IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 10206 of 1995 with SPECIAL CIVIL APPLICATION NO. 6373 of 1995 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- KAIRA DISTRICT CO OP MILK PRODUCERS' UNION LTD Versus STATE OF GUJARAT -------------------------------------------------------------- Appearance: Special Civil Appln No. 10206 of 95 Mr. K. G. Vakharia, Senior Counsel with Mr. Sirish Joshi, Advocate for the petitioner. Mr. S.N. Shelat, Addl. Advocate General with Mr. D.N. Patel, Assistant Government Pleader for respondents Nos. 1, 2, 3 and 7 Mr. V.H. Patel, Advocate for respondent Nos. 4 to 6 Mr. S.B. Vakil, Advocate for the respondent No.8 Mr. M.D.Pandya, Senior Counsel for the respondent No.9 Special Civil Application No. 6373 of 95 Mr. B.S. Patel, Advocate for the petitioner. Mr. S.N. Shelat, Additional Advocate General with Miss Harsha Devani, Asstt. Government Pleader for respondent Nos. 1, 2 and 3. Mr. B.D. Karia, Advocate for respondent Nos. 4, 5 and 6 Mr. S.B. Vakil, Advocate for respondent No.7 Mr. M.D.Pandya, Senior Counsel for respondent No.8 -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI Date of decision: 29/02/96 ORAL JUDGEMENT These two petitions raise common questions and at the instance of all the learned Counsel they have been heard and decided together. 2. The petitioners of these two petitions are Co-operative Societies, who have voiced a common grievance that the respondent Government has exceeded its authority in making nominations of three representatives on each of the Management Committees (i.e. the Boards of Directors) of these Societies under the provisions of Section 80(1) of the Gujarat Co-operative Societies Act, 1961 (hereinafter referred to as "the Act"). The matters have been argued on the basis of the record of Special Civil Application No.10206 of 1995 which contains the complete record and the Counsel for the parties in the other petition have referred to and relied upon this petition and have requested that the affidavits filed and the papers produced in Special Civil Application No. 10206 of 1995 should be read in the other petition also. The Counsel appearing in Special Civil Application No. 10206 of 1995 for various parties have led the arguments which have been adopted by the Counsel appearing in the other petition. 3. The controversy centers around the question as to whether the State Government continues to remain a surety on the basis of the guarantee bond which it had executed on 9th April, 1984 in respect of loans which were provided for by the creditor Indian Dairy Corporation (for short "IDC") whose successor is National Dairy Development Board (for short "NDDB") in favour of member Societies of Gujarat Co-operative Milk Marketing Federation Limited, Anand (hereinafter referred to as "GCMMFL"), which are compendiously described as Cluster-I. If the State Government is held to be continuing as a surety, then the action of the State Government based on the provisions of Section 80(1) of the said Act, of appointing three representatives on each of the Committees of these two Societies would stand justified and if it is held that the State Government is no more a guarantor for repayment of loan as envisaged under Section 80(1) of the Act, then it's action of appointing nominees on the Management Committees of these Societies under that provision would be bad. 4. Both the petitioner Societies are admittedly the members of the Gujarat Co-operative Milk Marketing Federation Limited, which is impleaded as respondent No.9 in Special Civil Application No. 10206 of 1995. The facts on record disclose that after negotiations, the Government passed Resolutions sanctioning to give a guarantee bond in favour of the Indian Dairy Corporation, the predecessor of NDDB. The initial resolution was passed by the State Government on 31.3.1982, but all the terms and conditions contained therein came to be substituted by the resolution dated 5.1.1984. These two resolutions disclose that the Government had decided to implement the Operation Food II Programme in the State under their earlier resolution dated 11.7.1978 and a question regarding giving of Government guarantee to the Indian Dairy Corporation for the repayment of the loan amount that may be received from it by the GCMMFL from time to time for Clusters I and II had arisen and in that context the Government sanctioned the guarantee to be executed in favour of the Indian Dairy Corporation for the repayment of such loans. It was stipulated that the GCMMFL would take necessary steps to enter into tripartite agreements with the recipients of the loans in order to enable them to pay interest on the loan and to repay the principal. The amount of loan was secured by a pari passu charge alongwith the IDC on the unencumbered assets of the GCMMFL and Gujarat Dairy Development Corporation ("GDDC" for short) or their successors and District Unions under Clusters I and II. Under Clause (viii) of the Resolution of 1984, it was provided that in case of default by the GCMMFL and/or GDDC or it's successor or recipient Unions in respect of the repayment of the loan, or payment of interest, such amount as may have been paid by the Government to the lending institution under the guarantee will be treated as the sum due from the GCMMFL and/or GDDC or it's successors or it's recipient Unions to the Government. Under Clause (xi) which came to be amended by the corrigendum issued by the Government on 18.3.1987, the Government had a right to nominate three Government nominees under Section 80(1) of the said Act on the Board of Directors of the GCMMFL as well as on the Board of Directors of the concerned District Co-operative Milk Producers' Union Limited, which were receiving financial assistance through the GCMMFL under Operation Flood II Programme. It appears that by a