Judgment:
S.K. Mohanty, J.
1. Seizure of hotel 'Jhilmil' at Chandaneswar in the district of Balasore, handing over possession of the same in favour of and issue of sale letter to opposite party No. 4 by Orissa State Financial Corporation are under challenge in this proceeding under Article 226 of the Constitution of India.
2. A partnership firm styled as 'M/s. Hotel Jhilmil' with petitioner and, one Hemanta Kumar Dhar as partners applied for loan to the Corporation to establish a hotel at Chandaneswar. The Corporation sanctioned loan of Rs. 8,39,000/- in two phases on 22-7-1988 and 1-9-1988. The partnership however availed only Rs. 7,94,000/ - out of the sanctioned amount. Pending final sanction of subsidy amounting to Rs. 2,36,700/- by the Subsidy Committee, the Corporation also disbursed same amount to the partnership as loan. After completion, the hotel started functioning from November, 1989. As on 30-6-1991, the partnership had defaulted Rs. 3,26,435/- out of which principal was Rs. 9,720/- and interest Rs. 2,27,715/-.
The Corporation by notice dated 8-7-1991 (Annexure-A) gave a second chance to the partnership to pay the defaulted amount by 24-7-1991, intimating therein that in default, the Corporation will take over possession of the hotel under Section 19 of the State Financial Corporation Act, 1959 with right to lease and sell the same. Since the partnership did not comply the notice, the Corporation by another notice dated 29-7-1991 (Annexure B) recalled the loan and called upon the partnership to pay the entire dues amounting to Rs. 12,59,415/- by 15-8-1991, failing which the Corporation will take over the hotel under Section 29 of the Act with right of leasing out or selling the same without any further reference to the partnership. It ultimately seized the hotel as to payment was made and on the same day made over its possession to opposite party No. 4 (who was in occupation of four rooms of the hotel since 31-10-1990 by virtue of a document of lease for 5 years for running the office relating to his business.) It published sale notice in daily 'samaj' on 12-3-1992 fixing the date and time of sale as 17-3-1992 at 10-30 a.m. in the branch office of the Corporation at Balasore and the earnest money to be deposited at Rs. 1,00,000/-. On 14-3-1992 opposite party No. 4 deposited Rs. 1,00,000/- towards earnest money and submitted a tender/application (Annexure C) offering to purchase the hotel at Rs. 12,00,000/- to be payable by instalments to be fixed by the Corporation. Auction was not held on date fixed as there was only one offer by opposite party No. 4. The Auction Committee thereafter authorised the Managing Director of the Corporation to negotiate and sell the hotel. Negotiation was accordingly held and Corporation ultimately decided to sell the hotel in favour of opposite party No. 4 for a consideration of Rs. 14,00,000/- with down payment of Rs. 2,00,000/- immediately and another Rs. 1,00,000/- by 15th of April, 1992. Accordingly, on 30-3-1992 the Corporation issued a sale letter (Annexure H) to opposite party No. 4 indicating conditions of payment and calling upon the latter to execute appropriate documents. The Corporation also delivered formal possession of the hotel to opposite party No. 4 on 31-3-1992, since actual possession had already been given to him on 9-3-1992.
3. Learned counsel for the petitioner attacked the aforesaid action of the Corporation as unjust, unfair, unreasonable and arbitrary on the following grounds. The Corporation made secret negotiation with opposite party No. 4 and received advance consideration on 12-2-1992 much prior to seizure. This conduct of the Corporation indicates that much before the actual seizure, the Corporation had already decided to hand over possession of the hotel to opposite party No. 4 under leave and licence agreement immediately after its seizure. The Corporation has not placed any material to show that it negotiated with any other party for running the hotel after seizure of the same. The public notice through daily 'Samaj' about sale of the hotel 5 days thereafter was quite inadequate and was a mere eye-wash on the background of secret negotiation beforehand. By Annexure-H dated 30-3-1992, the Corporation accepted the offer of opposite party No. 4 subject to compliance of conditions enumerated therein within 7 days. Compliance of the conditions with utmost dispatch and hurried issue of the sale letter on the following date indicated the anxiety of the Corporation to transfer the hotel in favour of opposite party No. 4. If there was only one offer (by opposite party No. 4) on 17-3-1992 as contended by the Corporation, there should have been fresh advertisement and at any rate, the petitioner should have been informed that opposite party No. 4 had agreed to purchase the hotel for Rs. 14,00,000/- with down payment of Rs. 3,00,000/- to enable him at least to find out a purchaser at higher consideration, because ultimately he was the person affected.
