Pitabash Chhotaray v. Orissa State Financial Corporation And Another

1. The question that has arisen in these two matters — a Civil Revision and a Miscellaneous Appeal have been filed by way of abundant caution — is, if the provisions contained in O. 21, R. 58 of the C.P.C are applicable to proceeding under S. 31 of the State Financial Corporation Act, 1951 (Central Act No. LXIII of 1951) (Hereinafter called ‘the Act’) read with S. 32 thereof.

2. Shorn of unnecessary details, the facts in short are:

One Parikhit Chhotary, brother of the petitioner, had obtained a loan from the Orissa State Financial Corporation (hereinafter called, ‘the Corporation’) mortgaging certain property as security for the loan. On his default in payment of loan, steps were taken for sale of the property mortgaged. In course of the proceeding, the property was directed to be sold. At this stage, the petitioner, brother of Parikhit, filed an application under O. 21, R. 58 of the C.P.C for the lifting of the order of attachment and release of his property from the proposed sale. The learned District Judge rejected the application as incompetent holding that the provisions contained in O. 21, R. 58 were not applicable to proceeding under S. 32 of the Act.

3. Not being sure about the legal position, the claimant has filed an appeal as well as a revision. For convenience I would treat the claimant as the appellant.

4. Shri Samareswar Mohanty, the learned counsel of the appellant, has urged that the learned District Judge has erred in law in the face of the express provisions contained in S. 32(8) of the Act in holding (a) O. 21, R. 58 did not have any application to a proceeding under S. 32, and (b) denial of an opportunity to a third party, whose property has been fraudulently mortgaged, hypothecated or assigned to the Corporation, to seek release of his property would render the provision of S. 32 of the Act unconstitutional and, therefore, this Court should so construe the provision as to save it from the vice of unconstitutionality.

5. Shri S.N Sinha, the leaned counsel for the Corporation, has sought to repel the challenge contending that the proceeding under S. 32 of the Act not being a suit, no decree is passed therein. Sub-section (8) of S. 32 provides the procedure for attachment and sale but nothing more. The proceeding is between a Corporation and the industrial concern. Therefore, a third party has no locus standi. When the only defence available to the industrial concern is, whether the Corporation is entitled to the reliefs under S. 31 of the Act, conceding to a third party the right to raise claims would widen the scope of S. 32 not contemplated by the provisions and would encourage unscrupulous persons to raise bogus claims to defeat the interest of the Corporation. Introduction of such claims would defeat the provisions and their purpose would be frustrated. He has further urged that the interpretation as advocated by the counsel for the appellant would open up a floodgate of litigations.

6. Let me touch on the last contention of the learned counsel for the respondents, i.e the floodgate plea, which does not appeal to me. If the provisions would bear the meaning and permit third parties to raise claims to property mortgaged, hypothecated or assigned to the Corporation, it would not be permissible to shut the door of a claimant, who has reason to be aggrieved, on the basis of the floodgate argument. I close this part by quoting a line from the speech of Lord Wilberforce in the House of Lords. Repelling the floodgate argument and the plea of increased litigation, the noble Lord observed:

“Be it so, if that is the route to justice.” (See 1981 (1) All ER 161: National Carries Ltd. v. Panalpina (Nothern) Ltd.).

7. With a view to providing medium and longterm credit to industrial undertakings, which fall outside the normal activities of commercial Banks, a Central Industrial Finance Corporation was set up under the Industrial Finance Corporation Act, 1948. The State Governments wished that similar Corporations should also be set up in the States to supplement the work of the Industrial Finance Corporation. Such State Corporations could finance medium and small scale industries. With that object in view, the State Financial Corporation Act, 1951 was enacted. Special provision was made with a view to making realisation of loan or advance easier and expeditious.

8. Section 31 of the Act authorises the Corporation in case of breach of any agreement or default in payment of loan or advance or any instalment thereof, etc. to approach the District Judge either for sale of property pledged, mortgaged, etc. as security for the loan or advance for enforcing the liablility of surety, for transfer of the management of the industrial concern, or for ad interim injunction restraining the industrial concern from transferring or removing its machinery or plants, etc. When an application seeking the relief of sale or for ad interim injunction is made, the District Judge is enjoined by S. 32 to follow the procedure laid down therein. The industrial concern is given full opportunity to show cause and lead evidence with reference to the claim made by the Corporation. After making an investigation, the District Judge may, as provided in sub-sec. (7), confirm the order of attachment and direct sale of attached property, 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 attachment property, release the property from attachment etc. Then comes sub-sec. (8) which reads as under:

“32. Procedure of District Judge in respect of application under S. 31—

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(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 the property in execution of a decree as if the Financial Corporation were the decree-holder.”

