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CASE NO.: Appeal (civil)  2314 of 2000

PETITIONER: National Textile Corporation (Guj.) Ltd.

RESPONDENT: State Bank of India & Ors.

DATE OF JUDGMENT: 08/08/2006

BENCH: S.B. Sinha & P.P. Naolekar

JUDGMENT: J U D G M E N T W I T H CIVIL APPEAL NOS.2315 TO 2321 OF 2000

S.B. SINHA, J :

These appeals involving identical questions of law and fact were taken  up for hearing together and are being disposed of by this common judgment.

The factual matrix of the matter, however, would be noticed from  Civil Appeal No.2316 of 2000.   

The management of the New Manekchowk Spinning and Weaving  Mills Company Limited was taken over in terms of Section 18(1) of the  Industries (Development & Regulation) Act, 1951.  The Gujarat State  Textile Corporation Limited was appointed as its Authorized Controller.   The period of takeover was extended upto 31.03.1974.   

The Parliament thereafter enacted the Sick Textile Undertakings  (Nationalization) Act, 1974, (for short, ’the Act) which came into force with  effect from 01.04.1974 in terms whereof the right, title and interest of the  said textile mills vested absolutely in the Central Government.  The Central  Government, however, issued an appropriate notification whereby and  whereunder the said mills instead of continuing to vest in the Central  Government were directed to vest in the National Textile Corporation  (Gujarat).   

Statutory provisions :

       Before we advert to the rival contentions of the parties, we may notice  some of the relevant provisions of the Act.  

"Appointed day" had been defined in Section 2(1) of the the Act to  mean the "1st day of April, 1974".

       The term "owner" has been defined in Section 2(h) of the Act as  under :

"(h)  "owner", when used in relation to a sick textile  undertaking, means any person or firm who or which is,  immediately before the appointed day, the immediate  proprietor or lessee or occupier of the sick textile  undertaking or any part thereof, and in the case of a  textile company  which is being wound up or the  business whereof is being carried on by a liquidator or  receiver, includes such liquidator or receiver, and also  includes any agent or manager or such owner but does

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not include any person or body of persons authorized  under the Industries (Development and Regulation) Act,  1951, or the Sick Textile Undertakings (Taking Over of  Management) Act, 1972, to take over the management of  the whole or any part of the sick textile undertaking"            Before the Commissioner of Payments, the creditors became entitled  to file their respective claims for the purpose of disbursement thereof out of  the amount of compensation towards nationalization of the mills deposited  with it by the Central Government.  

The claims under the Act are divided into two distinct categories (i)  post-takeover management period; and (ii) pre-takeover management period.

The post-takeover management period was 14.02.1969 to 31.03.1974.   

The Second Schedule appended to the 1974 Act provided :

"Order of priorities for the discharge of liabilities in respect of a sick  textile undertaking PART A Post-Takeover Management Period  Category I\027 (a) Loans advanced by a bank. (b) Loans advanced by an institution other than a bank. (c) Any other loan. (d) Any credit availed of for purpose of trade or manufacturing  operations.

Category II\027 (a) Revenue, taxes, cesses, rates or any other dues to the  Central Government or a State Government. (b) Any other dues."

In terms of Section 3 of the Act, the right title and interest of the  owner in relation to every sick textile undertaking vested absolutely in the  Central Government.  Section 5 provides that every liability, other than the  liability specified in sub-section (2) thereof in respect of any period prior to  the appointed day, shall be that of such owner and shall be enforceable  against him and not against the Central Government or the National Textile  Corporation.  Sub-section (3) of Section 5 reads as under :     

       "5.(3) For the removal of doubts, it is hereby declared that \026 (a)     save as otherwise expressly provided in this  section or in any other section of this Act, no  liability, other than the liability specified in sub- section (2), in relation to a sick textile undertaking  in respect of any period prior to the appointed day,  shall be enforceable against the Central  Government or the National Textile Corporation;

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

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

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Corporation."

