Kerala Financial Corporation v. Nellai Sons and others

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT :** **THE HONOURABLE MR. JUSTICE S.S.SATHEESACHANDRAN** **MONDAY, THE 22ND FEBRUARY 2010 / 3RD PHALGUNA 1931** **WP(C).No. 17675 of 2008(D)** **-------------------------AGAINST THE ORDER IN EA.31/2008 IN EP.96/1990 IN OPFC.100/1982 of ADDL.D.C. & ADDL.MACT,ALAPPUZHA.** **....................** ## **PETITIONER(S):** - **---------------** **THE KERALA FINANCIAL CORPORATION THIRUVANANTHAPURAM, REP. BY ITS BRANCH MANAGER ALAPPUZHA.** **BY ADV. SRI.A.A.ABUL HASSAN, SC, KFC** ## **RESPONDENT(S):** - **---------------** **1. M/S NELLAI SONS, A PARTNERSHIP FIRM REPRESENTED BY ITS MANAGING PARTNER M.N.NAYAGOM MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **2. N.SUBRAMANYA NAGARAJAN,RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **3. N.MUTHUSSWAMI, RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **4. N.PADMANABHAN, RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **5. N.LEXMIRAM,RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **6. N.MANGAYARKARARI AMMAL, W/O.NEELANAYAGOM PILLAI,RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **7. M.N.NAYAGOM, RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **8. N.SIVASURYA KUMAR , RESIDING AT MACHUNGAL VEEDU, NORTH OF IRON BRIDGE,ALAPPUZHA.** **WPC.17675/08** ## **9. M.P.DIVAKARAN, HOUSE NO.546** **PRASANTHI NAGAR, VELLOOR, THIRUVANANTHAPURAM (DELETED)** **9TH RESPONDENT IS DELETED AT THE RISK OF THE PETITIONER AS PER ORDER DATED 6.8.2009 IN I.A.NO.9374/20096** **ADV. SRI.K.V.SADANANDA PRABHU FOR R2 TO 5 & 8** **THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 06/08/2009, THE COURT ON 22/02/2010 DELIVERED THE FOLLOWING:** ## **WPC.17675/08** ## **APPENDIX** ## **PETITIONER'S EXHIBITS:** **EXT.P1: COPY OF THE ORDER IN O.P.(FC).NO.100/82 DATED 22.12.1984 PASSED BY THE ADDL.DISTRICT JUDGE, ALLEPPEY.** **EXT.P2: COPY OF THE STATEMENT FROM 01/03/1982 TO 25/02/2008 OF THE KFC.** **EXT.P3: COPY OF THE STATEMENT FROM 01/03/1982 TO 01/03/2008 AS PER THE STATEMENT ON THE BASIS OF COMPOUND INTEREST.** **EXT.P4: COPY OF THE AFFIDAVIT AND I.A.NO.31/2008 IN E.P.NO.96/1990 IN O.P.(FC). NO.100/1982 FILED BY THE PETITIONER/DECREE HOLDER BEFORE THE ADDL.DISTRICT COURT, ALAPPUZHA.** **EXT.P5: COPY OF THE OBJECTION FILED BY THE 3RD JUDGMENT DEBTOR ON BEHALF OF ALL THE JUDGMENT DEBTORS BEFORE THE ADDL.DISTRICT COURT, ALAPPUZHA.** **EXT.P6: COPY OF THE STATEMENT SHOWING THE BALANCE AMOUNT DUE AS RS.7,53,125.00 AS ON 03.3.2008 FILED BY THE JUDGMENT DEBTORS.** **EXT.P7: COPY OF THE ORDER IN E.A.NO.31/2008 IN E.P.NO.96/1990 IN O.P.(FC). NO.100/1982 DATED 17.3.2008 OF THE ADDL.DISTRICT JUDGE, ALAPPUZHA.** **EXT.P8: COPY OF THE ORDER IN R.P.NO.554/2005 IN C.R.P.NO.3040/2001 DATED 20.11.2006 PASSED BY THIS HONOURABLE COURT.** ## **RESPONDENTS EXHIBITS:** **EXT.R4(A): COPY OF THE ORDER OF THE ADDL.DISTRICT JUDGE IN E.P.NO.96/1990 IN O.P.(FC).NO.100/1982 DATED 10.2.2003.** **EXT.R4(B): COPY OF THE ORDER OF THE DISTRICT JUDGE IN E.A.NO.26/03 IN O.P.(FC). NO.100/82 DATED 21.2.2003.** **EXT.R4(C): COPY OF THE ORDER OF THE HIGH COURT OF KERALA IN C.R.P.NO.852/03 DATED 8.1.2008.** **/TRUE COPY/** **P.A. TO JUDGE** ## **S.S.SATHEESACHANDRAN, J.** **-------------------------------** **W.P.(C).NO.17675 OF 2008 ()** **----------------------------------Dated this the 22[nd] day of February, 2010** ## **J U D G M E N T** The writ petition is filed seeking mainly the following reliefs: i. to call for the records in this case. ii. to set aside Ext.P7 order dated 17.3.2008 in E.A.No.31/2008 in E.P.No.96/1990 in O.P.(FC).No.100 of 1982 of the Additional District Judge, Alappuzha. iii. to hold that the petitioner/decree holder is entitled to recover compound interest at the rate of 11% per annum as per the agreement/mortgage deed executed by the respondents 1 to 8/judgment debtors from the date of filing O.P. (FC).No.100 of 1982 (01.03.1982) till realisation of the whole amount as per computation in Ext.P3. 2. Petitioner is the Kerala Financial Corporation, hereinafter referred to as the 'KFC'. The 1[st] respondent is a firm and respondents 2 to 8 are the partners of that firm. The above WPC.17675/08 2 respondents had availed a loan of Rs.2,35,595/on the security of a mortgage from the KFC, Alappuzha Branch, for the purpose of starting a hotel business. The loan being defaulted, the KFC filed a petition under Sections 29, 30 and 31 of the State Financial Corporation Act, 1951, hereinafter referred to as the 'SFC Act' as O.P. (FC).No.100 of 1982 before the Additional District Judge, Alappuzha, seeking an order for sale of the mortgage property. In that proceedings, the 9[th] respondent got himself impleaded canvassing a case that the respondents 1 to 8 had executed an agreement for sale in his favour, which included the property covered by the mortgage as well. The Additional District Judge, Alappuzha allowed the O.P. vide Ext.P1 order dated 22.12.1984. The operative portion of Ext.P1 order, which has some significance in considering the question canvassed in the writ petition, reads thus: “In the result, this O.P. is allowed as prayed for and the petitioner Corporation is given the right to bring to sale of the properties described in the petition 1[st] WPC.17675/08 3 schedule A, B and C for the realisation of Rs.4,27,882.28 due to the petitioner as on 1.3.1982 with subsequent interest at 11% per annum till date of realisation and other amounts which the petitioner pays or incurs in future till date of sale on account of insurance premium and other amounts such as for inspection and preservation of the properties as provided in the mortgage deed with interest at 11% per annum. The petitioner shall also be entitled to get the costs in these proceedings. The amount of Rs.5,000/paid during the pendency of the petition and as mentioned in the memo dated 4.12.1984 as stated earlier shall be given credit to as on the date of such payment.” 3. The KFC filed the execution petition as E.P.No.96 of 1990 pursuant to Ext.P1 order seeking realisation of the debt due from the respondents by sale of mortgage property. Then, indisputably, some payments had been effected by the respondents/judgment debtors in the execution proceedings and various orders have been passed in execution of Ext.P1 order including one for settling proclamation for sale of the property. While proceedings continued as such, the KFC filed two statements – one WPC.17675/08 4 calculating simple interest and the other calculating compound interest as per the contract rate from the date of O.P., 1.3.1982. Ext.P2 is the statement as to the balance amount due on computing simple interest at 11% per annum as on 25.2.2008. Ext.P3 is the statement as to the balance amount due on the basis of compound interest as per the contract/mortgage deed as on 1.3.2008. Ext.P4 petition was filed supported by an affidavit by the Deputy Manager of KFC for accepting Ext.P3 statement which is computed on the basis of the compound interest as per the contract/mortgage deed. The 4[th] respondent filed Ext.P5 objection contending that Ext.P1 order allows recovery with simple interest at 11% per annum and that order having become final, the decree holder KFC is not entitled to seek/claim compound interest on the balance sum due as stated in Ext.P3 statement. It was also contended that the decree holder, at various stages of the execution proceedings, had filed similar statements calculating compound interest and the court had not only rejected the same, but accepting the statement prepared on the basis of WPC.17675/08 5 simple interest, had ordered auction of the schedule properties. Though there was a revision against that order at the instance of the decree holder, according to the judgment debtors, the calculation of the amount due with simple interest at 11% per annum was not agitated nor any objection was raised on the calculation of the amount due with simple interest. Claim canvassed for realising the balance amount with compound interest, according to the judgment debtors, is barred by res judicata. With the objection, the judgment debtors filed Ext.P6 statement showing the part payments made from time to time calculating the balance amount due after each payment with 11% simple interest, and also stating the balance amount due after the part payments made. The learned Additional District Judge, after hearing the counsel on both sides, dismissed Ext.P4 application of the decree holder vide Ext.P7 order dated 17.3.2008. Ext.P1 order provided only for the amount due with simple interest at 11% per annum till realisation, and it does not make any reference for realisation of the amount WPC.17675/08 6 at the compound interest as per the contract was the reason, as seen in Ext.P7 order, which persuaded the learned District Judge to decline the claim of the decree holder for realisation of the balance amount with compound interest. Propriety and correctness of Ext.P7 order is challenged in the writ petition invoking the supervisory jurisdiction vested with this Court under Article 227 of the Constitution of India. 4. I heard the counsel on both sides. The learned counsel for the petitioner KFC assailed Ext.P7 order of the court below contending that Ext.P1 order passed under Section 32 of the SFC Act has only the effect of a decree in legal fiction, and so much so, the principle applicable that in execution, the court cannot go behind the decree does not apply in execution of an order under Section 32 of the SFC Act. An application moved under Section 31(1) of the SFC Act, it is submitted by the counsel, is akin to an application for attachment in execution of a decree. Determination of the actual amount due from the debtor to the KFC is not the subject WPC.17675/08 7 matter of the application, leave alone adjudication when an application is filed under Section 31 of the SFC Act, and so much so, the KFC is not precluded in seeking and claiming the amount due from the debtor as per the contract after passing of an order on its application under Section 31 of the SFC Act. Reliance is placed on **Maganlal v. M/s.Jaiswal Industries, Neemach and others (AIR 1989 SC 2113), Calicut Steel Re-rolling Co. (P) Ltd. v. Kerala Financial Corporation (1989 (2) KLT 474), Cochin Soft Drinks Co. v. Kerala Financial Corporation (1998 (2) KLT 618), Hotel Seaking v. Kerala Financial Corporation (2000 (1) KLR 169).** Order dated 20.11.2006 in R.P.No.554 of 2005 in C.R.P.No.3040 of 2001 rendered by this Court (a copy of which is produced as Ext.P8) to contend that there is no decree as such passed by making an order under Section 32 of the SFC Act and it is only by legal fiction that the order passed under the section is treated as a decree. The learned counsel further WPC.17675/08 8 contended that the quantum to be fixed for the purpose of enforcing the debt should be in terms of agreement between the debtor and the KFC, and where the contract between the parties provide for compound interest, then, irrespective of the order passed under Section 32 of the SFC Act, the decree holder is entitled to realise the amount due with compound interest as per the contract. Ext.P7 order is therefore liable to be set aside and the entitlement of the decree holder KFC to realise the sum due on the basis of Ext.P4 statement has to be upheld allowing Ext.P5 application, is the submission of the counsel. On the other hand, the learned counsel appearing for the respondents/judgment debtors strenuously contended that the challenge against Ext.P7 order of the court below is devoid of any merit, and at any rate, interference with that order in exercise of the visitorial jurisdiction vested with this Court is not called for either on the facts involved or under law. Pointing out that in Ext.P1 order, there is specific direction as to how the balance amount has to be realised with simple interest at 11% per annum, it is submitted WPC.17675/08 9 by the counsel that there was no appeal against that part of the order by the KFC so far. Inviting my attention to sub section (9) of Section 32 of the SFC Act, it is contended that the decree holder KFC should have preferred an appeal if it was in any way aggrieved by the order/direction given in Ext.P1 that the realisation of the balance amount should be with simple interest at 11% per annum. At various stages, after passing of Ext.P1 order, according to the counsel, adjudication had been made by the court in the execution proceedings as the balance amount due to the decree holder. The market value to be included in the proclamation for sale of the mortgage property was fixed on the statement given by the decree holder including the amount with simple interest in accordance with Ext.P1 order and it is evidenced by Ext.R4(a) order dated 10.2.2003, according to the counsel. What had transpired on the basis of the statements filed earlier by the parties has also been given expression to in Ext.R4(a) order, all of which, according to the counsel, would clearly indicate that the decree holder did not press any claim for WPC.17675/08 10 compound interest at that stage. Though orders passed on the execution on different point had been challenged before this Court till filing of Ext.P4 application, the claim of compound interest on the basis of the contract was never pressed into service, and it was a case of claiming the balance amount due only with simple interest as directed in Ext.P1 order, according to the counsel. The loan provided to the respondents on the mortgage of their properties was for a sum of Rs.2,35,595/- and the decree given in Ext.P1 order on the basis of the application of the KFC was for an amount of Rs.4,27,882.28 with simple interest at 11% per annum. As against an earlier claim of Rs.8,53,432/- calculated on the basis of the simple interest the amount now claimed with compound interest in respect of the loan amount of Rs.2,35,595/- by the KFC, according to the counsel, is Rs.29,37,116.84. Inviting my attention to the affidavit sworn to in support of Ext.P4 application, the learned counsel for the respondents contended that no acceptable reason whatsoever has been stated why the KFC has not WPC.17675/08 11 claimed compound interest at an earlier stage, if at all it was entitled to, or failed to do so on account of some mistake or omission. It is further submitted that the respondents have discharged all liabilities under the contract as directed by the court below and the execution petition stands closed by order of that court on 23.6.2008. The learned counsel also sought to distinguish the decisions relied by the counsel for the decree holder KFC submitting that in all those cases where the application under Section 31 of the SFC Act had been allowed, as prayed for', and it was interpreted in execution 'as is agreed' between the parties under the contract. In the present case, according to the counsel, Ext.P1 order specifically directs calculation of the balance amount due with simple interest at 11% per annum and that order even now stands not disputed. By the conduct of the decree holder in filing statement on the basis of such order and claiming the amount due from the respondents, it is estopped from setting forth and canvassing a case that the balance amount is to be discharged with compound interest. Ext.P4 application was WPC.17675/08 12 filed in 2008 when Ext.P1 order was passed as earlier in 22.12.1984 with the execution petition thereof presented on 1990, is commented upon by the counsel that the belated claim for the balance amount with the compound interest was rightly and correctly repelled by the court below under Ext.P7 order, and that order does not warrant any interference. 5. I have considered the rival submissions made by the counsel on both sides with reference to Ext.P7 order and the materials produced on either side. A cursory perusal of Section 31 of the SFC Act, 1951 would be enough to indicate that the learned District Judge has no power to order any payment to be made by the KFC by way of an independent relief. All that is contemplated under that Section is passing of an order for the sale of the property pledged, mortgaged or hypothicated or for enforcement of any liability of a surety, and, if so found satisfied, an interim injunction restraining the debtor from transferring or removing its machinery or plant or equipment from the premises. So much so, WPC.17675/08 13 there was no justification for the learned District Judge, who passed Ext.P1 order, in quantifying or ascertaining the liability of the debtor with direction as to the rate of interest with which it has to be discharged. A combined reading of Sections 31 and 32 of the SFC Act gives a clear indication that the learned District Judge can grant reliefs as enumerated in Section 31 of the above Act and a direction for payment to the KFC in the nature of the decree is not covered by Section 31 of that Act. Be that as it may, the larger question emerges for consideration whether an order passed by the learned District Judge ascertaining the liability of the debtor in an application under Ext.P1 order with direction as to the rate of interest with which it is to be discharged in an application under Section 31 of the SFC Act, can be ignored as not binding on the parties to the proceedings for the reason that the above Section does not empower the learned District Judge to fix such liability. Even assuming that the learned District Judge has no competency to ascertain the liability and fix the quantum to be paid by the debtor in a WPC.17675/08 14 proceedings under Section 31 of the SFC Act, where an order is passed in those lines, it has to be given effect to unless it is corrected and modified as provided by law. It cannot be contended for a moment that the order of the learned District Judge in ascertaining the liability of the debtor in a proceedings under Section 31 of the SFC Act was one without jurisdiction, but only not specifically empowered or authorised under the provisions of the Act. I do not find any merit in the submissions made by the learned counsel for the respondents/judgment debtors that an appeal should have been preferred against the order if at all the KFC was aggrieved. An appeal as contemplated under sub section (9) of Section 32 of the SFC Act lies only from the orders covered by sub sections 4A, 5 or 7 of Section 32 of the above Act and not in any other case. Quantification and ascertainment of a liability in Ext.P1 order with direction specifying the rate of interest with which the balance amount has to be discharged under Ext.P1 order, even if it was not amenable to an appeal, should have been challenged by appropriate WPC.17675/08 15 proceedings as provided by law for correcting that part of the order. Atleast a review petition inviting the attention of the learned District Judge to the provisions of Sections 31 and 32 of the SFC Act should have been moved by the decree holder for correcting that portion of Ext.P1 order. Without dong so, and all along meekly submitting to the directions of the court, the KFC has moved Ext.P4 application, that too, twenty four years after passing of Ext.P1 order and eighteen years after presentation of execution petition, for acceptance its Ext.P3 statement based on compound interest to realise the balance amount due from the debtors. As rightly contended by the counsel for the petitioner, it is seen, at various stages during the course of the execution proceedings, even for ascertainment of the market value of the mortgage property, statements had been filed by both sides and at no stage of such proceedings, the decree holder KFC had canvassed a claim for realisation of compound interest nor even questioned the orders passed by the court in fixing the market value with reference to the WPC.17675/08 16 directions given in Ext.P1 order. All the decisions relied by the counsel clearly demonstrate that there was specific challenge atleast right from inception of the execution proceedings on the basis of the order passed by the court under Sections 31 and 32 of the creditor Financial Corporation as to the entitlement of the KFC to claim compound interest on the basis of the contract. On the other hand, in the present case, after waiting for twenty four years and meekly submitting to the directions in Ext.P1 order that the balance amount is claimable with simple interest fixed by the court in that order, the KFC has come forward with a claim for realising the balance amount from the date of presentation of its petition under Section 31 of the SFC Act with compound interest as agreed under the contract. Orders passed by the court during the pendency of the execution proceedings till filing of Ext.P4 application on the statements filed by the decree holder, accepting the direction in Ext.P1 oder allowing that claim only with simple interest, without setting up any challenge or seeking WPC.17675/08 17 review of that direction in Ext.P1 order, in effect bars the entertainability of Ext.P4 application moved by the KFC to claim the balance amount with compound interest. 6. The apex court in **Delhi Financial Corporation v. B.B.Behel (1999 (3) SCC 298)** , while holding that the relationship between the Financial Corporation and the borrower is one of creditor and debtor and that the transaction of advancing loan is governed by the terms of the agreement is stated in unequivocal terms that once an order of recovery passed under Section 31 of the State Financial Corporations Act has become final, it was not open to work out the amount of loan due and payable by the debtor as against the figure mentioned in the order of recovery in a challenge raised against an order passed in a proceeding in execution of the recovery order, under Section 32 of the Act. The facts of the above case would disclose the application under Section 31 was disposed of by the Additional District Judge passing an order of recovery for the quantified WPC.17675/08 18 amount with interest at the rate specified in the order. Not being satisfied with the recovery passed, the Financial Corporation initiated proceedings under Section 29 of the Act to take possession of the mortgaged properties. That action was challenged by the debtor before the High Court by filing a writ petition. The High Court disposed the petition holding that the Financial Corporation could not invoke Section 29 of the Act till the rights under Section 31 of the Act were exhausted and directed it to reschedule the loan. The special leave petition preferred against the judgment of the High Court before the Apex Court was unsuccessful. While dismissing the special leave petition, the Apex Court directed the finance company to approach the civil court for modification of the decree to re-schedule the loan. The appellant financial company re-scheduled the loan and then filed an application before the executing court for recovery of the decretal amount. However, on the application of the debtor the proceedings thereof were stayed by the execution court. The stay order was challenged by the finance WPC.17675/08 19 company before the High Court by way of a revision. The High Court re-determined the amount payable reducing the rate of interest and also waiving the interest for a particular period taking note of the terrorist activity prevailing in the State by which it was held that the debtor had suffered a set back in his business during the period. Failure of the Financial Corporation to reschedule the loan was also taken note by the court for re-determining the amount covered by the recovery order. The order of the High Court re-determining the amount under the recovery order, for the reason stated above, was challenged before the Apex Court and analysing the questions involved, as pointed out earlier, it has been held, when the order of recovery has become final, it was not open to the High Court to work out the amount of loan due and payable by the debtor reducing the rate of interest or waiting the interest for a particular period. The decision is applicable to the facts of the present case also, where the finance company seeks realisation of the balance amount due under the loan with compound interest on the basis of the WPC.17675/08 20 contract ignoring the amount ascertained in Ext.P1 recovery order with direction to pay such sum with the rate of simple interest specified under such order. That Ext.P1 order has become final and it cannot be impeached on the basis of Ext.P4 application moved in a proceeding under Section 32 of the Act. 7. It is seen that as against the earlier claim of Rs.8,53,432/- calculated with simple interest in its execution petition on the basis of Ext.P1 order in respect of a loan for a sum of Rs.2,35,595/provided to the decree holder, eighteen years after the filing of that execution petition, the KFC has claimed a sum of Rs.29,37,116.84 on the basis of Ext.P3 statement calculating the balance amount due for the period from 1.3.1982 to 25.2.2008 with compound interest by filing Ext.P4 application. In the affidavit sworn in support of Ext.P4 application, other than stating that the decree holder is entitled to get compound interest as per the contract, nothing more is stated why the claim was not pressed into service at any stage earlier or to explain the 21 WPC.17675/08 mistake or omission in claiming the amount earlier with simple interest as directed in Ext.P1 order. In the given facts of the case and especially in view of the fact that the decree holder had submitted to the orders on Ext.P1 order and also orders passed by the court below in the execution proceedings at various stages till filing of Ext.P4 application, without any demur or objection as to the directions in Ext.P1 order ascertaining the liability of the amount due from the judgment debtors and also that it had claimed the amount in the execution petition only on the basis of such ascertainment, I find no impropriety or illegality in the dismissal of Ext.P4 application vide Ext.P7 order by the court below. At any rate, this is not a fit case where the extraordinary jurisdiction of this Court can be invoked to challenge Ext.P7 order of the court below. Writ petition lacks merit, and it is dismissed. ## **S.S.SATHEESACHANDRAN JUDGE** ## prp