Supreme Court: In a batch of petitions filed against the Judgment of High Court of Rajasthan, wherein Arfat Petrochemicals Pvt. Ltd.’s (‘respondent’) petition was allowed and the decision of the Cabinet Committee of the State of Rajasthan and instruction issued to the Rajasthan State Industrial Development and Investment Corporation Ltd. (‘RIICO’) to cancel a series of permissions and approvals granted/awarded to the respondent in respect of industrial land in Kota, Rajasthan, were set aside. The Division Bench of Surya Kant* and Vikram Nath JJ., held that when the actions of a Committee constituted by Cabinet are validated by the Council of Ministers and the rest of the Council, it ensures that the Rules of Business were followed by the State Government in the course of decision-making process.
Background
A land approximately of 271.39 acres of land was allotted by the State of Rajasthan through the District Collector, Kota, in the Large-Scale Industrial Area, Kota (‘LIA, Kota’) to J.K. Synthetics Ltd. (‘JKSL’) on 12-09-1958. Following the allotment, a lease deed was executed with JKSL by the Collector, Kota, and permission was granted for setting up its industrial units in the area. JKSL’s retention of the property was facilitated over the following decades through the execution of fresh lease deeds with respect to the same area, as and when the period specified in the earlier lease lapsed.
Just after the first allotment was initially made, the State Government exercised its powers under Section 100 of the Rajasthan Land Revenue Act, 1956 and formulated the Rajasthan Industrial Areas Allotment Rules, 1959 (‘1959 Rules’) to regulate the allocation of land to entrepreneurs and the development of industrial areas across the State.
While the above stated leases were subsisting, the Rajasthan State Industrial and Mineral Development Corporation Ltd. (‘RSIMDC’) was incorporated for carrying out development projects across the State. The Corporation was subsequently split into two entities, with RIICO acting as its direct successor. To regulate RIICO’s activities in respect of the lands over which it would have control, the RIICO Disposal of Land Rules, 1979 (‘1979 Rules’), were issued under Article 93(xv) of the Articles of Association (‘AoA’) of the Company. The Rules provided a mechanism by which RIICO could grant different types of approvals and permissions in relation to industrial lands and their utilization. On 18-09-1979, an Order was passed by the State Government to allot all industrial lands within its territory to RIICO. Thus, the Corporation would, from that point onwards, step into the shoes of the state government in overseeing further development of the areas under its supervision. Whether or not this included the LIA, Kota, was a point of contention among the parties. The Joint Director of the Department of Industries at Kota also issued an Order on 28-09-1979, according to which a number of industrial areas would be transferred to RSIMDC in compliance with the Government decision of 18-09-1979.
Even after the Government Order dated 18-09-1979, JKSL continued to deal directly with the District Collector, Kota. Another lease, extending JKSL’s utilization of the land in LIA, Kota, was signed on 06-10-1982 between the Collector and JKSL, and not RIICO. During the same period, the 1959 Rules were amended to introduce provisions that would effectuate the allocation of industrial areas to RIICO, and to then facilitate the Company administering these lands under the 1979 Rules.
In the backdrop of these amendments, confusion arose regarding whether Rules 11-A and 12 of the 1959 Rules would be applicable prospectively or retrospectively. A notification was issued by the State Government on 23-05-1987, clarifying that Rule 12 of the 1959 Rules, added on 13-07-1982, would not apply retrospectively and the lease rent and other items pertaining to different deeds would remain a state subject.
However, in the 1990s, JKSL encountered financial difficulties and was eventually declared a “sick company” by the Board for Industrial and Financial Reconstruction (‘BIFR’) on 02-04-1998, under the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’). Following the classification of JKSL as a sick company, the matter was referred to the Appellate Authority for Industrial and Financial Reconstruction (‘AAIFR’). During this period, JKSL signed a Memorandum of Understanding with Arfat Petrochemicals Pvt. Ltd. & Ors. (‘respondent No. 1’) as part of its plan to sell the Kota unit of its operations.
A Joint Venture & Shareholder Agreement (‘JV’) was signed between Respondent No. 1 and JKSL on 13-05-2003, which cemented the former’s obligation to discharge the liabilities outstanding on LIA, Kota, as well as the dues of the labourers. The AAIFR scheme was finalized on 07.01.2005, and it included an obligation on the part of Respondent No. 1 to honour the earlier tripartite agreements with the JKSL workers unions. Part of the rehabilitation scheme involved hiving off 227.15 acres of the land in the LIA, Kota, away from JKSL and to Respondent No. 1.
