rice mill case union of india

8/11/2019 Rice Mill Case Union of India

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Andhra High Court

Venkateswara Rice And Flour Mill vs Union Bank Of India And Anr.

on 24 June, 1986

Equivalent citations: 1988 63 CompCas 483 AP

Author: R Swamy

Bench: R Swamy

JUDGMENT

Rama Swamy, J.

1. The twin writ petitions, though filed for different reliefs, since common questions of

fact and law arise for adjudication between the same parties, can be disposed of by acommon 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 a writ of mandamus to direct the

respondents to convert 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 sick units under a 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 quota of levy rice to the Central Government and the State

Government, the petitioner-mill ran into financial troubles; thereby it became a sick

industry. Anterior thereto, the first respondent accorded loans on sufficient hypotheca.

Accounts 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 totime 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


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and augmenting its resources to set stability in the petitioner is being jeopardised. 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 suppressed the fact ofsecuring 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 to 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 has approached this court.

Therefore, there are no bona fides on the part of the petitioner.

4. As the outset, Sri M.S.K. Sastry, learned counsel for the respondents, raised the

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

the writ jurisdiction under article 226 of the Constitution of India. I am disposed to

reject his contention as being too late in the day to put the clock back as the respondents

just awoke from their deep slumber and in the interregnum, judicial tidal waves have

swept off the shores of archaic (old ancient)conception 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 (democratic,free) State rendering economic justice to every citizen. Article 38 enjoins on the State to

strive to promote the welfare of the people to secure social, economic and political

justice. It also further mandates the State to strive to minimise 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. Therespondents is a nationalised bank amenable to the control and discipline in the

management of its business by the Central Government and the Reserve Bank which 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


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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 (dispute)has its birth from the contractual womb. Thestream 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 inRadhakrishna Agarwal v. State of Bihar, AIR1977 SC 1496. It is true that

if the relief in the writ petition is squarely and purely founded on contractual premise in

disregard of statutory character or a statutory responsibility enjoining on 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 elsewhere. But when its operation is grounded on a statutory thrust and the

disobedience thereof impinges on 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 the threshold and this court has to go into the merits and se whether the

lis in the writ petitions is founded on purely contractual claims or has its birth in

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 up to a limit of Rs. 4,00,000 for purchase

of machinery ; working capital in C.C.I. cash credit (on hypotheca of raw material) up to

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-levy 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

a third account called Documentary Bill Purchase (DBP) for non-levy, for sales to otherStates and was granted up to 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
http://indiankanoon.org/doc/541216/http://indiankanoon.org/doc/541216/http://indiankanoon.org/doc/541216/http://indiankanoon.org/doc/541216/


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dated February 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 C.C. 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 or

54,000 quintals per year. The petitioner is entitled to, as per the instructions of the

Reserve Bank, a cocessional 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 infrastructural

facilities, access to the 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

Bangalore, 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 anyaction was taken, he filed the writ petitions. At this juncture, it is worthy of note that

when the petitioner had approached the respondent for additional loan facilities on

giving additional security, the respondents have granted the loan, but started recovering

immediately from the sale proceeds a major portion, i.e., 15% and 50%, from levy and

non-levy sales respectively towards the discharge of the debts, and thereby there is no

scope for augmenting the 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 would also annihilate the very industry. Thus, the petitioner unit is not able to meet

the levy demand from the Government, both Central and State, and is not in a position

to run the business effectively on healthy lines.

6. From these facts, the material question 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 powerto 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 public interest or banking policy so do, it may determine the policy in

relation to advances to be followed by banking companies generally or by any banking

company in particular, and when the policy has been so determined, all banking


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companies or the banking company concerned, as the case may be, shall be bound to

follow the policy so determined. Clause (e) of sub-section (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. Sub- section (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 section 30 of the Reserve Bank of India 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 framed by the Reserve Bank

or Central Government on their satisfied that it is expedient in public interest to make

such policy or fix 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 identify small scale sick industries for their rehabilitation.

Under point 1.1, a "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 is to be identified as 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 funds and it needs infusion of funds

from outside sources for its survival (vide point No. 2.3) and 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

granted by the respondents, as a fact, the petitioner started generating its business.

