Holding

A State Financial Corporation’s action under Section 29 cannot be set aside unless it is arbitrary, unreasonable or violates statutory provisions; here PFC acted reasonably, so the High Court’s order was erroneous.

Summary

Punjab Financial Corporation (PFC) had granted a term loan of Rs 24.25 lakh to M/s Surya Auto Industries, secured by mortgage of immovable property. The borrower defaulted, paying only Rs 2.70 lakh, ignored several statutory notices and refused concessions offered by PFC. PFC invoked Section 29 of the State Financial Corporations Act, 1951 to take possession of the unit and later issued a second notice to take over the collateral. The borrower filed a writ petition alleging that PFC’s action was unfair, violated natural justice and that the corporation could not compound penal interest. The Punjab & Haryana High Court quashed the action, directed a review of all pending cases where penal interest had been compounded and altered the interest rate. The Supreme Court held that a State Financial Corporation’s recovery action can be set aside only if it is arbitrary, unreasonable or violative of statutory provisions; in the present case PFC acted reasonably and fairly. Consequently, the High Court’s order was set aside, the writ petition dismissed and the appeal allowed.

Issues considered

The legality of PFC’s action under Section 29 of the State Financial Corporations Act, 1951 in taking possession of the borrower’s unit.
Whether the High Court was justified in declaring the corporation’s action unfair and unreasonable and in directing a review of all pending cases where penal interest was compounded.
The scope of judicial review over actions of State Financial Corporations – when courts may intervene.
The permissibility of compounding penal interest under the Act.

Legislation cited

Constitution of Indias. Article 14, s. Article 21
State Financial Corporations Act, 1951s. 24, s. 29, s. 3

Subjects

State Financial Corporations ActSection 29loan defaultpossessionpenal interestfairnessjudicial reviewcreditor-debtor relationshippublic money

Judgment

(2009] 15 (ADDL.) S.C.R. 1187

PUNJAB FINANCIAL CORPORATION A
v.
~·,.. M/S. SURYA AUTO INDUSTRIES
-\
(Civil Appeal No. 7910 of 2009)
DECEMBER 01, 2009
B
[G.S. SINGHVI AND ASOK KUMAR GANGULY, JJ.]

State Financial Corporations Act, 1951 - s. 29 - Rights
of Financial Corporation in case of default - Default in
payment of loan and interest - Notice by Financial c
Corporation for possession of Unit of borrower -
Subsequently, non-payment of outstanding dues and failure
to avail concession offered by Corporation - Financial
Corporation taking over collateral security and compounding
~
of penal interest - High Court quashing the same and D
directing review of all pending cases in which penal interest
\
I -;. compounded - Sustainability of - Held: Not sustainable -
Financial Corporation being instrumentality of State, is
expected to act fairly and reasonably qua its borrowers/
debtors, but is not supposed to give loans and refrain from E
taking action for taking recovery thereof - Proceedings/action
initiated by Corporation for recovery of outstanding dues
cannot be nullified by courts except when such action is wholly
arbitrary, unreasonable and unfair- On facts, Corporation had
... acted in a reasonable and fair manner - High Court
F
~ overlooked important facts.

The question which arose for consideration in this
appeal was whether the High Court was justified in
quashing the action taken by the appellant-State Financial
Corporation u/s. 29 of the State Financial Corporations G
Act, 1951 for recovery of its dues and also directing
review of all pending cases in which penal interest was
--( compounded.

1187 H
1188 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A Allowing the appeal, the Court

HELD: 1.1. Even though the primary function of a
Corporation established u/s. 3 of the State Financial
Corporations Act, 1951 is to promote small and medium
industries in the State, but it is not obliged to revive and
8
resurrect every sick industrial unit de hors the financial
implications of such exercise. The Corporation is not
supposed to give loans and refrain from taking action for
recovery thereof. Being an instrumentality of the State,
C the Corporation is expected to act fairly and reasonab,ly
qua its borrowers/debtors, but it is not expected to
flounder public money for promoting private interests.
The relationship between the Corporation and borrower
is that of creditor and debtor. The corporation is expected
to recover the loans already given so that it can give
D fresh loans to others. The proceedings initiated by the
Corporation and activn taken for recovery of the ~ 1