stroke of pen, under resolution dated 14th April, 1995, the Government had cancelled nominations of persons under Section 80(1) and under Section 80(2) of the Act, as shown in the accompanying statement. Therefore, as per the said clause (xi) which is based on the provisions of Section 80(1) of the said Act, the Government claims a right to nominate three persons on the petitioners who are member Unions of the GCMMFL and who had received loans under the Operation Flood II Programme. Pursuant to the Government resolutions, a guarantee bond came to be executed by the Government of Gujarat in favour of the IDC on 9th April, 1984 in which there is a reference to the fact that the IDC had agreed to give financial assistance for the implementation of the Operation Flood II Project in the State of Gujarat and that the GCMMFL was to implement directly and through, it's member Co-operative institutions the Operation Flood II Project in the State of Gujarat. It is also recorded that the State Government had authorised the GCMMFL to receive financial assistance from the Corporation out of which 29,47,55,300/were to be treated as loan as per the loan agreement dated August 11, 1982. The GCMMFL was authorised to transfer a part of the loan to its member Co-operative institutions after executing a supplementary loan agreement. The State Government had agreed as a surety to give guarantee of the amount of refund payable by the borrower to the Corporation as per the agreements between them. The surety guaranteed the compliance of the terms and conditions contained in the loan agreement between the Corporation and the borrower and due repayment of the principal of the loan and payment of interest thereon or any instalment or instalments thereof granted by the Corporation, as provided under clause (3) of the guarantee bond. It was stipulated that the surety consented to the Corporation making any variance that it may think fit in the terms and conditions and agreed that such variance would not affect its liability under the guarantee provided. However, such variance was to be made with the express or implied consent of the borrower. It was also stipulated in clause (viii) that the guarantee given by the surety was one single and indivisible for the loan that may be disbursed by the Corporation upto a maximum of Rs. 29,47,55,300/-. 5. It appears that the GCMMFL resolved in the year 1992 to request the NDDB (successor to IDC) to accept the guarantee of the GCMMFL in respect of the financial assistance which was given to the Federation and 12 member Union of the Federations and to vacate the Government guarantee already provided to the IDC for the loan component of Operation Food II assistance to the extent that loans were received by these 12 member Unions which constituted Cluster-I. This fact is reflected from letter dated 22.7.1992 addressed to the NDDB by the GCMMFL. In context of this request, the NDDB responded by its letter dated 16th September, 1992 conveying its decision to accept GCMMFL's guarantee to repay the loan component of Cluster I and to vacate the guarantee furnished by the Government in respect of the said loan component of Cluster I under Operation Flood II Programme. Thereafter, on 15.3.1994 the NDDB wrote a letter to the State Government stating that they had made alternate arrangement for securing the loan component of the financial assistance under Operation Flood II and III given/to be given to the GCMMFL and it's 12 member Unions and that it would therefore, not be necessary for the Government to stand the guarantee and the NDDB had decided to reduce the Government guarantee to the extent of the financial assistance made available to the GCMMFL projects under Operation Flood II. It was also communicated that the NDDB had decided to retain the guarantee only to the extent of Rs. 1579.69 lacs being the total loan component of the Operation Flood II and II for the projects under the purview of of GDDC (i.e. Cluster II), and, accordingly the Government was requested to agree and confirm the variations suggested in that letter. 6. The loan agreement dated 11th August, 1982 which has been referred to in the guarantee bond was an agreement between the Corporation i.e. the creditor and the GCMMFL in respect of the loans to the maximum extent of Rs. 19,97,59,000/-, which were to be taken for the project for Cluster I which consisted of the members of the GCMMFL including the petitioners. There was another loan agreement also executed on 11th August, 1982 between the Corporation i.e. the creditor and the GCMMFL, which was in respect of loans taken for the project for Cluster II with which we are, admittedly, not concerned. Cluster II consisted of Gujarat Dairy Development Corporation and four District Unions of Bhavnagar, Junagadh, Surendranagar and Kutch. The dispute in the present petition relates to the guarantee given by the State Government in context of the member Unions of GCMMFL falling in Cluster I including the petitioners. 7. The State Government in respect of the petitioner Kheda District Milk Producers' Union Limited (Special C.A No. 10206 of 95) issued the impugned order on 9.11.1995 appointing three representatives named therein on the Board of Directors of that petitioner Society under Section 80(1) of the said Act. 8. In Special Civil Application No. 6373 of 1995, the petitioner Society which is also a member of the GCMMFL, challenges the order dated 27.7.1995 made by the State Government under Section 80(1) of the Act nominating three persons named therein on the Board of Directors of that Society. 