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State Financial Corp... v. M/S. Satpathy Brothe...
Structured Summary of the Provided Opinion
Factual and Procedural Background
The State Financial Corporation Ltd. (the Corporation) filed a petition before the District Judge, Puri, against M/s. Satpathy Brothers and Nanda Company (Private) Ltd. (opposite party No. 1) and its directors (opposite parties 2 to 4). Opposite party No. 1 applied for and was sanctioned a loan of Rs. 2,40,000 by the Corporation's Board on 28-9-1962. Mortgages were executed and registered on 30-10-1962 and a supplementary mortgage on 27-12-1963, creating a first charge over properties described in the petition.
The borrowers defaulted on interest and instalment payments due on 30-9-64, 30-9-65 and 30-9-66 and had failed to pay interest amounting to Rs. 19,280.34 Paise up to 31-12-66. After service of notice and non-payment, the Corporation applied under Section 31 of the State Financial Corporations Act, 1951 for reliefs including sale of the mortgaged properties and an ad interim injunction restraining alienation of the mortgaged properties.
The opposite parties objected on several grounds, one being that Section 31 of the Act is unconstitutional. They sought a reference under Section 113 of the Code of Civil Procedure (CPC). The District Judge concluded that Section 31 was hit by Article 14 of the Constitution and referred the question to the High Court under Section 113 CPC. The High Court (this Court) entertained the reference and addressed the constitutionality of Section 31.
Legal Issues Presented
- Whether Section 31 of the State Financial Corporations Act, 1951 is hit by Article 14 of the Constitution (i.e., whether Section 31 is constitutionally valid).
- Whether the District Judge was justified in making a reference under Section 113 CPC on the question of validity of Section 31 (this issue was considered and the District Judge's reference was addressed).
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Maganlal Chhaganlal (P.) Ltd. v. Municipal Corporation of Greater Bombay, (1974) 2 SCC 402 : AIR 1974 SC 2009 | The Constitution Bench upheld validity of the Bombay Municipal Corporation Act (as amended) and the Bombay Government Premises (Eviction) Act, 1955; observed that the procedures in those Acts were not so harsh or onerous as to amount to unconstitutional discrimination and emphasised procedural safeguards (notice, opportunity to be heard, application of Code of Civil Procedure provisions, right of appeal). | The Court relied on this decision to conclude that the procedural scheme under the State Financial Corporations Act (Sections 31 and 32) likewise provided adequate safeguards and thus Section 31 was not violative of Article 14. The Court treated Maganlal as controlling authority and used its reasoning to uphold Section 31. |
| Northern India Caterers (Private) Ltd. v. State of Punjab, AIR 1967 SC 1581 | Earlier majority decision relied upon by several Bench decisions to strike down statutes in comparable contexts (as indicated by the text). | The Court noted that the earlier majority in Northern India Caterers had been the basis for several state Bench decisions holding similar statutes ultra vires, but that Northern India Caterers' precedent is now overruled by the subsequent Constitution Bench in Maganlal. The effect was to deprive those earlier Bench decisions of their authority. |
| Brahmananda Sahu v. State of Orissa, (1969) 35 Cut LT 1304 : AIR 1970 Orissa 189 | Held (at the Bench level) that a similar statute was ultra vires based on Northern India Caterers. | The Court explicitly overruled this Bench decision, stating it can no longer be treated as good law because it conflicts with the higher authority in Maganlal (1974). |
| Arjun Pradhan v. Revenue Divisional Commissioner, (1970) 36 Cut LT 602 | Bench decision following Northern India Caterers to hold similar statutory provisions ultra vires. | The Court overruled this Bench decision as being in direct conflict with the later Constitution Bench authority (Maganlal) and thus no longer good law. |
| Hari Sahu v. Union of India, (1971) 37 Cut LT 860 | Bench decision (similar context) relying on Northern India Caterers. | The Court overruled this decision as inconsistent with the later Constitution Bench decisions upholding similar statutory procedures. |
| Padmanav Pradhan v. State of Orissa, (1971 (2) Cut WR 338) : AIR 1972 Orissa 88 | Bench decision holding similar provisions ultra vires based on Northern India Caterers. | The Court held this Bench decision cannot be maintained in view of the subsequent Constitution Bench rulings and overruled it. |
| Pandia Nadar v. State of Tamil Nadu, (1974) 2 SCC 539 : AIR 1974 SC 2044 | Constitution Bench (five Judges) upheld the Tamil Nadu Land Encroachment Act (3 of 1905) as constitutionally valid and followed the reasoning in Maganlal. | The Court cited Pandia Nadar as a further authority consistent with Maganlal, supporting the conclusion that special statutory procedures of the sort under the State Financial Corporations Act can be constitutionally valid. |
Court's Reasoning and Analysis
The Court proceeded by analysing the statutory scheme and the specific provisions under consideration before turning to constitutional issues:
- Statutory scheme and definitions: The Court outlined the structure of the State Financial Corporations Act (Chapters I–V) and reproduced the definitions of "Board", "Financial Corporation" and "industrial concern" to situate Sections 31, 32 and 46-B in context.
