Full Judgment Text
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CASE NO.:
Appeal (civil) 2314 of 2000
PETITIONER:
National Textile Corporation (Guj.) Ltd.
RESPONDENT:
State Bank of India & Ors.
DATE OF JUDGMENT: 08/08/2006
BENCH:
S.B. Sinha & P.P. Naolekar
JUDGMENT:
J U D G M E N T
W I T H
CIVIL APPEAL NOS.2315 TO 2321 OF 2000
S.B. SINHA, J :
These appeals involving identical questions of law and fact were taken
up for hearing together and are being disposed of by this common judgment.
The factual matrix of the matter, however, would be noticed from
Civil Appeal No.2316 of 2000.
The management of the New Manekchowk Spinning and Weaving
Mills Company Limited was taken over in terms of Section 18(1) of the
Industries (Development & Regulation) Act, 1951. The Gujarat State
Textile Corporation Limited was appointed as its Authorized Controller.
The period of takeover was extended upto 31.03.1974.
The Parliament thereafter enacted the Sick Textile Undertakings
(Nationalization) Act, 1974, (for short, ’the Act) which came into force with
effect from 01.04.1974 in terms whereof the right, title and interest of the
said textile mills vested absolutely in the Central Government. The Central
Government, however, issued an appropriate notification whereby and
whereunder the said mills instead of continuing to vest in the Central
Government were directed to vest in the National Textile Corporation
(Gujarat).
Statutory provisions :
Before we advert to the rival contentions of the parties, we may notice
some of the relevant provisions of the Act.
"Appointed day" had been defined in Section 2(1) of the the Act to
mean the "1st day of April, 1974".
The term "owner" has been defined in Section 2(h) of the Act as
under :
"(h) "owner", when used in relation to a sick textile
undertaking, means any person or firm who or which is,
immediately before the appointed day, the immediate
proprietor or lessee or occupier of the sick textile
undertaking or any part thereof, and in the case of a
textile company which is being wound up or the
business whereof is being carried on by a liquidator or
receiver, includes such liquidator or receiver, and also
includes any agent or manager or such owner but does
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not include any person or body of persons authorized
under the Industries (Development and Regulation) Act,
1951, or the Sick Textile Undertakings (Taking Over of
Management) Act, 1972, to take over the management of
the whole or any part of the sick textile undertaking"
Before the Commissioner of Payments, the creditors became entitled
to file their respective claims for the purpose of disbursement thereof out of
the amount of compensation towards nationalization of the mills deposited
with it by the Central Government.
The claims under the Act are divided into two distinct categories (i)
post-takeover management period; and (ii) pre-takeover management period.
The post-takeover management period was 14.02.1969 to 31.03.1974.
The Second Schedule appended to the 1974 Act provided :
"Order of priorities for the discharge of liabilities in respect of a sick
textile undertaking
PART A
Post-Takeover Management Period
Category I\027
(a) Loans advanced by a bank.
(b) Loans advanced by an institution other than a bank.
(c) Any other loan.
(d) Any credit availed of for purpose of trade or manufacturing
operations.
Category II\027
(a) Revenue, taxes, cesses, rates or any other dues to the
Central Government or a State Government.
(b) Any other dues."
In terms of Section 3 of the Act, the right title and interest of the
owner in relation to every sick textile undertaking vested absolutely in the
Central Government. Section 5 provides that every liability, other than the
liability specified in sub-section (2) thereof in respect of any period prior to
the appointed day, shall be that of such owner and shall be enforceable
against him and not against the Central Government or the National Textile
Corporation. Sub-section (3) of Section 5 reads as under :
"5.(3) For the removal of doubts, it is hereby declared that \026
(a) save as otherwise expressly provided in this
section or in any other section of this Act, no
liability, other than the liability specified in sub-
section (2), in relation to a sick textile undertaking
in respect of any period prior to the appointed day,
shall be enforceable against the Central
Government or the National Textile Corporation;
(b) no award, decree or order of any court,
tribunal or other authority in relation to any sick
textile undertaking passed after the appointed day
in respect of any matter, claim or dispute, in
relation to any matter not referred to in sub-
section (2), which arose before that day, shall be
enforceable against the Central Government or the
National Textile Corporation.
