Topic: Swadeshi Cotton Mills V. Union of India - Principles of Natural Justice
Swadeshi Cotton Mills V. Union of India
Equivalent citations: 1981 AIR 818, 1981 SCR (2) 533 - Bench: Reddy, O. Chinnappa (J), Sarkaria, Ranjit Singh, Desai, D.A. - Citation: 1981 AIR 818 1981 SCR (2) 533, 1981 SCC (1) 664 1981 SCALE (1)90 - Citator Info: RF 1985 SC 520 (35) / F 1985 SC1416 (100) / RF 1986 SC 555 (6) / RF 1986 SC1173 (24) / RF 1986 SC1571 (44) / D 1987 SC1802 (29) / RF 1988 SC 686 (12) / RF 1988 SC 782 (8,9) / F 1990 SC1402 (23) / RF 1992 SC 1 (133) - Date Of Judgment: 13/01/1981
Industries (Development and Regulation) Act, 1951, (65 of 1951) Ss. 18A(1)(b), 18AA(1)(a)-Taking over of an industrial undertaking-Opportunity of being heard-Whether and when to be given-Denial of opportunity-Whether vitiates order-Opinion of take-over by Government-Whether liable to judicial scrutiny.
Administrative Law-Doctrine of Natural Justice-What is- When applicable-Pre-decisional and post-decisional hearing- When arises.
The Industries (Development and Regulation) Act, 1951 empowers the Union of India in the public interest to take under its control the industries specified in the First Schedule to the Act. Item 23 of the First Schedule relates to textiles of various categories.
Section 15 authorises the Central Government to make or cause to be made a full and complete investigation into the circumstances of the case if the Central Government is of the opinion that (a) in respect of any scheduled industry or industrial undertaking or undertakings (i) there has been, or is likely to be, a substantial fall in the volume of production for which, having regard to the economic conditions prevailing, there is no justification; or (ii) there has been, or is likely to be, a marked deterioration in the quality of any article... which could have been or can be avoided; or (iii) there has been or is likely to be a rise in the price of any article..... for which there is no justification; or (iv) it is necessary to take any such action for the purpose of conserving any resources of national importance; or (b) any industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. After the investigation is made under section 15, section 16(1) empowers the Central Government if action is desirable, to issue appropriate directions, and section 16(2) provides for the issue of interim directions by the Central Government pending investigation under section 15.
Chapter III-A consisting of Sections 18A, 18-AA, 18-B, 18-C, 18-D, 18-E and 18-F deal with "direct management or control of Industrial Undertakings by Central Government in certain cases". Sec. 18-A empowers the Central Government by notified order, to authorise any person or body of persons to take over the management of the whole or any part of an industrial undertaking or to exercise in respect of the whole, or any part of the undertaking such functions of control as may be specified in the order, if the Central Government is of opinion that:
(a) an industrial undertaking to which directions have been issued in pursuance of section 16 has failed to comply with such directions, or (b) an industrial undertaking in respect of which an investigation has been made under 534
section 15 is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. Section 18AA(5) stipulates that the provisions of Sections 18-B to 18 E shall be applicable to the industrial undertaking in respect of which an order has been made under section 18-AA even as they apply to an industrial undertaking taken over under Section 18-A. Section 18-F empowers the Central Government to cancel the order made under section 18-A if it appears that the purpose of the order has been fulfilled or it is not necessary that the order should remain in force.
The appellant M/s. Swadeshi Cotton Mills was taken over by the Government of India by a notification dated April 13, 1978 in exercise of the powers conferred on it under clause (a) of sub-section (1) of section 18AA of the Industries (Development and Regulation) Act, 1951 on the ground that the company had by creation of encumbrances on the assets of its industrial undertakings, brought about a situation which had affected and is likely to further affect the production of articles manufactured or produced by it and that immediate action is necessary to prevent such a situation. The Government authorised the National Textile Corporation Limited to take over the management, subject to the conditions that the authorised person shall comply with all the directions issued from time to time by the Central Government and that the authorised person shall hold office for a period of five years.
