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CASE NO.: Appeal (civil)  4191 of 2004

PETITIONER: Ram Pravesh Singh & Ors

RESPONDENT: State of Bihar & Ors

DATE OF JUDGMENT: 22/09/2006

BENCH: B.P. Singh & R V Raveendran

JUDGMENT: J U D G M E N T

RAVEENDRAN, J.

       Appellants who were the employees of Futwah Phulwarisharif  Gramya Vidyut Sahakari Samiti Ltd., a co-operative society under  liquidation, have challenged the order dated 30.9.2002 passed by the  Patna High Court, dismissing their appeal (L.P.A. No.1030/2002)  against the order dated 24.2.2002 passed by a Single Judge rejecting  their writ petitions.

2.      Prior to 1976, Bihar State Electricity Board (for short, ’the  Board’) was supplying electricity to the rural areas surrounding Patna.  In the year 1976, the Bihar Government, the Board and Rural  Electrification Corporation brought into existence a society registered  under the Bihar Co-operative Societies Act, known as the ’Futwah -   Phulwarisharif Gramya Vidyut Sahakari Samiti Ltd. (for short ’the  Society’) to implement a REC Scheme for better distribution of  electricity to rural areas.  The state government granted a licence  dated 24.8.1976 to the society, under section 3 of the Indian  Electricity Act, 1910 (’Act’ for short) to supply electricity to the Futwah  and Phulwari Sharif Blocks, for a period of 20 years, with options to  the licencee to extend the period of licence.  

3.      By letter dated 23.4.1993, the Board recommended to the State  Government, to revoke the licence granted to the Society and merge  the Society with the Board, assigning three reasons : (i) The purpose  for which the Society was created no longer existed. (ii) The Society  was drawing electricity from multiple points in the Board’s distribution  network, making it difficult to ascertain the actual quantity of  electricity drawn by the Society. (iii) The financial position and  management of the Society was in a very bad shape and huge arrears  were due from the Society to the Board, in spite of Board supplying it  to the Society at 7 paise per unit (as against the Board’s cost price of  90 to 115 paise per unit).  

4.      The State Government, after considering the matter, issued a  notification dated 25.4.1995, in exercise of its power under sections 4  and 5 of the Act revoking the licence dated 24.8.1976 granted to the  Society. The State Government also constituted a  Committee to   evaluate the assets of the society which had to be transferred to the  Board. The Committee was also required to consider whether it would  be useful for the Board to absorb some of the employees of the  Society. At a Meeting held on 18.9.1995 (as per Minutes drawn up on  10.11.1995), the said Committee made the following suggestions :

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(a)     The Society should be liquidated in view of the cancellation  of the licence;  

(b)     The Liquidator of the Society should realize the amounts  due to the Society and also invite claims from creditors of  the Society for settlement of claims;  

(c)     The amounts due in regard to the electricity supplied up to  the date of cancellation (25.4.1995) should be credited to  the Society, and the amounts due for electricity supplied  thereafter should be received by the Board;  

(d)     The accounts relating to the income and expenditure of the  Society and the Board be maintained separately, from the  date of cancellation of licence, so that they could settle the  accounts between them; and

(e)     The Board should consider taking work from the  employees of the society and pay salary to them. The  Board may also consider absorbing the eligible employees  of the Society after examining whether they were qualified  for the posts and were duly appointed and whether their  pay-fixation has been properly done.  

5.      The State Government by letter dated 2.1.1996 requested the  Board to implement the suggestion of the Committee relating to the  employees of the society that the Board should take work from the  employees of the society and pay their salaries, and also consider the  absorption of eligible employees. Some assurance was also held out in  1996 on the floor of the Legislature that the Board will be persuaded  to take over the undertaking of the society with its employees.  However, thereafter, the State Government took a decision that the  assets and liabilities of the society should be transferred to the Board,  but not the services of the employees of the Society. The said decision  was communicated by the Secretary, Energy Department to the  Secretary, Cooperative Department and the Board, by letter dated  24.2.1997.  

