Gulati, J. - (1.) THIS is a first appeal from order against the judgment and decree of the Second Additional District Judge, Kanpur, dated 20th September, 1969.
(2.) THE first respondent, the U. P. Financial Corporation, entered into an agreement with an industrial concern called "M/s. Raki Electronics, Kanpur" through its proprietor, Sri Ram Kishan Gupta, for the grant of a loan to the latter of a sum of Rs. 70,000 for purposes of setting up a factory for the production of radios and allied equipments. The loan was secured by taking a mortgage of the machineries and properties of the debtor as also by a collateral security in the shape of a house mortgaged by Munna Lal, the appellant. The property mortgaged by Munnalal is detailed in Schedule 'B' of Annexure I to the agreement, while the properties mortgaged by the debtor are detailed in Schedules 'A', and 'C' to the aforesaid Annexure I. The agreement evidencing the loan dated 13th December, 1961 is a composite document embodying the terms and conditions for the repayment of loan with interest and for the mortgage of the properties of the debtor as well as of Munnalal, the surety, According to the terms and conditions in the aforesaid deed, the loan carried interest at the rate of 5 per cent, and the principal amount and interest were payable in instalments. In the case of default, the entire outstanding principal with interest at enhanced rate became payable. It appears that out of a sum of Rs. 70,000 agreed to be advanced, only a sum of Rs. 26,000 was advanced to begin with. The debtor committed default in the payment of interest as also in the payment of instalments of the principal amount. Thereupon the Financial Corporation filed a petition before the District Judge, Kanpur under Section 31 of the State Financial Corporations Act, 1951 (hereinafter referred to as the 'Act'), claiming a sum of Rs. 26,000 as principal and Rs. 2,746.84 as interest. In the aforesaid application the following prayer was made :- "It is, therefore, prayed that the following reliefs may be granted to the petitioner against the opposite parties :- (a) order for the sale of the properties detailed in Schedules 'A', 'B' and 'C' to this petition. (b) an ad interim injunction restraining the opposite party No. 1 from transferring or removing machinery, plant or equipment particularly those mentioned in Schedule 'C' from its premises without the permission of the Board of Directors of the petitioner. (c) interest from 16-3-1964 to the date of filing this petition and pendente lite and future interest." This Petition has been allowed by the District Judge and the appellant Munnalal has come up in appeal against it. The appeal came up for hearing before a Division Bench. One of the questions that arose before the Bench was whether an application under Section 31 of the Act was maintainable against the surety so that the property mortgaged by him could be ordered to be sold. A decision of another Division Bench of this Court in Uttar Pradesh Financial Corporation v. M/s. Deekey Industries (P.) Ltd., 1971 All LJ 756 was brought to the notice of the Bench. In that case it was held that such a petition under Section 31 of the Act was maintainable even against a surety. The correctness of this decision was doubted by the Bench. Hence the following question has been referred to a larger Bench :- "Whether the appellant Munnalal as surety who had mortgaged his property in favour of the Financial Corporation to secure or guarantee the loan advanced to Messrs. Raki Electronics, an industrial concern, could be proceeded against at the instance of the Financial Corporation before the District Judge under Section 31 of the State Financial Corporations Act, 1951?" This is how the matter has come up before us. As the entire F. A. F. O. has not been referred to us and only a question has been referred, we shall attempt to answer the question only and shall send the case back to the Division Bench for disposal.
(3.) THE Act provides for the establishment of a State Financial Corporation for purposes amongst others of advancing loans to industrial concerns as defined in Section 2 (c) of the Act. This is clear from Section 25 (1) (g) of the Act. Section 25 defines the various kinds of businesses which Financial Corporation may transact, Sub-clause (g) of clause (1) of Section 25 provides for granting loans or advances to or subscribing to debentures of, an industrial concern, repayable within a period not exceeding twenty years from the date on which they are granted or subscribed to, as the case may be, Sub-section (2) of Section 25 provides :- "(2) No accommodation shall be given under clauses (a), (b) and (g) of sub-section (1) unless it is sufficiently secured by a pledge, mortgage, hypothecation or assignment of Government or other securities, stock, shares, or secured debentures, bullion, movable or immovable property or other tangible assets in the manner prescribed by regulations or unless it is guaranteed as to the repayment of the principal and the payment of interest by the State Government, a scheduled bank or a State Co- operative Bank." Thus a loan to an industrial concern cannot be advanced unless it is secured by a mortgage of movable or immovable property or the repayment of the loan and the interest is guaranteed by the State Government, a scheduled Bank or a State Co-operative Bank. There was some discussion as to whether the Corporation was entitled to take mortgage of the property of a third person as a surety. But it appears to us that sub-section (2) of Section 25 is so widely worded that the Corporation can take the mortgage of property even belonging to a surety, besides the property of the borrower. Section 29 enumerates the rights of the Corporation in cases of default. Amongst the rights conferred upon the Corporation is the right to take over the management of the industrial concern and the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. Section 31 contains special provisions for enforcement of claims by Financial Corporation. This section is material and is reproduced below :- "31. SPECIAL PROVISIONS FOR ENFORCEMENT OF CLAIMS BY FINANCIAL CORPORATION :- (1) Where an industrial concern, in breach of any agreement makes any default in repayment of any loan or advance or any instalment thereof or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate payment of any loan or advance under Section 30 and the industrial concern fails to make such repayment then without prejudice to the provisions of Section 29 of this Act and of Section 69 of the Transfer of Property Act, 1882, any officer of the Financial Corporation, generally or specially authorised by the Board in this behalf, may apply to the District Judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs, namely :- (a) for an order for the sale of the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation as security for the loan or advance; or (b) for transferring the management of the industrial concern to the Financial Corporation; or (c) for an ad interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without the permission of the Board where such removal is apprehended." (2) An application under sub-section (1) shall state the nature and extent of the liability of the industrial concern to the Financial Corporation, the ground on which it is made and such other particulars as may be prescribed." ;