4. Learned counsel for the Corporation on the other hand submitted that out of the loan taken, the partnership firm had repaid only Rs. 37,360/- (Rs. 26,860/- from subsidy and Rs. 10,500/- from business) till the date of seizure on 9-3-1992. When the notices dated 7-7-1991 and 27-7-1991 (Annexures A and B) issued by the Corporation did not bear any fruit, the Corporation had no other alternative than to take over possession of the hotel. In this connection, the officials of the Balasore Branch of the Corporation visited Chandaneswar in January, 1992 and discussed with the petitioner and his partner for payment or to face action under the Act. The staff of opposite party No. 4 who were holding office in the hotel coming to know of such discussion, offered to the officers of the Corporation to take over the hotel on leave and licence basis in case of seizure and deposited Rs. 1,00,000/- indicating their sincerity. Since the Corporation has no adequate man-power to guard the hotel after seizure, for the advantage of the tourists and general public and as opposite party No. 4 who runs his office in the hotel itself contacted the Corporation officials to take the hotel under leave and licence in case of seizure, there was nothing wrong in accepting Rs. 1,00,000/-from opposite party No. 4 on 12-2-1992 and for this bona fides of the Corporation cannot be doubted. Since the petitioner did not comply with the notices and personal contacts proved futile, the Corporation was forced to seize the hotel on 9-3-1992 and to deliver possession of the same on leave and licence basis to opposite party No. 4, who was readily available at the hotel. Since there was an earlier advertisement of sale of certain units on 17-3-1992, in the facts of the case it was thought proper to hold auction of the hotel also on the same date. The hotel however could not be auctioned on the date fixed because of solitary offer by opposite party No. 4 for consideration of Rs. 12,00,000/-. The Auctioning Authority did not feel the offer to be adequate and in this circumstances authorised the Managing Director to negotiate in the matter. The petitioner himself appeared on 17-3-1992 and requested to take part in the bid without complying the conditions prescribed in the sale notice and therefore his request could not be acceded to. Ultimately, the Managing Director of the Corporation was authorised to negotiate. The petitioner in his individual capacity negotiated and offered to take the hotel with down payment of Rs. 38,000/- and further sum of Rs. 12,000/- to Rs. 20,000/- by the end of March, 1992. On the other hand, opposite party No. 4 offered down payment to Rs. 3,00,000/ - and agreed to take the hotel for a consideration of Rs. 14,00,000/- which covered the entire amount outstanding against the hotel. In the circumstances, the Corporation rightly issued the sale letter to opposite party No. 4 on 30-3-1992 and formally handed over possession to him on 31-3-1992. In this background it is submitted that the action of the Corporation was perfectly just, fair and reasonable.
5. At the outset it is necessary to know the power of the Corporation in case of default in repayment of any loan and when and in what manner it should be exercised. The Corporation is vested with wide powers under Section 29 of the Act to enable it to realise the defaulted amount. Wider the power, greater is the responsibility of a public authority exercising the same. The Act has been enacted for general benefit and common good of the general public. Therefore, while exercising the power the authority is to remember the object of the Act and its approach must be purposeful, just and fair. On Mahesh Chandra v. U. P. Financial Corporation, 1992 (1) SCALE 388, in the matter of power of the Corporation, the apex Court had held :
An action is bad even without proof of motive of dishonesty, if the authority is found to have acted contrary to reason. Power under Section 29 of the Act to take possession of a defaulting unit and transfer it by sale requires the authority to act cautiously, honestly, fairly and reasonably. Default in payment of loan may attract Section 29. But that along is insufficient either to assume possession or to sell the property. Neither should be resorted to unless it is imperative.....Lack of reasonableness or even fairness at either of the two stages renders the take over and transfer invalid.