The appellant Mills challenged the aforesaid order in a writ petition in the High Court. The case was heard by a Full Bench of five Judges to consider the question whether in construing section 18AA of the Industries Development and Regulation Act, 1951, compliance with the principle of audi alteram partem is to be implied and whether hearing is to be given to the parties who would be affected by the order to be passed prior to the passing of the order or whether hearing can be given after the order is passed and whether the order passed under the said Section is vitiated by not giving of such hearing and whether such vice can be cured. The Bench by a majority answered the three questions as follows:-
(a) Section 18AA(1)(a)(b) excludes the giving of prior hearing to the party who would be affected by order thereunder.
(b) Section 18-F expressly provides for a post- decisional hearing to the owner of the industrial undertaking, the management of which is taken over under section 18AA to have the order made under section 18AA cancelled on any relevant ground.
(c) As the taking over of management under section 18A is not vitiated by the failure to grant prior hearing the question of any such vice being cured by a grant of a subsequent hearing does not arise.
The minority, however, held that in compliance with the principles of natural justice, prior hearing to the owner of the undertaking was required to be given before the passing of an order under section 18AA, that the second question did not arise as the denial of a prior hearing would not cure the vice by the
grant of subsequent hearing, but it would be open to the Court to moderate the relief in such a way that the order is kept alive to the extent necessary until the making of the fresh order to subserve public interest and to make appropriate directions.
After the decision on the reference the case was reheard on merits by a Full Bench of three Judges and the writ petition was allowed in part. The challenge to the validity of the order being rejected but insofar as the impugned order seeking to take over the corporate entity of the company, the corporate entity of the subsidiary and its assets, the petition was allowed and the respondents, the Union of India and the authorised person were directed to release from its control and custody and/or deliver possession of any assets or property of the company which were not referable to the industrial undertakings. Appeals to this Court were filed on behalf of the Company as well as by the Union of India and the National Textile Corporation.
Two propositions were propounded on behalf of the company that: (a) Whether it was necessary to observe the rules of natural justice before issuing a notified order under section 18AA(1)(a) and further whether section 18-F impliedly excludes rules of natural justice relating to prior hearing; and it was contended (1) the mere use of the word 'immediate' in sub-clause (a) of section 18AA does not show a legislative intent to exclude the application of audi alteram partem rule altogether. (2) The word 'immediate' in clause (a) has been used in contra distinction to 'investigate'. It only means that under section 18AA action can be taken without prior investigation under section 15. The use of the word 'immediate' in section 18AA(1)(a) only dispenses with investigation under section 15 and not with the principle of audi alteram partem altogether and this is indicated by the marginal note of section 18A and para 3 of the Statement of Objects and Reasons of the Amendment Bill which inserted section 18AA in 1971. (3) The word 'immediate' occurs only in clause (a) and not in clause (b) of section 18AA(1). It would be odd if intention to exclude this principle of natural justice is spelt out in one clause of the sub-section when the other clause does not exclude it. (4) Section 18-F does not exclude a pre-decisional hearing. The so-called post-decisional hearing contemplated by section 18-F cannot be and is not intended to be a substitute for a pre-decisional hearing. (5) Section 18F incorporates only a facet, albeit qualified, of section 21 of the General Clauses Act. The language of the Section implicity prohibits an enquiry into circumstances that led to the passing of the order of take-over and under it the aggrieved person is not entitled to show that on merits the order was void ab initio. (6) 'Immediacy' does not exclude a duty to act fairly because even an emergent situation can co-exist with the canons of natural justice. The only effect of urgency on the application of the principle of fair hearing would be that the width, form and duration of the hearing would be tailored to the situation and reduced to the reasonable minimum so that it does not delay and defeat the purpose of the contemplated action. (7) Where the civil consequences of the administrative action are grave and its effect is highly prejudicial to the rights and interests of the person affected and there is nothing in the language and scheme of the statute which unequivocally excludes a fair pre-decisional hearing and the post-decisional hearing provided therein is not a real remedial hearing equitable to a full right of appeal the Court should be loath to infer a legislative intent to exclude even a minimal fair hearing at the
pre-decisional stage merely on ground of urgency. (8) The Central Government appointed four Government Officials including one from the office of the Textile Commissioner to study the affairs of the Company and to make recommendation. This Official Group submitted its report on February 16, 1978. The evidence on the basis of which the impugned order was passed was not disclosed to the appellant company till May 1978, only after it had filed the writ petition in the High Court. If there was anything adverse to the appellants in the survey report there was time enough about six weeks between the submission of the Survey Report and the passing of the impugned order for giving a short, reasonable opportunity to the appellants to explain the adverse findings against them. If there was immediacy situational modifications could be made to meet the requirement of fairness, by reducing the period of notice; that even the manner and form of such notice could be simplified to eliminate delay, that telephonic notice or short opportunity for furnishing their explanation to the Company might have satisfied the requirements of natural justice. Such an opportunity of hearing could have been given after the passing of a conditional tentative order and before its enforcement under section 18AA. For the interregnum suitable interim action such as freezing the assets of the Company or restraining the Company from creating further encumbrances, could be taken under section 16.
