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 a
common 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 to
time 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
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 of
securing 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. The
respondents 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
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. The
stream 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 in Radhakrishna Agarwal v. State of Bihar, AIR 1977 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 other
States 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
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 any
action 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 power
to 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
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 the
petitioner 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
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's
capacity 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 the
light 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 an
added 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
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 an
egalitarian 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
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
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.