6.      In view of the rejection of the proposal for absorption of services  of employees of the Society by the Board, several representations   were sent by the Administrator of the Society to the State government   to absorb the services of the employees of the society. The  Administrator of the Society also furnished a list of employees of the  Society with particulars of designations and educational and technical  qualifications to the State Government. The number of employees is  225 ranging from Engineers to Class IV employees. The said list was  forwarded by the State Government to the Board on 14.7.1999 with a  request to ascertain the existing vacancies in the Board. There were  some more correspondence relating to the suggestions from various  quarters, for absorption of the suitable and fit employees of the  Society by the Board.  

7.      But the Board did not absorb the services of the employees of  the Society. Therefore, the employees of the society (appellants) filed  CWJC Nos.1503 of 2000 and 14394 of 2001 seeking a direction to the  Board to absorb them in equivalent posts with continuity of service  and also pay their arrears of salaries, allowances and other dues. They  contended that they had a right, both in law and in equity, as also a  ’legitimate expectation’ to be absorbed into the services of the Board,  for the following reasons :  

a)      The Committee constituted by the State Government had  recommended that the Board should take work from the  employees of the society and ultimately absorb them;

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b)      The employees of the society have a ’legitimate expectation’   that they should be absorbed by the Board for the following  reasons :  

(i)     Initially several private companies were generating and  distributing electricity in the State. When the Board was  constituted, the undertakings of all those private  companies were taken  over and their employees were  all absorbed in the services of the Board.  

(ii)    Whenever the undertaking of any  company or  institution was taken over by any statutory body or  corporation, the services of employees of such  undertaking are also normally taken over.  

(iii)   When an ’undertaking’ is purchased, in the absence of  an intention to the contrary, all the assets and  liabilities, as also the services of all employees are  transferred to the purchaser and therefore the Board  cannot refuse to absorb them.  

(iv)    When certain departments were abolished by the State  of Bihar, this Court and the High Court had passed  several orders directing absorption of the retrenched  employees in other departments of the state  government.

(v)     The society was constituted by the Board and the state  government to discharge the functions which were  earlier being carried on by the Board. The licence  granted to the society to distribute electricity was  subsequently revoked on the recommendation of the  Board. The Board has expressed its readiness to take  over the undertaking of the Society. The Board has in  fact taken over the assets of the Society and  discharging the functions of the society without any  interruption, on revocation of the Society’s licence on  25.4.1995.

(vi)    The Board had extracted some work from the  employees of the society from 25.4.1995 till May, 1996.  

c)      There are large number of vacancies in the Board in various  categories of posts and there would be no difficulty for  absorption of their services by the Board.  

d)      All the employees of the society have crossed the maximum age  limit for seeking fresh employment and if they were not  absorbed by the Board, they will be deprived of their livelihood.

e)      The society was an instrumentality of the State Government and  the Board, and answered the definition of ’State’ within the  meaning of that expression in Article 12 of the Constitution of  India. When the undertakings of such instrumentality of the  state was taken over by another instrumentality of the State,   ’fairness in action’ which is one of the hallmarks of a ’State’  require that the rights of the employees are protected by  providing for their absorption in an appropriate manner.  

The State Government, in its counter, while denying the claim of the  writ petitioners, however, admitted that in August, 2001, it had taken  a decision that when the prohibition against recruitment in the Board is  lifted and appointments are made in future, preference should be

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given to the eligible employees of the society if necessary by granting  relaxation of the age limit.

8.      A learned single Judge of the High Court rejected the said  contentions and consequently, dismissed the writ petitions by order  dated 24.2.2002. He held :  

(i)     The state government had not given any specific direction to  the Board to absorb the services of the employees of the society.  Any decision taken by the state government that as and when  prohibition against recruitment was lifted and appointments were to  be made, the Board should give preference to the eligible  employees of the society, was not by itself a direction to the Board.  At all events, having regard to  section 78A of the Electricity  (Supply) Act, 1948 the State Government can issue direction only  in regard to matters of policy, but   could not issue a direction to  appoint or absorb any employee of the society in its service as that  would amount to encroachment of Board’s power under section 15  of the Act -- vide Rakesh Ranjan Verma vs. State of Bihar [1992  Suppl.(2) SCC 343].  

