Dismissed

Vishal Industries v. the General Manager

Karnataka HC9 Nov 2021WP/41699/2017

Case brief

AI extract

What is this about?

The High Court dismissed two writ petitions challenging notices issued by Karnataka State Financial Corporation (KSFC) for recovery of defaulted loans and seizure of industrial premises, holding the actions were in compliance with the SFC Act and noting the petitioner's defaults and breach of contract regarding sub-letting.

What did the court decide?

Petitions dismissed with cost of Rs. 25,000/- payable to the respondent corporation.

Vishal Industries Vs the General Manager — Banking and Recovery | Karnataka HC (2021)

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 9^TH DAY OF NOVEMBER 2021

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BEFORE

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THE HON’BLE MRS. JUSTICE K.S.MUDAGAL

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WRIT PETITION No.24845/2018 (GM-CPC)

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C/W

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WRIT PETITION NO.41699/2017(GM-KSFC )

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IN WRIT PETITION No.24845/2018

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BETWEEN :

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SRI.ASRAR A SHARIF S/O G AHMED SHARIF AGED ABOUT 28 YEARS RESIDING AT OPP. TO N.G.O. HALL NEAR K.E.B. CIRCLE, MEHADI NAGAR SHESHADRIPURA EXTENSION SHIVAMOGGA TOWN SHIVAMOGGA – 577 201 … PETITIONER (BY SRI.J.D.KASHINATH, ADV.)

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AND :

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SMT.LAKSHMI W/O S.MURUGESHAN AGED ABOUT 58 YEARS PROPRIETOR UDAYAM ALUMINIUM INDUSTRIES FLAT NO.RC-20, KALLUR MANDI INDUSTRIAL ESTATE SHIVAMOGGA – 577 201

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SRI.G.AHMED SHARIFF S/O AHMED SHARIFF AGED ABOUT 60 YEARS RESIDING AT K.E.B. CIRCLE MEHADI NAGAR, SHESHADRIPURAM EXTENSION SHIVAMOGGA – 577 201

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SRI.G.AHMED SHARIFF’S WIFE NAME NOT KNOWN

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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S/O G AHMED SHARIFF AGED ABOUT 55 YEARS RESIDING AT K.E.B. CIRCLE MEHADI NAGAR, SHESHADRIPURAM EXTENSION SHIVAMOGGA – 577 201

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THE CHIEF SECRETARY GOVERNMENT OF KARNATAKA DEPARTMENT OF INDUSTRIES & COMMERCE

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BANGALORE – 560 052

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THE JOINT DIRECTOR DISTRICT INDUSTRIAL CENTER SHIVAMOGGA DISTRICT

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SHIVAMOGGA – 577 201

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THE GENERAL MANAGER KARNATAKA STATE FINANCIAL CORPORATION LTD., SHIVAMOGGA – 577 201

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… RESPONDENTS

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(BY SRI.V.F.KUMBAR, ADV. FOR C/R1; R2 AND R3 ARE SERVED; SRI.K.DILIP KUMAR, HCGP FOR R4 AND R5; SRI.VINAYA KUMAR G.S., ADV. FOR R6)

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THIS WRIT PETITION IS FILED UNDER ARTICLE 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED ORDER DATED 31.05.2018 PASSED ON I.A.NO.V FILED UNDER SECTION 151 OF CPC FILED BY THE R-1/PLAINTIFF FILED IN O.S.75/2017 PASSED BY THE II ADDITIONAL CIVIL JUDGE AND JMFC AT SHIVAMOGGA AT ANNEX-A AS ILLEGAL AND ACCORDINGLY DISMISS THE I.A.V FILED BY THE R-1 AND ETC.

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IN WRIT PETITION NO.41699/2017

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BETWEEN :

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VISHAL INDUSTRIES R/C 20, MANDI KALLUR INDUSTRIAL ESTATE SHIVAMOGGA – 577 203 REPRESENTED BY ITS SOLE PROPRIETOR SRI.ASRAR A SHARIF S/O G.AHMED SHARIF AGED ABOUT 28 YEARS RESIDING AT OPP. TO N.G.O. HALL NEAR K.E.B. CIRCLE, MEHADI NAGAR SHESHADRIPURA EXTENSION

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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SHIVAMOGGA TOWN SHIVAMOGGA – 577 202

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SRI.ASRAR A SHARIF S/O G AHMED SHARIF AGED ABOUT 28 YEARS RESIDING AT OPP. TO N.G.O. HALL NEAR K.E.B. CIRCLE, MEHADI NAGAR SHESHADRIPURA EXTENSION SHIVAMOGGA TOWN SHIVAMOGGA – 577 201 … PETITIONERS

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(BY SRI.J.D.KASHINATH, ADV.)

