C.M.W.P. No.8386 of 2002

25th May, 2005

Cases Cited:
Government of AP Vs. JB Educational Society, 2005(3) SCC 212 [Para 9]
State of West Bengal Vs. Kesoram Industries, 2004(1) JT (SC) 375 [Para 9]
Association of Natural Gas Vs. Union of India, 2004(4) SCC 489 [Para 9]
Fateh Chand Vs. State of Maharashtra, AIR 1977 SC 1825 [Para 9]
Zaber Bhai Amaidas Vs. State of Bombay, AIR 1954 SC 752 [Para 9]
Central Provinces and Berar Sales, In re, AIR 1939 FC 1 [Para 9]
Deep Chand Vs. State of U.P., AIR 1959 SC 648 [Para 9]
State of Orissa Vs. MA Tulloch & Co., AIR 1964 SC 1284 [Para 9]
Zaber Bhai Amaidas Vs. State of Bombay, AIR 1954 SC 752 [Para 9]
M. Karunanidhi Vs. Union of India, 1979(3) SCC 431 [Para 9]
Engineering Kamgar Union Vs. Electro Steels Castings Ltd, AIR 2004 SC 2401 [Para 9]
Bharat Hydro Power Corporation Vs. State of Assam, 2004(2) SCC 553 [Para 9]
Association of Natural Gas Vs. Union of India, 2004 (4) SCC 489 [Para 9]
M/s. Krishna Utensils, Rampur Vs. State Financial Corporation, AIR 1989 All 226 [Para 10]
State of Tamil Nadu Vs. G. N. Venktaswami, 1994(5) SCC 314 [Para 10]
Unique Butyle Tube Industries (P) Ltd. Vs. U.P. Financial Corporation, 2003(1) ALL MR 1196 (S.C.)=(2003)2 SCC 455 [Para 18,19]
Pawan Kumar Jain Vs. The Pradeshiya Industrial and Investment Corporation of UP Ltd., 2004(6) JT (SC) 305 [Para 20]
State Bank of India Vs. M/s. Indexport Registered, AIR 1992 SC 1740 [Para 21]

JUDGMENT

YATINDRA SINGH, J.:- The main question involved in this writ petition is, whether the recovery under the UP Public Moneys (Recovery of Dues) Act, 1972 (the 172 Act) can proceed after insertion of Section 32-G in the State Financial Corporation Act, 1951 (the 1951 Act) and the enactment of the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (the 1993 Act).

THE FACTS

2. M/s. J. S. Patel Private Limited (the Company) applied for grant of loan from the U.P. Financial Corporation (the Corporation) on 18-10-1996. The Corporation sanctioned a term loan of Rs.1.7 crores however, only a sum of Rs.1,42,48,000/- was disbursed to the company on instalments. This loan was to be paid in five years. The company premises was also mortgaged with the Corporation and the entire machinery, goods (finished and unfinished) were hypothecated.

3. The Company could not pay the loan. The Corporation issued letter dated 23-11-2000 asking the Company to repay the dues failing which it threatened to take action under Section 2 of the 1951 Act. The Company filed original Suit No.638 of 2000 before the Civil Judge (Senior Division), Allahabad for injunction against the recovery along with application for temporary injunction. The temporary injunction was granted on 16-2-2001. The Corporation filed an FAFO No.374 of 2001 before this Court against his order and obtained an interim order on 27-3-2001. The Corporation took possession of the factory premises of the Company on 2-3-2001 and advertised for auction of the factory premises on 9-3-2002. We are informed that the auction has been held and possession has been handed over to the purchaser.

4. The petitioners are guarantors of the loan. The Corporation sent a letter to the Collector Kanpur Nagar for recovering the amount as arrears of land revenue under the 1972 Act against the petitioners. The Tehsildar issued a citation dated 25-1-2002 to the petitioner to appear and pay the remaining amount mentioned therein, hence the present writ petition.

5. In this writ petition judgment was delivered on 12-7-2002. The Judges differed in their views and the case was referred to the full bench.

POINTS FOR DETERMINATION

6. We have heard counsel for the parties. The following points arise for determination in this case:

(i) Which Act will prevail in case an Act enacted by the Parliament in pursuance of an entry in list-I of the seventh schedule of the Constitution is contrary to an Act enacted by the State in pursuance of an entry in list-II of the same schedule?

