Kerala Financial Corporation vs Vincent Paul & Anr

Kerala Financial Corporation .... Appellant(s)

Versus

Vincent Paul & Anr. .... Respondent(s)

WITH

CIVIL APPEAL NO. 3450 OF 2003

AND

CIVIL APPEAL NO. 3451 OF 2003

J U D G M E N T

P.Sathasivam,J.

1) These appeals are filed against the judgments and orders

dated 27.11.2001 and 22.01.2002 passed by the High Court of

Kerala at Ernakulam in A.S. No. 557 of 2000 and O.P. No.

33834 of 2001 respectively.

1 2) Brief facts:

(a) The Kerala Financial Corporation (in short "the KFC"), a

Public Sector Undertaking, is a State Financial Corporation.

On 24.10.1977, a loan of Rs.50 lakhs was sanctioned by the

KFC to a firm called Cable India (hereinafter referred to as "the

Firm") on hypothecation of land and machinery. In view of

consistent failure of the firm to repay the loan, on 11.09.1987,

the KFC took over the firm under Section 29 of the State

Financial Corporations Act, 1951 (in short "the Act"). On the

same day, the Firm filed O.S. No. 2194 of 1987 with I.A. No.

1776 of 1987 for temporary injunction restraining the KFC

from taking over the firm.

(b) On 07.10.1988, a notice was published by the KFC in

Mathrubhumi Malayalam Daily inviting tenders from intending

buyers for purchase of the property. The last date for

submission of tender was 31.10.1988. Pursuant to the same,

only one bidder, i.e. one Vincent Paul, submitted the tender

quoting an amount of Rs. 7.5 lakhs as bid amount and also

deposited the earnest money of Rs. 10,000/- as stipulated in

the tender notice. On the same day, after discussion and

2

negotiation between the KFC and Vincent Paul, the KFC

issued a letter to the said Vincent Paul expressing its

willingness to sell the property for Rs. 8.25 lakhs subject to

certain conditions.

(c) By letter dated 01.11.1988, the Firm filed O.S. No. 2109

of 1988 before the Munsiff Court, Thrissur, seeking injunction

to restrain the KFC from taking any action pursuant to the

auction/sale proceedings and on the very same day the

learned Judge directed to maintain status quo as on

31.10.1988.

(d) By letter dated 05.11.1988, the KFC informed Vincent

Paul that further proceedings of the sale could be finalized

only after vacating the temporary injunction ordered by the

Munsif Court, Thrissur. On 10.11.1988, I.A. No. 1776 of

1987 in O.S. No. 2194 of 1987 filed by the firm was dismissed.

On 17.01.1992, O.S. No. 2109 of 1988 was also dismissed and

the injunction was vacated. Against the said order, on

26.02.1992, the Firm filed A.S. No. 56 of 1992 before the

District Judge, Thrissur. In the meantime, on 03.02.1993, the

first suit i.e. O.S. No. 2194 of 1987 itself was dismissed.

3 Against the said order, the Firm filed AS. No. 146 of 1993

before the District Judge, Thrissur.

(e) On 06.12.1994, Vincent Paul filed a suit bearing O.S. No.

1522 of 1994 before the subordinate Judge, Thrissur for

specific performance of the agreement of sale. Subsequent to

the filing of the said suit, the appeals i.e. A.S. No. 56 of 1992

and A.S. No. 146 of 1993 were dismissed by a common

judgment dated 10.04.1995 by the Addl. District Judge,

Thrissur. The suit for specific performance i.e. O.S No 1522 of

1994, filed by Vincent Paul was also dismissed by the Sub-

ordinate Judge, Thrissur, vide judgment dated 07.03.2000,

holding that there is no concluded contract between the

parties so as to entitle the plaintiff to a decree for specific

performance. Against the said order, on 18.09.2000, Vincent

Paul filed A.S. No. 557 of 2000 before the High Court of

Kerala.

(f) On 17.09.2001, the KFC invited fresh tenders for the sale

of assets. One K.K. Ummer Farook responded to the tender by

making an offer of Rs. 55,55,555/- for the land and building

which was the highest amount among the four offers received.

4 In the meantime, by judgment dated 27.11.2001, the Division

Bench of the High Court allowed A.S. No.557 of 2000 filed by

Vincent Paul, consequently decreed the suit filed by him.

Against the said judgment, the KFC filed Civil Appeal No. 3446

of 2003 before this Court by way of special leave petition.

Challenging the same judgment, K.K. Ummer Farook filed Civil

Appeal No. 3450 of 2003 before this Court by way of special

leave petition. K.K. Ummer Farook also filed O.P. No. 33834 of

2001 before the High Court praying for direction to convey the

property being the highest bidder in the second tender and the

same was dismissed as infructuous by the High Court vide

judgment dated 22.01.2002. Against the said judgment, K.K.

