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State Bank Of India v. The Podar Mills Limited And Others
Factual and Procedural Background
The 1st respondents operated textile undertakings in Bombay and Jaipur. The Bombay undertaking's management was taken over in 1983 by the National Textile Corporation under the Textile Undertakings (Taking Over of Management) Act, 1983. The Jaipur unit was closed on 2 August 1985.
On 18 December 1986 the appellants (a nationalised bank) filed a suit against the 1st respondents, their directors and the National Textile Corporation to recover approximately Rs. 14.76 crores advanced on the security of immovable property mortgages and hypothecation of plant and machinery. On 14 February 1987 the appellants sought appointment of a Court Receiver and an injunction. By order dated 7 March 1988 the Court Receiver was appointed over secured movable and immovable properties, with directions about appointment of the 1st respondents as agents for the Jaipur machinery (and sale by the Receiver if the 1st respondents could not accept terms). An appeal against that order was admitted on 30 March 1988; the Appeal Court directed formal possession by the Receiver and later confirmed that ad interim order. The appeal remains pending.
On 5 May 1988 the 6th respondent (a trade union representing the Jaipur unit workmen) filed a Chamber Summons seeking to be made a defendant to the suit. The 6th respondent's supporting affidavit claimed workmen's dues under the Industrial Disputes Act of approx. Rs. 2,94,00,000 and claims for notice pay, compensation and gratuity of approx. Rs. 1,00,00,000. The affidavit stated the workmen wished to restart the undertaking, relied upon a viability study that found the unit technically viable, and asserted that the union was a "necessary and affected party" because workmen might lose jobs and be unable to recover dues.
The Chamber Summons was contested. The learned single Judge allowed the Chamber Summons and ordered that the 6th respondent be made a defendant, relying upon certain Supreme Court authorities. The appellants appealed against that order; the present opinion is the judgment of the Division Bench allowing the appeal and setting aside the single Judge's order.
Legal Issues Presented
- Whether the 6th respondent (the trade union representing the Jaipur unit workmen) is a "necessary" or "proper" party to the appellants' suit and therefore should be made a defendant.
- Whether Section 529-A of the Companies Act, 1956 (providing overriding preferential payments to workmen's dues in winding up) or the cited Supreme Court authorities (Workers of Rohtas Industries Ltd. cases and National Textile Workers' Union v. P.R. Ramakrishnan) justify adding the 6th respondent as a defendant in this non‑winding up suit.
- Whether the factual possibility of the workmen reviving the enterprise within the pendency of the suit creates a direct interest sufficient to render the union a necessary party.
Arguments of the Parties
6th Respondent's Arguments (as recorded)
- The 6th respondent asserted that, on behalf of the workmen, it had claims under the Industrial Disputes Act for wages (approx. Rs. 2,94,00,000) and for notice pay, compensation and gratuity (approx. Rs. 1,00,00,000).
- It argued that the workmen were keen to restart the undertaking, had obtained a viability study (by ATIRA) confirming technical viability, and were confident a viable scheme would be propounded within 3–4 months — hence a real prospect of revival existed.
- Because all assets of the 1st respondents appeared to be secured to the appellants, the union contended that upon execution of any decree the 1st respondents would be left asset-less and the workmen's rights (including those under Section 529-A of the Companies Act) would be lost; thus the union claimed a direct interest in the subject-matter and sought to be added as a defendant to protect the workmen's claims.
- Counsel for the 6th respondent conceded the union could not answer the issues in the suit or prevent a decree in favour of the appellants but maintained that the union's interest in the proceeds of execution and in potential revival gave it sufficient interest to be a necessary/affected party.