9. The controversy centres round the scope of sub-sec. (8). What is the scope and intent of the sub-section? Does it simply mean that an attachment or sale shall be made by complying with the formal requirements as prescribed in O. 21, or are the provisions relating to the attachment or sale of property also applicable to a proceeding under S. 32?

10. At this stage, it is worthwhile to notice S. 46-B of the Act which reads as under:

“The provisions of this Act and on only 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 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.”

In my opinion, the language of sub-section (8) is clear. It says that an order of attachment or sale of property shall be carried into effect as far as practicable in the manner provided in the Code of Civil Procedure for the attachment or sale of the property in execution of the decree. An order of attachment or sale is not carried into effect in the manner provided in the Code of Civil Procedure unless third party claims, if there be so, are entertained and adjudicated. The sub-section does not read that an order of attachment or sale of property shall be made in the manner provided in the Code of Civil Procedure, but shall be carried into effect.

11. The purpose of the proceeding is to sell the property mortgaged, hypothecated assigned, etc. for realisation of the loan advanced or the advance made. By sale, the title of the borrower is lost and would vest in the purchaser. It is, therefore, intended that the sale should be real, not an illusory one. That is to say, the purchaser in such a sale should acquire real title to the property, not supposed title. Title does not pass to him unless the borrower has title in it. If the borrower had fraudulently mortgaged with the Corporation property not belonging to him and the same is attached and sold, the purchser may ultimately be acquiring paper title, but not real title. If the borrower had no title in the property sold, the purchsaser would be involved in litigations in future, and he may find to his utter dismay that he has been duped and has purchased only litigations. Such could not be the intent of the provision. When the law, therefore, prescribes sale of the property of the borrower, it envisages a transfer of real title after settling all controversies at the threshold. Therefore, it envisags an investigation to the title where disputes are raised by third parties. This is so in public interest. Therefore, detailed provisions have been incorporated in O. 21 as well as in the various Public Demands Recovery Acts providing for investigation of pleas advanced by third parties, so that in the very proceeding the controversies relating to title are set at rest and multiplicity of proceedings is avoided. (See also S. 84 of the Code of Criminal Procedure, 1973 providing for entertainment of claim by the third party to the attachment of the property of person absconding).

12. Denial of an opportunity to the third party to claim the property attached or sold as his would deny principles of natural justice and would render the provision unconstitutional. In course of argument, I put hypothetical question to the learned counsel for the Corporation as to what would happen where property of the third party had been fraudulently mortgaged with the Corporation and what was the remedy available to the third party where his property was attached and sold for realisation of loan advanced to the borrower, who had no title to the property. He answered that the third party had the remedy of a suit after the sale was effected. In my opinion, such a procedure would be productive of grave injustice not only to the third party but also to the purchaser. After the sale, the situation becomes more complicated so far as the third party is concerned and he would have to pursue an expensive remedy and may be deprived of this property until the close of litigation. It would be also prejudicial to the purchaser, who may have purchased the property in good faith, if it turns out in the subsequent litigation that the third party has the title. The purchaser would not only lose title but would discover after incurring expenditure that he had purchased merely a paper title. Public policy frowns upon a course which has the potentiality of such eventualities. Apprehension of a litigation later with a likelihood of title coming to a nought would act as a damper and would not attract purchasers. Therefore, it is proper to settle such controversies at the threshold, so far as it is possible to do so, that disputes as to the title are not postponed but are settled before title passes finally to the purchaser.

13. Therefore, the legislature in its wisdom had incorporated the provision contained in O. 21 relating to claims by third parties in sub-sec. (8) of S. 32 of the Act by providing that an order of attachment or sale of property shall be carried into effect in the manner provided in the Code of Civil Procedure for the attachment or sale of the property in execution of a decree as if the Corporation were the decree-holder. As a similar provision was wanting in the matter of transfer of management of an industrial concern to the Corporation involving delivery of possession, S. 32-A was incorporated at a later stage in 1956 providing for investigation of claims of third parties.