On behalf of the Union of India and the Authorised Officer it was contended that (1) the presumption in favour of audi alteram partem rule stands impliedly displaced by the language scheme, setting and the purpose of the provision in section 18AA. (2) Section 18AA on its plain terms deals with situations where immediate preventive action is required. The paramount concern is to avoid serious problems which may be caused by fall in production. The purpose of an order under section 18AA is not to condemn the owner but to protect the scheduled industry. The issue under section 18AA is not solely between the Government and the management of the industrial undertaking. The object of taking action under this Section is to protect other outside interests of the community at large and the workers. (3) The rule of natural justice to give a hearing has been incorporated in section 18-F which gives an opportunity of a post-decisional hearing to the owner of the undertaking who if he feels aggrieved can on his application be heard, to show that even the original order under section 18AA was passed on invalid grounds and should be cancelled or rescinded. (4) On a true construction of section 18AA read with section 18-F the requirements of natural justice and fair play can be read into the statute only insofar as conformance to such canons can reasonably and realistically be required of it by the provision for a remedial hearing at a subsequent stage. (5) Under section 18-F the Central Government exercises curial functions and that Section confers on the aggrieved owner a right to apply to the Government to cancel the order of take-over. This section casts an obligation on the Central Government to deal with and dispose of an application filed thereunder with reasonable expedition.
Allowing the appeal by the Company,
HELD: (Sarkaria & Desai, JJ. per Chinnappa Reddy, J. dissenting.)
In the facts and circumstances of the instant case, there has been a noncompliance with the implied requirement of the audi alteram partem rule of
natural justice at the pre-decisional stage. The impugned order could be struck down as invalid on that score alone. But in view of the commitment / concession that a hearing would be afforded to the Company, the case is remitted to the Central Government to give a full, fair and effective hearing.
1. The phrase 'natural justice' is not capable of a static and precise definition. It cannot be imprisoned in the straight-jacket of a cast-iron formula. Rules of natural justice are not embodied rules. Hence not possible to make an exhaustive catalogue of such rules. Two fundamental maxims of natural justice have now become deeply and indelibly ingrained in the common consciousness of mankind as pre-eminently necessary to ensure that the law is applied impartially objectively and fairly. These twin principles are (i) audi alteram partem and (ii) nemo judex in re sua. Audi alteram partem is a highly effective rule devised by the Courts to ensure that a statutory authority arrives at a just decision and it is calculated to act as a healthy check on the abuse or misuse of power. Its reach should not be narrowed and its applicability circumscribed.[554C-G]
2. The rules of natural justice can operate only in areas not covered by any law validly made. If a statutory provision either specifically or by inevitable implication excludes the application of the rules of natural justice then the Court cannot ignore the mandate of the Legislature. Whether or not the application of the principles of natural justice in a given case has been excluded in the exercise of statutory power depends upon the language and basic scheme of the provision conferring the power, the nature of the power the purpose for which it is conferred and the effect of that power. [556A-B]
3. The maxim audi alteram partem has many facets. Two of them are (a) notice of the case to be met, and (b) opportunity to explain. The rule cannot be sacrificed at the altar of administrative convenience or celerity; for, convenience and justice are often not on speaking terms. Difficulties, however, arise when the statute conferring the power does not expressly exclude this rule but its exclusion is sought by implication due to the presence of certain factors such as urgency where the obligation to give notice and opportunity to be heard would obstruct the taking of prompt action of a preventive or remedial nature. Audi alteram partem rule may be disregarded in an emergent situation where immediate action brooks no delay to prevent some imminent danger or injury or hazard to paramount public interests. Section 133 of the Code of Criminal Procedure empowers the magistrates specified therein to make an exparte conditional order in emergent cases for removal of dangerous public nuisances. Action under section 17 Land Acquisition Act furnishes another such instance. Similarly action on grounds of public safety public health may justify disregard of the rule of prior hearing. [556C-H]
4. Cases where owing to the compulsion of the fact situation or the necessity of taking speedy action no pre- decisional hearing is given but the action, is followed soon by a full post-decisional hearing to the person affected do not in reality constitute an exception to the audi alteram partem rule. To call such cases as exception is a misnomer because they do not exclude fair play in action but adapt it to the urgency of the situation by balancing the competing claims of hurry and hearing. [560H-561A]
