shall  act  on  business  principles  due  regard  being  had  by  it  to  the  

interests of industry, commerce and the general public.  Section 25 provides  

that the Financial  Corporation may, subject  to the provisions of this Act,  

carry on and transact any of the kinds of business enumerated in Clauses (a)  

to (v).  These include guaranteeing, on such terms and conditions as may be  

agreed  upon,  (i)  loans  raised  by  industrial  concerns  which  are  repayable  

within a period not exceeding twenty years, and are floated in the public  

market;  (ii)  loans  raised  by  industrial  concerns  from scheduled  banks  or  

State  cooperative  banks  or  other  financial  institutions;  transferring  for  

consideration any instruments relating to loans and advances granted by it to  

industrial  concerns;  granting  loans  or  advances  to,  or  subscribing  to  

debentures of, an industrial concern, repayable within a period not exceeding  

twenty years from the date on which they are granted or subscribed to, as the  

case may be; planning and assisting in the promotion and development of  

6

industries; providing export related credit and services; undertaking money  

market related activities.  Section 29 (1) lays down that where any industrial  

concern,  which is under a liability to the Financial  Corporation under an  

agreement, makes any default in repayment of any loan or advance or any  

installment thereof or in meeting its obligations in relation to any guarantee  

given by the Corporation or otherwise fails to comply with the terms of its  

agreement with the Financial Corporation, the latter shall have the right to  

take over the management or both of the industrial concerns, as well as the  

right  to  transfer  by  way  lease  or  sale  and  realize  the  property  pledged,  

mortgaged, hypothecated or assigned to the Financial Corporation.

8. Section 29 of the Act has become subject matter of consideration in  

several cases.  In Mahesh Chandra v. Regional Manager, U.P. Financial  

Corporation (1993)  2  SCC  279,  a  two-Judge  Bench  of  this  Court  

considered whether the respondent-Corporation could take possession of the  

mortgaged property even before disbursement of the sanctioned loan and sell  

the same without  giving opportunity  to the borrower to pay off  debts or  

bring  a  better  offer  and  observed  that  the  corporations  deal  with  public  

money  for  public  benefit  and,  therefore,  their  approach  has  to  be  public  

oriented and helpful to the loanee.  A helping attitude on the part  of the  

7

Corporation to constantly monitor the working of the industrial concern or  

units (it may even charge the overhead expenses on this account) would sub-

serve  the  purpose  of  the  loan,  object  of  the  Act,  and  the  constitutional  

objective of economic justice to the needy.    

9. The two-Judge Bench then adverted to the scope of Section 29 of the  

Act and observed:

“Section  29  confers  very  wide  power  on  the  Corporation  to  ensure prompt payment by arming it with effective measures to  realise the arrears. But the simplicity of the language is not an  index of the enormous power stored in it. From notice to pay  the  arrears,  it  extends  to  taking  over  management  and  even  possession with a right to transfer it  by sale………… Power  under Section 29 of the Act to take possession of a defaulting  unit  and  transfer  it  by  sale  requires  the  authority  to  act  cautiously, honestly, fairly and reasonably. Default in payment  of  loan may attract  Section 29.  But that  alone is  insufficient  either  to  assume  possession  or  to  sell  the  property.  Neither  should be resorted to unless it is imperative. Even though no  rules appear to have been framed nor any guideline framed by  the Corporation was placed, yet the basic philosophy enshrined  in Section 24 has to be kept in mind. Rationale of action and  motive in exercise of it has to be judged in the light of it. Lack  of reasonableness or even fairness at either of the two stages  renders  the  take  over  and  transfer  invalid.  Unfortunately  the  Corporation was guilty of  not  acting in accordance with law  either  at  the  stage  of  take  over  or  in  transferring  the  unit.  Admittedly  the  entire  loan  was  not  disbursed.  Need  of  the  capital in the last stages cannot be doubted. If the Corporation  refused to release the amount at a time when the unit is nearing  completion or is ready to start functioning, then it falls short of  capital  and it  is bound to land itself  in trouble.  This is what  happened in this case. The partners did not cooperate and the  

