SCA/7573/1999 1/35 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 7573 of 1999 With SPECIAL CIVIL APPLICATION No. 9712 of 1999 With SPECIAL CIVIL APPLICATION No. 8794 of 1999 With SPECIAL CIVIL APPLICATION No. 8498 of 1999 With SPECIAL CIVIL APPLICATION No. 8421 of 1999 With SPECIAL CIVIL APPLICATION No. 8667 of 1999 With SPECIAL CIVIL APPLICATION No. 8666 of 1999 With SPECIAL CIVIL APPLICATION No. 10966 of 2000 With SPECIAL CIVIL APPLICATION No. 10349 of 2000 With SPECIAL CIVIL APPLICATION No. 9878 of 2000 With SPECIAL CIVIL APPLICATION No. 8066 of 2000 With SPECIAL CIVIL APPLICATION No. 9222 of 2000 With SPECIAL CIVIL APPLICATION No. 9150 of 2000 With SPECIAL CIVIL APPLICATION No. 9874 of 2000 With SPECIAL CIVIL APPLICATION No. 7378 of 2000 With SPECIAL CIVIL APPLICATION No. 13430 of 2003 With SPECIAL CIVIL APPLICATION No. 9971 of 2003 With SPECIAL CIVIL APPLICATION No. 9345 of 2004 With SPECIAL CIVIL APPLICATION No. 11314 of 2000 With SPECIAL CIVIL APPLICATION No. 8017 of 1999 With SPECIAL CIVIL APPLICATION No. 12470 of 2004 For Approval and Signature: HONOURABLE MR.JUSTICE DN PATEL ========================================= = 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? SCA/7573/1999 2/35 JUDGMENT 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================= = MARKETYARD COMMERCIAL CO-OP BANK LTD - Petitioner(s) Versus STATE OF GUJARAT & 3 - Respondent(s) ========================================= = SPECIAL CIVIL APPLICATION NOs. 7573/1999, 9712/1999, 8794/1999, 8498/1999, 8421/1999, 8667/1999, 8666/1999, 10966/2000, 10349/2000, 9878/2000, 8066/2000. Appearance : MR PRAKASH K JANI for Petitioner(s) : 1, MR S.N.SHELAT, ADVOCATE GENERAL, MS SHRUTI TRIVEDI, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 9222/2000, 9150/2000, 9874/2000. Appearance : MR PRAKASH K JANI for Petitioner(s) : 1, MR S.N.SHELAT, ADVOCATE GENERAL, MR HD DAVE, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 7378/2000 Appearance : MR Shrish Joshi for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 13430/2003 Appearance : MR HV Chhatrapati for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, ASSISTANT GOVERNMENT PLEADER for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 9971/2003 Appearance : MR PS Gogia for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government SCA/7573/1999 3/35 JUDGMENT Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4. ===================================================================== SPECIAL CIVIL APPLICATION NOs. 9345/2004 Appearance : MR Manav A Mehta for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 11314/2000 Appearance : MR Tushar Mehta for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 8017/1999 Appearance : MR HL Patel for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, ===================================================================== SPECIAL CIVIL APPLICATION NOs. 12470/2004 Appearance : MR MK Vakharia for Petitioner(s) : 1, MR S.N.Shelat, Advocate General, MR HD Dave, Assistant Government Pleader for Respondent(s) : 1 - 3. RULE SERVED for Respondent(s) : 2, MR PV HATHI for Respondent(s) : 4, CORAM : HONOURABLE MR.JUSTICE DN PATEL Date : 05/10/2005 ORAL JUDGMENT 1. In all the aforesaid petitions, a common question of law has been raised to the effect whether the Government of Gujarat is liable for the failure of the Government SCA/7573/1999 4/35 JUDGMENT Company viz. Gujarat Small Industries Corporation Limited – Respondent No.4, in making payment of non – convertible Bonds issued by the Government Compnay. 2. The learned Counsel appearing for both the sides have considered Special Civil Application No. 7573/1999 as the lead matter. As per Section 71 of the Gujarat Co- operative Societies Act, 1961 (hereinafter referred as “Act, 1961” for short), the petitioner-Cooperative Society may invest or deposit its fund in Central Bank or the State Bank of India or in the postal Savings Bank etc. which are referred to in Section 71 of the Act, 1961. There is also a provision of sub-section 1(g) of the Section 71 of the Act, 1961 for getting approval of the Registrar, in case of deposit in any other company, other than which are referred in Section 71. In pursuance of this provision, the petitioner-society applied to Respondent Nos. 1 and 2-State of Gujarat for investing of its funds in the Gujarat Small Industries Corporation Limited (which is a Government Company). 