Pursuant to the AAIFR scheme, Respondent No. 1 initially restarted one of the units for manufacture of acrylic fibre. The remaining 6 units remained comatose. Consequently, the overall objective of reviving the industrial units in the LIA, Kota, was frustrated. The offshoot of this was a decade of litigation primarily involving the workers unions and Respondent No. 1, regarding the latter’s failure to revive the industrial units as contemplated in the AAIFR scheme.
Thereafter, the workmen initiated proceedings before multiple forums including the National Company Law Tribunal, the Rajasthan High Court, the BIFR and AAIFR, in their attempt to recover their dues and have the rehabilitation scheme implemented. Among these litigations was an SLP, and resultant Review Petitions filed before the Court concerning directions issued by AAIFR to Respondent No. 1. The directions were in favour of the workmen and in furtherance of the rehabilitation scheme that AAIFR had previously approved. However, in appeal, the High Court ruled that AAIFR had no jurisdiction over Respondent No. 1 as it was not a “sick company” under SICA. This was further appealed to the Supreme Court. The SLP by the Appellant Unions and others, was dismissed by the Court on 18-11-2016, and the subsequent Review Petitions were also rejected on 17-08-2017 and 06-03-2018, respectively, affirming that no directions could be issued to Respondent No. 1 but also noting that the AAIFR plan should be executed. Some of the other proceedings by individuals or groups of workers, remain pending in various forums and do not require recounting for our purposes.
Analysis of the Issues
1. Whether the 1979 Rules of RIICO are statutory in nature?
The Court said that at the outset it must be noted that RIICO is not a statutory body. The Company was brought into being under the Companies Act, 1956 by the State of Rajasthan, which holds 100% shares in it. The distinction between companies that are brought into being “by” an Act, and those created “under” an Act, is that a company incorporated under the Companies Act is not a creation of the said Act but it has come into existence in accordance with the provisions of the Companies Act. The Court further said that RIICO does not owe its existence to a statute but was rather created under the Companies Act and is subject to its provisions. It is only governed by the provisions of the Companies Act and not created by it. The Court said that in the present case, Rule 12 of the 1959 Rules merely states that lands allotted to RIICO will be further dealt with by the Corporation as per its 1979 Rules. An obligation is thus imposed upon RIICO to abide by its own guidelines, which it had issued under Article 93 of its AoA. The obligation for RIICO to abide by the 1979 Rules stems from its own AoA under which those Rules came into being. Thus, the Court said that it was clear that no statutory force underpins the 1979 Rules and there is no question of them prevailing over or governing the subject area.
2. Whether failure to observe Principles of Natural Justice by the State Government vitiated its decision to annul the permissions/approvals granted by RIICO in favour of Respondent No. 1?
The Court referred to A.K. Kraipak v. Union of India, (1969) 2 SCC 262, wherein the nature of an administrative power and the obligations reposed upon the State to function in a just and fair manner was explained. It has already been held by the Court that RIICO had no authority whatsoever to accord permission for conversion and sub-division of the industrial land allotted to Respondent No. 1. The Court further opined that the State Government has always retained its authority as lessor and was the only competent authority to grant such permissions to Respondent No. 1 within the framework of the 1959 Rules. Therefore, the Court held that the self-styled power exercised by RIICO, was without any sanction in law, it lacked inherent competence and RIICO acted beyond its jurisdiction in respect of LIA, Kota. The Court further said that the permissions accorded by RIICO in favour of Respondent No. 1 did not confer any rights whatsoever, much less any enforceable right in the eyes of law. RIICO usurped the powers vested in the State Government and passed palpably illegal orders in favour of Respondent No.1. Thus, the Court said that the agreements between RIICO and Respondent No. 1 were nothing but brutum fulmen. Thus, no legally vested right of Respondent No. 1 had been infringed and it had no legitimate ground to seek an opportunity to be heard in a matter strictly between RIICO and State Government.
3. Whether the State Government could have exercised its powers under Article 138 of the AoA of RIICO to direct cancellation?
The Court said that the State Government being the sole investor, its overriding powers had been acceded to by RIICO through Article 138 of its AoA. The Court noted that Article 138 opens with a non obstante clause and, therefore, the Court said that the power given to State Government to issue directions under this provision could not be curtailed and was not subject to any other provision within the Articles. Article 138 also empowers the State Government to “vary and annul any such direction or instruction”. Therefore, the Court said that the Directors were obligated to comply with the Government directions/instructions.