5. The general principle as distinguished from an absolute rule of uniform application seems to be that where a statute does not in terms exclude this rule 538
of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. [561G]
6. If the statute conferring the power is silent with regard to the giving of pre-decisional hearing to the person affected and the administrative decision taken by the authority involves civil consequences of a grave nature and no full review or appeal on merits against that decision is provided courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing shorn of all its formal trappings and dilatory features at the pre-decisional stage, unless viewed pragmatically it would paralyse the administrative process or frustrate the need for utmost promptitude. [561H] 7(i). A comparison of the provisions of Section 18A(1)(b) and Section 18AA(1)(c), bring out two main points of distinction: First, action under Section 18A(1)(b) can be taken only after an investigation had been made under Section 15; while under Section 18AA(1)(a) or (b) action can be taken without such investigation. The language, scheme and setting of Section 18AA read in the light of the Objects and Reasons for enacting this provision make this position clear beyond doubt. Second, before taking action under Section 18A(1)(b), the Central Government has to form an opinion on the basis of the investigation conducted under section 15, in regard to the existence of the objective fact, namely: that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest; while under section 18A(1)(a) the Government has to satisfy itself that the persons incharge of the undertaking have brought about a situation likely to cause fall in production, by committing any of the three kinds of acts specified in that provision. This shows that the preliminary objective fact attributable to the persons in charge of the management or affairs of the undertaking, on the basis of which action may be taken under section 18(A)(1)(b), is of far wider amplitude than the circumstance, the existence of which is a sine qua non for taking action under section 18AA(1). The phrase "highly detrimental to the scheduled industry or public interest" in section 18-A is capable of being construed to cover a large variety of acts or things which may be considered wrong with the manner of running the industry by the management. In contrast with it, action under section 18AA(1)(a) can be taken only if the Central Government is satisfied with regard to the existence of the twin conditions specifically mentioned therein, on the basis of evidence in its possession. [569D-H]
7(ii). An analysis of section 18AA(1)(a), indicates that as a necessary preliminary to the exercise of the power thereunder, the Central Government must be satisfied "from documentary or other evidence in its possession" in regard to the co-existence of two circumstances: (i) that the persons in charge of the industrial undertaking have by committing any of these acts, namely, reckless investments, or creation of incumbrances on the assets of industrial undertaking, or by diversion of funds, brought about a situation which is likely to affect the production of the article manufactured or produced in the industrial undertaking, and (ii) that immediate action is necessary to prevent such a situation.
8. It cannot be laid down as a general proposition that whenever a statute confers a power on an administrative authority and makes the exercise of that power conditional on the formation of an opinion by that authority in regard 539
to the existence of an immediacy, its opinion in regard to that preliminary fact is not open to judicial scrutiny at all. While it may be conceded that an element of subjectivity is always involved in the formation of such an opinion, the existence of the circumstances from which the inference constituting the opinion, as the sine qua non for action, are to be drawn, must be demonstrable, and the existence of such "circumstances", if questioned, must be proved at least prima facie. [571 E-G]
9. From a plain reading of section 18AA, it is clear that it does not expressly in unmistakable and unequivocal terms exclude the application of the audi alteram partem rule at the pre-decisional stage. [574B]
In the instant case, so far as Kanpur Unit is concerned, it was lying closed for more than three months before the passing of the impugned order. There was no 'immediacy' in relation to that unit, which could absolve the Government from the obligation of complying fully with audi alteram partem rule at the pre-decisional or pre- takeover stage. [583A]
Keshav Mills Co. Ltd. v. Union of India,  3 S.C.R. 22; Kamla Prasad Khetan v. Union of India,  S.C.R. 1052; Maneka Gandhi v. Union of India,  2 S.C.R. 621; Sukhdev Singh & Ors. v. Bhagatram Sardar Singh,  3 S.C.R. 619; A. K. Kraipak v. Union of India,  1 S.C.R. 457; Ridge v. Baldwin,  A.C. 40; 196; Heatley v. Tasmanian Racing & Gaming Commission, 14 Australian Law Reports 519; Nawabkhan Abbaskhan v. State of Gujarat,  3 S.C.R. 427; State of Orissa v. Dr. Bina Pani Dei,  2 S.C.R. 625; Ambalal M. Shah v. Hathi Singh Manufacturing Co. Ltd.  3 S.C.R. 171; and S. L. Kapoor v. Jagmohan & Ors.,  1 S.C.R. 746, referred to.