- Extraction of relevant provisions: Sections 31 (special reliefs available to a Financial Corporation on default), 32 (procedural framework for interim attachment, injunctions, investigation, confirmation or modification of orders and right of appeal) and 46-B (non-obstante clause and saving that Act is in addition to other laws, not in derogation thereof) were set out and summarised.
- Functional analysis of Sections 31 and 32: The Court explained that Section 31 creates special remedies for enforcement of claims by Financial Corporations (sale, management transfer, interim injunction) while Section 32 prescribes specific procedures for interim attachment, notice, opportunity to be heard, investigation under the Code of Civil Procedure (CPC) and right of appeal to the High Court. Section 46-B preserves concurrent remedies in civil courts and clarifies that the Act operates notwithstanding inconsistencies with other laws but is not intended to derogate entirely from other applicable law.
- Safeguards and procedural fairness: The Court emphasised that the Act provides notice to the industrial concern, opportunity to object and be heard, application of the Code of Civil Procedure to investigations to the extent consistent with the Act, and appellate remedy to the High Court. The availability of these procedural safeguards led the Court to conclude that the Act did not impose harsh or unconscionable procedures.
- Reliance on higher court precedent: The Court relied on the Constitution Bench decision in Maganlal Chhaganlal which upheld similar statutory procedures and observed they were not so harsh as to amount to unconstitutional discrimination. The Court also noted Pandia Nadar which followed Maganlal and upheld the Tamil Nadu Act.
- Disposition of conflicting Bench decisions: The Court observed that several earlier Bench decisions of this Court, which had held similar statutes ultra vires based on Northern India Caterers (AIR 1967 SC 1581), are inconsistent with the subsequent Constitution Bench authorities and were therefore overruled.
- Conclusion on constitutionality: Applying the statutory scheme, identified safeguards and binding Supreme Court precedents, the Court held that Section 31 is not violative of Article 14 and is constitutionally valid. The reference made under Section 113 CPC was therefore discharged.
- Ancillary directions: The Court ordered the records returned to the District Judge and directed that the District Judge dispose of the case within three months, with parties to bear their own costs.
Holding and Implications
Holding: The Court held that Section 31 of the State Financial Corporations Act, 1951 is not hit by Article 14 of the Constitution and is valid. The reference made by the District Judge under Section 113 CPC is discharged.
Implications / Consequences:
- The immediate consequence for the parties is that the question of the constitutional validity of Section 31 is resolved in favour of the Corporation; the District Judge's reference is discharged and the District Judge was directed to proceed with and dispose of the original matter within three months from the date of the opinion.
- The Court expressly overruled several earlier Bench decisions of the same Court (Brahmananda Sahu v. State of Orissa; Arjun Pradhan v. Revenue Divisional Commissioner; Hari Sahu v. Union of India; Padmanav Pradhan v. State of Orissa) to the extent they conflict with the subsequently rendered Constitution Bench decisions (Maganlal and Pandia Nadar). The opinion states these Bench decisions "can no longer be held to be good law" and are overruled.
