Delhi High Court
Grindlays Bank vs Union Of India & Ors on 9 January, 2009
Author: S.L. Bhayana
Bench: Vikramajit Sen, S.L. Bhayana
* IN THE HIGH COURT OF DELHI AT NEW DELHI
W.P.(C) No.2430/1987
Date of Decision: January 09, 2009
GRINDLAYS BANK ....Petitioner
Through: Mr.Sanjeev Anand with
Mr. Vikas Kakkar & Mr.
D. Nishant, Advs.
Versus
UNION OF INDIA & Ors. ....Respondents
Through: Mr. Naveen Sharma with
Ms. Swati B. Sharma for
Respondent No. 3.
CORAM:
Hon'ble Mr. Justice Vikramajit Sen
Hon'ble Mr. Justice S.L. Bhayana
1. Whether reporters of local papers may be allowed
to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported
in the digest or not? Yes
S.L. BHAYANA, J.
This Writ Petition has been filed under Article 226 of the Constitution of India challenging the constitutional validity of the Swadeshi Cotton Mills Company Limited (Acquisition and Transfer of Undertakings) Act, 1986 (hereinafter referred to as „the Act‟) with the prayer that an appropriate Writ, order or direction be issued declaring that the Petitioner‟s claim as a secured Bank creditor is entitled to preference and priority over the claims of all other unsecured creditors and that the Petitioner is entitled to receive WP(C) 2430/1987 Page 1 of 14 payment of its secured debt simultaneously with payments that may be made to other secured creditors/Banks including Nationalized Banks under the Act and further declaring that the Act is arbitrary, discriminatory and, therefore, bad in law. The Petitioner has further prayed that a Writ of Mandamus be issued directing Respondent Nos. 1 and 2 to make payment of the Petitioner‟s secured debt along with payments made to any other secured creditors including Nationalized Banks. The Petitioner further prayed to declare that the classification of the Petitioner‟s claim by Respondent No. 2 under Category VI Part II of the Schedule to the Act is bad in law.
2. The brief facts of the case of the Petitioner are that the Petitioner is a banking company with limited liability incorporated under the English Companies Act having its registered office at Minerva House, P.O. Box No. 7 Montague Clase, London, SE 1 9 DH U.K. The Petitioner is registered under Section 592 of the Indian Companies Act and is carrying on its business of banking at New Delhi and also at other places in India. In the year 1973, the Petitioner had advanced a loan facility of Rs. 25 lacs to Respondent No. 4 for financing the import of six diesel generating sets from Russia and Czechoslovakia for installation at its industrial units at different locations in UP. Consequently a Charge was created by way of hypothecation of the said generating sets in favour of the Petitioner by Respondent No. 4. Respondent No. 4 repaid a sum of Rs. 6.11 lacs of the said principal loan of Rs. 25 lacs to the Petitioner. In August, 1977, Respondent no. 4 further repaid a sum of Rs. 1,23,000/- to the Petitioner and the Company‟s principal liability was reduced to Rs. WP(C) 2430/1987 Page 2 of 14 18.89 lacs and approximately Rs. 2.5 lacs was then due towards unpaid interest. On 13th April, 1978, Respondent No. 1/Union of India through the Ministry of Industry authorized Respondent No. 3 to take over the management of the following six industrial undertakings belonging to respondent No. 4:-
(i) The Swadeshi Cotton Mills, Kanpur
(ii) The Swadeshi Cotton Mills, Pondicherry
(iii) The Swadeshi Cotton Mills, Naini
(iv) The Swadeshi Cotton Mills, Maunath Bhanjan
(v) The Udaipur Cotton Mill Ltd, Udaipur, and
(vi) The Rae Bareli Taxtile Mills Ltd., Rae Bareli.
