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PETITIONER: MAHESH CHANDRA

       Vs.

RESPONDENT: REGIONAL MANAGER, U.P. FINANCIAL CORPORATION AND ORS.

DATE OF JUDGMENT12/02/1992

BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. SAHAI, R.M. (J)

CITATION:  1993 AIR  935            1992 SCR  (1) 616  1993 SCC  (2) 279        JT 1992 (2)   326  1992 SCALE  (1)388

ACT:      State Financial Corporations Act, 1951:      Section  29-Uttar Pradesh State Financial  Corporation- Loan to industrial concern-Default in payment of  loan-Power of  Corporation  to take possession and sell  the  mortgaged property-Guidelines  for exercising powers under section  29 issued.      Financial   Corporation-Loan  to   industrial   concern against hypothecated property-Default in payment of loan  by debtor- Corporation’s refusal to release hypotheca to debtor for private sale for repayment of debt-Taking possession  of property  by Corporation and sale by invitation  of  tenders without notice or opportunity to debtor-Corporation’s action held  contrary  to  Section 24-Sale held  vitiated  and  not binding on debtor-Held Corporation is an instrumentality  of State-It  is bound to act fairly and reasonably  in  selling the   property  of  debtor-Section  29  does   not   exclude principles of natural justice.      Section  24-State  Financial Corporation  are  extended arms  of  Welfare  State-Their  approach  should  be  public oriented-Board  should discharge its functions  on  business principles.      Words and Phrases.      ‘Business’-Meaning of.

HEADNOTE:      The  appellant was owner of two plots.  In one  of  the plots  a  rice mill was constructed by  the  partnership  in which  he was a managing  partner.  For  taking  a  loan  he hypothecated  the  mill and the plots  with  U.P.  Financial Corporation  which  sanctioned a loan of Rs.  4,28,000,  but disbursed only Rs. 3,78,660 to him.  Due to  non-cooperation of  other partners, lack of working capital and  failure  of the  Financial Corporation to release the balance  loan  the mill landed into a rough weather.  Consequently                                                        617 defaults were committed in repayment of loan.  The appellant requested the Corporation to release the vacant hypothecated plot to enable him to negotiate for private sale to pay  off his  debt and also stated that he was ready and  willing  to pay the outstanding amount of Rs. 5,03,165 towards principal

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and interest in full satisfaction under "one time settlement scheme".    The   Corporation  rejected  his   request   and exercising   its  power  under  section  29  of  the   State Financial   Corporations  Act, 1951 took possession  of  the hypotheca,  invited tenders for its sale and without  giving any  notice  or opportunity to the  appellant  accepted  the tender  of  Rs.  2,55,000  given  by  respondents  3  to  5. Pursuant  to the sale the 3rd respondent took possession  of the  property and invested a large sums for the  improvement of  the  mill.  The appellant filed a writ petition  in  the High Court which was dismissed.  Against the decision of the High Court the appellant filed an appeal in this Court.      Allowing the appeal, this Court,      HELD :1. Section 29 of the State Financial Corporations Act  confers  very wide power on the Corporation  to  ensure prompt  payment  by  arming it  with  effective  measure  to realise the arrears. Every wide power, the exercise of which has  far reaching repercussion, has inherent  limitation  on it. It should be exercised to effectuate the purpose of  the Act.  [629D-E]      1.1. The Corporation has been given statutory right  to take  over possession and management of the defaulting  unit or hypotheca or both including the right to sell and realise the  loan  or  advance due from the  unit  or  debtor.   The Corporation  is  an  instrumentality  of  the  State.    The Corporation  or its employees or officers are bound  to  act reasonably  and fairly in dealing with the property  of  the debtor.   The  exercise of the power or  discretion  in  its dealing  would  be  subject to the  same  constitutional  or public  law limitation as the Government.   The  Corporation also equally must conform its action with the same  standard that meet the test of justness, fairness, reasonableness and relevance.  [628G-H]      Kasturilal  Laxmi  Reddy v. State of J &  K,  [1980]  3 S.C.R. 1338, referred to.      1.2. Sub-section 4 of section 29 treats the Corporation "to  be  a trustee" of the debtor or person  claiming  title through  him.  It  saddles the Corporation  or  the  officer concerned with inbuilt duties, responsibilities                                                        618 and  obligations  towards  the debtor in  dealing  with  the property and entails him to act as a prudent and  reasonable man standing in the shoes of the owner.  Therefore, when the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell  or  further  mortgage etc.,  the  Corporation  or  its officers  or  employees stand in the shoes of  a  debtor  as trustee and the property cestue que trust. They are bound to exercise  their  power in good faith in selling  or  dealing with  the property of the debtor as an ordinary prudent  man would  exercise  in  the management of his  own  affairs  to preserve  and protect his own estate.  Their acts should  be reasonable,  just and fair which must meet the eye  and  the offer accepted must be competitive and every attempt  should be made to secure as maximum price as possible to  liquidate the  liabilities incurred by the industrial concern  or  the debtor under the Act.  [630G-H, 631C, 632C-D]      N. Suryanarayan Iyer’s Indian Trust Act, 3rd Edn.  1987 page 275; Kerr on Receivers, 17th Edn., page 208; Halsbury’s Law of England, 4th Edn. Vol. 39, para 919, referred to.      Fertiliser  Corporation Kamgar Union (Regd.)  Sindri  & Ors.  v.  Union of India & Ors., [1981] 2 S.C.R. 52;  Ram  & Shyam  Co. v. State of Haryana, [1985] Supp. 1  S.C.R.  541; Sachinand  Pandey v. State of West Bengal, [1987] 2.  S.C.R. 223;  Haji  T.M.  Hassan v.  Kerala  Financial  Corporation,