9. The learned Senior Counsel appearing for the petitioner in Special Civil Application No. 10206 of 1995 contended that there was no contract of guarantee executed by the State Government qua the petitioner Union and therefore, there was no occasion empowering the State Government to nominate its representatives on the Board of Directors of the petitioner Union. He submitted that nowhere in the guarantee bond there was any reference to the guarantee being given on behalf of the petitioner Union and the guarantee bond was intended to secure repayment of loan which was given to the GCMMFL by the creditor and not for repayment of loan by the member Union to the GCMMFL. He submitted that there was no privity of contract between the petitioner Union and the State Government and the State Government cannot claim any right to nominate representatives on the Board of Directors of the petitioner. He submitted that the liability of the State Government under the guarantee bond did not depend upon the failure of the petitioner Union to pay the loan transferred to it by the GCMMFL. In support of his contention, he relied upon the decisions of the Supreme Court in the cases of State of Maharashtra Vs. Dr.M.N.Kaul - AIR 1967 S.C 1634; Punjab National Bank Ltd. Vs. Sri Bikram Cotton Mills Ltd., - AIR 1970 S.C.C 1973 and Asstt. Excise Commissioner and ors. Vs. Issac Peter and ors. - (1994) 4 S.C.C 104. His next contention was that even if it is assumed that the guarantee bond executed by the State Government was also in respect of defaults committed by the member Union in repaying the loan which was transferred to them, the evidence discloses that so far as the petitioner and other member Unions falling in Cluster I are concerned, the guarantee was released by the creditor NDDB and the State Government was no longer liable as a surety in respect of the loans which were advanced to the member Unions falling in Cluster I which included both these petitioners. It was contended that a stipulation which was for the benefit of a party can always be waived by that party and reliance in support of that contention was placed on the decision in Makati Nanchand Kakaldas and ors. Vs. Champaklal Chhotalal Kapadia, reported in XIX G.L.R 945. The third contention was that the nomination of the respondent No.4 was invalid because he had worked as Assistant General Manager of the petitioner Union and resigned only on 31.12.1994. It was therefore, submitted that he was disqualified by virtue of bye-laws 17.2.2 of the petitioner Union. Reliance was placed in support of this contention on the ratio of the decision of this Court in the case of Bhogilal Jethalal Patel Vs. Yusufbhai Ramanbhai Gajiawala & ors., reported in XVI G.L.R 215. As regards respondents Nos. 5 and 6 who are the two other nominees, it was submitted that they were not having sufficient experience to be put on the Board of Directors. It was lastly contended that the petitioner Union can go ahead with the meeting of the Board for electing the Chairman of the Board of Directors under Section 145Z(2) of the Act even if the Collector who is required to preside over the meeting does not attend the same. It was submitted that under the said provision, the Collector was not required to convene the meeting but he was required only to preside over it and the meeting was required to be held as per the bye-laws of the Society under which a Managing Director can convene a meeting of the Board of Directors. Apprehension was voiced on behalf of the petitioner that by prolonging the election of the Chairman of the Board, a situation may be brought about where it can be said that the new Board of Directors has not functioned within six months and thereupon a Custodian may come to be appointed under Section 74D of the said Act on the ground that the new Committee of management though elected was not functioning for a period of six months. 10. The learned Counsel appearing for the petitioner Baroda District Co-operative Milk Producers' Union Limited (Special Civil Application No. 6373/95) while adopting the contentions canvassed in the main petition, supplemented the arguments by a further contention that the impugned order nominating three representatives on the Board of Directors of that Society was malafide as it was made with a view to convert a minority into a majority. He however had no particulars to indicate how the members were divided. Reliance was placed in support of this contention on the decision of this Court in Amreli District Co-operative Sale & Purchase Union Ltd. & ors. Vs. State of Gujarat, reported in XXV (2) G.L.R 1244. 11. The learned Counsel who appeared for the respondent No.8 - NDDB supported the petitioners' contention and contended that the respondent State Government was released of its liability under the guarantee bond to the extent of the loan component which was intended for the Cluster I, which consisted of the member Unions of the GCMMFL including these two petitioner Unions. He submitted that a surety can be released in part and therefore, the State Government was no longer liable as a surety in support of the loans which were given to these two petitioners and other member Unions of GCMMFL, which were in Cluster I. He made a statement on behalf of the NDDB that the State Government will not be held liable as a surety in respect of the loans which were advanced to these two petitioners and other members of GCMMFL who fell in Cluster I in view of the NDDB having already released the guarantee to the extent of the loan component of Cluster I. The learned Advocate appearing for the respondent No.9 GCMMFL adopted the contentions of the learned Counsel appearing for the petitioners and the NDDB. 12. The learned Additional Advocate General appearing for the State Government contended that the repayment of loan even by the member Unions to the GCMMFL was guaranteed by the State Government having regard to the documentary evidence on record. It was submitted that the guarantee bond cannot be read in isolation and since it referred to the loan agreements