D.Y. Chandrachud, J.
1. By these proceedings, the appellant seeks to challenge an order dated 16-3-1998 of the learned Civil Judge, Senior Division, Latur, declining to grant interim relief to the appellant in a suit instituted by the appellant. The appellant has impugned in the suit two notices which were issued by the State Industrial & Investment Corporation of Maharashtra on 17th July, 1997 and on 19th August, 1997. By the first notice of 17-7-1997, the respondent recalled the principal amount of the loan advanced to the appellant and the interest, thereon, totally amounting to Rs. 56,94,622/-. By the take over notice dated 19-8-1997, the respondent sought to exercise the powers conferred upon it under section 29(1) of the State Financial Corporations Act, 1951, by taking over possession of the assets mortgaged or hypothecated to the respondent.
The trial Court initially granted an order of status quo, which it vacated, by the impugned order dated 16-3-1998, while declining the application for interim relief. The trial Court found that the appellant had defaulted in the payment of the loan installments and the exercise of powers, under section 29 of the State Financial Corporations Act, 1951, by the respondent, could not be faulted.
2. Against the order passed by the Trial Court, the present Appeal from Order came to be filed. An ad interim order was passed on 17-3-1998, restraining the respondent from disturbing the possession of the appellant. This order was continued on 4-5-1998 on the appellant's depositing an amount of Rs. 6 lacs within a period of six weeks with the respondent. By a subsequent order of 4-9-1998, the ad interim relief granted earlier was continued, on a condition that the appellant deposits with the respondent an amount of Rs. 3 lacs per quarter, towards the repayment of the loan amount which would be taken into consideration at the time of the final settlement of account.
Aggrieved by the order passed by the learned Single Judge of this Court, granting interim relief in the aforesaid terms, the respondent filed a Special Leave Petition before the Supreme Court. By its order dated 23-4-1999, the Supreme Court disposed of the appeal filed by the respondent in the following terms :
'Leave granted.
Having heard learned Counsel for the parties we are of the opinion that the High Court should have given some reasons as to why the respondent was directed to pay only Rs. 3 lacs per quarter. The appeal which was filed by the respondent was against the order of the trial Court declining to give any interim relief. By the order under challenge the effect is that appeal is more or less allowed. The High Court, in our mind, should give detailed reasons while disposing of the application for interim relief. We accordingly set aside the judgment of the High Court subject to the condition that instead of Rs. 3 lacs per quarter the respondent will pay Rs. 5 lacs per quarter. The first installment to be paid by on or before 15th May, 1999. The High Court should dispose of the application or the appeal, as the case may be, within six months from today. In case default is committed by the respondent, the appellant will be at liberty to realize the entire amount claimed by it immediately.
The appeal is disposed of.'
In pursuance of the direction of the Supreme Court, the appeal from order has been placed for hearing and final disposal before me.
3. Briefly stated the material facts of the present case are that on 11-10-1994, the respondent sanctioned a loan in the amount of Rs. 100 lacs to the appellant. The rate of interest was to be 19-5% per annum, and the loan was repayable in 21 quarterly installments, commencing twelve months after the disbursement of the first installment. On 26-11-1995, the agreed rate of interest was modified and a rate of interest at the rate of 4.5% above the reference rate of the respondent came to be fixed. The total interest payable was thus 16.5% + 4.5% viz. 21% per annum. The appellant was entitled to a rebate of 2% for punctual payment while in the case of default, interest at 8% per annum was provided for. Thereafter, on 23-1-1996, it is stated that there was a further modification in the rate of interest applicable and a rate of interest of 21% was provided for with a rebate of 2% for punctual payment and in case of default, penal interest of 8% was provided for. The loan was repayable in 21 quarterly installments, commencing from 15-1-1997 and ending on 15-1-2002. A deed of mortgagee is stated to have been entered into on 29-1-1996 which provided for, inter alia, a variation in the rate of interest.
4. The amount of loan was reduced in January, 1996 from Rs. 1 crore to Rs. 70 lacs. A total amount of Rs. 54 lacs came to be disbursed out of the sanctioned loan amount on 29-1-1996, 19-2-1996 and 29-3-1996.
