Madras High Court
P.S.S. Somasundaram Chettiar vs Union Of India (Uoi) Represented By The ... on 5 February, 2002
ORDER K.P. Sivasubramaniam, J.
1. In W.P.No.1390 of 1976 filed by an individual, the petitioner has prayed for a declaration of the provisions of Sick Textile Undertakings (Nationalisation) Act, 1974 (Act 57 of 1974), as illegal and void and that the said Act will not be applicable to the case of the petitioner.
2. In W.P.No.1391 of 1976 also the very same prayer has been made by Somasundaram Corporation Private Limited represented by the Chairman and Managing Director, the writ petitioner in W.P.1390 of 1976.
3. In W.P.No.5538 of 1979, he has challenged the taking over of the following Textile Mills under Act 57 of 1974, namely,
(i) Somasundaram Mills - A Unit
(ii) Kaleeswara Mills - A Unit at Coimbatore.
(iii) Kaleeswara Mills - B Unit at Kalaiyarkoil.
(iv) Somasundram Mills - B Unit at Muthanendal at Manamadurai.
4. In W.P.No.5675 of 1979, the petitioner has prayed for the issue of a writ of mandamus forbearing the Union Government and the National Textile Corporation from taking over the interest, rights and title of M/s. Somasundaram Mills and Kaleeswara Mills, without taking over the liabilities attached thereto and that the guarantee or surety given by the petitioner for the said two mills are not valid and are unenforceable.
5. At this stage, it may be mentioned here that the Supreme Court upheld the vires of the Act 57 of 1974 in the judgments reported in PANIPAT W. & G. MILLS CO. LTD., VS. UNION OF INDIA (A.I.R.1986 SC., 2082 ) and MINERVA MILLS LTD. v. UNION OF INDIA . Therefore, the prayer of the petitioner in the above petitions to the extent of the validity of the Act will not arise for consideration. Therefore, the main issue to be decided is as regards whether the classification of B Unit as a sick mill and the inclusion of the same in the Schedule to the Act is valid or not.
6. Mr. Vedantham Srinivasan, learned counsel for the petitioner contends that while Kaleeswara Mills at Coimbatore was established in the year 1906, the B Unit of the Mills at Kalaiyar Koil, was established only in the year 1965. The B unit was working profitably and without any labour problems. The new unit was started with new spindles and new machineries and the two units were always treated as separate undertakings of the Company, right from 1965 onwards. The Balance- sheet and the Profit and Loss Account were also drawn up separately. It is further pointed out that some of the creditors had filed C.P.No.5 2 of 1968 for winding up and this Court, by order dated 21.2.1972 ordered the winding up of the Company, and by a later order dated 17.8.1972 in Application No.190 of 1972 had stayed the winding up order as far as the B unit was concerned. Subsequently, the Sick Textile Undertakings (Taking over of Management) Act 72 of 1972 (hereinafter called "1972 Act") was passed. Both A and B units were separately shown in the schedule, thereby resulting in vesting of the undertaking with the Government. In Civil Writ Petition No.1974 of 1973, the petitioner moved the Supreme Court questioning the inclusion of B unit under the 1972 Act. Though stay was granted by the Supreme Court in respect of B unit, subsequently as a result of the promulgation of Emergency and suspension of fundamental right, the Supreme Court allowed the petitioners to withdraw the proceedings before the Supreme Court and permitted them to move the High Court under Article 226 of the Constitution of India. Hence, the above writ petitions have been filed. It is further contended that though the Supreme Court upheld the constitutional validity of the 1974 Act, it was also held by the Supreme Court that the aggrieved parties would be entitled to challenge the merits of the inclusion of any undertaking in the Schedule, if the essential requisites are not satisfied. Therefore, it is open to the petitioners to object to the inclusion of the B unit in the Schedule by pointing out that the requirements under both the Acts are not satisfied. In order to substantiate his contention that the inclusion of the B unit was not valid, learned counsel raised the following points for consideration:-
(i)The B unit was established as a separate unit from the inception and had always been treated as a separate Unit. In fact, in the Schedule of the Act itself, the two units have been shown separately.
(ii)The B unit was functioning in a profitable manner and satisfactorily without any problem and cannot therefore be described as a sick unit.
(iii)The order of winding up was stayed in so far as B unit was concerned and hence the definition of Sick Textile Unit as occurring in both the Acts cannot apply.
