Kanchalal Chandulal Parikh and another vs Bank of India and others

Bharucha, J.—The appeal is directed against the judgment and order of Penside J. decreeing the suit filed by the first respondent.

The facts that gave rise to file the suit, shortly stated, are these : The Ahmedabad Jupiter Spinning, Weaving and Manufacturing Co. Ltd (the first defendant) applied for a loan of Rs. 25,00,000 to the Bank of India Ltd., in April, 1968. An advance was made in this sum on April 26, 1968, in what was called account No. 1 repayable on demand with interest as stated. On the same day, the following documents were executed. A demand promissory note was executed by the first defendant in favour of its directors, the second, third and fourth defendants, in the sum of Rs. 25,00,000 with interest as stated and the second, third and fourth defendants endorsed the promissory not e in favour of the Bank of India Ltd. Letters of continuing security and of lien and set off were executed. The second, third and fourth defendants executed a deed of guarantee in favour of the said bank. The fifth defendant, the State of Maharashtra, also executed a deed of guarantee in favour of the said bank. The said account No. 1 was operated upon from time to time.

In November, 1968, the first defendant applied to the said bank for another loan of Rs. 25,00,000. This advance was made in account No. 2 on November 21, 1968, and it was repayable on demand with interest stated. On the same date, the first defendant executed a demand promissory note in the sum of Rs. 25,00,000, with interest as stated in favour of the second, third and fourth defendants and the second, third and fourth defendants endorsed it in favour of the said bank. Letters of continuing security and of lied and set off were executed. A deed of guarantee in respect of the said advance was executed by the second, third and fourth defendants in favour of the said bank. In respect of this advance, the fifth defendant executed a deed of guarantee in favour of the said bank on November 19, 1968. The said account No. 2 was operated from time to time.

On July 9, 1969, the undertaking of the said bank and all its assets stood transferred to the plaintiffs by virtue of the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

On september 2, 1969, and June 2, 1970, the fifth defendant executed two deeds of guarantee guarantee guaranteeing repayment to the plaintiffs of the amounts due under the said accounts Nos.1 and 2.

On July 16, 1970, letters of acknowledgment in respect of both the said accounts were given by the first defendant and the second, third and fourth defendants confirmed that their guarantees were in full force and effect.

On october 8, 1971, the Central Government took over the management of the second defendant under the provisions of section 16A of the Industries (Development and Regulation) Act, 1951, and appointed the National Textile Corporation as the authorised controller thereof.

On February 6, 1973, the plaintiffs called upon the authorised controller to repay the amounts due under the said accounts Nos. 1 and 2. By two letters dated June 22, 1973, the authorised controller acknowledged that sums of Rs. 29,19,805.62 and Rs. 29,19,805.43 were due in the said accounts Nos. 1 and 2 with interest as stated therein.

On March 27, 1974, the fifth defendant executed two deeds of guarantee in respect of the said accounts Nos. 1 and 2.

On December 21, 1974, the Sick Textile Undertakings (Nationalisation) Act, 1974, came into force.

On March 20, 1975, and 25, 27 March; 1975, respectively, the plaintiffs'' advocates called upon the first defendant and the second, third and fourth defendants and the fifth defendant to pay the amounts due in respect of the said accounts Nos. 1 and 2. Further correspondence ensued. On July 22, 1975, a notice u/s 80 of the CPC was given and on September 26, 1975, a suit , the second defendant died. His heirs were brought on recorded.

On December 2, 1981, the suit was decreed. The learned judge rejected the submission made on behalf of the defendants that the suit was barred by limitation and that it was not maintainable. He held that there was no novation which absolved the second, third and fourth defendants of their liability under the deeds of guarantee.

The first of the two appeals before us (Appeal No. 274 of 1982) is filed by the third and fourth defendants. The second (Appeal No. 458 of 1982) is filed by the fifth defendant.

Mr. Mehta, learned counsel for the appellants in the first appeal, submitted that the suit was barred by the law of limitation. He drew our attention to the fact that the learned single judge had held the guarantees to be continuing guarantees. In his submission, these guarantees covered subsequent (sic) but were valid only for three years from the date of each advance.