- Costs: The parties were directed to bear their own costs.
- Procedure going forward: The District Judge is to receive the records back immediately and to dispose of the case within three months, with intimation to this Court.
G.K Misra, C.J:— Facts may be stated in short. The State Financial Corporation Ltd. (hereinafter to be referred to as the Corporation) is the petitioner before the District Judge, Puri, M/s. Satpathy Brothers and Nanda Company (Private) Ltd. (opposite party No. 1) is an industrial concern. Its Directors are opposite parties 2 to 4. Opposite party No. 1 applied to the Corporation for a loan for setting up a rice mill at Sakhigopal in the district of Puri. The Board of Directors of the Corporation sanctioned a loan of Rs. 2,40,000 on 28-9-1962. Opposite parties executed and registered one mortgage bond on 30th October, 1962 and a supplementary mortgage bond on 27th December, 1963. In the mortgage deeds a first charge was created in respect of properties mentioned in Schedules B to D of the petition. Opposite parties 2 to 4 executed the mortgage deeds as Directors of the company and in their personal capacity as guarantors. The entire amount of Rs. 2,40,000 was paid to the opposite parties in different instalments.
2. As per the terms and conditions of the mortgage bonds opposite parties were to pay the accrued interest quarterly each year and to repay the principal also in several instalments. Opposite parties defaulted in making repayment which fell due on 30-9-64, 30-9-65 and 30-9-66. They failed to pay interest to the tune of Rs. 19,280.34 P. till 31-12-66. Despite service of notice opposite parties did not pay the amounts accrued due. The Corporation accordingly filed a petition before the District Judge under Section 31 of the State Financial Corporations Act, 1951 (hereinafter to be referred to as the Act). They asked for an order for sale of the mortgaged properties and for adjustment of the sale proceeds towards the realisation of the principal with interest. They also asked for an ad interim injunction for restraining the opposite parties from alienating or dealing in any manner with the properties mentioned in Schedules B to D.
3. Opposite parties filed an objection on several grounds. One of the grounds was that Section 31 of the Act is unconstitutional. An application was filed by them for making a reference to the High Court under Section 113 of the CPC to decide the question of unconstitutionality of Sec. 31. The learned District Judge held that Section 31 of the Act is hit by Article 14 of the Constitution and made a reference to the High Court for its opinion. This is how the matter has come before us.
4. Section 113 of the CPC prescribes that where the court is satisfied that a case pending before it involves a question as to the validity of any Act or any provision contained therein, the determination of which is necessary for the disposal of the case, and is of opinion that that Act or provision is invalid and the same has not been so declared by the High Court to which that court is subordinate or by the Supreme Court the Court shall state a case setting out its opinion and reasons therefor and refer the same for the opinion of the High Court.
5. The constitutionality of Section 31 of the Act was raised before the learned District Judge. He was of opinion that the section is hit by Article 14 of the Constitution. There is no decision of this court or the Supreme Court on the point. The learned District Judge, was therefore, right in making the reference.
6. Before we examine the constitutionality of Section 31 of the Act it would be appropriate to notice the scheme of the Act. Chapter I deals with short title, extent and commencement and certain definitions. Chapter II refers to incorporation of State Financial Corporations, their capital and management. Powers and duties of the Board have been dealt with in Chapter III. Chapter IV covers investment of funds, accounts and audit. Chapter V deals with miscellaneous matters. The definitions of “Board”, “Financial Corporation” and “industrial concern” in Section 2(a), (b) and (c) are as follows:
“2. (a) “Board” means the Board of Directors of the Financial Corporation;
(b) “Financial Corporation” means a Financial Corporation established under Section 3 and includes a joint financial corporation established under Section 3-A;
(c) “Industrial concern” means any concern engaged or to be engaged in the manufacture, preservation or processing of goods or in mining or in the hotel industry or in the transport of passengers or goods by road or by water or in the generation or distribution of electricity or any other form of power or in the development of any continuous area of land as an industrial estate.
