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

3. 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 in Authorized Controller. The period of takeover was extended upto 31.03.19744. 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)12. 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 considered for the purposes of categorization."13. 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. 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 appellants claim cannot be covered in any of the categories in the Second Schedule...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 appellants claim for the same reasons become non-existent....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...."14. 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...."

Court's reasoning:
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.