The opinion does not contain a detailed account of the other parties' (for example, the appellants') specific legal arguments in relation to the Chamber Summons beyond noting that the Chamber Summons was contested and that the learned single Judge relied on certain Supreme Court judgments when allowing it.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Workers of Rohtas Industries Ltd. v. Rohtas Industries Ltd., (1987) 2 SCC 588 | The Supreme Court in a winding-up context directed payment of wages from certain stocks and indicated that the order was made because there were other assets against which financial institutions could assert claims; the order addressed wages out of specific products. | The court distinguished this authority: it was a winding-up proceeding and was made under "peculiar circumstances"; the present matter is not a winding-up and the Rohtas orders were held inapplicable to justify making the 6th respondent a defendant. |
| Workers of Rohtas Industries v. Rohtas Industries Ltd., 1987 (Supp) SCC 462 | The Supreme Court reiterated that its earlier order in the Rohtas case was made under peculiar circumstances and "may not be taken as a precedent" for general application; the Court considered sufficiency of company assets when directing limited payment to workers. | The court relied on this clarification to conclude the Rohtas decisions could not be relied upon by the 6th respondent to be added as a defendant in a non‑winding up suit. |
| National Textile Workers' Union v. P.R. Ramakrishnan, AIR 1983 SC 75 (1983 Tax LR 2407) | The Supreme Court in a winding-up context upheld trade unions' limited claim to appear and be heard (audi alteram partem) because winding up may terminate workers' services and fairness requires an opportunity to be heard. | The court held this authority did not help the 6th respondent's claim to be made a defendant in the present suit; it was relevant only to a right to be heard in winding-up proceedings, not to being added as a defendant in ordinary suits. |
| Udit Narain Singh v. Board of Revenue, AIR 1963 SC 786 | Defines "necessary party" and "proper party": a necessary party is one without whom no effective order could be made; a proper party is one whose presence is desirable for a complete and final decision though an effective order could still be made in their absence. | The court applied this definition and concluded the 6th respondent satisfied neither test; it was neither a necessary nor a proper party to the suit. |
Court's Reasoning and Analysis
The court began with the foundational question whether the 6th respondent could assist in resolving any of the issues in the suit or prevent a decree in favour of the appellants. Counsel for the 6th respondent conceded it could not do either. The union's asserted interest rested on the feared loss of workmen's dues upon realization of secured assets by the appellants and on Section 529-A of the Companies Act.
The court analysed Section 529-A and observed that its preferential payment scheme applies expressly "in the winding up of a company." Because the present matter is an ordinary suit (and not a winding-up proceeding), Section 529-A did not assist the 6th respondent in establishing that it was a necessary or proper party to the suit. The court therefore rejected the statutory argument that would convert the union's claimed rights under Section 529-A into a basis for party‑status in this suit.
Turning to the doctrinal test (Udit Narain Singh), the court explained that a "necessary party" is one without whom no effective order could be made, while a "proper party" is one whose presence is desirable for a complete decision though an effective order could still be made without them. Applying these tests, the court found that the 6th respondent met neither criterion: the suit's issues could be effectively adjudicated and any decree could be executed without the union's presence.
The court then examined the Supreme Court authorities relied upon by the single Judge. The Rohtas decisions were considered: those orders were made in a winding-up context, related to payment from specific stocks, and were described by the Supreme Court itself as decided under "peculiar circumstances" and not to be treated as general precedent. The Division Bench distinguished Rohtas on two grounds: (1) the present case is not a winding-up; and (2) the Rohtas order related to allocation of particular secured products where the balance of assets was considered sufficient to protect financial institutions. For those reasons the Rohtas authorities could not be invoked to compel adding the 6th respondent here.
The court addressed National Textile Workers' Union v. P.R. Ramakrishnan and noted that the unions in that case had limited their claim to the right to appear and be heard in a winding-up petition; the Supreme Court's majority decision grounded that right in the audi alteram partem principle because winding-up orders can terminate workers' services. The Division Bench held that this decision did not support the union's contention that it must be made a defendant in an ordinary suit.
The court also observed that the 6th respondent’s case rested on an anticipated scheme to restart the works within 3–4 months; those months had expired by about September 1988 and, as at the time of the Division Bench hearing, counsel for the union had no instructions about any such scheme.
Given these considerations — inability of the union to assist in deciding suit issues, inapplicability of Section 529-A to the suit, the doctrinal tests for necessary/proper parties, the distinguishable nature of the cited precedents, and the absence of any active revival scheme — the court found no justification to make the union a defendant.
Holding and Implications
Holding: The Division Bench allowed the appeal and set aside the single Judge's order. The Chamber Summons brought by the 6th respondent was dismissed. The court directed no order as to costs throughout.
Implications:
- The direct effect is that the 6th respondent (the trade union) will not be made a defendant to the appellants' suit; the appellants may proceed without adding the union as a party.
- The court emphasized that Section 529-A (preferential payments in winding up) does not apply to ordinary suits and therefore cannot be invoked to convert trade‑union claims into a basis for party status in such suits.
- The Division Bench expressly distinguished the cited Supreme Court decisions (Rohtas and National Textile Workers' Union) on the grounds that they arose in winding-up contexts or peculiar circumstances and thus do not establish a general rule requiring addition of unions as defendants in non‑winding up litigation. The opinion did not purport to lay down any broader precedent beyond the facts and reasoning stated; it confined its ruling to the direct effect on the parties in this matter.
