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CASE NO.: Appeal (civil)  3636-3637 of 1998

PETITIONER: Pawan Kumar Jain

RESPONDENT: The Pradeshiya Industrial & Investment Corporation of U.P. Ltd. & Ors.

DATE OF JUDGMENT: 11/08/2004

BENCH: S. N. Variava & Arijit Pasayat

JUDGMENT: J U D G M E N T

S. N. VARIAVA, J.

       These Appeals are against the Order of the Allahabad High Court  dated 01.09.1997 by which Appellant’s Writ Petition has been  dismissed and the Order dated 06.11.1997 by which the Review  Petition has been dismissed.         Briefly stated the facts are as follows.         The 1st Respondent had advanced monies to the 4th Respondent.   The Appellant stood guarantor in respect of the said loan as at that  time he was a Director of the 4th Respondent-Company.  By the Writ  Petition, the Appellant challenged the Recovery Notice issued against  him under the Uttar Pradesh Public Moneys (Recovery of Dues) Act,  1972.  The High Court has dismissed the Writ Petition and the Review  Petition.                 Mr. Mohta submitted that the Central Government has  issued a Notification specifying 1st Respondent-Corporation as a  Financial Institution within the meaning of the term as defined in  Section 2(h) of the Recovery of Debts Due to Banks and Financial  Institutions Act, 1993 (hereinafter referred to as the "Debt Recovery  Act").  He submitted that such an Institution can only proceed in the  manner laid down in the Debt Recovery Act.   He submitted that it is  not open to give a go-by to the provision of the Debt Recovery Act and  use the machinery under the U.P. Public Moneys (Recovery of Dues)  Act, 1972 (hereinafter called the "U.P. Act").  For this reason the  Notice is bad and requires to be quashed.  In support of his  submission, he relied upon the case in Unique Butyle Tube  Industries (P) Ltd. Vs. U. P. Financial Corporation & Ors. [(2003)  2 SCC 455].  In this case, it has been held that a Financial Institution  within the meaning of that term in the Debt Recovery Act cannot  proceed under the U. P. Act.   This authority would have been binding upon us.  However, in  reply Mr. Bhalla pointed out that in respect of the 1st Respondent- Institution the Notification by the Central Government has only been  issued on 24.01.2004, whereas the Recovery Certificate is of a much  earlier date.  He submitted that, therefore, in this case the  proceedings under the U. P. Act are not barred.  He pointed out that  under Section 31 of the Debt Recovery Act, it is only suit or proceeding  pending before any Court, which stand transferred to the Tribunal  established under that Act.     In our view, Mr. Bhalla is right.  As the  action was initiated prior to the Notification being issued by the Central  Government, the action would not be barred and would not stand  transferred to the Tribunal.         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.\027(1) Where any person is party\027

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(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\027  

(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  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.\027(1) Nothing in section 3, shall \026  

(a)     affect any interest of the State  Government, the Corporation, a Government  company or any banking company, in any

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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 \026

(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 time."                          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.         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

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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.         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 first 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.   We, however, clarify that it will be open to the 1st Respondent to  proceed against the Appellant before the Debt Recovery Tribunal in  accordance with principles laid down in Unique Butyle Tube’s case  (supra).         The Appeals stand disposed of accordingly.  There will be no  order as to costs.