Supreme Court: Lease of Blacklisted Rice Mills Doesn’t Allow Paddy Allocation (2020)

Date of the Judgment: 06 March 2020
Citation: Food Corporation of India vs. M/s. V.K. Traders (2020) INSC 208
Judges: S.A. Bobde (CJI), B.R. Gavai, and Surya Kant JJ.

Can a new entity that leases a blacklisted rice mill be eligible for paddy allocation? The Supreme Court of India recently addressed this question, ruling that merely leasing a blacklisted rice mill does not absolve the new lessee from the liabilities of the previous owner. The court held that such lease agreements, often unregistered, were attempts to circumvent the ban imposed on defaulting rice millers. This case clarifies the responsibilities of entities taking over blacklisted mills. The judgment was delivered by a three-judge bench comprising Chief Justice S.A. Bobde, Justice B.R. Gavai, and Justice Surya Kant, with the majority opinion authored by Justice S.A. Bobde.

Case Background

The Food Corporation of India (FCI) allocated paddy to rice mills for custom milling, who would then supply the milled rice back to FCI. During the Kharif Marketing Season of 2004-05, disputes arose regarding the quality of the milled rice. An investigation by the Central Bureau of Investigation (CBI) found the rice to be defective, leading to the blacklisting of 182 rice millers. The FCI issued a circular on 10 October 2012, imposing a ban on these millers for three years for ‘Beyond Rejection Limit’ (BRL) rice and five years for ‘Beyond Prevention of Food Adulteration’ (BPFA) rice. To circumvent this ban, the blacklisted mill owners leased their mills to new entities. These new lessees then applied to FCI for paddy allocation, claiming they were not subject to the ban. FCI rejected these requests, stating that the lease agreements were sham transactions designed to bypass the ban. The High Court, however, ruled in favor of the new lessees, leading to the current appeal before the Supreme Court.

Timeline

Course of Proceedings

The learned Single Judge of the High Court held that the new lessee firms were separate entities from the defaulting owners and could not be held responsible for the previous defaults. Consequently, the ban imposed by the FCI on allocating paddy to these new entities was set aside. The Division Bench of the High Court upheld this view, dismissing the appeals filed by the FCI. The FCI then appealed to the Supreme Court.

Legal Framework

The Supreme Court considered Section 17(1)(d) of the Registration Act, 1908, which mandates the registration of lease deeds for a term exceeding one year. The court noted that many of the lease deeds presented by the respondents were unregistered and for periods exceeding one year, rendering them invalid as evidence of a valid transfer of possessory rights. The court observed that the lease deeds did not meet the statutory requirements of the Registration Act, 1908.

Section 17(1)(d) of the Registration Act, 1908 states:

“17. Documents of which registration is compulsory.—(1) The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act No. XVI of 1864, or the Indian Registration Act, 1866, or the Indian Registration Act, 1871, or the Indian Registration Act, 1877, or this Act is or was in force, namely:—
(d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;”

Arguments

Arguments by the Food Corporation of India (FCI):

• The lease deeds relied upon by the new entities were unregistered and therefore had no legal sanctity.
• The lease durations often exceeded one year, requiring compulsory registration under the Registration Act, 1908.
• These lease deeds were sham transactions executed by defaulting rice millers to evade liability for FCI’s losses.
• Allowing new lessees to operate would indirectly permit what was impermissible for the defaulting millers.
• The FCI had suffered losses due to the sub-standard rice supplied by the blacklisted millers, and these losses needed to be recovered.

Arguments by the Respondents (New Lessees):

• The legality of the lease arrangement was not disputed by the parties to the agreement (lessee and lessor).
• The FCI had no locus standi to question the binding nature of the contract.
• Liability for default was attached only to the rice miller found responsible after due inquiry and notice.
• The new lessees had merely taken over the physical assets of the mill and were not obligated to discharge the previous liabilities of the lessors.
• It was unreasonable for the FCI to coerce the lessees to make payments for the defaults of the lessors.

The innovativeness of the argument by the FCI was that they argued that the lease deeds were a sham and a way to circumvent the ban imposed on the defaulting rice millers. The respondents argued that they were separate legal entities and not liable for the defaults of the lessors.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the respondents, who had taken over on leasehold basis certain blacklisted rice mills, were entitled to allocation of paddy for custom milling.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following legal provision:

• Section 17(1)(d) of the Registration Act, 1908: This section mandates the registration of lease deeds for a term exceeding one year. The court relied on this to invalidate the unregistered lease deeds presented by the respondents.