3. The permission was also granted by the State of Gujarat vide its order dated 18th November, 1997 under Section 71(1)(g) of the Act, 1961. In pursuance of this permission, the petitioner-society invested the amount in SCA/7573/1999 5/35 JUDGMENT Gujarat Small Industries Corporation Limited which is a Government Company. Unsecured Non-Convertible Bonds in the nature of promissory notes were issued to the petitioner-Society (Annexure – C to the memo of the petition). Because of the financial difficulties, the Gujarat Small Industries Corporation Limited i.e, Respondent No.4 was not able to make payment of non- convertible debentures. The said Bonds were issued for 17 months and 29 days from the date of allotment i.e, from 30th December, 1997, but the said Corporation was unable to redeem the said Non-Convertible Bonds. As Respondent No.4 is a Government of Gujarat Company, the money ought to be returned by the State of Gujarat to the petitioner. It is also submitted by the learned Counsel for the petitioner that Respondent No.4 is a Public Sector Undertaking Company which is owned, run and managed by the Government of Gujarat and because of the permission given by the Government under Section 71(1)(g) of the Act, 1961, the amount was invested by the petitioner in Gujarat Small Industries Corporation Limited. It is also submitted by the learned Counsel for the petitioner that the salaries of the employees of the Respondent No.4 - Corporation has also been paid by the Government corpus. The Government has released sizeable amount for the payment of salaries to the employees. It SCA/7573/1999 6/35 JUDGMENT is the liability of the Government to develop the industries under the Industries (Development and Regulation) Act, 1951 and therefore, Respondent No.4 Corporation was performing the functions of the Government and it being an instrumentality of the State of Gujarat, for the non-fulfillment of the liabilities of Respondent No.4 Corporation Limited, the Government of Gujarat is responsible. The learned Counsel appearing for the petitioner has relied upon the case decided by Hon'ble Supreme Court in Kapila Hingorani v. State of Bihar reported in (2003) 6 SCC 1. The learned Counsel for the petitioner has also relied upon the following judgments: (i) AIR 1975 SC 1331 : Paras 80,81,82,83 upto 107 (ii) AIR 1979 SC 1628 : Paras 11 to 21 and 33. (iii) AIR 1980 SC 840 : Para 21 and 22 (iv) AIR 1981 SC 212 : Para 22, 23, 23-A, 23-B, 23-C, 23-D, 27,28,30,32,33,36,29,54,55 and 77. (v) AIR 1988 SC 1737 : Paras 50, 62, 63, 64, 65, 66,67, 68 (vi) AIR 1996 SC 2005 : Paras 28, 31, 32, 33, 34, 35. (vii) 2003(6)SCC 1 : Paras 27, 28, 30 to 39, 48, 49, 53, 54, 55, 61, 63, 64, 67, 68, 70, 71, 73. (viii) DHN Food Distributors Ltd and others V. London Borough of Tower Hamlets reported in All England Law Reports [1976] 3 ALL ER 462 SCA/7573/1999 7/35 JUDGMENT 4. I have heard learned Advocate General for the State of Gujarat who has mainly submitted that the petitions are not maintainable in law. The present petitions are nothing but a suit for recovery of money based upon Non- Convertible Bonds in the nature of Promissory Notes issued by Respondent No.4. It is also submitted by the learned Advocate – General that there is no privity of contract between the petitioner-Bank and the State Government. It is further submitted that there is no enforceable right vested in the petitioner and there is no fundamental right, no legal right and no contractual right vested in the petitioner to get the recovery of the money from the State Government. The State is not a guarantor of Respondent No.4 Corporation Limited. In fact Annexure – C to the memo of the petition reveals that the Non-Convertible Bonds which are in the nature of promissory notes issued by Respondent No.4 to the petitioners are nothing but unsecured, Non-Convertible Bonds and, therefore, the State of Gujarat is not responsible for non-payment of the amount to the petitioner by Respondent No.4. The learned Advocate- General appearing for the State has relied upon the following judgments delivered by the Hon'ble Supreme Court and other High Court: (i) AIR 1962 SC 1320 (ii) AIR 1965 SC 1740 SCA/7573/1999 8/35 JUDGMENT (iii) (2004) 9 SCC 786 (iv) AIR 1999 SC 1734 (v) AIR 1999 SC 2573 (vi) AIR 1999 SC 2552 (vii) AIR 1997 SC 2275 (viii) AIR 1976 Kerala 37 (ix) JT 2003 (5) SC 1 (x) JT 2003 (4) SC 328 (xi) JT 2003 (6) SC 68 5. It is vehemently submitted by the learned Advocate General on behalf of the State that merely recommending the institution in which the petitioner could invest the amount, fetches no liability of the Government. Thus, recommendations cannot make the State liable. As the liability is arising out of the contract between the petitioner and Respondent No. 4, the State Government is not a party