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PETITIONER: U.P. FINANCIAL CORPORATION

       Vs.

RESPONDENT: GEM CAP (INDIA) PVT.  LTD.  AND ORS.

DATE OF JUDGMENT02/03/1993

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) KULDIP SINGH (J)

CITATION:  1993 AIR 1435            1993 SCR  (2) 149  1993 SCC  (2) 299        JT 1993 (2)   226  1993 SCALE  (1)747

ACT: State Financial Corporations Act, 1951: Section 29.  Company--Loan by Corporation-Default in payment of  loan  by Debtor-Company-Proceedings by  Corporation  for recovery of 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 administrative authorities-High Court cannot  act as an appellate authority. Article 12-State-Financial Corporation is instrumentality of state. Administrative Law. Judicial Review of Administrative action-Scope of. Doctrine of fairness.

HEADNOTE: The  respondent-Company  obtained loan from  the  appellant- Financial  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. Thereafter,  the appellant-Corporation issued  notice  under section 29 of the State Financial Corporations Act, 1951 for taking over the respondent’s unit for recovery of the amount due   Rs.38.57 lakhs.  Ile respondent-Company filed  a  writ petition  in  the  Allahabad  High  Court  questioning   the appellant’s action.  Ile High Court allowed the petition and directed  (1) expeditious rehabilitation of the concern  and (2) to restore back the 150 possession  of the unit to the respondent-Company.   Against the  judgment  of the High Court the  Financial  Corporation riled an appeal in this Court. Allowing the appeal and setting aside the order of the  High Court, this Court, HELD : 1. It is true that the appellant-Corporation which Is

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an  instrumentality  of the State created  under  the  State Financial  Corporations  Act, 1951 is not like  an  ordinary money-  lender or a Bank which lends money.  It 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.  Corporations too  borrow monies  from Government or other financial corporations  and they  too have to pay interest thereon.  No doubt it 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. [156H, 157A-C,F,] Promoting industrilisation 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 band  and foot in the name of fairness.  Fairness is  not  a one  way  street   more particularly  in  matters  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  bay. [157D-F] Mahesh   Chandra   v.  Regional  Manager,   U.P.   Financial Corporation Ors.,   (1992) 2 J.T.. 326, held Inapplicable. 2.  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. 151 unreasonably.   The High Court exercising  its  jurisdiction under  Article  226  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 way become 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 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 scrutiny/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 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

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administrative  authority is so unfair or unreasonable  that no  reasonable person would have taken that action, can  the Court intervenes. [158C-F] A.K  Kraipak  & Ors. v. Union of India & Ors.,  A.I.R.  1970 S.C.  150;  Secretary of State for Education  v.  Talimeside Metropolitan Borough Council, 1977 A.C. 1014 and  Associated Provincial  Picture Houses Ltd., v. Wednesbury  Corporation, (1948) 1 K.B. 223, relied on. 3.   While passing the impugned 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 administrative action it was not justified  in acting as an appellate court. [153D,159C]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 830 of 1993. 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 152 Pankaj Kalra for the Respondents. The Judgment of the Court was delivered by B.P.  JEEVAN  REDDY, J. The appeal is directed  against  the judgment and order of a Division Bench of the Allahabad High Court  allowing  Writ Petition 20544 of  1986  with  certain directions.  The first respondent Gem Cap (India) Pvt.  Ltd. is  a  private limited company.  Second respondment  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  the loan  are  contained  in  the agreement and 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 respondents.  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 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 the respondents, all  designed to  stall the appellant from taking over  and/or  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  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 the U.P. Financial Corporation               :-               (1)   to consider expeditiously the resolution               dated               29.1.1986aimed  at the rehabilitation  of  the               industrial concern in question in the light of

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             the feasibility report of the U.P.  Industrial               Consultants Ltd. the Financial aid                153               forthcoming from the Bank of Baroda and  other               financial institutions and the reports of  the               managing  director  of the  corporation  dated               18.12.85 and 29.1.1986;               (2)   to  restore back possession of the  unit               to the petition No. 1 forthwith.               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.               The  petition is allowed accordingly  with  no               order, however, as to costs." With  great  respect to the Learned Judges who  allowed  the writ 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- Corporation.  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 respondent-Company,  with the  aid of public funds, without giving any thought to  the interest of public financial institutions.  The approach  is :  "the Corporafion is supposed to act in the best  interest of  the  industrial  concern with the  object  primarily  to promote  and  advance the industrial  activity  without,  of course,   undue  involvement  or  risk  of   its   financial commitment’s........  It needs no emphasis to say  that  the Corporation  is conceived  ’.Regional Development Bank  with the principal object to accelerate the industrial growth  in the State by providing financial assistance mainly to  small and  smaller of the medium scale industries.   The  approach has  to  be business like in conformity  with  the  declared policy of the State Govt.  If the unit is potentially viable or  such as maY be capable of being rehabilitated, it  would deserve being administered proper treatment and not lead  to its liquidation." Here was a company which drew  substantial public  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 154 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  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-corporation  now stands to lose more than a  crore of rupees  all public money in this one instance. To  continue the factual narration  against the judgment  of the Allahabad High Court aforesaid (dated April 6, 1987) the

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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  respondents 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  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               "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    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 had risen to over a crore of rupees  by now.  Whereupon, this Court passed  155 the following order :               "The appellant in consultation with the  other               creditors   is   permitted   to   put-up   the               industrial undertaking of the  firstrespondent               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  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."               It  is 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.               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  the  Company,  to               confirm  in  writing  to  the  petitioner-Cor-               poration  within three weeks from  today  that               they  unconditionally  agree  to  settle   the               claims  of  the.  Financial Corporation  at  a               figure  which  would represent  the  principal               amount   said  to  be  Rs.  26.30  lacs    and               interest  thereon from the inception at  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 and  take  within

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             six weeks thereafter, an appropriate  decision               including  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.               156               If, however, any offer, as indicated above, is               not   communicated  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               respondents,  steps  for the  sale  by  public               auction  of the subjectmatter of the  security               in  its  favour  and to  treat  and  hold  the               proceeds  of sale as substituted  security  in               the   place  of  the  subject-matter  of   the               security, subject to the final result of  this               S.L.P.  Call  this matter in the 3rd  week  of               May, 1992." Pursuant  to the said order the second respondent,  Managing Director  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 explicit.               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  (Company)  as  well  as  The  Registered               Office of the Company, 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 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  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. It   is   true  that  the  appellant   Corporation   is   an instrumentality of the  157 State created under the State Finance Corporation Act, 1951. The  said  Act  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 Corporation  is not like an ordinary money-lender or a  Bank which  lends  money.   It 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

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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, mote particularly it? matters  like the  present one.  The above narration of facts  shows  that the  respondents 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’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 (21)  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 158 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   uncertainty.    The jurisdiction may become rudderless. 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 principles of natural justice 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, 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 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 more  than  one  possible

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course  of  action upon which there is room  for  reasonable people  to  hold  differing opinions as 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 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.               "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 frequently  been               used  and  is  frequently used  as  a  general               description of the                159               things that must not be done.  For instance, a               person 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 irrelevant to what he has to consider.  If               he does not obey those rules, he may truly  be               said,   and  often  is  said,  to  be   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  this is not the occasion to examine the  content  and contours  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. On behalf of the appellant reliance has been placed upon the decision  of  this  court  in  Mahesh  Chandra  v.  Regional Manager,  U.P. Financial 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 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. 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. 160