- (1.) The case of the appellant-State Financial Corporation (for short the 'Corporation') is that it was established under the State Financial Corporation Act, 1951 (hereinafter referred to as the 'Act'). On 10th December, 1975, it sanctioned a term loan of Rs.30 lakhs to the 1st respondent-Company (for short the 'Company') payable in 17 half-yearly instalments by the 22nd of August, 1986. The Memorandum of Agreement executed between the Corporation and the Company and the Deeds of Mortgage and Hypothecation executed by the Company in favour of the Corporation, inter alia provided for recall of the entire balance of the loan in the event of default on the part of the Company in paying two instalments of the loan and further to recover the balance of loan as arrears of land revenue. Accordingly, the Corporation disbursed Rs.18 lakhs to the Company in 1977 and Rs.10 lakhs in 1978. In 1979, the Acetylene Gas plant of the Company was commissioned. In 1980, the Corporation disbursed the balance of Rs.2 lakhs to the company thus making the total payment of loan of Rs.30 lakhs. In July 1981, the Oxygen Gas plant of the Company was also commissioned.
(2.) The Company, however, made persistent defaults in repayment of the loan instalments with the result that the recovery certificate was issued against it under Section 3 of the U.P. Public Moneys (Recovery of Dues) Act. The Company challenged the said recovery proceedings before the High Court in W.P. No. 15648 of 1981 which, however, was withdrawn by it later. Thereafter on 30th November, 1981, the Company filed Company Petition No. 23 of 1981 under Sections 397 and 398 of the Companies Act in the High Court seeking removal of persons then in management on grave charges of manipulation of accounts, re-allotment of forfeited shares etc.
(3.) On 25th March, 1982, the State Government issued Office Memorandum enunciating a scheme for rehabilitation of sick units and setting up, inter alia a State Level Inter-institutional Committee with power to approve loan upto Rs. 30 lakhs. On 9th January, 1984, there was a compromise in Company Petition No. 23 of 1981 whereunder the then management of the Company started running the plants. On 30th November, 1984, the Joint Director of Industries declared the Company to be a sick unit. On 5th October, 1985, the State Level Inter-institutional Committee suggested a Rehabilitation Package which envisaged reschedulement of payment by the Company, arrangement of finances by the Company, appointment of two Directors nominated by the Corporation and execution of personal guarantee by the Directors.;