outstanding dues cannot be nullified by the courts except
when such action is found to be in violation of any
statutory provision resulting in prejudice to the borrower
E or where such proceeding/action is shown to be wholly
arbitrary, unreasonable and unfair. The court cannot sit
as an appellate authority over the action of the
Corporation and substitute its decision for the one taken
by the Corporation. [Para 14] [1204-8-F]
F
1.2 High Court committed an error in declaring that
the action taken by the Corporation was unfair and
unreasonable and the direction issued for review of all
pending . cases where penal interest has been
G compounded is legally unsustainable. The appellant had
acted in a most reasonable and fair manner and the High
Court was not justified in nullifying the second notice
issued u/s. 29_ of the Act by assuming that the appellant
had not taken effective steps for realization of its dues
in furtherance of first notice. High Court ignored that the
H
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1189
INDUSTRIES

respondent had not only adopted a recalcitrant attitude A
in the matter of payment of the outstanding dues, but also
failed to avail the concessions offered by the appellant·
Corporation by reducing the rate of interest and
rescheduling the payment of outstanding dues and did
not take benefit of the schemes notified by the appellant- B
Corporation for restoration of unit on payment of the
principal amount with a 10% outstanding interest. It also
erred in declaring that the appellant-Corporation will be
entitled to charge simple interest at the rate of 10% after
expiry of six months from the date of taking over of the c
unit. Respondent had not challenged the terms of loan
agreement. Therefore, High Court could not have suo
motu altered terms of agreement and directed the
appellant to make fresh calculation of the outstanding
dues and allowed the respondent to pay the amount as
0
per fresh demand by selling the mortgaged property.
Thus, the impugned order is set aside and the writ
petition is dismissed. [Paras 15, 16, 17 and 19] [1204-G-
H; 1205-A, F-H; 1206-B-C-G]
U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd E
(1993) 2 SCC 299; Haryana Financial Corporation v.
Jagdamba. Oil Mills (2002) 3 SCC 496, relied on.

Central Bank of India v. Ravindra (2002) 1 SCC 367;
Arava/i Pipes v. Haryana Financial Corporation (2001) 2 All F
India Banking Law Judgments 516; Mahesh Chandra v.
Regional Manager, UP.Financial Corporation (1993) 2 SCC
279; U.P. Financial Corporation v. Naini Oxygen & Acetylene
Gas Ltd. (1995) 2 SCC 754; Kamataka State Financial
Corp_oration v. Micro Cast Rubber & Allied Products (P) Ltd. G
(1996) 5 sec 65, referred to.

Case Law Reference:
(2002) 1 SCC 367 Referred to. Paras 4, 18
(2001) 2 All India H
1190 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R. 'r
~

A Banking Law
V"
Judgments 516 Referred to. Para 4
(1993) 2 sec 219 Referred to. Para 8
~'

B
(1995) 2 sec 754 Referred to. Para 11
(1996) 5 sec 65 Referred to. Para 12
(1993) 2 sec 299 Relied on. Paras 15, 17
A.
(2002) 3 sec 496 Relied on. Paras 15, 17
c
CIVIL APPELLATE JURISDICTION : Civil-Appeal No.
7910 of 2009.

From the Judgment & Order dated 21.11.2008 of the High
Court of Punjab & Haryana at Chandigarh in Civil Writ Petition
...
D No. 11932 of 2007. ~

T.S. Doabia, Samar Vijay Singh, Jagjit Singh Chhabra for .. ~

the Appellant.

E The Judgment of the Court was delivered by

G.S. SINGHVI, J. 1. Leave granted.

2. This is an appeal for setting aside order dated _.__

21.11.2008 passed by the Punjab and Haryana High Court ~

F whereby it allowed the writ petition filed by the respondent,
quashed the action taken by the appellant-Corporation under
Section 29 of the State Financial Corporations Act, 1951 (for
short, 'the Act') for recovery of its dues and also directed review
of all pending cases in which penal interest has been
G compounded.
3. On an application made by the respondent for grant of ,.._
loan for setting up an industrial unit in District Gurdaspur
(Punjab), the appellant-Corporation sanctioned a term loan of
Rs.24.25 lacs. For securing repayment of the loan, the
H
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1191
.~
INDUSTRIES [G.S. SINGHVI, J.]