(ii) Whether the 1972 Act has been rendered void and inoperative, after the insertion of Section 32-G in the 151 Act insofar as it relates to recovery of debt payable to the Corporation?

(iii) Whether Section 3 of the 1972 Act is inconsistent with Section 32-G of the 1951 Act and if it is so, what is the effect?

(iv) Whether recovery against the guarantor can be made under the 1993 Act.

(v) Whether the jurisdiction of the Collector to entertain an application of the Corporation for recovery under Section 3 of the 1972 Act of debt not being less than Rs.10 lacs, is barred by Section 18 of the 1993 Act.

(vi) Whether the Corporation having taken possession of the assets and properties of the borrower company under Section 29 of the 1951 Act was bound to exhaust its remedy under the said provision before initiating recovery proceeding against the sureties/guarantors?

Point number (ii), (iii), (v) and (vi) were framed by the Division Bench in its referring order; the remaining points have been framed by us.

POINT I : THE CENTRAL ACT WILL PREVAIL

7. Part XI of our Constitution is titled as 'Relations between the Union and the States'. Chapter I of this part is 'Legislative Relations' and deals with distribution of legislative power between the Parliament and the State legislature. Sub-Article (1) of Article 246 (Article 246(1)) of the Constitution states that the Parliament has exclusive power to make laws with respect to the matters enumerated in List I in the Seventh Schedule. Sub-Article (2) of Article 246 (Article 246 (2)) enables the Parliament as well as the State legislature to make laws in respect to the matters enumerated in List III in the Seventh Schedule. Sub-Article (3) of Article 246 (Article 246 (3)) enables the State Legislature to enact laws in respect of any matter enumerated in List II in the Seventh Schedule. Thus,

I List I is in domain of Parliament ;

I List II is in domain of the State legislature;

III List III is in domain of Parliament as well as State legislature;

8

9. Indications regarding supremacy of the Central law under List-I and the State Act under List-II are mentioned in Article 246. This article not only talks about distribution of powers but also explains the supremacy of powers. Article 246 (2) specifically states that 'it is subject to Clause (1)'. Similarly Article 246 (3) states that it is 'subject to Clauses (1) and (2)'. The use of these words shows that the power of the Parliament under Article 246(1) is supreme whereas the power of State legislature in respect of laws under list II (Article 246(3)) is subject to the power exercised by the Parliament in respect of law under list I. In view of this - in case of repugnancy or inconsistency between the Central law under list-I and the State law under list-II-Central law shall prevail. (i) Government of AP Vs. JB Educational Society, 2005(3) SCC 212; (ii) State of West Bengal Vs. Kesoram Industries, 2004(1) JT (SC) 375; (iii) Association of Natural Gas Vs. Union of India, 2004(4) SCC 489; (iv) Fateh Chand Vs. State of Maharashtra, AIR 1977 SC 1825; (v) Zaber Bhai Amaidas Vs. State of Bombay, AIR 1954 SC 752; (vi) Central Provinces and Berar Sales, In re, AIR 1939 FC 1 page 8. However, while interpreting the Central law and the State law, harmonious construction is to be adopted; and repugnancy or inconsistency between the Central and State Acts should be avoided, (i) Deep Chand Vs. State of U.P., AIR 1959 SC 648; (ii) State of Orissa Vs. MA Tulloch & Co., AIR 1964 SC 1284; (iii) Zaber Bhai Amaidas Vs. State of Bombay, AIR 1954 SC 752; (iv) M. Karunanidhi Vs. Union of India, 1979(3) SCC 431; (v) Engineering Kamgar Union Vs. Electro Steels Castings Ltd, AIR 2004 SC 2401; (vi) Bharat Hydro Power Corporation Vs. State of Assam, 2004(2) SCC 553; (vii) Association of Natural Gas and others Vs. Union of India and others, 2004 (4) SCC 489.

POINTS II & III : THE 1972 ACT - NOT VOID

10. The counsel for the petitioner submits :

(i) Article 254 rather than Article 246 of the Constitution is applicable as the 1972 Act and Section 32-G of the 1951 Act were enacted in pursuance of Entry 7 and Entry 11-A of list-III of the seventh schedule.

(ii) The law laid down in the full bench decision in M/s. Krishna Utensils, Rampur Vs. State Financial Corporation, AIR 1989 All 226 (the Krishna case) - that the 1951 Act was made in pursuance of Entry 43 of List-I and the 1972 Act was made in pursuance of Entry 43 of List II - is based on a concession of the parties; and it is not binding.