Ummer Farook filed C.A. No. 3451 of 2003 before this Court

by way of special leave petition.

3) Heard Mr. Rajendran Nair, learned senior counsel for the

appellant in C.A.No.3446 of 2003, Mr. V. Giri, learned senior

counsel for the appellant in C.A. Nos. 3450 and 3451 of 2003

and Mr. C.S. Rajan, learned senior counsel for respondent

No.1 in C.A. Nos. 3446 and 3450 of 2003, Mr. R.

Sundarvardan, learned senior counsel for respondent

5

No.2 in C.A.No.3446/2003 and respondent No.3 in

C.A.No.3450 of 2003.

4) During the course of hearing, Mr. P.V. Dinesh, learned

counsel appearing for the KFC filed additional affidavit stating

that the KFC, formed in 1953, is a statutory Corporation

constituted under the Act and more than 95% of the shares

are held and controlled by the State Government. The Board

is constituted under Section 10 of the Act. According to him,

the Managing Director is appointed by the State Government

and its Chairman is the nominee of Small Industries

Development Bank of India (in short "SIDBI") and substantial

re-finance is granted from SIDBI for sanctioning loans. He

pointed out that the procedure for the sale is as per the

standing orders and recovery policy as approved by the Board

from time to time and the recovery policy may change every

year for settlement of NPA loan accounts. According to the

procedure that was followed in 1988, a sale proclamation shall

be published in a local daily newspaper in Vernacular

language with details of property and date of opening tender or

auction. The tender has to be submitted to the Managing

6

Director at the Head Office and the opening of

tender/auctioning has to be conducted at the Head Office.

The sale will be confirmed by the Managing Director. Officers

of the Corporation will value the properties and 80% of that

valuation will be considered as upset price for the purpose of

sale of properties.

5) He further pointed out the procedure which has been

followed in the present case. He stated that the notice to

defaulter/promoter under Section 29 was issued and

thereafter, the assets were taken by the Branch/District

Manager authorized by Managing Director. Valuation of

assets was done by the officers of KFC. Land valuation was

done by the Legal Officer in consultation with Village Officer

concerned and by conducting local enquiry for fixing market

value. Valuation of building, plant and machinery was done

by Technical Officer based on the norms approved by the

Institute of Engineers. The tender notice was published in two

newspapers for the sale of the property.

6) Though these details have been furnished by the counsel

for the KFC during the course of hearing, the fact remains that

7

the State Government has not framed rules or guidelines for

sale of public properties by way of tender or auction. KFC is

incorporated under Section 3 of the Act. Section 29 of the Act

empowers the KFC to attach and sell the security in discharge

of debts. It gives KFC the right to take over possession of the

security offered while taking the loan and the right to

transfer/sale the same as if KFC is the owner. The money

acquired after such transfer/sale of the secured property shall

be used in discharge of debts due to KFC including all

expenses incurred by it. The residue amount, if any, is to be

paid to the person entitled. Section 31 of the Act also provides

the same remedy but the procedure goes through the District

Judge. In terms of this Section, KFC has to apply to the

District Judge in whose jurisdiction the property may lie for an

order of sale. However, Section 29 provides for speedy

recovery.

7) The procedure of attachment and sale of property though

available under the Code of Civil Procedure, 1908, it shall

apply only when there is a decree at the instance of any of the

parties. In the present case, the KFC had not proceeded

8

through the Civil Court but has taken independent action

under Section 29 of the Act.

8) Coming to the decree for specific performance granted by

the High Court in favour of Vincent Paul, by notice under Ex.

B1, KFC invited tenders from intending buyers for purchase of

immovable property attached by them. The last date for

submission of tender was 31.10.1988. Vincent Paul

submitted a tender quoting an amount of Rs. 7.5 lakhs as

bidding amount. He also deposited a sum of Rs.10,000/- for

earnest money deposit as stipulated in the tender notice. One

of the conditions of tender was that the successful bidder

whose bid is accepted should pay 25% of the purchase price

offered within one week, if and when the tender is accepted,

the balance amount be paid within one month thereafter.