Section 8 provides for deposit of the amount of compensation in cash  by the Central Government.  Section 17 provides for appointment of  Commissioners of Payments, whereas priority and examination of claims  filed before it are contained in Section 21 and 22 of the Act, which read as  under :  

"21.   The claims arising out of the matters specified in  the Second Schedule shall have priorities in accordance  with the following principles, namely :-

(a)     category I will have precedence over all  other categories and category II will have  precedence over category III and so on;

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

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

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

"22.  (1) On receipt of the claims under section 20, the  Commissioner shall arrange the claims in the order of  priority specified in the Second Schedule and examine the  same in accordance with the said order;

(2)     If on examination of the claims, the Commissioner  is of the opinion that the amount paid to him under this  Act is not sufficient to meet the liabilities specified in  any lower category, he shall not be required to examine  the liabilities in respect of such lower category."

Section 27 which occurs in Chapter VII of the Act provides as under :

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

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

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Proceedings :

       The company took some loan from the State Bank of India.  During  the period of takeover also, the State Bank of India continued to extend  various credit facilities to the management.  The Respondent Bank in its  claim stated :

"3.     The appellant has given various credit facilities  before and after the authorized controller took over the  management.  The appellant had given the facility of  hypothecation account with the limit of  Rs.13,50,000.00p.  the amount in that account  outstanding as on March 31, 1974 was Rs.1,34,148.39p.  and the amount outstanding as on March 31, 1974 was  Rs.7,22,343.02p.  In the Mortgaged account the limit was  Rs.20,00,000/- and the amount outstanding as on March  31, 1974 was Rs.19,74,399.85p. and the amount  outstanding as on March 31, 1977 was Rs.24,86,190.93p.   In the Pledge account the limit was Rs.30,00,000.00p.  and the amount outstanding as on March 31, 1974 was  Rs.20,65,989.90p. and the one outstanding on March 31,  1977 was Rs.28,65,735.15p.   In the deferred payment  guarantee account, the appellant had paid installments of  Rs.6,43,709.20p. and the installments to be paid by the  appellant were to the extent of Rs.6,35,218.42p. the  appellant paid over due interest of the amount of  Rs.16,800.49p.  Thus, in this account the total amount  claimed was Rs.12,95,828.20p.  The appellant had issued  cheques on or before March 31, 1974 but paid on or  before Sept. 21, 1974, bills cheques of the value of  Rs.6,16,291.58p. The appellant had debited  Rs.21,911.65p. in the account of the National Textile  Corporation as the bills or cheques of this value  purchased on or before March 31, 1974 but returned or  paid on or before Sept. 21, 1974.  The appellant also  claimed bank charges, and other amounts relating to the  period upto March 31, 1974 but debited before  September 21, 1974.   The appellant also claimed Bank  charges Rs.,17,39,648.00p. being the amount of  bills/cheques purchased by the appellant on or before  March 31, 1974 but realized on or after April 1, 1974.   Thus the appellant in all claimed Rs.99,97,944.32p.  under four head as per the statement of the account  annexed with the application of claim."       

       By an order dated 30.09.1978, the Commissioner of Payments held as  under :

       "That out of total claims, an amount of  Rs.51,55,524.81p. could be admitted in Category I, an  amount of Rs.24,86,109.93ps. could be admitted in  Category IV and the rest of the amount of  Rs.23,55,939.58ps. could not be considered for the  purposes of categorization."

       An appeal was preferred thereagainst before the City Civil Court.  The  said appeal was dismissed by an order dated 18.08.1980, holding :  

       "As discussed in the earlier part of the judgment,  only those liabilities falling under the aforesaid two  periods are required to be discharged out of the  compensation amount fixed from the undertaking except  as mentioned in sub-section (1) of Section 27 of the Act.   

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The appellant had made payments to the supplier after  1.4.1974 i.e. after the appointed day.  The Act restricted  discharge of certain liabilities enumerated in the Second  Schedule only falling due upto 31.3.1974.  The  appellant’s claim cannot be covered in any of the  categories in the Second Schedule\005..Since the liability  of the respondent No.1 does not exist on account of the  contract having ceased  to have effect on 1.4.1974, the  appellant’s claim for the same reasons become non- existent\005.It appears from the award of the Assistant  Commissioner of Payments that the adjustments with the  respondent No.2 for the bills purchased or the cheques  realized was made.  That has been done as the bills  discounted or purchased on or before March 31, 1974,  remained with the erstwhile owners and such ownership  on rights vested in the nationalized textile corporation by  virtue of Section 4 of the Act\005."