..-·-,1_ respondent mortgaged immovable properties in favour of the A
appellant-Corporation. As per the terms of agreement executed
between the parties, the respondent was required to repay the
loan together with interest on specified dates but it failed to
• adhere to the time schedule and a sum of Rs.2. 70 lacs only
was deposited till 2002. Therefore, after issuing notice under B
Section 29 of the Act, the appellant-Corporation took
possession of the unit. This action was followed by notices
dated 2.12.2002, 3.3.2003, 30.5.2003 and 29.8.2003, whereby
~ .>.
the respondent was repeatedly called upon to pay the
outstanding dues. The respondent not only ignored the notices c
but also failed to avail the concession offered by the appellant-
Corporation vide letter dated 10.9.2004 to reduce the rate of
interest and reschedule the payment of the outstanding dues.
The attitude of non-cooperation adopted by the respondent in
the matter of repayment of loan and interest forced the
~ D
appellant-Corporation to issue notice dated 26.6.2007 under
/-
Section 29 of the Act for taking over collateral security.

4. The respondent challenged the threatened take over of
collateral security in W.P. No.11932/2007 by contending that
action taken by the appellant-Corporation is contrary to the E
provisions of the Act, rules of natural justice and the law laid
down in Central Bank of India v. Ravindra (2002) 1 SCC 367
_..
and Aravali Pipes v. Haryana Financial Corporation (2001)
; 2 All India Banking Law Judgments 516. The respondent also
• made a grievance that the officers of the appellant-Corporation F
had deliberately disposed of the machinery for a paltry sum of

... Rs.5 lacs and this had the effect of destroying the unit. In the
counter affidavit filed on behalf of the appellant-Corporation, it
was pleaded that action under Section 29 of the Act was
necessitated because the writ petitioner failed to abide by the G
' terms of the loan agreement and mortgage. It was further
•-----\ pleaded that even though the appellant-Corporation offered to
-"": reduce the rate of interest and reschedule the payment of
outstanding dues, the respondent did not avail the same. Not
only this, the respondent failed to take benefit of the schemes
H
1192 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A notified on 3.1.2005 and 18.3.2005 for restoration of the unit ~·

on payment of the principal amount along with 10% of the T

B
outstanding interest.

5. On the pleadings of the parties, the High Court
formulated the following question:
..
"Whether after invoking power under Section 29 of the Act,
the respondent Corporation has absolute power of
retaining the property without taking any steps and to A__ ..
!
continue to charge the interest and penal interest; without l
c any limit."

6. The Division Bench of the High Court then stated the { '
principle that as per the contract between the parties, the ..,
debtor is liable to pay interest till the principal amount is repaid
D and there is statutory power to take over the mortgaged ~
property and thereafter also, interest continues to run, but ~
observed that being a public authority, the Corporation is duty ·'
bound to act fairly; that the power to take possession of the
mortgaged property cannot be exercised without any
responsibility and that the Corporation is bound to take further
E
steps within reasonable time and if it does not do so, the debtor
will not only stand deprived of mortgaged property without any
purpose resulting in loss of earning and possibility of repayment
~
by raising money against the property. The Division Bench then .,
held that as the appellant-Corporation is not shown to have ....
F takef! any steps for a period of six years after taking over the
unit and no explanation has been offered for this, it neither
charge interest at the contractual rate nor can it proceed against
any other property till the earlier taken over property is disposed .....
of. The Division Bench also referred to the judgment of this '•
G Court in Central Bank of India v. Ravindra (supra) and held ~-

that the Corporation is not entitled to compound penal interest. r-.
The conclusions recorded by the High Court and operative part ~
of the impugned order read as under:

H "23. In view of above discussion, our conclusions are as
r1·
PUNJAB FINANCIAL CORPORATION v. SURYA AUTO 1193
INDUSTRIES [GS. SINGHVI, J.]

·~
under:- A

(i) Taking over of unit under Section 29 of the Act casts
an obligation on the Financial Corporation to proceed
against the property taken over within reasonable time.
Failure to do so, will be violation of concept of fair
B
procedure under Articles 14 and 21 of the Constitution.

