The High Court · 2012
Case Details
Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 IN THE HIGH COURT OF ORISSA AT CUTTACK FAO No.506 of 2012 (From the order dated 7th September 2012 passed by the learned District Judge, Ganjam in Special Judicial Case No.01 of 2003) T.R.K. Rao (since dead) through LRs and others …. Appellants -versus- Industrial Promotion & Investment Corporation of Orissa Ltd. (IPICOL), Bhubaneswar and another …. Respondents Advocate(s) appeared in this case:- For Appellants : Mr. R.P. Mohapatra, Advocate For Respondents : Mr. S.K. Padhi, Senior Advocate & Mr. S. Sharma, Advocate For Respondent No.1 CORAM: JUSTICE B.P. ROUTRAY JUDGMENT 5th October 2024 B.P. Routray, J. 1. Present appeal is directed against order dated 7.9.2012 of the learned District Judge, Ganjam passed in Special Judicial Case No.01 of 2003. FAO No.506 of 2012 Page 1 of 12
Legal Reasoning
Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 2. The Respondent, i.e. Industrial Promotion and Investment Corporation of Odisha Limited (in short, “IPICOL”), a Government of Odisha undertaking, applied to the District Judge, Ganajm under Section 31 of the State Financial Corporation Act, 1951 seeking following reliefs:- “(a) That let a decree be passed against all the Opposite Parties the guarantors who are jointly and severally liable for repayment of the above dues to the petitioner company (IPICOL) which amounts to Rs.1,65,00,615 (Term loan, interest funded interest as described above with 12.5% P.A. will realization of the same. (b) That let orders for ad interim injunction be passed restraining the opposite parties from transferring or removing the properties held in their names and their heirs/successors in interest. (c) In the event of failure to pay the dues of the petitioner an attachment order before judgment be passed attaching the properties of the guarantors, heirs, successors in interest. (d) That any other relief to which the Hon’ble Court deems fit and proper under the circumstances of the case be also awarded in favour of the applicant. (e) Cost be awarded against the opposite parties.” 3. Present Appellants were Opposite Parties before the District Judge, who borrowed loan amount from the Respondent (IPICOL). The case of the Petitioner (IPICOL) before the District Judge is that, Opposite Party No.1-T.R.K. Rao purchased assets of M/s.Manorama Chemicals Pvt. Ltd on 31.3.1988, by availing financial assistance from the Petitioner. In due process, the Petitioner as well as Odisha State Financial Corporation (in short, “OSFC”) being approached and on the FAO No.506 of 2012 Page 2 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 application of the private Opposite Parties sanctioned financial assistance of Rs.40,00,000/- along with seed capital assistance of Rs.5,00,000/- in favour of private Opposite Parties to purchase said M/s.Manorama Chemicals Pvt. Ltd. OSFC also extended term loan of Rs.30,00,000/- in favour of the Opposite Parties in addition to the financial assistance granted by IPICOL. For such sanction of term loan of Rs.40,00,000/- and seed capital assistance of Rs.5,00,000/-, a mortgage/hypothecation of its fixed assets was executed as security for the loan amount of the Petitioner. The Opposite Parties also executed the Deed of Guarantee on 14.2.1990 for repayment of the loan with interest in case the Company fails to repay the same. Since the loan amount was not paid, the Petitioner issued several legal notice and the assets of the Company were taken over by the OSFC on 29.3.1996. It needs to mention here that, after purchase the Opposite Parties renamed the unit as M/s.Shree Ranga Chemicals Pvt. Ltd. (the Company) constituted under the Companies Act, 1986. After taking over assets of the Company by OSFC, the same were sold to M/s.Rungta India Pvt. Ltd on 21.2.1997 for the consideration of Rs.20,00,000/- with down payment of Rs.4,35,000/-. After deducting the sale value of Rs.20,00,000/-, there was still balance loan amount of FAO No.506 of 2012 Page 3 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 Rs.1,07,96,687/- outstanding against the borrower Company (M/s.Shree Ranga Chemicals Pvt. Ltd.) as on 31.3.1997. The Opposite Parties being the Directors of the Company were noticed by the Petitioner on different dates to repay the balance dues and as on 9.9.2002 the outstanding amount was Rs.1,65,00,615/-. Though a proposal for One Time Settlement was given to the Opposite Parties on 29.6.2002, the same remained inresponsive by the Opposite Parties. Thus the Petitioner finally approached the learned District Judge, Ganjam under Section 31 of the SFC Act with such reliefs on 4.1.2003. 