Date of the Judgment: 21 March 2024
Citation: 2024 INSC 256
Judges: Sanjiv Khanna, J., Dipankar Datta, J.
Can a financial corporation proceed with the sale of a mortgaged property when a borrower defaults on loan repayment? The Supreme Court of India recently addressed this issue, clarifying the powers of State Financial Corporations in recovering dues. The case involved a loan default, multiple settlement attempts, and the eventual sale of the mortgaged property. The Supreme Court bench, comprising Justices Sanjiv Khanna and Dipankar Datta, delivered the judgment.
Case Background
The Orissa State Financial Corporation (hereinafter referred to as ‘the Corporation’) sanctioned a loan of Rs. 3,26,258.78 to Prasanta Kumar Mohapatra, the second respondent. The loan was to be repaid in 24 monthly installments, starting from January 31, 1997, and ending on December 31, 1998. Sukanti Mohapatra, the first respondent, mortgaged a plot of land as security for the loan. Despite several notices, the loan remained unpaid, leading the Corporation to recall the loan on November 8, 2002, with an outstanding amount of Rs. 10,91,673.07 as of June 30, 2002. The Corporation stated that the loan was for a vehicle that became untraceable.
Timeline
| Date | Event |
|---|---|
| 31.01.1997 | Loan repayment started. |
| 31.12.1998 | Loan repayment was to end. |
| 08.11.2002 | Loan recalled by the Corporation. |
| 06.01.2004 | First OTS proposal by respondents, rejected due to non-payment of upfront fee. |
| 08.09.2004 | Second OTS proposal by respondents, rejected due to willful default and clandestine sale of vehicle. |
| 31.03.2006 | Third OTS proposal by the Corporation for Rs. 6,27,400, subject to payment within 30 days or in installments. |
| 07.08.2006 | Representation by respondent no. 2 for reduction of OTS amount. |
| 02.09.2006 | Corporation rejected the representation for reduction of OTS amount. |
| 14.11.2006 | Sale notice of the mortgaged property issued with an offset price of Rs. 13,15,000. |
| 24.11.2006 | Letter issued to respondents to pay dues of Rs. 21,58,000, failing which the sale would proceed. |
| 29.11.2006 | Mortgaged property sold for Rs. 13,20,000 to Tusar Ranjan Mishra. |
| 05.12.2006 | Balance sale amount paid by Tusar Ranjan Mishra. |
| 06.12.2006 | High Court passed an interim order directing respondent no. 2 to deposit Rs. 2,50,000. |
| 12.04.2007 | Writ petition disposed of by the High Court. |
| 03.05.2007 | Application for modification disposed of by the High Court. |
| 03.05.2007 | Representation by respondent no. 1 challenging the sale. |
| 21.06.2007 | Corporation rejected the representation challenging the sale. |
| 11.06.2007 | Writ Petition filed by respondent no. 1. |
| 27.06.2007 | Corporation returned Rs. 2,50,000 to respondent no. 1. |
| 06.07.2007 | Respondent no. 1 paid Rs. 4,00,000. |
| 21.10.2008 | Sale deed executed in favor of Tusar Ranjan Mishra. |
| 31.07.2024 | Deadline for respondents to pay the entire sale consideration along with interest. |
Course of Proceedings
Prasanta Kumar Mohapatra filed a writ petition before the High Court seeking to quash the sale notice and requesting acceptance of payment under the third OTS proposal. The High Court initially directed him to deposit Rs. 2,50,000. Later, the High Court disposed of the writ petition, observing that if the sale was found to be wrong, it would be recalled after giving an opportunity to Sukanti Mohapatra to repay the amount. Sukanti Mohapatra also challenged the sale through a representation, which was rejected by the Corporation. Sukanti Mohapatra then filed a separate writ petition. The High Court directed her to deposit Rs. 4,00,000, and further directed that physical possession of the property would not be taken without the leave of the Court. Subsequently, both respondents filed another writ petition with similar prayers.
Legal Framework
The Corporation took action under Section 29 of the State Financial Corporations Act, 1951, which allows the corporation to seize and sell mortgaged property when a borrower defaults on loan repayment. The relevant part of the provision is:
“Section 29 of the State Financial Corporations Act, 1951 gives a right to the financial corporation inter alia to sell the assets of the industrial concern and realize the property pledged, mortgaged, hypothecated or assigned to the financial corporation.”