Under the guarantees, "the undersigned jointly and severally hereby guarantee that due payment two days after demand in writing, of all advances, liability ..." would be made. The period of limitation would, therefore, start running only upon a demand being made. The suit is filed within three years of the demand being made and is, therefore, in time.

Mr. Mehta next submitted that there was an implicit novation of the contract whereby the plaintiffs had looked only to the fifth defendant for repayment of the advances made. He draw attention to the fact that fresh guarantees had not been required from the fifth defendant.

We see no novation, express or implied. The liability of the third and the fourth defendants under the guarantees executed by them remained and was not in any way affected by the renewals of the guarantees taken from the fifth defendant.

This brings us to the substantial point in the appeals. The submission of the appellants is that the liability of the principal debtor , the first defendant, stood discharged on nationalisation. Therefore, the liability of the guarantors stood discharged.

For the purposes of examining the submission, it is necessary to refers to the provisions of the Sick Textile Undertakings (Nationalisation) Act, 1974 (now called "the Nationalisation Act".)

Section 2 of the Nationalisation Act is the definition section. Clause (d) of sub-section (1) thereof defines "custodian" to mean a custodian appointed u/s 5 of the Sick Textiles Undertakings (Takings over of Management) Act, 1972. Clause (h) defines "owner" when used in relation to a sick textile undertaking to mean any person or firm who or which is, immediately before the appointed day (which is April 1, 1974), the proprietor or lessee or occupier of the sick textile undertaking or any part thereof.

By reason of section 3 of the Nationalisation Act, on the appointed date, every sick textile undertaking and the right, title and interest of the owner in relation thereto stood transferred to, and vested absolutely in, the Central Government. Upon such vesting, every sick textile undertaking stood transferred to and vested in the National Textile Corporation. u/s 4, a sick textile undertaking is "deemed to include all assets, rights leaseholds, ... and all property, movable and immovable, included lands, buildings... cash balances, cash balances, cash on hand, reserve funds, investments and book debts..."

Section 5 reads thus :

(1) Every liability, other than the liability specified in sub-section

(2) of the owner of a sick textile undertaking, in respect of any period prior to the appointed day, shall be the liability of such owner and shall be enforceable against him and not against the Central Government or the National Textile Corporation.

(2) Any liability arising in respect of -

(a) loans advanced by the Central Government, or a State Government, or both to a sick textile undertaking (together with interest due thereon) after the management of such undertaking had been taken over by the Central Government,

(b) amounts advanced to a sick textile undertaking (after the management of such undertaking had been taken over by the Central Government by the National Textile Corporation or by a State Textile Corporation or by both, together with interest due thereon.

(c) Wages, salaries and other dues of employees of the sick textile undertaking, in respect of any period after the management of such undertaking had been taken over by the Central Government,

shall, on and from the appointed day, be the liability of the Central Government and shall be discharged, for and on behalf of that Government by the National Textile Corporation as and when repayment of such loans or amounts becomes due or as and when such wages, salaries or other dues become due and payable.

(3) For the removal of doubts, it is hereby declared that, -

(a) save as otherwise expressly provided in this section or in any other section of this Act, no liability, other than the liability specified in sub-section (2), in relation to a sick textile undertaking in respect of any period to the appointed day, shall be enforceable against the Central Government or the National Textile Corporation;

(b) no award, decree or order of any court, tribunal or other authority in relation to any sick textile undertaking passed after the appointed day in respect of any matter, claim or dispute, in relation to any matter not referred to in sub-section (2), which arose before that day, shall be enforceable against the Central Government or the National Textile Corporation ;

(c) no liability of any sick textile undertaking or any owner thereof for the contravention, before the appointed day, of any provision of law for the time being in forced shall be enforceable against the Central Government or the National Textile Corporation.

Explanation. - In this section, "State Textile Corporation" means a corporation, formed and registered under the Companies Act, 1956, in a State, which is in charge of the management of a sick textile undertaking either as a person authorised under the Industries (Development and Regulation) Act, 1951, or as the custodian under the Sick Textile Undertakings (Taking Over of Management) Act, 1972, and includes the West Bengal State Textile Corporation Limited which has advanced amounts to sick textile undertakings in the State."

Under the provisions of section 8, the owner of every sick textile undertaking is required to be given by the Central Government an amount equal to the amount specified in the corresponding entry in the First Schedule. Payment of a further amount u/s 9 is contemplated, in consideration of the retrospective operation of the provisions of section 3, 4 and 5, and the payment of interest therein is provided for "the appointment of commissioners of Payments is made u/s 17". The amount to be paid to the owner is, by reason of section 18, to be paid by the Central Government to the Commissioner for payment to the owner.

Section 20 deals with claims to be made to the Commissioner, and its principle clause read thus :

"Every person having a claim against the owner of a sick textile undertaking shall prefer such claim before the Commissioner, within thirty days from the specified date,"

Section 21 deals with priority of claims and needs reproduction :

"The claims arising out of the matters specified in the Second Schedule shall have priorities in accordance with following principle namely :- (a) category I will have precedence over all other categories and category II will have precedence over category III and so on ;

(b) the claims specified in each of the categories except category IV shall rank equally and be paid in full, but if the amount is insufficient to meet such claims in full, they shall abate in equal proportions and be paid accordingly :

(c) the liabilities specified in category IV shall be discharged, subject to the priorities specified in this section, in accordance with the terms of the secured loans and the priority inter se on such loans ; and

(d) the question of payment of a liability with regard to a matter specified in a lower category shall arise only if a surplus is left after meeting all the liabilities specified in the immediately higher category."

Sections 22 and 23 deal with the examination of claims and the admission or rejection of claims. Section 24 provides that after the admission of a claim, the amount due in respect thereof shall be credited by the Commissioner to the relevant fund to be paid to the person to whom the amount is due and "on such credit or payment, the liability of the owner in respect of such claim shall stand discharged".

The commissioner is authorised by section 25 to disburse the balance, after meeting the liabilities specified in the Second Schedule, to the owner of the sick textile undertaking

Section 27 reads thus :

"(1) Where any liability of the owner of a sick textile undertaking arising out of any item specified in category I of the Second Schedule is not discharged fully by the Commissioner out of the amount paid to him under this Act, the Commissioner shall intimate in writing to the Central Government the extent of the liability which remains undischarged, and that liability shall be assumed by the Central Government.

(2) The Central Government may, by order, direct the National Textile Corporation to take over any liability assumed by that Government under sub-section (1) and on receipt of such direction, it shall be the duty of the National Textile Corporation to discharge such liability."

Section 5 of the Nationalisation Act is specific. It provides that every liability (other than the liability specified in sub-section (2) thereof, with which we are not concerned) in respect of any period prior to the appointed day shall be the liability of the owner and shall be enforceable against him. The Nationalisation Act does not, therefore, absolve the owner of any liability.

The appellants'' submission is that, in any event, such liability is limited to the amount payable to the owner u/s 8 and enforceable only under the provisions of section 20 to 24. Reliance is placed upon the obligation seemingly cast by section 20 upon every person having a claim against the owner to prefer it before the Commissioner Emphasis is laid on clause (b) of section 21 which ways that the claims specified in each of the categories in the Second Schedule, except category IV, shall be paid in full, but, if the amount is insufficient to meet the claims in full, they shall "abate in equal proportions and be paid accordingly". Because the word "abate" is used, it is suggested that if there is not enough money available to meet the claim, the claim ceases is exact. Stress is laid on the liability of the owner standing discharged upon payment of a claim by reason of the provisions of section 24. Stress is also laid on the provisions of section 27 whereby the liability of the owner arising out of any item specified in category I of the Second Schedule which is not discharged fully by the Commissioner out of the amount paid to him is assumer by the Central Government to take over this liability.

The Shorter Oxford English Dictionary defines ''abate'' to mean, inter alia, "to curtail" and "to bring down in size, amount, value". So read, clause (b) section 21 only means that if the amount is insufficient to meet the claims in full, the claims shall stand reduced in the same proportion and shall be so paid. The word "abate" is not used to indicate that claims to the extent that they remained unpaid, stand discharged.

Section 24 confers a discharge upon the extend that his liability is reduced by the payment on a claim. To the extend the claim is not honoured by the Commissioner, the owner''s liability is not discharged.

In regard to section 27, it must be noted that the liability that is assumed by the Central Government is only such liability as arises out of any item specified in category I of the Second Schedule and has not been fully discharged by the Commissioner. The Second Schedule sets out the "order of priorities for the discharged of liabilities in respect of a sick textile undertaking". Part A thereof is comprised of category I and category II and refers to the "post-take-over management period. Part B, which is comprised of categories III to VI, relates to the "pre-take-over management period". Category I lists loans from banks, institutions and others and creditors availed of for the purpose of trade or manufacturing operations. The liability that is assumed by the Central Government, therefore, relates only as was in the hands of the custodian under the Sick Textile Undertaking (Taking Over of Management) Act, 1972.

The Nationalisation Act, read overall, does not, therefore, limit the liability of the owner to the amount of compensation under the Nationalisation Act. In providing a machinery for the adjudication of claims against as owner, the Nationalisation Act only protects the interest of creditors of the owner to the extent of the amount payable to the owner under it.

We are, accordingly, unable to accept the submission made on behalf of the appellants that, by reason of the Nationalisation Act, the liability of the owners stands discharged or curtailed and, consequently, the liability of the guarantors stand discharged.

We are supported in the view that we take by two High Courts which have considered the same or analogous provisions. In Bihar State Electricity Board and Another Vs. Gaya Cotton and Jute Mills Ltd., , the contention that no decree could be passed in view of the provisions of the Nationalisation Act was considered and it was held that the Nationalisation Act did not deal with a claim based on a personal liability which could be enforced by a suit. A single judge of the Calcutta High Court in The Indian Cable Co. Ltd. Vs. Lodna Colliery Co. (1920) Ltd., , held that the analogous provisions of the Coal Mines (Nationalisation) Act, 1973, neither directly nor by implication took away the jurisdiction of the civil courts to entertain suite against the ex-owners of collieries nationalised thereby, particularly in respect of claims arising before the appointed day. The statute only laid down a procedure for having certain claims admitted and adjudicated upon by the Commissioner at the instance of creditors, to be realised out of compensation monies payable to such owners.

In the view that we taken , it is not necessary to consider the alternative submission made by Mr. Mody, learned counsel for the respondents. We may only indicate the submission and the judgment of the Supreme Court upon which it is based. The submission is that even assuming that, by reason of the Nationalisation Act, the liability of the principal debtor stood discharged, the guarantors are not discharged. The submission is based on the judgment in Maharashtra State Electricity Board, Bombay Vs. Official Liquidator, High Court, Ernakulam and Another, . The Supreme Court held that the liquidation of the company, the principle debtor, did not have any effect on the liability of the surety of his liability.

In the view that we take, it is not necessary to consider the alternative submission made by Mr. Mody, learned counsel for the respondents. We may only indicate the submission and the judgment of the Supreme Court upon which it is based. The submission is that even assuming that, by reason of the Nationalisation Act, the liability of the principle debtor stood discharged, the guarantors are not discharged. The submission is based on the judgment in Maharashtra State Electricity Board, Bombay Vs. Official Liquidator, High Court, Ernakulam and Another, . The supreme Court held that the liquidation of the company, the principle debtor, did not have any effect on the liability of the surety. A discharge which a principle debtor secured by operation of law did not absolve the surety of his liability.

In the result, the judgment and the order of the learned single judge must be upheld.

The appeals are dismissed with costs.

Mr. Mody states that credit shall be given to all the defendants in respect of the amount, if any, received by the plaintiff from the Commissioner under the Nationalisation Act.