A writ petition was thereafter filed before the High Court.  By reason  of the impugned judgment, a learned Judge of the High Court while allowing  the said writ petition held as under :    

"6. I have given anxious thought to the  submissions made on behalf of the parties.  The main  question for determination by this Court is whether  outstanding dues in different accounts for the pre-take- over as on 14.2.1969 were the liabilities of the  Authorized Controller, or that liabilities which were  thereafter can be considered under Section 5 of the Act  for the purpose of awarding the compensation amount.   For this purpose, we have to see the actual meaning of  loan and advances.  Loans and advance loans have been  explained by the Apex Court in the case of Jiwanlal  Acharya vs. Rameshwar Agarwalla, reported in AIR  1967 SC 1118, wherein it has been held that the loan  means an advance, whether of money or in kind on  interest, made by a money-lender and shall include a  transaction on a bond bearing interest in respect of post  liability and in transaction, which in substance is a loan.   When a loan is renewed by the execution of a fresh  document of removal, there is no difficulty in holding  that the former loan was repaid by borrowing a fresh  loan on the document of renewal.  So, the transaction  itself can be treated as a fresh loan.  The word  "advance" appears to have been used there for  convenience of the language, particularly to indicate  that the loan must have been made after commencement  of the Act.  It does not imply that there should have  been an actual advance, whether of money or any kind.   Thus, in view of the proposition of law laid down by  the Apex Court, the loans advanced by the petitioner  bank prior to 14.2.1969, guaranteed by the Authorized  Controller and by the State Government and by the  State Government and guarantee for the post-take-over  period would fall under the category no.1(a) of the  Second Schedule and it would not fall in category no.4  of part "B".  The Bombay High Court has completely  answered the question regarding the liability of the  Authorised Controller for the amount due prior to  1.4.1974 and thereafter\005."

Submissions :

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Mr. L. Nageshwara Rao, the learned Senior Counsel appearing on  behalf of the appellant, would submit that the High Court committed a  serious error in holding :

(i) loan was advanced during post-takeover period during which the  management was with the corporation; (ii) the facility was given by the bank  to continue to avail the credit facilities to pay the amount of loan on renewal  thereof;  (iii) the undertaking given by the Controller for continuing to  obtain the said facilities would not make the outstanding dues on account of  priority claim of the company; (iv)  There exists a difference between a loan  and liability; whereas the principal amount would come within the purview  of priority claim,  claim of  interest would not.   

Mr. R. Sundaravardan, the learned Senior Counsel appearing on  behalf of the State Bank of India, on the other hand, submitted that: (i) the  bank acted to its detriment at the instance of the Controller and relying on  the guarantee furnished by it as also by the State of Gujarat continued to  extend the facilities which would amount to a new loan.  (ii) Such credit  facility had been given so that the mills may survive and, thus, the Appellant  cannot now be permitted to contend that the loan advanced by the Bank  would not be disbursed on a priority basis.  (iii) In any event, as part of the  amount to be paid had been apportioned for past dues in terms of Section 60  of the Indian Contract Act, this Court should not interfere with the impugned  judgment.

Mr. T.L. Vishwanatha Iyer, the learned Senior Counsel appearing for  the Bank of Baroda, supplemented Mr. Sundaravardan contending that the  deferred payment guarantee should be treated as an advance given during  post management period and, thus, would come within the purview of  Category I of the Second Schedule of the Act.  It was submitted that for all  intent and purport, the liability is akin to the concept of loan and in that view  of the matter any amount which was payable as on 31.3.1974 including the  amount of interest would come within the purview of the expression ’loan’.

