Lakhani And Co. vs National Textile Corporation And ... on 8 April, 1981

    Lakhani And Co. vs National Textile Corporation And Anr. on 8/4/1981

JUDGMENT

   A.M. Ahmadi, J.

   1. By a contract dated 10th September 1973 between Messrs The Rajnagar
Spinning, Weaving and Manufacturing Company, Limited, and Messrs Lakhani and
Company through Messrs Maheshkumar Dhirajlal and Company, certain goods were
sold on the terms and conditions of the contract to the appellants Messrs
Lakhani and Company, Clause 19 of the contract reads as under:

     Clause 19:- All disputes and questions whatsoever which shall arise between
the parties hereto out of or in connection with the contract or as to the
construction or application thereof or the respective rights and obligations of
the parties hereunder clause or thing herein contained or any account of
valuation to be made hereunder or as to any other matter in any way relating to
these presents shall be referred to arbitration in accordance with the Rule for
the time being in force as applicable to piecegoods for export and which will be
framed by the Bombay Mill owners Association in consultation with the Exporter's
Representatives selected in accordance with the provision therein nothing in the
rules or arbitration or any implication thereof which runs counter to the terms
and conditions shall be applied thereto.

   Subsequently, Messrs Rajnagar Spinning, Weaving and Manufacturing Company,
Limited, a sick-textile undertaking, was taken over by the Central Government by
virtue of the provisions contained in the Sick Textile Undertakings
(Nationalisation) Act, 1974 (hereinafter called 'the Act'). Section 3 of the Act
deals with acquisition of rights of owners of sick textile undertakings. It
provides that on the appointed day, every sick textile undertaking and the
right, title and interest of the owner in relation to every such sick textile
undertaking shall stand transferred to, and shall vest absolutely in, the
Central Government. It further provides that every such sick textile undertaking
which has vested in she Central Government shall stand transferred to, and
vested in, the National Textile Corporation. The National Textile Corporation,
therefore, filed a Summary Suit No. 3514 of 1976 to recover the price of the
goods supplied to the appellant by the sick textile undertaking. Immediately on
the service of summons of the said suit, the appellant took out a Notice of
Motion for stay of the suit under Section 34 of the Arbitration Act, 1940, on
the strength of the abovequoted arbitration clause. The learned Chamber Judge
examined the provisions of the Act and came to the conclusion that the scheme of
the Act indicated that what stood transferred and vested in the respondent No. 1
was only the right, title and interest of the owner in relation to the sick
textile undertaking and not any liability of such owner and the requirement of
Clause 19 to refer the dispute to arbitration being a liability could not be
taken as transferred to respondent No. 1. In this view that he took, the learned
Chamber Judge rejected the summons for stay of proceedings under Section 34 of
the Arbitration Act even though on facts he came to the conclusion that the
appellant was at the date of the taking out of the Chamber Summons and even
prior thereto always ready and willing to do all things necessary to the proper
conduct of the arbitration. The appellant being aggrieved by the order passed by
the learned Chamber Judge rejecting his application for stay of proceedings has
preferred the present appeal.

   2. Ill order to understand the scheme of the Act it is necessary to refer to
a few provisions on which reliance was placed at the hearing of this appeal. The
Act was enacted to provide for the acquisition and transfer of the sick textile
undertakings, and the right, title and interest of the owners in respect of the
sick textile undertakings, specified in the First Schedule to the Act with a
view to re-organising and rehabilitating such sick textile undertakings so as to
subserve the interests of the general public by the augmentation of the
production and/ distribution, at fair prices, of different varieties of cloth
and yarn, and for matters connected therewith or incidental thereto. Section 2
contains the dictionary of the Act. The expression "appointed day" means the 1st
day of April, 1974. The expression "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. The expression "sick textile
undertaking" means a textile undertaking, specified in the First Schedule, the
management of which has, before the appointed day, been taken over by the
Central Government under the Industries (Development and Regulation) Act, 1951,
or as the case may be, vested in the Central Government under the Sick Textile
Undertakings (Taking Over of Management) Act, 1972. Sub-section (1) of Section 3
with which we are concerned in the present appeal leads as under:

     3. (1) On the appointed day, every sick textile undertaking and the right,
title and interest of the owner in relation to every such sick textile
undertaking shall stand transferred to, and shall vest absolutely in, the
Central Government.

