Holding

Action against a guarantor under the Uttar Pradesh Public Moneys (Recovery of Dues) Act cannot be taken until the principal debtor's mortgaged property is first sold, rendering the recovery certificate against the appellant unsustainable.

Summary

Denin Leathers Ltd obtained a term loan from the Pradeshiya Industrial and Investment Corporation (PICUP) and mortgaged its immovable property. After the company converted to a public limited company, recovery certificates were issued against several guarantors, including the appellant Ashok Mahajan, under the Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972. The appellant challenged the recovery, arguing that under the Act a guarantor cannot be pursued until the mortgaged property of the principal debtor is sold. The Allahabad High Court rejected this claim, holding that the collector could recover the amount as arrears of land revenue under Section 279(1)(b) of the Uttar Pradesh Zamindari Abolition Act, 1950. On appeal, the Supreme Court referred to its earlier decision in Pawan Kumar Jain v. PICUP, which held that action against a guarantor is barred until the principal debtor's property is sold, and directed the High Court to reconsider the matter in that light. The appeal was allowed, with the Supreme Court ordering a fresh consideration by the High Court and granting no order as to costs.

Issues considered

Whether a recovery certificate under the Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972 can be issued against a guarantor before the mortgaged property of the principal debtor is sold.
Whether the collector may treat the recovery as arrears of land revenue under Section 279(1)(b) of the Uttar Pradesh Zamindari Abolition Act, 1950.
Interpretation of Sections 3 and 4 of the Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972 with respect to guarantor liability.

Legislation cited

Subjects

loan recoveryguarantor liabilityrecovery certificatepublic moneys actarrears of land revenuezamindari abolition actmortgageauctionwrit petitionArticle 226

Judgment

ASHOK MAHAJAN A
v.
STATE OF U.P. AND ORS.

SEPTEMBER 26, 2006

[ARIJIT PASA YAT AND LOKESHWAR SINGH PANTA, JJ.] B

Uttar Pradesh Public Moneys (Recovery of Dues) Act, 1972; S.4:

Recovery of loan-Issuance of recovery certificate against guarantor-
Challenge to-Dismissed by High Court-On appeal, Held: High Court is C
directed to re-consider the matter in the light of the observations made by
Supreme Court in the case ofPa wan Kumar Jain v. Pradeshiya Industrial and
Investment Corporation of U.P. Limited on similar issu.e-Directions issued-
Uttar Pradesh Zamindari Abolition Act, 1950-Section 279(/)(b).

A Company had taken term loan from the Pradeshiya Industrial and D
Investment Corporation ofUttar Pradesh by mortg;iging immovable properties.
Initially, the borrower/company had coinmenced its business as a private
limited company but subsequently it was converted to a Public Limited
Company. Appellant was serving as a Director in th.e said company. On
7. 7.1998 a recovery certificate was issued by the Corporation to one of the E
guarantors of the company for recovery of the loan. Later, recovery certificates
were also issued against other guarantors including the appellant. Auction
proceedings were fixed on 25.5.03 in terms of Seetion 4 of the Uttar Pradesh
Public Moneys (Recovery of Dues Act) 1972. Appellant filed a writ petition
on the ground that the recovery could not have been made from him in terms
of provisions of the Act. The High Court rejected the stand and held that the F
authority concerned was entitled to recover the amount in question as arrears
of land revenue in terms of the provisions under Section 279(1)(b) of the Uttar
Pradesh Zamindari Abolition Act, 1950. Hence the present appeals.

The appellant, one of the guarantors, contended that even if it is conceded
that he had any liability, the properties of the principal borrower had to be G
dealt with first.
. --.
The respondent-State submitted that as borrower has no property, the
properties of the appellant have rightly been dealt with; and that the appellant
657
H
658 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A has kept on changing his stand.
Allowing the appeal, the Court

HELD: Keeping in view the factual scenario of the present case, it would
be appropriate to direct the High Court to re-consider the matter in the light
B of the observations made by this Court in the case of Pawan Kumar Jain v.
Pradeshiya Industrial and Investment Corporation of UP. Limited.

Pawan Kumar Jain v. Pradeshiya Industrial and Investment
Corporation of U.P. Limited, (2004( 6 SCC 758, relied on. (662-E-F(

C CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4257 of2006.

From the Final Judgments and Orders dated 5.12.2002, 19.5.2003 and
27 .5.2004 of the High Court of Judicature at Allahabad in Civil Misc. Writ
Petition Nos. 52132 of2002, 21153 of2003 and 25806 of2003 respectively.

D R.K. Jain and P.K. Jain for the Appellant.

Dinesh Dwivedi, Suvira-Lal, Kamlendra Mishra, Ajay Sharma and Gaurav
Sarin for the Respondents.

The Judgment of the Court was delivered by
E ARIJIT PASA YAT, J. Leave granted.