3. On 24th January, 1979 and 8th February, 1979, Respondent No. 3 which had taken over the management of Respondent No. 4‟s six undertakings, made a payment of Rs. 1,71,606.60/- towards reduction of Respondent No.4‟s liability to the Petitioner under the aforesaid loan account. Thereafter no further payment was made by Respondent Nos. 3 to 5 for liquidating the aforesaid loan liability to the Petitioner despite legal notices served on the Respondents. The Petitioner filed a Civil Suit for recovery of the loan amount against Respondent Nos. 3 to 5 on 20th January, 1982 seeking a decree for Rs. 37,14,612 with interest @ 16 % p.a. On 19th April, 1986, Respondent No. 1/Union of India promulgated the Swadeshi Cotton Mills Company Limited (Acquisition and Transfer of Undertakings) Ordinance which was duly published in the Gazette of India dated 19th April, 1986. The said Ordinance was replaced by the Swadeshi Cotton Mills Company Ltd. (Acquisition and Transfer of WP(C) 2430/1987 Page 3 of 14 Undertakings) Act No. 30) of 1986 and all the rights, titles and interests of the Company in relation to every such textile undertaking were transferred to the Central Government and all the assets of the aforesaid six industrial undertakings vested in the Central Government. It is further averred by the Petitioner that Section 19 of the Act provides that the claims arising out of matters specified in the Schedule shall have priorities in accordance with the following principles, namely:-
(a) Category-I shall have precedence over all other categories and Category-II shall have precedence over Category-III and so on;
(b) the claims specified in each of the categories, shall rank equally and be paid in full, but, if the amount is insufficient to meet such claims in full, they shall abate in equal proportions and be paid accordingly; and
(c) The question of discharging any liability with regard to a matter specified in a lower category shall arise only if a surplus is left after meeting all the liabilities specified in the immediately higher category.
4. The Petitioner further averred that under Section 20 of the Act, it is specified that on receipt of the claims made under Section 18, the Commissioner shall arrange the claims in the order of priorities specified in the Schedule and examine the same in accordance with such order. The Petitioner has challenged the vires of the Act claiming that classification made by the Respondents under the Act is discriminatory inasmuch as it tends to discriminate between WP(C) 2430/1987 Page 4 of 14 similarly placed persons and bodies without reason and there is no reasonable classification or nexus to the objects sought to be achieved. The Petitioner and other Nationalized Banks are involved in the same business and, therefore, cannot be discriminated by the Respondents. Thereafter, no payment was made to the Petitioner as they were classified under Category VI of the Schedule to the Act whereas the Petitioner being a secured creditor should have been classified by Respondent No. 2 in Category II of Part I of the Schedule to the Act.
5. Learned counsel for the Petitioner has submitted that the Act is discriminatory in nature and is not sustainable under the law and, therefore, is liable to be struck down. He has further submitted that the Petitioner being a secured creditor is entitled to be classified in Category II of Part I of the Schedule to the Act along with other Nationalized Banks and public financial institutions which have been classified in the said category. He has further submitted that the Act discriminates between the Nationalized Banks and the Petitioner Bank which is a foreign Bank although both are secured creditors. It is violative of Article 14 of the Constitution of India as its provisions are discriminatory and, therefore, it is liable to be struck down. In support of his submissions, he relied upon the following decisions of the Apex Court as well as the High Courts:-
a) Durga Enterprises (P) Ltd. v. Principal Secretary, Govt. of UP (2004) 13 SCC 665
b) L. Hirday Narain v. Income Tax Officer, Bareilly AIR 1971 SC 33
c) Bengal Immunity Co. Ltd. v.State of Bihar AIR 1955 SC 661 WP(C) 2430/1987 Page 5 of 14
d) The East Bulliaree/Kendwadih Colliery Co. Pvt. Ltd. v. Union of India AIR 1983 Delhi 70
e) M.P. State Agro Industries Development Corpn. Ltd. V. Jahan Khan (2007) 10 SCC 88