4. The Opposite Parties contested the case taking several defences on their part. It is stated by the Opposite Parties in their defence that, after their purchase of the Company on 31.3.1988 for Rs.70,00,000/- including down payment of Rs.4,00,000/-, the Opposite Parties further invested another sum of Rs.42,17,000/- by taking loan from different other sources as well as by investing personal funds. But to their misfortune, several worries and problems cropped up including the devastating flood of 1999, causing substantial damage to the plant and machineries of the Company. Neither the Petitioner nor OSFC did assist the Opposite Parties in those hard days to recover the Company FAO No.506 of 2012 Page 4 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 as a sick unit and ultimately the OSFC took possession of the unit of Opposite Parties on 29.3.1996 and sold it to M/s.Rungta India Pvt. Ltd. 5. Learned District Judge framed six issues in the process of adjudication and answered all of them in favour of the Petitioner and ordered that the Opposite Parties are liable for payment of the whole outstanding amount of Rs.1,65,00,615/- along with interest pendente lite and future, as per the claim of the Petitioner made in the application. 6. The Opposite Parties being the Appellants before this Court in terms of Section 32(9) of the SFC Act have though prayed for setting aside the impugned order, but do not dispute the financial assistance/loan amount extended by the Petitioner (IPICOL) and outstanding to the extent of the claim of the Petitioner made before the learned District Judge. The Appellants, who were the Opposite Parties before the District Judge, also do not dispute their status as Directors of the Company that defaulted repayment of the loan amount to the extent of Petitioner’s claim. Without disputing those factual aspects, the main stand taken by the Appellants before this Court is that, the application under Section 31 of the SFC Act is not maintainable in absence of FAO No.506 of 2012 Page 5 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 joinder of the principal borrower, i.e. the Company, and secondly, such application filed on 4.1.2003 is barred by limitation in view of Article 137 of the Limitation Act. Thus, the points fall before this Court to adjudicate are that, (i) Whether the application of the Petitioner under Section 31 of the SFC Act is barred by non-joinder of the principal borrower, i.e. the Company ? Secondly, (ii) Whether the application of the Petitioner is barred by law of limitation ? 7. Ext.4 is the document of contract and Ext.6 is the Guarantee Deed. Ext.5 is the letter of hypothecation and Ext.8 is the document showing deposit of title deeds. It is true that, the Opposite Parties deposited the title deeds creating equitable mortgage for the loan amount availed by them in terms of Section 58(f) of the Transfer of Property Act. It is also admitted that OSFC acquired the assets of the Company on 29.3.1996 due to non-payment of loan dues and sold it to M/s.Rungta India Pvt. Ltd on 21.2.1997. It is also not in dispute that, after adjustment of the sale value of the Company, the claim amount is outstanding against the Petitioner as on 9.9.2002. 8. Section 31 of the SFC Act prescribes special provisions for enforcement of claims by the Financial Corporation in case of default FAO No.506 of 2012 Page 6 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 or breach of agreement by an industrial concern. The Financial Corporation is also authorized to apply for such release, inter alia, for enforcing liability of any surety. 9. The Opposite Parties (present Appellants) before the learned District Judge are the sureties and the principal borrower is the Company, i.e. M/s.Shree Ranga Chemicals Pvt. Ltd. It is not disputed that, the Opposite Parties were the Directors of the Company and the assets of the Company were acquired by OSFC on 29.3.1996 and sold to third party on 21.2.1997. The Petitioner (present Respondent) was not a party to that sale and he filed the application under Section 31 of the SFC Act against the sureties since unpaid loan amount was outstanding against the Company, i.e. the principal borrower. It is true that, the liability of a surety is co-extensive with that of the principal debtor and the decree can be executed either against the principal debtor or the surety, at the discretion of the creditor. Therefore, in absence of principal debtor, the liability against him cannot be determined and secondly, in absence of determination of liability against the principal debtor, the liability of the surety cannot also be finally determined. It is true of course, that, the Financial Corporation is entitled for enforcing the liability of the surety under Clause (aa) of FAO No.506 of 2012 Page 7 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 sub-Section (1) of Section 31 of the SFC Act. But that does not exclude determination of liability of the principal debtor and enforcement of the same. In this regard, the