State Financial Corporations, In The Past, Unfairly Usurped The Authority To Proceed Against The Guarantor Under Section 29 And Section 31 Of SFC Act

1.         It is respectfully submitted, it appears to a surety or a guarantor, that for quite some time, knowingly or unknowingly, an unwarranted inclination has developed among the Creditors/Tribunals to usurp and any how widen the scope and width of its jurisdiction to cover the surety, irrespective of whether the statute conferred the same or not, and surprisingly and unfortunately, the higher Courts have, by and large, unjustifiably supported such tendency to the detriment of the surety. For example, (as cited below), a Division Bench of Hon’ble Orissa High Court in 1992, Hon’ble Madras High Court in 2005 and Hon’ble Kerala High Court in 2007 have time after time held that under Section 29 of the State Financial Corporations Act, 1951 (‘SFC Act’), a State Financial Corporation can realise the property mortgaged by a surety, while exercising its power of realising the property mortgaged, hypothecated or assigned, in the event of a default by the industrial concern in repayment of any loan or advance

{Miss. K.T. Sulochana Nair v. Managing Director, Orissa State Financial Corporation, AIR 1992 Ori (DB) 157; Decided on 11 February, 1992); G. Kailasam v. Tamilnadu Industrial Investment Corporation Ltd, AIR 2005 Mad 297; A.N.Ponnappan v. Kerala Financial Corporation, AIR 2007 Ker 234}.


2.         In this regard, a Division Bench of Orissa High Court in K.T. Sulochana case (supra) has held as follows.


“A bare reading of the aforesaid provision makes it abundantly clear that the Financial Corporation shall have the right to take over the management or possession of both of the industrial concern as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. There is nothing in the aforesaid provision to indicate that the right under Section 29 of the Act is only in respect of the property of the loanee mortgaged with the Corporation. On the other hand, all properties mortgaged with the Corporation would come within the purview of Section 29 of the Act.”


However, on the contrary, Hon’ble Supreme Court in Karnataka State Financial Corporation Vs N. Narasimahaiah & Ors {2008 AIR 1797, 2008 (5) SCC 176; Decided on 13/03/2008} has, inter alia, held as follows.


“14. 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.” (Emphasis supplied)


It would be interesting to note here that the Supreme Court in this judgment did not find even worth discussing the decisions of the Division Bench of Orissa High Court in K.T. Sulochana case (supra), of Madras High Court in G. Kailasam case (supra) and of Kerala High Court in A.N. Ponnappan case (supra).


3.         Further, a three judge bench of Hon’ble Supreme Court in Maharashtra State Financial Corporation vs Jaycee Drugs And Pharmaceuticals {1991 SCC (2) 637; Decided on 19 February, 1991} has held as follows.


“At this place it may be pointed out that with regard to the enforcement of the liability of a surety it was held by a Full Bench of the Allahabad High Court in Munnalal Gupta v. Uttar Pradesh Financial Corporation and Another, A.I.R. 1975 Allahabad 416 that from the scheme of the Act it is clear that the speedy remedy contained in Section 31 is available not against the surety but against the borrower only. In arriving at this conclusion reference was made inter alia to the reliefs (a), (b) and (c) contained in sub-section (1) of Section 31 and to sub-section (4) of Section 32 of the Act as it then stood. It was pointed out that this sub-section (4) contemplated a notice to the borrower industrial concern after an interim order had been passed to show cause why the ad interim injunction should not be made absolute but did not contemplate a notice to the surety and that it would be unthinkable that the Legislature intended that the property of the surety may be attached and put to sale without even a notice to him. (Emphasis supplied)


“It appears that in order to meet the difficulty in enforcing the liability of a surety as pointed out in the case of Munnalal Gupta (supra) Parliament found it necessary to make specific provisions in this behalf and passed the State Financial Corporations (Amendment) Act, 1985.”


In this regard, Hon’ble Supreme Court in Karnataka State Financial Corporation case (supra) has further observed as follows.


“22. Section 31 of the Act provides for the reliefs which may be sought for by the Corporation strictly in terms thereof. Clause (aa) of sub- section (1) of Section 31 of the Act provides for a final relief. It does not speak of any interlocutory order. Clause (aa), as noticed hereinbefore, has been inserted by Act No. 43 of 1985. Thus, prior thereto even Section 31 could not have been taken recourse to against a surety. (emphasis supplied)

From aforesaid, it is evident that the State Financial Corporations in the past unfairly usurped and widened the scope and width of its authority to cover the surety under Section 31 of SFC Act up to and until 1975 till passing of a contrary judgment by the Allahabad High Court in Munnalal Gupta case (supra), and also under Section 29 of SFC Act up to and until 2008 till passing of a contrary judgment by the Supreme Court in Karnataka State Financial Corporation case (supra).

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