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CASE NO.: Appeal (civil)  5502 of 2004

PETITIONER: M/s Amar Alcoholi Ltd.                   

RESPONDENT: SICOM Ltd. & Anr.                                

DATE OF JUDGMENT: 08/11/2005

BENCH: ASHOK BHAN & ALTAMAS KABIR

JUDGMENT: J  U  D  G  M  E  N  T        

Bhan, J.

       The final judgment and order dated 10th of  October, 2003, passed by the High Court of  Judicature at Bombay, Nagpur Bench at Nagpur in  Writ Petition No. 153 of 12003 dismissing the writ  petition filed by the appellant, is under challenge  in the instant appeal.  By the impugned order, the  High Court has declined the prayer of the appellant  to quash the auction of the properties including  the plants and machinery of the appellant,  which  were mortgaged in favour of SICOM Limited (the  first respondent herein).

       The short question that arises for our  consideration in this appeal is, whether SICOM (the  first respondent) is a State Financial Corporation  within the meaning of and governed by the State  Financial Corporations Act, 1951 (for short "the  Act")?

       To appreciate the question, it would be  necessary to state the facts giving rise to the  present appeal, which are in brief, as follows:

       The first respondent, formerly known as "The  State Industrial Investment Corporation of  Maharashtra Limited" (SIICOM), is a company  established under the provisions of the Indian  Companies Act, 1956, by the Government of  Maharashtra in the year 1966, with 100 per cent  shares being owned by the State Government, with an  object of development of industries and financing  the industrial undertakings in the State of  Maharashtra.   

The appellant company mainly engaged in the  transport business, approached the first respondent  to get a loan for setting up a unit to manufacture  grain based alcohol with installed capacity of 5000  Kilo Litres annually.  The appellant was sanctioned  a term loan of Rs.90 lakhs in august, 1994 in  consortium with IREDA (Rs. 65 lakhs) and Oriental  Bank of Commerce (Rs. 35 lakhs).  Commercial  production of the appellant’s unit which was  scheduled to begin in April 1995 could commence  only in July 1996.  On account of such delay of

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over one year in commencing production, the  appellant company started defaulting in payment  right from July 1996 itself.  Several opportunities  were given to the appellant to pay up the amount  due and outstanding.  On the failure of the  appellant to pay up the same, the first respondent  sent a demand notice dated 23rd March, 1999 to the  appellant stating that a sum of Rs.19,91,783/- be  paid by the 31st of March, 1999.  Pursuant to the  demand notice issued by the first respondent,  certain payments were made by the appellant.   However, the appellant again defaulted in payment  of instalments and, as on 14th December, 2000, a sum  of Rs.97,57,695/- (principal amount + the interest  accrued thereon) became due and payable.  As many  as 16 cheques issued by the appellant-company  bearing different dates amounting to Rs.36.81 lakhs  were dishonoured on presentation.   

Owing to the continuous defaults and non- payment of instalments and interest on time, the  first respondent issued a take over notice on 8th  January, 2001 stating therein that in case the  appellant fails to clear the outstanding dues of  Rs.97,57,695/- on or before the 25th of January,  2001, the first respondent would take over the  possession of the hypothecated and mortgaged assets  on 31st of January, 2001 at 10.00 A.M.  Subsequently  due to negotiations between the parties, the first  respondent, vide its letter dated 6th February,  2001,  deferred the take over of the assets of the  appellant company to 20th February, 2001.  The  appellant-Company was asked to pay Rs.19.81 lakhs  by the 15th of February, 2001, failing which the  mortgaged assets will be taken over by the first  respondent on 20th of February, 2001.  The appellant  issued 12 post-dated cheques amounting to 19.81  lakhs.  On receipt of those cheques, the take over  action was again deferred.  Out of those 12 cheques  issued in favour of the 1st respondent, four  cheques were dishonoured on presentation.  The  appellant’s limit was once again extended till 20th  of August, 2001 to enable it to make good the  outstanding payments, failing which the assets were  to be taken over by the first respondent.  The  arrears were not cleared and finally owing to  continued defaults on the part of the appellant- company, the first respondent took over the  possession of the assets mortgaged with it invoking  its powers under Section 29 of the State Financial  Corporation Act, 1951 (for short "the Act") and  took the actual possession thereof on 23rd of  October, 2001.   

In order to recover the arrears, it was decided  to put the mortgaged property to auction.  The  advertisement for sale of the property was  published on 23rd of November, 2001 in response to  which the only offer of Rs.261 lakhs was received  which was rejected on the ground that the offer for  purchase was below the disposal value estimated by  the Government Approved Valuer.  Soon thereafter,  the appellant approached the first respondent in  January, 2002 for One Time Settlement (OTS).  The  proposal put forth by the appellant was accepted by

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the first respondent vide its letter dated 6th  February, 2002 for OTS at Rs.95 lakhs.  The  appellant issued a cheque of Rs.20 lakhs towards  OTS which was dishonoured on presentation.   However, the said amount of Rs. 20 lakhs was  subsequently paid by the appellant company.  The  balance sum of Rs.75 lakhs which was payable by the  appellant on or before the 28th of February, 2002,  as per the terms of the OTS, remained unpaid.  To   clear the balance payment, the last date for  payment of the said amount of Rs.75 lakhs was  extended thrice by the first respondent, the last  one being the  28th March, 2002.  Not being able to  clear the dues, the appellant again requested for  extension of time till 15th of April, 2002 for  clearing the outstanding dues, which was not agreed  to.  The appellant was informed by the first  respondent that it shall be taking steps to  safeguard its interest including auctioning the  assets in possession of the first respondent by  identifying the interested buyers.  As the  appellant failed to make the payment as per the  terms of the OTS within the stipulated period, the  OTS was cancelled on 9th of April, 2002.

       After cancellation of OTS, the unit of the  appellant was advertised for sale for the second  time on 8th of June, 2002.  The highest offer of  Rs.376 lakhs was received in the auction and the  same was approved by the first respondent.  The  appellant vide its letter of 2nd of July, 2002 was  given an opportunity to match the offer or give  better offer to clear dues of Rs.100.94 lakhs  existing as on 30th of June, 2002 on or before 18th  of July, 2002.  Needful was not done.   On 6th of  August, 2002, another opportunity was given to the  appellant, as a special case, to make the aforesaid  payment by the 18th of August, 2002.   There being  no better offer, the auction price of Rs.376 lakhs  was accepted but, however the party who had given  the offer of Rs.376 lakhs did not pay the balance  purchase consideration.                    Due to failure of the second auction also, the  first respondent decided to re-auction it for the  third time and advertisement was published in the  newspapers on 30th October, 2002.  M/s. Karan  Distilleries Pvt. Ltd.,  which offered the highest  bid in response to the said advertisement, is the  2nd respondent in this appeal.  It offered Rs.225  lakhs which, after negotiations, was finally  increased to Rs.320 lakhs, which was accepted by  the first respondent.  The appellant and its  promoter were given a chance to match/improve upon  the offer made by the 2nd respondent.  As there was  no counter-offer received from the appellant  despite giving them chance, the first respondent  proceeded with the sale of the assets to recover  its dues.  On receipt of the entire consideration,  the first respondent handed over the physical  possession of the assets of the appellant to the 2nd  respondent and also executed Deed of conveyance in  their favour.

       Aggrieved by the order of auctioning, the

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appellant filed writ petition in the High Court  seeking, inter alia,  stay of the auction  proceedings for sale of the unit by the first  respondent.  The High Court by way of interim  relief, stayed the proceedings subject to the  appellant’s depositing a sum of Rs. 50 lakhs on or  before 21st of March, 2003, failing which the stay  was to stand vacated automatically without any  further reference to the Court.  The appellant  could deposit only half of the amount ordered by  the High Court and thus failed to comply with the  direction.  As the compliance with the order of the  High Court was a condition precedent to the interim  order, the stay stood vacated automatically.    After filing of the writ petition, the appellant  filed an additional affidavit before the High Court  submitting that the provisions of Section 29 of the  Act were not applicable to the first respondent as  it ceases to be a financial corporation after the  reduction of shares of the Govt. of Maharashtra to  49% only.

       The High Court dismissed the writ petition  holding that the first respondent was a financial  corporation and it had been notified as such by the  Central Government in exercise of its powers under  Section 46 of the Act.  It was further held that  reduction of shareholdings below 50% of the Govt.  of Maharashtra would not make any difference to the  status of the first respondent being a financial  corporation.  The other two submissions, viz, (i)  that the true and correct accounts of the  outstanding dues were not furnished to the  appellant and, therefore, the attachment and sale  of the appellant’s property was not justified; and  (ii) that it was sold at inadequate price, were  rejected by the High Court, holding that no  material has been placed before the Court to  substantiate  aforesaid contentions.

       Aggrieved against the dismissal of its writ  petition,  the appellant has filed the present  appeal by grant of special leave.

       Counsel for the parties have been heard.

       It is not in dispute that the first respondent  was established by the State Government with the  object of developing the industries and financing  industrial concerns in the State.  It is also not  in dispute that the Central Government had extended  the provisions of Section 29 of the Act to the  first respondent.  Thus, the first respondent would  be covered by the expression "an institution  established by a State Government" offering range  of services including the object of financing  industrial concerns in the State of Maharashtra.   It would thus be a financial corporation covered  under the Act.   

       Section 46  of the Act confers the power on the  Central Government to extend the provisions of the   Act "to any institution established by a State  Government".  Section 46 of the Act reads as under: "46.  Power to apply Act to

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certain financial institutions in  existence at commencement of Act  -(1) The Central government may,  by notification in the official  Gazette, direct that all or any  of the provisions of this Act  shall, subject to such exceptions  and restrictions as may be  specified, apply to any  institution established by a  State Government which has for  its object the financing of  industrial concerns, and on the  issue of such notification, the  institution shall be deemed to be  a Financial Corporation  established by the State  Government for the State within  the meaning of this Act and the  provisions of this Act shall  become applicable thereto  according to the tenor of the  notification.

Provided that no notification  shall be issued under this sub- section in respect of any  institution unless a request is  made in that behalf by the State  Government concerned.

(2)     Any notification issued under  sub-section (1) may suspend the  operation of any enactment  applicable to any such  institution immediately before  the issue of the notification."

In the year 1986 a request was made to the  Central Government by the Government of Maharashtra  to extend the provisions of Sections 27, 29, 30,  31, 32A to 32F, 41, 41A, 42 and 44 of the Act to  the first respondent.  The Central Government  accepted the request of the Government of  Maharashtra and the provisions of the afore- mentioned sections were extended to the first  respondent vide notification No. F.No.5(9)/86-IF-II  dated 11th December, 1986.

       Government of Maharashtra vide the Govt.  Resolution bearing No. IDL/1093/(8928)/IND-8 dated  3rd October, 1994 decided:

(a) to have a public participation in the  capital structure of  the first respondent in  accordance with the new industrial policy  framed by the Government of Maharashtra in  the year 1983;  (b) to hold only 49% of the share capital by  the Government;  (c) to give by private placement 26% of the  capital to the selected financial  institutions and banks;  (d) to offer 2% capital out of the said 26%,  to the employees of the said company in

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consonance with the policy framed by the  Government of India; and  (e) to offer the balance 25% to the public  through public issue.   

       It would be seen from the above that provisions  of Section 29 and other provisions of the Act were  made applicable to the first respondent by the  Central Government by virtue of the powers vested  in it  under Section 46 of the Act.   Section 29  enables the first respondent to take over the  assets of the delinquent borrowers.  As the  appellant had failed to discharge its liability in  spite of several opportunities afforded to it, as  has been enumerated in the foregoing paragraphs,   in our view, the first respondent was fully  justified in taking over the assets of the  appellant in exercise of its powers under Section  29 of the Act.

       Under Section 46 of the Act the Central  Government by a notification in the official  Gazette is empowered to direct that all  or any of  the provisions of the Act shall, subject to such  exceptions and restrictions as may be specified,  apply to any institution established by a State  Government which has for its object the financing  of industrial concerns,  and on the issuance of  such notification the institution shall be deemed  to be "a  Financial Corporation" established by the  Government within the meaning of the Act.  It is  not disputed that Respondent No. 1 had been  established by the State Government with the object  of financing industries and the Central Government  had issued the notification under Section 46  confering the powers to be exercised under various  sections of the Act including Section 29.  As a  matter of fact, Annexure A, annexed with the  additional affidavit filed by the appellant on  9.10.03 itself suggests beyond doubt that   respondent no.1 was established in the year 1996 by  the Government of Maharashtra as a 100% Government  owned company with the objective of industrialising  of backward areas of the State of Maharashtra.   Thus, respondent no.1 would be covered by the  expression "any institution established by  a State  Government" offering range of services.  This apart  the Central Government in the year 2003, i.e., even  subsequent to the disinvestment of equity up to 51  per cent held by the Government of Maharashtra, at  the request of the Government of Maharashtra by  virtue of its power under Section 46 (1) of the  Act, has made the provisions of Section 32 G of the  Act, applicable to the first respondent vide  notification dated 16th of September, 2003.   This  also shows that Respondent No. 1 is being treated  by the State of Maharashtra as well as Central  Government as the financial Corporation within the  meaning of the Act.  

       The principal contention advanced by Mr. Ashok  A. Desai, the learned senior counsel appearing on  behalf of the appellant, is that consequent to the  reduction of stakes of the Govt. of Maharashtra in  the first respondent and consequent to the change

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in its nomenclature, the first respondent had  ceased to have the status of a State Financial  Corporation under the Act.  We are unable to accept  this contention.

       In the facts and circumstances enumerated  herein above, it is crystal clear that the first  respondent  was originally established as, and even  as of date continues to be, a company established  by the Government of Maharashtra.  It may be  mentioned that the State of Maharashtra being the  single largest shareholder has retained the overall  control over the management of the first respondent   by retaining the right to nominate its Directors by  virtue of the Amended Article 18(a)  of the  Articles of Association of the Companies.   

       By mere reduction in its stakes to below 50 per  cent, SICOM (the first respondent) would not cease  to be a State Finance Corporation in view of the  fact that it has been established by the State of  Maharashtra for financing industrial concerns and  that it had been so notified by the Central  Government in exercise of its powers under Section  46 of the Act.  The first respondent is a finance  corporation covered by the Act and reduction in the  shareholdings of the State of Maharashtra below 50  per cent shall not make any difference to the  status of the first respondent, i.e, being a  financial corporation.

       The other two points which had been raised in  the writ petition regarding the non-supply of  details of the outstanding amount due and the  inadequacy of the sale consideration were rejected  by the High Court by observing that no material had  been placed before the Court to substantiate them.  The learned  counsel sought to contend  before us  too, that the auction proceedings are liable to be  set aside because the details of outstanding amount  was not furnished to the appellant and that the  mortgaged property had been sold for inadequate  consideration.  There is no material placed before  us to substantiate these two contentions.  The  allegations made are vague, particularly when the  appellant was afforded suitable opportunities to  match the bid/offer and it did not turn up, and  cannot be ascertained from any admitted data.  The  same are rejected.

       It was admitted before the High Court that  outstanding amount had been recovered from the sale  of the appellant’s property.  In view of this, the  High Court had permitted the appellant to withdraw  the sum of Rs.25 lakhs deposited by the appellant  in pursuance to the interim order of the High  Court.  This direction of the High Court holds good  and does not call for any interference.

       Lastly, the counsel for the appellant contended  that the first respondent be directed to return the  balance amount, if any, after adjusting the  outstanding amount due from the appellant.   

       The counsel for respondents, in all fairness,  

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concedes that if there is any balance amount,  the  same shall be paid back to the appellant.  The  appellant would be at liberty to move appropriate  application before the first respondent.  If such  an application is filed, the first respondent shall  take a decision thereon within a period of two  months from the date of the receipt of such  application and, in case there is any excess amount  after adjusting the amount due from the appellant  out of the sale proceeds of the mortgaged property  of the appellant-company, the same shall be  returned to the appellant forthwith.

       For the foregoing reasons, the appeal stands  dismissed.  However, there shall be no order as to  costs.