There is nothing to indicate that the language in sub-sec. (8) of S. 32 bears a restrictive meaning. Therefore, when it says that an order of attachment or sale or property shall be carried into effect in the manner provided in the code of execution of a decree, it means the entire gamut relating to identical subject. How is attachment or sale complete unless the impediments are removed? What are the purpose and intendment behind the sale? To transfer to the purchaser title on which he can rely but not a vulnerable, defeasible paper title. The impediments may be by way of claims of third parties, which should be removed by investigation thereinto and settling the controversy. Real sale is not effected by sweeping all the weaknesses and infirmities under the carpet.

14. Inasmuch as the provisions contained in Ss. 31 and 32 of the Act provide a complete Code, such of the provisions of the Civil Procedure Code as would be inconsistent with the provisions contained in the Act expressly or by necessary implication would not be attracted and be applicable. But entertainment and investigation of claims of third parties are not discountenanced by any of the provisions contained in the Act. No doubt, as the learned counsel for the Corporation submits, special provisions were made to enable the Corporation to realise its funds conveniently and easily, but justice cannot be slaughtered at the altar of convenience and expedition. Investigation into claims at the threshold is also beneficial to the Corporation and in its interest. It is better that the challenge is grappled with at the earliest than postponing it to a later day. If the claim of the third party is upheld in a subsequent suit, the entire exercise under S. 32 would be discovered by all concerned to have been in vain and the Corporation would be back to square one.

15. I would now refer to a few decisions. In AIR 1972 Patna 348 Thakur Paper Mills Ltd. v. Industrial Finance Corpn. of India), the Court was called upon the construe S. 30 of the Industrial Finance Corporation Act, the predecessor of the State Financial Corporation Act. Section 30 of the Industrial Financial Corppration Act and S. 32 of the State Financial Corporation Act are identical. Construing sub-sec. (10) of S. 30, which is identical with sub-sec. (8) of S. 32 of the State Financial Corporation Act, Untwalia, J., to whom the matter had been referred on difference of two learned Judges of that Court, observed:

“…..In other words, the procedure of issuing sale proclamation as provided by R. 66 onward of O. 21 will be attracted. If the sale takes place, the provisions of S. 47 or R. 90 of O. 21 for setting aside the sale may be applicable; the provision contained in R. 89 may also be applicable….”

Though we are not concerned with the applicability of S. 47, etc., this decision lends support to my view that the provisions contained in O. 21 relating to the claims by third parties are attracted having regard to the language used in sub-sec. (8) of S. 32 of the State Financial Corporation Act. In AIR 1972 SC 801 (Asnew Drums (Private) Ltd. v. Maharashtra State Finance Corpn.), the question was, if an order passed by the District Judge refusing to set aside the sale was appealable. It was contended that sub-sec. (8) of S. 32 provided an appeal having regard to the expression “in the manner provided in the Code Procedure”. The Supreme Court observed:

“…..It is difficult to understand why the scope of the language should be cut down by not including appeals provided under the Code of Civil Procedure within the ambit of the words “in the manner provided in the Code of Civil Procedure”. “Manner” means method of procedure and to provide for an appeal is to provide for a mode of procedure.”

The following observation of the Full Bench in AIR 1975 Orissa 132 (State Financial Corpn. v. Satpathy Brothers and Nanda Co. (P). Ltd.) as instructive:

“……The entire Civil Procedure Code 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.”

Reliance was placed by the learned counsel for the Corporation on AIR 1963 Punjab 555 (Swaya Mal Sant Ram v. Punjab Financial Corpn.) There the question was, if creditors of Industrial concern were necessary parties and if O. 34, R. 4 of the Code of Civil Procedure had application. The learned single Judge held that having regard to the provisions contained in the Act, O. 34, R. 4 of the Code of Civil Procedure were not applicable and creditors were not necessary parties. We are not concerned with the said question here. This decision has, therefore, no relevance.

16. I am, therefore, of the view that entertainment and investigation of claims by third parties in the manner provided in O. 21, R. 58 of the Civil P.C come within the purview of sub-sec. (8) of S. 32 of the Act. Hence, I accept the appeal, set aside the impugned order and direct the learned District Judge that claims filed by the appellants be disposed of in accordance with law after giving adequate opportunity to all the parties.

17. In the result, the appeal is allowed and the Civil Revision is disposed of. The appellants shall have costs. Hearing fee is assessed at Rs. 250/-.

Appeal allowed.