Priority claims : The basic fact of the matter is not in dispute.  Although the  managements of the textile mills were taken over in terms of the provisions  of the 1951 Act, the Authorized Controller managed the affairs of the mills  for or on behalf of the owners.  The liabilities incurred or profits made  during the said period were to be credited to the account of the owners.  The  owners in terms of the provisions of the Act were not entitled to receive the  amount of compensation but also the interest provided for in the said Act as  also the amount of compensation payable for taking over of the management  of the mills under the 1956 Act.

The claim of every claimant was required to be determined by the  Commissioner of Payments strictly in terms of the provisions of the Act.   For the purpose of enabling it to disburse his claim from the amount  deposited with it by the Central Government, priorities were to be accorded  to the specified category of claim in terms of the Second Schedule of the  Act.   

The Commissioner of Payments as a statutory authority was to act  within the four-corners of the Act.

In terms of the provisions of the Act, the liability of the owner has not  ceased to run.  The entire claim of the bank, if not capable of being  disbursed from the amount deposited by the Central Government, the same  would abate.  The claimants, therefore, are entitled to realize their remaining  claims from the owners.   

The Authorized Controller and the State of Gujarat furnished  guarantees.  Guarantees furnished by the State of Gujarat were de’hors the  provisions of the   Act.  In terms of the provisions of the Act, the State of

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Gujarat had no role to pay.  It might have encouraged the Authorized  Controller to revive the functioning of the mills upon continuing to obtain  the facilities of the erstwhile owners from the banks and other industrial  institutions for revival of the mill as a part of social welfare measure.  Under  the Act, however, it could not have intermeddled with the affairs of the  functioning of the mills by the Authorized Controller.  Any action taken  pursuant to or in furtherance of any representation made by the State of  Gujarat would, thus, be of its own liability.  Such liabilities can be enforced  by the claimants.  For the self same reasons any guarantee furnished by the  Gujarat Financial Corporation would also be an act on its own behalf.  It,  while carrying out the management of the mill, could have incurred loan on  behalf of the owner but if it had furnished any guarantee, the same would  constitute an independent act, although furnished for obtaining loan or  continue to obtain the facilities for running the mills.  It could not act both as  a loaner and a guarantor.  The liability of the owner and guarantor would  depend upon the terms of the documents executed in favour of the Bank  and/or the provisions of the Indian Contract Act.  Similarly if a claim comes  within the purview of Section 27 of the Act, the Central Government would  continue to be liable therefor.  A similar guarantee furnished by the Gujarat  State Financial Corporation on its own behalf subject to the terms of the  guarantee may become enforceable against it.

We are in these appeals, however, only concerned with the  interpretation of the relevant provisions of the Second Schedule of the Act.   Continuing the credit facilities given by the banks to the owner, in our  opinion, would not amount to a fresh agreement.   

For the purpose of attracting the provisions of the Second Schedule,  the amount mentioned in Category I must be confined to loans advanced by  the banks or other financial institutions, or any other loan or any credit  availed of for the purpose of trade or manufacturing operations.  A  distinction, therefore, exists between a loan given to the Controller and  availing of the credit facilities which were available to the owner of the  textile mills so as to enable it to carry on the manufacture operation thereof  after its take over.  The textile undertakings were sick ones.  The  managements of such mills were taken over for the purpose of revival  thereof.  If in that process the Authorized Controller was required to raise  loan either from a bank or from a financial institution other than a bank or  from any other person or availed any other credit, indisputably, the same  would come within the purview of Category-I liability being a post-takeover  management period.   

Such loan, however, it will bear repetition to state, would not be  renewal of pre-takeover loan. In Jiwanlal Achariya v. Rameshwar Lal  Agarwalla [AIR 1967 SC 1118], this Court was concerned with  interpretation of the expression ’loan’ contained in Section 2(f) of the Bihar  Money Lending (Regulation of Transactions) Act, 1939, which was in the  following terms :

"Loan" means "an advance, whether of money or  in kind, on interest made by a money-lender, and shall  include a transaction on a bond bearing interest executed  in respect of past liability and any transaction which in  substance is a loan, but shall not include\005\005"

This Court in the context of the said definition of ’loan’ opined that  when a loan is renewed by execution of a fresh document, there is no  difficulty in holding that the former loan was repaid by borrowing a fresh  loan on the document of renewal.   