(c) no liability of any sick textile undertaking or
any owner thereof for the contravention, before the
appointed day, of any provision of law for the time
being in force, shall be enforceable against the
Central Government or the National Textile
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Corporation."
Section 8 provides for deposit of the amount of compensation in cash
by the Central Government. Section 17 provides for appointment of
Commissioners of Payments, whereas priority and examination of claims
filed before it are contained in Section 21 and 22 of the Act, which read as
under :
"21. The claims arising out of the matters specified in
the Second Schedule shall have priorities in accordance
with the following principles, namely :-
(a) category I will have precedence over all
other categories and category II will have
precedence over category III and so on;
(b) the claims specified in each of the
categories, except category IV, 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;
(c) the liabilities specified in category IV shall
be discharged, subject to the priorities specified in
this section, in accordance with the terms of the
secured loans and the priority, inter se, of such
loans; and
(d) the question of payment of a 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."
"22. (1) On receipt of the claims under section 20, the
Commissioner shall arrange the claims in the order of
priority specified in the Second Schedule and examine the
same in accordance with the said order;
(2) If on examination of the claims, the Commissioner
is of the opinion that the amount paid to him under this
Act is not sufficient to meet the liabilities specified in
any lower category, he shall not be required to examine
the liabilities in respect of such lower category."
Section 27 which occurs in Chapter VII of the Act provides as under :
"27. (1) Where any liability of the owner of a sick textile
undertaking arising out of any item specified in category
I of the Second Schedule is not discharged fully by the
Commissioner out of the amount paid to him under this
Act, the Commissioner shall intimate in writing to the
Central Government the extent of the liability which
remains undischarged, and that liability shall be assumed
by the Central Government.
(2) The Central Government may, by order, direct the
National Textile Corporation to take over any liability
assumed by that Government under sub-section (1), and
on receipt of such direction, it shall be the duty of the
National Textile Corporation to discharge such liability."
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Proceedings :
The company took some loan from the State Bank of India. During
the period of takeover also, the State Bank of India continued to extend
various credit facilities to the management. The Respondent Bank in its
claim stated :
"3. The appellant has given various credit facilities
before and after the authorized controller took over the
management. The appellant had given the facility of
hypothecation account with the limit of
Rs.13,50,000.00p. the amount in that account
outstanding as on March 31, 1974 was Rs.1,34,148.39p.
and the amount outstanding as on March 31, 1974 was
Rs.7,22,343.02p. In the Mortgaged account the limit was
Rs.20,00,000/- and the amount outstanding as on March
31, 1974 was Rs.19,74,399.85p. and the amount
outstanding as on March 31, 1977 was Rs.24,86,190.93p.
In the Pledge account the limit was Rs.30,00,000.00p.
and the amount outstanding as on March 31, 1974 was
Rs.20,65,989.90p. and the one outstanding on March 31,
1977 was Rs.28,65,735.15p. In the deferred payment
guarantee account, the appellant had paid installments of
Rs.6,43,709.20p. and the installments to be paid by the
appellant were to the extent of Rs.6,35,218.42p. the
appellant paid over due interest of the amount of
Rs.16,800.49p. Thus, in this account the total amount
claimed was Rs.12,95,828.20p. The appellant had issued
cheques on or before March 31, 1974 but paid on or
before Sept. 21, 1974, bills cheques of the value of
Rs.6,16,291.58p. The appellant had debited
Rs.21,911.65p. in the account of the National Textile
Corporation as the bills or cheques of this value
purchased on or before March 31, 1974 but returned or
paid on or before Sept. 21, 1974. The appellant also
claimed bank charges, and other amounts relating to the
period upto March 31, 1974 but debited before
September 21, 1974. The appellant also claimed Bank
charges Rs.,17,39,648.00p. being the amount of
bills/cheques purchased by the appellant on or before
March 31, 1974 but realized on or after April 1, 1974.
Thus the appellant in all claimed Rs.99,97,944.32p.
under four head as per the statement of the account
annexed with the application of claim."
By an order dated 30.09.1978, the Commissioner of Payments held as
under :
"That out of total claims, an amount of
Rs.51,55,524.81p. could be admitted in Category I, an
amount of Rs.24,86,109.93ps. could be admitted in
Category IV and the rest of the amount of
Rs.23,55,939.58ps. could not be considered for the
purposes of categorization."