(ii) If the Court reaches a conclusion that action of the
,I, Corporation is unfair, the Court may, to effectuate the right
of the borro~er, set aside the demand for contractual rate
of interest and substitute the same for a reasonable rate c
of interest, without prejudice to the remedy of the borrower
to claim damages in appropriate proceedings. The Court
may also direct giving of a fresh opportunity to the borrower
to pay the recalculated amount and restrain the
Corporation from proceeding against other assets of the D
borrower.

24. Accordingly, we allow this petition and apart from
setting aside compounding of penal interest, declare that
from 1.4.2003 i.e. after expiry of period of six months from
E
the date of taking over of unit of the petitioner, the
Corporation will be entitled to simple interest @ 10%. The
Corporation is directed to make fresh calculation
accordingly within one month from the date of receipt of a
copy of this order. We further direct the Corporation to
allow the petitioner to pay the amount as per fresh demand,
F
if necessary, by selling the mortgaged property which has
been taken over, subject to the payment being made
directly to the Corporation to the extent of its dues. We also
restrain the Corporation from giving effect to its notice
Annexure P-8 of taking over other properties till the unit G
--+ already taken over is disposed of. The Corporation may
also review all pending cases where penal interest has
been compounded in violation of law laid down by the
Hon'ble Supreme Court and where no steps are being
taken after taking over of the unit." H
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1195
INDUSTRIES [G.S. SINGHVI, J.]

consideration in several cases. In Mahesh Chandra v. A
Regional Manager, U.P. Financial Corporation (1993) 2 SCC
279, a two-Judge Bench of this Court considered whether the
respondent-Corporation could take possession of the
mortgaged property even before disbursement of the .
sanctioned loan and sell the same without giving opportunity a·
to the borrower to pay off debts or bring a better offer and
observed that the corporations deal with public money for public
benefit and, therefore, their approach has to be public oriented
and helpful to the loanee. A helping attitude on the part of the
Corporation to constantly monitor the working of the industrial c
concern or units (it may even charge the overhead expenses
on this account) would sub-serve the purpose of the loan,
object of the Act, ana the constitutional objective of economic
justice to the needy.

9. The two-Judge Bench then adverted to the scope of D
Section 29 of the Act and observed:

"Section 29 confers very wide power on the Corporation
to erb ... e prompt payment by arming it with effective
measures to realise the arrears. But the simplicity of the E
language is not an index of the enormous power stored in
it. From notice to pay the arrears, it extends to taking over
management and even possession with a right to transfer
it by sale ............ Power under Section 29 of the Act to
take possession of a defaulting unit and transfer it by sale F
requires the authority to act cautiously, honestly, fairly and
reasonably. Default 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 G
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 act!on and motive in exercise of it has to be judged in
the light of it. Lack of reasonableness or even fairness at
H
•'

:-
1196 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A 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
B 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 >-.

c · the Corporation without any explanation refused to release
the full amount. Result was that 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
D ·\
beforehand to enable the unit holder to comply with
shortcomings 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
E 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 unit holder, could not start, then how will the
amount be repaid. Endeavour should be to adjust and
F 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 1aw, to
observe the process of taking over strictly. Bi·~ ii there is
no option left and the unit is taken over then its transfer
G requires not only sincere effort but to act reasonably and
fairly."
~

In paragraph 22 of the judgment, the Court laid down
guidelines to be followed by the Corpo~ation while exercising
power under Section 29 of the Act.
H
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1197
INDUSTRIES [G.S. SINGHVI, J.]

10. A substantially different view was expressed by another A
t
two-Judge Bench in UP. Financial Corporation v. Gem Cap
~
(India) Pvt. Ltd (1993) 2 SCC 299. While indicating that the
Corporation established under the 1951 Act is not like an
ordinary money-lender or a bank which lends money and it is
a lender with a purpose that is promoting the small and medium B
industries, the Court observed:-