Explanation.- The expression “processing of goods” includes any art or process for producing, preparing or making an article by subjecting any material to a manual, mechanical, chemical, electrical or any other like operation.”
7. Three relevant sections may be extracted. They are Sections 31, 32 and 46-B.
“31. (1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any instalment thereof or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate repayment of any loan or advance under Section 30 and the industrial concern fails to make such repayment, then, without prejudice to the provisions of Section 29 of this Act and of Section 69 of the Transfer of Property Act, 1882 any officer of the Financial Corporation, generally or specially authorised by the Board in this behalf, may apply to the District Judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs, namely:—
(a) for an order for the sale of the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation as security for the loan or advance; or
(b) for transferring the management of the industrial concern to the Financial Corporation; or
(c) for an ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without the permission of the Board, where such removal is apprehended.
(2) An application under sub-section (1) shall state the nature and extent of the liability of the industrial concern to the Financial Corporation, the ground on which it is made and such other particulars as may be prescribed.
32. (1) When the application is for the reliefs mentioned in clauses (a) and (c) of sub-section (1) of Section 31, the District Judge shall pass an ad interim order attaching the security, or so much of the properly of the industrial concern as would on being sold realise in his estimate an amount equivalent in value to the outstanding liability of the industrial concern to the Financial Corporation, together with the costs of the proceedings taken under Section 31, with or without an ad interim injunction restraining the industrial concern from transferring or removing its machinery, plant or equipment.
(2) When the application is for the relief mentioned in clause (b) of sub-section (1) of Section 31, the District Judge shall grant an ad interim injunction restraining the industrial concern from transferring or removing its machinery, plant or equipment and issue a notice calling upon the industrial concern to show cause, on a date to be specified in the notice, why the management of the industrial concern should not be transferred to the finanical corporation.
(3) Before passing any order under sab-section (1) or sub-section (2), the District Judge may, if he thinks fit, examine the officer making the application.
(4) At the same time as he passes an order under sub-section (1), the District Judge shall issue to the industrial concern a notice accompanied by copies of the order, the application and the evidence, if any, recorded by him calling upon it to show cause on a date to be specified in the notice why the ad interim order of attachment should not be made absolute or the injunction confirmed.
(5) If no cause is shown on or before the date specified in the notice under sub-sections (2) and (4), the District Judge shall forthwith make the ad interim order absolute and direct the sale of the attached property or transfer the management of the industrial concern to the Financial Corporation or confirm the injunction.
(6) If cause is shown, the District Judge shall proceed to investigate the claim of the Financial Corporation in accordance with the provisions contained in the Code of Civil Procedure, 1908, in so far as such provisions may be applied thereto.
(7) After making an investigation under sub-section (6) the District Judge may—
(a) confirm the order of attachment and direct the sale of the attached property;
(b) vary the order of attachment so as to release a portion of the property from attachment and direct the sale of the remainder of the attached property;
(c) release the property from attachment;
(d) confirm or dissolve the injunction; or
(e) transfer the management of the industrial concern to the Financial Corporation or reject the claim made in this behalf:
Provided that when making an order under clause (c), the District Judge may make such further orders as he thinks necessary to protect the interests of the Financial Corporation and may apportion the costs of the proceedings in such manner as he thinks fit:
Provided further that unless the Financial Corporation intimates to the District Judge that it will not appeal against any order releasing any property from attachment, such order shall not be given effect to, until the expiry of the period fixed under sub-section (9) within which an appeal may be preferred or, if an appeal is preferred, unless the High Court otherwise directs until the appeal is disposed of.
(8) An order of attachment or sale of property under this section shall be carried into effect as far as practicable in the manner provided in the Code of Civil Procedure, 1908 for the attachment or sale of property in execution of a decree as if the Financial Corporation were the decree-holder.
(8-A) An order under this section transferring the management of an industrial concern to the Financial Corporation shall be carried into effect, as far as may be practicable, in the manner provided in the Code of Civil Procedure, 1908, for the possession of immovable property or the delivery of movable property in execution of a decree, as if the Financial Corporation were the decree-holder.