(ii)    Even if the society was to be considered as an  instrumentality of the State, that would not assist the appellants to  contend that the society was an extension of the Board, nor cast  any obligation on the Board to absorb the employees of the society.  When the licence granted under section 3 of the Act was revoked  and the undertaking of the Society (licencee) was agreed to be  purchased by Board, the  provisions of the Act governed the matter  and those provisions did not enable the appellants to claim any  right of being absorbed in the services of the Board.  

(iii)   The fact that the Board took over the undertakings of the  private companies which were generating and distributing electrical  power till then, along with the services of the employees of such  private undertakings, did not have any relevance to the appellants’  claim for absorption. The undertakings and services of employees  of the erstwhile licencees were taken over several decades ago  when the Board was constituted and when the Board was financially  and administratively in a completely different position. As the  financial position of the Board was presently precarious due to  various circumstances, in particular, setting up of Jharkhand State  Electricity Board following the reorganization of the state of Bihar  and as the Board itself was considering retrenchment of large  number of its existing employees, it cannot be compelled to take  over the services of the employees of the society in the absence of  any legal right in the appellants.  

(iv)    It could not direct absorption on equitable grounds. Any  equitable consideration of the claim of the appellants cannot ignore  the financial position of the Board, howsoever sympathetically the  court may view the plight of the appellants. The state government,  being interested in the welfare of the employees of the society had  considered several  alternatives to rehabilitate the employees of the  Society. In the course of exploring the various alternatives,  information was sought by the Government, views were expressed  and assurances were made on the floor of the House, to explore  the possibility of the Board absorbing the services of the employees  of the society. But that did not create any right in the employees of  the society to seek employment from the Board. In the absence of  any specific decision by the Board or assurance by the Board to  absorb the services of the appellants, the principle of ’legitimate  expectation’ was not attracted.  

(v)     Having regard to Section 7 and 7A of the Act, when the  undertaking of a licensee was purchased by the Board, there was

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no obligation on the part of the Board to absorb the employees of  the erstwhile licensee.  

9.      The Letters Patent Appeal filed by the appellants against the said  decision of the learned single Judge was dismissed by a Division Bench  by a brief order dated 30.9.2002, both on the ground of limitation and  on merits, thereby affirming the decision of the learned single judge.  The said order is challenged in this appeal. On the contentions urged,  the following question arises for our consideration :-  

Whether there is any obligation on the part of the Board -  either contractual or statutory, or on equitable  considerations-to absorb the services of the appellants?  

Contractual Obligation :

10.     The licence granted to the society under section 3 of the Indian  Electricity Act, 1910 was revoked by the State Government on  25.4.1995. It is no doubt true that on such revocation, the Board  took  over the entire activities of the society relating to distribution of power  to the licensed areas. The Board also gave its concurrence to purchase  the undertaking of the society. But the Board neither entered into any  contract with the society, nor gave any assurance to the Society or its  employees to absorb the employees of the society into its service.  Therefore, obviously, there is no contractual obligation on the part of  the Board to absorb the services of the appellants.  

Statutory Obligation :

11.     Section 3 of the Act dealt with grant of licence by the State  Governmnet to any person to supply energy in any specified area.  Section 4 dealt with revocation of such licences. The provisions that  would have effect when a licence was revoked, were listed in section  5. Section 6 gave the option to the Electricity Board and the State  Government to purchase the undertaking of a licensee, in the  circumstances mentioned therein. Section 7 provided for vesting of the  undertaking of the licensee sold to a purchaser under section 5 or 6.  Section 7A provided for determination of the purchase price. None of  these provisions of the Act required the purchaser of the undertaking  to take over the services of the employees of the Society. The  appellants have not been able to show any other statutory provision  which entitles them to seek absorption by the Board. Hence, there is  no statutory obligation to absorb them into Board’s service.

Equitable considerations :

12.     Realising that the appellants had no contractual or statutory  right, learned counsel for the appellants sought to derive support for  the claim on equitable considerations, by placing reliance on an  amalgam of the principles relating to legitimate expectation, fairness  in action and natural justice, reiterating the contentions urged before  the High Court.   