thereto neither there is any privity contract between the petitioner and State Government. Even, the memorandum of Association of Respondent No.4 Corporation- Limited (Annexure – I to the further affidavit filed by the petition) reveals that the liability of the company is limited. It is further submitted by the learned Advocate General that some of the amount was released from the State renewal fund for the payment of voluntary retirement scheme to the employees of Respondent No.4 Corporation Limited vide order dated 30th November, 1999 (Annexure – III to the further affidavit filed by the petitioner) is to be treated as unsecured loans to SCA/7573/1999 9/35 JUDGMENT Respondent No.4 Corporation as per condition No.2 attached with it. The said amount was released because fundamental right vested in the employees under Article 21 of the Constitution was violated. No such right is vested in the petitioner because present petitions is for recovery of the money which was invested by the petitioner in Respondent No.4 Corporation and therefore, it is further submitted by the Learned Advocate General that petitions may not be entertained by this Court in exercise of extra ordinary jurisdiction conferred upon this Court under Article 226 of the Constitution of India. 6. I have also heard learned Counsel Mr. Hathi appearing on behalf of Respondent No.4 Corporation- Limited, who submitted that the present petitions is not tenable in law. The money suit ought to be filed before the lowest available Court. Several suits are pending. There are 28 cases e.g. Civil Suit No. 1699/2001 and similarly Civil Suit No. 1089/2001 in the Trial Court. Thus, for recovery of money Civil Suit ought to be filed by the petitioner. Mr. Hathi has further submitted that because of financial constraints, Respondent No.4 is not in a position to redeem unsecured, non-convertible Bonds in the nature of Promissory Notes. There is no privity of SCA/7573/1999 10/35 JUDGMENT contract between the petitioner and Respondent No. 1 and 2 neither Respondent Nos.1 and 2 are the guarantors of Respondent No.4, therefore, petitions may not be entertained by this Court. In fact, there is no prayer against Respondent No.4 Corporation-Limited. 7. Having heard learned Counsels for both the sides and looking to the facts and circumstances of the case, the documents on record, and the judicial pronouncement which are referred to hereinafter, I see no reason to entertain the present petitions especially for the following facts and reasons: (i) The petitioner, a Co-operative Society has purchased Unsecured, Non-convertible Bonds in the nature of Promissory Notes and has invested the amount in the Gujarat Small Industries Corporation Limited. Section 71 of the Act, 1961 reads as under: “71. Investments of funds: - a)in a Central Bank, or the State Co- operative Bank, b)in the State Bank of India, c)in the Postal Savings Bank, d)In any of the securities specified in Section 20 of the Indian Trusts Act, 1882 (II of 1882) e)in shares, or security bonds, or debentures, issued by any other society with limited liability; or f)in any co-operative bank or in any SCA/7573/1999 11/35 JUDGMENT banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose, g)in any other mode permitted by the rules, or by general or specified order of the State Government. 2. Notwithstanding anything contained in sub-section(1), the Registrar may, with the approval of the Stat Co-operative Council, order a society or a class of societies to invest any funds in a particular manner, or may impose conditions regarding the mode of investment of such funds. As per Section 71 (1)(g) of the Act, 1961, it appears from the facts of the case, the State of Gujarat has given permission to invest amount with Respondent No.4 Corporation- Limited vide its order dated 18th November, 1997. This permission granted by the Government permits the petitioner co-operative society to invest the amount, not only in the enlisted institutions which are referred to in Section 71 but also additionally in the Corporation-Limited which is permitted by the State of Gujarat under Section 71(1) (g) of the Act, 1961. Thus, the permission granted by the Government never compelled petitioner-society to invest the amount, only in Gujarat Small Industries Corporation Limited. The discretion was always vested in the SCA/7573/1999 12/35 JUDGMENT petitioner-society to chose the institution. The discretion to choose the institution given under Section 71 of the Act, 1961, was never taken away by the State of Gujarat on the contrary, scope to choose the institution is widen, by