f) The State of Jammu and Kashmir v. Shri Triloki Nath Khosa (1974) 1 SCC 19
g) Mohd. Shujat Ali v. Union of India AIR 1974 SC 1631
h) Aashirwad Films v. Union of India 2007 (8) Scale 288
6. The judgments relied upon by the counsel for the Petitioner have no application to the case in hand.
7. On the other hand, learned counsel for Respondent No. 3 has submitted that the Act as per its Preamble has been enacted with a view to give effect the Policy of the State towards securing the Directive Principles specified in Clauses (b) and (c) of Article 39 of the Constitution and for matters connected therewith or incidental thereto. He has further submitted that the Act is protected by the provisions of Article 31 C of the Constitution of India and, therefore, cannot be called in question on the ground that it is inconsistent with or takes away or abridges any of the rights conferred by Article 14 of the Constitution of India. He has further submitted that the Act is also protected by the provisions of Article 31 A of the Constitution of India as the acquisition of the company in question by the Act was made in public interest and for giving effect to the Directive Principles of State policy. Therefore, the Act cannot be deemed to be void on the ground that it is inconsistent with or takes away or abridges any of the rights conferred by Article 14 of the Constitution of India. He has further submitted that the scheme of categorization of creditors is provided for not only under this Act but also under the Sick Textile Undertakings (Nationalization) Act, 1974 which is in para materia WP(C) 2430/1987 Page 6 of 14 and also under the Companies Act, 1956 wherein the categorization/classification of creditors is made for discharging of liabilities. The prioritization of the various creditors has been done so in public interest and to protect public money, therefore, the classification between post takeover and pre takeover liabilities and the Nationalized Banks and non-nationalized or private Banks is reasonable and has a nexus sought to be achieved by the Act. He has further submitted that the Act is in para materia with the Sick Textile Undertakings (Nationalization) Act, 1974 which also contained similar provisions for acquisition of such similar textile companies by the Central Government and the said Act was protected by the provisions of Article 31 B by being placed in 9th Schedule to the Constitution of India. However, the said Act was challenged before the Supreme Court and the Supreme Court upheld the constitutional validity of the said Act in M. Asghar v. UOI (1986) 4 SCC 283, holding that classification of liabilities was in consonance with the objectives of Article 39 (b) of Directive Principle of State Policy and hence was not ultra vires to the Constitution. He submitted that identical issues have been dealt by the Supreme Court in the aforesaid case and the issue is, therefore, no more res integra.
8. We have heard learned counsel for the parties in support of their arguments.
9. Let us now examine the Act, its preamble and its scheme to find out whether the legislation had laid down any policy or guidelines.
WP(C) 2430/1987 Page 7 of 14
The Preamble of the Act reads as under:-
"An Act to provide for the acquisition and transfer of certain textile undertakings of the Swadeshi Cotton Mills Company Limited, with a view to securing the proper management of such undertakings so as to subserve the interests of the general public by ensuring the continued manufacture, production and distribution of different varieties of cloth and yarn and thereby to give effect to the policy of the State towards securing the principles specified in clauses (b) and (c) of article 39 of the Constitution and for matters connected therewith or incidental thereto.
WHEREAS the Swadeshi Cotton Mills Company Limited has, through its six textile undertakings, been engaged in the manufacture and production of different varieties of cloth and yarn;
AND WHEREAS the management of the said textile undertakings was taken over by the Central Government under section 13AA of the Industries (Development and Regulation) Act, 1951;
AND WHEREAS large sums of money have been invested with a view to making the said textile undertakings viable;
AND WHEREAS further investment of very large sums of money is necessary for the purpose of securing the optimum utilization of the available facilities for the manufacture, production and distribution of cloth and yarn by the said textile undertakings of the company;
AND WHEREAS such investment is also necessary for securing the continued employment of the workmen employed in the said textile undertakings;
AND WHEREAS it is necessary in the public interest to acquire the said textile undertakings of the Swadeshi Cotton Mills Company Limited to ensure that the interests of the general public are served by the continuance by the said undertakings of the Company of the manufacture, production and distribution of different varieties of cloth and yarn which are vital to the needs of the country;
AND WHEREAAS such acquisition is for giving effect to the policy of the State towards securing the principles specified in clauses (a) and (b) of article 39 of the Constitution."WP(C) 2430/1987 Page 8 of 14
10. From the Preamble of the Act, it is clear that the acquisition and transfer of certain textile undertakings of the Swadeshi Cotton Mills Company Limited was made with a view to ensure that the interests of the general public are served by the continuance by the said undertakings of the company of the manufacture, production and distribution of different varieties of cloth and yarn which are vital to the needs of the country and thereby to give effect to the policy of the State towards securing the principles specified in clauses (b) and (c) of Article 39 of the Constitution and for matters connected therewith or incidental thereto. It is also mentioned in the Preamble that very large sums of money have been invested by the Government with a view to making the said textile undertakings viable. So, the Government had invested crores of rupees after acquiring the aforesaid undertakings in order to see that the persons who were employed in such undertakings do not suffer on account of closure of these undertakings as the same were mis- managed by the previous management. These undertakings were taken over by the Government with a very noble cause and to serve the interest of general public.
