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CASE NO.: Appeal (civil)  4257 of 2006

PETITIONER: Ashok Mahajan

RESPONDENT: State of U.P. & Ors

DATE OF JUDGMENT: 26/09/2006

BENCH: ARIJIT PASAYAT & LOKESHWAR SINGH PANTA

JUDGMENT: J U D G M E N T (Arising out of S.L.P. (C) No. 21243-245 of 2004)

ARIJIT PASAYAT, J.

Leave granted.

Appellant calls in question legality of the judgment  rendered by a Division Bench of the Allahabad High Court  dismissing the writ petition filed by the appellant. The said  writ petition was filed under Article 226 of the Constitution of  India, 1950 (in short ’the Constitution’) for quashing the  recovery certificate dated 24.4.2002 issued by the respondents  1 and 2.   

Background facts as projected by appellant in a nutshell  are as follows:

One M/s Denin Leathers Limited (hereinafter referred to  as the ’borrower’) had taken term loan of Rs.40 lacs from  Pradeshiya Industrial and Investment Corporation, Uttar  Pradesh Limited (in short ’PICUP’) and had mortgaged its  immovable properties to secure the loan.  Initially the  borrower had commenced its business as a private limited  company in 1979 but subsequently in the year 1995 it was  converted to a Public Limited Company. While the borrower  becomes a public limited company, appellant’s name was  included as a Director.  On 7.7.1998 a recovery certificate was  issued in respect of one Sanjay Mahajan who was one of the  guarantors in respect of the loan.  According to the appellant  due to continued losses the financial condition of the company  was bad and added to the financial problems in the year 1999  because of a devastating fire, assets of the company were  destroyed. On 2.2.2002 recovery certificate was issued against  the guarantors, namely, Keshav Ram Mahajan, Sanjay  Mahajan and Smt. Juli Mahajan. On 25.7.2002 the house and  household articles of the appellant were attached by the  District Authorities by an order to the effect that dues  amounted to nearly Rs.1.24 crores plus interest plus 10%  collection charges. Appellant made a representation to the  authorities stating that he was not a guarantor though  coercive steps were taken against him. The appellant was  arrested on 24.11.2002.  The recovery certificate was issued  on 24.4.2002, as the appellant subsequently learnt in the  name of the appellant as well as Keshav Mahajan, Ajay

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Mahajan and Sanjay Mahajan. Auction proceedings in respect  of property took place on 21.4.2003 under the Uttar Pradesh  Public Moneys (Recovery of Dues Act) 1972 (in short the ’Act’).   The date for fresh auction was fixed on 22.5.2003 under  Section 4 of the Act as well as under several other statutes.   Appellant filed the writ petition on the ground that under the  Act the recovery could not have been made.  The High Court  with reference to terms of guarantee rejected the stand and  held that the Collector was entitled to recover the amount as  arrears of land revenue under Section 279(1)(b) of the Uttar  Pradesh Zamindari Abolition Act, 1950 (in short the  ’Zamindari Act’).

Learned counsel for the appellant submitted that even if  it is conceded that the appellant had any liability, the  properties of the principal borrower had to be dealt with first.   

In response, learned counsel for the respondent  submitted that as borrower has no property, as is accepted in  various documents, therefore, the properties of the appellant  have been rightly dealt with. It is submitted that the appellant  has been changing his stand.  Initially he stated that he was  not a guarantor and subsequently says that even if he is a  guarantor properties of the borrower have to be dealt with  first.   

At this juncture it would be appropriate to take note of  the following observations of this Court in Pawan Kumar Jain  v. Pradeshiya Industrial and Investment Corpn. of U.P.  Limited (2004 (6) SCC 758).  "5. 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.--(1) 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 assistance; or (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-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 (d) to any agreement providing that any  money payable thereunder 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 any instalment thereof; or (ii) having become liable under the conditions  of the grant to 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,- then, in the case of State  Government, such officer as may be

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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  Director thereof, and in the case of a banking  company, the local agent thereof, by whatever  name called, may send a certificate to the  Collector, mentioning the sum due from such  person and requesting that such sum  together with costs of the proceedings be  recovered as if it were an arrear of land  revenue. (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 (1). 4. Savings. -- (1) 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 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 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 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 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 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 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  certifies that there is no prospect of  realization of the entire sum due through the  first mentioned process within a reasonable

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time." 6. He submitted that by virtue of these  provisions, the 1st Respondent cannot proceed  against the Appellant/guarantor until the 1st  Respondent has first sold the property of the  principal-debtor which had been mortgaged 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 1st  Respondent with the 4th Respondent. He  points out that thereafter the property was  handed back to the 1st Respondent. He  submits that, therefore, the 1st Respondent is  not entitled to proceed against the Appellant. 7. Mr. Bhalla admits the above mentioned  facts. He, however, submits that the company  committed defaults and, therefore, the One  Time Settlement failed. He submitted that  earlier attempts to sell the properties 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 guarantor for recovery of the  amount. 8. 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 firs sold off. As the  Appellant has not sold the property of the  principal-debtor, the action against the  Appellant cannot be sustained.  We, therefore,  set aside the Recovery Notice."    

It would be appropriate to direct the High Court to re- consider the matter in the light of the observations quoted  above, keeping in view the factual scenario of the present  case.          

The appeals are allowed to the aforesaid extent without  any order as to costs.