LEGAl EAGLE
Inspite of all its merits, in reality the SFCs essentially remain – a State-managed Financial Institution running on Public Exchequer. And the rest is best left at that. In the same breath, and as a responsible member of my fraternity, I think, an ounce of that culpability can be attributed to us as sometimes even under insouciant judicial pronouncements he and his surety scot free from their liability.
‘New teeth to the old Tiger’ State Financial Corporations
The Writer talks about the role of the State Financial Corporations and the process of recovery by them
Raunaq Rao The Columnist is a practicing Advocate and takes keen interest in public affairs and socio-legal issues raunaq.rao@gmail.com
W
e have achieved political freedom but our revolution is not yet complete and is still in progress, for political freedom without the assurance of the right to live and to pursue happiness, which economic progress alone can bring, can never satisfy a people. Therefore, our immediate task is to raise the living standards of our people, to remove all that comes in the way of the economic growth of the nation. …” said Nehru in his 13th October, 1949 speech to the United States Congress. The intention was clear and the goal was set for the First Cabinet. Industrial development had no substitute – Industrialisation it was - and that was the agenda of the first Minister of Industries & Supplies, Dr. Syama Prasad Mookerjee during his tenure in office (from 15.08.1947 to 06.04.1950) One of first legislative steps in this direction was the setting up of the Central Industrial Finance Corporation under the Industrial Finance Corporations Act, 1948
which aimed at providing medium and long term credit to industrial undertakings which back then fell outside the “normal activities” of Commercial Banks. Soon a need was felt and expressed by the State Governments that similar Corporations be set up at StateLevel to supplement the work of the Industrial Finance.It was also felt that these State Corporations be established under a special legislation in order to make it possible to incorporate in the Constitution necessary provisions in regard tomajority control by the Government, guaranteed by the State Government in regard to the payment of principal. With this view the State Financial Corporation Bill was introduced in the Parliament. The State Financial Corporation Act was thus enacted on 31.10.1951. As envisaged State Financial Corporations (SFCs), played apivotal role in the development of small and medium enterprises with the main objectives of financing and promoting such enterprises for achieving balanced regional growth, catalyse investment, regenerate employment and widen the ownership base of industry. Between 1951 till date there are according to available statistics 18 SFCs nation-wide and counting. With the deregulated financial system, and with the coming into fray of the Amendment Act of 2000, this provided greater flexibility to the SFCs. Inspite of all its merits, in reality the SFCs essentially remain – a State-managed Financial Institution running on Public Exchequer. And the rest is best left at that. In the same breath, and as a responsible member of my fraternity, I think, an ounce of that culpability can be attributed to us as sometimes even under insouciant judicial pronouncements the debtor and
his surety walk scot free from their liability. In the year 2006, the Supreme Court in the case of Maharashtra State Financial Corp. v. Ashok K. Agarwal was faced with the following facts:The Corporation had advanced loans to Crystal Marketing Private Ltd. The Directors of the Company had stood surety towards the loan. On default in repayment, the hypothecated property was attached. Upon auction sale of the attached properties, there arose a shortfall of Rs. 16,79,033/-. Upon being demanded by the Corporation from the surety, the same was not paid. The Corporation moved an application under Section 31 of the Act for enforcing the liability of the surety for the said amount. The District Judge dismissed the application holding that it was barred by limitation. Upon Appeal to the High Court dismissed reiterating the District Courts finding. In appeal before the Supreme Court, two substantial questions arose: (a) Whether an application under Section 31 is in the nature of execution proceeding and, therefore, Article 136 of the Limitation Act is attracted allowing a limitation of 12 years; and; (b) Whether the limitation for enforcing a continuing guarantee commences only from the date of failure of the surety to pay on demand. The Supreme Court however considered only the first question, and whilst dismissing the appeal held that an application under Section 31 of the Act is not by way of execution of a decree or order of any civil court and as such the residuary Article 137 of the Limitation Act applies which provides for a limitation of 3 years; and since the application was not moved within this limitation period, it was time-barred. The second question as regards limitation for enforcing the continuing
guarantee remained unanswered despite an attempt to review. So what really happens when a debtor does not pay? The remedy to that lies in S. 29 of the Act whereunder the SFCs can take over the assets of the debtor, which asset is thereafter auctioned and the dues realised. In the event of any deficit, the SFCs can apply for an action under S. 31 of the Act, whereby such deficit is recovered from the debtors and their sureties. However, more often than not, the period of time spent between action under S. 29 and thereafter under S. 31 is more than 3 years. This year i.e. 2014, by virtue of the case of D. Bhandari v. HP State Industrial Development Corporation Ltd., the Supreme Court revisited this question. Their Lordships, Justices A.K. Sikri and K. S. Radhakrishnan at the very outset made it clear that it was not a virgin path that they were treading. It has been now held that when the Corporation takes steps for recovery of the amount by resorting to the provisions of Section 29 of the Act, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the industrial concern. As the Corporation would be in a position to know as to whether there is a shortfall or there is excess amount realised, only after the sale of the mortgage/ hypothecated assets. In the same breath, the Bench expressed that it had become necessary to clarify the legal position and to reconcile the ratio of the previous judgments of the Supreme Court which although unintended, had left scope for ambiguity to creep in thus leaving the rest to one’s imaginative interpretation, which this judgment now peacefully lays to rest JULY 2014
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