5. The case of the respondent is that the appellant committed a breach of some of the essential terms of the agreement under which the loan was sanctioned to the appellant. These breaches included :
(1) a default in making payment of the installments under the loan facility, despite the fact that for the year 1995-96, the annual financial statement of the appellant indicated a net profit of Rs. 125 lacs and cash accruals of Rs. 130 lacs. Similarly, for the six months ending on 30-9-1996, the financial statement indicated a net profit of Rs. 120 lacs ;
(2) the appellant, according to the respondent, came out with a public issue without the permission of the respondent as a result of which it has received approximately Rs. 234 lacs as and by way of subscription money ;
(3) the appellant decided to invest cash accruals in the amount of Rs. 38.50 lacs into a diversification project without permission of the respondent; and
(4) the nominee Director, appointed by the respondent on the Board of Directors, was not kept informed about the meetings of the Board of Directors of the company.
6. Some of the material correspondence is on the record of this proceeding. This correspondence includes a letter dated 27-9-1996 by the respondent pointing out that the permission of the respondent had not been taken for the diversification project involving long term financial commitments. There is a similar letter dated 18-9-1996, in which, the respondent reminded the appellant to intimate its nominee Director of the meetings of the Board on a regular basis and recorded that no progress report had been received from the company. By a letter dated 7-10-1996, the respondent expressed its disapproval of the appellant having proceeded with a rights issue for a diversification project without the approval of the respondent and about the failure of compliance in respect of the terms and conditions of the loan agreement.
7. On 16-3-1997, the respondent issued a demand notice to the appellant calling upon the appellant to pay the principle overdue of Rs. 2.87 lacs and interest due as on 28-2-1997 amounting to Rs. 2.79 lacs. A total amount of Rs. 5,66,674/- was mentioned in the letter of demand. This was followed by a further letter dated 20-6-1997 setting out that the over-dues on account of the principal and interest were in the sum of Rs. 6.22 lacs and Rs. 4.07 lacs respectively. A reminder was addressed on 26-6-1997.
Eventually, on 17-7-1997, the respondent addressed a notice by which it recorded that inspite of several opportunities the over-dues had not been cleared. Besides this, a grievance was made about the fact that the nominee Director of the respondent had not been called for the Board Meetings and investments had been made without the prior approval of the respondent. It was stated that post dated cheques had been remitted to the respondent in May, 1997, but on 8-7-1997 the appellant had requested the respondent not to deposit two of the cheques. In view of the default committed by the appellant, the respondent recalled the entire amount of loan outstanding in the amount of Rs. 53.87 lacs together with interest of Rs. 3.70 lacs making a total amount of Rs. 56.94 lacs. Thereafter, on 19-8-1997, the respondent stating that its demand had not been cleared, intimated to the appellant that the respondent was proceeding to take action in exercise of its statutory powers under section 29(1) of the State Financial Corporations Act, 1951, for taking over possession of the securities which had been created in favour of the respondent.
8. The appellant instituted a suit in the Court of the learned Civil Judge, Senior Division at Latur to challenge the recall notice dated 17-7-1997 and the take over notice dated 19-8-1997. The principal contentions in the suit were that the rate of interest which has been charged is exorbitant and that there was a lack of bargaining power between the appellant and the respondent, consequent upon which the appellant was induced to enter into terms to its detriment.
The respondent filed its written statement in the trial Court setting out the circumstances in which the action came to be adopted. The circumstances of the default on the part of the appellant in payment of the loan installments and its failure of compliance under the agreement with the respondent has been adverted to.
The trial Court declined to grant interim relief by its judgment and order of 16-3-1998. In arriving at this conclusion on the question of interim relief the trial Court had regard to the principles of law laid down by the Supreme Court in relation to the exercise of powers under the State Financial Corporations Act, 1951. The trial Court held that where such a corporation, invokes its right to take possession of the assets mortgaged in its favour, the courts should not substitute their judgment for the judgment of the corporation. The trial Court was of the view that the appellant has not been regular in payment of the loan installment and was a defaulter. The trial Court rejected prima facie the argument that the documents in relation to the loan transactions have been signed under economic duress. Relying on the judgment of the Supreme Court reported in U.P. Financial Corporation v. Naini Oxygen & Acetylene Gas Ltd., : (1995)2SCC754 , the trial Court has held that unless mala fides are shown, it would not be open to the Court to interfere with the action of the Corporation. The Court was of the view that from the inception the appellant has insisted upon a rescheduling of the loan installments though that was not acceded to by the respondent. The appellant prima facie was held to have defaulted in the payment of the loan installments and was held to be a defaulter. In these circumstances, the action of the respondent, it was held, could not be regarded as arbitrary or unfair. The trial Court was of the view that the question, as to whether the terms of the mortgage were unreasonable, could not be considered at the interlocutory stage and will have to be considered at the trial of the suit. The trial Court has held that the appellant has also committed a breach of the terms and conditions of the agreement such as changing the location of the unit and not obtaining the permission of the respondent for its rights issue.