" ............ At the same time, it is necessary to keep certain
basic facts in view. The relationship between the
corporation and the borrower is that of creditor and debtor.
The corporation is not supposed to give loans once and
c
go out of business. it has also to recover them so that it
can give fresh loans to others. The corporation no doubt
has to act within the four corners of the Act and in
furtherance of the object underlying the Act. But this factor
cannot be carried to the extent of obligating the corporation D
i
to revive and resurrect every sick industry irrespective of
... the cost involved. Promoting industrialisation at the cost
of public funds does not serve the public interest; it
merely amounts to transferring public money to private
account. The fairness required of the corporation cannot E
be carried to the extent of disabling it from recovering
what is due to it. While not insisting upon the borrower to
honour the commitments undertaken by him, the
corporation alone cannot be shackled hand and foot in
' ~
the name of fairness. Fairness is .not a one way street, F
more partic.ularly in matters like the present one .............
These corporations are not sitting on King Solomon's
mines. They too borrow monies from Government or other
financial corporations. They too have to pay interest
thereon. The fairness required of it must be tempered - G
nay, determined, in the light of all these circumstances.
I
Indeed, in a matter between the corporation and its
4 debtor, a writ court has no say except in two situations:
(1) there is a statutory violation on the part of the
corporation or (2) where the corporation acts unfairly i.e., H
1198 SUPREME COURT REPORTS [2009) 15 (ADDL.) S.C.R.

A unreasonably. While the former does not present any
-difficulty, the latter needs a little reiteration of its precise lh
;..,.-=r
meaning. What does acting unfairly or unreasonably
mean? Does it mean that the High Court exercising its
jurisdiction under Article 226 of the Constitution can sit
f:3 as an appellate authority over the acts and deeds of the
corporation and seek to correct them? Surely, it cannot
be. That is not the function of the High Court under Article
226. Doctrine of fairness, evolved in administrative law
was not supposed to convert the writ courts into appellate
c authorities over administrative authorities. The constraints >..
- -self-imposed undoubtedly - of writ jurisdiction still
remain. Ignoring them would lead to confusion and
uncertainty. The jurisdiction may become rudderless."

(emphasis added)
D
11. In U.P. Financial Corporation v. Naini Oxygen &
Acetylene Gas Ltd. (1995) 2 SCC 754, the Court considered -f
~
_whether the State Financial Corporation was bound to accept
the report of Industrial Reconstruction Bank of India ,which
E contained recommendat1on for resurrection of the defaulter
' company and whether the High Court was justified in
commanding the Corporation to hand over possession of the
unit to the company without any adjustment and observed:

"However, we cannot lose sight of the fact that the +--
f · Corporation is an independent autonomous statutory body
having. its own constitution and rules to abide by, and
functions and obligations to discharge. As such, in the
discharge of its functions, it is free to act according to its
own light. The views it forms and the decisions it takes are
G. on the basis of the information in its possession and the
advice it receives and according to its own perspective
and calculations. Unless its action is mala fide, even a
wrong decision taken by it is not open to challenge. It is ~
not -for the courts or a third party to substitute its decision,
H however more prudent, commercial or businesslike it may
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1199
INDUSTRIES [G.S. SINGHVI, J.]

be, for the decision of the Corporation. Hence, whatever A
the wisdom (or the lack of it) of the conduct of the
Corporation, the same cannot be assailed for making the
Corporation liable.

We are, therefore, of the view that this is not a matter 8
where the High Court should have stepped in and
substituted its judgment for the judgment of the Corporation
which should be deemed to know its interests better
whatever the sympathies the Court had for the prosperity
of the Company. In matters commercial, the courts should C
not risk their judgments for the judgments of the bodies to
whom that task is assigned."

12. In Karnataka State Financial Corporation v. Micro
Cast Rubber & Allied Products (P) Ltd. (1996) 5 SCC 65, the
Court referred to the earlier judgments in Mahesh Chandra v. D
i Regional Manager, U.P. Financial Corporation (supra) and
U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd
(supra), adverted to the factual matrix of the case and held that
-l in the absence of any violation of the statutory provisions by the
, appellant-Corporation, its decision to accept the offer made by E
~he particular bidder for rational reasons cannot be interfered
with by the High Court in exercise of powers under Article 226
of the Constitution.