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

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

One M/s Denin Leathers Limited (hereinafter referred to as the 'borrower')
G had taken term loan of Rs.40 lacs from Pradeshiya Industrial and Investment
Corporation, Uttar Pradesh Limited (in short 'PICUP') and had mortgaged its
immovable properties to secure the loan. Initially the borrower had commenced
its business as a private limited company in 1979 but subsequently in the year
1995 it was converted to a Public Limited Company. While the borrower
becomes a public limited company, appellant's name was included as a Director.
H
ASH OK MAHAJAN v. STATE OF U.P. [PASAYAT, I.] 659
On 7. 7.1998 a recovery certificate was issued in respect of one Sanjay Mahajan A
who was one of the guarantors in respect of the loan. According to the
appellant due to continued losses the financial condition of the company was
bad and added to the financial problems in the year 1999 because of a
devastating fire, assets of the company were destroyed. On 2.2.2002 recovery
certificate was issued against the guarantors, namely, Keshav Ram Mahajan,
Sanjay Mahajan and Smt. Juli Mahajan. On 25.7.2002 the house and household B
articles of the appellant were attached by the District Authorities by an order
to the effect that dues amounted to nearly Rs.1.24 crores plus interest plus
I0% collection charges. Appellant made a representation to the authorities
stating that he was not a guarantor though coercive steps were taken against
him. The appellant .was arrested on 24.11.2002. The recovery certificate was C
issued on 24.4.2002, as the appellant subsequently learnt in the name of the
appellant as weir as Keshav Mahajan, Ajay Mahajan and Sanjay Mahajan.
Auction proceedings in respect of property took place on 21.4.2003 under the
Uttar Pradesh Public Moneys (Recovery of Dues Act) 1972 (in short the
'Act'). The date for fresh auction was fixed on 22.5 .2003 under Section 4 of
the Act as well as under several other statutes. Appellant filed the writ D
petition on the ground that under the Act the recovery could not have been
made. The High Court with reference to term~ of guarantee rejected the stand
and held that the Collector was entitled to recover the amount as arrears of
land revenue under Section 279( I)(b) of the Uttar Pradesh Zamindari Abolition
Act, 1950 (in short the 'Zamindari Act'). E
Learned counsel for the appellant submitted that even if it is conceded
that the appellant had any liability, the properties of the principal borrower
had to be dealt with first.

In response, learned counsel for the respondent submitted that as F
borrower has no property, as is accepted in various documents, therefore, the
properties of the appellant have been rightly dealt with. It is submitted that
the appellant has been changing his stand. Initially he stated that he was not
a guarantor and subsequently says that even if he is a guarantor properties
of the borrower have to be dealt with first.
G
At this juncture it would be appropriate to take note of the following
observations of this Court in Pawan Kumar Jain v. Pradeshiya Industrial
and Investment Corpn. of U.P. Limited, (2004) 6 SCC 758.

"5. Mr. Mohta then relied upon Sections 3 and 4 of the U. P. Act,
which read as follows:- H
660 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

A 3. Recovery of certain dues as arrears of land revenue.-(/) Where
any person is party-

(a) to any agreement r~lating to a loan, advance or grant given to hinJ
or relating to credit in respect of, or relating to hire-purchase of goods
. ; .s~ld to him by the State Government or the Corporation, by way of
B 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 . · (c) to any agreement relating to a guarantee given by the State
Government or the Corporation in respect of a loan raised by an
. industrill concern; or
(d) to any .agreement' providing that any. moneyjiayable thereunder
··D ... to the State Government shall be recoverable as ariea.S· of land
-. reve~ue; and. Such- person-

l (i) makes any default in repayment of the Joan or advance or any
. instalment thereof; or · · · · · ·
/
(ii) having become liable under the conditions of the grant to refund
E the grant or any portion thereof, makes any default in the refund of
such grant or portioq or any instalment thereof; or (iii) otherwise fails
to comply with the tenns 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
F 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 nanie 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.
G
(2) The Collector on receiving the certificate shall proceed to recover
the amount stated therein as an arrear of land revenue.

(3) No su.it for the recovery of any sum due as aforesaid shall lie in '
the civil court against any person referred to in sub-section (I).
H
_.
ASHOKMAHAJANv. STATEOFU.P. [PASAYAT,J.] 661
4. Savings. - (I) Nothing in section 3, shall - A
{a) affect any interest of the State Government, the Corporation, a
Government company or any banking company, in any property created
by any mortgage, charge, pledge or other encumbrance; or

(b) bar a suit or affect any other right or remedy against any person
other than a person referred to in that section, in respect of a contract B
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 C
favour of the State Government, the Corporation, a Government
company or banking company, then -

(a) in every case of a pledge of goods, proceedings shall first be taken
for sale of the thing pledged, and if the proceeds of such sale are less D
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, E
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 F
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 ifthe Collector
certifies that there is no prospect of realization of the entire sum due
through the first mentioned process within a reasonable time." G
6. He submitted that by virtue of these provisions, the Ist Respondent
cannot proceed against the Appellant/guarantor until the I st
Respondent has first sold the property of the principal-debtor which
had been mortgaged in their favour. He points out that on 22nd July,
H
662 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

A 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 Ist Respondent with the 4th Respondent. He points out that
thereafter the property was handed back to the I st Respondent. He
submits that, therefore, the I st Respondent is not entitled to proceed
B against the Appellant.

7. Mr. Bhalla admits the above mentioned facts. He, however, submits
that the company committed defaults and, therefore, the One Time
Settlement failed. He submitted that earlier attempts to sell the
properties of the 4th Respondent Company yielded no result as no
c offers were received. He submitted that action under Section 29 has
again been initiated against the 4th Respondent Company. He
submitted that as the 4th Respondent Company has committed defaults
and it has not been possible to recovery by sale of property, action
has been taken against the guarantor for recovery of the amount.
D 8. In our view, the above set out provisions of the U.P. Act are very
clear. Action against the guarantor cannot be taken until the property
of the principal-debtor is firs sold off. As the Appellant has not sold
the property of the principal-debtor, the action against the Appellant
cannot be sustained. We, therefore, set aside the Recovery Notice."
E It would be appropriate to direct the High Court to re-consider the
matter in the light of the observations quoted above, keeping in view the
factual scenario of the present case.

The appeals are ·allowed to the aforesaid extent without any order as to
F costs.
S.K.S. Appeal allowed.