9. I have heard the learned Counsel for the parties. For deciding whether the interference of this Court is called for in this Appeal from Order, regard must be had to the settled principles of law laid down by the Supreme Court, particularly those in regard to judicial review in matters relating to the invocation of powers by State Financial Corporations under section 29 of the Act.
In Uttar Pradesh Financial Corporation v. Gem Cap (India) Pvt. Ltd. 1994 Bank.J. (S.C.)56 : A.I.R. 1993 S.C. 1435, the Supreme Court held that a State Financial Corporation is not like an ordinary bank which lends money. It is a lender with a purpose-the purpose being to promote small and medium scale industries. The Corporation is not merely expected to disburse loans but to recover them as well, so that it can offer fresh loans to others. The Corporation has to act in furtherance of the objects underlying the Act. Promoting industrialization at the cost of public funds does not serve the public interest; it merely amounts to transferring public money to private accounts. The burden of the Corporation cannot be carried to the extent of disabling it from recovering what is due to it. The function of judicial review would not, therefore, extend to the courts sitting as an appellate authority over a decision of the State Financial Corporation.
Similarly, in A.P. State Financial Corporation v. Gar Rerolling Mills & another : [1994]1SCR857 , Dr. Justice A.S. Anand (as the learned Chief Justice then was), delivering the judgment of a Bench of the Supreme Court, held that the State Financial Corporations Act, 1951, was enacted with a view to promote industrialization by giving financial assistance to industrial units. The Financial Corporations have to recover loans and advances, so as to enable them to give financial assistance to other industries and unless the Corporations recover their dues, the money will not remain in circulation for long. Parliament gave these Corporations powers under sections 29 and 31 of the Act so that the Corporations are not choked by defaulting debtors by adopting frustrating or dilatory tactics.
In U.P. Financial Corporation v. Naini Oxygen & Acetylene Gas Ltd., : (1995)2SCC754 , the Supreme Court held that the State Financial Corporation is an automous statutory body, having its own constitution and Rules to abide by, and with functions and obligations to discharge. As such, in the discharge of its functions, it is free to act according to business policy. The views it forms and the decision which it takes are on the basis of the information in its possession and the advice which it receives and according to its own perspectives and calculations. Unless its action is mala fide, even a wrong decision taken by it would not be open to challenge. It would not be open for the Court to substitute the decision of the Financial Corporation by another decision however more prudent, commercial and business like it may be.
Similarly, in Orissa State Financial Corporation v. Hotel Jogendra : (1996)5SCC357 , the Supreme Court held that public money is meant to be recycled to needy entrepreneurs. Dilatory tactics defeat public policy and the process of the Court is liable to become an instrument of abuse. The courts in such a case would protect only honest and sincere litigants.
10. Bearing in mind the principles which have been laid down by the Supreme Court and having regard to the facts of the present case, the order passed by the trial Court is appropriate and correct and does not call for interference by this Court. The narration of facts makes it abundantly clear that there was, in fact, a default on the part of the appellant in payment of the loan installments and in complying its obligations towards the respondent. The respondent was justified in taking a serious view of the attempt on the part of the appellant of investing its cash accruals in a diversification of its activities without the permission of the respondent and, the conduct of the appellant in assuming financial obligations, including a public issue of shares, without the permission of the respondent. A sufficient opportunity was given to the appellant to repay the dues of the respondent. Though the respondent had indicated that it was not willing to reschedule the loan installments, the appellant persisted in its default. In the interests of fairness and reasonableness, the appellant was given an intimation of its default and opportunities to rectify it. As regards the rate of interest, the Industrial Development Bank of India has intimated on 21st April, 1995 that the State Financial Corporations can determine the rate of interest which they will charge, depending on their perception of the risk involved in each project. Consequently, the decision of the respondent to invoke its powers under section 29 of the State Financial Corporations Act, 1951, cannot be faulted.
