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Lending public money by MJ Antony

Since state financial corporations are set up to encourage the establishment of industries by providing loans on liberal terms, the recovery of debts from chronic defaulters is seen by courts from two angles. One is that public money is lent for starting private enterprises and, therefore, the financial institutions should be tough on the debtors. The other approach is that these units benefit the public and, therefore, the endeavour should be to accommodate the interests of both the general public and the financial corporation.

For some time, the Supreme Court was wavering between these two attitudes. However, the court has recently taken a firm view on chronic defaulters that favours state institutions. This approach was evident in its recent judgment in the case of Punjab Financial Corporation vs Surya Auto Industries. The Punjab and Haryana High Court swung into a sympathetic mode when the borrower unit defaulted for a long time. It passed an order that found fault with the corporation for being inactive for six years, demanding compound interest and proceeding against the collaterals. The high court went further and asked the corporation to review all cases where penal interest had been compounded.

However, the Supreme Court found that the high court was in error on all counts. Though there have been judgments from the court that adopted a liberal attitude towards defaulters, since 1993 the tide has turned to help the corporations. State corporations are not like ordinary moneylenders or banks, but the basic relationship between them and the borrowers is that of creditor and debtor.

It recalled its earlier judgment in the case of UP Financial Corporation vs Gem Cap (1993), which emphasised that “promoting industrialisation at the cost of public funds does not serve public interest; it merely amounts to transferring public money to private account. The fairness required of the corporation cannot be carried to the extent of disabling it from recovering what is due to it.”

Fairness, it added, was not a one-way street.

In the case of Haryana Financial Corporation vs Jagdamba Oil Mills (2002), the court spoke more vehemently in favour of the state lending institutions. “If re-payments are not received as per schedule, it will disturb the equilibrium of the financial arrangements of the corporations. They do not have at their disposal unlimited funds. They have to cater to the needs of the intended borrowers with the available finance. Non-payment of the instalments by a defaulter may stand in the way of a deserving borrower getting financial assistance,” the judgment said. Indulgence shown to a chronic defaulter would amount to “flogging a dead horse without any conceivable result being expected.”

Moreover, courts should not rush in to support a borrower when there is a dispute over repayment. This has been emphasised in several judgments. The Jagamba judgment stressed that state corporations were free to act according to their own light. The views they formed and the decisions they took were on the basis of information in their possession and the advice they received. “Unless its action is mala fide, even a wrong decision by it is not open to challenge,” the court said. “It is not for the courts or a third party to substitute its decision, however more prudent, commercial or businesslike it may be, for the decision of the corporation.”

The scope of judicial review in such cases is now limited to two circumstances:

when there is a violation of a statutory rule on the part of the financial corporation, and
when the institution acts unfairly or unreasonably.

The first situation is easy to recognise, but in the second, there could be grey areas. Even then, courts should not interfere with the action of the corporation as if it is an appellate authority over the decision of the state institution.

Sometimes, courts take great pains to revive sick units so that the state is benefited and workers are not thrown on the streets. In the latest judgment, the court did not approve of these good intentions. According to it, courts are “not obliged to revive and resurrect every sick industrial unit. The corporation is supposed to act fairly, but it is not supposed to give loans and refrain from taking action for the recovery. The corporation is not expected to flounder (sic) public money for promoting private interests.”

In the Surya Auto case, the court found that the borrowing unit had not only adopted a recalcitrant attitude but also failed to avail itself of concessions in instalments and interest offered by the corporation. In such gross cases, the courts should not help the defaulters. Thus the court puts more power in the hands of the financial institutions.