In that case, the appellant therein claimed that no money was in fact  advanced on February 4, 1954 and that the promissory note executed on that  date was to pay by renewal of a loan for Rs.4,000/- which had been taken as  far back as October 1946.  The sum of Rs.10,000/- included the principal

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amount of Rs.4,000 and the remainder was towards interest.

In the aforementioned factual matrix, it was held that all that S.2(f)  requires is that there should be an instrument  in writing by which the  obligor obliges himself to pay the past liability and the instrument should  bear interest   

In this case, no such document admitting and acknowledging the past  loan and a fresh document was executed. Jiwanlal Achariya (supra),  therefore, was decided in the fact situation obtaining therein.  

The High Court in its impugned judgment relied upon State Bank of  India v. Edward Textile Mills Ltd. & Ors. [AIR 1988 Bombay 313].  The  said decision was reversed by this Court in State Bank of Indore v.  Commissioner of Payments and Others [(2004) 11 SCC 516], holding :

"Thus, the heading of the Second Schedule provides  "priorities for the discharge of liabilities". The term  "liability" as stated above would include interest. It  would include a loan. It would also include credits  availed of. It would include revenue, taxes, cesses, rates  and other dues. However, the payment in priority is for a  loan. The distinction in language makes it very clear that  what was to be paid in priority was only the amount of  the loan i.e. the principal amount and not the interest  amount due thereon. Of course, payments towards  interest would remain liabilities. But for recovery of that  the remedy would be to proceed against the owner/surety. This Court has in the case of Industrial Finance  Corpn. of India Ltd. v. Cannanore Spg. and Wvg. Mills  Ltd  held that by virtue of the provisions of the Act the  liability of the principal debtor and that of the surety does  not come to an end. It is held that if the compensation to  be paid by virtue of Section 21 and the Second Schedule  does not satisfy the full claim then the creditor is not  barred from filing a civil suit for the balance. Further, in  the case of Punjab National Bank v. State of U.P. it has  been held that even though mode of recovery, against a  surety, may be affected the liability of the principal  debtor and the guarantor does not get affected by the  provision of this Act. Not only are these authorities  binding us but we are in complete agreement with what is  laid down therein.

It is thus clear that the interest amounts are not to be  paid in priority under the provisions of this Act. In this  view, strictly speaking, even interest up to 31-3-1974 was  not payable in priority\005"

       Mr. Iyer placed strong reliance upon a decision of this Court in  Commissioner of Income-tax, Lucknow v. The Bazpur Co-operative Sugar  Factory Ltd. [AIR 1989 SC 1866].  In that case, this Court was dealing with  the provisions of Income Tax Act, 1961 vis-‘-vis the bye-laws framed by a  cooperative society.  The question, which arose for consideration therein,  does not arise before us.   It was held therein that the deposits made by the  members could not be regarded as loans advanced by the members to the  assessee.  The moneys deposited represented contribution by the members  for converting the partly paid up shares into fully paid up shares and  thereafter for defraying the loan taken from the Industrial Finance  Corporation.  Any balance remaining was to be refunded to the members.    Such a question does not arise in the instant case.

       In Industrial Finance Corporation of India Ltd. v. Cannanore Spinning  and Weaving Mills Ltd. and Others [(2002) 5 SCC 54], a Division Bench of  this Court interpreting the provisions of the 1974 Act, held :

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"Turning attention to the effect of the Sick Textile  Undertakings (Nationalisation) Act, 1974, a bare perusal  of some of the provisions will indicate that there is no  discharge of the liability of principal debtor, leave alone  that of the surety. Sections 3, 4, 5 and 20 of the Act of  1974, if read together, would depict that the liability of  the owner of the undertaking/the debtor continues and it  is only the claim against the security which stands  discharged by reason of the statutory shift of the charge  on to the compensation. The liability of the principal  debtor does not in any way come to an end, neither that  of the guarantor\005"

       While doing so, it relied upon a decision of this Court in Punjab  National Bank v. State of U.P. and Others [(2002) 5 SCC 80], wherein it had  been held that the loan of a guarantor does not come to end with the coming  into force of the 1974 Act, stating :  