As to duties, responsibilities and obligations of the Corporation towards the debtor it is stated:
It (Sub-section (4) of Section 29) saddles the Corporation or the officer concerned with inbuilt duties, responsibilities and obligation towards the debtor in dealing with the property and entails him to act as a prudent and reasonable man standing in the shoes of the owner..... when the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell or further mortgage etc., the Corporation or its officers or employees stand in the shoes of their debtor as trustee and the property cestue que trust...... He should, therefore, use reasonable diligence in inviting competition to that and...... It would, however, be improper for the trustee to contract in circumstances of haste and improvidence.
6. Now the present case is to be examined in the light of the above pronouncement of the apex Court. Since the partnership had defaulted in repayment of the principal and interest as fixed in the loan agreement, the Corporation was empowered under Section 29 of the Act to take over management or possession of the hotel in question and to transfer it by way of lease or sale. But the core question is whether such power under Section 29 of the Act has been exercised fairly and reasonably. The loan amount was to be repaid by the petitioner within a period of 8/2 years with a moratorium of 1 1/2 years. The first instalment of the loan was sanctioned on 22-7-1988. Therefore repayment was to start from February, 1990. By 30-6-91 the total default stood at Rs. 3,26,435/- which included interest amounting to Rs. 2,21,715/-, a substantially high amount compared to the loan. For clearing the arrear dues the petitioner was duly noticed on 8-7-1991. He did not comply with the same by the date fixed. Thereafter notice under Section 30 of the Act was issued by the Corporation on 27-7-1991 recalling the entire loan and calling upon the petitioner to pay the same by 15-8-91. This was also not complied. The petitioner did not made any payment thereafter for about 6 months till the actual seizure of the hotel was made on 9-3-1992. Thus the power of seizure was exercised by the Corporation long six months after issue of the notice under Section 30 of the Act. In the circumstances it can rightly be said that the Corporation exercised the power because of imperative need therefor. In other words, it cannot be said that the Corporation acted either unfairly or unreasonably in deciding to take possession and ultimately taking possession on 9-3-92. In our view the challenge of the petitioner that the decision of the Corporation to take over possession was unjust, unfair and unreasonable is satisfactorily countered by the Corporation.
7. The next question arises, whether after seizing the hotel the Corporation has acted fairly in handing over possession of the hotel to opposite party No. 4 on the very same day. The Corporation has not placed any material on record to indicate as to when exactly it took the decision to take over actual possession of the hotel. In this background receipt of Rs. 1 lakh from opposite party No. 4 on 12-2-92 when the actual seizure was made on 9-3-92 smacks of some unfair deal behind the curtain. It is explained by the Corporation that coming to know about the proposed seizure of the hotel in January, 1992 opposite party No. 4 who was running its office in the hotel, offered opposite party No. 3, the Branch Manager of the Corporation, to take over the hotel on leave and licence basis in case of seizure and as per his (opposite party No. 3's) instruction opposite party No. 4 deposited Rs. 1 lakh on 12-2-92. The Corporation justifies the action of its Branch Manager entering into a discussion with opposite party No. 4 on the grounds that the Corporation has no adequate man power to guard the hotel after seizure, that it wanted continuation of the hotel business for the benefit of the tourists and general public and that if the hotel is leased out on leave and licence basis, the Corporation will get return. As to the discussion between opposite party No. 3 and opposite party No. 4 in above manner, no document has been placed on record. The Corporation and its employees have not taken the stand that by 12-2-1992 the Corporation had already taken a firm decision to take over the hotel. So the action of opposite party No. 4 in depositing Rs. 1 lakh and the Corporation accepting the same about one month prior to the actual seizure, even if it be towards consideration for leave and licence, handing over possession of the hotel to opposite party No. 4 on the date of seizure itself without making any attempt to find out any other competitor to take the hotel at better price and non-disclosure of the terms of ultimate leave and license raise a genuine suspicion that the Corporation had engaged in secret negotiation with opposite party No. 4. Above action of the Corporation was undoubtedly arbitrary had hasty and liable to be struck down. Even though the power of seizure was justified, the subsequent action cannot be sustained being vitiated by arbitrariness not expected from an instrumentality of State.