Judgment

The Supreme Court overturned the High Court’s decision, ruling that the new lessees were not entitled to paddy allocation. The court emphasized that the lease deeds were invalid due to non-compliance with Section 17(1)(d) of the Registration Act, 1908. The court also noted that these lease agreements were attempts to circumvent the ban on blacklisted millers.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 17(1)(d) of the Registration Act, 1908: The court relied on this provision to invalidate the lease deeds, stating that they did not meet the statutory requirements for registration.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the fact that the lease deeds were not registered as mandated by Section 17(1)(d) of the Registration Act, 1908. The court also recognized that the lease agreements were a deliberate attempt to circumvent the ban imposed on blacklisted rice millers. The court emphasized that allowing such practices would undermine the purpose of the ban and cause financial losses to the FCI. The court also considered the fact that the FCI had suffered losses due to the sub-standard rice supplied by the blacklisted millers, and these losses needed to be recovered.

Fact:Law Ratio

The court’s reasoning can be summarized as follows:

The court rejected the argument that the new lessees were separate legal entities, stating that they had essentially stepped into the shoes of the defaulting millers. The court also emphasized the need to uphold the integrity of the ban imposed on blacklisted millers. The court stated:

“Even in a case where a proprietorship/partnership firm has been in existence for long and took over a mill-in-default only on-word basis, no right to seek allocation of paddy can be claimed by it unless the liabilities arising out of the previous bilateral agreement are satisfied.”

The court concluded that allowing the new lessees to receive paddy allocation would undermine the purpose of the ban and cause further financial losses to the FCI. The court also observed:

“The plea taken by the appellant-FCI, that such documentation was made only to escape the liability fastened on the defaulting rice millers, carries some weight, though it is a pure question of fact.”

The Supreme Court did not consider any alternative interpretations.

The court’s decision was unanimous, with all three judges concurring on the judgment.

Key Takeaways

• Lease agreements for blacklisted rice mills must be registered under Section 17(1)(d) of the Registration Act, 1908, to be legally valid.
• New lessees of blacklisted rice mills are not automatically entitled to paddy allocation.
• New lessees must clear the dues, including penalties and interest, of the original defaulting rice millers to be eligible for paddy allocation.
• This judgment prevents the circumvention of bans imposed on defaulting entities through sham lease transactions.

Directions

The Supreme Court allowed the respondent-lessees the liberty to pay the dues, including penalty/interest, of the original rice-millers. Upon production of a ‘No Dues Certificate’, they can seek allocation of paddy for custom milling in accordance with the policy of FCI.

Development of Law

The ratio decidendi of this case is that merely leasing a blacklisted rice mill does not entitle the new lessee to paddy allocation unless the liabilities of the previous defaulting miller are satisfied. This judgment clarifies that new entities cannot circumvent bans imposed on defaulting entities by entering into lease agreements. This is a new position of law as the High Court had held that the new lessees were separate entities and not liable for the defaults of the lessors.

Conclusion

The Supreme Court ruled that new lessees of blacklisted rice mills are not entitled to paddy allocation unless they clear the dues of the original defaulting millers. The court found that the lease deeds were invalid and were attempts to circumvent the ban. This judgment ensures that entities cannot evade liabilities by leasing out blacklisted assets and clarifies the responsibilities of new entities taking over such assets.

Category

✓ Civil Law
✓ Contract Law
✓ Lease Agreements
✓ Registration Act, 1908
✓ Section 17(1)(d), Registration Act, 1908
✓ Food Corporation of India
✓ Blacklisted Entities
✓ Paddy Allocation
✓ Civil Law, Registration Act, 1908
✓ Civil Law, Section 17(1)(d), Registration Act, 1908

FAQ

Q: Can I lease a blacklisted rice mill and get paddy allocated?
A: No, according to the Supreme Court, you cannot automatically get paddy allocated just by leasing a blacklisted rice mill. You must first clear all the dues of the previous owner.

Q: What is the significance of Section 17(1)(d) of the Registration Act, 1908 in this case?
A: Section 17(1)(d) of the Registration Act, 1908 mandates that lease deeds for a term exceeding one year must be registered. The Supreme Court used this to invalidate the unregistered lease deeds in this case.

Q: What happens if I lease a blacklisted mill and don’t pay the previous owner’s dues?
A: If you don’t pay the dues of the previous owner, you will not be eligible for paddy allocation. The Supreme Court has made it clear that new lessees must clear all outstanding liabilities.

Q: What does this judgment mean for other industries?
A: This judgment sets a precedent that entities cannot circumvent bans by leasing out blacklisted assets. It emphasizes the need for proper due diligence and compliance with legal requirements when taking over assets.

Q: Can I get paddy allocation if I pay the dues of the previous owner?
A: Yes, the Supreme Court has allowed new lessees to seek paddy allocation after clearing all the dues, including penalties and interest, of the original defaulting rice millers and upon production of ‘No Dues Certificate’.