JUDGMENT
A. Ramamurthi, J.
1. Petition filed under Section 51 (aa) of the State Financial Corporations Act, 1951, to direct respondent Nos. 2 to 4 to pay the petitioner, a sum of Rs. 17,18,836.95 with further interest at 16 per cent per annum towards term loan account and Rs. 1,21,957.58 with further interest at 5 per cent per annum towards soft loan account from the date of petition till the date of payment.
2. The case in brief is as follows :
The first respondent through its proprietor applied for a loan to the petitioner-Corporation for its business for construction of building and for purchase and erection of machinery and for the implementation of the project for manufacture of PVC pipes. The Corporation sanctioned a term loan of Rs. 5.55 lakhs and a soft loan of Rs. 1.05 lakhs by the sanctioned order dated April 25, 1987. The proprietor of the first respondent executed a deed of hypothecation on November 4, 1987, thereby hypothecating the machinery financed by the Corporation. Respondent Nos. 2 to 4 executed a deed of guarantee on November 4, 1987, thereby fully guaranteeing the due repayment of the loan. The guarantee is a continuing one. After availing of the loan and commencing its business, the first respondent did not care to repay the loan and became a chronic defaulter. Subsequently, the proprietor died on September 6, 1994, leaving behind respondent Nos. 2 to 4 as his legal heirs and the third respondent took charge of the business and in spite of reminders, failed to pay the amount. The Corporation foreclosed the loan on December 4, 1992, and the unit was taken over
possession on December 1, 1993. The properties were brought to sale in public auction and the building and machinery were sold for Rs. 3.50 lakhs on May 3, 1995, and the sale proceeds were credited to the loan account. The Corporation sent a Lawyer’s notice dated November 17, 1997, calling upon them to make the payment and as they were not paid, the petition is filed invoking the deed of guarantee dated November 4, 1987.
3. The third respondent filed a counter adopted by respondent Nos. 2 to 4. The third respondent was never in charge of the first respondent business as alleged by the petitioner. They are not aware of the details of the financial transaction alleged to have happened between the petitioner and the late V.M. Loganathan. The third respondent is the only son of the deceased Loganathan and the second respondent is his wife and the fourth-respondent is the only daughter. Loganathan died intestate at Chennai, on September 6, 1994. leaving behind respondent Nos. 2 to 4 as legal heirs and immediately the third respondent informed the same to the petitioner-Corporation. The death certificate was also produced to the petitioner. At that time, the petitioner assured that they would inform about the final offer to them in respect of any final decision. However, no communication was received. The petitioner appears to have sold the machinery for a meagre amount far below the market price without giving any option to these respondents. They had been kept under a cloud with some ulterior motive and no notice was given to them either before the sale or after the sale. In fact, the third respondent sent a letter dated October 16, 1995, to the Corporation, calling upon them to furnish the details regarding the status of the auction; but, however, no reply was received.
4. The petitioner-Corporation is the trustee of the property hypothecated to them. In this case, the factory and the machinery were taken over by the petitioner on December 1, 1993, itself during the lifetime of the erstwhile proprietor. In the case of default, they should have intimated the sole proprietor and before confirming the sale, the procedures ought to have been complied with. The petitioner wantonly failed and neglected to give such a final offer and notice, before confirming the sale for a meagre price. If the petitioner had irnbrmed them about the proposed sale price, respondent Nos. 2 to 4 could have made alternative arrangement to make the payment of such price. They also filed a writ petition to give them the final option to purchase the properties of the first respondent and it is still pending. It is the burden on the petitioner to establish that the auction sale was conducted following the mandatory procedures. The properties are worth more than Rs. 20 lakhs but they were sold only for a sum of Rs. 3.50 lakhs. The respondents denied their liability and, as such, they are not liable to pay any amount.
Heard both the sides.
5. The points that arise for consideration are :
(1) Whether respondent Nos. 2 to 4 are liable to pay the amount claimed in the petition ?
(2) To what relief ?
Points
6. The petitioner-Corporation has come forward with a specific case that the erstwhile proprietor of the first respondent-company namely, V.M. Loganathan availed of a term loan of Rs. 5.55 lakhs and also a soft loan of Rs. 1.05 lakhs by order dated April 25, 1987. He also executed a deed of hypothecation on November 4, 1987 thereby hypothecating the machinery purchased out of the said finance. Respondent Nos. 2 to 4 executed a deed of guarantee on the same day for due repayment of the loan and the guarantee is a continuing one. The erstwhile proprietor died on September 6, 1994, leaving behind respondent Nos. 2 to 4 as legal heirs. It appears that the erstwhile proprietor did not pay the loan regularly and, as such, the petitioner-Corporation foreclosed the loan and they took over the assets and brought them to sale in public auction. The building and machinery were sold for a sum of Rs. 3.50 lakhs on May 3, 1995 and it was also given credit to the loan account. A lawyer’s notice was also issued, calling upon respondent Nos. 2 to 4 to make the payment.
7. PW-1 Jayaveeran working as officer finance in the petitioner-Corporation was examined as PW-1. Exhibits P-1 and P-2 are the sanction orders issued by the Corporation relating to the term loan and the soft loan. Exhibit P-3 is the hypothecation deed executed by the erstwhile proprietor. Exhibit P-4 is the deed of guarantee executed by him. He further stated that the first defendant died on September 6, 1994; and respondent Nos. 2 to 4 are the legal heirs and they are looking after the company. Exhibit P-5 is the document relating to the auction. Exhibit P-6 is the legal notice dated November 17, 1997.