Arguments
The appellant, the Orissa State Financial Corporation, argued that they had followed due process under Section 29 of the State Financial Corporations Act, 1951, in seizing and selling the mortgaged property. They contended that multiple opportunities were given to the respondents to settle the dues through various OTS proposals, but the respondents failed to comply. The Corporation emphasized that the sale was a last resort after the respondents defaulted on their loan obligations.
The respondents, Sukanti Mohapatra and Prasanta Kumar Mohapatra, argued that the Corporation had wrongly rejected their request for a reduction of the OTS amount. They claimed that the sale was conducted without proper consideration of their attempts to settle the dues. They also contended that the Corporation should have accepted their representation for a reduced OTS amount and that the sale was not conducted fairly.
| Submissions | Appellant (Orissa State Financial Corporation) | Respondents (Sukanti Mohapatra and Prasanta Kumar Mohapatra) |
|---|---|---|
| Loan Default | ✓ Loan was not repaid despite notices. | ✓ Loan was not repaid as the vehicle became untraceable. |
| OTS Proposals | ✓ Multiple OTS proposals were offered. ✓ Respondents failed to deposit the upfront fee for the first OTS. ✓ Second OTS was rejected due to willful default and clandestine sale of vehicle. ✓ Third OTS proposal was not availed. |
✓ Made a request for one time settlement under OTS scheme 2003. ✓ Submitted another OTS proposal under OTS scheme 2004. ✓ Made a request for reduction of OTS amount. |
| Sale of Property | ✓ Sale was conducted as per Section 29 of the State Financial Corporations Act, 1951. ✓ Sale was a last resort. |
✓ Sale was conducted without proper consideration of their attempts to settle dues. ✓ Corporation wrongly rejected their request for reduction of the OTS amount. |
| Fairness of Process | ✓ Corporation was indulgent and proceeded fairly. ✓ Multiple opportunities were given to the respondents to repay the loan. |
✓ The sale was not conducted fairly. |
The innovativeness of the argument by the respondents was that they sought a reduction in the OTS amount, which the Corporation had already reduced substantially.
Issues Framed by the Supreme Court
The Supreme Court did not frame any specific issues but dealt with the question of whether the High Court’s judgment was sustainable on facts and in law.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the High Court’s judgment was sustainable on facts and in law? | The Supreme Court held that the High Court’s judgment was unsustainable both on facts and in law. The Court found that the Corporation had acted in accordance with Section 29 of the State Financial Corporations Act, 1951, and had given multiple opportunities to the respondents to settle their dues. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was Considered |
|---|---|---|
| Mahesh Chandra v. Regional Manager, U.P. Financial Corporation & Ors. [(1993) 2 SCC 279] | Supreme Court of India | Overruled. The guidelines in this case were found to place unnecessary restrictions on the power of the financial corporation under Section 29 of the State Financial Corporations Act, 1951. |
| Kerala Financial Corporation v. Vincent Paul & Anr. [(2011) 4 SCC 171] | Supreme Court of India | Not applicable. The guidelines in this case were specific to the Kerala Financial Corporation and did not prescribe a procedure for other aspects of the recovery process. The Court found that the appellant corporation was indulgent and had proceeded fairly. |
| Haryana Financial Corporation & Anr. v. Jagdamba Oil Mills & Anr. [(2002) 3 SCC 496] | Supreme Court of India | Followed. This case overruled Mahesh Chandra and clarified that Section 29 of the State Financial Corporations Act, 1951, gives the financial corporation the right to sell the assets of a defaulting industrial concern. |
| Section 29 of the State Financial Corporations Act, 1951 | – | The Court held that the Corporation had acted in accordance with this provision. |
| Sections 31 and 32 of the State Financial Corporations Act, 1951 | – | The Court held that these provisions were not applicable in the facts of the present case. |
Judgment
The Supreme Court held that the High Court’s judgment was unsustainable both on facts and in law. The Court found that the Corporation had acted in accordance with Section 29 of the State Financial Corporations Act, 1951, and had given multiple opportunities to the respondents to settle their dues.
| Submission | Court’s Treatment |
|---|---|
| Loan was not repaid despite notices. | Accepted as a fact. |
| Multiple OTS proposals were offered by the Corporation. | Accepted as a fact. The Court noted that the Corporation had substantially reduced the amount while accepting the third OTS proposal. |
| Respondents failed to deposit the upfront fee for the first OTS. | Accepted as a fact. |
| Second OTS was rejected due to willful default and clandestine sale of vehicle. | Accepted as a fact. |
| Third OTS proposal was not availed by the respondents. | Accepted as a fact. The Court noted that the respondents did not avail the concession. |
| Sale was conducted as per Section 29 of the State Financial Corporations Act, 1951. | Accepted as valid. |
| Sale was a last resort. | Accepted as a fact. |
| Sale was conducted without proper consideration of their attempts to settle dues. | Rejected. The Court noted that multiple opportunities were given to the respondents. |
| Corporation wrongly rejected their request for reduction of the OTS amount. | Rejected. The Court held that this was a commercial decision of the Corporation. |
| Corporation was indulgent and proceeded fairly. | Accepted. |
| Multiple opportunities were given to the respondents to repay the loan. | Accepted as a fact. |
| The sale was not conducted fairly. | Rejected. |
Mahesh Chandra v. Regional Manager, U.P. Financial Corporation & Ors. [(1993) 2 SCC 279]* was overruled. The Supreme Court held that the guidelines issued in *Mahesh Chandra* placed unnecessary restrictions on the exercise of power by the financial corporation under Section 29 of the State Financial Corporations Act, 1951, by requiring the defaulting unit-holder to be associated or consulted at every stage in the sale of the property.
The judgment in Kerala Financial Corporation v. Vincent Paul & Anr. [(2011) 4 SCC 171]* was not found applicable as it laid down guidelines for the sale of properties owned by the Kerala Financial Corporation, in the absence of State specific rules for the same, and did not comment on or prescribe a procedure for other aspects of the recovery process.
The Court followed the decision in Haryana Financial Corporation & Anr. v. Jagdamba Oil Mills & Anr. [(2002) 3 SCC 496]* which held that Section 29 of the State Financial Corporations Act, 1951, gives a right to the financial corporation to sell the assets of the industrial concern and realize the property pledged, mortgaged, hypothecated or assigned to the financial corporation.
What weighed in the mind of the Court?
The Supreme Court was primarily influenced by the fact that the Orissa State Financial Corporation had acted within the bounds of the law, specifically Section 29 of the State Financial Corporations Act, 1951. The Court also noted that the Corporation had provided multiple opportunities to the respondents to settle their dues through various OTS proposals. The respondents, despite these opportunities, failed to repay the loan or comply with the terms of the OTS. The Court also emphasized that the decision to reject the representation for reduction of the OTS amount was a commercial decision of the Corporation.
| Sentiment | Percentage |
|---|---|
| Corporation’s adherence to Section 29 of the State Financial Corporations Act, 1951 | 30% |
| Multiple opportunities given to the respondents to settle dues | 25% |
| Respondents’ failure to repay the loan or comply with OTS | 30% |
| Commercial decision of the Corporation to reject reduced OTS | 15% |
| Ratio | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
The Court’s reasoning involved a step-by-step analysis of the facts and the law. The Court first established that the Corporation had the power to sell the mortgaged property under Section 29 of the State Financial Corporations Act, 1951. Then, the Court examined the actions of the Corporation and found that it had followed due process. The Court also considered the conduct of the respondents and found that they had defaulted on their loan obligations and failed to avail the opportunities to settle the dues.
The Court considered alternative interpretations but rejected them because it found that the Corporation had acted fairly and within its legal rights. The Court also emphasized that the decision to reject the representation for reduction of the OTS amount was a commercial decision of the Corporation.
The Court’s decision was based on the following reasons:
✓ The Corporation had the legal right to sell the mortgaged property under Section 29 of the State Financial Corporations Act, 1951.
✓ The Corporation had followed due process in seizing and selling the property.
✓ The respondents had defaulted on their loan obligations and failed to avail the opportunities to settle the dues.
✓ The decision to reject the representation for reduction of the OTS amount was a commercial decision of the Corporation.
The Court’s reasoning is encapsulated in the following quotes:
“The impugned judgment passed by the Division Bench of the High Court, allowing Writ Petition (Civil) nos. 7220/2007 and 8405/2007 filed by respondent nos. 1 and 2 – Sukanti Mohapatra and Prasanta Kumar Mohapatra, is unsustainable, both on facts and in law.”