(Per Chinnappa Reddy, J. dissenting)
The principles of natural justice are not attracted to the situations contemplated by section 18AA of Industries (Development and Regulation) Act.
1. Natural justice like Ultra Vires and Public Policy is a branch of the public law and is a formidable weapon which can be wielded to secure justice to the citizen. While it may be used to protect certain fundamental liberties, civil and political rights, it may be used as indeed it is used more often than not, to protect vested interests and to obstruct the path of progressive change. The time has come to make an appropriate distinction between natural justice in its application to fundamental liberties, civil and political rights and natural justice in its application to vested interests. [590A-B]
2. Our constitution as befits the Constitution of a Socialist Secular Democratic Republic, recognises the paramountcy of the public weal over the private interest. Natural justice, ultra vires, public policy, or any other rule of interpretation must, therefore, conform, grow and be tailored to serve the public interest and respond to the demands of an evolving society. [590C]
3(i). The principles of natural justice have taken deep root in the judicial conscience of our people. They are now considered so fundamental as to be implicit in every decision making function, judicial, quasi-judicial or administra-
tive. Where authority functions under a statute and the statute provides for the observance of the principles of natural justice in a particular manner, natural justice will have to be observed in that manner and in no other. Where the statute is silent about the observance of the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice. Where the conflict is between the public interest and the private interest the presumption must necessarily be weak and may, therefore, be readily displaced. The presumption is also weak, where what are involved are mere property rights. In cases of urgency, particularly where the public interest is involved, preemptive action may be a strategic necessity. Even in cases of preemptive action, if the statute so provides or if the Courts so deem fit in appropriate cases, a postponed hearing may be substituted for natural justice. [590A-C; 591F-G]
3(ii). Where natural justice is implied, the extent of the implication and the nature of the hearing must vary with the statute, the subject and the situation. [592B]
4. The absence of the expression 'immediate action' in section 18AA(1)(b) does not make any difference. Section 18AA(1)(a) refers to a situation where immediate preventive action may avert a disaster, whereas section 18AA contemplates a situation where the disaster has occurred and action is necessary to restore normalcy. Restoration of production where production has stopped in a key industry or industrial undertaking is as important and urgent in the public interest as prevention of a situation where production may be affected. Immediate action is, therefore, as necessary in the situation contemplated by section 18AA(1)(b) as in the situation contemplated by section 18AA(1)(a).