observation of this Court in Orissa State Financial Corporation vs. Ramesh Chandra Behera and another, 2002 (I) OLR – 548, is important to be referred. The relevant observations are as follows:- “6. Law is no more res integra that the liability of a surety is co- extensive with that of the principal debtor and a decree can be executed either against the principal debtor or the surety, at the discretion of the creditor. However, where the surety is made to discharge such liability of the principal debtor, such surety has got a right to be reimbursed by the principal debtor. Sector 31 of the Act, quoted supra, contemplates several reliefs which can be granted on the basis of an application of a Financial Corporation. Clause (a) of Section 31 (1) deals with the question of sale of property mortgaged, which does not preclude the Court to decide the liability of the principal debtor. In view of the amended provision of Section 31, incorporated by the Amendment Act of 1985, there cannot be any iota of doubt that Section 31 can also be invoked for enforcing the liability of a surety. Before passing an order under any of the clauses, i.e.(a), (aa), (b) and (c) of Section 31 (1), it is incumbent upon the District Judge to find out the liability of the principal debtor first, and only after being satisfied about the liability of the principal debtor, i.e. the industrial concern, and regarding the default in payment of any loan or advance as envisaged under Sub-section (1) of Section 31 has to pass appropriate order granting reliefs in accordance with the various clauses enumerated in Sub-section (1) of Section 31. The reliefs which can be granted under Clauses (a) and (aa) imply that the liability of the industrial concern has to be found out first. Though there is no provision in Section 31 to enforce the personal liability of an industrial concern, a cumulative reading of the Section leads to the conclusion that there is no bar to decide about such liability. Once such liability is found, the Court can proceed in the manner contemplated in Sections 31 and 32 of the Act. On the basis of such finding, the Corporation can seek appropriate relief under Section 32-G of the Act, or even alternatively can file a suit to enforce the liability. The view taken by me finds support from the earlier decisions of this Court in Misc. FAO No.506 of 2012 Page 8 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 Appeal No.670 of 1996 (OSFC v. Bani Prasanna Das and another) decided on October 22, 1998. 7. In view of the clear position of law enunciated and the reasons stated above, I am not inclined to agree with the observations made by the District Judge. I am of the opinion that the loanee-respondent No.1, i.e. the Industrial concern, is also liable for the amount due and the said amount can be recovered from respondent No.1 by following the provisions of Section 32-G of the Act.” 10. Thus for the reasons stated in the above paragraphs, the principal debtor becomes a necessary party to the proceeding for determining his liability first and then after being satisfied with the liability of the principal debtor and the default thereof, the reliefs against the surety would be enforced in terms of the provisions under Section 31 of the SFC Act. 11. Here in the case at hand where the principal debtor, i.e. the Company (industrial concern) is absent and so, in his absence determining the liability of sureties alone is illegal. Accordingly, in the opinion of this Court, the principal debtor, i.e. the Company is a necessary party in whose absence there cannot be any effective adjudication. 12. So far as the question of limitation is concerned, as stated earlier, the application was filed on 4.1.2003, whereas the liability is determined on the date of sale of the assets of the Company on FAO No.506 of 2012 Page 9 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 21.2.1997. The Hon’ble Supreme Court in Maharashtra State Financial Corporation vs. Ashok Kumar Agarwal and others, (2006) 9 SCC 617, have held that, Article 137 of the Limitation Act applies in case of application under Section 31 of the SFC Act where the limitation of three years is applied. The relevant observations are as follows:- “5. Sections 31 of the Act contains special provisions for enforcement of claims by State Financial Corporations. It is by way of a legal fiction that the procedure akin to execution of decrees under the Code of Civil Procedure has been permitted to be invoked. But one cannot lose sight of the fact that there is no decree or order of a civil court when we are dealing with applications under Section 31 of the Act. The legal fiction at best refers to a procedure to be followed. It does not mean that a decree or order of a civil court is being executed, which is a sine qua non for invoking Article 136. The proposition set out