(iv) Even otherwise, the B unit was transferred by Kaleeswara Mills to Somasundaram Corporation on 4.2.1974 and a sale deed had been executed on 29.9.1974 itself. Under Section 31 of 1974 Act, only such of those transfers which were effected subsequent to the introduction of the Bill would be governed by the provisions of the Act. The Bill was introduced in the Parliament only on 2.9.1974. As such, the Act will have no application to the B unit and its inclusion in the Schedule was therefore, not valid.
7. Mr. Sundar, learned counsel appearing for the National Textile Corporation (NTC) contends that the definition of Sick Textile undertakings as incorporated in both the Acts, is an inclusive definition and would include all the units owned by a textile company which was being wound up. The petitioners cannot deny the fact that the B unit was owned by the Company. It cannot also be denied that the winding up order continued to be in force. The mere fact that there was an order of stay of the liquidation or the winding up, will not amount to terminating the order of winding up. He would further submit that the Company did not comply with the various conditions enumerated under the conditional order of stay and hence the respondents cannot be heard to rely on the said order.
8.On the issue of alleged transfer of B unit in favour of M/s. Somasundaram Corporation, learned counsel contends that the alleged transaction was totally void and contrary to the provisions of the Act. The undertaking having vested with the Central Government with effect from 1.4.1974 and the sale having taken place only subsequently, the alleged transfer was totally illegal. Section 31 was intended only to prohibit such transfers. Further, a transfer during the pendency of winding up proceedings was totally misconceived. After the winding up, the property would vest with the Official Liquidator. Therefore, any alleged transfer behind the back of the Official Liquidator has to be treated as non-est in law.
9. In his reply, Mr.Vedantam Srinivasan reiterated his earlier submissions and contended that it was open to the Court to go into the alleged sickness of the Unit. He would also contend that by a definition or legal fiction, a unit which is undoubtedly profit making and functioning well cannot be classified as a sick unit. It is further contended that under Section 8 of 1972 Act, no proceeding for winding up shall lie in Court or be continued without the consent of the Central Government.
10. We have heard submissions of both sides in the context of the applicability of both the Acts as against B unit and whether the inclusion of the B unit in the Schedule is valid. It is true that the inclusion of an undertaking in the Schedule to the Act may be justiciable. But we are unable to accept the contention raised on behalf of the petitioners for the following reasons:-
In the 1974 Act "sick textile undertaking" has been defined under Section 2(j) as follows:-
"2(j) 'sick textile undertaking' means a textile undertaking, specified in the First Schedule, the management of which has, before the appointed day, been taken over by the Central Government under the Industries (Development and Regulation) Act, 1951, or as the case may be, vested in the Central Government under the Sick Textile Undertakings (Taking Over of Management) Act, 1972."
11. "Sick Textile undertaking" has been defined under Section 2(d)(i) of the 1972 Act as follows:-
"2.(d) "sick textile undertaking" means the textile undertaking which fall within one or more of the following categories, namely:-
(i)which is owned by a textile company, which is being wound up, whether volunatarily or by or under the supervision of any Court, or in respect of which a provisional liquidator has been appointed by a Court, "
12. The above definition would imply that the criteria is the " textile company which is being wound up" and not different units of the same Company. In a winding up proceeding, the entire assets of the Company are treated as belonging to the single undertaking or establishment or entity. The fact that one branch of the Company or one unit of the Company is functioning well does not render it as a different entity. It cannot be disputed that the said unit is also part and parcel of the Company and would be taken into account as an asset of the Company for the purpose of winding up and the distribution of the assets to the creditors, under the Companies Act. Likewise, under the 1974 Act, the effect of vesting would include all the assets, rights, lease-holds and all properties movable and immovable. The claim that any unit or branch which is profit earning cannot be treated as a sick establishment, amounts to raising a contention that the profit earning segments of the very same Company should be segregated and that such segments cannot be subject matter of vesting. There is no legal basis to raise such a contention and the provisions of the Act do not contemplate any such exercise. The provisions clearly envisage inclusion of all properties, assets, and rights over movables and immovables. It would be sufficient to refer to some of the judgments of the Supreme Court which are as follows:-
(a) In MINERVA MILLS LTD. v. UNION OF INDIA , it was held that where the open land in question situate within the compound of the textile mill which was taken over, it could not be said that the land did not form part of the undertaking and did not vest in the Government. It was further held that the question whether the vacant land was in use or not was not relevant for the purpose of Section 4(1) and it cannot be said that the vacant land not being in use was unrelated to and unconnected with the textile undertaking. It was also observed that under Section 4(1), the Sick Textile Undertakings shall be deemed to include all properties, movable and immovable in the ownership, possession, power or control of the owner.