Further, the Court said that in the present case, the State Government had directed RIICO to recall its permission for conversion of the usage of land, sub-division of plots and supplementary lease deeds executed in favour of Respondent No. 1. All these actions of RIICO pertained to its business affairs. Since RIICO took these decisions exceeding its powers and in a completely unauthorised and illegal manner, the Court said that the State Government was well within its rights to invoke Article 138 of AoA and nullify the unauthorised and unlawful decisions taken by RIICO. The very objective behind reposing power in the State Government under Article 138 of the AoA is to enable it to undo and annul the decisions taken by RIICO in the conduct of its business affairs, which the State Government may find is derogating from public interest or in conflict with its own policy. Thus, the State Government was entitled to resort to Article 138 where it finds that the business affairs have been conducted by RIICO detrimental to the State’s interest as a Principal stake holder.
4. Whether the Rules of Business were not followed by the State Government?
The Court said that the Rules of Business were substantially complied with. The Court noted that the entire Cabinet was called on 29-12-2018 to consider various decisions taken by RIICO during the previous regime. The Court said that the intention behind Article 166(3) under which the Rules of Business were framed, have been succinctly set out by the Court in Gulabrao Keshavrao Patil v. State of Gujarat, (1996) 2 SCC 26. The purpose behind Article 166(3) is to form regulations for the convenient administration of Government. The Minister of Industries was not, at any point, missing from the overall decision to review the actions taken by RIICO and to take necessary steps thereafter. The cabinet sub-Committee was merely acting on behalf of the entire Council of Ministers, when carrying out the exhaustive fact-finding enquiries. The Council was collectively involved in the decision to have sub-committees set up to revisit different decisions taken by the prior government, including with respect to actions by RIICO. The Court said that in the present case, the sign off from the Minister for Industries was clear from the authorization granted on 01-01-2019 to the sub-committee to look into the decisions of the prior Government and RIICO. Therefore, the Court said that the spirit behind the Rules of Business was complied with in the present case. The specific Committee that was authorized to investigate RIICO and its alleged misuse of non-existent powers in favour of Respondent No. 1, was a creation of the entire Council, including the Minister for Industries. The sub-committee’s actions in this context were completely validated and backed by the Minister and the rest of the Council. Therefore, the Court found it difficult to hold that the Rules of Business were not followed by the State Government in the course of its decision-making process.
5. Whether the Doctrine of Legitimate Expectations and Promissory Estoppel was applicable in favour of Respondent No. 1?
The Court said that Respondent No. 1 cannot have any legitimate expectation or promissory estoppel. The Court further said that the supplementary lease deeds and corresponding permissions were executed with/by RIICO which had no authority and power to do so. This, combined with the overriding public interest in having the land in LIA, Kota utilized for industrial purposes for the economic progression of the state or any revised purpose, as may be permitted by the State Government in public interest, therefore, the Court said that there was no doubt that Respondent No. 1 had no further valid defences against the cancellation of the supplementary lease deeds.
Court’s Decision
The Court concluded that the supplementary leases signed between Respondent No. 1 and RIICO were unsustainable. The Court said that RIICO did not possess the authority to enter into the agreements, as the land in LIA, Kota remained under the ownership and control of the State Government uninterruptedly from the first lease signed with JKSL, till the present date. The Court also concluded that there was no legal infirmity in the action of the Appellants in setting aside the decisions taken by RIICO or in directing the cancellation of the supplementary leases of 2018. Therefore, the Court upheld the cancellation of the supplementary deeds and quashing of the approvals for conversion of land and sub-division of plots.
The Court also said that Respondent No. 1 was not precluded from reapproaching the State Government and seeking conversion of the usage of land and attendant approvals under the 1959 Rules. Therefore, the Court directed that the State Government shall be at liberty to consider such a proposal in the public interest and in accordance with the 1959 Rules.
Thus, the Court allowed the appeals by the State of Rajasthan and RIICO and therefore, the impugned Judgment dated 20-07-2021 passed by the High Court was set aside.
[Bishambhar Prasad v. Arfat Petrochemicals (P) Ltd., 2023 SCC OnLine SC 458, Decided on 20-04-2023]
Judgment Authored by: Justice Surya Kant