5. The marginal note refers to the power to take over without investigation but there is no sufficient reason to suppose that the word immediate is used only to contra- distinguish it from the investigation contemplated by section 15 of the Act, though of course a consequence of immediate action under section 18AA may be to dispense with the enquiry under section 15. In fact, facts which come to light during the course of an investigation under section 15 may form the basis of action under section 18AA(1)(a). Where in the course of an investigation under section 15 it is discovered that the management have, by reckless investments or creation of encumbrances on the assets of the industrial undertaking or by diversion of funds brought about a situation which is likely to affect the production of the articles manufactured or produced in the industrial undertaking, if the Government is satisfied that immediate action is necessary to prevent such a situation, there is no reason why the Central Government may not straightaway take action under section 18AA(1)(a) without waiting for completion of investigation under section 15. [597A-B]
6. Where there is a provision in the statute itself for revocation of the order by the very authority making the decision, it appears to be unnecessary to insist upon a pre- decisional observance of natural justice. [598A]
7. The likelihood of production being jeopardized or the stoppage of production in a key industrial undertaking is a matter of grave concern affecting the public interest. Parliament has taken so serious a view of the matter that it has authorised the Central Government to take over the management of the industrial undertaking if immediate action may prevent jeopardy to production or restore production where it has already stopped. The necessity for immediate 541
action by the Central Government contemplated by Parliament is definitely indicative of the exclusion of natural justice. It is not as if the owner of the industrial undertaking is left with no remedy. He may move the Central Government under section 18-F to cancel the order made under section 18AA. [598C-D]
8. Neither section 18-F of the Industries (Development and Regulation) Act nor section 21 of the General Clauses Act by itself excludes natural justice. The exclusion of natural justice where such exclusion is not express has to be implied by reference to the subject, the statute and the statutory situation. Where an express provision in the statute itself provides for a post decisional hearing the other provisions of the Statute will have to be read in the light of such provision and the provision for post- decisional hearing may then clinch the issue where pre- decisional natural justice appears to be excluded on the other terms of the statute. That a post-decisional hearing may also be had by the terms of section 21 of the General Clauses Act may not necessarily help in the interpretation of the provisions of the statute concerned. [599 A-C] Ridge v. Baldwin, 1964 A.C. p. 40; Annie G. Phillip v. Commissioner of Internal Revenue, 75 L.E.d. 1289; John H. Fahey v. Paul Mallonee, 91 L.E.d. 2030; Margarita Fuentes v. Robert L. Shevin, Attorney General of Florida, 32 L.E.d. 2d 556 and Lawrence Mitchell v. W. T. Grant Co., 40 L.E.d. 2d 406, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1629, 1857 & 2087 of 1979.
From the Judgment and Order dated 1-5-1979 of the Delhi High Court in Civil Writ No. 408 of 1978.
F. S. Nariman, S. D. Parekh, A. D. Mehta, Lalit Bhasin, Vinay Bhasin and Vineet Kumar for the Appellants in C.A. No. 1629 and for R. 1 in C.A. No. 2087/79.
V. N. Tarkunde, S. Ganesh, K. Vasudev and T.V.S.N. Chari for the Appellants in CA 1857/79.
Soli J. Sorabjee, Solicitor General and Girish Chandra for Appellants in CA 2087 and for Respondent (UOI) in CA 1629/79.
Soli J. Sorabjee, Solicitor General, S. Ganesh Vasdev and T.V.S.N. Chari for Respondent No. 2 in CA 1629. T. V. S. N. Chari for Respondent No. 4 in CA 2087 Suresh Parik and S. Swarup for Respondent No. 3 in CA 2087. F. S. Nariman, B. P. Maheshwari and Suresh Sethi for Respondent-Swadeshi Cotton Mills Co. Ltd. in CA No. 1857 and 2087/79.
C. M. Chopra for Intervenor.
The Judgment of R. S. Sarkaria and D. A. Desai, JJ. was delivered by Sarkaria, J. O. Chinnappa Reddy, J. gave a dissenting Opinion.
SARKARIA,J. These appeals arise out of a judgment, dated May 1, 1979, of the High Court of Delhi, in the following circumstances:
Appellant No. 1 in Civil Appeal 1629 of 1979 is Swadeshi Cotton Mills Co. Ltd. (hereinafter referred to as the Company). It was incorporated as a private company with an authorised capital of Rs. 30 lakhs in 1921 by the Horseman family by converting their partnership business into a Private Joint Stock Company. Its capital was raised in 1923 to Rs. 32 lakhs and thereafter in 1945 to Rs. 52.50 lakhs by issue of bonus shares. In 1946, the Jaipuria family acquired substantial holding in the Company. Jaipuria family is the present management. By issue of further bonus shares in 1946, the capital of the Company was increased to Rs. 122.50 lakhs. In 1948, the paid-up capital of the Company was raised to Rs. 210 lakhs by the issue of further bonus shares. The subscribed and issued capital consisting mainly of the bonus shares has since remained constant at Rs. 210 lakhs.