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AND :

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THE GENERAL MANAGER KARNATAKA STATE FINANCIAL CORPORATION NO.1/1, K.S.F.C. BHAVAN THIMMAIAH ROAD NEAR CANTONMENT RAILWAY STATION BANGALORE – 560 052

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THE ASSISTANT GENERAL MANAGER (IES) KARNATAKA STATE FINANCIAL CORPORATION BRANCH OFFICE, MUNICIPAL SHOPPING COMPLEX GOPI CIRCLE, NEHARU ROAD SHIVAMOGGA TOWN SHIVAMOGGA – 577 201 … RESPONDENTS

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(BY SRI.VINAYA KUMAR G.S.ADV.)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE NOTICE DATED 30.06.2017 AND ANOTHER NOTICE DATED 16.08.2017 ISSUED BY THE R-2 AS ANNEXURE – A & B AS ILLEGAL AND ETC.

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THESE WRIT PETITIONS COMING ON FOR FURTHER HEARING THIS DAY, THE COURT MADE THE FOLLOWING:

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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ORDER

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Since common questions of law and facts are involved

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in these two cases, they are taken up together for disposal by this common order.

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Petitioner No.2 in W.P.No.41699-41700/2017 was allotted industrial site No.20 of Mandil Kallu Industrial Estate by the Karnataka State Small Scale Industrial Development Corporation (for short, ‘KSSIDC’), Shivamogga. On 20.01.2010, the KSSIDC issued possession Certificate. Petitioner No.2 is the sole proprietor of Petitioner No.1M/s.Vishal Industries. Respondent Nos.1 and 2 in that case are the General Manager and Assistant Manager of the Karnataka State Financial Corporation ( for short, ‘KSFC’)

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KSFC is established under the State Financial Corporation Act, 1951. On 28.06.2011, the KSFC has sanctioned term loan of Rs.5,20,000/- to M/s Vishal Industries for the purpose of acquisition of plant and machinery in Site No.20. For that loan, M/s. Vishal Industries represented by its sole proprietor has mortgaged the shed and hypothecated the machinery.

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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On further request of M/s. Vishal Industries, the KSFC sanctioned working capital term loan of Rs.6,00,000/on 18.06.2013. The loan was sanctioned for manufacture of automobile clamps and other related products in the building situated on Site No.20. Regarding mortgage of the property and hypothecation of machinery, the industry represented by its proprietor has executed a Mortgage Deed dated 27.07.2011. The said industry committed default in repayment of the loan.

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Admittedly, on 17.01.2017, the KSFC by exercising powers under Section 29 of the State Financial Corporation Act, 1951 (for short, ‘SFC Act’), took possession of the said Industry. The borrowers and one Smt. Laxmi the wife of Murugeshan (Respondent No.1 in W.P No.24845/2018) and her husband broke open the lock of the premises. Therefore, the KSFC filed a complaint against them and others before Tunganagar Police Station of Shivamogga and the FIR was registered against them. The KSFC issued a notice dated 30.06.2017 as per Annexure-B in W.P.No.41699-41700/2017 calling upon the petitioners to pay the over-due amount of Rs.4,15,064.10/- and cautioning

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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the notice that if they fail to comply the notice the entire loan will be recalled and auction proceedings will be initiated.

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Admittedly, the petitioner did not pay over-due amount. Therefore the KSFC issued another notice as per Annexure-A in WP No.41699-41700/2017 dated 16.08.2017 recalling the entire loan amount and calling upon the petitioner to pay the same. In the said notice, the petitioners were informed that, if notice is not complied, action will be taken for auctioning the mortgaged and hypothecated properties in accordance with the relevant Rules. After issuing said notices, the KSFC seized the said industrial shed on 17.01.2017.

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One Smt. Laxmi, W/o S.Murugeshan the first respondent in WP No.24845/2018 filed OS No.75/2017 against the proprietor of M/s. Vishal Industries, his parents, the General Manager of KSFC and other Government officials for mandatory and permanent injunction. In that suit she claimed that, the father of the allottee of the shed has letout the premises to her to start Aluminum Vessels

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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Manufacturing Industry. She further alleged that the allottee and lessor in collusion with KSFC to wrongfully evict her, have locked the premises.