11. The shareholders of the aforesaid six textile undertakings which were taken over by the Union of India had filed various suits in various courts against the decision of which an SLP was filed in the Supreme Court. While finally disposing of the SLP in the case of M/s. Doypack Systems Pvt. Ltd. v. Union of India and Others (1988) 2 SCC 299), the Supreme Court has observed as under:- WP(C) 2430/1987 Page 9 of 14
"12.The preamble to the Act, however, reiterated that the Act provided for the acquisition and transfer of textile undertakings and reiterated only the historical facts that the management of the textile undertakings had been taken over by the Central Government under Section 18- AA of the IDR Act and further that large sums of money had been invested with a view to making the textile undertakings viable and it was necessary to make further investments and also to acquire the said undertakings in order to ensure that interests of general public are served by the continuance of the undertakings. The Act was passed to give effect to the principles specified in clauses (b) and (c) of Article 39 of the Constitution. In our opinion, this was indicative of the fact that shares were intended to be taken over.
68.Section 7 of the Act, in our opinion, neither controls Sections 3 and 4 of the Act nor creates any ambiguity. It was highlighted before us and in our opinion rightly that this sum of Rs. 24.32 crores paid by way of compensation comes out of the public exchequer. These paid-up shares in its equity capital can necessarily have a face value only of the amounts so paid, irrespective of whatever may be contended to be the value of the assets and irrespective of whether any asset or property in relation to the undertakings, was taken into account. After providing for compensation of Rs. 24.32 crores to be paid to the Commissioner for payments to discharge Part I liabilities, government has to undertake an additional 15 crores at least for discharging those liabilities. To leave a company, the net wealth of which is negative at the time of take-over of the management, with the shares held by it as investment in other company, in our opinion, is not only to defeat the principles of Article 39(b) and (c) of the Constitution but it will permit the company to reap the fruits of its management. That would be an absurd situation. It has to be borne in mind that the net wealth of the company at the time of takeover, was negative, hence Sections 3 and 4 can be meaningfully read if all the assets including the shares are considered to be taken over by the acquisition. That is the only irresistible conclusion that follows from the construction of the documents and the history of this Act. We have to bear in mind the Preamble of the Act which expressly recites that it was to ensure the principles enunciated in clauses
(b) and (c) of Article 39 of the Constitution. The Act must be so read that if further ensures such meaning and secures the ownership and control of the material resources to the community to subserve the common good to see that the operation of economic system does not result in injustice."
WP(C) 2430/1987 Page 10 of 14
12. Some of the shareholders who were not parties in the earlier Special Leave Petition [Doypack Systems Pvt. Ltd. (supra)] filed another Petition before the Supreme Court under Article 32 of the Constitution challenging the constitutional validity of the Act on various grounds (Anil Kumar Neotia v. Union of India (1988) 2 SCC 587). While dismissing the Petition, the Supreme Court has observed as under:-
"13.................The preamble to the Act, however, reiterated that the Act provided for the acquisition and transfer of textile undertakings and reiterated only the historical facts that the management of the textile undertakings had been taken over by the Central Government under Section 18-AA of the IDR Act and further that large sums of money had been invested with a view to making the textile undertakings viable and it was necessary to make further investments and also to acquire the said undertakings in order to ensure that interests of general public are served by the continuance of the undertakings. The Act was passed to give effect to the principles specified in clauses (b) and (c) of Article 39 of the Constitution. In our opinion, this was indicative of the fact that shares were intended to be taken over.