8

Corporation without any explanation refused to release the full  amount.  Result  was  that  the  appellant  stood  pressed  on  one  hand  from absence  of  capital  and  on  the  other  by  recovery  proceedings.  The  Corporation,  therefore,  should  honour  their  commitments  of  releasing  entire  loan  timely except  for  very  good reasons which should be intimated beforehand to enable  the  unit  holder  to  comply  with  shortcomings  if  any.  In  its  absence of its completion, the proceedings for recovery under  Section  29  may  not  be  justified.  Similarly  various  situations  may  arise  which  may  hamper  start  of  the  unit  —  delay  in  electric supply or delayed delivery of machinery vital for the  functioning  of  the  unit.  Such  difficulties  do  require  rescheduling of payment of instalment because, if the unit, for  reasons beyond the control of unit holder, could not start, then  how will the amount be repaid. Endeavour should be to adjust  and accommodate as business considerations require the unit to  function  for  benefit,  both,  of  the  general  public  and  the  Corporation. It is not mandatory, as a matter of law, to observe  the process of taking over strictly. But if there is no option left  and the  unit  is  taken over then its  transfer  requires  not  only  sincere effort but to act reasonably and fairly.”   

In  paragraph  22  of  the  judgment,  the  Court  laid  down guidelines  to  be  

followed by the Corporation while exercising power under Section 29 of the  

Act.

10. A substantially different  view was expressed by another two-Judge  

Bench in U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd (1993)  

2 SCC 299.  While indicating that  the Corporation established under the  

1951 Act is not like an ordinary money-lender or a bank which lends money  

9

and it is a lender with a purpose that is promoting the small and medium  

industries, the Court observed:-

“…………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 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  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. Fairness is   not  a  one  way  street,  more  particularly  in  matters  like  the   present  one………….  These  corporations  are  not  sitting  on  King  Solomon’s  mines.  They  too  borrow  monies  from  Government or other financial corporations. 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 situations: (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,  the latter  needs a  little  reiteration  of  its  precise  meaning.  What  does  acting  unfairly  or  unreasonably  mean?  Does  it  mean that  the  High  Court  exercising  its  jurisdiction  under  Article  226  of  the  Constitution can sit as an appellate authority over the acts and  deeds of the corporation and seek 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  

10

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 rudderless.”

(emphasis added)

11. In  U.P. Financial Corporation v. Naini Oxygen & Acetylene Gas  

Ltd. (1995) 2 SCC 754, the Court considered whether the State Financial  

Corporation  was  bound  to  accept  the  report  of  Industrial  Reconstruction  

Bank  of  India  which  contained  recommendation  for  resurrection  of  the  

defaulter company and whether the High Court was justified in commanding  

the Corporation to hand over possession of the unit to the company without  

any adjustment and observed:

“However, we cannot lose sight of the fact that the Corporation  is  an independent  autonomous statutory body having its  own  constitution and rules to abide by, and functions and obligations  to discharge. As such, in the discharge of its functions, it is free  to act according to its own light. The views it forms and the  decisions  it  takes  are  on  the  basis  of  the  information  in  its  possession and the advice it receives and according to its own  perspective and calculations. Unless its action is mala fide, even  a wrong decision taken by it is not open to challenge. It is not  for the courts or a third party to substitute its decision, however  more  prudent,  commercial  or  businesslike  it  may be,  for  the  decision of the Corporation. Hence, whatever the wisdom (or  the  lack  of  it)  of  the  conduct  of  the  Corporation,  the  same  cannot be assailed for making the Corporation liable.

11

We are, therefore, of the view that this is not a matter where the  High Court should have stepped in and substituted its judgment  for the judgment of the Corporation which should be deemed to  know its interests better whatever the sympathies the Court had  for the prosperity of the Company. In matters commercial, the  courts should not risk their judgments for the judgments of the  bodies to whom that task is assigned.”

12. In Karnataka State Financial Corporation v. Micro Cast Rubber  

& Allied Products (P) Ltd.  (1996) 5 SCC 65,  the Court  referred to the  

earlier  judgments  in  Mahesh  Chandra  v.  Regional  Manager,  U.P.  

Financial Corporation  (supra) and  U.P. Financial Corporation v. Gem  

Cap (India) Pvt. Ltd (supra), adverted to the factual matrix of the case and  

held that in the absence of any violation of the statutory provisions by the  

appellant-Corporation, its decision to accept the offer made by the particular  

bidder for rational reasons cannot be interfered with by the High Court in  

exercise of powers under Article 226 of the Constitution.

