Case: National Textile Corpn.(Guj) Ltd Vs. State Bank Of India

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." 35. 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 : 36. 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;" 37. 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. Since 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. 38. 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. 39. 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. 40. 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. 41. 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 would continue to remain available to the respondent-Bank even if the 1958 Act applies.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]21. 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 owners22. The Authorized Controller and the State of Gujarat furnished guarantees. Guarantees furnished by the State of Gujarat were dehors the provisions of the Act. In terms of the provisions of the Act, the State of Gujarat had no role to pay. It might have encouraged the Authorized Controller to review 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 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 it23. 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 agreement24. 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 institution, 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 period35. 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 owner37. 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, 187238. 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.