13. In Haryana Financial Corporation v. Jagdamba Oil
Mills (2002) 3 SCC 496, a three-Judge Bench disapproved the F
view expressed by two-Judge Bench in Mahesh Chandra v.
Regional Manager, U.P. Financial Corporation (supra) and
approved the one expressed by another two-Judge Bench in
U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd
(supra). The facts of that case were that the appellant- G
Corporation had sanctioned a term !oan of Rs.7,48,000/- to the
respondent. The loan was to be repaid in 8 years in 15 half-
yearly installments. After disbursement of the last installment,
the respondent made a request to reschedule repayment of the
loan. The S,§_ic;t__ request was accepted by the appellant- H
1200 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A Corporation. Despite this, the respondent continued to commit
default in repayment of loan. Therefore, after issuing notice
~.-..,.,
under Section 29 of the Act, the appellant-Corporation took
possession of the unit. The respondent filed suit for permanent
injunction, which was decreed by the trial Court. The first and
B second appeals preferred by the appellant-Corporation were
>.
dismissed by the District Judge and High Court respectively.
The three-Judge Bench of this Court noticed the background
in which the Act was enacted and proceeded to obs'erve:
. \

"The Corporation as an instrumentality of the State deals
c with public money. There can be no dolllit that the
,>-.

approach has to be public-oriented. It can operate
effectively if there is regular realization of the instalments.
While the Corporation is expected to act fairly in the matter
of disbursement of the loans, there is corresponding duty
D cast upon the borrowers to repay the instalments in time,
unless prevented by insurmountable difficulties. Regular
r-
payment is the rule and non-payment due to extenuating
circumstances is the exception. If the repayments are not i
received as per the scheduled time-frame, it will disturb i-
E the equilibrium of the financial arrangements of the
Corporations. They do not have at their disposal unlimited
funds. They have to cater to the needs of the intended
borrowers with the available finance. Non-payment of the
instalment by a defaulter may stand in the way of a ,_
F deserving borrower getting financial assistance."

The three-Judge Bench then referred to the judgments in
Mahesh Chandra v. Regional Manager, U. P. Financial
Corporation (supra) and U.P. Financial Corporation v. Gem
Cap (India) Pvt. Ltd (supra), approved the view taken in the
G
later decision by recording the following observations:

"As was observed by this Court in Gem Cap case the
legislative intent in enacting the statute in question was to ~-.-
promote industrialization of the States by encouraging
small and medium industries by giving financial assistance
PUNJAB FINANCIAL CORPORATION v. SURYA AUTO 1201
INDUSTRIES [G.S. SINGHVI, J.]

in the shape of loans and advances, repayable within a A
..... ......(
stipulated period. Though the Corporation is not like an
ordinary moneylender or a bank which lends money, there
is purpose in its lending i.e. to promote small and medium
industries. The relationship between the Corporation and
the borrower is that of a creditor and debtor. That basic B
feature cannot be lost sight of. A Corporation is not
supposed to give loan and then to write it off as a bad debt
and ultimately to go out of business. As noted above, it has
to recover the amounts due so that fresh loans can be
~
c
given. In that way industrialization, which is the intended
object, can be promoted. It certainly is not and cannot be
called upon to pump in more money to revive and resurrect
each and every sick industrial unit irrespective of the cost
involved. That would be throwing good money after bad
'I' money. As was rightly observed in Gem Cap case D
promoting industrialization does not serve public interest
+ if it is at the cost of public funds. It may amount to
transferring public money to private account."

The fairness required of the Corporations cannot be
carried to the extent of disabling them from recovering E
what is due to them. The matter can be looked at from
another angle. The Corporation is an independent
/
autonomous statutory body having its own constitution
J and rules to abide by, and function$ and obligations to
discharge. As such in the discharge of its functions, it is F
,,..
free to act according to its own light. The views it forms
and decisions it takes are on the basis of the information
in its possession and the advice it receives and
".... according to its own perspective and calculations. Unless
its action is ma/a fide, even a wrong decision by it is not G
open to challenge. It is not for the courts or a third party
to substitute its decision, however, more prudent,
commercial or businesslike it may be, for the decision
9f the Corporation. As was observeci by this Court in U.P.
Financial Corpn. v. Naini Oxygen & Acetylene Gas Ltd H
1202 SUPREME C<?URT REPORTS [2009) 15 (ADDL.) S.C.R.