11. The trial Court has come to the conclusion that prima facie, the appellant was a defaulter and had committed a breach of the terms and conditions of the agreement. This finding cannot be regarded as erroneous or such as to warrant interference in this appeal from order.
12. When the Appeal from Order had come up before this Court for admission, as stated earlier, an order was passed by the learned Single Judge permitting the appellant to deposit an amount of Rs. 3 lacs per quarter and subject to that, the respondent was ordered to restrain from taking over possession. The Supreme Court, in its order of 23-4-1999, enhanced the amount of deposit from Rs. 3 lacs per quarter to Rs. 5 lacs per quarter. This Court was directed to dispose of the Appeal from Order within a period of six months. In pursuance of the order passed by the Supreme Court, it has been stated on behalf of the appellant that an amount of Rs. 30 lacs has been deposited.
Having regard to this position, during the course of the hearing of the Appeal from Order, I inquired with the learned Counsel for the parties whether a reasonable opportunity could be granted to and availed of by the appellant to repay the dues of the respondent. The matter was, therefore, adjourned to enable the parties to sit together and if possible, to resolve the dispute. The learned Counsel for the respondent stated that as a State Financial Corporation, the respondent was of the view that in order to secure its interest it would be necessary to require the appellant to deposit a monthly payment that would clear the dues of the respondent within the reasonable future. The learned Counsel for the respondent drew my attention to a letter written by the appellant to the respondent 28-2-2000, by which, the appellant proposed a one time settlement of all the outstanding dues of the respondent in the amount of Rs. 74 lacs, out of which, an amount of Rs. 10 lacs was paid by a cheque dated 28-2-2000. The appellant has assured the respondent that it would pay the balance of Rs. 64 lacs on or before 31st March, 2000. No payment was thereafter made, as stated in the letter. The learned Counsel appearing on behalf of the respondent submitted that the appellant ought to pay the amount of Rs. 64 lacs which the appellant had committed to pay in its letter of 28-2-2000 in reasonable monthly installments as may be suggested by the Court.
After hearing the learned Counsel for appellant as well as the respondent, a consensus emerged from the submissions of the learned Counsel that a figure of Rs. 2.75 lacs per month may be fixed as and by way of payment of the loan installments. This would be without prejudice to the rights and contentions of the parties in the trial Court in respect of the final adjustment of accounts. However, on seeking instructions from the appellant, the learned Counsel for the appellant, informed the Court that the appellant cannot pay any amount by way of a monthly installment and that the appellant is not ready to accept the figure of Rs. 64 lacs which has been adverted to in the appellant's letter of 28-2-2000.
In view of the position adopted by the appellant, the learned Counsel for the respondent has submitted, in my view, with a measure of justification that the appellant has no serious intention to repay the dues of the respondent and is dis-entitled to the grant of relief. An affidavit has been filed on behalf of the respondent in this proceeding on 29-8-2000 in which it has been stated that the appellant has undertaken an expansion project for doubling its capacity and is setting up a new unit at Navi Mumbai at a capital outlay of Rs. 15 crores, to be funded from internal accruals, preferential allotment to promoters and institutional investors and that the Unit Trust of India has purchased four lac shares of the appellant company and transferred the amount to the promoters. The net profit of the company for the year 1999-2000 was stated to be in the amount of Rs. 2.20 crores.
13. In the facts and circumstances of the case, I am of the view that the conclusion which has been arrived at by the trial Court is correct and proper and requires no modification or interference in this proceeding. Before concluding, it must be recorded that the observations of the trial Court as well as those in this order are only prima facie in nature and confined only to the issue as to whether the appellant is entitled to interim relief in the suit. The trial Court will try and dispose of the suit on merits in accordance with law uninfluenced by the observations made in the order of this Court or in the order of the trial Court.
14. The Appeal from Order is accordingly rejected.