In the year 1946, the Company had only one undertaking, a Textile Unit at Kanpur, known as "The Swadeshi Cotton Mills, Kanpur". Between 1956 and 1973, the Company set up and/or acquired five further Textile Units in Pondicherry, Naini, Udaipur, Maunath Bhanjan and Rae Bareilly. Each of these six Units or undertakings of the Company was separately registered in accordance with the provisions of Section 10 of the Industries (Development and Regulation) Act, 1951 (hereinafter called the IDR Act). In addition to these six industrial undertakings, the Company (it is claimed) had other distinct businesses and assets. It holds inter alia 97 per cent shares in the subsidiary, Swadeshi Mining and Manufacturing Company Ltd., which owns two sugar Mills. The Company claims, it has substantial income from other businesses and activities including investments in its subsidiary and in other shares and securities which include substantial holding of 10,00,000 Equity Shares of Rs. 10/- each in Swadeshi Polytex Ltd., representing 30 per cent of the total equity capital value of Swadeshi Polytex Ltd., the intrinsic value whereof exceeds Rs. 5 crores.
The Company made considerable progress during the years 1957 to 1973. The reserves and surplus of the Company increased from Rs. 2.3 crores in 1957 to Rs. 4.3 crores in 1973-74, but declined to Rs. 2.8 crores in 1976-77. The fixed assets of the Company increased from 5.8 crores in 1957 to 19 crores in 1973-74, but declined to Rs. 18 crores, registering a marginal decrease of Rs. 1 crore in 1976-77. 543
The Company maintained separate books of accounts for each of its six industrial undertakings. From and after April 1973, the Company maintained separate sets of books of accounts of the businesses and assets other than of the said six industrial undertakings. Annual accounts of the six industrial undertakings were first prepared separately in seven sets which were separately audited. The consolidated annual accounts of the Company were then prepared from such annual accounts at the registered office of the Company at Kanpur, and after audit, were placed before the shareholders of the Company. The Company made over-all profits up to the year 1969 and even thereafter up to 1975. The Balance Sheet showed that the Company suffered a loss of Rs. 86.23 lakhs after providing depreciation of Rs. 93.93 lakhs and gratuity of Rs. 48.79 lakhs, though the trading results showed a gross profit of Rs. 56.49 lakhs. During the year ending March 31, 1976, the Company again suffered a loss of Rs. 294.82 lakhs after providing for depreciation. The last Balance Sheet and Profit & Loss Account adopted by the shareholders and published by the Company relates to the year ending March 31, 1977. It shows that the Company suffered a loss of Rs. 200.34 Lakhs after taking into account depreciation of Rs. 73.27 lakhs which was not provided in accounts.
Between 1975 and 1978, the Company created the under- noted encumbrances on the fixed assets:
------------------------------------------------------------ Unit As on As on As on As on Remarks 31-3-75 31-3-76 31-3-77 31-3-78
(in lakhs) (in lakhs)
------------------------------------------------------------ 1 2 3 4 5 6
------------------------------------------------------------ (i) Pondi- 2.40 Nil Nil Nil On fixed chery assets of
(ii) Maun- 11.40 5.71 Nil Nil On fixed ath assets of
(iii)Udaipur 2.76 Nil Nil Nil On fixed assets of
(iv) Kanpur 13.44 9.75 5.95 2.00 On fixed (ICICI) asset of
(v) Kanpur Nil 150.00 150.00 150.00 On fixed assets of
------------------------------------------------------------ 1 2 3 4 5 6
------------------------------------------------------------ vi)Company 67.53 68.45 59.44 59.44 On diesel generating
(vii)Udaipur Nil 25.00 25.00 25.00 On fixed assets of
(viii)Naini Nil Nil 70.00 70.00 On fixed assets of
(ix) Kanpur, 106.20 75.31 50.67 15.97 On new Rae machinery
Bareilly of Kanpur,
& Naini Rae
------------------------------------------------- 203.73 334.22 361.06 322.41
------------------------------------------------------------ The borrowings of the Kanpur, Pondicherry, Naini, Udaipur, Maunath Bhanjan and Rae Bareilly Units of the Company as on March 31, 1978 against current assets were Rs. 256.78, 183.92, 271.05, 70.72, 47.98 and 55.82 lakhs respectively. All the encumbrances on fixed assets (except the encumbrances of Rs. 70 lakhs on the fixed assets of Naini Unit for gratuity funding to get the benefit of Section 44A of the Income-tax Act) were created prior to March 31, 1976.
