Case: Mahesh Kumar Saharia Vs. State Of Nagaland &amp; Ors

The appellant, formerly a shareholder and Managing Director of the Nagaland Forest Products Limited (hereinafter called the "Company"), challenged the vires of Nagaland Forest Products Ltd. (Acquisition of Shares) Ordinance, 1981 and Nagaland Forest Products Ltd. (Acquisition of Shares) Act, 1982, which replaced the Ordinance (hereinafter called the "State Act"), contending inter alia that the said legislations were ultra vires the powers of Nagaland State Legislature in view of Section 20 of the Industries (Development & Regulation) Act, 1951 (hereinafter called the "Central Act").2. Pursuant to a contract entered into between late Shri Ram Gopal Saharia, father of the appellant and the Government of Nagaland dated 24.4.1972 to establish a plywood factory in the territory of Nagaland on the terms and conditions stipulated therein, the Company was incorporated. The authorised share capital of the Company was Rs. 50,00,000/- divided into (i) 20,000 (6% cumulative redeemable) preference shares of Rs. 100/- each, (ii) 15,000 `G class enquiry shares of Rs. 100/- each, and (iii) 15,000 `S class equity shares of Rs. 100/- each `G and `S class equity shares carried the same rights. It appears that the appellants group, on the one hand and the Government of Nagaland on the other hand, subscribed 50% each of the equity shares. The Company after obtaining necessary certificate of commencement of business on 22.7.1972, as required under the Central Act, commenced its business thereafter. The father of the appellant was the first Managing Director of the Company. After the death of his father, the appellant became the Managing Director some time in 1975. A Cabinet ranking Minister of the Government of Nagaland was the Chairman of the Company since its inception except during Governors Rule.3. While so, on December 14, 1981, the Deputy Commissioner, Mon District, directed the Manager, Nagaland Forest Product Limited to close down the plywood factory on 14.12.1981 till further orders. It was followed by Ordinance 1 of 1981 which enabled the State Government to take over the assets, books of accounts, registers etc. of the Company. The Ordinance came into force on 17.12.1981. As noticed earlier, the Ordinance was replaced by the Act. The appellant challenged the Ordinance initially and subsequently by amending the petition appropriately, the Act was also challenged.4. Before the High Court, the Act was challenged on various grounds but before us the learned counsel appearing for the appellant, Mr. Sunil Gupta, confined his attack to the lack of legislative competence based on Section 20 of the Central Act. In other words, the contention was that taking over of the assets (Acquisition of Shares of the Company) amounts to taking over of management/control of the Company, which field is occupied by Parliament as contemplated by Section 20 of the Central Act.5. The High Court in its considered and reasoned judgment rejected all the contentions and observed thus while rejecting the contention based on lack of legislative competence, which alone was pressed before usAct was not enacted for taking over management or control of the company by the Nagaland State Government. In pith and substance it was enacted to acquire the `S class shares of the Company. If an attempt was made to take over management or control of any industrial undertaking in a declared industry indisputably the bar of Section 20 of the IDRA would inhibit exercise of such executive power. However, if pursuant to a valid legislation for acquisition of scheduled undertaking the management stands transferred to the acquiring body it cannot be said that this would be in violation of Section 20. Section 20 does not preclude or forbid a State legislature exercising legislative power under an entry other than Entry 24 of List II, and if an exercise of that legislative powers, to wit, acquisition or shares of a company owning an industrial undertaking in a declared industry the consequential transfer of management for control over the industry or undertaking follows as an incident of acquisition, such taking over of management or control pursuant to an exercise of legislative power is not within the inhibition of Section 20"......................."52. From the principles of catena of decisions enunciated in the decided cases, it is found that merely because an industry is a declared industry under Entry 52, that by itself will not put an embargo on the State legislature to pass legislation within its competence. It has further been found in many of the cases that mere incidental trenching does not warrant the striking down of an impugned Act. As regards the contention that the Parliament having made the requisite declaration in Section 2 of Schedule I thereof the State Legislature was denuded of its competence to enact the impugned provisions under Entry 42 of List III cannot be accepted. On examination of the various provisions of the Act there arises no doubt that it is for acquisition of property in `S class shares of the company and in pith and substance it falls under Entry 42 of List III, and is not in conflict with entries 52 or 7 List I."

Court's reasoning:
Section 3 of the State Act stated that all the shares of the Company other than those already held by the Government stood transferred to and vested in the State Government. In consequence of such vesting of the shares, the Government naturally exercises rights as shareholder and incidentally acquires the control and management of the Company. But that will not fall under the mischief of Section 20 of the Central Act because Section 20 prohibits the State Government from taking over management or control de hors ownership of the undertaking. The Central Act is concerned with the control and management of the undertaking and not with its ownership. By acquiring ownership, incidentally management and control of the Company also vests with that, it will be incidental and such an exercise of legislature power is not prohibited under Section 20 of the Central Act. Notwithstanding the taking over of the Company by the State Government still if the Central Government finds scope to exercise their power under Section 20 of the Central Act, it is open to them to do so. This is exactly what has been held by the Constitution Bench of this Court in Ishwari Khetans caseThere is thus a long line of decisions which clearly establishes the proposition that power to legislate for acquisition of property is an independent and separate power and is exercisable only under Entry 42, List III and not as an incident of the power to legislate in respect of a specific head of legislation in any of the three lists. This power of the State legislature to legislate for acquisition of property remains intact and untrammelled except to the extent where on assumption of control of an industry by a declaration as envisaged in Entry 52, List I, a further power of acquisition is taken over by a specific legislation.26. As already pointed out, in pith and substance the impugned legislation is one for acquisition of scheduled undertakings and that field of acquisition is not occupied by the IDR Act which deals with control of management, regulation and development of a declared industry and there is no repugnancy between the impugned legislation and the IDR Act. Both can co-exist because the power acquired by the Union under the IDR Act can as well effectively be exercised after the acquisition of the scheduled undertakings as it could be exercised before the acquisition. Therefore, the contention that the State legislature lacked legislative competence to enact the impugned legislation must be negatived....................30. The impugned legislation was not enacted for taking over management or control of any industrial undertaking by the State Government. In pith and substance, it was enacted to acquire the scheduled undertakings. If an attempt was made to take over management or control of any industrial undertaking in a declared industry indisputably the bar of Section 20 would inhibit exercise of such executive power. However, if pursuant to a valid legislation for acquisition of scheduled undertaking the management stands transferred to the acquiring body, it cannot be said that this would be in violation of Section 20. Section 20 forbids executive action of taking over management or control of any industrial undertaking under any law in force which authorises State Government or a local authority so to do. The inhibition of Section 20 is on exercise of executive power but if as a sequel to an acquisition of an industrial undertaking, beforehave already noticed that the decision of the Constitution Bench in Ishwari Khetans has been consistently followed/applied right upto this date. There is, therefore, no merit in the argument that Ishwari Khetans case requires reconsideration.