   Sub-section (2) of Section 3 next provides that every sick textile
undertaking which stands vested in the Central Government by virtue of Sub-
section (1) shall, immediately after it has so vested, stand transferred to, and
vested in, the National Textile Corporation. Section 4(1) next provides that the
sick textile undertaking referred to in Section 3 shall be deemed to include all
assets, rights, lease-holds, powers, authorities and privileges and all
property; movable and immovable, including lands, buildings, workshops, stores,
instruments, machinery and equipment, cash balances, cash on hand, reserve
funds, investments and book debts and all other rights and interests in, or
arising out of, such property as were immediately before the appointed day in
the ownership, possession, power or control of the owner of the sick textile
undertaking, whether within or outside India, and all books of account,
registers and all other documents of whatever nature relating thereto and shall
also be deemed to include the liabilities and obligations specified in Sub-
section (2) of Section

   5. Sub-section (2) of Section 4 on which reliance was placed by Mr. Shah may
now be reproduced:

     4. (2) All property as aforesaid which have vested in the Central
Government under Sub-section (1) of Section 3 shall, by force of such vesting,
be freed and discharged from any trust, obligation, mortgage, charge, lien and
all other in cumbrances affecting it, and any attachment, injunction or decree
or order of any court restricting the use of such property in any manner shall
be deemed to have been withdrawn.

   The rest of the sub-sections of Section 4 are not relevant for our purpose.
Section 5 provides that every liability, other than the liability specified in
Sub-section (2) of the owner of a sick textile undertaking, in respect of any
period prior to the appointed day, shall be the liability of such owner and
shall be enforceable against him and not against the Central Government or the
National Textile Corporation. The liabilities set out in Sub-section (2) of
Section 5 are not material for our purpose. It is not necessary to refer to any
other provision in the Act as no reliance was placed on those provisions by the
learned advocates for the parties in this appeal.

   3. Mr. Trivedi, the learned advocate for the appellant, contended that the
Rajnagar Spinning, Weaving and Manufacturing Company, Limited, was admittedly a
sick textile undertaking within the meaning of Section 2(j) of the Act.
Ordinarily but for the acquisition of the rights of the owners of that
undertaking by virtue of Section 3 of the Act the said Company would have been
entitled to file a suit to recover its dues from the appellant. If the said
Company had instituted the suit, it would have been open to the appellant to
invoke Clause 19 of the contract and seek stay of further proceedings under
Section 34 of the Arbitration Act. lnfact, according to Mr. Trivedi, the said
Company bad instituted Summary Suit No. 2-91 of 1974 and in that suit a summons
was taken out for stay of proceedings under Section 34 of the Arbitration Act,
invoking Clause 19 of the contract. While the said proceedings were pending,
under the provisions of the Act the rights of the owners of the Company sick
textile undertaking-were acquired and the National Textile Corporation withdrew
that suit with permission to file a fresh suit and accordingly the present suit
came to be instituted. Mr. Trivedi, therefore, argued that the National Textile
Corporation has stepped into the shoes of owners of the sick textile undertaking
and, therefore, it was incumbent upon it to resort to arbitration under clause
19 of the contract instead of tiling a suit to recover its dues from the
appellant. Since the National Textile Corporation has chosen to file a suit
without resorting to arbitration, the appellant is entitled to invoke Clause 19
of the contract and ask for stay of proceedings under Section 34 of the
Arbitration Act as the appellant was, at the time when the summons was taken out
and still is ready and willing to do all things necessary to the proper conduct
of the arbitration. There is considerable merit in the submission of Mr.
Trivedi.

   4. It is not in dispute that Messrs Rajnagar Spinning Weaving and
Manufacturing Company Limited was a sick-textile undertaking on the appointed
day, that is, 1st April 1974. By virtue of Sub-section (1) of Section 3 of the
Act, on the appointed day the said undertaking and the right, title and interest
of the owner in relation thereto stood transferred to and vested absolutely in
the Central Government, By the thrust of Sub-section (2) of Section 3 of the Act
the said sick textile undertaking stood transferred to, and vested in, the
National Textile Corporation. On a plain reading of Sub-section (1) of Section 3
of the Act it becomes clear that on the appointed day the sick textile
undertaking and the right, title and interest of the owner in relation thereto
stood transferred to, and vested absolutely in, the Central Government. Sub-
section (1) of Section 4 then indicates the general effect of such vesting. Sub-
section (2) of that section which was relied upon by Mr. Shah next provides that
the property which has vested in the Central Government under Sub-section (1) of
Section 3 shall, by force of such vesting, be freed and discharged from any
trust obligation, mortgage, charge, lien and all other in cumbrances affecting
it, and any attachment, injunction or decree or order of any Court restricting
the use of such property in any manner shall be deemed to have been withdrawn.
According to Mr. Shah the right to recover the unpaid price of the goods
supplied becomes vested in the Central Government without any obligation or any
restriction and hence the same can be enforced in ordinary course by instituting
a suit in a civil Court. In other words, according to Mr. Shah, it is an
obligation so far as the National Textile Corporation is concerned to be
required to resort to arbitration and stay of proceedings under Section 34 of
the Arbitration Act and amounts to restricting the right of the National Textile
Corporation to recover its dues from the appellant in ordinary course by
instituting a suit in the municipal Court. It is difficult to agree with this
submission of Mr. Shah.