8. The petitioner has attached the sale in favour of opposite party No. 4 on the ground that the Corporation has not discharged the trust imposed on it by law and has not acted in a reasonable and prudent manner. The hotel is situated at a religious place but in the interior of Balasore district which adjoins the State of West Bengal. Soon after seizure of the hotel on 9-3-1992 the Corporation advertised in daily 'Samaj' dated 12-3-1992 that the hotel will be sold on 17-3-1992 in its Branch office at Balasore. It is explained that earlier some other units had been advertised for sale on 17-3-1992 and therefore, the Corporation fixed the same date for sale of the hotel in question. If really by a genuine leave and licence agreement possession of the hotel had been transferred in favour of opposite party No. 4 on 9-3-1992 as against deposit of Rs. 1 lakh, then there was absolutely no justification for the Corporation to hastily advertise on 12-3-1992 fixing the date of sale as 17-3-1992. The locality of the place where the hotel is situate would normally invite businessmen from the neighbouring State of West Bengal. In this view of the matter, there should have been advertisement in a daily newspaper of West Bengal and some business magazines also sufficiently ahead of the date fixed for sale. But this was not done and thereby the Corporation has not acted prudently. The fact that on 17-3-1992 there was the solitary offer of opposite party No. 4 undisputedly indicates that the advertisement for the sale was not at all adequate and in this view of the matter, the Corporation should have adjourned the sale of the hotel and re-advertised it giving sufficient gap. This was not done. On the other hand, the Corporation thought it proper to negotiate with opposite party No. 4. Such conduct of the Corporation is open to legitimate criticism as being unjust and unfair.
9. There are three recognised modes by which a property is put to sale. The first and the best mode is by public auction, as thereby the best price can be had. The second mode is by inviting tender. This mode is to be adopted only if sale by public auction is not possible. The third is by private negotiation which a public authority should always avoid since it cannot withstand public criticism. In the case of hand no doubt the first and best mode the adopted by advertising in daily newspaper about sale of the property calling upon prospective purchasers to deposit earnest money and take part in the sale to be held, in public. When on the date fixed, there was the solitary offer of opposite party No. 4 in fitness of things sale by public auction should have been adjourned to a future date. But this mode was given a go-bye and the solitary tender/application filed by opposite party 4 on 14-3-1992 was pursued. It is not understood how and why opposite party 4 submitted tender on 14-3-1992 and the Corporation received the same when it had decided to sell by public auction. On 14-3-92 the opposite party No. 4 submitted tender/application (Annexure-G) offering to purchase the hotel for a consideration of Rs. 12 lakhs. It is contended that since auction could not be held on the date fixed, the D.A.C. (Disposal-cum-Advisory Committee-Default Account) authorised the Managing Director of the Corporation to negotiate and sell the hotel. It is claimed that accordingly negotiation was held and the sale letter Annexure-H was issued to opposite party No. 4 fixing the consideration at Rs. 14 lakhs subject to the condition that opposite party No. 4 shall deposit another Rs. 1 lakh by 15-4-1992, the loan shall be repaid within a period of 5 1/2 years, and the Directors of opposite party No. 4 shall furnish their personal guarantee for repayment of balance loan with interest etc. It may be profitably noted here that offer by opposite party No. 4 as per Annexure-C was in a tender form which seems to have been prescribed by the Corporation. In item No. 14 the tenderer/applicant was to indicate if he has any bank account. The tenderer has not furnished any information against this item. In item No. 15 he is called upon to indicate if he is prepared to give sufficient mortgage in shape of collateral security for the balance deferred payment. As against this item it is noted that security cannot be offered by the company. It may be recalled here that in the sale letter, mortgage in shape of collateral security has not been insisted upon and on the other hand, opposite party No. 4 has been directed to furnish personal guarantee of the Directors for repayment of the loan. Annexure-1 signed by the representatives of opposite party No. 4 and the Corporation indicates that in terms of the sale letter dated 30-3-1992 documents were executed on 31-3-1992 thereby meaning that the sale was completed on this latter mentioned date. Curiously enough the Corporation does not disclose if the conditions indicated in the sale letter were complied before execution of the document of sale on the following date, i.e. on 31-3-92 for reasons best known to the opposite parties the document dated 31-3-1992 referred to in Annexure I is also not brought on record. These facts at least raise a suspicion regarding the bona fides of the Corporation in dealing with the property. In the facts of the case, without entering into any negotiation with opposite party No. 4 the Corporation should have made fresh advertisement.