"We have gone through the provisions of the said Act  and in our opinion the decision of the courts below is not  correct. Section 5 of the said Act provides for the owner  to be liable for certain prior liabilities and Section 29  states that the said Act will have an overriding effect over  all other enactments. This Act only deals with the  liabilities of a company which is nationalised and there is  no provision therein which in any way affects the liability  of a guarantor who is bound by the deed of guarantee  executed by it. The High Court has referred to a decision  of this Court in Maharashtra SEB v. Official Liquidator,  High Court, Ernakulam where the liability of the  guarantor in a case where liability of the principal debtor  was discharged under the insolvency law or the company  law, was considered. It was held in this case that in view  of the unequivocal guarantee, such liability of the  guarantor continues and the creditor can realise the same  from the guarantor in view of the language of Section  128 of the Contract Act as there is no discharge under  Section 134 of that Act. In our opinion, the principle of the aforesaid decision  of this Court is equally applicable in the present case.  The right of the appellant to recover money from  Respondents 1, 2 and 3 who stood guarantors arises out  of the terms of the deeds of guarantee which are not in  any way superseded or brought to a naught merely  because the appellant may not have been able to recover  money from the principal borrower. It may here be added  that even as a result of the Nationalisation Act the  liability of the principal borrower does not come to an  end. It is only the mode of recovery which is referred to  in the said Act."

In Rashtriya Mill Mazdoor Sangh v. National Textile Corporation  (South Maharashtra) Ltd. and Others  [(1996) 1 SCC 313], this Court  held  that gratuity payable by erstwhile owner cannot be recovered from the  Central Government or the Corporation, stating :                          "The submission is that since the Act has been enacted to  protect the interests of the workmen employed in the  textile undertakings whose management has been taken  over, sub-section (7) of Section 3 should be construed in  a manner that the interests of the workmen are protected  and are not jeopardised and therefore, sub-section (7) of  Section 3 should be confined in its application to

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liabilities other than the liabilities relating to the dues of  the workmen in respect of the gratuity payable under the  Payment of Gratuity Act. We find it difficult to accept  this contention. It is one of the cardinal principles of the  statutory construction that where the language of an Act  is clear, the preamble cannot be invoked to curtail or  restrict the scope of the enactment and only where the  object or meaning of an enactment is not clear the  preamble may be resorted to explain it. [See: Burrakur  Coal Co. Ltd. v. Union of India SCR at p. 49 and  Motipur Zamindary Co. (P) Ltd. v. State of Bihar SCR at  p.      504.] Here we find that the language of sub-section  (7) of Section 3 is clear and unambiguous inasmuch as in  the said provision it has been declared that any liability  incurred by the textile company in relation to the textile  undertaking before the appointed day shall be  enforceable against the textile company concerned and  not against the Central Government or the Custodian.  The words "any liability" in sub-section (7) of the said  Section 3 are of wide amplitude to cover every liability  that was incurred by the textile company in relation to the  textile undertaking before the appointed day. Moreover,  the statement in the preamble on which reliance has been  placed by the learned counsel for the appellant, regarding  giving protection to the interests of the workmen  employed therein, also indicates that what was intended  was to reorganise and rehabilitate the textile undertakings  whose management was being taken over with a view to  prevent the closure of such undertakings and consequent  unemployment of workmen and thereby protect the  interests of the workmen who were employed in the  textile undertaking at the time of the taking over of the  management of the said undertaking. The said statement  in the preamble does not refer to persons who had ceased  to be in employment of the textile undertaking on the  date of such taking over of the management. We are,  therefore, unable to hold that sub-section (7) of Section 3,  must be so construed as to exclude its applicability in  respect of liability for payment of gratuity under the  Payment of Gratuity Act."

The liability of the owner continues even during the take-over period.   Indisputably, however, that would not mean that any act done by the  statutory authority or the State would be binding on the owner.  The Gujarat  Financial Corporation or the State of Gujarat having furnished guarantee on  their own behalf, the same indisputably would continue to remain binding on  them.  Such guarantees which were furnished by the Gujarat Financial  Corporation or the State of Gujarat would, thus, be enforceable against them.   We, however, may clarify that we, at present advised, have not gone into the  question of effect of abatement of claims against the owner.  