in Gujarat State Financial Corporation v. Natson Mfg. Co. (P) Ltd., (1979) 1 SCC 193 found support in Everest Industrial Corporation and Others v. Gujarat State Financial Corporation, 1987 (3) SCC 597. Again in Maganlal v. Jaiswal Industries, (1989) 4 SCC 344, this Court noticed that an order under Section 32 is not a decree stricto sensu as defined in Section 2(2) of the Code of Civil Procedure, the Financial Corporation could not be said to be a decree-holder. This makes it clear that while dealing with an application under Sections 31 and 32 of the Act there is no decree or order of a civil court being executed. It was only on the basis of a legal fiction that the proceedings under Section 31 are treated as akin to execution proceedings. In fact this Court has observed that there is no decree to be executed nor is there any decree-holder or judgment-debtor and therefore in a strict sense it cannot be said to be a case of execution of a decree. Article 136 of the Limitation Act has no application in the facts of the present case. Article 136 specifically uses the words “decree or order of any civil court”. The application under Sections 31 and 32 of the State Financial Corporation Act is not by way of execution of a decree or order of any civil court. 6. Article 137 of the Limitation Act applies in the facts of the present case. When Article 137 is applied, the application moved by the appellant Corporation on 2-1-1992 for proceeding against the FAO No.506 of 2012 Page 10 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 sureties i.e. the respondents herein, was clearly barred by time and the courts below were correct in holding so. To recall the facts of the present case, the notice demanding repayment of the amount of loan was issued against the borrower, that is, M/s.Crystal Marketing Private Limited on 8-3-1983 and the application under Sections 31 and 32 of the State Financial Corporation was filed against the said borrower on 25-10-1983. The liability of sureties had crystallised then.
Decision
7. The amendment under Section 31 of the State Financial Corporation Act which authorizes the State Financial Corporations to take action under Section 31 of the Act for enforcing the liability against the sureties, was brought about in the year 1985 by introduction of sub-section (aa) in Section 31(1) of the Act. Even after this amendment the appellant did not wake up to take any step against the sureties in the present case. Notice was issued to the sureties only on 7-12-1991 and the application for enforcement of liability against them was filed on 2-1-1992. The application, therefore, was clearly barred by time and the decisions of the courts below cannot be faulted. The courts below rightly dismissed the application on the ground that it was barred by limitation. The appeal has no merit. It is dismissed with no order as to costs.” 13. According to Mr. S.K. Padhi, learned Senior Advocate for Respondent No.1, the period of limitation is 12 years in terms of Article 62 of the Limitation Act. In this regard, he relies on the decision of the Hon’ble Supreme Court in Himachal Pradesh Financial Corporation vs. Pawna and others, (2015) 5 SCC 617. In the said case, a civil suit for recovery of the balance amount was filed by the Financial Corporation against the defaultee debtor and the period of limitation was counted for 12 years by the Hon’ble Supreme Court in terms of Article 62 of the Limitation Act. FAO No.506 of 2012 Page 11 of 12 Signature Not Verified Digitally Signed Signed by: BASANTA KUMAR BARIK Reason: Authentication Location: High Court of Orissa, Cuttack Date: 22-Oct-2024 11:35:52 But in the case at hand, it is not the civil suit initiated by the Financial Corporation in respect of the mortgage. This is a case where the application under Section 31 of the SFC Act has been filed and thus the afore-cited case by learned counsel for Respondent No.1 is distinguished. Rather in terms of the principles laid in the case of Maharashtra State Financial Corporation (supra) by the Hon’ble Supreme Court, which is on the similar issue as involved in the present case, the limitation of 3 years is counted. Therefore, from the last date of cause of action, when the outstanding amount against the principal borrower as well as the Appellants were determined on 21.2.1997 and the application being filed on 4.1.2003, i.e. beyond the period of three years, it is concluded that such application made by the Petitioner- Corporation before the District Judge is barred by limitation. 14. In the result, for the reasons stated and discussions made above, the appeal is allowed and the impugned order dated 7.9.2012 of the learned District Jude, Ganjam in Special Judicial Case No. 01 of 2003 is set aside. No order as to costs. B.K. Barik/Secretary FAO No.506 of 2012 Page 12 of 12 (B.P. Routray) Judge