Appeal allowed.
Bharucha, J.:— This is an appeal against the judgment and order of Guttal, J. making absolute the Chamber Summons filed by the applicant (the 6th respondent before us) to make it a defendant to the suit.
2. The 1st respondents have textile undertakings in Bombay and Jaipur. The management of the Bombay undertaking was taken over in 1983 by the National Textile Corporation under the provisions of the Textile Undertakings (Taking Over of Management) Act, 1983. The Jaipur unit was closed on 2nd August, 1985.
3. On 18th December, 1986 the appellants, who are a nationalised bank, filed this suit against the 1st respondents, their directors and the National Textile Corporation to recover the sum of (approximately) Rs. 14.76 crores which had been advanced by the appellants to the 1st respondents on the security of the mortgage of immoveable property and the hypothecation of plant and machinery. On 14th February, 1987 the appellants took out a Notice of Motion for the appointment of the Court Receiver as Receiver of the security and for an injunction restraining the respondents from disposing it of. The Notice of Motion was, by an order dated 7th March 1988, made absolute in terms of prayer (a), i.e to say, the Court Receiver was appointed Receiver of the secured moveable and immoveable properties. The Court Receiver was directed to appoint the 1st respondents the agents of the Court Receiver in respect of the machinery, fittings, fixtures and the immoveable property of the Jaipur undertaking. If the 1st respondents were not willing or not in a position to accept the terms and conditions fixed by the Court Receiver in this regard, the Court Receiver was given the liberty to have the machinery and moveables sold and retain the net sale proceeds. There was an appeal against the order dated 7th March, 1988. The appeal was admitted on 30th March, 1988. The Appeal Court, while it did not stay the operation of the order, directed that the Court Receiver should take formal possession of the property, both, immoveable and moveable. This ad interim order was confirmed when the Notice of Motion reached hearing before the Appeal Court. The appeal is still pending.
4. On 5th May, 1988 the Chamber Summons with which we are here concerned was taken out by the 6th respondent. The 6th respondent is a trade union representing the workmen of the 1st respondents in the Jaipur unit. It was the case of the 6th respondent in the affidavit in support of the Chamber Summons that it was, on behalf of these workmen, entitled to make a claim against the 1st respondents for full wages from August, 1985 under the provisions of the Industrial Disputes Act in the sum of approximately Rs. 2,94,00,000/- and also a claim for notice pay, compensation and gratuity in the sum of approximately Rs. 1,00,00,000/-. The workmen were very keen to re-start the undertaking and had approached the appropriate authorities of the State and Central Governments in that behalf. An exhaustive viability study had been made by the Ahmedabad Textile Industry Research Association, which had concluded that the Jaipur unit was technically viable. The workmen were confident that a viable scheme would be propounded within 3 to 4 months. In the circumstances, it was clear that the 6th respondent was a “necessary and affected party with the results and outcome of the above suit in asmuch as the workers may lose their job and may not be able to recover the dues to the tune of Rs. 4,25,00,000/- (approx.).”
5. The Chamber Summons was contested. The learned single Judge allowed the Chamber Summons and directed that the 6th respondent be made a defendant to the suit. The learned Judge relied upon the judgments of the Supreme Court in Workers of Rohtas Industries Ltd. v. Rohtas Industries Ltd., (1987) 2 Supreme Court Cases 588, Workers of Rohtas Industries v. Rohtas Industries Ltd., 1987 (Supp) Supreme Court Cases 462, and National Textile Workers Union v. P.R Ramakrishnan, AIR 1983 SC 75 : (1983 Tax LR 2407). In his view, the judgments established a nexus between the claim of the workmen and the relief claimed in the suit. If the workmen succeeded in their efforts to revive and rebuild the undertaking, they would be able to produce goods and increase the wealth of the 1st respondents, in which event the appellants would be able to realise the debt without selling the security and, consequently, the claim in regard to the sale of the mortgaged and hypothecated property might be rejected. The suit had been filed in 1986. It was possible for the workmen to revive and revitalise the undertaking and make it a profitable enterprise and this could happen before the suit was heard and disposed of in the ordinary course. The 6th respondent had, therefore, a direct interest in the subject-matter of the suit, limited though it was to the sale of the mortgaged and hypothecated property, and it was, therefore, a necessary party to the suit.
6. We shall consider the relevant judgments. We think it necessary to go first to the basics. We asked Mr. Shah, who appeared on behalf of the 6th respondent, whether the 6th respondent could help in answering the issues in the suit; he, fairly and quite rightly, stated that it could not. He also rightly stated that the 6th respondent could not prevent a decree from being passed in favour of the appellants. His submission, however, was that since all the assets of the 1st respondents were secured to the appellants, as seemed apparent from the plaint, they would be realised in execution of the decree so that the 1st respondents would remain an empty husk without any assets. In the circumstances, the legal rights of the workmen, given by Section 529-A of the Companies Act, 1956, would be lost. It was true that the execution of the decree could be not stopped by the 6th respondent but the proceeds of such execution would have to be apportioned between the appellants and the workmen.
7. Since emphasis has been placed upon Section 529-A, it needs to be reproduced.
“529-A. Overriding preferential payments. (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company —
(a) workmen's dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues;
shall be paid in priority to all other debts.
(2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.”
It will be seen that workmen's dues and dues due to secured creditors are, by that provision, to be paid in priority to all other debts “in the winding up of a company.” This is not a winding up proceeding but a suit. Section 529-A, therefore, does not help the 6th respondent in its claim that it is a necessary party to the suit. It is not even a proper party thereto. In this behalf we may refer to the judgment of the Supreme Court in Udit Narain Singh v. Board of Revenue, AIR 1963 SC 786. The Supreme Court said that a necessary party was one without whom no order could be made effectively and a proper party was one in whose absence an effective order could be made but whose presence was necessary for a complete and final decision on the question involved in the proceeding. The 6th respondent does not satisfy either requirement. On principle, therefore, the 6th respondent is neither a necessary nor a proper party to the suit.
8. The Supreme Court was considering a winding up proceeding in Workers of Rohtas Industries Ltd. v. Rohtas Industries Ltd., (1987) 2 Supreme Court Cases 588. It had before it a claim to wages for about 7 years. It passed an order limited to “stocks which were the products of this industry before its closure” and directed that the wages should be paid thereout. It did so because: “So far as the pledge and the priority of the financial institutions are concerned, we have no doubt that they have other sufficient securities and properties of the company and, therefore, if this stock of finished products are sold to meet the basic requirements of the workers, their interests would not be in jeopardy.” This order is distinguishable from the facts before us inasmuch as (1) this is not a winding-up proceeding; and (2) the claim is not for a part of the secured property on the basis that the balance is enough to meet the claim in full. This order came up for consideration again in Workers of Rohtas Industries v. Rohtas Industries Ltd., 1987 (supp) Supreme Court Cases 462, and the Supreme Court then said that in the earlier order it had already indicated “the peculiar circumstances of the case”. These considerations were kept in view when the various claims of the financial institutions were brushed aside from immediate consideration and wages for the limited period were directed to be disbursed. The Supreme Court added, “We have no difficulty in saying that order of this Court was made under peculiar circumstances obtaining in this case and may not be taken as a precedent. Whether the company's assets are sufficient to meet all the liabilities is a matter which is yet to be seen and this Court really intended to say that there were other assets against which the financial institutions could pitch their claim”. In our view, therefore, neither of these orders can be availed of by the 6th respondent.
9. In National Textile Workers' Union v. P.R Ramakrishnan, AIR 1983 SC 75 : (1983 Tax LR 2407), trade unions had made a claim to be made parties to a winding-up petition but at the hearing before the Supreme Court “it was conceded on behalf of these two unions that they were not pressing their applications for being added as parties, ….. and they were claiming only the right to appear and be heard in support or opposition to the winding up petition.” The majority judgment of the Supreme Court upheld this limited claim relying upon the audi alteram partem rule for it was “difficult to imagine how any system of law which is designed to promote justice through fair play in action can permit the Court to make a winding up order which has the effect of bringing about termination of the services of the workers without giving them an opportunity of being heard against the making of such order.” It is difficult to see how this judgment can assist the 6th respondent in its claim to be made a defendant to the suit.
10. We have mentioned that the affidavit-in-support of the Chamber Summons proceeded upon the basis that a viable scheme to re-start the Jaipur unit would be formulated by the workmen in 3 to 4 months. These 3 to 4 months expired in or about September 1988. We are told by Mr. Shah that he has no instructions to date about any such scheme.
11. For the reasons aforementioned, there is no justification for making the 6th respondent a defendant to the suit. The appeal is allowed. The judgment and order of the learned single Judge are set aside. The Chamber Summons is dismissed. There shall be no order as to costs throughout.
Appeal allowed.
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