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[1988] 1 SCR 1079; Lakshmanasami Gounder v. C.I.T. Selvamani JUDGMENT:      1.3. It is not mandatory as a matter of law, to observe the process of taking over strictly.  Defaults 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 render the  take  over and transfer invalid.                                         [630F, 629H, 630A-B]      1.4. In the instant case, the Corporation was guilty of not  acting  in accordance with law either at the  stage  of take over or in transferring the unit. [630B]                                                        619      1.5.  The  attitude  adopted  by  the  Corporation  was contrary to the spirit and scheme of section 24 of the  Act. Section  24 of the Act requires the Board to  discharge  its function on business principles, due regard being had to the interest  of industry, commerce and general public.  Instead of  agreeing to receive five lacs in lump-sum as offered  by the appellant it opted for two lacs fifty thousands tendered by  the purchaser that too in four yearly  instalments.   It was  neither  business  principle, nor in  the  interest  of commerce  and  industry, nor good of general  public.   This solicitous  attitude,  at  the  expense  of  the  appellant, appears  to be unjust and unfair and no  reasonable  prudent owner would accept such an offer.                             [626C, 625F; 626A-B; 635G; 636A]      1.6. Section 29 does not exclude the application of the principles of natural justice.  Before accepting the  tender of  the  third respondent, an opportunity should  have  been given to the appellant as to why such an offer of the  third respondent  be not accepted.  No bonafide actions have  been taken  or  attempted by the Corporation.  The  sale  of  the property  is vitiated by unjust and unreasonable act on  the part of the Corporation and is liable to be set aside.   The appellant is not bound by the sale or the subsequent acts of the purchasers claiming through them.                                               [636A, C-D, F]      The Corporation should immediately resume possession of the hypotheca sold.  It will be open to the appellant to pay the entire liability and have the hypotheca redeemed as  per contract.  If the appellant fails to do so, the  Corporation can  sell  the  same  in open  auction,  after  giving  wide publicity in the press.  [636G, 637A]      2. The financial corporations under the State Financial Corporations  Act  were visualised not as a  profit  earning concerns  but an extended arm of a welfare state to  harness business  potential  of the country to  benefit  the  common man. They deal with public money for public benefit.   Their approach  has to be public oriented, helpful to the  loanee, without  loss  to the Corporation.  Endeavour should  be  to adjust  and accommodate as business  considerations  require the  sick unit to function for benefit, both of the  general public  and  the Corporation.  The  Corporation,  therefore, should  honour  their commitments of releasing  entire  loan timely  except  for  very  good  reasons  which  should   be intimated  before hand to enable the unit holder  to  comply with shortcoming if any.  In the absence                                                        620

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of  completion  of it, the proceedings  for  recovery  under section 29 may not be justified.  [625F-G, 630D-F]      3. The following necessary directions are issued to  be observed  by  the Financial  Corporations  while  exercising power under section 29:-          (A) Every  endeavour  should be made, to  make  the              unit  viable and be put on  working  condition.              If it becomes unworkable.          (B) Sale of a unit should always be made by  public              auction.          (C) Valuation of a unit for purposes of determining              adequacy  of  offer or for determining  if  bid              offered   was   adequate,  should   always   be              intimated  to the unit holder to enable him  to              file   objection  if  any  as  he  is   vitally              interested in getting the maximum price.          (D) If  tenders are invited then the highest  price              on  which  tender  is to be  accepted  must  be              intimated to the unit holder.          (E) If  unit  holder is willing to offer  the  sale              price,  as  the  tenderer, then  he  should  be              offered  same  facility  and  unit  should   be              transferred to him.  And the arrears  remaining              thereafter   should  be  re-scheduled   to   be              recovered  in instalments  with interest  after              the payment of last instalment  fixed under the              agreement entered into as a result of  tendered              amount.              If he brings third parties with higher offer it              would be tested and may be accepted.          (F) Sale by private negotiation should be permitted              only  in very large concerns  where  investment              runs  in  very high amount for  which  ordinary              buyer  may  not be available  or  the  industry              itself  may  be of such nature that  by  normal              buyers may not be available.  But before taking              such  steps there should be advertisements  not              only in daily newspapers but business magazines              and papers.          (G) Request of the unit  holder to release any part              of  the  property on which the concern  is  not              standing  of  which  he  is  the  owner  should              normally  be  granted on  condition  that  sale              proceeds  shall be deposited in  loan  account.              [634H, 635A-G]                                                        621      4.  ‘Business’  is a word of wide import.   It  has  no definite  meaning.  Its perceptions differ from  private  to public sector or from institutional financing to  commercial banking.  [625F]      5.  The law consists of body and soul.  The  letter  of the  law is the body and the sense and reason of its is  the soul quia ratio legis est enima legis. In other words,  like a  nut the letter of the law represents the shell and  sense and the purpose of its Kernal.  The law intends to serve the purpose.   Justice is both the cause and effect, the  origin and the legitimate end of law.  One will receive no  benefit from the law, if the ratio and the letter of law defeats its purpose. [629C]      6.  In  legislations enacted for  general  benefit  and common  good the responsibility is far graver.   It  demands purposeful  approach.  The exercise of discretion should  be objective.   Test  of reasonableness is  more  strict.   The public  functionaries should be duty conscious  rather  than power  charged.  Its actions and decisions which  touch  the

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common  man have to be tested on the touchstone of  fairness and   justice.   That  which  is  not  fair  and   just   is unreasonable.   And what is unreasonable is  arbitrary.   An arbitrary  action is ultra vires.  It does not  become  bona fide  and in good faith merely because no personal  gain  or benefit  to  the  person  exercising  discretion  should  be established.   An action is mala fide  if it is contrary  to the  purpose  for which it was authorised to  be  exercised. Dishonesty is discharge of duty vitiates the action  without anything  more.   An  action is bad even  without  proof  of motive  of  dishonesty, if the authority is  found  to  have acted contrary to reason.  [629E-H]

