Guarantor — Recovery of loan — Corporation cannot sell out properties mortgaged to it by guarantors — State Financial Corporation Act — Section 29, section 31.

The properties in question were the ancestral properties of one the late Manmohan Swain. One Smt. Sanjukata Swain purchased a TATA truck by availing a loan from Orissa State Financial Corporation (‘OSFC’). Accordingly, an agreement was entered into between the parties. In the said loan, the late Manmohan Swain, and other two persons, namely, Ganeswar Swain and Ghanashyam Swain stood as guarantors and created equitable mortgage in respect of the properties in question in favour of OSFC. Since the loan amount was not paid, the OSFC published a notice for sale of the mortgaged properties in the newspaper. The said properties were put to auction and the sale was finalised in favour of Shri Subhransu Sekhar Padhi for a total consideration of Rs.10,09,000. Pursuant to such sale, sale deed was executed between OSFC and Shri Subhansu. Thereafter, OSFC sent a notice by Registered Post to the petitioner Prafulla Chandra Swain, the son of the late Manmohan Swain to take refund of Rs.2,85,486. Being dissatisfied with such action of OSFC, the petitioners filed the writ petition.

The High Court observed that section 29 speaks about the right of financial corporation in case of default in repayment of loan. The default contemplated thereby is of the industrial concern. When an industrial concern makes any default in repayment of any loan or advance or any instalment thereof under the agreement or in meeting its obligation in relation to any guarantee given by the corporation, the financial corporation has the right to take over the management or possession or both of the industrial concern. It further gives right to the corporation to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated as assigned to the financial corporation by the industrial concern. 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. The said 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. In view of the above, the Court held that the OSFC in exercise of power vested u/s. 29 of the SFC Act cannot sell out the properties mortgaged to it by the guarantors. The Court further observed that section 31 of the SFC Act provides for a special provision for enforcement of claims by the financial corporation against a surety or guarantor. The financial corporation can proceed against a surety or mortgagor invoking the provision u/s. 31 for the default committed by the industrial concern, and also where the financial corporation requires the industrial concern to make immediate repayment of loan or advance in terms of section 30 and the industrial concern fails to make such repayment. To exercise power u/s. 31, the OSFC is required to apply to the District Judge having appropriate jurisdiction. Thus, section 29 is concerned with the property of industrial concern, while section 31 takes within its sweep both the property of industrial concern and that of the surety. The statute provides an additional remedy for recovery of the amount in favour of the OSFC by proceeding against the surety in terms of section 31 of the OSFC Act. Such a power is not vested with the corporation u/s. 29.

Needless to say that public money has to be recovered from the defaulters, who do not repay the loan amount to the financial institutions. This does not mean that financial institutions are at liberty to dispose of the secured asset of the defaulters in unreasonable or arbitrary manner in flagrant violation of the statutory provisions and principles of natural justice.