13.     It may be true that when the Board took over the undertakings  of the erstwhile private licencees several decades ago, it also took over  the services of the employees of such private licensees. It is also  possible that this Court in exercise of its jurisdiction under Article 142,  on the facts of a given case, might have directed that the persons,  whose services had been terminated on account of closure of an  instrumentality of the State, be continued in the service of  Government Departments or other Government Corporations. It may  also be true that certain enactments providing for transfer of  undertakings in pursuance of nationalization or otherwise, had also  provided for continuation/transfer of the services of the employees of

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the undertakings to the transferee. But these do not attract the  principle of ’legitimate expectation’.

14.     What is legitimate expectation? Obviously, it is not a legal right.  It is an expectation of a benefit, relief or remedy, that may ordinarily   flow from a promise or established practice. The term ’established  practice’ refers to a regular, consistent predictable and certain  conduct, process or activity of the decision-making authority. The  expectation should be legitimate, that is, reasonable, logical and valid.  Any expectation which is based  on sporadic or casual or random acts,  or which is unreasonable, illogical or invalid cannot be a legitimate  expectation. Not being a right, it is not enforceable as such. It is a  concept fashioned by courts, for judicial review of administrative  action. It is procedural in character based on the requirement of a  higher degree of fairness in administrative action, as a consequence of  the promise made, or practice established. In short, a  person can be  said to have a ’legitimate expectation’ of a particular treatment, if any  representation or promise is made by an authority, either expressly or  impliedly, or if the regular and consistent past practice of the authority  gives room for such expectation in the normal course. As a ground for  relief, the efficacy of the doctrine is rather weak as its slot is just  above ’fairness in action’ but far below ’promissory estoppel’. It may  only entitle an expectant  : (a) to an opportunity to show cause before  the expectation is dashed; or (b) to an explanation as to the cause for  denial. In appropriate cases, courts may grant a direction requiring the  Authority to follow the promised procedure or established practice. A  legitimate expectation, even when made out, does not always entitle  the expectant to a relief. Public interest, change in policy, conduct of  the expectant or any other valid or bonafide reason given by the  decision-maker, may be sufficient to negative the ’legitimate  expectation’.

The doctrine of legitimate expectation based on established practice  (as contrasted from legitimate expectation based on a promise), can  be invoked only by someone who has dealings or transactions or  negotiations with an authority, on which such established practice has  a bearing, or by someone who has a recognized legal relationship with  the authority. A total stranger unconnected with the authority or a  person who had no previous dealings with the authority and who has  not entered into any transaction or negotiations with the authority,  cannot invoke the doctrine of legitimate expectation, merely on the  ground that the authority has a general obligation to act fairly.         15.     In Union of India v. Hindustan Development Corporation [1993  (3) SCC 499], this Court explained the nature and scope of the  doctrine of ’legitimate expectation’ thus :

"For legal purposes, the expectation cannot be the  same as anticipation. It is different from a wish, a  desire or a hope nor can it amount to a claim or  demand on the ground of a right. However earnest  and sincere a wish, a desire or a hope may be and  however confidently one may look to them to be  fulfilled, they by themselves cannot amount to an  assertable expectation and a mere disappointment  does not attract legal consequences. A pious hope  even leading to a moral obligation cannot amount to  a legitimate expectation. The legitimacy of an  expectation can be inferred only if it is founded  on the sanction of law or custom or an  established procedure followed in regular and  natural sequence. Again it is distinguishable  from a genuine expectation. Such expectation

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should be justifiably legitimate and protectable.  Every such legitimate expectation does not by  itself fructify into a right and therefore it does  not amount to a right in the conventional  sense."  

[Emphasis supplied]

       This Court also explained the remedies flowing by applying the  principle of legitimate expectation :