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She claimed that her lessors have to take possession of the property in accordance with law and KSFC also has to proceed against her in accordance with law. She further claims that though the loan was availed by the allottee, KSFC has locked her unit and seized her plants and machineries also. Therefore she sought permanent injunction against KSFC not to meddle with her peaceful possession and enjoyment of the property. She also sought injunction against the allottee and his parents for peaceful possession and enjoyment of the property.

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In the said suit she filed IA Nos. 2 and 3 against the defendants therein seeking temporary injunction to restrain them from interfering with her peaceful possession and enjoyment of the property. The Court on hearing the parties, by a common order dated 14.06.2017 rejected both the applications on the ground that the leasing of the premises in her favour was in violation of the Mortgage

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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Agreement between KSFC and the allottee. Therefore, her possession is not a lawful possession and she has not made out prima-facie case.

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She challenged that order in M.A.No.37/2017 before the Senior Civil Judge and Chief Judicial Magistrate at Shivmogga. The first appellate Court vide order dated 04.10.2017 dismissed the said appeal on merits. She challenged those orders before this Court in WP.Nos.54558/2017 and 54675/2017(GM-CPC). This Court dismissed those petitions on 04.01.2018 on merits.

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When those proceedings were going on, the allottee submitted a letter dated 08.08.2017 as per Annexure-K to WP Nos.41699-700/2017 claiming that due to financial difficulties he could not meet repayment schedule. He further claimed that, locking of the industry has caused financial loss to him and due to that, he is unable to generate funds to make further payments. He also claimed that along with requisition-Annexure-K, he annexed a cheque of Rs. 1,00,000/- and the KSFC can realize the same and sought 5 months time to settle the entire claim

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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and sought for delivery of possession of the industry to him for re-opening the same.

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KSFC in response to Annexure-K issued notice

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as per Annexure-L dated 21.08.2017 calling upon the borrowers to clear the entire loan amount of Rs. 5,56,048/within 15 days failing which action will be taken against them Under Section 32 of the SFC Act. M/s.Vishal Industries and its proprietor (borrower) in WP.No.41699-700/2017 have sought quashing of the notices dated 30.06.2017 and 16.08.2017 and mandamus against the KSFC to consider the representation dated 08.08.2017 and to provide 5 months time to pay the balance amount.

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The aforesaid reliefs are sought on the following

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grounds:-

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i) That the action of KSFC is illegal, arbitrary and violative of Article 14 of Constitution of India.

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ii) The impugned notices are non-speaking orders. The statutory provisions of Section 29 of SFC Act are not complied.

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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iii) Declaration of their account as NPA-2016 are against the provisions of SFC Act.

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iv) The procedure contemplated under Section 13 of

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, ’SARFAESI Act’) and Section 32 of KSFC Act are not followed.

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KSFC opposes the said petitions on the following grounds:-

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i) Section 13 of SARFAESI Act is not applicable and the notices dated 30.06.2017 and 16.08.2017 were issued in full compliance of provisions of Section 29 of SFC Act.

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ii) The petition is mala fide and it has been filed only with an intention to drag on proceedings.

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iii) The borrowers are not entitled to any relief, as they had sub-let the property to Smt.Laxmi Murugeshan in violation of the terms of Loan and Mortgage Agreement and they have indulged in high handed act of breaking open the lock of the seized industry.

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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After seizure of industry and aforesaid notices,

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KSFC took-over the hypothecated plant and machinery. At that stage, Smt.Laxmi Murugeshan, the plaintiff in OS 75/2017, has filed IA No.5 under Section 151 of Code of Civil Procedure,1908 (for short, ’CPC’) seeking direction against KSFC for return of certain machinery mentioned in the application on the ground that in the guise of seizing the machineries of the borrower, KSFC has seized her machineries, therefore, they shall be returned to her. The trial Court on hearing the parties by order dated 31.05.2018 allowed the application and directed KSFC to release the machineries, which are not the subject matter of hypothecation / loan agreement and the Mortgage Deed dated 27.07.2011. Challenging that order, the borrower has preferred W.P.No.24845/2018.