“It is not for the Court to sit in judgment on the merits over the proposal, unless there were extraordinary facts or the proposal/offer made by the appellant – Corporation was not in accordance with the terms of the OTS scheme.”
“However, respondent nos. 1 and 2 – Sukanti Mohapatra and Prasanta Kumar Mohapatra remained in default, despite benevolent consideration and concession afforded to them. Sale was made, as a matter of last resort.”
There were no minority opinions in this case.
The Court’s decision has potential implications for future cases involving loan defaults and recovery by State Financial Corporations. It clarifies the powers of these corporations under Section 29 of the State Financial Corporations Act, 1951 and emphasizes that courts should not interfere with the commercial decisions of these corporations unless there are extraordinary circumstances.
No new doctrines or legal principles were introduced in this case.
Key Takeaways
✓ State Financial Corporations have the power to seize and sell mortgaged property when a borrower defaults on loan repayment, under Section 29 of the State Financial Corporations Act, 1951.
✓ Courts should not interfere with the commercial decisions of State Financial Corporations unless there are extraordinary circumstances.
✓ Borrowers must repay their loans and comply with the terms of any settlement agreements.
✓ The decision clarifies that the guidelines in *Mahesh Chandra* are not the correct law.
Directions
The Supreme Court gave an option to the respondents to pay the entire sale consideration of Rs. 13,20,000 along with the registration amount and the stamp duty, to the third respondent with interest at the rate of 18% per annum, compounded annually, with effect from 01.01.2007 till the date of payment, on or before 31.07.2024. If the payment is not made, the Corporation will be entitled to take police aid to put the third respondent in possession of the mortgaged immovable property.
Development of Law
The ratio decidendi of the case is that State Financial Corporations have the power to sell mortgaged property under Section 29 of the State Financial Corporations Act, 1951, and that courts should not interfere with the commercial decisions of these corporations unless there are extraordinary circumstances. The decision also clarifies that the guidelines in *Mahesh Chandra* are not the correct law, as it was overruled in *Haryana Financial Corporation*.
Conclusion
The Supreme Court allowed the appeals, holding that the High Court’s judgment was unsustainable. The Court upheld the Corporation’s actions under Section 29 of the State Financial Corporations Act, 1951, and gave the respondents a final opportunity to settle their dues by repaying the sale consideration with interest. This judgment reinforces the powers of State Financial Corporations in recovering dues and emphasizes the importance of repaying loans.
Category
✓ State Financial Corporations Act, 1951
✓ Section 29, State Financial Corporations Act, 1951
✓ Loan Recovery
✓ Mortgage Law
✓ Debt Recovery
✓ Supreme Court Judgments
✓ Financial Law
✓ One Time Settlement
FAQ
Q: What is the main issue in the Orissa State Financial Corporation vs. Sukanti Mohapatra case?
A: The main issue was whether the Orissa State Financial Corporation was justified in selling a mortgaged property after the borrower defaulted on loan repayment, and whether the High Court’s intervention was correct.
Q: What is Section 29 of the State Financial Corporations Act, 1951?
A: Section 29 of the State Financial Corporations Act, 1951, allows State Financial Corporations to take over the management or possession of a defaulting industrial concern’s assets and sell them to recover dues.
Q: What did the Supreme Court decide in this case?
A: The Supreme Court ruled in favor of the Orissa State Financial Corporation, holding that the corporation had acted within its legal rights under Section 29 of the State Financial Corporations Act, 1951. The Court also gave the borrowers one final opportunity to repay the loan.
Q: What does this judgment mean for borrowers?
A: This judgment reinforces that borrowers must repay their loans and comply with the terms of any settlement agreements. It also clarifies that courts should not interfere with the commercial decisions of State Financial Corporations unless there are extraordinary circumstances.
Q: What does this judgment mean for State Financial Corporations?
A: This judgment clarifies the powers of State Financial Corporations under Section 29 of the State Financial Corporations Act, 1951, and reinforces their ability to recover dues through the sale of mortgaged properties.
Q: What was the significance of the overruling of *Mahesh Chandra* in this case?
A: The overruling of *Mahesh Chandra* clarified that the guidelines in that case placed unnecessary restrictions on the power of the financial corporation under Section 29 of the State Financial Corporations Act, 1951.