Case Note & Summary
The dispute arose out of a loan default by a company engaged in rubber manufacturing, which had been financed by the Karnataka State Financial Corporation under the State Financial Corporations Act, 1951. The corporation had extended financial assistance of Rs 14.15 lakhs in March 1981, followed by additional sanctions, but the unit incurred losses from inception and defaulted in repayment. In October 1990, the corporation took possession of the unit under Section 29 of the Act and initiated sale proceedings through public advertisements. Several offers were received and considered; the corporation ultimately accepted the combined offers of M/s Prime Inputs (India) Ltd. for land and building and M/s Shakti Rubbers for plant and machinery, and entered into an agreement for sale on January 25, 1993. The borrowers and a subsequent offeror filed a writ petition in the Karnataka High Court challenging the sale, principally alleging non-compliance with the guidelines laid down by the Supreme Court in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation and rejection of a supposedly higher offer. A single Judge allowed the writ petition, quashing the sale proceedings and directing compliance with directions 2, 3 and 4 from Mahesh Chandra. The Division Bench dismissed the corporation's appeal. On special leave, the Supreme Court examined the scope of judicial review and the applicability of the guidelines. The appellant contended that it had substantially complied with the guidelines: the unit had been valued at Rs 28 lakhs before the first advertisement, the respondents were kept informed of all offers, and they were given opportunities to revive the unit or bring higher offers. It argued that the later offer of Rs 25 lakhs was not in substance higher because it required the appellant to bear electricity dues, provided a longer payment period, offered lower down payment, provided no earnest money, and the undertaking to pay Rs 10 lakhs to Canara Bank did not improve the offer as the sale was subject to the bank's second charge. The respondents argued that the Rs 25 lakhs plus Rs 10 lakhs to Canara Bank constituted a higher offer. The Supreme Court held that the directions in Mahesh Chandra were guidelines for exercise of power under Section 29 and that the corporation's action was not liable to interference if it acted broadly in consonance with them. On facts, it found substantial compliance. On the higher offer question, the Court accepted the appellant's evaluation that the offer was not higher due to the terms and the existing liability to Canara Bank. The Court reiterated that judicial review under Article 226 is confined to statutory violation or unfair/unreasonable action and that the High Court does not sit as an appellate authority over the corporation's commercial decisions. It found no statutory violation or unfairness. Accordingly, the Supreme Court allowed the appeal, set aside the High Court orders, and dismissed the writ petition, thereby upholding the appellant's sale of the unit to M/s Prime Inputs (India) Ltd. and M/s Shakti Rubbers.
Headnote
A) State Financial Corporations - Sale of Assets - Scope of Judicial Review - State Financial Corporations Act, 1951, Section 29; Constitution of India, Article 226 - In exercising power under Section 29 to sell a defaulting unit, the State Financial Corporation's action is not liable to be interfered if broadly in consonance with the guidelines in Mahesh Chandra; judicial review is confined to statutory violation or unfair/unreasonable action, and the High Court does not sit as an appellate authority. Held that no statutory violation or unfairness was shown in accepting combined offers over a later conditional offer, and the High Court was not justified in interfering. (Paras 1-5) B) State Financial Corporations - Sale of Assets - Compliance with Guidelines on Valuation and Tender - State Financial Corporations Act, 1951, Section 29 - Directions 2, 3 and 4 in Mahesh Chandra require intimation of valuation and highest tender to the unit holder and offering the same facility to the unit holder if willing to match the tender price. Held that the appellant substantially complied by valuing the unit at Rs 28 lakhs, making the respondent aware of all offers received, and providing sufficient opportunity to submit a revival proposal or bring higher offers. (Paras 1-5) C) State Financial Corporations - Sale of Assets - Comparative Evaluation of Competing Offers - State Financial Corporations Act, 1951, Section 29 - While accepting the combined offers of M/s Prime Inputs (India) Ltd. and M/s Shakti Rubbers worth Rs 24 lakhs over respondent No.2's offer of Rs 25 lakhs, the appellant considered all material terms including payment of electricity dues, payment period, down payment, and earnest money; respondent No.2's undertaking to pay Rs 10 lakhs to Canara Bank did not enhance the offer because the sale was subject to the bank's second charge, and every purchaser was bound to discharge that liability. Held that the appellant's rejection of respondent No.2's offer was reasonable and not unfair. (Paras 1-5) D) Writ Jurisdiction - Judicial Review of Financial Corporation Decisions - Constitution of India, Article 226 - The High Court's power under Article 226 is not appellate in nature when reviewing sale decisions under Section 29 of the State Financial Corporations Act, 1951; it is limited to checking statutory violation or unfairness/unreasonableness. Held that as no such grounds existed, the High Court's interference with the accepted tenders was unwarranted and the writ petition was liable to be dismissed. (Paras 1-5)
Issue of Consideration
Whether the High Court was justified in interfering with the appellant State Financial Corporation's decision to accept the offers of M/s Prime Inputs (India) Ltd. and M/s Shakti Rubbers and reject the offer of respondent No.2; whether the appellant substantially complied with directions 2, 3 and 4 in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation.
Final Decision
The Supreme Court allowed the appeal, set aside the judgments of the High Court, and dismissed the writ petition filed by respondents Nos. 1 and 2. It held that the appellant had acted in substantial compliance with the Mahesh Chandra guidelines, that no statutory violation or unfairness/unreasonableness was shown, and that the High Court was not justified in interfering with the appellant's decision to accept the offers of M/s Prime Inputs (India) Ltd. and M/s Shakti Rubbers.
Law Points
- In sale by State Financial Corporation under Section 29 of State Financial Corporations Act
- 1951
- scope of judicial review confined to statutory violation or unfair/unreasonable action
- High Court does not sit as appellate authority
- guidelines in Mahesh Chandra are directory requiring substantial compliance
- valuation and highest tender must be intimated to unit holder
- unit holder must be afforded same facility if willing to match tender price
- comparative evaluation of offers by corporation is not to be interfered if based on reasonable commercial considerations.