"\005 it is generally agreed that legitimate expectation gives  the applicant sufficient locus standi for judicial review and  that the doctrine of legitimate expectation is to be confined  mostly to right of a fair hearing before a decision which  results in negativing a promise or withdrawing an  undertaking is taken. The doctrine does not give scope to  claim relief straightaway from the administrative  authorities as no crystallized right as such is involved. The  protection of such legitimate expectation does not require  the fulfillment of the expectation where an overriding  public interest requires otherwise. In other words where a  person’s legitimate expectation is not fulfilled by taking a  particular decision then decision-maker should justify the  denial of such expectation by showing some overriding  public interest. Therefore even if substantive protection of  such expectation is contemplated that does not grant an  absolute right to a particular person. It simply ensures the  circumstances in which that expectation may be denied or  restricted. A case of legitimate expectation would  arise when a body by representation or by past  practice aroused expectation which it would be  within its powers to fulfil. The protection is limited to  that extent and a judicial review can be within those limits.  But as discussed above a person who bases his claim on  the doctrine of legitimate expectation, in the first instance,  must satisfy that there is a foundation and thus has locus  standi to make such a claim. In considering the same  several factors which give rise to such legitimate  expectation must be present. The decision taken by the  authority must be found to be arbitrary, unreasonable and  not taken in public interest. If it is a question of policy,  even by way of change of old policy, the courts cannot  interfere with a decision. In a given case whether there are  such facts and circumstances giving rise to a legitimate  expectation, it would primarily be a question of fact. If  these tests are satisfied and if the court is satisfied that a  case of legitimate expectation is made out then the next  question would be whether failure to give an opportunity of  hearing before the decision affecting such legitimate  expectation is taken, has resulted in failure of justice and  whether on that ground the decision should be quashed. If  that be so then what should be the relief is again a matter  which depends on several factors." (emphasis supplied).

16.     In Punjab Communication Ltd. v. Union of India  - 1999 (4) SCC  727, this Court observed :

       "The principle of legitimate expectation is still at a  stage of evolution. The principle is at the root of the rule of  law and requires regularity, predictability and certainty in  the Governments dealings with the public\005 The procedural

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part of it relates to a representation that a hearing or other  appropriate procedure will be afforded before the decision  is made."

"However, the more important aspect is whether the  decision maker can sustain the change in policy by resort  to Wednesbury principles of rationality or whether the  court can go into the question whether the decision-maker  has properly balanced the legitimate expectation as  against the need for a change\005.. In sum, this means that  the judgment whether public interest overrides the  substantive legitimate expectation of individuals will be for  the decision-maker who has made the change in the  policy. The choice of the policy is for the decision-maker  and not for the court. The legitimate substantive  expectation merely permits the court to find out if the  change in policy which is the cause for defeating the  legitimate expectation is irrational or perverse or one  which no reasonable person could have made."               

17.     Recently, a Constitution Bench of this Court in Secretary, State  of Karnataka v. Umadevi [2006 (4) SCC 1] referred to the  circumstances in which the doctrine of legitimate expectation can be  invoked thus :  

"The doctrine can be invoked  if the decisions of the  administrative authority affect the person by depriving him  of some benefit or advantage which either (i) he had in the  past been permitted by the decision-maker to enjoy and  which he can legitimately expect to be permitted to  continue to do until there have been communicated to him  some rational grounds for withdrawing it on which he has  been given an opportunity to comment; or (ii) he has  received assurance from the decision-maker that they will  not be withdrawn without giving him first an opportunity of  advancing reasons for contending that they should not be  withdrawn."  

Another Constitution Bench, referring to the doctrine, observed thus in  Confederation of Ex-servicemen Associations vs. Union of India [JT  2006 (8) SC 547] :  

"No doubt, the doctrine has an important place in the  development of Administrative Law and particularly law relating  to ’judicial review’. Under the said doctrine, a person may have  reasonable or legitimate expectation of being treated in a  certain way by an administrative authority even though he has  no right in law to receive the benefit. In such situation, if a  decision is taken by an administrative authority adversely  affecting his interests, he may have justifiable grievance in the  light of the fact of continuous receipt of the benefit, legitimate  expectation to receive the benefit or privilege which he has  enjoyed all throughout. Such expectation may arise either from  the express promise or from consistent practice which the  applicant may reasonably expect to continue."

"In such cases, therefore, the Court may not insist an

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administrative authority to act judicially but may still insist it to  act fairly. The doctrine is based on the principle that good  administration demands observance of reasonableness and  where it has adopted a particular practice for a long time even  in absence of a provision of law, it should adhere to such  practice without depriving its citizens of the benefit enjoyed or  privilege exercised."  

