Supreme Court clarifies the forum for recovery of dues in nationalized textile undertakings: UCO Bank vs. National Textile Corporation Ltd. (2020)

Introduction

Date of the Judgment: 05 March 2020
Citation: Civil Appeal No. 2046 of 2020 (Arising out of SLP (Civil) No. 15914 of 2014)
Judges: A.S. Bopanna, J., R. Banumathi, J., Hrishikesh Roy, J.

When a company is taken over by the government, who is responsible for its old debts? The Supreme Court of India recently addressed this question in a case involving a nationalized textile company and a bank seeking to recover outstanding dues. This case clarifies the correct legal avenue for resolving such disputes. The court had to decide whether the Permanent Machinery of Arbitrators (PMA) was the correct forum to decide the dispute or whether the existing debt recovery proceedings should be revived. The judgment was delivered by a three-judge bench comprising Justices A.S. Bopanna, R. Banumathi, and Hrishikesh Roy, with the opinion authored by Justice A.S. Bopanna.

Case Background

M/s Shree Sitaram Mills Ltd. had credit facilities with UCO Bank. The Ministry of Textiles was the guarantor for these facilities. The textile mill was taken over by National Textile Corporation Ltd. (NTC) under the Textile Undertaking (Take-over of Management) Act, 1983 and was nationalized w.e.f. 01.04.1994 under the Textile Undertakings (Nationalisation) Act, 1995.

UCO Bank filed a recovery suit against NTC in 1988, seeking to recover Rs. 3,19,09,000. This case was transferred to the Debts Recovery Tribunal (DRT), which issued a recovery certificate against Shree Sitaram Mills Ltd. for Rs. 11,70,78,726.69 on 05.08.2004. However, these proceedings were adjourned sine die because the company was declared sick under the Sick Industrial Companies (Special Provisions) Act, 1985.

UCO Bank also submitted a claim to the Commissioner of Payment on 17.01.2002, seeking Rs. 1,05,35,86,783.47 towards post-takeover liability. The Commissioner awarded Rs. 70,23,025 towards the principal amount and Rs. 89,59,609 towards interest till the appointed date. The remaining claim of Rs. 103,46,83,660.47 towards interest beyond the appointed date was rejected.

UCO Bank, seeking to recover the balance amount, requested arbitration with the Union of India on 30.08.2004. The bank claimed Rs. 103,76,04,149.47 from NTC and Shree Sitaram Mills Ltd. The Joint Secretary was appointed as the sole arbitrator under the Permanent Machinery of Arbitration (PMA), and directed the parties to submit their claims.

NTC then filed an application for discontinuation of the arbitral proceedings, citing the Supreme Court’s judgment in Electronics Corporation of India Ltd. vs. Union of India, which recalled the orders that had led to the creation of the PMA.

Timeline:

Course of Proceedings

The High Court’s Single Judge dismissed NTC’s writ petition, stating that the PMA was formed by the Government of India’s Office Memorandum dated 22.01.2004 and was not affected by the dissolution of the Committee of Disputes (COD). The Single Judge held that since both parties were covered under the OM dated 22.01.2004, no consent was required for arbitration under the PMA mechanism.

The Division Bench of the High Court, however, allowed NTC’s appeal. It noted that UCO Bank’s claim before the PMA was for a period prior to 01.04.1994, and thus the liability was not of NTC but of the earlier owner company. The Division Bench held that the Single Judge had erred in presuming that Shree Sitaram Mills Ltd. was taken over, when only the textile undertaking of Shree Sitaram Mills Ltd. was taken over. The court also pointed out that UCO Bank had made its claim before the Commissioner of Payments, which was meant for claims against the earlier owner company. Thus, the Division Bench concluded that the arbitration proceedings against NTC were misconceived.

Legal Framework

The Textile Undertakings (Nationalisation) Act, 1995, particularly Section 4(2) and 4(5), specifies that liabilities pertaining to the pre-nationalization period (before 01.04.1994) remain with the erstwhile owner and cannot be enforced against the National Textile Corporation Ltd.

Section 20 of the Textile Undertakings (Nationalisation) Act outlines the process for claims against the earlier owner company, which are to be made before the Commissioner of Payments.

Section 7 of the Textile Undertakings (Nationalisation) Act provides that a claimant dissatisfied with the Commissioner’s decision may appeal to the principal civil court of original jurisdiction.