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The sub-lessee claims that the borrower and KSFC have colluded with each other and have wrongfully locked her premises and seized her articles. The borrower claims that, KSFC and sub-lessee have colluded with each other and set up the sub-lessee against them. KSFC claims that, to defeat the proceeding under Section 29 of SFC Act

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the borrowers have colluded with sub-lessee and set-up her against KSFC, in filing suit.

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Apparently, there was a clause in Mortgage Deed that, the borrower shall not sub-let the mortgaged property without the knowledge and consent of KSFC. The sub-lessee claims that she was inducted in property by the father of the borrower. Apparently father of borrower was not the allottee of the site. Only to overcome the allegation of breach of terms of Loan agreement and Mortgage Deed, father is setup as lessor. She has filed suit for injunction only to defeat act of KSFC in taking over possession of the industrial unit. The perusal of order on IA Nos. 2 and 3 in OS No. 75/2017 shows that, the injunction application was seriously contested by the 6^th defendant ie., KSFC. The borrower and the alleged sub-lessor have only filed formal objection. That also manifestly shows that, in the suit, KSFC was the target.

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So far as the challenge to the order against IA No.5, the trial Court ordered to return the machineries which are not subject matter of the hypothecation agreement between the borrower and KSFC. The said order has not

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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caused any prejudice to the borrower, because, the plant and machinery which were the subject matter of hypothecation are not ordered to be returned to sub-lessee. Therefore this Court does not find any ground to interfere with the order impugned in WP.No.24845/2018.

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So far as challenge in WP Nos.41699-700/2017, the petitioner has admitted that, he is the defaulter in payment of loan availed during the period 2011 and 2013. The loan became over due by 2016 and the account of the borrower was declared as non-performing asset in 2016 itself. Notices under Section 29 were issued on the ground of default in repayment of loan as well as breach of the terms of agreement.

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Section 29(1) of SFC Act, which is relevant for the purpose of these cases, reads as follows:-

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“29. Rights of Financial Corporation

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in case of default.— (1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any installment thereof or in meeting its obligations in relation to any

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concerns, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.

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The reading of above provision shows that KSFC

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has right to take-over management or possession of industrial concern, if the said industrial concern commits any default in repayment of loan or any installment thereof or meeting any obligations under the loan agreement. Further section 30 of SFC Act empowers KSFC to acquire the industrial concern on the grounds stated in clauses (a) to (f) of the said provision. The Clause-(b) thereof deals with the failure of industrial concern to comply the terms of contract in the matter of loan. Clause-(e) deals with the industrial concern removing the plant and machinery or other

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equipment forming part of security from the premises of industrial unit. The Clause-(c) deals with the reasonable apprehension of KSFC that, industrial concern is unable to pay the debts. The Clause-(f) deals with any reason necessary to protect the interest of financial corporation.

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In the case on hand, the borrowers themselves have unequivocally admitted that their industry was running in loss, therefore they were unable to discharge loan. Further, they have also admitted that, they inducted sublessee in breach of the terms of mortgage and loan agreement. Further having availed loan to run Automobile Component and Clamps Manufacturing Unit, they have undertaken manufacturing of Aluminum Vessels. Therefore, by no stretch of imagination, it cannot be said that the notices (Annexure-A and B) in W.P. Nos.41699-700/2017 are violative of the provisions of Sections 29 and 30 of the SFC Act.

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The powers to grant order in the nature of writ of mandamus and certiorari can be exercised only when the Statutory Body fails to discharge its statutory functions or

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W.P.No.24845/2018 C/W W.P.No.41699/2017

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acts exceeding it’s power or when such acts are unfair. After issuing notices under Sections 29 and 30 of the SFC Act, there is no mandatory provision in the SFC Act requiring KSFC to consider the representation of the borrower to revive the loan or extend the time to repay the loan.

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Apart from that the bona fides of the petitioner have also to be noted. He sent the notice (Annexure-K) on 08.08.2017 seeking 5 months time to settle the loan. Though nearly 5 years have been elapsed, so far he has not deposited even a single pie at least before this Court. As rightly pointed-out by the learned counsel for KSFC, the petitions in WP.Nos.41699-700/2017 (GM-KSFC) smack of mala-fides . Therefore, both the petitions are dismissed with cost of Rs.25,000/- payable to KSFC.

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Sd/JUDGE

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KGR/

Vishal Industries v. the General Manager

Case brief

What is this about?

What did the court decide?

Vishal Industries v. the General Manager

Case brief

What is this about?

What did the court decide?

What the court decided

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