(9) Any party aggrieved by an order under sub-section (5) or sub-section (7) may, within thirty days from the date of the order, appeal to the High Court, and upon such appeal the High Court may, after hearing the parties, pass such orders thereon as it thinks proper.
(10) Where proceedings for liquidation in respect of an industrial concern have commenced before an application is made under sub-section (1) of Section 31, nothing in this section shall be construed as giving to the Financial Corporation any preference over the other creditors of the industrial concern not conferred on it by any other law.
(11) The functions of a District Judge under this section shall be exercisable—
(a) in a presidency town, where there is a city civil court having jurisdiction, by a Judge of that court and in the absence of such court, by the High Court; and
(b) elsewhere, also by an additional District Judge.
46-B. The provisions of this Act and of any rules or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or Articles of Association of an industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act shall be in addition to, and not in derogation of any other law for the time being applicable to an industrial concern.”
8. We would now proceed to make an analysis of the aforesaid three sections. Section 31 prescribes special provision for enforcement of claims by Financial Corporation. Section 32 lays down the procedure, which the District Judge would follow in respect of application under Section 31. Section 46-B makes clear that relief in Civil Court can be obtained de hors the provisions of the Act.
9. Under Section 31 three types of reliefs can be prayed for by the Financial Corporation. They are for an order for sale of the mortgaged security, for transferring the management of the industrial concern to the Financial Corporation, and for an ad interim injunction restraining the industrial concern from transferring or removing its machinery, plant or equipment from the premises of the industrial concern without the permission of the Board.
10. In exercise of his powers under Section 32 the District Judge can grant reliefs under Section 31(1)(a) and (c) by passing ad interim order attaching the security and also by granting ad interim injunction.
11. Under Section 32(2) ad interim injunction can be granted in respect of a relief claimed under Section 31(1)(b). In such a case a notice calling upon the industrial concern to show cause on a date to be specified in the notice is to be issued.
12. Before passing any order under sub-section (1) or (2) of Section 32 the District Judge may examine the officer of the Finance Corporation making the application. When an order is passed under Section 31(1), a notice would be issued to the industrial concern. The notice would be accompanied by copies of the interim order, the application and the evidence, if any, calling upon the industrial concern to show cause by a specified date.
13. Under sub-section (5) if no cause is shown the ad interim order would be made absolute.
14. If, however, cause is shown, the District Judge shall proceed to investigate the claim of the Financial Corporation in accordance with the provisions contained in the Code of Civil Procedure in so far as such provisions may be applied thereto. That means the whole of the Code of Civil Procedure would apply excepting the provisions which would be inconsistent with any of the provisions prescribed in the Act.
15. Under Section 32(7) the District Judge may pass any order as he thinks fit. He may confirm the order of attachment and direct the sale of the attached property; or he may release either the whole or a part of the property from attachment. He may confirm or dissolve the order of injunction. It is not necessary to give full details.
16. Under Section 32(9) an aggrieved party has a right of appeal to the High Court against an order passed under sub-section (5) or sub-section (7) of Section 32. The High Court after hearing the party may pass such orders as it thinks fit.
17. Section 46-B clarifies the position that the provisions of the Act and the rules made thereunder shall have effect in case they are inconsistent with any other law for the time being in force or any provision in the memorandum or articles of association of an industrial concern. Subject to this restriction the provisions of the Act shall be in addition to, and not in derogation of any other law for the time being applicable to an industrial concern. Thus the jurisdiction of the Civil Court in certain circumstances is not ousted.
18. This, in substance, is the scheme of Sections 31, 32 and 46-B. These sections provide a complete code by themselves and confer powers on high judicial authorities like the District Judge and the High Court in appeal. If recourse is taken to a civil suit it would be filed in a competent court of lowest jurisdiction. A Subordinate Judge has unlimited pecuniary jurisdiction. Under the Act without filing an application before a Subordinate Judge it would be filed before the District Judge. If the valuation of the application is less than Rs. 5,000 an appeal would lie to the District Judge with a second appeal to the High Court, if recourse had been taken to Civil Court while under the Act the appeal would always lie to the High Court.