Arguments

Appellant (UCO Bank) Submissions:

• The Office Memorandum dated 22.01.2004 provides a mechanism for PMA, which was not quashed by the Supreme Court in Electronics Corporation of India Ltd. vs. Union of India (2011) 3 SCC 404.
• The Electronics Corporation of India Ltd. vs. Union of India (2011) 3 SCC 404 case dealt with the abolition of the High-Powered Committee on disputes, not the PMA.
• The Office Memorandum dated 22.01.2004 is an executive instruction, a policy decision in an economic matter, and requires no judicial review.
• The Appellant Bank is a public sector bank and cannot allow its funds to sink. DRT proceedings have stalled, and the Commissioner of Payments rejected the balance claim of approximately Rs. 100 crores, stating it was beyond its jurisdiction under Section 20 of the Nationalisation Act.
• After the takeover of the management of the borrower company in 1983 and the nationalization of the owner company in 1955, all rights and liabilities vested in Respondent No. 1. Shree Sitaram Mills Ltd. (as referred to in the 1st schedule of the Nationalisation Act) and Shree Sitaram Mills Ltd. are one and the same entity.

Respondent (National Textile Corporation Ltd.) Submissions:

• As per Section 4(2) and 4(5) of the Textile Undertakings (Nationalisation) Act, 1995, all liabilities pertaining to the pre-nationalization period (before 01.04.1994) are of the erstwhile owner and cannot be enforced against Respondent No. 1.
• Shree Sitaram Mills Ltd. was not nationalized; only the textile undertaking owned by it was nationalized. Shree Sitaram Mills Ltd. continued to exist as a private entity.
• The appellant had already approached the Commissioner of Payments under the Textile Undertakings (Nationalisation) Act, 1995, and therefore cannot maintain the instant claim.
• As per Section 7 of the Textile Undertakings (Nationalisation) Act, 1995, a claimant dissatisfied with the Commissioner’s decision may appeal to the principal civil court of original jurisdiction.
• The arbitral notice dated 17.10.2011 stated that the forum was constituted per the Supreme Court’s mandate in ONGC vs. Collector of Central Excise 1995 Supp (4) SCC 541, which was recalled by the Supreme Court in Electronics Corporation of India Ltd. vs. Union of India (2011) 3 SCC 404.
• The appellant is forum shopping, having already approached various courts/tribunals.

The innovativeness of the argument is that the UCO bank argued that the PMA was not abolished by the Supreme Court and that the bank cannot be made to suffer due to the technicalities of the law.

Issues Framed by the Supreme Court

✓ What is the appropriate forum for the adjudication of the dispute between the parties?

Treatment of the Issue by the Court

Authorities

Cases:

• ONGC vs. Collector of Central Excise, Mumbai 1995 Supp (4) SCC 541 – This case was referred to as the basis for the formation of the Permanent Machinery of Arbitrators (PMA).
• Electronics Corporation of India Ltd. vs. Union of India (2011) 3 SCC 404 – This case was cited by the respondent to argue that the mechanism suggested in ONGC vs. Collector of Central Excise had outlived its utility and was recalled by the Supreme Court.
• Swadeshi Cotton Mills Company Ltd. vs. The Commissioner of Central Provident Fund MANU/TN/ 0532/1999 – This case from the High Court of Madras was cited by the Division Bench of the High Court to support the view that liability does not transfer on takeover.
• U.P State Sugar Corporation Ltd. vs. Dr. Kailash Behari Sharma MANU/UP/1055/1997 – This case from the High Court of Allahabad was cited by the Division Bench of the High Court to support the view that liability does not transfer on takeover.

Legal Provisions:

• Section 4(2) and 4(5) of the Textile Undertakings (Nationalisation) Act, 1995 – These sections specify that pre-nationalization liabilities remain with the erstwhile owner.
• Section 20 of the Textile Undertakings (Nationalisation) Act – This section outlines the process for claims against the earlier owner company.
• Section 7 of the Textile Undertakings (Nationalisation) Act – This section provides for appeals against the Commissioner’s decision to the principal civil court of original jurisdiction.

Judgment

How each authority was viewed by the Court?