18.     Let us now examine whether the principles of legitimate  expectation can have any application in this case. What transpired  several decades ago when the Board commenced its operations and  when its finances were sound, cannot have any bearing on its action in  the year 1995. The position of the Board vis-‘-vis the Society in 1995  was completely different from the position of the Board vis-‘-vis the  several ex-licensees when the Board took over their undertakings  several decades back.  Further, the assumption that whenever an  undertaking is taken over, transferred or purchased, the transferee or  purchaser should continue the services of the employees of the  erstwhile owner of the undertaking, is not sound. In fact, statutory  provisions seem to indicate otherwise. Section 25-FF of the Industrial  Disputes Act, 1947 provides that where the ownership or management  of an undertaking is transferred, whether by  agreement or by  operation of law, from the employer in relation to that undertaking to  a new employer, every workman who has been in continuous service  for not less than one year in that undertaking immediately before such  transfer shall be entitled to notice and compensation in accordance  with the provisions of Section 25-F, as if the workman had been  retrenched, except in the cases mentioned in the proviso thereto.  Therefore, the natural consequence of a transfer of an undertaking,  unless there is a specific provision for continuation of the service of the  workmen, is termination of employment of its employees, and the  employer’s liability to pay compensation in accordance with Section  25F. In Anakapalle Co-operative Agricultural and Industrial Society  Ltd. v. Workmen [AIR 1963 SC 1489], a Constitution Bench of this  Court rejected the contention of the employees that, on transfer of the  undertaking, the employees of the undertaking should be absorbed by  the purchaser/transferee of the undertaking. This Court held :  

"This double benefit in the form of payment of compensation  and immediate re-employment cannot be said to be based on  any considerations of fair play or justice. Fair play and justice  obviously mean fair play and social justice to both the parties. It  would, we think, not be fair that the vendor should pay  compensation to his employees on the ground that the transfer  brings about the termination of their services, and the vendee  should be asked to take them back on the ground that the  principles of social justice require him to do so. \005\005 and in that  sense, the said compensation is distinguishable from gratuity.  Therefore, if the transferor is by statute required to pay  retrenchment compensation to his workmen, it would be  anomalous to suggest that the workmen who received  compensation are entitled to claim immediate reemployment in  the concern at the hands of the transferee."  

19.     The Board had never agreed nor decided to take services of any  of the employees of the Society. In fact, it is not even the case of the  appellants that the Board had at any point of time held out any  promise or assurance to absorb their services. When the licence of the  Society was revoked, the State Government appointed a Committee to

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examine the question whether the Board can take over the services of  the employees of the Society. The Committee no doubt recommended  that the services of eligible and qualified employees should be taken  over. But thereafter the State Government considered the  recommendation and rejected the same, apparently due to the  precarious condition of the Board which itself was in dire financial  straits, and was contemplating retrenchment of its own employees. At  all events, any decision by the State Government either to recommend  or direct the absorption of the Society’s employees was not binding on  the Board, as it was a matter where it could independently take a  decision. It is also not in dispute that for more than two decades or  more, before 1995, the Board had not taken over the employees of  any private licencee. There was no occasion for consideration of such a  course. Hence, it cannot be said that there was any regularity or  predictability or certainty in action which can lead to a legitimate  expectation.  

20.     The appellant next submitted that this Court, in some cases, has  directed absorption in similar circumstances. Reliance is placed on the  decision in G. Govinda Rajulu v. Andhra Pradesh State Construction  Corporation Ltd. -- 1986 (Supp) SCC 651. We extract below the entire  judgment :  

"We have carefully considered the matter and after hearing  learned counsel for the parties, we direct that the  employees of the Andhra Pradesh State Construction  Corporation Limited whose services were sought to be  terminated on account of the closure of the Corporation  shall be continued in service on the same terms and  conditions either in the government departments or in the  government corporations. The writ petition is disposed of  accordingly. There is no order as to costs."

The tenor of the said order, which is not preceded by any reasons or  consideration of any principle, demonstrates that it was an order made  under Article 142 of the Constitution on the peculiar facts of that case.  Law declared by this Court is binding under Article 141. Any direction  given on special facts, in exercise of jurisdiction under Article 142, is  not a binding precedent. Therefore, the decision in  Govindarajulu  cannot be the basis for claiming relief similar to what was granted in  that case. A similar contention was negatived by the Constitution  Bench in Umadevi (supra) :  

"The fact that in certain cases, the Court directed  regularization of the employees involved in those  cases cannot be made use of to found a claim based  on legitimate expectation."      

21.     We will now consider the contention that the appellants are  entitled to relief based on the principle of fairness in action, on  equitable considerations. Learned counsel for the appellants relied on  two decisions of this Court in support of his contention \026 Gurmail Singh  v. State of Punjab [1991 (1) SCC 189] and Kapila Hingorani v. State of  Bihar [2003 (6) SCC 1].

22.     The observations in Gurmail Singh (supra) on which reliance is  placed are extracted below :

"This is where, as here, the transferor and/or transferee is  a State or a State instrumentality, which is required to act  fairly and not arbitrarily (see the recent pronouncement in

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Mahabir Auto Stores v. Indian Oil Corporation  -- 1990 (3)  SCC 752) and the court has a say as to whether the terms  and conditions on which it proposes to hand over or take  over an industrial undertaking embody the requisite of  "fairness in action" and could be upheld. We think that,  certainly, in such circumstances it will be open to this  Court to review the arrangement between the State  Government and the Corporation and issue appropriate  directions. Indeed, such directions could be issued even if  the elements of the transfer in the present case fall short  of a complete succession to the business or undertaking of  the State by the Corporation, as the principle sought to be  applied is a constitutional principle flowing from the  contours of Article 14 of the Constitution which the State  and Corporation are obliged to adhere to."  

"It was very fair on the part of the State Government to  decide that, as the tubewells would be operated by the  Corporation, it would be prudent to run them with the help  of the appellants rather than recruit new staff therefore  and that the government should bear the burden of any  losses which the Corporation might incur as a result of  running the tubewells. But having gone thus far, we are  unable to see why the government stopped short of giving  the appellants the benefit of their past services with the  government when thus absorbed by the Corporation. Such  a step would have preserved to the appellants their rightful  dues and retirement benefits. The conduct of the  government in depriving the appellants of substantial  benefits which have accrued to them as a result of their  long service with the government, although the tubewells  continue to be run at its cost by a Corporation wholly  owned by it, is something which is grossly unfair and  inequitable. This type of attitude designed to achieve  nothing more than to deprive the employees of some  benefits which they had earned, can be understood in the  case of a private employer but comes ill from a State  Government and smacks of arbitrariness. Acting as a  model employer, which the State ought to be, and having  regard to the long length of service of most of the  appellants, the State, in our opinion, should have agreed  to bear the burden of giving the appellants credit for their  past service with the government. That would not have  affected the Corporation or its employees in any way \026  except to a limited extent indicated below \026 and, at the  same time, it would have done justice to the appellants.  We think, therefore, that this is something which the State  ought to be directed to do."

"But in a case where one or both of the parties is a State  instrumentality, having obligations under the Constitution,  the court has a right of judicial review over all aspects of  transfer of the undertaking. It is open to a court, in such a  situation, to give appropriate directions to ensure that no  injustice results from the changeover."

These observations have to be understood in the background of  the facts of that case. The appellants therein were tubewell  operators in the Public Works Department (PWD) of the State  Government. The State took a decision to transfer all tubewells  to a Corporation wholly owned and managed by the State and as  a consequence all the permanent posts with reference to the  Tubewell Circle in the PWD were abolished. Notices were served

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in terms of Section 25F of the Industrial Disputes Act. When  those notices were challenged, they were set aside on the  ground that they were not in consonance with clause [c] of  Section 25F. The State Government issued fresh notices of  termination and they were also set aside by the High Court on  the ground that they did not conform to clause [b] of Section  25F. Thereafter, the State Government served fresh notices  terminating the services in accordance with Section 25F for the  third time. The third round notices were also challenged. But the  High Court upheld the notices of retrenchment. The order of the  High Court was challenged before this Court. During the  pendency of the long drawn litigation, the newly formed  Corporation decided to take over their services by extending  them the same scale of Pay, which they were getting when they  were in the employ of the State Government. Therefore, the only  grievance that survived for consideration before this Court  related to appellants  therein being treated as fresh appointees  on the dates of their respective appointment by the corporation,  thereby denying them the benefit of their past service and  seniority. It is in the context of examining the said grievance,  this Court made the aforesaid observations. As noticed above,  retrenchment under Section 25-FF was found to be valid. The  Corporation had voluntarily taken over the services of the  retrenched employees. The question whether the transferee or  the purchaser of the undertaking should absorb the services of  the employees of the previous employer was not in issue and  therefore, the said decision is of no assistance. On the other  hand, what may be relevant are the following observations of the  Constitution Bench in Uma Devi (supra) :