(b) In GOVARDHANDAS v. UNION OF INDIA , a contention was raised that the Ginning and Pressing Factory which belong to the textile undertaking was not part of the textile undertaking. It was held that the separate valuation of the land may show that the Ginning and Pressing Factory was treated by the owner as a distinct department of the undertaking.
The circumstance that there was a separate Provident Fund Scheme may show that the Mill and the Press were probably started on different occasions. The Supreme Court held that from those circumstances, it was not possible to infer that the Ginning and Pressing Factory constituted a separate establishment. Therefore, the taking over of the Ginning and Pressing Factory was held to be valid.
(c) In VIDARBHA MILLS BERAR LTD. v. UNION OF INDIA the question arose as to whether the property of the textile Company which was not necessary for running the Textile mill would also be taken over under the 1972 Act. The Supreme Court held that once the property was found to be the property of the textile undertaking, there was no escape from the provisions and from the take over.
(d) In VIDARBHA MILLS BERAR LTD. v. UNION OF INIDA , the question arose as to whether while leasing the textile undertaking to the Government, certain properties which were not leased to the Government, but which belonged to the undertaking, could be deemed to have been taken over. The Supreme Court held that all properties under the ownership, possession, power and control of the undertaking would vest with the Government.
(e) In ADONI COTTON MILLS LTD. v. UNION OF INDIA , the Supreme Court considered as to whether the report of the Committee stating that the management of the Mill was resourceful and confident of putting the Mill on sound footing, should result in concluding that the Mill was not a sick textile undertaking. It was held that merely because the new management and the new lessee managed to start the Mill just before the appointed day and appear to be resourceful and confident, it did not follow that the Mill was not a sick textile undertaking. It was held that no importance could be attached to the report.
(f) In FINE KNITTING CO. LTD. V. UNION OF INDIA , the Company was having hosiery section and knitting section. The hosiery section had not stopped working and only the knitting section was closed. It was held that both sections were under the ownership, possession, power and control of the Textile company and hence the inclusion of the hosiery section in the Schedule to the Act was justified.
13. The above decisions clearly envisage that having regard to the wider language used while defining "sick textile industries" in both the Acts, all properties and assets belonging to the undertaking would vest with the Central Government and there is absolutely no scope for excluding one unit of the very same company on the ground that it was running in a good condition. The expression "unit" itself as employed by the petitioner himself only signifies that it is part and parcel of the main Company. Even going by the ordinary Dictionary meaning of the "unit", it is no more than a part of a larger organisation or machinery. It is not the case of the petitioners that B unit is under a different entity or management. Hence, we are unable to accept the contention on behalf of the petitioners that B unit is an independent unit and the provisions of the Act will not apply to the said unit.
14. We are also unable to comprehend as to how the circumstance of the two units, having been shown separately in the Schedule to the Act, would support the contention of the petitioners. Such listing in the Schedule has been done probably due to a cautious approach to avoid any complaint of ambiguity or uncertainty and intended to eliminate the objection that the non-mention of B unit in the Schedule would mean that it is not vested with the Government. In whatever manner the sick textile undertakings are detailed in the Schedule, such description in the Schedule can neither over-reach nor fall short of the mandatory consequences of the statutory provisions under the Act, especially the definition of "sick textile undertakings". When once the Company has been classified as a sick textile undertaking, all the properties and assets of the undertaking are vested with the Government. The mentioning or non-mentioning of all or any of the subsidiary unit or assets of the undertakings, will have no significance at all.