When the tender was opened on 31.10.1988, the amount

quoted by Vincent Paul was noticed as the highest one. After

discussion and negotiation between the KFC and Vincent Paul,

the price was ultimately fixed at Rs. 8.25 lakhs. Thereafter,

letter dated 31.10.1988 (Ex. A2) was issued by the KFC to

Vincent Paul calling upon him to pay the balance amount of

9

Rs.8.15 lakhs after appropriating Rs.10,000/- paid by him

towards Earnest Money Deposit. According to Vincent Paul-

the plaintiff, as per Ex. A2 the plaintiff has to deposit 25% of

the amount payable within a week thereof i.e., on or before

05.11.1988 and the balance amount within one month

thereafter. It is his grievance that inasmuch as the defendant-

KFC did not abide by the agreement to sell despite his

compliance, he filed suit for specific performance. On the

other hand, it was contended by the defendant-KFC that there

was no concluded contract and Ex. A2 has not been accepted

by the plaintiff. According to them, Ex. B1 was only a tender

notice and the suit for specific performance is not

maintainable and in any event is barred by limitation since it

was filed only in 1994. Though the trial Court accepted the

case of the defendant and dismissed the suit, the High Court

in appeal filed by the plaintiff granted decree for specific

performance.

9) Whether the plaintiff-Vincent Paul has made out a case

for discretionary relief of specific performance? For this, it is

10

useful to refer the letter dated 31.10.1988 of the KFC

addressed to Vincent Paul which reads as under:

"KERALA FINANCIAL CORPORATION

HEAD OFFICE: VELLAYAMBALAM, TRIVANDRUM-695 033

No. BL.1158/R/88 Date : 31.10.1988

Shri Vincent Paul

Pellissery House

P.O. Ammadam,

Trichur.

Sir,

Sub: Sale of the assets of M/s Cables India

Punkunnam, Trichur.

Ref: Your tender letter dated 31.10.1988 and further

discussion with us.

With reference to the above we may inform that we are

agreeable to sell the assets viz. the landed properties

comprised in Sy. Nos. 1856/6 (19 cents) and 1856/7 (43

cents) together with building thereon and machinery

including the electrical fittings and accessories for

Rs.8,25,000/- subject to compliance of the following

conditions:-

1. 25% of the sale consideration should be

remitted to us within a week from the date

of confirmation of the transaction.

2. The balance should be remitted in a lump

sum within one month from the date of

remittance of the initial payment.

3. All the formalities in this regard should be

complied within two months.

Leaving the amount of Rs.10,000/- remitted on

31.10.1988, the balance consideration amounting to

11

Rs.8,15,000/- should be remitted to the Corporation to

execute the sale deed and transfer the possession to you.

Yours faithfully,

Sd/-

MANAGER (RECOVERY)"

10) According to the plaintiff-Vincent Paul, it was agreed to

by him as to the offer of Rs. 8.25 lakhs by the KFC and in view

of the fact that he has remitted a sum of Rs.10,000/- on

31.10.1988 as Earnest Money Deposit, he was ready to pay

the balance amount but the sale was not completed due to

failure on the part of the KFC. Learned senior counsel for

Vincent Paul submitted that communication dated 31.10.1988

is a concluded contract and no further confirmation is

required in this regard and the plaintiff has to pay the balance

amount and the KFC has to execute the sale deed and transfer

the possession to him. The stand taken by the learned senior

counsel for Vincent Paul was totally denied by the KFC by

submitting that the communication dated 31.10.1988 is not

absolute but subject to confirmation by Vincent Paul within a

week. Admittedly on receipt of the communication dated

31.10.1988 from the KFC, the plaintiff had not sent any reply

12

in the form of confirmation of the said transaction as provided

in clause (1) of Ex. A2. In such circumstance, it cannot be

contended that there is a concluded contract between the KFC

and Vincent Paul. After 31.10.1988, KFC sent another letter

on 05.11.1988 intimating the plaintiff that further proceedings

can be finalized only after vacating the temporary injunction

ordered by the Munsif Court, Thrissur. The said letter has not

been disputed by Vincent Paul. Inasmuch as the KFC has

agreed to sell the property in question for Rs.8.25 lakhs

subject to compliance of three conditions mentioned in Ex. A2,

unless the other party to the contract, namely, Vincent Paul

conveys his willingness within a week with regard to the terms

stipulated therein, he cannot take advantage of mere

remittance of a sum of Rs.10,000/- towards Earnest Money

Deposit as stipulated in Ex. B1. These aspects have been

correctly appreciated by the trial Court and it rightly

dismissed the suit filed by Vincent Paul. On the other hand,

the High Court, on an erroneous assumption as to the

communication dated 31.10.1988 concluded that there was a

valid contract and granted a decree for specific performance.

13 We are unable to accept the reasoning of the High Court for

granting decree for specific performance in favour of Vincent

Paul.