10. Before taking a final decision to sell the hotel to opposite party No. 4 for Rs. 14 lakhs in the facts of the case a duty was cast on the Corporation to intimate this fact to the petitioner at least to enable him to bring third parties with higher offer. Such a course of action was also not adopted.
11. Mr. B. Misra appearing for opposite party No. 4 placed reliance on the decision of the apex Court in the case of Haji T. M. Hassan Rawther v. Kerala Financial Corporation (AIR 1988 SC 157) and submitted that the Corporation has rightly negotiated with opposite party No. 4 and finalised the deal. In the referred case, the State Financial Corporation invited tenders for sale of certain property. The appellant submitted the highest tender and was given all concessions for payment of the tender amount, but he did not avail and instead negotiated with the Corporation to make payment by instalments. That was also granted to him. He again failed. Thus the appellant could not act according to the tender. In such circumstances, the property was offered to the next tenderer whose tender amount was raised after negotiation. Ultimately, the Corporation decided to sell the property to the second next tenderer. Such decision of the Corporation was upheld by the apex Court. It is not understood how this decision has any application to the facts of the case before us. In our case, the Corporation never decided to sell the property by inviting tenders. Therefore, the question of negotiation with the opposite party No. 4 could not arise.
12. In the light of the discussions in the foregoing paragraphs, or conclusion would be that although seizure of the hotel was legally justified, the conduct of the Corporation in handing over possession to opposite party No. 4 under leave and license and deciding to sell to him was neither above-board, nor reasonable nor prudent expected from a financial institution. The Corporation did not make any endeavour to get the best price either for the leave and license or for the ultimate sale, so that both the financial institution and the petitioner could have been benefited thereby. It has failed to discharge its duty as a trustee and contracted with the opposite party No. 4 in circumstances of haste and improvidence and therefore the delivery of possession and sale of hotel in favour of opposite party No. 4 cannot be sustained and hereby quashed.
13. Now the difficult question arises as to what directions are to be given to the Corporation with regard to the hotel in question. We have held that the action of the Financial Corporation effecting seizure of the hotel on 9-3-1992 is not illegal. But the subsequent actions in handing over possession to opposite party No. 4 under the so-called leave and license agreement and ultimate sale in his favour are illegal. In the facts of the case the Corporation is directed to take over possession of the hotel from opposite party No. 4 within three weeks from today. It may either to transfer possession of the hotel under agreement for leave and license or bring it to sale. In either case, the Corporation shall give wide publicity through advertisement in one daily english newspaper and business magazines published from Calcutta and an Oriya daily. If the petitioner offers himself as a bidder complying the conditions of the advertisement then he shall be allowed to take part in the bid. With the above directions, the writ application is disposed of. There shall be no order as to costs.
D.P. Mohapatra, J.
14. I agree.