A in commercial matters the courts should not risk their
judgments for the judgments of the bodies to whom that
task is assigned. As was rightly observed by this Court in
Kamataka State Financial Corpn. v. Micro Cast Rubber
& Allied Products (P) Ltd. in the matter of action by the
B Corporation in exercise of the powers conferred on it under
.Section 29 of the Act, the scope of judicial review is
confined to two circumstances i..e. (a) where there is
statutory violation on the part of State Financial
Corporation, or (b) where State Financial Corporation acts
c unfairly i.e. unreasonably. While exercising its jurisdiction
under Article 226 of the Constitution of India, 1950 (in short
"the Constitution"), the High Court does not sit as an
Appellate Authority over the acts and deeds of the
Corporation. Similarly, the courts other than the High
o · Courts are not to interfere with action under Section 29 of
the Act unless the aforesaid two situations exist."

(emphasis added)

Commenting upon the judgment in Mahesh Chandra v.
E Regional Manager; U.P. Financial Corporation (supra), the
three-Judge Bench observed:

"The view in Mahesh Chandra case appears to have been
too widely expressed without taking note of the ground
realities and the intended objects of the statute. If the
F
guidelines as indicated are to be strictly followed, it would
be giving premium to a dishonest borrower. It would not
further the interest of any Corporation and consequently of
the industrial undertakings intending to avail financial
assistance. It would only provide an unwarranted
G opportunity to the defaulter (in most cases chronic and
deliberate) to stall recovery proceedings. It is not to be
understood that in every case the Corporations shall take
recourse to action under Section 29. Procedure to be
followed, needless to say, has to be observed. If any reason
H is indicated or cause shown for the default, the same has
PUNJAB FINANCIAL CORPORATION v. SURYAAUTO 1203
INDUSTRIES [G.S. SINGHVI, J.]

to be considered in its proper perspective and a conscious A
decision has to be taken as to whether action under
-....
'
Section 29 of the Act is called for. Thereafter, the
/ modalities for disposal of seized unit have to be worked
" out. The view expressed in Gem Cap case appears to be
-1
more in line with the legislative intent. Indulgence shown B
to chronic defaulter would amount to flogging a dead
horse without any conceivable result being expected. As
the facts in the present case show, not even a minimal
portion of the principal amount has been repaid. That is a
J.. c
factor which should not have been lost sight of by the courts
below. It is one thing to assist the borrower who has
intention to repay, but is prevented by insurmountable
difficulties in meeting the commitments. That has to be
established by adducing material. In the case at hand

- factual aspects have not even been dealt with. and solely D
relying on the decision in Mahesh Chandra case the
matter has been decided ...........
+
.. The aforesaid guidelines issued in Mahesh Chandra
case place unnecessary restrictions on the exercise of
power by Financial Corporation contained in Section 29 E
of the Act by requiring the defaulting unit-holder to be
associated or consulted at every stage in the sale of the
property. A person who has defaulted is hardly ever likely
to cooperate in the sale of his assets. The procedure
-J indicated in Mahesh Chandra case will only lead to further F
,.. delay in realization of the dues by the Corporation by sale
of assets. It is always expected that the Corporation will
try and realize the maximum sale price by selling the
assets by following a procedure which is transparent and
acceptable, after due publicity, wherever possible. G

The subsequent decisions of this Court in Gem Cap,
Naini Oxygen and Micro Cast Rubber run counter to the
-" view expressed in Mahesh Chandra case. In our opinion,
the issuance of the said guidelines in Mahesh Chandra
H
1204 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A case are contrary to the letter and the intent of Section 29.
In our view, the said observations in Ma/1esh Chandra
case do not lay down the correct law and the said decision
is overruled."

B 14. The proposition of law which can be culled out from
the decisions noted above is that even though the primary
function of a corporation established under Section 3 of the Act
is to promote small and medium industries in the State, but it
is not obliged to revive and resurrect every sick industrial unit
C de hors the financial implications of su-ch exercise. The
corporation is not supposed to give loans and refrain from
taking action for recovery thereof. Being an instrumentality of
the State, the corporation is expected to act fairly and
reasonably qua its borrowers/debtors, but it is not expected to
flounder public money for promoting private interests. The
0 relationship between the corporation and borrowei is that of
creditor and debtor. The corporation is expected to recover the
loans already given so thal ii can give fresh loans/financial +
assistance to others. The proceedings initiated by the
corporation and action taken for recovery of the outstanding
E dues cannot be nullified by the courts except when such action
is found to be in violation of any statutory provision resulting in
r prejudice to the borrower or where such proceeding/action is
shown to be wholly arbitrary, unreasonable and unfair. The court
cannot sit as an appeliate authority over the action of the
F corporation and substitute its decision for the one taken by the
corporation.

