ODISHA STATE FINANCIAL CORPORATION V. VIGYAN CHEMICAL INDUSTRIES AND OTHERS 2025 INSC 928:

DATE: 05/08/2025

COURT: Supreme Court of India

BENCH: Justice J.B. Pardiwala and Justice R. Mahadevan

FACTS:

The Appellant, Odisha State Financial Corporation (OSFC), in collaboration with the Industrial Promotion & Investment Corporation of Odisha (IPICOL), provided financial assistance to M/s. Manorama Chemicals Works Ltd. for establishing a bleaching powder manufacturing unit in Odisha. In 1985, the Respondent, M/s. Vigyan Chemical Industries Limited, supplied raw materials worth ₹66,454.65 to Manorama. However, when Manorama defaulted on its loan repayment, the Appellant took possession of the industrial unit in 1987 under Section 29 of the State Financial Corporations Act, 1951. Subsequently, the Respondent filed a recovery suit against Manorama and sought to implead the Appellant. The Trial Court allowed the impleadment, which the Appellant unsuccessfully challenged through a Miscellaneous Appeal and Writ Petition. The Trial Court was then directed to dispose of the suit within a year. During the pendency of the suit, the Appellant furnished two bank guarantees of Rs.6,36,243 and Rs.3,50,000 respectively, in favour of the Trial Court.

The Trial Court partly decreed the Respondent’s suit, prompting the Appellant to file a Civil Appeal, which was dismissed. Following this, the Respondent’s cross-objection was allowed, and the suit was decreed in full by the Fast Track Court in 2006. The Appellant then preferred a Second Appeal before the High Court, which granted a stay on the decree, conditional upon deposit of the decretal amount within 45 days. The High Court eventually dismissed the appeal, ruling that the suit was not barred by limitation, a view later affirmed by the Supreme Court. The Respondent initiated execution proceedings, and the Execution Court ordered attachment of the Appellant’s deposits amounting to nearly Rs.22 crores. Following the dismissal of its Writ Petition by the High Court, the Appellant approached the Supreme Court once again.

ISSUES:

The key issues in this case were whether the suit filed by Respondent No. 1 (M/s. Vigyan Chemical Industries Ltd.) against the Appellant (Odisha State Financial Corporation, OSFC) was maintainable in law; whether the decree passed by the trial court against OSFC was legally enforceable; whether the execution proceedings initiated by Respondent No. 1 to recover the decretal amount along with interest were valid; and whether OSFC was liable to pay the awarded sum, including the interest calculated at 24% compounded monthly, for the default of Respondent No. 2 (M/s. Manorama Chemical Works Ltd.).

JUDGEMENT WITH REASONING:

The Supreme Court allowed the appeal filed by OSFC, holding that the original suit instituted against it was not maintainable and the resulting decree was unenforceable. Consequently, all judgments and orders passed by the lower courts and the execution proceedings based on the said decree were set aside. Respondent No. 1 was directed to refund the entire sum of Rs.2,92,57,559/- already received, without any interest, within three months, failing which OSFC would be entitled to recover the amount with simple interest at 6% per annum.

The Court noted that the trial court erroneously entertained the suit against OSFC despite the fact that OSFC’s role was limited to financial assistance under statutory powers and that it had taken possession of the industrial unit under Section 29 of the State Financial Corporations Act, 1951. There was no privity of contract or direct liability between OSFC and the Respondent, which rendered the suit against OSFC legally unsustainable. The trial court also failed to appreciate that the decree passed against OSFC lacked a sound legal foundation, and the application of the repealed Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 to the execution proceedings was inapplicable. Additionally, the Court held that the execution of the decree, based on flawed legal premises and exorbitant interest rates, could not be sustained.

The Court also criticized the conduct of both the appellant and the lower courts. It strongly disapproved of the lack of diligence, timely objection, and legal strategy by OSFC and its counsel, which prolonged litigation unnecessarily and jeopardized public funds. However, it observed that despite the lapses, public financial institutions must be protected from unjust liabilities imposed through judicial misdirection. The Court emphasized that procedural safeguards and legal propriety are vital in protecting public resources. It exercised its extraordinary powers under Article 142 of the Constitution to rectify the injustice and ensure fair and equitable relief by ordering a refund of the amount collected through execution, thereby bringing the prolonged litigation to a close.

ANALYSIS:

The Appellant, Odisha State Financial Corporation (OSFC), along with the Industrial Promotion & Investment Corporation of Odisha (IPICOL), jointly financed M/s. Manorama Chemicals Works Ltd. for establishing a bleaching powder manufacturing unit in Odisha. In 1985, M/s. Vigyan Chemical Industries Limited (Respondent No. 1) supplied raw materials worth Rs.66,454.65 to Manorama. When Manorama defaulted on its loan repayment, OSFC took possession of the industrial unit in 1987 under Section 29 of the State Financial Corporations Act, 1951. Respondent No. 1 filed a recovery suit against Manorama and sought to implead OSFC as a defendant. Although OSFC challenged the impleadment through a Miscellaneous Appeal and a Writ Petition, both were dismissed, and the Trial Court was directed to adjudicate the matter within one year. During the pendency of the suit, OSFC furnished two bank guarantees—one of Rs.6,36,243 and another of Rs.3,50,000 in favour of the Trial Court.

The Trial Court initially passed a partial decree in favour of the Respondent. Upon the Respondent's cross-objection, the suit was decreed in full by the Fast Track Court in 2006. OSFC challenged this decree through a Second Appeal before the High Court, which granted a conditional stay, requiring the deposit of the decretal amount within 45 days. The High Court later dismissed the appeal, holding that the suit was not barred by limitation, a decision upheld by the Supreme Court. Subsequently, Respondent No. 1 initiated execution proceedings, and the Execution Court attached OSFC’s deposits amounting to nearly Rs.22 crores. After its Writ Petition was dismissed by the High Court, OSFC once again approached the Supreme Court, contesting the maintainability of the suit, the legality of the decree, and the execution proceedings arising from it.