From a reading of the definition and the factual circumstances, it would be clear that thepetitioner 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


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petitioner as a sick industry. The question is whether such an attitude is feasible or is in

consonance with the objectives or revival of the sick industry.

10. Under the caption "Objectives of a nursing programme", the Reserve Bank of India

has stated that the basic objective of the nursing programme is "to restore the unit'scapacity 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 a considerable debt burden

which "hangs like a millstone round its neck". Thirdly, it is realised that the sources of

finance will be the bank as the borrowers' resources to operate at a higher level of

activity. The sick unit requires additional inputs of finance. Financial constraints could

be tided over only gradually out of the generation of internal surplus. 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 generation of internal surplus."

11. It is thus clear that due to inherent financial constraints and mounting debt liability,

the small scale industry is groaning under its burden 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 finance 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. Guidelines are mere guides. Each case would present its peculiar facts. In thelight of those facts, the officers would carefully analyse and wisely apply the nursing

programme with a desire to sustain in 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 entrepreneur is to swindle public money without appreciable

personal stakes involved therein, the extension of the nursing programme would be anadded impetus to further escalation or when its rehabilitation is beyond redemption ; of

course, in such situations, the application of the nursing programme would be a futile

exercise and the officers may allow the industry to meet 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


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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 letter enclosed to the guidelines that " the operating staff should have

a proper attitude, approach and understanding towards sick units and should

understand that the policy is translated into action without any distortion ". Even in the

latest letter dated July4, 1984, the Reserve Bank had directed levy of interest at 12 1/2%

on the loans given to supply levy quota.

12. In Shashi Kumar v. State of Bihar, [1986] 2 SCC 64, the facts are that the

Government of India had evolved a scheme to encourage graduate unemployed

entrepreneurs 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 the aid of, and secured the

loans from, the banks in the State of Bihar, but due to teething troubles, they committed

default in repayment 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 entrepreneurs were placed and

to provide appropriate infrastructure to subserve the agro service centres so as to enable

the entrepreneurs to carry on their trade or occupation or business assured under article

19(1) of the Constitution of India. As seen in the preamble to the Constitution, the

Directive Principles of 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 might 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 inequalities in income, facilities and

opportunities among persons engaged in different avocations. The nursing programme

is a step-in-aid to establish economically sound units in the process of establishing anegalitarian State affording economic opportunity to the small entrepreneurs.

13. On a perusal of the pleadings and the material placed before me, it would appear that

the petitioner's unit was started with an ambitious programme to mill paddy and

produce rice on a large scale as a small scale industry, but its internal financial resources


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started depleting due to mismanagement. The petitioner approached the respondents

for additional finance by giving adequate hypotheca. Though finances have been given,

the conditions imposed thereunder are onerous(difficult), in the charging of interest and

recovery. The interest charged there under is contrary to the directions. The recovery of

50% from the sale proceeds for the discharge of debts would practically stand as an

impediment in generating the internal resources to secure stability in the business.

When the petitioner-industry approached the respondents, there appear to be some

misunderstanding, 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 so state

that there is a lurking suspicion in that regard 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 troubles and to stabilise its working by

generating internal surplus and working capital and in that regard it need

postponement of the recovery. Under the guidelines, the maximum period to be availed

of is 10 years. The petitioner-industry seeks only two to three years. The petitioner is

prepared to pay interest at 12 1/2 % 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 their "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 drive the sick industry to liquidation defeating the very

objective of the nursing programme of the sick industry. Thus, the respondents have not

adopted not merely a sympathetic approach and in the language of the Reserve Bank "a

proper attitude, approach and understanding towards sick units", but also failed to

translate into action the nursing programme in its true spirit and thereby in the

language of the 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


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light of the guidelines issued by the Reserve Bank for helping the petitioner-sick unit

under the nursing programme; direct the recovery 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

realisation of sale proceeds therefrom regularly and continue to pay the interest and

reschedule 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 if free to recover the outstanding amounts according to law.

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

Rice is procured for the Central Pool under statutory levy system. The State Governments/UT

Administrations issue Levy Orders in exercise of the powers delegated to them under the Essential

Commodities Act, 1955. The Levy Orders are issued by the State Government after obtaining the prior

concurrence of Central Government. The percentage of Levy varies from State to State as given below.

rice mill case union of india

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