(iii) The case State of Tamil Nadu Vs. G.N. Venktaswami, 1994(5) SCC 314 (the Venktaswami case) was in relation to The Tamilnadu Recovery Act. In this case, it has been held that the Act involved in that case, which is similar to the 1972 Act, was enacted in pursuance of Entry 11-A of List-III. In view of this the Krishna case is no longer good law.

11. The full bench in the Krishna case, AIR 1989 All 226 has held that the 1972 Act has been made in pursuance of the Entry 43 of the list-II of the seventh schedule. In the Venktaswami case it has been observed that the Tamil Nadu Recovery Act is referable to the Entry 30 of List-II of the seventh schedule as well as to Entry 11-A of the list III of the seventh schedule. However, it is not necessary to decide the question-

1 Under which entry the 1972 State Act has been enacted; or

1 Whether Article 246 or 254 is applicable in this case.

Even if it is taken that the 1972 Act was made in pursuance of Entry 11-A of List-III of the Constitution and Article 254 is applicable, it does not make any difference.

12. Section 32-G was inserted in the 1951 Act in the year 1985 by the Central Act No.43 of 1982. It is subsequent to the 1972 Act. However this section is not contrary to anything contained in the 1972 Act. This section states that the procedure is 'without prejudice to any other mode of recovery'. This shows that Section 32-G does not bar any other mode of recovery. The 1972 Act also provides a mode of recovery; it is not contrary to Section 32-G of the 1951 Act; it has not become void as there is no repugnancy between the two.

POINT IV : RECOVERY CAN BE MADE AGAINST THE GUARANTOR

13. Section 19 of the 1993 Act is titled as 'Application to the Tribunal'. Sub-section (1) of Section 19 (Section 19 (1)) states that a bank/financial institution may make an application before a Tribunal to recover any debt from any person. The word 'debt' is defined under Section 2(g) of the 1993 Act; it states

"2. Definitions- In this Act, unless the context otherwise requires,-

...

(g) 'debt' means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on the date of the application;"

14. Section 2(g) of the 1993 Act defines debt as a liability of any person towards a bank/financial institution during course of any business activity undertaken by the bank/financial institution. The guarantees are given by the persons to the bank/financial institution during course of business activity: it is a liability due by a person - namely the guarantor: it is a debt within the meaning of Section 2 (g) of the 1993 Act and is recoverable under the 1993 Act.

15. Let's consider this problem from another angle: what will happen if the guarantors are not covered under the 1993 Act. The principal borrowers are admittedly covered under the 1993 Act recovery proceedings against them have to be undertaken under the 1993 Act. In case the guarantors are not covered under the 1993 Act then recovery proceeding against them will have to be undertaken in the Civil Court. This will not only multiply the proceedings but will also defeat the entire object of the 1993 Act - such a situation is not contemplated under the 1993 Act. In our opinion the guarantors are covered under the 1993 Act and recovery proceedings against them can be taken under this Act.

POINT V : JURISDICTION UNDER THE 1972 ACT - BARRED

16. The 1993 Act has been enacted for expeditious adjudication and recovery of debts due to the banks and financial institutions. However, in view of sub-section (4) of Section 1 (Section 1(4)) of this Act, it does not apply when the amount of debt is less than Rs.10 lakhs.

17. Section 2(d),(e),(h) defines the words 'Bank', 'Banking Company' and 'Financial Institution'. The Corporation is neither a bank nor a banking company. Under Section 2(h)(i) the financial institution has been defined to mean a public institution within the meaning of Section 4 (A) of the Company Act, 1956. The Corporation is also not a financial institution within the meaning of this section. Section 2 (h)(ii) of the 1993 Act includes such other institution as financial institution that the Central Government may by notification specify. The Central government has specified the Corporation under Section 2(h)(ii) of the 1993 Act by notification dated 28-3-1995. This means the Corporation is a financial institution within the meaning of the 1993 Act. The debt is more than Rs.10 Lakhs and the 1993 Act is applicable for recovery of this debt.