15. The further contention of Mr. Vedantham Srinivasan, that by a definition or legal fiction, a unit which was performing well and successful in its functioning, cannot be treated as a sick unit, over- looks the circumstance that the vires of the entire Act was challenged and had been held to be valid by the Supreme Court. Also, as pointed out earlier, the definition clause had been noticed and considered by the Supreme Court in several of its judgments and it is not possible for this Court to entertain a contention which in effect amounts challenging the validity and the scope of the definition and other provisions. Firstly, we are unable to accept the very contention that there is an element of fiction in the definition clause. If the competent authority is satisfied that the undertaking is fit to be classified as a sick undertaking, then it would mean that the Government was satisfied in so declaring on an overall consideration of all the assets and liabilities. It is not possible to treat the liabilities different from assets, nor a profit yielding unit from a unit of the same company running under loss. The object of the take-over is not only of the liabilities but also the assets. Even in a winding up proceeding under Companies Act, exclusion of profit yielding units cannot be contemplated. Under general principles of equity also, it would be unreasonable for the owner to expect that the Government should take over only the liabilities and he should retain the profits and assets. Such a scheme would be unreasonable and against public interest. Therefore, there is no element of fiction or deeming is contemplated under such definition. Assuming for the sake of discussion that the definition involves a fiction, even so as stated earlier, it is not open to this Court to go into the vires of the definition clause considering that the entire Act had been held as valid by the Supreme Court. The effect of the definition had also been dealt with by the Supreme Court in many judgments.
16. We find no merit in the contention that the B unit having been transferred to Somasundaram Corporation, prior to the introduction of the Bill in the Parliament on 2.9.1974, the Act will have no application to the B unit since the sale deed had been executed on 29.8.1974. The said submission overlooks the simple fact that the appointed day as fixed under Section 2(1)(d) of the 1974 Act is the First day of April, 1974 on which date the undertaking shall be vested with the Central Government. Under Section 3, vesting shall take effect on the appointed day. In the present case, admittedly the sale deed had been executed only on 29.8.1974 long after the appointed day. Reliance placed upon Section 31 of the Act cannot be sustained. It is true that the said provision holds that all transfer of assets on and from the date of introduction of the Bill in the House of People, without the prior approval of the Central Government shall be void and inoperative. But the said provision will apply only to cases of undertakings which could not be taken over by the Central Government by reason of any decree, order or injunction of any Court. The case on hand does not fall under the said category. There is no order or decree restraining the Central Government from taking over the management, except for the order of interim stay of winding up which will be dealt with below. The vesting in favour of the Central Government having taken effect on 1.4.1974, any subsequent transfer would be violative of the provisions of the Act and hence inoperative. As regards the issue of order of winding up which was passed by a learned single Judge of this Court on 21.2.1972 and the subsequent order of stay of the winding up order in so far as B unit was concerned, it is true that by virtue of the order of interim stay, the petitioners were permitted to run the B unit. Elaborate arguments were advanced by both sides regarding the effect of the order of interim stay and the consequential applicability of Section 31 of 1974 Act. According to learned counsel for the respondents, certain conditions were imposed under the order of stay which were never complied with by the petitioner and hence the order of interim stay did not become operative. The allegation that some of the terms of the conditional order were not complied with by the petitioners, has not been denied. However, it is needless to deal with the said allegations raised by both sides considering the very scope of the interim order. The last paragraph of the order of stay reads thus:
"It is also made clear that the order for stay regarding the B unit does not mean that the Directors of the Company are exempt from the statutory obligations as per the winding up orders."
17.Hence, apart from the fact that the terms of the interim order had not been strictly complied with by the petitioners, even otherwise, the order does not militate against the statutory obligations as per the winding up order. Much less can the order of interim stay prevent the statutory vesting under Section 3 of the 1974 Act. We must also observe that while admittedly, the conditions of the interim order had not been complied with by the petitioners, he cannot be heard to plead that he is protected by the order of interim stay. In the order of interim stay, it has been observed more than once that the order of winding up was stayed only on the conditions stipulated in the order. Therefore, viewed from any angle, the petitioners cannot seek to derive any benefit out of the order of interim stay of winding up.
18. The contention that the listing of the undertaking in the Schedule to the Act is justiciable, does not also help the petitioners in any manner in the present case. Assuming that the said issue is justiciable, it is only the classification of the entire Company as a sick textile undertaking which could be gone into. The declaration of the Private Limited Company of Kaleeswara Mill as a sick textile undertaking is not called in question. What is disputed now is the inclusion of the B unit as a sick establishment. For reasons already stated, having regard to the definition of "sick textile undertaking", we have already held that the B unit cannot be segregated from the assets and properties of Kaleeswara Mills.
19. In the result, we are inclined to reject all the contentions raised on behalf of the petitioners seeking for a declaration that the provisions of the Acts are not applicable to the B unit Kaleeswara Mills situate in Kalaiyarkoil, Ramanad District.