such permission. Wisdom ought to be utilised properly by those who are managing the affairs of the petitioner-society before investment. The State of Gujarat has not compelled the petitioner to invest surplus amount in the Respondent No.4 Corporation only. What is granted by the government was a permission to chose one more institution for the their investment, but there was no compulsion by the State of Gujarat for the investment of the surplus fund in Respondent No. 4 Corporation. (ii) The petitions preferred by the petitioners is nothing but a money suit based upon unsecured, non-convertible bonds in the nature of promissory notes. (iii)There is no privity of contract between the petitioners in all the aforesaid petitions and the State of Gujarat. The State of Gujarat is SCA/7573/1999 13/35 JUDGMENT not a guarantor of Respondent No.4. Corporation- Limited. (iv) There is no legal right or a contractual right or a fundamental right vested in the petitioner to get money recovered from Respondent Nos.1 and 2- the State of Gujarat. In fact, there is no enforceable right vested in the petitioners for the recovery of the money from State of Gujarat. Right is a interest recognized and protected by rule of law. No such interest vested in the petitioners has been recognized and protected by rule of law which compel the State of Gujarat to make payment of dues of Respondent No. 4 Corporation. The petitioners have purchased “unsecured bonds”. The petitioners' wisdom has failed because of either financial condition of Respondent No.4 Corporation or because of lack of technical knowledge on the part of the petitioners. There was no compulsion by the State of Gujarat to invest the surplus amount with Respondent No.4 only. Out of several institutions which are referred to in Section 71 of the Act, 1961, the petitioner has to chose one or more. Thus, petitioner is always taking SCA/7573/1999 14/35 JUDGMENT risk whenever investment is not properly made. (v) There is a vast difference between the Corporation and the Government itself. The concept of the Government-Company is not unknown within the Companies Act, 1956. Government can float Government-Company under the Companies Act, 1956. The liability of the Government- Company and the liability of the Government are not synonymous to each other. Respondent No.4 is a Company Limited which can sue and can be sued also. Respondent No.4 is a separate legal entity. There are separate provisions under the Companies Act, 1956 for the Government-Company, right from Section 617 onwards of the Act, 1956 but nowhere liability of the Government Company has been held as liability of the Government. Respondent No.4 was doing a business which was a commercial one. The functions of Respondent No.4 was never sovereign one and therefore, any liability arising out of failure of commercial transaction between the petitioners and Respondent No.4 Corporation-Limited , the State Government cannot be held liable for the same. Looking to the articles of the Association and SCA/7573/1999 15/35 JUDGMENT memorandum of association of Respondent No.4 Company (Annexure – II of the further affidavit- in-reply of the petitioner), the main object and other objectives of Respondent No.4 Corporation- Limited were ordinary and commercial business activities and therefore, Respondent No.4 if is unable to redeem the unsecured, non-convertible bonds withtin the time prescribed therein, then the State Government is not responsible for the payment towards such unsecured, non-convertible bonds. (vi) It is also vehemently submitted by the learned Counsel for the petitioner and relying upon several decisions that Respondent No.4 Corporation-Limited is an instrumentality or agency of the State Government and therefore, for the Act of the agent, the principal is responsible. The learned Counsel for the petitioner has replied upon several decisions but they are not helpful to the petitioners for the reasons that all these judgments are pertaining to the discussion as to the meaning of words “other Authorities” under Article 12 of the Constitution of India. The words SCA/7573/1999 16/35 JUDGMENT “instrumentality” and “agency”, of the Government, “deep and pervasive control” of the government and such other tests have been referred to in those judgments cited by the learned Counsel appearing for the petitioners while giving meaning to words “the State” as per Article 12 of the Constitution of India. There is not a single judgment cited by the learned Counsel appearing for the petitioner, which points out that for the liability of the Government