18. Section 34 of the 1993 Act is titled as 'Act to have overriding effect'. Sub-section (2) of Section 34 (Section 34 (2)) saves the mode of recovery under the Acts mentioned in that sub-section. The 1972 Act is not saved under Section 34(2) of the 1993 Act. The question, whether recovery under the 1972 Act can proceed after enactment of the 1993 Act or not, was considered by the Supreme Court in Unique Butyle Tube Industries (P) Ltd. Vs. U.P. Financial Corporation, (2003)2 SCC 455 : [2003(1) ALL MR 1196 (S.C.)] (the Unique Butyle case) and the Supreme Court held as follows (Para 9) :

"Section 34 of the Act consists of two parts. Sub-section (1) deals with the overriding effect of the Act notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than the Act. Sub-section (1) itself makes an exception as regards matters covered by sub-section (2). The UP Act is not mentioned therein. The mode of recovery of debt under the UP Act is not saved under the said provision i.e. sub-section (2). ...........[The High Court went wrong .... by holding that the proceedings under the UP Act were permissible."

19. In the Unique Butyle case [2003(1) ALL MR 1196 (S.C.)] (supra) the recovery was against the principal borrower. While deciding point-IV, we have held that recovery against the guarantor can be initiated under the 1993 Act. Same reasoning-as applicable to the principal borrower-will apply to a recovery against the guarantor. In view of the Unique Butyle case, recovery proceedings can neither be initiated against the principal borrower nor against the guarantor under the 1972 Act if the debt is more than 10 lakhs; recovery proceedings can only be initiated under the 1993 Act.

POINT NO.-VI : NOT NECESSARY TO DECIDE

20. The counsel for the petitioner submitted that the recovery proceeding against the guarantor can not be taken before the property of the principal debtor is sold off. In support of his submission he placed before us the following observations of the Supreme Court in Pawan Kumar Jain Vs. The Pradeshiya Industrial and Investment Corporation of UP Ltd. and others, 2004(6) JT (SC) 305 (the Pawan Kumar case) :

"In our view the above set out provisions of the UP Act (the 1972 State Act) are very clear. Action against the guarantor cannot be taken until the property of the principal debtor is first sold off. As the appellant (sic Respondent Corporation) has not sold the property of the principal-debtor, the action against the appellant (guarantor) cannot be sustained. We, therefore, set aside the recovery notice."

21. The counsel for the respondents submitted that

Guarantee is governed by Section 128 of the Contract Act. Liability of the guarantor is co-extensive with the principal borrower and the guarantor is jointly liable with the principal borrower.

The proceeding against the guarantors can always be taken without recourse to the proceeding against the principal borrower.

The Pawan Kumar case has neither taken into account Section 128 of the Contract Act nor earlier larger bench decision in State Bank of India Vs. M/s. Indexport Registered, AIR 1992 SC 1740.

Sub-section (2) of Section 4 (Section 4 (2)) of the 1972 Act mandates that the recovery should be made first against certain kind of property mentioned in that sub-section. The observations of the Supreme Court should be confined to the property covered by Section 4(2) of the 1972 Act and to no other property. And it cannot be said that every kind of property of the principal borrower has to be sold first before proceeding against the guarantor-whether covered by Section 4(2) of the 1972 Act or not.

22. There is force in the submission of the respondents. However, it is not necessary to express our opinion on this point. We have already held that the recovery against the guarantor can be initiated under the 1993 Act and the recovery under the 1972 Act is barred.

CONCLUSIONS

23. Our conclusions are as follows :

(a) In case of repugnancy or inconsistency between the Central Act under list-I and the State Act under list-II-the Central Act shall prevail.

(b) The UP Public Moneys (Recovery of Dues) Act, 1972 is neither contrary to Section 32-G of the State Financial Corporation Act, 1951 nor is there any repugnancy between the two. It is not void.

(c) The guarantors are covered under the Recovery of Debt Due to Bank and Financial. Institution Act, 1993 and recovery proceedings against them can be taken under this Act.

(d) Recovery proceedings can neither be initiated against the principal borrower nor against the guarantor under the UP Public Moneys (Recovery of Dues) Act, 1972 if the debt is more than 10 lakhs : recovery proceedings can only be initiated under the 1993 Act.

24. In view of our conclusion the writ petition is allowed. The recovery proceedings against the petitioner under UP Public Moneys (Recovery of Dues) Act, 1972 are quashed. It would be open to the respondents to initiate recovery proceedings in accordance with law.

SUNIL AMBWANI, J.:- 25. I agree.

D. P. SINGH, J. :- 26. I agree.

Petition allowed.