In the accounting year 1976-77, only one new encumbrance was created by the Company on its fixed assets. The following are statistics of production in each of the six units of the Company during the years 1975-76, 1976-77 and 1977-78:
------------------------------------------------------------ Name of the Unit 1975-76 1976-77 1977-78 (figures in lakhs)
------------------------------------------------------------ Naini 66.13 kgs. 65.76 kgs. 72.35 kgs. Udaipur 18.51 kgs. 18.50 kgs. 18.60 kgs. Maunath Bhanjan 15.59 kgs. 16.63 kgs. 18.49 kgs. Rae Bareilly 12.09 kgs. 13.58 kgs. 14.00 kgs. Pondicherry 170.52 Mtrs 178.77 Mtrs 176.54 Mtrs Kanpur 318.75 Mtrs 472.12 Mtrs 238.22 Mtrs ------------------------------------------------------------ 545
On April 13, 1978, the Government of India in exercise of its power under clause (a) of sub-section (1) of Section 18AA of the IDR Act, passed an order (hereinafter referred to as the impugned order) which reads as follows: "SO 265(E)/18AA/IDRA/78-Whereas the Central Government is satisfied from the documentary and other evidence in its possession, that the persons in charge of the industrial undertakings namely,
(i) M/s. Swadeshi Cotton Mills, Kanpur,
(ii) M/s. Swadeshi Cotton Mills, Pondicherry, (iii)M/s. Swadeshi Cotton Mills, Naini,
(iv) M/s. Swadeshi Cotton Mills, Maunath Bhanjan, (v) M/s. Udaipur Cotton Mills, Udaipur, and (vi) Rae Bareilly Textile Mills, Rae Bareilly of M/s. Swadeshi Cotton Mills Company Ltd., Kanpur (hereinafter referred to as the said industrial under takings), have, by creation of encumbrances on the assets of the said industrial undertakings, brought about a situation which has affected and is likely to further affect the production of articles manufactured or produced in the said industrial undertakings and that immediate action is necessary to prevent such a situation;
Now, therefore, in exercise of power conferred by clause (a) of sub-section (1) of Section 18AA of the Industries (Development and Regulation) Act, 1951 (65 of 1951), the Central Government hereby authorises the National Textile Corporation Limited (hereinafter referred to as the Authorised person) to take over the management of the whole of the said industrial undertakings, subject to the following terms and conditions, namely:-
(i) The authorised person shall comply with all the directions issued from time to time by the Central Government;
(ii) the authorised person shall hold office for a period of five years from the date of publication of this order in the Official Gazette;
(iii)the Central Government may terminate the appointment of the authorised person earlier if it considers necessary to do so.
This order shall have effect for a period of five years commencing from the date of its publication in the Official Gazette.
Sd/- R. Ramakrishna
Joint Secretary to the Govt. of India
On April 19, 1978, three petitioners, namely, the Company through its Joint Secretary, Shri Bhim Singh Gupta, its Managing Director, Dr. Rajaram Jaipuria, and its subsidiary company, named Swadeshi Mining and Manufacturing Company, through its Directors and Shareholders filed a writ petition under Article 226 of the Constitution in the Delhi High Court against the Union of India and the National Textile Corporation to challenge the validity of the aforesaid Government Order dated April 13, 1978. The writ petition was further supplemented by subsequent affidavits and rejoinders.
The Union of India and the National Textile Corporation Ltd., who has been authorised to assume management of the undertakings concerned were impleaded, as respondents. The writ petition first came up for hearing before a Division Bench who by its order dated August 11, 1978, requested the Chief Justice to refer it to a larger Bench. The case was then heard by a three Judge Bench who by their order dated October 12, 1978, requested the Hon'ble the Chief Justice to constitute a still larger Bench to consider the question whether a prior hearing is necessary to be given to the persons affected before the order under Section 18AA is passed. Ultimately, the reference came up for consideration before a Full Bench of five Judges to consider the question, which was reframed by the Bench as under:
"Whether in construing Section 18AA of the Industries (Development and Regulation) Act, 1951, as a pure question of law compliance with the principle of audi alteram partem is to be implied. If so, (a) whether such hearing is to be given to the parties who would be affected by the order to be passed under the said Section prior to the passing of the order; or
(b) whether such hearing is to be given after the passing of the order; and
(c) if prior hearing is to be normally given and the order passed under the said Section is vitiated by not giving of such
hearing whether such vice can be cured by the grant of a subsequent hearing."
The Bench by a majority (consisting of Deshpande, C.J.,R. Sacher and M. L. Jain, JJ.) answered this three fold question as follows: