M/S Venkateswara Ric... v. Union Bank Of India,...

1. The twin writ petitions though filed for different reliefs, since common questions of fact and law arise for adjudication between the same parties, they can be disposed of by a common judgment. The petitioner, a partnership firm was registered as a small scale industry and claims to be a sick unit and needs nursing by the inflow of additional finances to restore its normalcy. Therefore, it seeks Writ of Mandamus to direct the respondents to covert the outstanding liability in the relevant accounts into a long term loan, to evolve a scheme rescheduling the repayment in tune with the guidelines issued by the Reserve Bank of India to help the sick units under nursing programme and to direct not to deduct 15% and 50% of the sale amounts derived by the petitioner by sale of levy and non-levy rice respectively and for other reliefs.

2. The material facts averred are as follows: Due to frequent change in the policy of the Government to give levy rice to the Central Government and the State Government quotas, the petitioner-mill ran into financial troubles; thereby it became a sick industry. Anterior thereto, the first respondent accorded loans on sufficient hypotheca. Account Nos. 1 and 2 have been opened and they are being operated upon. When the firm became a sick industry, it had approached the respondents to apply the Nursing programme to the petitioner to rehabilitate and to regenerate its activities so as to restore its normal health. The circulars issued by the Reserve Bank of India from time to time have come in aid to the petitioner for application thereof. On inspection, the subordinates of the respondents found that the petitioner is a sick industry and agreed to apply the Nursing Programme. They accorded additional inputs by necessary finances, but started collecting 15% and 50% of the sales made by the petitioner from its very inception from the sales of the levy and non-levy rice. As a result, feeding its finances and augmenting the resources to set stability in the petitioner is being jeopardished. As a result, the petitioner is constrained to approach this Court for the above reliefs.

3. The respondents in the counter-affidavit, have admitted that they have lent money to the petitioner on hypotheca, but the petitioner-industry has supressed of securing loans from other banks and private agencies and on becoming aware thereof the respondents with the consent of the petitioner-industry have discharged the liabilities. There is an outstanding liability of nearly Rs. 18.00,000/- due and payable by the petitioner. The petitioner is not a sick industry. The respondents did not agree for the Nursing Programme. When it is about to take legal recourse to recover the outstandings, with a view to put spokes in their way, the petitioner approached this Court. Therefore, there are no bona fides on the part of the petitioner.

4. At the outset, Sri M.S.K Sastry, learned counsel for the respondents raised preliminary objection of maintainability of the writ petitions against the respondents. It is stated that the respondent-bank is a commercial venture. It is not a State amenable to, jurisdiction under Article 226 of the Constitution of India. I am disposed to reject his contention as being too late just to put the clock back and the respondents/in the day/awoke from their deep slumber but in the interregnum, judicial tidal waves have swept off the shores of archaic conceptions root and branch. Though the respondent. is a bank engaged in commercial activity, the preamble to the Constitution which is an integral part thereof envisages establishment of an egalitarian State rendering economic justice to every citizen. Article 38 enjoins the State to strive to pomote the welfare of the people to secure social, economic and political justice. It also further mandates the State to strive to minimise the inequalities in income and to endeavour to eliminate inequalities in status, facilities and opportunities not only among individuals but also among groups of people engaged in different avocations who are residing in different areas. The State, though a welfare State, is also entitled under law to undertake commercial activities. Article. 19(6)(ii) of the Constitution enables the State to carry on any trade, business, etc., to the exclusion of the citizens. The respondent is a Nationalised Bank amenable to the control and discipline in the management of its business by the Central Government and the Reserve Bank who is entitled to issue instructions either statutory or executive at the instance of the Central Government in the working or management of the affairs of the respondent. The respondents are bound thereby. It is, thus, an “other authority” within the meaning of Article 12 of the Constitution. Therefore, it is a “State” amenable to the jurisdiction of this Court under Article 226 of the Constitution. The preliminary objection is accordingly rejected.

5. It is next contended that the lis has its birth from contractual womb. The stream cannot rise higher than the source. Therefore, it being a contractual liability, the petitioner cannot seek remedy against the respondents interdicting its right to recover by issue of writ of mandamus. Therefore, even if it is assumed that there is illegality, no mandamus can be issued Therefore, the writ is not maintainable. In support of his contention, Sri M.S.K Sastry, learned counsel for the respondents placed reliance on the decision in Radhakrishna Agarwal v. State of Bihar(1). It is true that it the relief in the writ petition is squarely and purely founded on contractual premise disregard of statutory character or a statutory responsibility enjoining the respondents to abide thereby, certainly the remedy for enforcement of the contractual liability lies elsewhere and this Court has to direct the petitioner to seek redressal for injury elsewere. But when its operation is grounded on a statutory thrust and the disobedience thereof impinges the statutory provisions or enforceable executive instructions in vogue issued by the state, certainly this Court' in exercise of its power under Article 226 of the Constitution could issue appropriate writ or direction compelling the respondent to abide by the laws. Therefore, the writ petitions cannot be thrown out at its threshold and this Court has to no into merits and see whether the lis in the writ petitions is foundded on purely contractual claim or has its birth from statutory or executive instructions which the respondents are to abide by. Before going into those and consequential questions, it is necessary to set out the relevant factual data. The petitioner was granted a term loan upto to a limit of Rs. 4,00,000/- for purchase of the machinery; working capital in C.C.I, cash credit (on hypotheca of raw material) upto a limit of Rs. 5,00,000/-, Rs. 2.5 lakhs towards levy rice with interest at 12.5% per annum and Rs. 2.5 lakhs towards non-leavy with interest payable thereon at 18% per annum. The cash credit hypotheca account is divided into Account No. 1 and Account No. 2. There is third account called Documentary Bill purchase (DBP) for non-levy, for sales to other States and was grated upto Rs. 1,00,000/-. The petitioner had increased the intake of raw material i.e, paddy and productive capacity of conversion into rice. The Government have also increased the rate of levy, from time to time. Pursuant to a representation made by the petitioner, the Technical Officer inspected it and in his report dated February 12, 1985 a copy of which was sent by the Zonal Manager in his letter dated Feb 13, 1985 to the Head Office at Bombay mentioned that as on January 25, 1985, the petitioner had the facility of an outstanding account of Rs. 6,41,694-44 on C.C No. 1 Rs. 3,13,480/- on CC. No. 2 Term Loan Rs. 3,37,653-91 and D.B.P Rs. 47,500/-. It is also stated that the capacity of the mill to manufacture rice is 240 quintals per day and 54,000 quintals per year. The petitioner is entitled to, as per the instructions of the Reserve Bank, to a concessional rate of interest at 12.5% on levy rice. Most of the rice mills during the preceding season incurred losses. The petitioner-unit had all infractural sic. infrastructure facilities, access to market, availability of raw material, viz., paddy and he recommended “to apply the Nursing programme for revival of the petitioner-unit.” By letter dated August 23, 1985 the Zonal Technical Consultancy Cell of the respondents at Banglore while pointing out the defects, has recommended that it is not worthwhile to extend the Nursing Programme to the petitioner. Then the petitioner unit had approached the Government of India and the Reserve Bank of India. But, before any action is taken he filed the writ petitions. At this juncture, it is to note that when the petitioner had approached for the additional loan facilities on giving additional security, the respondents have granted loan, but started recovering immidiately from the sale proceeds a major portion i.e, 15% and 50% from levey and non-levy sales respectively towards the discharge of the debts, thereby there is no scops for augmenting working capital as internal surpluses to secure stability in working the industry. On the other hand, it would deplete not only the working capital but also annihilates the very industry. Thus, the petitioner-unit is not able to meet the levy demand from the Governments both Central and State and is not in the position to run the business effectively on healthy lines.

6. From these facts, the material questions that emerge are whether the petitioner is a sick unit; whether the respondents are bound by the instructions admittedly issued by the Reserve Bank of India to revive the sick unit and whether the writ of Mandamus can be issued as prayed for?

7. Section 21 of the Banking Regulation Act (10 of 1949), for short, “the Act”, gives power to the Reserve Bank to control advances to be made by the Banking Companies. Sub-section (1) thereof postulates that where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any hanking company in particular, and when the policy has been so determined all, banking companies or the banking company concerned, as the case may be shall be bound to follow the policy so determined. Clause (e) of subsection (2) adumbrates that the Reserve Bank has also power to give directions as to the rate of interest and other terms and conditions on which advances or financial accommodation may be made or guarantees may be given. Subsection (3) mandates that every banking company shall be bound to comply with any directions given to it under Section 21. The Central Government is also empowered under Sec. 30 of the Reserve Bank Act, 1934 or under Section 25(5) of the Act to exercise control on the banks. Thus, it must be held that the respondents being a banking company more particularly a Nationalised Bank shall be bound by Section 21 to abide by the Banking Policy issued by the Reserve Bank or Central Government on their being satisfied that it is expedient in the public interest to make such policy or the rate of interest in that regard or other terms and conditions of advances or financial accommodation.

8. In Circular SIB No. 100, dated September 28, 1979 the Reserve Bank of India issued consolidated guidelines to identity small scale sick indus tries for their rehabilitation. Under point 1.1 “Sick unit” is defined as “a unit which fails to generate internal surplus on a continuing basis, and depends for its survival on frequent infusion of external funds………………………”. In point No. 2.1 it is stated that the Reserve Bank of India at a seminar on sick industries, resolved that a sick industry to be identified is one which is incurring cash losses. If the erosion of the loss of capital is 50%, it may face liquidity problems apart from imbalance in its financial structure leading to depletion of working capital in its business and the need for infusion of the funds and it needs infusion of funds from outside source for its survival (vide point No. 2.3) and the banks are the sources to infuse additional funds.

9. From the evidence placed before me by both the parties, it is clear that the loss is not either 50% or more than 50%. On the other hand on the additional loan facility having been granted by the respondents, as a facts, the petitioner started generating its business. From a reading of the deflation and the factual circumstances, it would be clear that the petitioner-unit is a sick industry. Obviously, the officers who inspected the petitioner-unit in the letters referred to hereinbefore found the insignia that the petitioner is a sick industry. But in the first letter, it is left to the discretion of the higher authorities to take a decision and in the second letter the Technical Adviser recommended not to treat the petitioner as a sick industry. The question is whether such an attitude is feasible or is in consonance with the objectives of the revival of the sick industry.

10. Under the caption “Objective of a Nursing programme”, the Reserve Bank of India has stated that the basic objective of Nursing Programme is “to restore the unit's capacity, and to generate internal surpluses.” The internal surpluses could be used to reduce the irregularity if any or inherent failure in the working of the unit. In the second objective, it is recognised that a sick unit usually has considerable debt burden which “hangs like a millstone round its neck”. In clause thirdly, it is realised that the sources of the finance will be the Bank as the borrowers' resources to operate at a higher level of activity. The sick unit requi???es additional inputs of finances. Financial constraints could be tided over only gradually out of the internal generation of surplus. Under clause fourthly, therefore, it is adumbrated that the repayment programme “has to be carefully worked out; enough funds should be available in the business to operate at the desired level, with a view to ensuring continued internal generation of surplus.”

11. It is thus clear that due to inherent financial constraints audi: mounting debt liability the small scale industry is groaning under its harden;. seeking to tide over this difficulty. The Nursing Programme is intended to come in aid to stabilise such an industry. The source to lend the finances is” the Bank so that the additional inputs would be applied to generate internal-surplus. The desire of the Bank officials should be to resuscitate the sick unit. The guidelines are mere guides. Each case would present its peculate facts. In the light of those facts, the officers would carefully analyse and wisely apply the Nursing programme with a desire to sustain the industry, so that the generated internal surpluses would be ploughed back into the industry to attain stability in its working but not with immediate animation to recover the finances advanced. In that process, the repayment programme should be carefully worked out in such a way that there would remain enough surplus funds in working of the business to operate at the desired level. If the motivation of the enterpreneur is, to swindle the public money without appreciable personal stakes involved therein and extension of Nursing Programme would be an added impetus to further escalation, or when its teh???bilitation is beyond redemption; of course, in such situations, the application of free Nursing Programme would be a futile exercise and the officers may allow the industry to have its natural death. Obviously* keeping this objective in view, the Reserve Bank of India itself has cautioned the officers to proceed with the “implementation of the Nursing Programme with an “approach to a Nursing [Programme” to “improve the capability of the unit to generate internal surplus”. The systematic approach in that regard to achieve the objective was reiterated in paragraph 2 of the enclosing letter to the guidelines that “the operating staff should have a proper attitude, approach and understanding” towards the sick units and should understand that the policy is “translated into action without any distortion” Even in the latest letter dated July 4, 1984, the Reserve Bank had directed to levy interest at 12½% on the loans given to supply levy quota.

12. In Shashi Kumar v. State of Bihar 1986 1 SCC 64., the facts are that the Government of India had evolved a scheme to encourage graduate unemp loyed enterpreneurs to set up Agro Service Centres to augment agricultural production in the country and directed the banks to advance loans for the implementation of the scheme. The petitioners and persons similarly situated had taken aid of and secured the loans from the Banks in the State of Bihar, but due to teething trouble, they committed default in payment of the loans taken necessitating the bank to lay action for the recovery thereof. When the bank was to approach the civil court to recover the loans advanced, the petitioners therein filed writ petitions in the High Court of Bihar which ended in dismissal, but they appealed to the Supreme Court While granting leave, Pathak, J. speaking on behalf of their Lordships of the Supreme Court considered the problem in a pragmatic reality and directed the Government of India to evolve a new procedure to tide over the difficult situation in which the enterpreneurs were placed and to provide appropriate infrastructure to subserve the Agro Service Centres so as to enable the enterpreneurs to carry on their trade or occupation or business assured under Article 19 (1) of the Constitution of India. As seen the preamble of the Constitution and the Directive Principles of the State Policy in Part IV are to render economic justice in a welfare State to its people by securing and protecting as effectively as it may a social order in which social justice shall inform all the institutions of the national life and the endeavour of the State shall be to minimise the inequalities in income, facilities and opportu nities among persons engaged in different avocations. The Nursing Pro gramme is a step-in-aid to establish economically sound based units in the process of establishing an egalitarian State affording economic opportunity to the small enterpreneurs.

13. In a perusal of the pleadings and the material placed before me, it would appear that the petitioner's unit was started with an ambitious pro gramme to mill paddy and produce the rice in a large scale as a small scale industry, but its internal financial resources started depletion due to misma nagement. The petitioner approached the respondents for additional finances on giving adequate hypothieca. Though finances have been given, the condi tions imposed thereunder are onerous, charging of interest and recovery. The interest charged thereunder is contrary to the directions. The recovery of 50% from the sale proceeds for the discharge of debts would practically stand an impediment to generate the internal resources to secure stability in the business. When the petitioner industry approached the respondents, there appears to be some misunderstandings, though there is an averment that the officer concerned of the respondents has demanded illegal gratification; and it is a far cry in the banking system. In the view I am taking it is not necessary to go into that question. But, suffice it to state that there is a lurking suspicion in thai regard and that all is not well. I need not pursue further in this regard. It is not as if the petitioner-firm had not given sufficient security as hypotheca for the finances advanced by the respondents. It is not as if the petitioner-industry would not be in a position to repay the loans advanced, but what it needs is sufficient breathing time to tide over the teething trouble and to stabilise its working by generating internal surplus working capital and in that regard it needs postponement of the recovery. Under the guidelines the maximum priod to be availed of is 10 years. The petitioner-industry seeks only for two to three years. The petitioner is prepared to pay the interest at 12½% as prescribed under supply of levy rice scheme on the advances in that account and the commercial rate of interest on the non-levy, but immediate recovery would stumble generating internal surplus of working capital. The respondents have spread its “protective umbrella” but when the petitioner-industry is convalescing from its sickness in its thrust to restore its normal health taking away the protective umbrella would render the sick industry to liquidation defeating the very objective of Nursing Programme of the sick industry. Thus, the respondents have not adopted not merely a sympathetic approach in the language of the Reserve Bank “a proper attitude, approach and understanding towards sick units”, thereby failed to translate into action the Nursing Programme in its true spirit and thereby in the language, the of Reserve Bank “distorted the policy” thus necessitating the issue of the writ as sought for.

14. Under those circumstances, the respondents are directed to reschedule the repayment of the advances made by the respondents and payable by the petitioner-industry in the respective accounts by converting them into long term loans by evolving a suitable scheme for repayment, spilling over to repay in suitable instalments in the light of the guidelines issued by the Reserve Bank for helping the petitioner-sick unit under Nursing Programme; direct the reconvey of the sale-proceeds as part of that scheme so as to allow requisite reasonable amount for generating the internal surplus after meeting establishment charges in running the mill. The petitioner should give an undertaking that the respondents shall have effective control and supervision in the working of the mill; the sale of the rice towards levy and non-levy; accounting of the realisations of sale proceeds therefrom regularly and continue to pay the interest and rescheduled instalments of the principal without any break. The respondents are free to make frequent inspection of the accounts of the petitioner-industry. The petitioner-industry shall submit quarterly accounts to the respondents of the sales and realisation therefrom till the debts are liquidated. If any additional security is needed, the petitioner-industry shall also furnish the same. If the petitioner commits default in any of the clauses, the Bank is free to recover the outstanding amount according to law.

15. The writ petitions are accordingly allowed, but in the circumstances, without costs.