An appeal was preferred thereagainst before the City Civil Court. The
said appeal was dismissed by an order dated 18.08.1980, holding :
"As discussed in the earlier part of the judgment,
only those liabilities falling under the aforesaid two
periods are required to be discharged out of the
compensation amount fixed from the undertaking except
as mentioned in sub-section (1) of Section 27 of the Act.
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The appellant had made payments to the supplier after
1.4.1974 i.e. after the appointed day. The Act restricted
discharge of certain liabilities enumerated in the Second
Schedule only falling due upto 31.3.1974. The
appellant’s claim cannot be covered in any of the
categories in the Second Schedule\005..Since the liability
of the respondent No.1 does not exist on account of the
contract having ceased to have effect on 1.4.1974, the
appellant’s claim for the same reasons become non-
existent\005.It appears from the award of the Assistant
Commissioner of Payments that the adjustments with the
respondent No.2 for the bills purchased or the cheques
realized was made. That has been done as the bills
discounted or purchased on or before March 31, 1974,
remained with the erstwhile owners and such ownership
on rights vested in the nationalized textile corporation by
virtue of Section 4 of the Act\005."
A writ petition was thereafter filed before the High Court. By reason
of the impugned judgment, a learned Judge of the High Court while allowing
the said writ petition held as under :
"6. I have given anxious thought to the
submissions made on behalf of the parties. The main
question for determination by this Court is whether
outstanding dues in different accounts for the pre-take-
over as on 14.2.1969 were the liabilities of the
Authorized Controller, or that liabilities which were
thereafter can be considered under Section 5 of the Act
for the purpose of awarding the compensation amount.
For this purpose, we have to see the actual meaning of
loan and advances. Loans and advance loans have been
explained by the Apex Court in the case of Jiwanlal
Acharya vs. Rameshwar Agarwalla, reported in AIR
1967 SC 1118, wherein it has been held that the loan
means an advance, whether of money or in kind on
interest, made by a money-lender and shall include a
transaction on a bond bearing interest in respect of post
liability and in transaction, which in substance is a loan.
When a loan is renewed by the execution of a fresh
document of removal, there is no difficulty in holding
that the former loan was repaid by borrowing a fresh
loan on the document of renewal. So, the transaction
itself can be treated as a fresh loan. The word
"advance" appears to have been used there for
convenience of the language, particularly to indicate
that the loan must have been made after commencement
of the Act. It does not imply that there should have
been an actual advance, whether of money or any kind.
Thus, in view of the proposition of law laid down by
the Apex Court, the loans advanced by the petitioner
bank prior to 14.2.1969, guaranteed by the Authorized
Controller and by the State Government and by the
State Government and guarantee for the post-take-over
period would fall under the category no.1(a) of the
Second Schedule and it would not fall in category no.4
of part "B". The Bombay High Court has completely
answered the question regarding the liability of the
Authorised Controller for the amount due prior to
1.4.1974 and thereafter\005."
Submissions :
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Mr. L. Nageshwara Rao, the learned Senior Counsel appearing on
behalf of the appellant, would submit that the High Court committed a
serious error in holding :
(i) loan was advanced during post-takeover period during which the
management was with the corporation; (ii) the facility was given by the bank
to continue to avail the credit facilities to pay the amount of loan on renewal
thereof; (iii) the undertaking given by the Controller for continuing to
obtain the said facilities would not make the outstanding dues on account of
priority claim of the company; (iv) There exists a difference between a loan
and liability; whereas the principal amount would come within the purview
of priority claim, claim of interest would not.
Mr. R. Sundaravardan, the learned Senior Counsel appearing on
behalf of the State Bank of India, on the other hand, submitted that: (i) the
bank acted to its detriment at the instance of the Controller and relying on
the guarantee furnished by it as also by the State of Gujarat continued to
extend the facilities which would amount to a new loan. (ii) Such credit
facility had been given so that the mills may survive and, thus, the Appellant
cannot now be permitted to contend that the loan advanced by the Bank
would not be disbursed on a priority basis. (iii) In any event, as part of the
amount to be paid had been apportioned for past dues in terms of Section 60
of the Indian Contract Act, this Court should not interfere with the impugned
judgment.
Mr. T.L. Vishwanatha Iyer, the learned Senior Counsel appearing for
the Bank of Baroda, supplemented Mr. Sundaravardan contending that the
deferred payment guarantee should be treated as an advance given during
post management period and, thus, would come within the purview of
Category I of the Second Schedule of the Act. It was submitted that for all
intent and purport, the liability is akin to the concept of loan and in that view
of the matter any amount which was payable as on 31.3.1974 including the
amount of interest would come within the purview of the expression ’loan’.
Priority claims :
The basic fact of the matter is not in dispute. Although the
managements of the textile mills were taken over in terms of the provisions
of the 1951 Act, the Authorized Controller managed the affairs of the mills
for or on behalf of the owners. The liabilities incurred or profits made
during the said period were to be credited to the account of the owners. The
owners in terms of the provisions of the Act were not entitled to receive the
amount of compensation but also the interest provided for in the said Act as
also the amount of compensation payable for taking over of the management
of the mills under the 1956 Act.
The claim of every claimant was required to be determined by the
Commissioner of Payments strictly in terms of the provisions of the Act.
For the purpose of enabling it to disburse his claim from the amount
deposited with it by the Central Government, priorities were to be accorded
to the specified category of claim in terms of the Second Schedule of the
Act.
The Commissioner of Payments as a statutory authority was to act
within the four-corners of the Act.
In terms of the provisions of the Act, the liability of the owner has not
ceased to run. The entire claim of the bank, if not capable of being
disbursed from the amount deposited by the Central Government, the same
would abate. The claimants, therefore, are entitled to realize their remaining
claims from the owners.
The Authorized Controller and the State of Gujarat furnished
guarantees. Guarantees furnished by the State of Gujarat were de’hors the
provisions of the Act. In terms of the provisions of the Act, the State of
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Gujarat had no role to pay. It might have encouraged the Authorized
Controller to revive the functioning of the mills upon continuing to obtain
the facilities of the erstwhile owners from the banks and other industrial
institutions for revival of the mill as a part of social welfare measure. Under
the Act, however, it could not have intermeddled with the affairs of the
functioning of the mills by the Authorized Controller. Any action taken
pursuant to or in furtherance of any representation made by the State of
Gujarat would, thus, be of its own liability. Such liabilities can be enforced
by the claimants. For the self same reasons any guarantee furnished by the
Gujarat Financial Corporation would also be an act on its own behalf. It,
while carrying out the management of the mill, could have incurred loan on
behalf of the owner but if it had furnished any guarantee, the same would
constitute an independent act, although furnished for obtaining loan or
continue to obtain the facilities for running the mills. It could not act both as
a loaner and a guarantor. The liability of the owner and guarantor would
depend upon the terms of the documents executed in favour of the Bank
and/or the provisions of the Indian Contract Act. Similarly if a claim comes
within the purview of Section 27 of the Act, the Central Government would
continue to be liable therefor. A similar guarantee furnished by the Gujarat
State Financial Corporation on its own behalf subject to the terms of the
guarantee may become enforceable against it.
We are in these appeals, however, only concerned with the
interpretation of the relevant provisions of the Second Schedule of the Act.
Continuing the credit facilities given by the banks to the owner, in our
opinion, would not amount to a fresh agreement.
For the purpose of attracting the provisions of the Second Schedule,
the amount mentioned in Category I must be confined to loans advanced by
the banks or other financial institutions, or any other loan or any credit
availed of for the purpose of trade or manufacturing operations. A
distinction, therefore, exists between a loan given to the Controller and
availing of the credit facilities which were available to the owner of the
textile mills so as to enable it to carry on the manufacture operation thereof
after its take over. The textile undertakings were sick ones. The
managements of such mills were taken over for the purpose of revival
thereof. If in that process the Authorized Controller was required to raise
loan either from a bank or from a financial institution other than a bank or
from any other person or availed any other credit, indisputably, the same
would come within the purview of Category-I liability being a post-takeover
management period.
Such loan, however, it will bear repetition to state, would not be
renewal of pre-takeover loan. In Jiwanlal Achariya v. Rameshwar Lal
Agarwalla [AIR 1967 SC 1118], this Court was concerned with
interpretation of the expression ’loan’ contained in Section 2(f) of the Bihar
Money Lending (Regulation of Transactions) Act, 1939, which was in the
following terms :
"Loan" means "an advance, whether of money or
in kind, on interest made by a money-lender, and shall
include a transaction on a bond bearing interest executed
in respect of past liability and any transaction which in
substance is a loan, but shall not include\005\005"
This Court in the context of the said definition of ’loan’ opined that
when a loan is renewed by execution of a fresh document, there is no
difficulty in holding that the former loan was repaid by borrowing a fresh
loan on the document of renewal.
In that case, the appellant therein claimed that no money was in fact
advanced on February 4, 1954 and that the promissory note executed on that
date was to pay by renewal of a loan for Rs.4,000/- which had been taken as
far back as October 1946. The sum of Rs.10,000/- included the principal
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amount of Rs.4,000 and the remainder was towards interest.
In the aforementioned factual matrix, it was held that all that S.2(f)
requires is that there should be an instrument in writing by which the
obligor obliges himself to pay the past liability and the instrument should
bear interest
In this case, no such document admitting and acknowledging the past
loan and a fresh document was executed. Jiwanlal Achariya (supra),
therefore, was decided in the fact situation obtaining therein.
The High Court in its impugned judgment relied upon State Bank of
India v. Edward Textile Mills Ltd. & Ors. [AIR 1988 Bombay 313]. The
said decision was reversed by this Court in State Bank of Indore v.
Commissioner of Payments and Others [(2004) 11 SCC 516], holding :
"Thus, the heading of the Second Schedule provides
"priorities for the discharge of liabilities". The term
"liability" as stated above would include interest. It
would include a loan. It would also include credits
availed of. It would include revenue, taxes, cesses, rates
and other dues. However, the payment in priority is for a
loan. The distinction in language makes it very clear that
what was to be paid in priority was only the amount of
the loan i.e. the principal amount and not the interest
amount due thereon. Of course, payments towards
interest would remain liabilities. But for recovery of that
the remedy would be to proceed against the owner/surety.
This Court has in the case of Industrial Finance
Corpn. of India Ltd. v. Cannanore Spg. and Wvg. Mills
Ltd held that by virtue of the provisions of the Act the
liability of the principal debtor and that of the surety does
not come to an end. It is held that if the compensation to
be paid by virtue of Section 21 and the Second Schedule
does not satisfy the full claim then the creditor is not
barred from filing a civil suit for the balance. Further, in
the case of Punjab National Bank v. State of U.P. it has
been held that even though mode of recovery, against a
surety, may be affected the liability of the principal
debtor and the guarantor does not get affected by the
provision of this Act. Not only are these authorities
binding us but we are in complete agreement with what is
laid down therein.
It is thus clear that the interest amounts are not to be
paid in priority under the provisions of this Act. In this
view, strictly speaking, even interest up to 31-3-1974 was
not payable in priority\005"
Mr. Iyer placed strong reliance upon a decision of this Court in
Commissioner of Income-tax, Lucknow v. The Bazpur Co-operative Sugar
Factory Ltd. [AIR 1989 SC 1866]. In that case, this Court was dealing with
the provisions of Income Tax Act, 1961 vis-‘-vis the bye-laws framed by a
cooperative society. The question, which arose for consideration therein,
does not arise before us. It was held therein that the deposits made by the
members could not be regarded as loans advanced by the members to the
assessee. The moneys deposited represented contribution by the members
for converting the partly paid up shares into fully paid up shares and
thereafter for defraying the loan taken from the Industrial Finance
Corporation. Any balance remaining was to be refunded to the members.
Such a question does not arise in the instant case.
