M J Antony: Loan recovery made easy

OUT OF COURT

State financial corporations which try to recover loans from small and medium industries often meet with stiff resistance and prolonged litigation.

Facts of individual cases have led to varied results in the courts. Recently, the Supreme Court tried to sort out the law regarding sale of borrowers' assets under the State Financial Corporation Act in Karnataka State Industrial Corporation vs Cavalet India Ltd.

An earlier judgement of the court in Mahesh Chandra vs Regional Manager (1993) had put severe restrictions on the power of the financial corporations under Section 29 of the Act on sale of defaulting units.

For instance, it had required the defaulter to be associated or consulted at every stage in the sale of the property. This had resulted in further delay in the realisation of the dues by sale of assets.

The new judgement emphasised the right of state corporations to take coercive steps to get the money back. Although the corporations are not like ordinary money-lenders or a bank, the basic relationship is that of a creditor and a debtor.

"A corporation is not supposed to give loan and then write it off as a bad debt and ultimately go out of business," the judgement said. "It cannot be called upon to pump in more money to revive and resurrect each and every sick unit irrespective of the cost involved.

That would be throwing good money after bad money, and transferring public money to private account." The judgement quoted UP Financial Corporation vs Gem Cap (1993), which stated that "financial corporations are not sitting on King Solomon's mines, but they too have to borrow monies from government and other financial institutions and pay interest thereon."

In the present Karnataka corporation judgement, the Supreme Court laid down nine principles for the guidance of high courts, state financial corporations and borrowers.

According to the main proposition, courts have no say in the matter between the corporation and its debtor except in two exceptional cases: (a) when there is a statutory violation on the part of the corporation, or (b) where the corporation acts unfairly or unreasonably.

The Supreme Court advocated a hands-off policy in commercial matters, saying that the courts should not risk their judgement for the judgement of the bodies to which that task is assigned.

The Supreme Court went to the extent of stating that the courts should not interfere in the decision of the financial corporation even if it was wrong.

It is not for the courts or a third party to substitute its decision, however more prudent, commercial or businesslike it may be, for the decision of the financial corporation.

The only exception is when the corporation acts in a mala fide manner. In the matter of sale of property, the dominant consideration is securing the best price.

To achieve this, there should be maximum public participation in the process of sale. Public auction may not be the only mode to achieve this; other transparent and acceptable modes like tender and negotiations also can be adopted.

In a strong statement in favour of state corporations, the judgement said: "Fairness cannot be a one-way street. The fairness required of the financial corporations cannot be carried to the extent of disabling them from recovering what is due to them.

While not insisting upon the borrower to honour the commitments undertaken by him, the financial corporation alone cannot be shackled hand and foot in the name of fairness."

The present judgement effectively overrules the Mahesh Chandra judgement. Some high courts continued to follow that decision though the Supreme Court had subsequently limited that judgement to the facts of that case.

The Karnataka High Court view in this case was one such instance. It had relied on the Mahesh Chandra case and asked the corporation to repeat the entire sale process following the guidelines in that outdated decision.

However, the new judgement has plugged all scope for such deviations by high courts. Thus, the process of recovery of loans has now been rendered less tedious.