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Non-Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.7936  OF 2014

(Arising out of SLP(C) No. 12961 of 2011)

Subhransu Sekhar Padhi  …Appellant

Versus

Gunamani Swain & Others …Respondents

J U D G M E N T

Chelameswar, J.

1. Leave granted.

2. Aggrieved by the judgment dated 6.12.2010 of the High  

Court of Orissa in Writ Petition (C) No. 13033 of 2009, one of  

the respondents therein who is the purchaser of the property  

in an auction held under Section 29 of the State Financial  

Corporations  Act,  1951 (for  short  “the Act”)  preferred the

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instant appeal.   Some time in the financial year 2002-2003,  

the 9th respondent i.e. the Orissa State Finance Corporation  

(hereinafter referred to as “OSFC”) sanctioned a term loan of  

Rs. 5,26,500/- for purchase of a TATA truck in favour of the  

6th respondent who is wife of the 7th respondent.  The said  

loan transaction is secured by a mortgage of certain piece of  

land by the father-in-law of the 6th respondent and father of  

the 7th respondent (since died).  

3. As the borrower did not make the repayments in terms  

of the agreement between OSFC and the borrower, the OSFC  

attempted to seize the truck which was also hypothecated to  

the  OSFC.  As  the  same  was  not  traceable,  the  OSFC  

proceeded against the mortgaged property. The value of the  

said  property  was  estimated  at  about  Rs.  10,08,000/-.  

Eventually, the property was brought to sale by auction on  

9.2.2009 where the appellant became the highest bidder for  

an amount of Rs.10,09,000/-. The OSFC confirmed the sale in  

favour  of  the  appellant.  On  31.3.2009,  possession  of  the  

mortgaged property was handed over to the appellant.    

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4. On  10.6.2009,  the  OSFC  after  appropriating  the  

amounts due to it intimated the three sons of the mortgagor  

(respondent Nos. 2, 7 and 8 herein) to collect the residue  

amount of Rs.2,86,460/- from the Corporation.    

5. Challenging  the  seizure  and  sale  of  the  mortgage  

property, the writ petition came to be filed by the wife and  

children of the mortgagor.  The appellant herein and OSFC  

contested  the  writ  petition.   By  the  impugned  judgment  

herein, the writ petition was allowed, hence the appeal.

6. Two questions arise for our consideration;

(i) Whether the OSFC was legally entitled to invoke  Section 29 of the Act and bring the properties of  guarantors  to  sale  without  resorting  to  the  procedure  contemplated  under  Section  31  of  the Act.

(ii) Whether  the  High  Court  was  right  in  entertaining a challenge to the sale from 150  days after the sale took place and the property  was  handed  over  to  the  auction  purchaser  (appellant herein)

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7. In  the impugned judgment,  the High Court  answered  

the first question emphatically against the OSFC.

“The right of financial Corporation in terms of Section 29  must be exercised only on a defaulting party.  Section 29  does not empower the Corporation to proceed against the  surety  even  if  some  properties  are  mortgaged  or  hypothecated to it.  Our view is further strengthened by  the provisions of sub-section(4) of Section 29 which lays  down  appropriation  of  sale  proceeds  with  reference  to  only industrial concern and not surety or guarantor.   

xxx xxx xxx xxx In view of the above, we are of the considered view that  the OSFC in exercise of power vested under Section 29 of  the SFC Act cannot sell out the properties mortgaged to it  by the guarantors.”

As a consequence of such conclusion, the second question is  

also answered against the OSFC.

“14. In view of the above, sale of the properties of the  guarantors and subsequent execution of deed of transfer  under Annexure-5 are liable to be quashed for being done  in flagrant violation of the statutory provision contained  in Section 31 of the SFC Act which we direct accordingly.”

8. The High Court rested its judgment rightly on a decision  

of  this  Court  reported  in  Karnataka  State  Financial   

Corporation v.  N.  Narasimahaiah  &  Others,  (2008)  5  

SCC 176.  In that case, this Court categorically held1 that it is  

1  Para 20.  Section 29 of the Act nowhere states that the corporation can proceed against the surety even if   some properties are mortgaged or hypothecated by it.  The right of the financial corporation in terms of   Section 29 of the Act must be exercised only on a defaulting party.  There cannot be any default as is   envisaged in Section 29 by a surety or a guarantor.  The liabilities of a surety or the guarantor to repay the   loan of the principal debtor arises only when a default is made by the latter.

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only the properties of the defaulter which can be proceeded  

against  under  Section  29  of  the  Act  but  not  against  the  

properties of the third parties whether they are guarantors,  

mortgagors etc.  