13. In Haryana Financial Corporation v. Jagdamba Oil Mills  (2002)  

3 SCC 496, a three-Judge Bench disapproved the view expressed by two-

Judge Bench in  Mahesh Chandra v. Regional Manager, U.P. Financial  

Corporation (supra) and approved the one expressed by another two-Judge  

Bench  in  U.P.  Financial  Corporation  v.  Gem  Cap  (India)  Pvt.  Ltd  

(supra).   The  facts  of  that  case  were  that  the  appellant-Corporation  had  

12

sanctioned a term loan of Rs.7,48,000/- to the respondent.  The loan was to  

be repaid in 8 years in 15 half-yearly installments.  After disbursement of the  

last installment, the respondent made a request to reschedule repayment of  

the  loan.   The  said  request  was  accepted  by  the  appellant-Corporation.  

Despite this,  the respondent continued to commit default in repayment of  

loan.   Therefore,  after  issuing  notice  under  Section  29  of  the  Act,  the  

appellant-Corporation took possession of the unit. The respondent filed suit  

for permanent injunction, which was decreed by the trial Court.  The first  

and second appeals preferred by the appellant-Corporation were dismissed  

by the District Judge and High Court respectively.  The three-Judge Bench  

of  this  Court  noticed  the  background in  which the  Act  was enacted and  

proceeded to observe:

“The Corporation as an instrumentality of the State deals with  public money. There can be no doubt that the approach has to  be public-oriented. It can operate effectively if there is regular  realization  of  the  instalments.  While  the  Corporation  is  expected to act fairly in the matter of disbursement of the loans,  there is corresponding duty cast upon the borrowers to repay  the  instalments  in  time,  unless  prevented  by  insurmountable  difficulties. Regular payment is the rule and non-payment due  to extenuating circumstances is the exception. If the repayments  are not received as per the scheduled time-frame, it will disturb  the  equilibrium  of  the  financial  arrangements  of  the  Corporations.  They  do  not  have  at  their  disposal  unlimited  funds.  They  have  to  cater  to  the  needs  of  the  intended  borrowers  with  the  available  finance.  Non-payment  of  the  

13

instalment by a defaulter may stand in the way of a deserving  borrower getting financial assistance.”

The three-Judge Bench then referred to the judgments in Mahesh Chandra  

v.  Regional  Manager,  U.P.  Financial  Corporation  (supra)  and  U.P.  

Financial Corporation v. Gem Cap (India) Pvt. Ltd (supra), approved the  

view taken in the later decision by recording the following observations:

“As was observed by this Court in Gem Cap case the legislative  intent  in  enacting  the  statute  in  question  was  to  promote  industrialization  of  the  States  by  encouraging  small  and  medium industries by giving financial assistance in the shape of  loans  and  advances,  repayable  within  a  stipulated  period.  Though the Corporation is not like an ordinary moneylender or  a bank which lends money, there is purpose in its lending i.e. to  promote  small  and  medium  industries.  The  relationship  between the Corporation and the borrower is that of a creditor  and  debtor.  That  basic  feature  cannot  be  lost  sight  of.  A  Corporation is not supposed to give loan and then to write it off  as a bad debt and ultimately to go out of business. As noted  above, it has to recover the amounts due so that fresh loans can  be given. In that way industrialization, which is the intended  object, can be promoted. It certainly is not and cannot be called  upon to pump in more money to revive and resurrect each and  every sick industrial unit irrespective of the cost involved. That  would  be  throwing  good  money  after  bad  money.  As  was  rightly observed in    Gem Cap case   promoting industrialization    does not serve public interest if it is at the cost of public funds.  It may amount to transferring public money to private account.”

The fairness required of the Corporations cannot be carried to  the  extent  of  disabling  them from recovering what  is  due to  them.  The  matter  can  be  looked at  from another  angle.  The  Corporation  is  an  independent  autonomous  statutory  body  

14

having its own constitution and rules to abide by, and functions  and obligations to discharge.  As such in the discharge of  its  functions, it is free to act according to its own light. The views  it  forms  and  decisions  it  takes  are  on  the  basis  of  the  information  in  its  possession  and  the  advice  it  receives  and  according to  its  own perspective  and calculations.  Unless  its  action is mala fide, even a wrong decision by it is not open to  challenge. It is not for the courts or a third party to substitute its  decision, however, more prudent, commercial or businesslike it  may be, for the decision of the Corporation.  As was observed  by  this  Court  in  U.P.  Financial  Corpn. v.  Naini  Oxygen  &  Acetylene Gas Ltd in commercial matters the courts should not  risk their judgments for the judgments of the bodies to whom  that task is assigned. As was rightly observed by this Court in  Karnataka  State  Financial  Corpn. v.  Micro  Cast  Rubber  &  Allied  Products  (P)  Ltd. in  the  matter  of  action  by  the  Corporation  in  exercise  of  the  powers  conferred  on  it  under  Section 29 of the Act, the scope of judicial review is confined  to two circumstances i.e. (a) where there is statutory violation  on the part of State Financial Corporation, or (b) where State  Financial  Corporation  acts  unfairly  i.e.  unreasonably.  While  exercising its jurisdiction under Article 226 of the Constitution  of  India,  1950  (in  short  “the  Constitution”),  the  High  Court  does not sit as an Appellate Authority over the acts and deeds  of  the Corporation.  Similarly,  the courts  other  than the High  Courts are not to interfere with action under Section 29 of the  Act unless the aforesaid two situations exist.”