"Obviously, the State is also controlled by economic  considerations and financial implications of any public  employment. The viability of the department or the  instrumentality of the project is also of equal concern for  the State. The State works out the scheme taking into  consideration the financial implications and the economic  aspects. Can the court impose on the State a financial  burden of this nature by insisting on regularization or  permanence in employment, when those employed  temporarily are not needed permanently or regularly ? As  an example, we can envisage a direction to give  permanent employment to all those who are being  temporarily or casually employed in a public sector  undertaking. The burden may become so heavy by such a  direction that the undertaking itself may collapse under its  own weight. It is not as if this had not happened. So, the  court ought not to impose a financial burden on the State  by such directions, as such directions may turn  counterproductive."

23.     The decision in Kapila Hingorani (supra) is an interim order in a  public interest litigation. In the State of Bihar, various Government  companies and public sector undertakings had not paid salaries to  their workmen and other employees for a long time, resulting in  deaths and suicides of several employees. The petitioner therein  wanted the State to bear the responsibility for payment of salaries.  The State resisted the petition on the footing/contending that the  liabilities of the company cannot be passed on to the State by taking  recourse to the doctrine of lifting the veil or otherwise. This Court  issued certain interim directions for disposal of all liquidation  proceedings in regard to the Government companies in question and  appointment of a Committee to scrutinize (ascertain) the assets and  liabilities of the company. This Court also directed the State

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Government to deposit a sum of Rs.50 crores before the High Court for  disbursement of salaries to the employees. During the course of the  said interim order, this Court observed as follows :  "The government companies/public sector undertakings  being "States" would be constitutionally liable to respect life  and liberty of all persons in terms of Article 21 of the  Constitution of India. They, therefore, must do so in cases of  their own employees. The Government of the State of Bihar  for all intent and purport is the sole shareholder. Although in  law, its liability towards the debtors of the company may be  confined to the shares held by it but having regard to the  deep and pervasive control it exercises over the government  companies; in the matter of enforcement of human rights  and/or rights of the citizen to life and liberty, the State has  also an additional duty to see that the rights of employees  of such corporations are not infringed.

The right to exercise deep and pervasive control would in its  turn make the Government of Bihar liable to see that the life  and liberty clause in respect of the employees is fully  safeguarded. The Government of the State of Bihar, thus,  had a constitutional obligation to protect the life and liberty  of the employees of the government-owned companies/  corporations who are the citizens of India. It had an  additional liability having regard to its right of extensive  supervision over the affairs of the company."

The said observations made in an interim order with reference to the  State’s obligations will not be of any avail to seek employment under  the Board. We are not concerned in these appeals about the rights of  the employees of the Society vis-a-vis the Society or the State  Government. We are concerned with a specific question as to whether  they can seek absorption under the Board. We may in this behalf refer  to the decision of this Court in Bhola Nath Mukherjee v. Government of  West Bengal [1997 (1) SCC 562] relating to transfer of a licensee’s  undertaking to a State Electricity Board, as a consequence of  revocation of the licence. In that case the Board initially allowed the  employees of the erstwhile licensee to continue in its service but  subsequently introduced terms which rendered them fresh appointees  from the date of take over of the undertaking. The question that arose  for consideration was whether the employees  were entitled to  compensation under Section 25FF of the Act; and whether the liability  for payment of such compensation under Section 25FF of the Act was  on the transferor or the Board. This Court held that employees had no  right to claim any retrenchment compensation from the Board, nor did  they have any right to claim to be in continuous employment on the  same terms and conditions, after the purchase of the undertaking by  the Board. The said decision clearly recognises that the Board has no  obligation towards the employees of the previous owner of the  undertaking.

24.     We therefore find no reason to interfere with the order of the  High Court. The appeal is dismissed.