   5. Sub-section (2) of Section 4 merely lays down that the property which has
vested in the Central Government under Sub-section (1) of Section 3 shall, by
force of vesting, be freed and discharged from any trust, obligation, mortgage,
charge, lien and all other in cumbrances affecting it. The expression
"obligation" used in this sub-section takes colour from the other expressions
preceding it and immediately following it. It has the effect of freeing the
property from certain financial obligations such as mortgage, charge, lien or in
cumbrance of any other sort whatsoever. The term "obligation" must be understood
in that context and it cannot be given the meaning which Mr. Shah wants me to
give, namely, that it has the effect of freeing the National Textile Corporation
from the arbitration clause contained in the contract. The latter part of Sub-
section (2) of Section 4 further provides that any attachment, injunction or
decree or order of any Court restricting the use of such property in any manner
shall be deemed to have been withdrawn. I find it difficult to agree with Mr.
Shah that the expression "restricting the use" has the effect of doing away with
the arbitration clause in the contract. If there is an arbitration clause in the
contract it is incumbent on the parties to the contract in the event of a
dispute covered by the arbitration clause to refer the matter to arbitration.
This is so because the parties have mutually chosen the forum for resolving
their disputes and differences should they arise. The effect is that by the
contract the parties say that instead of going to Court to have their disputes
and differences resolved, they will resort to the speedier remedy of approaching
an arbitrator for adjudicating upon it. Such a clause in the contract can never
be said to be an obligation or a restriction referred to in Sub-section (2) of
Section 4 of the Act. As stated earlier, the expression "obligation" used in
Sub-section (2) takes colour from the words preceding and immediately following
that expression and if read in that context, it becomes obvious that the purpose
of the statute is to free the properties from certain financial obligations
incurred earlier by the owner of the silk textile undertaking. The latter part
of Sub-section (2) of Section 4 has the effect of lifting the restrictions on
the use of the property imposed by any order of attachment, injunction decree or
order of any Court. The contractual requirement to resort to arbitration can
never be said to be an obligation or a restriction of the type referred to in
Sub-section (2) of Section 4 of the Act. The essence of arbitration is that some
dispute is referred by the parties for settlement to a tribunal of their
choosing, instead of a Court. Arbitration, therefore, is nothing but an
agreement by which the parties to a dispute agree to substitute a tribunal of
their choosing in place of a Court. The rights of the owner of the sick textile
undertaking which stood transferred to the National Textile Corporation were
those arising under the contract. Whenever a right is transferred it carries
with it the corresponding obligations also. The right which stood transferred to
the National Textile Corporation was to claim the price of the goods supplied to
the appellant. If there was any dispute in that behalf it has to be settled by
arbitration. When the rights are transferred the transferee incurs corresponding
obligations. All such obligations are not carved out by Sub-section (2) of
Section 4 of the Act but only obligations which are fiscal in nature. Therefore,
assuming that the agreement to refer a dispute to arbitration is an obligation
(the learned Chamber Judge calls it a liability), it is certainly not an
obligation of the type referred to in the aforesaid sub-section so as to relieve
the National Textile Corporation there from. I have, therefore, no hesitation
whatsoever in concluding that the view taken by the learned Chamber Judge on the
language of Sub-section (2) of Section 4 of the Act is un-sustainable.

   6. The learned Chamber Judge seems to think that because respondent No. 2 has
not applied for stay it is not necessary to stay the proceedings under Section
34 of the Arbitration Act at the behest of the appellant. This approach is
thoroughly misconceived. Respondent No. 2 was merely the broker who had brought
about the transaction. The real parties to the contract were the appellant and
the sick textile undertaking. The appellant will be liable to pay for the goods
supplied. Primafacie the suit is directed against the appellant. Therefore, the
appellant as a party to the contract is entitled to invoke Clause 19 of the
contract. Assuming for the sake of argument that the respondent No 2 is also
sought to be made liable, merely because he does not invoke Section 34 of the
Arbitration Act is no reason to deny the appellant's right to resort to
arbitration. I, therefore, do not see any merit in this ground also.

   In the result this appeal is allowed. The order passed by the learned Chamber
Judge refusing to stay the proceedings under Section 34 of the Arbitration Act
is set aside. The summons taken out by the appellant is restored. The suit
pending in the trial Court will stand stayed under Section 34 of the Arbitration
Act. Parties will take further action to have the dispute resolved through
arbitration in accordance with law. There will be no order as to costs.