In Industrial Finance Corporation of India Ltd. v. Cannanore Spinning
and Weaving Mills Ltd. and Others [(2002) 5 SCC 54], a Division Bench of
this Court interpreting the provisions of the 1974 Act, held :
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"Turning attention to the effect of the Sick Textile
Undertakings (Nationalisation) Act, 1974, a bare perusal
of some of the provisions will indicate that there is no
discharge of the liability of principal debtor, leave alone
that of the surety. Sections 3, 4, 5 and 20 of the Act of
1974, if read together, would depict that the liability of
the owner of the undertaking/the debtor continues and it
is only the claim against the security which stands
discharged by reason of the statutory shift of the charge
on to the compensation. The liability of the principal
debtor does not in any way come to an end, neither that
of the guarantor\005"
While doing so, it relied upon a decision of this Court in Punjab
National Bank v. State of U.P. and Others [(2002) 5 SCC 80], wherein it had
been held that the loan of a guarantor does not come to end with the coming
into force of the 1974 Act, stating :
"We have gone through the provisions of the said Act
and in our opinion the decision of the courts below is not
correct. Section 5 of the said Act provides for the owner
to be liable for certain prior liabilities and Section 29
states that the said Act will have an overriding effect over
all other enactments. This Act only deals with the
liabilities of a company which is nationalised and there is
no provision therein which in any way affects the liability
of a guarantor who is bound by the deed of guarantee
executed by it. The High Court has referred to a decision
of this Court in Maharashtra SEB v. Official Liquidator,
High Court, Ernakulam where the liability of the
guarantor in a case where liability of the principal debtor
was discharged under the insolvency law or the company
law, was considered. It was held in this case that in view
of the unequivocal guarantee, such liability of the
guarantor continues and the creditor can realise the same
from the guarantor in view of the language of Section
128 of the Contract Act as there is no discharge under
Section 134 of that Act.
In our opinion, the principle of the aforesaid decision
of this Court is equally applicable in the present case.
The right of the appellant to recover money from
Respondents 1, 2 and 3 who stood guarantors arises out
of the terms of the deeds of guarantee which are not in
any way superseded or brought to a naught merely
because the appellant may not have been able to recover
money from the principal borrower. It may here be added
that even as a result of the Nationalisation Act the
liability of the principal borrower does not come to an
end. It is only the mode of recovery which is referred to
in the said Act."
In Rashtriya Mill Mazdoor Sangh v. National Textile Corporation
(South Maharashtra) Ltd. and Others [(1996) 1 SCC 313], this Court held
that gratuity payable by erstwhile owner cannot be recovered from the
Central Government or the Corporation, stating :
"The submission is that since the Act has been enacted to
protect the interests of the workmen employed in the
textile undertakings whose management has been taken
over, sub-section (7) of Section 3 should be construed in
a manner that the interests of the workmen are protected
and are not jeopardised and therefore, sub-section (7) of
Section 3 should be confined in its application to
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liabilities other than the liabilities relating to the dues of
the workmen in respect of the gratuity payable under the
Payment of Gratuity Act. We find it difficult to accept
this contention. It is one of the cardinal principles of the
statutory construction that where the language of an Act
is clear, the preamble cannot be invoked to curtail or
restrict the scope of the enactment and only where the
object or meaning of an enactment is not clear the
preamble may be resorted to explain it. [See: Burrakur
Coal Co. Ltd. v. Union of India SCR at p. 49 and
Motipur Zamindary Co. (P) Ltd. v. State of Bihar SCR at
p. 504.] Here we find that the language of sub-section
(7) of Section 3 is clear and unambiguous inasmuch as in
the said provision it has been declared that any liability
incurred by the textile company in relation to the textile
undertaking before the appointed day shall be
enforceable against the textile company concerned and
not against the Central Government or the Custodian.
The words "any liability" in sub-section (7) of the said
Section 3 are of wide amplitude to cover every liability
that was incurred by the textile company in relation to the
textile undertaking before the appointed day. Moreover,
the statement in the preamble on which reliance has been
placed by the learned counsel for the appellant, regarding
giving protection to the interests of the workmen
employed therein, also indicates that what was intended
was to reorganise and rehabilitate the textile undertakings
whose management was being taken over with a view to
prevent the closure of such undertakings and consequent
unemployment of workmen and thereby protect the
interests of the workmen who were employed in the
textile undertaking at the time of the taking over of the
management of the said undertaking. The said statement
in the preamble does not refer to persons who had ceased
to be in employment of the textile undertaking on the
date of such taking over of the management. We are,
therefore, unable to hold that sub-section (7) of Section 3,
must be so construed as to exclude its applicability in
respect of liability for payment of gratuity under the
Payment of Gratuity Act."
The liability of the owner continues even during the take-over period.