20. In W.P.Nos.5538 and 5675 of 1979, the petitioner is questioning the enforceability of the guarantee executed by the petitioner/ owner of the Mill towards the amounts which became payable by the undertaking. The petitioner contends that the Act itself has made the provision for payment of debts to financial institutions and under Section 23 where any liability to the owner is arising within the amount paid to him, the Commissioner shall inform the Central Government and the liability shall be assumed by the Central Government. The Central Government may direct the NTC to take over any liability assumed by the Government. It is further contended that Rule of Limitation was also applicable as against Banks and Financial institutions. Therefore, according to the petitioners, the respondents/Banks should not have filed suits on a later date and they should have sought for their remedy only before the Commissioner of Payments as constituted under the Act. The respondents having selected their remedy by filing claim petitions before the Textile Commissioner, it was not open to them to file a Civil Suit against the Managing Director and the other guarantors. The decrees and orders passed thereon by the Civil Court would be nullity, non-est and unenforceable. It is further contended that after the take over, the Authorised Controller appointed under the 1972 Act had entered into fresh agreements by way of novation with the various Banks. The management would be answerable only to the debts and liabilities incurred prior to the taking over of the management. Therefore, where a credit has been availed by the Sick Company, after the taking over of the management and by a novation, the liability is to be discharged only by the NTC and not by the owner. It is not open to the Banks and Financial Institutions to file a suit against a guarantor under the scheme of the Act. The Scheme of the Act contemplates assumption of liability by the Central Government/NTC.
21. In support of his contention that when a particular remedy has been prescribed under the Act, that remedy should be pursued only in the manner so prescribed and not by resorting to any other remedy which is impliedly barred, learned counsel refers to the judgment of the Supreme Court reported in BABU VERGHESE v. BAR COUNCIL OF KERALA .
22. Reference is also made to a judgment of a Full Bench of this Court in SUBRAMANIA v. NARAYANASWAMI in support of his contention that the liability of a surety was only co- extensive with that of a principal debtor. The Full Bench held that a non-agriculturist surety will not be liable for the entire debt if the principal debt had been scaled down under the provisions of the Agriculturists' Debt Relief Act.
23. Per contra, Mr. Hanumantha Rao, appearing for the Andhra Bank contends that the Bank had obtained a decree in O.S.No.580 of 1977, Sub-Court, Coimbatore, dated 12.2.1976, for a sum of Rs.12,98,796. The decree was now pending before the Debt Recovery Tribunal for execution. Another decree in O.S.No.403 of 1974, Sub-Court, Coimbatore, dated 15.4.1976 had also been obtained against the guarantor and the said decree was executed in E.P.No.95 of 1978. It is further stated that there is no basis in the contention that there was novation of the contract and the surety was not enforceable. Learned counsel also relied on the judgment of the High Court of Andhra Pradesh in C.C.C. Appeal Nos.52 and 75 of 1980, dated 27.11.1981 in support of his contention that the surety was liable to pay the entire amount.
24. We have considered the submissions of both sides in the context of the liability of the petitioner/ owner as a guarantor in respect of the amounts payable by the sick textile undertaking. In our opinion, the issues which are now raised before us are very much within the jurisdiction of the Civil Court where the suits had been filed against the petitioner. The dispute relates to the liability or otherwise of the petitioner as a guarantor and whether the Civil Court has jurisdiction to consider the issue. The Civil Court is not deprived of its jurisdiction to consider all the said issues which have now been raised before us. As would be evident from the facts stated above, suits have already been filed and ripened into decree. The questions raised before us relate to interpretation of the various terms of the contract of guarantee, the scope of Civil Court's jurisdiction vis-a-vis, the jurisdiction of the Commissioner of Payments as constituted under the Act. The Civil Court is not deprived of its power and jurisdiction to consider the said issues and hence this Court, while exercising its power under Article 226 of the Constitution of India, is not required to go into the same. The very nature of the objections raised by the petitioner involves interpretation of the terms of the guarantee. To that extent, the issue is purely contractual. Reference was made to the provisions of the Contract Act in the context of the liability of the surety as well as scope of the 1972 Act and 197 4 Act and the extent of the jurisdiction of the Civil Court to entertain the suit. It cannot be disputed that it is the Civil Court which is competent to go into all the said issues, if raised before the Civil Court. Therefore, we refrain from going into the said issues and the petitioners cannot be heard to raise these contentions under Article 226 of the Constitution of India, which they ought to have raised before the Civil Court.
25. Therefore, we do not find any merit in any of the above writ petitions and all the writ petitions are dismissed. No costs.