(emphasis added)

Commenting  upon  the  judgment  in  Mahesh  Chandra  v.  Regional  

Manager,  U.P.  Financial  Corporation  (supra),  the  three-Judge  Bench  

observed:

“The view in  Mahesh Chandra case appears to have been too  widely expressed without taking note of the ground realities and  the intended objects of the statute. If the guidelines as indicated  

15

are to be strictly  followed,  it  would be giving premium to a  dishonest  borrower.  It  would  not  further  the  interest  of  any  Corporation  and  consequently  of  the  industrial  undertakings  intending to avail financial assistance. It would only provide an  unwarranted opportunity to the defaulter (in most cases chronic  and deliberate)  to  stall  recovery  proceedings.  It  is  not  to  be  understood  that  in  every  case  the  Corporations  shall  take  recourse to action under Section 29. Procedure to be followed,  needless to say, has to be observed. If any reason is indicated or  cause shown for the default, the same has to be considered in its  proper perspective and a conscious decision has to be taken as  to  whether  action  under  Section  29  of  the  Act  is  called  for.  Thereafter, the modalities for disposal of seized unit have to be  worked out. The view expressed in   Gem Cap case   appears to be    more in line with the legislative intent.  Indulgence shown to  chronic  defaulter  would  amount  to  flogging  a  dead  horse  without any conceivable result being expected. As the facts in  the  present  case  show,  not  even  a  minimal  portion  of  the  principal amount has been repaid. That is a factor which should  not have been lost sight of by the courts below. It is one thing to  assist the borrower who has intention to repay, but is prevented  by  insurmountable  difficulties  in  meeting  the  commitments.  That has to be established by adducing material. In the case at  hand factual aspects have not even been dealt with, and solely  relying on the decision in Mahesh Chandra case the matter has  been decided………..

The aforesaid guidelines issued in Mahesh Chandra case  place  unnecessary  restrictions  on  the  exercise  of  power  by  Financial  Corporation contained in  Section 29 of  the Act  by  requiring  the  defaulting  unit-holder  to  be  associated  or  consulted at every stage in the sale of the property. A person  who has defaulted is hardly ever likely to cooperate in the sale  of his assets. The procedure indicated in Mahesh Chandra case  will only lead to further delay in realization of the dues by the  Corporation  by  sale  of  assets.  It  is  always  expected  that  the  Corporation  will  try  and realize  the  maximum sale  price  by  selling the assets by following a procedure which is transparent  and acceptable, after due publicity, wherever possible.

16

The  subsequent  decisions  of  this  Court  in  Gem  Cap,  Naini Oxygen and Micro Cast Rubber run counter to the view  expressed  in  Mahesh  Chandra  case.  In  our  opinion,  the  issuance  of  the  said  guidelines  in  Mahesh Chandra case are  contrary to the letter and the intent of Section 29. In our view,  the said observations in Mahesh Chandra case do not lay down  the correct law and the said decision is overruled.”

14. The proposition of law which can be culled out from the decisions  

noted  above  is  that  even  though  the  primary  function  of  a  corporation  

established  under  Section 3 of  the  Act  is  to  promote  small  and medium  

industries in the State, but it is not obliged to revive and resurrect every sick  

industrial  unit  de  hors  the  financial  implications  of  such  exercise.   The  

corporation is not supposed to give loans and refrain from taking action for  

recovery thereof.  Being an instrumentality of the State, the corporation is  

expected to act fairly and reasonably qua its borrowers/debtors, but it is not  

expected  to  flounder  public  money  for  promoting  private  interests.   The  

relationship between the corporation and borrower is  that of creditor  and  

debtor.  The corporation is expected to recover the loans already given so  

that it can give fresh loans/financial assistance to others.  The proceedings  

initiated by the corporation and action taken for recovery of the outstanding  

dues cannot be nullified by the courts except when such action is found to be  

in violation of any statutory provision resulting in prejudice to the borrower  

17

or  where  such  proceeding/action  is  shown  to  be  wholly  arbitrary,  

unreasonable and unfair.  The court cannot sit as an appellate authority over  

the action of the corporation and substitute its decision for the one taken by  

the corporation.