Company, the Government will be responsible. Thus, judgments cited by the learned Counsel for the petitioners are not helpful to the petitioners. In the aforesaid proposition, the only exception curved out by the Hon'ble Supreme Court is the case of Kapila Hingorani v. State of Bihar reported in (2003) 6 SCC 1. The facts of that case are not comparable with the facts of the present case. In the case decided by Hon'ble Supreme there was violation of Article 21 of the Constitution of India. The salaries were not paid for considerably longer period and therefore, in that reference and contexts, the Hon'ble Supreme Court has passed directions against the SCA/7573/1999 17/35 JUDGMENT Government of Bihar paragraph 74 reads as under: “74. We, however, hasten to add that we do not intend to lay down a law, as at present advised, that the State is directly or vicariously liable to pay salaries / remunerations of the employees of the public sector undertaking or the government companies in all situations. We, as explained hereinbefore, only say that the State cannot escape its liability when a human rights problem of such magnitude involving the starvation deaths and / or suicide by the employees has taken place by reason of non-payment of salary to the employees of public sector undertakings for such a long time. We are not issuing any direction as against the State of Jharkhand as no step had admittedly been taken by the Central Government in terms of Section 65 of the State Reorganisation Act and furthermore as only four public sector undertaking have been transferred to the State of Jharkhand in respect whereof the petitioner does not make any grievance. “ (emphasis supplied) This aforesaid judgment is not helpful to the petitioner. Looking to the facts of the present case, it is simple failure of the commercial transaction which has resulted into the disability of Respondent No.4 and redeemtion of unsecured, non-convertible debentures and therefore, the State Government cannot be held responsible. The State Government is not a guarantor of Respondent No.4 and therefore, the State is not responsible under the Gujarat State SCA/7573/1999 18/35 JUDGMENT Guarantors Act, 1963 for the defaults made by Respondent No.4 Corporation-Limited. (vii)It has been held by Hon'ble Supreme in the case of M/s. Burmah Construction Company, Appellants v. The State of Orissa reported in AIR 62 SC 1320 that High Courts normally do not entertain the petitions to interfere civil liability arising out of breach of contract or tort. Paragraph No.6 of the said judgment reads as under : “6. It is not necessary to consider in this case whether S.14 prescribes the only remedy for refund of tax unlawfully collected by the State. The appellants have not filed any civil suit for a decree for refund of tax unlawfully collected from them. This appeal arises out of a proceedings filed in the High Court substantially to compel the Collector to carry out his statutory obligations under S. 14 of the Act. The High Court normally does not entertain a petition under Art. 226 of the Constitution to enforce a civil liability arising out of a breach of contract or a tort to pay an amount of money due to the claimants and leaves it to the aggrieved party to agitate the question in a civil suit filed for that purpose. But an order for payment of money may sometimes be made in a petition under Art. 226 of the Constitution against the State or against an officer of the State to enforce a statutory obligation. The petition, in the present case is for enforcement of the liability of the Collector imposed by statute to refund a tax illegally collected and it was maintainable: but it can only be allowed SCA/7573/1999 19/35 JUDGMENT subject to the restrictions which have been imposed by the Legislature. It is no open to the claimant to rely upon the statutory right and to ignore the restrictions subject to which the right is made enforceable.” (Emphasis supplied) (viii)It has been held by Hon'ble Supreme Court of India in the case of Suganmal, Appellant v. State of Madhya Pradesh and others, Respondents reported in AIR 1965 SC 1740 that though High Courts have power to pass any appropriate order in exercise of powers under Article 226 of the Constitution, but the petitions which is solely praying for refund of money is not maintainable. Paragraph No. 6 of the judgment reads as under: “6. On the first point, we are of opinion that though the High Courts have power to pass any appropriate order in the exercise of the powers conferred under Art. 226 of the Constitution, such a petition solely praying for the