• ONGC vs. Collector of Central Excise, Mumbai 1995 Supp (4) SCC 541: The court acknowledged that the PMA was initially formed based on this case but noted that the mechanism was later recalled.
• Electronics Corporation of India Ltd. vs. Union of India (2011) 3 SCC 404: The court agreed that this case indicated the PMA’s lack of utility, supporting the decision to not use PMA.
• Swadeshi Cotton Mills Company Ltd. vs. The Commissioner of Central Provident Fund MANU/TN/ 0532/1999 and U.P State Sugar Corporation Ltd. vs. Dr. Kailash Behari Sharma MANU/UP/1055/1997: The court stated that these cases were related to Provident Fund dues and were not directly applicable to the present case involving a lender bank.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that the dispute was resolved in the appropriate forum. The Court noted that the liability of the National Textile Corporation was disputed, and the nature of the takeover of the textile mills needed to be examined before recoveries could be made. The Court also considered that the original recovery proceedings were already pending before the DRT and that it would be more appropriate to resolve the dispute in those proceedings. The court also considered that the PMA was not the correct forum to decide the dispute and that the dispute should be decided by the DRT.

Fact:Law Ratio:

Logical Reasoning:

The court considered the alternative interpretation that the PMA could be the correct forum, but it rejected this because the liability of NTC was disputed. The court emphasized that the existing recovery proceedings before the DRT were the appropriate forum to determine liability and make recoveries.

The Supreme Court decided that the arbitral proceedings before the PMA were not the appropriate forum. The court held that the question of liability and the manner of recovery should be decided in the existing recovery proceedings before the DRT.

The reasons for the decision are:

• The liability of the National Textile Corporation was disputed.
• The nature of the takeover of the textile mills needed to be examined before recoveries could be made.
• The original recovery proceedings were already pending before the DRT.
• The PMA was not the correct forum to decide the dispute.

The court quoted from the judgment:

• “…the consideration required herein is essentially with regard to the forum that is to be provided to the parties for the purpose of appropriate adjudication in that regard.”
• “…an adjudication on that aspect to be made cannot be considered as a dispute as involving only the two public sector establishments as contemplated under the Official Memorandum referred to above.”
• “Therefore, the question of liability could neither have been decided in the writ proceedings before the High Court nor in this appeal.”

There were no majority or minority opinions as the judgment was delivered unanimously by a three-judge bench.

The court analyzed the reasoning, legal interpretation, and application to the facts by stating that the liability of the respondent was disputed and that the matter should be decided by the DRT.

The potential implications for future cases are that disputes involving the liability of nationalized entities will be decided in the appropriate forums where the original recovery proceedings are pending.

No new doctrines or legal principles were introduced in this case.

Key Takeaways

• Disputes regarding the liability of nationalized entities should be resolved in the appropriate forum where the original recovery proceedings are pending.
• The Permanent Machinery of Arbitrators (PMA) is not the correct forum for disputes where the liability of the parties is disputed.
• Courts should not decide the question of liability in writ proceedings.
• Existing recovery proceedings should be revived to determine the liability of parties and make recoveries.

The judgment clarifies that disputes involving nationalized entities should be resolved in the appropriate forums where the original recovery proceedings are pending. This may lead to a more streamlined process for resolving such disputes.

Directions

The Supreme Court directed that:

• The proceedings in O.A. No. 2526/1999, which had concluded with a Recovery Certificate, and the proceedings in O.A. No. 1114/2000, which were adjourned sine die, shall be revived.
• UCO Bank is permitted to bring the respondents on record in the recovery proceedings as judgment debtors/defendants.
• The Recovery Officer/Presiding Officer of the DRT shall independently decide on the liability of the respondents, based on the materials available on record.

Specific Amendments Analysis

There was no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of the case is that disputes regarding the liability of nationalized entities should be resolved in the appropriate forum where the original recovery proceedings are pending, and the PMA is not the correct forum to decide such disputes. This case clarifies the appropriate forum for resolving disputes related to liabilities of nationalized entities, ensuring that such matters are resolved in the appropriate legal avenues. The court set aside the High Court’s decision that NTC was not liable, stating that the question of liability should be decided in the DRT proceedings.

Conclusion

The Supreme Court’s judgment in UCO Bank vs. National Textile Corporation Ltd. clarifies that disputes regarding the liabilities of nationalized entities should be resolved in the existing recovery proceedings before the Debts Recovery Tribunal (DRT), rather than through the Permanent Machinery of Arbitrators (PMA). The court set aside the High Court’s decision that NTC was not liable and directed the DRT to determine the liability of the parties. This decision ensures that such disputes are addressed in the appropriate legal forum, promoting efficiency and fairness in the resolution of such matters.