17.Furthermore, we are of the opinion that the law as declared by this Court in Doypack Systems Pvt. Ltd. (1987) 4 SCC 69 is binding on the petitioners and this question is no longer res integra in view of Article 141 of the Constitution. See the observations of this Court in M/s Shenoy and Co. v. CTO (1985) 3 SCR 659, where this Court observed that the judgment of this Court in Hansa Corporation Case (1981) 1 SCR 823 is binding on all concerned whether they were parties to the judgment or not. This Court further observed that to contend that the conclusion therein applied only to the parties before this Court was to destroy the efficacy and integrity of the judgment and to make the mandate of Article 41 illusory.
19.In view of the preamble to the Act which states and proclaims that the Act was passed to carry out the object of Article 39(b) and (c) of the Constitution and in view of the scheme of the Act as analysed before us and as also apparent from the aforesaid judgment, it is clearly manifest that the Act in question was passed for a public purpose and for the acquisition of shares there was a public purpose. The acquisition subserved the object of the Act. The compensation in the manner indicated WP(C) 2430/1987 Page 11 of 14 above and in the manner indicated in the aforesaid judgment for such acquisition has been provided for. No separate compensation need be provided in the circumstances of the case these shares. The factual basis for the legal challenge made in this writ petition was, therefore, incorrect in the facts of this case. It is apparently too late in the day to contend that there was no compensation for the shares or that the acquisition of the shares amounted to confiscation, or there was no public purpose in the Act. The petition, in our opinion, is wholly devoid of any merit.
20. For these reasons, this writ petition fails and is accordingly dismissed."
13. In the aforesaid case, the vires of the Act were challenged on various grounds. The Supreme Court dismissed the said Writ Petition upholding the Act.
14. The Act is a piece of social welfare legislation intending to achieve an avowed object envisaged under part IV of the Constitution. It is a welfare legislation intended as a measure to provide social security. In a welfare state, this is the constitutional object of the state. It is very clear that it has always been held to be lawful, whenever it was necessary in the public interest to legislate irrespective of the fact that it may affect some. The fundamental principle is that Article -14 of constitution of India forbids class legislation but permits reasonable classification for the purpose of legislation, which classification must satisfy the twin tests of classification being founded on an intelligible differentia which distinguishes persons or things that are grouped together from those that are left out of all the group and that differential must have a rational nexus to the object sought to be achieved by the statute in WP(C) 2430/1987 Page 12 of 14 question .Undoubtedly such a legislation would be in public interest and other interest shall be subservient to it, even if a few are affected here and there, that would not impinge upon the validity of the Act which otherwise serve the larger interest. A reference may be made to a legal maxim founded on public policy, salus populi est suprema lex i.e public welfare is the highest law. The Act was enacted in the public interest and a large sum of money had been invested by the Government with a view to making the textile undertakings viable. The Government made further investments in order to ensure that the interests of general public are served by the continuance of the undertaking and the Act was passed to give effect to the Principles specified in Clauses (b) and (c) of Article 39 of the Constitution of India. We do not find any illegality in the provisions of the Act by which the Petitioner has been classified under Category VI Part II of the Schedule to the Act. In our opinion, these provisions are neither discriminatory towards the Petitioner nor ultravires to the Constitution of India.
We are in respectful agreement with the findings arrived at by the Hon‟ble Supreme Court in the aforesaid citations upholding the constitutional validity of this Act. We hold that the Act has been made in the public interest and in order to subserve the interests of general public. We also hold that this Act has been in consonance with the Directive Principles of the State policy as specified in Clauses (b) and
(c) of Article 39 of the Constitution of India. A large sum of public money has been invested in order to see that the undertakings are properly managed and the interests of general public are served by continuance of the undertakings so that the manufacturing, WP(C) 2430/1987 Page 13 of 14 production and distribution of the yarn of various types and its availability to general public is not hindered and disrupted.
15. The petition is devoid of any merit and deserves to be dismissed.
16. Dismissed.
S.L. BHAYANA, J.
VIKRAMAJIT SEN, J.
January 09, 2009 NG WP(C) 2430/1987 Page 14 of 14