11) During the pendency of the appeal filed by Vincent Paul

in the High Court, the KFC invited fresh tenders for the sale of

assets of the Firm on 17.09.2001. One K.K. Ummer Farook

responded to the tender by making an offer of Rs. 55,55,555/-

for the land and building which was the highest amount

among the four offers received. By letter dated 17.11.2001,

the KFC informed K.K. Ummer Farook that they are unable to

proceed with the sale in view of the pendency of A.S. No. 557

of 2000 before the High Court. In the meantime, by judgment

dated 27.11.2001, the Division Bench of the High Court

allowed A.S. No.557 of 2000 filed by Vincent Paul,

consequently decreed the suit filed by him. Against the said

judgment, the KFC filed Civil Appeal No. 3446 of 2003 and

K.K. Ummer Farook filed Civil Appeal No. 3450 of 2003 before

this Court by way of special leave petition. K.K. Ummer

Farook also filed O.P. No. 33834 of 2001 before the High Court

praying for direction to convey the property being the highest

14

bidder in the second tender and the same was dismissed as

infructous by the High Court vide judgment dated 22.01.2002.

Against the said judgment, K.K. Ummer Farook filed C.A. No.

3451 of 2003 before this Court. It is not in dispute that while

ordering notice in the S.L.P.(C) No 7072 of 2002 (C.A. No. 3446

of 2003) filed by the KFC even on 12.04.2002, this Court

stayed the execution of the decree for specific performance

which shows that the land and building and all accessories

are with the KFC and the same position continues even today.

12) We have already concluded that the decree for specific

performance granted by the High Court cannot be sustained.

We also observed in the earlier part of our judgment that

though the KFC has initiated proceedings under Section 29 of

the Act, admittedly, the State has not framed Rules or

guidelines in the form of executive instructions for sale of

properties owned by them. Till such formation of Rules or

guidelines or orders as mentioned above, we direct the KFC to

adhere the following directions for sale of properties owned by

it:

15 (i) The decision/intention to bring the property for sale

shall be published by way of advertisement in two

leading newspapers, one in vernacular language

having sufficient circulation in that locality.

(ii) Before conducting sale of immovable property, the

authority concerned shall obtain valuation of the

property from an approved valuer and in

consultation with the secured creditor, fix the

reserve price of the property and may sell the whole

or any part of such immovable secured asset by any

of the following methods:

(a) by obtaining quotations from the persons

dealing with similar secured assets or

otherwise interested in buying such assets; or

(b) by inviting tenders from the public; or

(c) by holding public auction; or

(d) by private treaty.

Among the above modes, inviting tenders from the public

or holding public auction is the best method for disposal

of the properties belonging to the State.

16 (iii) The authority concerned shall serve to the borrower

a notice of 30 days for sale of immovable secured

assets.

(iv) A highest bidder in public auction cannot have a

right to get the property or any privilege, unless the

authority confirms the auction sale, being fully

satisfied that the property has fetched the

appropriate price and there has been no collusion

between the bidders.

(v) In the matter of sale of public property, the

dominant consideration is to secure the best price

for the property to be sold. This can be achieved

only when there is maximum public participation in

the process of sale and everybody has an

opportunity of making an offer. It becomes a legal

obligation on the part of the authority that property

be sold in such a manner that it may fetch the best

price.

(vi) The essential ingredients of sale are correct

valuation report and fixing the reserve price. In

17

case proper valuation has not been made and the

reserve price is fixed taking into consideration the

inaccurate valuation report, the intending buyers

may not come forward treating the property as not

worth purchase by them.

(vii) Reserve price means the price with which the public

auction starts and the auction bidders are not

permitted to give bids below the said price, i.e., the

minimum bid at auction.

(viii) The debtor should be given a reasonable

opportunity in regard to the valuation of the

property sought to be sold, in absence thereof the

sale would suffer from material irregularity where

the debtor suffer substantial injury by the sale.

13) In view of our discussion and conclusion, we are satisfied

that the KFC has not strictly followed the above procedure in

bringing the property for sale. Accordingly, we set aside the

judgment and order passed by the High Court granting decree

for specific performance in favour of Vincent Paul and all other

sale transactions either in the form of tender or auction in

18

respect of the property in question. We direct the KFC to first

issue the advertisement calling for tenders by way of public

auction by following the directions mentioned above. Before

resorting to such recourse, if the KFC has accepted any

deposit from any of the parties by way of tender or bid, the

same shall be returned within a period of 30 days to the

respective parties with simple interest @ 9% p.a. from the date

of such deposit till it is repaid to the parties concerned.

14) All the appeals are disposed of on the above terms.

.................................................J.

(P. SATHASIVAM)

...............................................J.

(DR. B.S. CHAUHAN)

NEW DELHI;

MARCH 14, 2011.

19