15. If the order impugned in this appeal is examined in the
light of the principles laid down in U.P. Financial Corporation
G v. Gem Cap (India) Pvt. Ltd (supra) and Haryana Financial
Corporation v. Jagdamba Oil Mills (supra), we do not find any
difficulty ii~ holding that the High Court committed an error in
declaring that the action taken by the Corporation was unfair
)-·
and unreasonable and the direction issued for review of all
pending cases where penal interest has been compounded is
H
PUNJAB FINANCIAL CORPORATION v. SURYA AUTO 1205
INDUSTRIES [G.S. SINGHVI, J.]

-..._· legally unsustainable. While decrying the appellant-Corporation A
#
for allegedly going into slumber after taking over the unit of the
respondent in furtherance of the first notice issued under
Section 29 of the Act, the High Court overlooked many
~ important factors, which are enumerated below:
8
(i) The respondent miserably failed to discharge its
obligation to repay the loan together with interest
and as against the outstanding dues of more than
.A. Rs.36 lacs in 2002, a paltry sum of Rs.2.70 lacs was
deposited.
c
(ii) The appellant-Corporation issued notices dated
2.12.2002, 3.3.3003, 30.5.2003 and 29.8.2003 to
the respondent requiring it to pay the amount
=>t specified therein, but the latter did not respond to
~
either of the notices. D
'
A (iii) Vi de letter dated 10.9.2004, the appellant-
Corporation offered to reduce the rate of interest
and reschedule the payment of dues, but the
respondent did not avail the same.
E
(iv) The respondent did not take benefit of the schemes
notified on 3.1.2005 and 18.3.2005 for restoration
1 of the unit by paying the principal amount along with
10% of the outstanding interest.
F
16. In our view, the appellant-Corporation had acted in a
most reasonable and fair manner and the High Court was not
justified in nullifying the second notice issued under Section 29
of the Act by assuming tl .at the appellant-Corporation had not
taken effective steps for realization of its dues in furtherance G
of first notice. Unfortunately, the High Court ignored that the
-~ respondent had not only adopted a recalcitrant attitude in the
matter of payment of the outstanding dues, but also failed to
avail the concessions offered by the appellant-Corporation by
reducing the rate of interest and rescheduling the payment of
H
1206 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A outstanding dues and did not take benefit of the schemes
notified by the appellant-Corporation for restoration of unit on
payment of the principal amount with a 10% outstanding
•
'

interest.

17. The High Court also committed serious error in
B
declaring that he appellant-Corporation will be entitled to
charge simple interest at the rate of 10% w.e.f. 1.4.2003 i.e.,
after expiry of six months from the date of taking over of the
unit. Undisputedly, the respondent had not challenged the terms ,l,
of loan agreement. Therefore, the High Court could not have
c suo motu altered terms of agreement and directed the appellant
to make fresh calculation of the outstanding dues and allowed
the respondenHo pay the amount as per fresh demand by
selling the mortgaged property. This approach of the High Court
"'
is ex facie contrary ·to the law laid down in U.P. Financial
D Corporation v. Gem Cap (India) Pvt. Ltd. (supra) and Haryana .,_
Financial Corporation v. Jagdamba Oil Mills (supra).

18. The direction given by the High Court for review of
pending cases in the light of judgment of this Court in Central
E Bank of India v. Ravindra (supra) is also unsustainable
because, as mentioned above, the High Court was not called
upon to examine the legality or ot~erwise of the ter.ms of
a_greement entered into between the appellant-Corporation and
~
respondent under which the latter was obliged to pay interest
F at the particular rate with periodical rests. Moreover, conclusion
No.3 contained in para 55 of that judgment clearly postulates
that stipulations incorporated in the contract entered into and
binding on the parties shall govern their substantive rights and
ob!igations in the matter of recovery and payment of interest.
G 19. In the result, the appeal is allowed, the impugned order
is set aside and the wr :• petition filed by the respondent is
?"-
dismissed.

N.J. Appeal allowed.
H