19. The parties would get better adjudication by the provisions of the Act. Provision has been made in the Act for service of notice to the industrial concern, for reception of objection and for full hearing. Considering the object with which these special procedures were enacted by the Legislature we are rather inclined to hold that the provisions are more progressive and the parties would get much better justice than what they would obtain if a civil suit is filed. At any rate, it is not more disadvantageous or unconscionable.
20. In (1974) 2 SCC 402 : AIR 1974 SC 2009 (Maganlal Chhaganlal (P.) Ltd. v. Municipal Corporation of Greater Bombay) a Constitution Bench consisting of seven Judges upheld the validity of the Bombay Municipal Corporation Act (3 of 1888) as amended by Maharashtra Act 14 of 1961 and the Bombay Government Premises (Eviction) Act, 1955. The provisions in those Acts were more or less similar to the provisions of this Act. Their Lordships summed up their conclusions in paragraphs 15 to 18. In paragraph 18 their Lordships observed thus:
“It is necessary to point out that the procedures laid down by the two Acts now under consideration are not so much harsh or onerous as to suggest that a discrimination would result if resort is made to the provisions of these two Acts in some cases and to the ordinary Civil Court in other cases. Even though the officers deciding these questions would be administrative officers there is provision in these Acts for giving notice to the party affected, to inform him of the grounds on which the order of eviction is proposed to be made, for the party affected to file a written statement and produce documents and be represented by lawyers. The provisions of the Code of Civil Procedure regarding summoning and enforcing attendance of persons and examining them on oath, and requiring the discovery and production of documents are a valuable safeguard for the persons affected. So is the provision for appeal ………….”
21. The provisions under the Act are more liberal. The application is to be filed before a District Judge and an appeal lies to the High Court. The entire Code of Civil Procedure is to be followed except to the extent it is inconsistent with any provisions of the Act. Parties would get full opportunities to present their case. The Act is, therefore, a step in advance of the adjudication made in Civil Courts. The action will be quicker and remedies will be available from the highest court of original civil jurisdiction and in appeal from the High Court. We, therefore, find no merit in the conclusion of the District Judge that Section 31 of the Act is hit by Article 14 of the Constitution.
22. Several Bench decisions of this court have been brought to our notice taking a view that in similar instances several statutes were held to be ultra vires. Those decisions are (1969) 35 Cut LT 1304 : (AIR 1970 Orissa 189) (Brahmananda Sahu v. State of Orissa); (1970) 36 Cut LT 602 (Arjun Pradhan v. Revenue Divisional Commr., Division Berhampur); (1971) 37 Cut LT 860 (Hari Sahu v. Union of India) and 1971 (2) Cut WR 338 : (AIR 1972 Orissa 88) (Padmanav Pradhan v. State of Orissa). The conclusions arrived at in those decisions were based on the majority decision in AIR 1967 SC 1581 (Northern India Caterers (Private) Ltd. v. State of Punjab) which now stands overruled in (1974) 2 SCC 402 : AIR 1974 SC 2009. The aforesaid four Bench decisions of this Court can no longer be held to be good law as they would be in direct conflict with (1974) 2 SCC 402 : AIR 1974 SC 2009 and are hereby overruled.
23. A Constitution Bench of five Judges also declared the Tamil Nadu Land Encroachment Act (3 of 1905) as constitutionally valid in (1974) 2 SCC 539 : AIR 1974 SC 2044 (Pandia Nadar v. State of Tamil Nadu) which followed (1974) 2 SCC 402 : AIR 1974 SC 2009.
24. On the aforesaid analysis, we would answer the question posed by the District Judge by saying that Section 31 of the Act is not hit by Article 14 of the Constitution and is valid. The reference is discharged. In the circumstances, parties will bear their own costs.
25. The case is lying for a long time before the District Judge awaiting answer to the reference made under Section 113 of the CPC. Records of the case be sent back at once and the District Judge is directed to dispose of the case within three months from today with intimation to this Court.
26. Mohanty, J.:— I agree.
27. Das, J.:— I agree.
28. Answered accordingly.
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