15. If the order impugned in this appeal is examined in the light of the  

principles laid down in  U.P. Financial Corporation v. Gem Cap (India)  

Pvt. Ltd (supra) and  Haryana Financial Corporation v. Jagdamba Oil  

Mills (supra), we do not find any difficulty in holding that the High Court  

committed an error in declaring that the action taken by the Corporation was  

unfair and unreasonable and the direction issued for review of all pending  

cases where penal interest  has been compounded is legally unsustainable.  

While decrying the appellant-Corporation for allegedly going into slumber  

after taking over the unit of the respondent in furtherance of the first notice  

issued  under  Section  29  of  the  Act,  the  High  Court  overlooked  many  

important factors, which are enumerated below:

(i) The  respondent  miserably  failed  to  discharge  its  obligation  to  

repay the loan together with interest and as against the outstanding  

dues of more than Rs.36 lacs in 2002, a paltry sum of Rs.2.70 lacs  

was deposited.

18

(ii) The  appellant-Corporation  issued  notices  dated  2.12.2002,  

3.3.3003, 30.5.2003 and 29.8.2003 to the respondent requiring it to  

pay the amount specified therein, but the latter did not respond to  

either of the notices.

(iii) Vide letter dated 10.9.2004, the appellant-Corporation offered to  

reduce the rate of interest and reschedule the payment of dues, but  

the respondent did not avail the same.

(iv) The respondent  did  not  take benefit  of  the  schemes  notified  on  

3.1.2005 and 18.3.2005 for restoration of the unit by paying the  

principal amount along with 10% of the outstanding interest.

16. In our view, the appellant-Corporation had acted in a most reasonable  

and  fair  manner  and  the  High  Court  was  not  justified  in  nullifying  the  

second  notice  issued  under  Section  29  of  the  Act  by  assuming  that  the  

appellant-Corporation had not taken effective steps for realization of its dues  

in furtherance of first notice.  Unfortunately, the High Court ignored that the  

respondent  had  not  only  adopted  a  recalcitrant  attitude  in  the  matter  of  

payment of  the outstanding dues,  but  also failed to avail  the concessions  

offered by the  appellant-Corporation  by reducing the rate  of  interest  and  

rescheduling the payment of outstanding dues and did not take benefit of the  

19

schemes  notified  by  the  appellant-Corporation  for  restoration  of  unit  on  

payment of the principal amount with a 10% outstanding interest.

17. The  High  Court  also  committed  serious  error  in  declaring  that  he  

appellant-Corporation will be entitled to charge simple interest at the rate of  

10% w.e.f. 1.4.2003 i.e., after expiry of six months from the date of taking  

over of the unit.  Undisputedly, the respondent had not challenged the terms  

of  loan agreement.   Therefore,  the  High Court  could not  have suo motu  

altered  terms  of  agreement  and  directed  the  appellant  to  make  fresh  

calculation of the outstanding dues and allowed the respondent to pay the  

amount  as  per  fresh  demand  by  selling  the  mortgaged  property.   This  

approach of the High Court is ex facie contrary to the law laid down in U.P.  

Financial  Corporation  v.  Gem  Cap  (India)  Pvt.  Ltd. (supra)  and  

Haryana Financial Corporation v. Jagdamba Oil Mills (supra).   

18. The direction given by the High Court for review of pending cases in  

the light of judgment of this Court in Central Bank of India v. Ravindra  

(supra) is also unsustainable because, as mentioned above, the High Court  

was not called upon to examine the legality or otherwise of the terms of  

20

agreement entered into between the appellant-Corporation and respondent  

under which the latter was obliged to pay interest at the particular rate with  

periodical  rests.  Moreover,  conclusion  No.3  contained in  para  55 of  that  

judgment  clearly  postulates  that  stipulations  incorporated  in  the  contract  

entered into and binding on the parties shall govern their substantive rights  

and obligations in the matter of recovery and payment of interest.

19. In the result, the appeal is allowed, the impugned order is set aside  

and the writ petition filed by the respondent is dismissed.

……………………. …J. (G.S. Singhvi)

………………………..J. (Asok Kumar Ganguly)

New Delhi December 01, 2009

21