8. The third respondent was examined as RW-1 and according to him, during, the time of the transaction, he was aged about 17 years and his sister the fourth respondent was then aged about 14 years. The second respondent was only a housewife and not educated. They were not aware of the transaction. The officials of the Corporation did not give any notice before confirming the auction. Exhibit D-1 is the letter dated October 16, 1995, sent by him to the Corporation and Exhibit D-2 is the acknowledgement. The approximate value of the machinery is Rs. 15 lakhs. Exhibit D-3 is also a legal notice sent by them and Exhibit D-4 is the reply. There is no reference in Exhibit D-4 to whom the property was sold in the auction. They did not furnish any basis for liability, They have also not received any details of accounts regarding the auction and no opportunity was given to anyone of them either prior to the auction or before confirmation of the auction.
9. It is admitted that the erstwhile proprietor died on September 16, 1994, and now the petitioner-Corporation has filed this application to enforce the liability against respondent Nos. 2 to 4. In para 7 of the petition, originally it was typed as respondents Nos. 2 to 4 have executed the deed of guarantee, but after an interlineation, it was typed as erstwhile proprietor executed the deed of guarantee. It therefore follows that no guarantee deed was executed by respondent Nos. 2 to 4. Moreover, it was not possible to execute the guarantee deed by them because the third respondent was then aged about 17 years and the fourth respondent was aged about 14 years. The burden is only upon the petitioner-Corporation to show that after due and wide publicity only, the machinery was sold for a proper and reasonable price. The contesting respondents took a stand that the properties are worth about Rs. 15 lakhs; but they were sold only for a meagre sum of Rs. 5.50 lakhs and there was no communication to them at any point of time. No doubt, respondent Nos. 2 to 4 are the legal heirs of the deceased and under the circumstances, even if any decree is passed, only against the assets of the deceased in the hands of respondent Nos. 2 to 4 can they be made liable. The statement of accounts has been filed as Exhibit P-8 in this case but there is nothing to show about any confirmation of payment from respondent Nos. 2 to 4.
10. A careful reading of the evidence of PW-1 in the cross-examination would establish that the officials have not done their duty properly. The death extract has been sent by RW-1 to the petitioner-Corporation at the earliest point of time. Under the circumstances, wher. the machinery was seized even during the lifetime of the erstwhile proprietor, there is a duty
cast on the part of the Corporation to give intimation about the proposed auction, so that it will be possible for him to bring a better offer or he can pay the entire amount and avoid sale of the property. Even after knowing about the death of the erstwhile proprietor, the Corporation has not thought it fit to bring it to the notice of the legal heirs about the proposed auction. There is no reasonable explanation on the part of PW-1 in this regard. It was suggested in the cross-examination that to oblige a particular person, intimation was not given to the legal heirs; but, it was denied by PW-1. Under the circumstances only respondent Nos. 2 to 4 took a stand that they are not liable for the petition claim. However it may be, RW-1 admitted that a writ petition has been filed, questioning the auction proceedings and the same is said to be pending.
11. Learned Counsellor the petitioner relied on the decisions reported in Eswari Industries v. Tamil Nadu Industrial Investment Corporation Ltd., (1998) 5 MLJ 1 and also Amar Cold Storage and Ice Factory v. Punjab Financial Corporation, I (1991) BC 307=(1991) 72 Comp Cas 163 (P&H), and both the decisions are under the State Financial Corporations Act and there is no dispute about the principles enunciated therein. It is the duty of the petitioner-Corporation to produce the relevant records to show that wide publicity was given and the properties were also sold for a reasonable price. For reasons best known to the Corporation it has not chosen to file any records. However, considering the fact that the same is the subject matter in the writ proceedings; it is not necessary to consider the same and it is open to the parties to agitate this claim in the writ proceedings, which is said to be pending.
12. The petitioner-Corporation has positively established that the erstwhile proprietor of the first respondent-company has availed of the loan. When once the proprietor has committed default, the Corporation is entitled to invoke the provisions under Section 29 of the State Financial Corporations Act, 1951 and seize the machinery after foreclosing the loan. When proper procedure has been adopted even during the lifetime of the erstwhile proprietor and he having failed to question about the seizure of the machinery and taking over of the unit, I am of the view that now respondent Nos. 2 to 4 cannot question the same. The statement of accounts filed now has not been seriously disputed by RW-1 in the course of evidence. Normally there is a duty cast on the petitioner-Corporation to send the statement of accounts to the legal heirs so that an opportunity can be given to them either to admit or deny the same. It has not been complied with by the Corporation, but, at the same time the statement of accounts has been filed in the Court and, as such, an opportunity was given to the respondents and they have not chosen to deny anyone of the entries made therein. Under the circumstances, the only conclusion that can be drawn that the statement of accounts is true and correct. Hence I am of the view that the petitioner-Corporation is entitled to collect the amount as claimed in the petition; but as respondent Nos. 2 to 4 have not executed any deed of guarantee, they cannot be made personally liable and the Corporation is entitled to collect the amount only out of the estate of the deceased proprietor. Hence, these points are answered accordingly.
13. For the reasons stated above, the petition is allowed and the petitioner Corporation is entitled to a decree for the amount claimed in the petition and respondent Nos. 2 to 4 are not personally liable for the amount and the Corporation is entitled to collect the same only out of the estate of the deceased erstwhile proprietor in the hands of respondent Nos. 2 to 4.