1958 Act :

The question now arises for consideration is as to whether the  provisions of the Bombay Relief Undertaking (Special Provision) Act, 1958  would be applicable in the instant case.  The 1958 Act was a temporary Act.   Clause (iv) Sub-section (1) of Section 4 of the said Act provided :

"4(iv) any right, privilege, obligation or liability accrued  or incurred before the undertaking was declared a relief  undertaking and any remedy for the enforcement thereof  shall be suspended and all proceedings relative thereto  pending before any court, tribunal, officer or authority  shall be stayed;"         

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The provisions of the said Act, however, do not bar adjustment of any  account; but what was suspended was a declaration of relief undertaking and  suspension of any remedy for the enforcement thereof.  What was stayed  was the proceedings pending before any court, tribunal, officer or authority,  but the  same had nothing to do with the adjustment of accounts in terms of  the provisions of the Indian Contract Act, 1872.  Section 59 of the Indian  Contract Act provides for application of payment where debt to be  discharged is indicated.  Section 60 thereof provides for application of  payment where debt to be discharged is not indicated.  Section 61, however,  provides that in absence of any party making appropriation, the payment  shall be applied in discharge of the debts in order of time, whether they are  or are not barred by the law in force for the time being as to the limitations  of suits.   

If the High Court was not correct in holding that the Authorized  Controller had renewed the loan taken by the owner, the facilities continued  and in that view of the matter Sections 60 and 61 of the Indian Contract Act  would become applicable.

In The Union of India v. Kishorilal Gupta and Bros. [AIR 1960 SCR  493], upon which Mr. Sundaravardan placed strong reliance, wherein the  question  which arose for consideration was as to where the parties to an  original contract could by mutual agreement enter into a new contract in  substitution of an old one, which does not contain an arbitration clause,  wherein the dispute resolution mechanism occurring in an earlier contract  could be taken recourse to.

Subba Rao, J., speaking for the majority, in the fact situation  obtaining therein, stated the principle thus :

"The following principles relevant to the present case  emerge from the aforesaid discussion: (1) An arbitration  clause is a collateral term of a contract as distinguished  from its substantive terms; but nonetheless it is an  integral part of it; (2) however comprehensive the terms  of an arbitration clause may be, the existence of the  contract is a necessary condition for its operation; it  perishes with the contract; (3) the contract may be non  est in the sense that it never came legally into existence  or it was void ab initio; (4) though the contract was  validly executed, the parties may put an end to it as if it  had never existed and substitute a new contract for it  solely governing their rights and liabilities thereunder;  (5) in the former case, if the original contract has no legal  existence, the arbitration clause also cannot operate, for  along with the original contract, it is also void; in the  latter case, as the original contract is extinguished by the  substituted one, the arbitration clause of the original  contract perishes with it; and (6) between the two falls  many categories of disputes in connection with a  contract, such as the question of repudiation, frustration,  breach etc. In those cases it is the performance of the  contract that has come to an end, but the contract is still  in existence for certain purposes in respect of disputes  arising under it or in connection with it. As the contract  subsists for certain purposes, the arbitration clause  operates in respect of these purposes."

The said decision would apply in the instant case.

In Lalit Mohan Pandey v. Pooran Singh and Others [(2004) 6 SCC  626], whereupon also the learned counsel placed reliance, this Court  emphasized the need to construe the statute having in mind the object  underlying the same by stating the principle of purposive construction.   Thus, the remedies available to the Bank under the Indian Contract Act

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would continue to remain available to the respondent-Bank even if the 1958  Act applies.    

For the reasons aforementioned, we are of the opinion that the High  Court was not correct in taking the views, it did.  The judgments and orders  passed by the High Court are, therefore, set aside with liberty to the parties  to file appropriate suits or proceedings before appropriate forum(s) for  recovery of the remaining amount, provided any cause of action therefor  survives.   Subject to the observations made herein, the appeals are allowed.  No  costs.