&      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4503 of 1990.      From  the  Judgment  and Order dated  5.2.1990  of  the Allahabad High Court in Civil Misc. Writ Petition No.  13916 of 1987.      R.K. Jain, P.N. Lekhi, P.K. Jain, S. Markandeya, Ms. C. Markandeya and M.K. Garg for the appearing parties.      The Judgment of the Court was delivered by      K. RAMASWAMY, J. The appellant, Managing Partner of M/s Shiva  Rice Mill situated at Nagina, Distt. Bijnor in  Uttar Pradesh, owned two                                                        622 plots  bearing  Nos.  208 and 220/2  admeasuring  18  and  8 Bishwas respectively purchased under a single sale deed.  In plot  No.  208  in an extent of  2,700  sq.  yards  abutting Highway,  near  Railway Goods Shed and one  furlong  to  the Railway  Station,  a strategic location of  importance,  the rice mill was constructed by the partnership firm.  The plot bearing No. 220/2 remained vacant and was not even valued as an  asset  of the partnership firm while  hypothecating  the rice  mill to the U.P. Financial Corporation for short  ‘the Corporation’.   A  loan of Rs. 4,28,000, was  sanctioned  in 1979 and Rs. 3,70,660 was alone disbursed in 1980 which  was repayable  in  eleven annual instalments   upto  1991.   The appellant repaid a sum of Rs. 9000 in December, 1981.   Non- cooperation  of  the  other partners  and  lack  of  working capital, due to failure to release the balance loan,  landed the running mill into rough weather and defaults in  payment were  committed.   While finding that interest  was  getting mounted,  the  appellant  wrote  repeated  letters  to   the Corporation  requesting  to release plot No. 220  so  as  to enable  him to negotiate for private sale of it  along  with his  two  more plots to pay off the debt.  It  is  his  case that,  pursuant  to his letter dated December 22,  1983,  on oral  promise  to  release the plot, he paid a  sum  of  Rs. 65,000  and  was  received  by  the  corporation.   He  also promised to pay Rs. 50,000.  The Corporation did not release it.   According  to him, in his letter  dated  February  10, 1986,Annexure  6, as on March 31, 1986 the  simple  interest payable  was  Rs.  1,93,670, the principal  amount  was  Rs. 3,70,660  and expenses was Rs. 3,835.  After  deducting  Rs. 65,000 towards arrears of interest, the outstanding was  Rs. 5,03,165  and  he was ready and willing to pay the  same  in full  satisfaction  under  "one  time  settlement   scheme", provided compound interest is waived.  The record also shows that  in  a meeting held in September, 1985  a  decision  to release  the  plot  appears  to have  been  reached  by  the corporation  and  the  Regional  Manager  was  asked  to  be contacted.   Ultimately, the Corporation did not  accede  to

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that request but had taken possession of the  hypotheca  and got  valued  at  Rs.  3,28,717.97  and  published  for  sale inviting  tenders.   It is necessary to point  out  at  this juncture  that as per the plan filed on record which is  not disputed that (a) Plot No. 221 faces the road, Plot No.  220 is in the middle and 219 is in the end towards north.   They are  contiguous. (b) The appellant in his  letter  submitted that  the mill could not run due to lack of running  capital and  non-cooperation of other partners; and (c) Sketch  plan clearly  shows that plots Nos. 219 and 221 could be used  to carve out housing plots                                                        623 only  if 220 was released, and that might have fetched  good price to enable the appellant to clear off the arrears.  Yet it  was not accepted, because according to the affidavit  of the  corporation  the appellant could have  sold  other  two plots.   Several  letters written by  the  appellant,  thus, received  no  response.  Instead recovery  proceedings  were initiated.      According  to  the purchasers, though  the  Corporation did not assert, that no response was evoked from public  for several  tenders called for.  The last date to  receive  the tender  in  question  was  January  13,  1987.    Deshbandhu Agarwal,  the  third respondent, per self, his  wife  (since died)  and  his son, respondents Nos. 4 & 5,  submitted  the tender on March 25, 1987 for a sum of Rs. 2,00,000 which was on  negotiation accepted at Rs. 2,55,000.   The  Corporation agreed  to  receive 25% of the  consideration,  namely,  Rs. 63,750  as initial payment and the balance consideration  in four  years  in  equal  half  yearly   instalments.   Before accepting  the tender no notice nor an opportunity  in  this regard   was  given  to  the  appellant.    The   appellant, therefore,  filed  the writ petition in the  Allahabad  High Court  which  was dismissed by judgment  dated  February  9, 1990.  This appeal under Art. 136 of the Constitution arises against that judgment.      When  the  matter  came  up  for  hearing,  this  Court suggested  to  the  parties  to  have  the  matter   settled amicably.   They had taken sufficient time.  The  purchasers reported  that they entered into an agreement to  sell  plot No. 220, and the purchaser declined to rescind the  contract with a threat to file a suit for specific performance.  They offered  to  pay  Rs. 40,000 said to  be  the  consideration therein but the appellant declined to accept the same.   The Corporation  though filed an exhaustive  counter  affidavit, did  not deny the offer made by the appellant in his  letter dated  February 10, 1986. When we enquired, the counsel  for the  Corporation,  on  instruction,  stated  that  they  had informed the appellant that his proposal was not  acceptable to  the  Corporation,  but no material has  been  placed  on record of such communication.  It was stated that as on  the date  of the sale a sum of Rs. 8,61,969.57 was due from  the appellant towards principal and interest @ 18%.  The  break- up  has  been  given in a separate statement  filed  by  the counsel.  Thus the proposed settlement had been fissled out.      Mahatma  Gandhiji, the father of the nation, in  Swaraj at  page  92, stated that, "from the very beginning  it  has been  my  firm  belief that agriculture  provides  the  only unfailing and perennial support to the  people                                                        624 of  this country.  India lives in villages".  Villagers  are poor  and most of them are unemployed or  underemployed  who need  productivity  which  would add to the  wealth  of  the nation.   This  vast human resources and  man  power  remain idle,  since majority own little or marginal  land  holdings

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out  depend  on agriculture as their  livelihood.   Cottage, agro-based  or  medium industries in rural areas  give  them economic  status  to  the owner,  employment  potential  for sustenance  to the workmen and fair price to  the  producer. The  father  of  the nation  laid,  therefore,  emphasis  to establish cottage industries, "to utilize the idle hours  of the  nation  and bring work to the people  in  their  homes, particularly when they had no other work to do."  He further stated, "I want the dumb millions of our land to be healthy. I want them to grow spiritually.  If we feel the need of the machine  we  certainly will have them.  Every  machine  that helps an individual has a place".  But he emphasised only on such  industries  which would  be,  "self-sufficient,  self- reliant  and free from exploitation".  The founding  fathers of  the Constitution in Art.  43 directed that,  "the  State shall   endeavour  to  promote  cottage  industries  on   an individual  and cooperative basis in rural areas".   Without social  progress  and economic  development,  democracy  and freedom   would  not  take  firm  roots.    Without   social stability,  it  would  be  impossible  to  achieve  economic development.  Without economic development there would be no social  progress  and without social progress  it  would  be impossible  for the people to take the destiny in their  own hands in a democracy.  Out Constitution, therefore, accepted mixed  economy  as  the base and  the  economic  policy  and planning  echo regeneration of social and economic  justice. Articles  38 and 39 aim in that pursuit that  the  ownership and  control of the material resources of the community  are so distributed as best to subserve the common good and  that the inequalities in income should be minimised.   Facilities and   opportunities   should  be   provided   to   eliminate inequalities in status and opportunity among the  individual and  groups  of  people.  Our  Bharat  needs  simultaneously greater   progress  by  building  industries   with   modern technological  advances  on  all fronts  and  should  create greater  employment opportunities.  To  accelerate  economic development  the  fiscal resources, human  resources,  their abilities and expertise need harness.  In the mixed  economy the  public  undertakings as well as   private  sector  need necessary  assistance and encouragement.  The growth of  the private  sector should not be stifled, cribbed  or  cabined. The bureaucracy should adopt positive approach to  stimulate production and                                                        625 productivity  in every sector of economy so as  to  increase the size of the national cake.      Finance  is the most important catalyst.  The State  of Uttar  Pradesh constituted the Corporation under s.3 of  the State  Financial Corporation Act 1951, Act 63 of  1951,  for short,  ‘the  Act’ which came into force  from  October  31, 1951.   To  promote  industrialisation  in  the  States   by encouraging  small entrepreneurs to participate in  economic growth  of the country by giving them  financial  assistance for  setting up medium and small scale industries.   Section 25(1)(g) of the Act provides that the Corporation may  grant loans or advances to an industrial concern (rice mill is  an industrial concern) repayable within a period not  exceeding 20  years from the date the loan was granted.  Although  the activity  has  multiplied,  capital  has  grown,  field   of operation  has  been  widened but the  disturbing  state  of affairs,  which  at  times, surfaces, is  complete  lack  of awareness  of  principles on which  these  institutions  are required  to  function.  More  distressing  is  unreasonable attitude adopted, often, by the Corporation while exercising power  under  s.29 to take over possession of the  unit  for

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default,  in  repayment of loan.  Evil is still  greater  in transferring  the  unit  as  more  often  the  owner  stands financially  ruined the Corporation too does not  gain  much but the transferee comes out, either with a working unit  or a  unit  ready to go at throw price,  in  easy   instalments giving rise to strong apprehensions that everything did  not proceed reasonably and fairly.      Corporations deal with public money for public benefit. The  approach  has  to be public oriented,  helpful  to  the loanee, without loss to the corporation.  Section 24 of  the Act itself required the Board "to discharge its function  on business principles, due regard being had to the interest of industry,  commerce  and general public".  ‘Business’  is  a word  of  wide  import.  It has no  definite  meaning.   Its perceptions  differ  from private to public sector  or  from institutional   financing   to  commercial   banking.    The financial corporations under the Act were visualised not  as a  profit earning concerns but an extended arm of a  welfare state  to  harness  business potential  of  the  country  to benefit the common man.      The release of plot No. 220 for private sale along with other   unemcumbered  two  plots  would  have  fetched   the necessary  amount  to pay off the debt.  Even the  offer  to receive  Rs. 5,00,000 in full quids would have salvaged  the problem.  Any prudent businessman with least acumen would                                                        626 have  agreed to the proposal of the release of the plot  for sake of recovering its debts. Instead of agreeing to receive five  lacks  in  lump  sum, it  opted  for  two  lacs  fifty thousands,  that  too in four yearly  instalments.   It  was neither business principle, nor in the interest of  commerce and  industry, nor good of general public.   Any  reasonable approach,  which  of  course  is  not  only  desirable   but necessary,  while  dealing  with such  matters,  would  have immediately  demonstrated that the Corporation by such  step of  releasing the plot, which was of no consequence  to  it, was going to gain and perpetuated the objectives of the Act. Instead  it  adopted an attitude which was contrary  to  the spirit  and scheme of s. 24 of the Act. Did the  Corporation gain  from its ultimate decision of taking  over  possession and  transferring the unit ?  Total loan disbursed  was  Rs. 3,78,660.  The appellant paid in all Rs. 74,000 and if it is added  to the amount paid by the appellant, it comes to  Rs. 3,29,000 only.  Whereas the appellant was willing to pay Rs. 5,00,000 and odd in 1986 over and the above the amount which he  had  paid,  if plot No. 220 was  released  or  one  time payment scheme was accepted.  Similar offer was accepted  in relation  to  mill  at  Meerut.  It did  not  get  back  the interest.  Even  what it disbursed was the  borrowed  public money.   Of course, the transferee got a mill  with  project cost estimated at 6 lacks and odd in 1980 at Rs. 2,55,000 in 1986 when the value must have gone up instead of going down.      There is a theorem that the economic self-interest  and profit  motive induce entrepreneurs to reallocate  resources among activities until they get the same (approximately,  if not exactly in practise) rate of return from different lines of  activity.   No body would like to lose money.   No  body would like to miss an opportunity to make profit or to  lose his money either.  Resources allocation in a market economy, thus,  primarily  is  a  matter  of  relative  priority   to different  activities.  The very process of economic  growth implies  continuous  reallocation of resources  to  generate income to plough  it back and earn profit.  One of the major causes to incur loss is the erosion of working capital  fund which  affects the day-to-day working of the  unit.   Unless

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working  capital is provided for, the industry is  bound  to get closed due to accumulated losses year after year.    The terms  of  loans  are  mainly  to  repay  immediately  after disbursement with commercial rate of interest together  with annual  on  half  yearly  rests.   Unless  the  unit  starts generating  internal resources and earn profit, running  the unit on industrial concern itself becomes difficult and  the ability  to  repay principal or interest get  impeded.   The result, therefore, is that it would commit default or breach                                                        627 of  contract  by default attracting penal interest  for  the period in default.  The industrial concern or unit, thereby, would be further burdened with additional cost of  interest, panel interest and interest over interest.  With the  result they  cannot  come out from the red, nor  generate  internal resources.    Many  a  time  the  corporation   takes   over possession  and sell thereof.  The genuine and  enthusiastic entrepreneur with no previous business experience would  get exposed  to this hazard (the pretenders to make quick  money would maintain concerted conduits and the officers too would be  solicitious to them).  Therefore, the Corporation  as  a policy of wise investment should map out payment schedule in disbursing the loan to see that the unit starts  functioning and  its  working  capital  is  maintained.   It  is  common knowledge that due to apathy or indifference or for  reasons best known or hidden that the disbursements would be delayed resulting in delay in completion of the project or to  start working  or loss of running capital, which would give  cause for default in payment of the  instalments; accumulation  of the liabilities and the ultimate closure of the unit or  the industrial concern, defeating the objectives of the Act  and the Constitution.      This  case demonstrates that in spite of reminding  the corporation  that  due  to  lack  of  working  capital,  the appellant  was unable to run the mill.  The corporation  did not release the balance loan and no explanation came  forth. Dr. Malcolm S. Adiseshaiah, the noted Economist, in his ‘The Why,  What  and Whither of the Public Sector  Enterprise  at page  42 under the caption ‘Problem of Loss-Making Units  in the  Public  Sector,  Erosion of  Working  Capital  and  its Results’  stated that, "I was informed that the best  course would be to get money as loan  and not as equity.  Anyhow we have to run the industry,  margin money was provided as loan on  the  same terms and conditions  regarding  interest  and repayment. So, on  this question also, rethinking is needed. Since margin money has to come from the owner, and since the Government  is  the owner of the public  sector,  it  should consider margin money released as equity".  At page 43 it is stated  that, "a drastic change in policy is needed to  make those units viable and to enable them to stand on their  own legs.   The rehabilitation programme is going on (we do  not call  it "modernisation", though in the government the  term "modernisation"  is used)... For losing concerns,  even  the payment of interest adds to their woes in finding  necessary working capital... by way of equity, so that these units are able to overcome the difficulty and start standing on  their own  legs".   With regard to the problems with the  bank  at page  45  and 46 it was stated thus: "If the  banks  take  a helpful                                                        628 attitude  in normally sanctioning the respective  limits  as announced  by the committee for working capital, it will  be quite  helpful  for the public sector-may be  even  for  the private sector".      Thus a helping attitude on the part of the  Corporation

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to constantly monitor the working of the industrial  concern or  units (it may even charge the overhead expense  on  this account)  would subserve the purpose of the loan, object  of the  Act,  and  the  constitutional  objective  of  economic justice to the needy.  Equally employment and better working conditions  to  the workmen are assured and  the  unit  gets stablised  and  starts  yielding returns  for  repayment  of principal amount and interest payable thereon.  The facts in this  case  do  demonstrate that non -  cooperation  by  the partners  and  depletion of working capital  are  causes  to close the mill and the consequential default in the  payment of  the principal amount and the interest  accrued  thereon. The corporation acted indifferently.      Let  us turn to s. 29 for the scheme of  dealing   with taken over sick unit.  Section 29(1) of the Act says that if an industrial concern makes any default in repayment of  any loan or advances or any  instalment thereof, the Corporation shall  have  the  right  to  take  over  the  management  or possession or both of the industrial concern as well as  the right  to transfer by way of lease or sale and  realise  the debt  from the property  pledged, mortgaged, or assigned  to the Corporation.      Sub-sec.  4  postulates  that in  the  absence  of  any contract  to the contrary, the amount received "be laid  by" the  corporation "in trust" firstly in the payment of  cost, charges  and the expenses and secondly in discharge  of  the debt  due to the Corporation and the residue, if any,  shall be paid to the defaulter or the persons entitled thereto.      The Corporation has been given statutory right to  take over  possession  and management of the defaulting  unit  or hypotheca  or both including the right to sell  and  realise the  loan  or  advance due from the  unit  or  debtor.   The Corporation  is  an  instrumentality  of  the  State.    The Corporation  or its employees or officers are bound  to  act reasonably  and fairly in dealing with the property  of  the debtor.   The  exercise of the power or  discretion  in  its dealing  would  be  subject to the  same  constitutional  or public  law limitation as the government.   The  Corporation also equally must conform its action with the same  standard that meet the test of justness, fairness, reasonableness and relevance.   In Kasturilal Laxmi Reddy v. State of J. &  K., [1980] 3                                                        629 SCR 1338, this Court held that when any Government’s  action fails  to  satisfy  the test of  reasonableness  and  public interests   are   found  to  be  wanting   in   quality   of reasonableness or lacking in the quality of public interest, it  would be liable to be struck down as invalid.   It  must follow as a necessary corollary, that the Government  cannot act  in a manner which would benefit a private party at  the cost  of  the  State;  such an  action  would  not  be  both unreasonable and contrary to public interest.      The  law consists of body and soul.  The letter of  the law is the body and the sense and reason of its is the soul, quia  ratio legis est enima legis.  In other words,  like  a nut the letter of the law represents the shell and sense and the  purpose  of its Kernal.  The law intends to  serve  the purpose.   Justice is both the cause and effect, the  origin and the legitimate end of law.  One will receive no  benefit from the law, if the ratio and the letter of law defeats its purpose.      Section  29 confers very wide power of the  Corporation to ensure prompt payment by arming it with effective measure to realise the arrears.  But the simplicity of the  language is  not  an index of the enormous power stored in  it.  From

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notice  to  pay  the  arrears, it  extends  to  taking  over management  and even possession with a right to transfer  it by  sale.  Every wide power, the exercise of which  has  far reaching  repercussion  has inherent limitation  on  it.  It should  be exercised to effectuate the purpose of  the  Act. In legislations enacted for general benefit and common  good the  responsibility  is far graver.  It  demands  purposeful approach.   The exercise of discretion should be  objective. Test   of  reasonableness  is  more  strict.    The   public functionaries  should  be duty conscious rather  than  power charged.   Its actions and decisions which touch the  common man  have  to be tested on the touchstone  of  fairness  and justice.   That which is not fair and just is  unreasonable. And what is unreasonable is arbitrary.  An arbitrary  action is  ultra vires.  It does not become bona fide and  in  good faith  merely  because no personal gain or  benefit  to  the person  exercising  discretion should  be  established.   An action  is  mala fide if it is contrary to the  purpose  for which  it  was  authorised to be  exercised.  Dishonesty  in discharge of duty vitiates the action without anything more. An action is bad even without proof of motive of dishonesty, if the authority is found to have acted contrary to  reason. 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                                                        630 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  Corporation   without   any explanation refused to release the full amount.  Result  was 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 shortcoming 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 the 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

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strictly.   But if there is no option left out and the  unit is  taken  over then its transfer require not  only  sincere effort but to act reasonable and fairly.      Equally  Sub-section 4 of s.29 treated the  Corporation "to  be  a trustee" of the debtor or person  claiming  title through  him.   It saddles the Corporation  or  the  officer concerned   with   inbuilt  duties,   responsibilities   and obligation  towards the debtor in dealing with the  property and  entails  him  to act as a prudent  and  reasonable  man standing  in  the shoes of the owner.   According  to  Prof. Issac, a noted author on Trusts, trusteeship has                                                        631 become  a  readily available tool for  everyday  purpose  of organisation  financing, risk shifting,  credit  operations, settling  disputes  and  liquidation  of  business  affairs. Maitland, the other renowned writer on Equity, observed that one  of  the exploits of equity; the largest  and  the  most important,  is the innovation and development of the  trust. Thus,  trust has been and is being applied for all  purposes mentioned  by  Prof.  Issac and many  others  as  device  to accomplish   different   purposes.    Trusteeship   is    an institution of elasticity and generality.  The broad base of the  concept  of property or its management  vested  in  one person and obligation imposed for its enjoyment by others is accepted  in  Hindu  jurisprudence.   Therefore,  when   the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell  or  further  mortgage etc.,  the  Corporation  or  its officers  or employees stands in the shoes of the debtor  as trustee   and  the  property  cestue  que  trust.    In   N. Suryanarayan Iyer’s Indian Trust Act, Third Edition, 1987 at page  275 in s. 37 it is stated that, "Where the trustee  is empowered to sell any trust property... by public auction or private contract and either at one time or at several  times should,  therefore,  use reasonable  diligence  in  inviting competition to that end.  Where a contract of sale has  been entered into bona fide by a trustee the court will not allow it to be rescinded or invalidated because another  purchaser comes  forward with a higher price.  It would,  however,  be improper  for  the trustee to contract in  circumstances  of haste  and  improvidence.   Where in a trust  for  sale  and payment  of  creditors  the trustee sold at  a  gross  under valuation  showing a preference to one of the creditors,  he was  held  guilty of breach of trust.  If  the  purchaser is privy of the fraud the property itself can be recovered from him."      The  sale  may be either by public auction  or  private contract.   In either case the trustee has to keep  in  mind that  the most advantageous price.  Kerr on  Receivers  17th Edition,  at page 208 stated that "a receiver,  however,  is not expected any more than a trustee or an executor to  take more  care of their property entrusted to him than he  would have   as  a  reasonably  prudent  man  of  business".    In Halsbury’s Law of England, 4th Edition, Vol. 39, at para 919 it  is stated that the "receiver will be compelled  to  show that he has acted with perfect regularity and has used  such degree  of  prudence  as would be expected  from  a  private individual in relation to his own affairs".  The trustee  or a receiver is, therefore, duty bound to protect and preserve the property in his possession and the                                                        632 standard  of  conduct expected of him, in dealing  with  the property  or  sale  thereof, is as  a  prudent  owner  would exercise  in dealing with his own property or  estate.   The degree  of care expected of him in handling  property  taken

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possession of is measured by the degree of care expected  of a  person  acting as trustee, executors or  assignees.   The object  and  endeavour  should also  be  to  secure  maximum advantage  or price in a sale of the property in lots or  as whole, as exigencies warrant.      The Corporation or its officers or servants as  trustee are  bound to exercise their power in good faith in  selling or  dealing with the property of the debtor as  an  ordinary prudent  man  would exercise in the management  of  his  own affairs to preserve and protect his own estate.   Therefore, the acts of the officer or servant of the corporation should be reasonable, just and fair which must meet the eye and the offer  accepted  must be of competitive  and  every  attempt should  be  made to secure as maximum price as  possible  to liquidate the liabilities incurred by the industrial concern or the debtor under the Act.      In Fertiliser Corporation Kamgar Union (Regd.),  Sindri &  Ors. v. Union of India & Ors., [1981] 2 S.C.R.  52,  this court  clearly said that, "we want to make it clear that  we do  not doubt the bona fides of the Authorities, but as  far as possible sales of public property, when the intention  is to  get the best price, ought to take place  publicly.   The vendors  are not necessarily bound to accept the highest  or any other offer, but the public at least get satisfied  that the Government has put all its cards on the table."  In  Ram &  Shyam Co. v. State of Haryana, [1985] Supp. 1 S.C.R.  541 this  court held that unilateral offer summarily  made,  not correlated to any reserve price made by the forth respondent after  making  full settlement in the  matter  was  accepted without giving an opportunity to the appellant to raise  the bid,  as  also inadequacy of his bid, it was held  that  the State  failed  to  discharge  its  administrative  functions fairly  and unfair treatment was meted out to the  appellant violating  the  principles  of  fair  play  in  action.   In Sachinand  Pandey v. State of West Bengal, [1987]  2  S.C.R. 223 this court held that :-          "On a consideration of the relevant cases cited  at          the  bar the following proposition may be taken  as          well  established; State owned or public  owned  or          public  owned property is not to be dealt  with  at          the                                                        633          absolute  discretion  of  the  executive.   Certain          precepts  and  principles  have  to  be   observed.          Public opinion is the paramount consideration.  One          of  the  methods of securing the  public  interest,          when  it  is considered necessary to dispose  of  a          property, is to sell the property by public auction          or  by  inviting  tenders.   Though  that  is   the          ordinary rule, it is not an invariable rule.  There          may be situation where there are compelling reasons          necessitating departure from the rule but then  the          reasons  for  the departure must  be  rational  and          should   not  be  suggestive   of   discrimination.          Appearance  of  public justice is an  important  as          doing  justice.  Nothing should be done which  give          an appearance of bias, jobbery or nepotism."      In  Haji T.M. Hassan v. Kerala  Financial  Corporation, [1988] 1 S.C.R. 1079 this court further held thus:-          "The  public property owned by the State or by  any          instrumentality  of the state should  be  generally          sold  by  public auction or  by  inviting  tenders.          This  court has been insisting upon that rule,  not          only to get the highest price for the property  but          also  to ensure fairness in the activities  of  the

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        state   and   public  authorities.    They   should          undoubtedly  act fairly.  There actions  should  be          legitimate.  There dealings should be above  board.          There  transactions should be without  aversion  or          affection.    Nothing  should  be   suggestive   of          discrimination.   Nothing  should be done  by  them          which  gives an impression of bias,  favourtism  or          nepotism.  Ordinarily these factors would be absent          if the matter is brought to public auction or  sale          by tenders.".      In Lakshmanasami  Gounder  v. C.I.T., Selvamani & Ors., [1991] 2 SCALE 956 this court, by a bench to which one of us (K.  Ramaswamy, J. was a member) in the context of  sale  of debtor’s property for recovery of the Government dues,  held that sale officer has statutory duty and the  responsibility to  have the date and place of sale mentioned in the  notice and given due publication in terms of the Act and the Rules. Public  Auction is one of the mode of sale intending to  get highest Competitive price for the property.  Public  auction also ensures fairness in action of the public authorities or the  sales officers who should act fairly,  objectively  and kindly.  Their actions should be legitimate.  Their  dealing should be free                                                        634 from suspicion. The fair and objective public auction  would relieve  the  public authorities or sale officers  from  the charge  of  bias,  favourtism, nepotism or else  beset  with suspicious feathers and of their non-account-ability.      The  sale  by  public  auction  or  tender  or  private negotiation   should   be  bona  fide  action.    First   is universally recognised to be the best and most fair  method. It is expected to fetch best competitive price and is beyond reproach.  Second would be resorted to rarely only if  first is  an impossibility.  Generally tenders should  be  calling quotation to execute public work or to award contracts  etc. And  third should always be avoided as it  cannot  withstand public  gaze.  It casts reflection on  Corporation  and  its officials and is against social and public interest. In case transfer  cannot  be effected by public auction  and  it  is necessary  to resort to sale by tender it is both  fair  and necessary  to inform the unit holder, if unit has  been  got valued  for purposes or transfer of the estimated value  for sale  as he is as much interested as the Corporation.   Sale of  public property by calling tenders escape  attention  of many  an  intending participants.  Every  endeavour  should, therefore,  be  made to give wide publicity and to  get  the maximum price.  Bureaucracy feels that accountability is  an impediment    to   efficient   discharge   of   the    duty. Accountability  is no more and no less than, the concept  of accountability  of a private concern to their  shareholders. There is a distinction between prying into details of day to day   administration  and  of  the  legitimate  actions   or resultant consequences thereof.  To enthuse efficiency  into administration,   a  balance  between   accountability   and autonomy  of  action  of management  in  public  enterprises should  be  carefully maintained.  Over emphasis  on  either would  impinge upon public efficiency.  But undermining  the accountability would give immunity or carte blanche power to deal  with the public property or of the debtor at  whim  or vagary.  Whether the public authority acted bona fide and in the best interest as prudent owner in the given facts  would do,   be   gauged  from  impugned   action   and   attending circumstances.   The  authority should  justify  the  action assailed   on   the  touchstone   of   justness,   fairness, reasonableness and as a reasonable prudent owner.

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    Keeping   these   various  factors   giving   rise   to conflicting interest the following directions are  necessary to  be  issued  to  be observed  by  the  Corporation  while exercising power under s. 29:                                                        635      Every endeavour should be made, to make the unit viable and be put on working condition.  If it becomes unworkable:      (1)  Sale  of a unit should always be  made  by  public auction.      (2)   Valuation  of a unit for purposes of  determining adequacy  of  offer or for determining if  bid  offered  was adequate,  should always be intimated to the unit holder  to enable  him  to  file  objection if any  as  he  is  vitally interested in getting the maximum price.      (3)   If tenders are invited then the highest price  on which tender is to be accepted must be intimated to the unit holder.      (4)(a)  If  unit holder is willing to  offer  the  sale price,  as  the  tenderer, then he should  be  offered  same facility  and  unit should be transferred to him.   And  the arrears  remaining  thereafter should be rescheduled  to  be recovered in  instalments with interest after the payment of last instalment  fixed under the agreement entered into as a result of tendered amount.      (b)  If  he brings third parties with higher  offer  it would be tested and may be accepted.      (5)  Sale  by private negotiation should  be  permitted only  in very large concerns where investment runs  in  very huge amount for which ordinary buyer may not be available or the  industry  itself may be or such nature that  by  normal buyers  may not be available.  But before taking such  steps there should be advertisements not only in daily  newspapers but business magazines and papers.      (6)  Request of the unit holder to release any part  of the  property on which the concern is not standing of  which he is the owner should normally be granted on condition that sale proceeds shall be deposited in loan account.      In  the light of the above guidelines it becomes  clear that  though tenders were invited the 3rd  respondent  alone had  given  the  tender  for  a  sum  of  Rs.  2  lacs.   On negotiation it was said to have been raised to Rs. 2,55,000. But deferred payments, on initial deposit of 25% and balance payment within four years of half yearly  instalments,  were given.   This  solicitous attitude, at the  expense  of  the appellant, appear to be unjust                                                        636 and unfair and no reasonable prudent owner would accept such an  offer.   The  appellant himself,  long  prior  to  sale, offered to pay Rs. 5 lacs and odd in full quids.  Section 29 does  not  exclude  the application  of  the  principles  of natural  justice.  It is not a straight jacket formula.   It depends  on  facts  in each  case.   Nothing  prevented  the Corporation to have given the appellant a chance for payment thereof  at reasonable  instalments with  interest  thereon. Nothing prevented them to release the open site, the subject of  mortgage on condition that the entire sale price of  the plots should be paid to discharge the liability and it be  a condition  in  the sale deed itself.  Before  accepting  the tender  of the third respondent, an opportunity should  have been  given to the appellant as to why such an offer of  the third respondent be not accepted.  The appellant would  have come forward to give his own offer or brought third  parties with  higher  offers.  No such bona fide actions  have  been taken  or  attempted  by the  Corporation.   Thus  the  acts smacked of bona fides or responsibility or reasonableness as

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an  ordinary prudent businessman/trustee/owner acting in  or dealing  with such trust.  Thus the sale of the property  is vitiated  by unjust and unreasonable act on the part of  the Corporation or its officers or employees and is liable to be set aside.      The possession given to the respondents 3 to 5 or L.Rs. of  the respondent is illegal and immediately be resumed  by the  Corporation.   The  third respondent  claimed  to  have improved  the mill or entered into an agreement of  sale  of open plot No. 220/2 with third parties.  But this is subject to  litigation attracting the doctrine of lis pendens  under s.  52  of  the Transfer of Property  Act.   The  appellant, therefore,  is not bound by the sale or the subsequent  acts of the purchasers/persons claiming through them.  One of the objections raised by the purchasers is that the appellant is one  of  five partners and the other did not object  to  the sale.  This is no ground to deny the relief to the appellant when injustice stares at the face.  The sale is  accordingly set  aside.   The  Corporation  should  immediately   resume possession  of  the  hypotheca  sold.  It  is  open  to  the appellant to pay the entire liability and have the hypotheca redeemed   as  per  contract.   If  it  not  possible,   the respondent  shall  release  plot  No.  220  to  enable   the appellant  to do plotting along with plot Nos. 219 and  221. The release shall be made within four weeks from the date of the receipt of the copy of this order or is produced  before the respondent.  The release shall be subject to payment  of the  entire sale price to the loan account.  The  respondent shall grant six months’ time from the date of release to the appellant to pay the entire arrears outstanding towards  the loan.  If he fails to do so, the Corporation                                                        637 is  directed to sell the same in open auction, after  giving wide  publicity in the press and by beat of  drum/microphone in  the town and neighbouring area.  The transfree would  be entitled,  if  available  at law,  to  proceed  against  the Corporation, for such reliefs as is open to them in law  for damages.      The  appeal  is  accordingly  allowed.   The  writ   of certiorari is issued quashing the sale.  Mandamus is  issued to the first respondent to immediately resume possession  of the hypotheca and implement the directions contained in  the judgment.  The parties would bear their own costs. T.N.A.                                       Appeal allowed.                                                        638