which indicated that the loans were to be given to the member Unions of the GCMMFL and that the GCMMFL was only a conduit pipe through which the loans were received by its members, the Government was in fact a surety in respect of the loans which were disbursed to the member Unions and since those loans were outstanding, the State Government was entitled to nominate its representatives on the Board of Directors of such member Unions, including these two petitioners, by virtue of the provisions of Section 80(1) of the Act. He also submitted that the Government Resolutions dated 31.3.1982 and 5.1.1984 which are required to be read alongwith the guarantee bond also indicated that the Government was liable as a surety even for the default of the recipient Unions. He pointed out that by letter dated 15.7.1983 the GCMMFL had requested the State Government to refer its member Unions in the Government Resolution and had forwarded details of loans which were to be given to these Union members. It was therefore, submitted that it was understood by all concerned that the State Government was to stand as a surety even in respect of the defaults of the recipient Unions. Reliance was placed in support of his submissions on the decisions reported in the case of Punjab National Bank Ltd. Vs. Sri Bikram Cotton Mills Ltd., - AIR 1970 S.C 1973; Fushakkal Kuttappu Vs. C. Bhargavi and ors. - AIR 1977 S.C. 105 and State of U.P and ors. Vs. Renusagar Power Co. & ors. - AIR 1988 S.C 1737. He further submitted that there was no unconditional release of the guarantee by the creditor and the decision of the creditor as reflected in it's letter dated 15.3.1994 for reducing the liability of the State Government under the guarantee bond was dependent on the Government's accepting the variations proposed in that letter. It was submitted that as per clause (viii) of the guarantee bond, the guarantee was one single and indivisible and therefore, it was not open to the creditor to unilaterally bifurcate it. It was submitted that since the State Government had not communicated confirmation or agreement to the proposal contained in the letter dated 15.3.1994, it continued to remain liable under the guarantee bond for the entire amount, thereby, entitling it to make nominations on the Board of Directors of the petitioners under Section 80(1) of the Act. Reliance was placed by him in support of his submissions on paragraph 4408 of Chity on Contracts 25th Edition at page 1196. On the third aspect regarding the nominees' eligibility, it was submitted that as regards the respondent No.4 since the objection of the petitioner (Special Civil Application No. 10206/95) was that he had in the recent past served as an employee of the petitioner Union, the State Government was prepared to withdraw that nomination. As regards the nomination of respondents Nos. 4 and 5 of that petition are concerned, he submitted that it was for the Government to nominate persons who, according to the Government, will safe-guard its interest and there was no serious objection against the nominations of these two respondents from any quarters. On the last contention of the petitioners, the learned Additional Advocate General submitted that the authority having power to preside over the meeting can always postpone it. He submitted that Section 145Z deals with a situation where election is to be held and the meeting for the purpose is required to be presided over by an independent person namely - the Collector or a person authorised by him for electing a Chairman. He submitted that Section 145Z would displace any conflicting bye-law. It was submitted that calling of a meeting by the Managing Director of the petitioner Union was only a ministerial act and whether to hold the meeting or not on a given date can always be decided by the person who is entitled to preside over the meeting. It was submitted that no move for appointment of a Custodian was in contemplation of the State Government. 13. Section 80(1) of the said Act which empowers the Government to appoint it's nominees will be attracted where the State Government has (a) subscribed to the share capital of a Society, directly or through another Society, or (b) guaranteed the repayment of principal of and payment of interest on, debentures issued or loans raised by a Society. The State Government has a right to nominate three representatives on the Committee of such Society in the manner as may be determined by it from time to time, notwithstanding anything contained in the bye-laws of the Society. The members nominated by the Government hold their office during the pleasure of the State Government or for the period that may be specified in the order of appointment. On assuming office, such nominees have all rights, duties, responsibilities and liabilities as if they were members of the Committee duly elected. It is clear from this provision that the State Government can nominate three representatives on the Board of Directors is to be exercised in respect of the Society for which it has guaranteed the repayment of loan amount and interest or the amount of debentures and interest. In the present case, the question of the Government having subscribed to share capital of the Society does not arise. This right of the Government to appoint three nominees over-rides anything to the contrary that may be contained in the bye-laws of such Society. The first question that requires to be determined is whether the State Government had stood as a surety only in respect of repayment which was to be made by the GCMMFL to the creditor i.e. IDC (now it's successor NDDB) or whether it had also stood a surety in respect of the repayment of loans by the sub-loanees i.e. the petitioners and other member Unions of GCMMFL. The effort made on behalf of the petitioners was to persuade the Court