9. A submission is sought to be made that the impugned  

judgment is contrary to the ratio of the decision of this Court  

in  A.P.  State  Financial  Corporation v.  M/s.  GAR Re-

rolling Mills & Another, (1994) 2 SCC 647.  In our opinion,  

the  said  decision  has  no  application  to  the  facts  of  the  

present  case.   It  was  a  case  where  the  APSFC  initially  

proceeded  against  Section  31  of  the  Act  against  the  

properties mortgaged by the borrower (industrial  concern)  

and obtained an order/decree but subsequently invoked the  

powers under Section 29.   The question before this  Court  

was  –  whether  the  Financial  Corporation  set  up  under  

Section 3 of the State Financial Corporation Act is entitled to  

take recourse to the remedy available to it under Section 29  

of the Act even after having obtained an order or a decree  

after  invoking the provisions of  Section 31 of  the Act  but  

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without executing that decree/order?  This Court held2 that it  

is always open to the State Financial Corporation to resort to  

such a course of action.

10. Therefore, we do not see any merit in the appeal.

11. However,  the appellant before us is  the purchaser of  

the property sold under Section 29 of the Act, who parted  

with the money in order to purchase the property.  He is a  

victim of an illegal procedure adopted by the Orissa State  

Financial Corporation.  The law regarding the authority of the  

State  Financial  Corporations  to  invoke  the  provisions  of  2   Para 17. The relief available to the Corporation under Section 29 of the Act to realise its dues in the  manner rescribed therein is wider in scope than the limited reliefs available to it under Section 31 of the Act  and is not controlled by Section 31 of the Act. The Legislature clearly intended to preserve the rights of the  Corporation under Section 29 of the Act, by expressly stating in Section 31 of the Act, that its recourse to   action under that section is without prejudice to the provisions of Section 29 of the Act. What alone is not   desirable or permitted, by the Act is to pursue both the remedies simultaneously by the Corporation and not

that it cannot withdraw or abandon the proceedings initiated under Section 31 at ’any stage’ and   then take recourse to the provisions of Section 29 of the Act. Any interpretation which frustrates the right  of the Corporation to recover its dues must be eschewed. Similarly, if in a given case, the Corporation has  taken  recourse  to  the  provisions of  Section 29 of  the Act,  there  is  no bar  for  it  without  taking those  proceedings to their logical conclusion to abandon them and approach the court under Section 31 of the Act  to seek one or more of the reliefs available to it under that section. Where, the defaulting party fails to   honour the order or decree of the court made under Section 31 of the Act, it has neither any legal nor even a  moral right to object to the Corporation from taking recourse to the provisions of Section 29 of the Act only  on the ground that it has obtained a proper relief under Section 31 of the Act which relief it does not wish   to pursue any further. Indeed, if the order of the court issued under Section 31 of the Act has been fully  complied and honoured with by the defaulting concern, no occasion would arise for the Corporation to  invoke the provisions of Section 29 of the Act. However, to hold that since the Corporation has initially  taken action under Section 31 of the Act and obtained an order/decree from the court, the Corporation is  prohibited  from  invoking  the  provisions  of  Section  29  of  the  Act,  notwithstanding  the  fact  that  the  defaulting concern has not honoured the court’s order or decree made under Section 31 of the Act, would   amount to putting premium of the activities of the defaulting concern aimed at frustrating the order/decree   of the court and

depriving the Corporation of recovering its legitimate dues and thereby rendering the expression  "without prejudice to ..." occurring in Section 31 otiose. Courts do not favour such a course.

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Section  29  with  respect  to  properties  other  than  those  

belonging to defaulter industrial concern is clearly declared  

by this Court in  Karnataka State Financial Corporation  

(supra) by its judgment dated 30th March, 2008 whereas the  

sale in question before us is dated 9th February, 2009, almost  

a  year  later.   The  authorities  of  the  9th respondent  

Corporation  sold  the  properties  to  the  appellant  herein  in  

flagrant  violation  of  the  settled  position  of  law.   We,  

therefore, direct the 9th respondent to refund the amount of  

Rs.10,09,000/-  (rupees  ten  lakhs  nine  thousands)  to  the  

appellant  with  interest  calculated  at  the  rate  12%  per  

annum.  However,  it  is  open to the Orissa State Financial  

Corporation to recover the amounts either from the defaulter  

- industrial  concern or from such other third party against  

whom the Corporation has a legal right to proceed.   

12. Appeal is dismissed.  Costs quantified at Rs.1,00,000/-  

(rupees  one  lakh)  to  be  borne  by  the  9th respondent  

Corporation.  It is open to the 9th respondent Corporation to  

recover the said amount from such of those officers who are  

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responsible for taking a wrong decision to proceed against  

the property in question under Section 29 of the Act.

13. All  the  payments,  as  directed  above,  shall  be  made  

within a period of 30 days from today.

………………………….J.                                                           (J. Chelameswar)

……………………..….J.                              (A.K. Sikri) New Delhi; August 21, 2014

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