Indisputably, however, that would not mean that any act done by the
statutory authority or the State would be binding on the owner. The Gujarat
Financial Corporation or the State of Gujarat having furnished guarantee on
their own behalf, the same indisputably would continue to remain binding on
them. Such guarantees which were furnished by the Gujarat Financial
Corporation or the State of Gujarat would, thus, be enforceable against them.
We, however, may clarify that we, at present advised, have not gone into the
question of effect of abatement of claims against the owner.
1958 Act :
The question now arises for consideration is as to whether the
provisions of the Bombay Relief Undertaking (Special Provision) Act, 1958
would be applicable in the instant case. The 1958 Act was a temporary Act.
Clause (iv) Sub-section (1) of Section 4 of the said Act provided :
"4(iv) any right, privilege, obligation or liability accrued
or incurred before the undertaking was declared a relief
undertaking and any remedy for the enforcement thereof
shall be suspended and all proceedings relative thereto
pending before any court, tribunal, officer or authority
shall be stayed;"
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The provisions of the said Act, however, do not bar adjustment of any
account; but what was suspended was a declaration of relief undertaking and
suspension of any remedy for the enforcement thereof. What was stayed
was the proceedings pending before any court, tribunal, officer or authority,
but the same had nothing to do with the adjustment of accounts in terms of
the provisions of the Indian Contract Act, 1872. Section 59 of the Indian
Contract Act provides for application of payment where debt to be
discharged is indicated. Section 60 thereof provides for application of
payment where debt to be discharged is not indicated. Section 61, however,
provides that in absence of any party making appropriation, the payment
shall be applied in discharge of the debts in order of time, whether they are
or are not barred by the law in force for the time being as to the limitations
of suits.
If the High Court was not correct in holding that the Authorized
Controller had renewed the loan taken by the owner, the facilities continued
and in that view of the matter Sections 60 and 61 of the Indian Contract Act
would become applicable.
In The Union of India v. Kishorilal Gupta and Bros. [AIR 1960 SCR
493], upon which Mr. Sundaravardan placed strong reliance, wherein the
question which arose for consideration was as to where the parties to an
original contract could by mutual agreement enter into a new contract in
substitution of an old one, which does not contain an arbitration clause,
wherein the dispute resolution mechanism occurring in an earlier contract
could be taken recourse to.
Subba Rao, J., speaking for the majority, in the fact situation
obtaining therein, stated the principle thus :
"The following principles relevant to the present case
emerge from the aforesaid discussion: (1) An arbitration
clause is a collateral term of a contract as distinguished
from its substantive terms; but nonetheless it is an
integral part of it; (2) however comprehensive the terms
of an arbitration clause may be, the existence of the
contract is a necessary condition for its operation; it
perishes with the contract; (3) the contract may be non
est in the sense that it never came legally into existence
or it was void ab initio; (4) though the contract was
validly executed, the parties may put an end to it as if it
had never existed and substitute a new contract for it
solely governing their rights and liabilities thereunder;
(5) in the former case, if the original contract has no legal
existence, the arbitration clause also cannot operate, for
along with the original contract, it is also void; in the
latter case, as the original contract is extinguished by the
substituted one, the arbitration clause of the original
contract perishes with it; and (6) between the two falls
many categories of disputes in connection with a
contract, such as the question of repudiation, frustration,
breach etc. In those cases it is the performance of the
contract that has come to an end, but the contract is still
in existence for certain purposes in respect of disputes
arising under it or in connection with it. As the contract
subsists for certain purposes, the arbitration clause
operates in respect of these purposes."
The said decision would apply in the instant case.
In Lalit Mohan Pandey v. Pooran Singh and Others [(2004) 6 SCC
626], whereupon also the learned counsel placed reliance, this Court
emphasized the need to construe the statute having in mind the object
underlying the same by stating the principle of purposive construction.
Thus, the remedies available to the Bank under the Indian Contract Act
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would continue to remain available to the respondent-Bank even if the 1958
Act applies.
For the reasons aforementioned, we are of the opinion that the High
Court was not correct in taking the views, it did. The judgments and orders
passed by the High Court are, therefore, set aside with liberty to the parties
to file appropriate suits or proceedings before appropriate forum(s) for
recovery of the remaining amount, provided any cause of action therefor
survives.
Subject to the observations made herein, the appeals are allowed. No
costs.