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Report No. 126

1.6. There is an alternative route which takes one to the same destination. The goal of setting up a Democratic Socialist Secular State was to be achieved by concrete steps taken towards implementing the Directive Principles of State Policy. One of the fundamental assumptions on which a welfare State can be founded is to so arrange the social order that in it justice, social, economic and political, will inform all institutions of national life.1

It is, therefore, a safe assumption that Industrial Policy Resolutions would have twin objectives to be attained, namely, to avoid concentration of wealth and means of production to sub-serve the common good by distributing ownership and control of material resources of the community on instrumentalities of the State which are more or less expected to work on no profit no loss basis.

The aims and objectives of the Constitution are clearly reflected in the Resolutions dated 6-4-1948 and 30-4-1956" laying down the industrial policy of the State which, amongst other things, required the State to progressively assume a predominant and direct responsibility for setting up new industrial undertakings. Public corporations, State holding companies and State controlled societies were chosen as the vehicles for translating this industrial policy into action-oriented programme.

Whatever garb they may wear, their life and soul, bone and blood, is the State itself. They are limbs of the State and they exist for the sole purpose of running the huge apparatus of the State industry smoothly and efficiently in pursuit of the objectives of the State policy.2 They should, however, be distinguished from a Department of the Government under the administrative control of any Ministry, otherwise a provision like sub-section (4) of section 32 of the Payment of Bonus Act, 1965, would create an unnecessary confusion.

National Textile Corporation was appointed as an authorised controller under section 18A of the Industries (Development and Regulation) Act, 1951, for reviving a sick unit, called the Model Mills. As the workmen raised a demand for bonus for the period 1964-65 to 1967-68, it was sought to be countered by urging that on the appointment of an authorised controller, the Model Mills is an establishment engaged in an industry carried on by or under the authority of a Department of the Central Government and, therefore, excluded from the operation of the Payment of Bonus Act.

Negativing the contention, it was held that on the appointment of an authorised controller, only the management changes but the unit remains by itself a unit irrespective of the nature and character of management.3

The stand taken by the employer that since the appointment of an authorised controller, the Model Mills becomes an establishment in an industry run by a Department of the Union Government betrays a very narrow outlook and self-defeating attitude because if the unit becomes a Department of the Government, it may at best go out of the tentacles of the Payment of Bonus Act but it would be subject to all the provisions of the Constitution.

A clear policy statement was made that the public sector corporations or companies must run on commercial principles and in business like manner to achieve the goals and objectives set for them but eschewing all the private sector tantrums of exploiting workmen. In any view of the matter, as these corporations and companies have been held to be instrumentalities and agencies of the State, they are within the purview of Part III of the Constitution.

However, these public sector undertakings, having acquired the format of a Government company or a corporation, have more or less betrayed an approach of the private sector when they lost the battle on the ground of application of Part III of the Constitution. An alternative was adopted by urging that Part XIV of the Constitution would not apply to the employees of these corporations and a Government company on the specious plea that the employees of these bodies are not members of a civil service of the Union or an all-India service or a civil service of the State or held a civil post under the Union or the State.

The protection of Part XIV was sought to be avoided by this contention on their behalf. Even that stood negatived when the courts ruled that these public sector undertakings will be subject to the limitation on heir power imposed by Article 14 in that they cannot act in an arbitrary manner or be guilty of discrimination and the actions qua not only their employees but even the consumers of their goods and services will have to be judged in the light of the constitutional culture4

To illustrate, a State Finance Corporation, after having entered into a contract to finance the project of setting up a five star hotel, backed out after the project was half through, leaving the victim to the so-called remedy of a suit for damages for a breach of contract because it was contended that contractual obligations even of a public sector undertaking, which is an instrumentality of the State, cannot be enforced by a high prerogative writ. This last attempt equally failed and the State Finance Corporation, by a writ of mandamus, was directed to fulfil its obligation of financing the project within the limits agreed upon.5

1. The Constitution of India, Preamble.

2. Justice O. Chinnappa Reddy, Inaugural Address, vide book titled 'Public Enterprises and Fundamental Rights: Basic Papers and Discussions of a National Level Seminar, 1984', compiled by Laxmi Narain & B.S. Murty, pp. 20-22.

3. Rashtriya Mill Mazdoor Sangh, Nagpur v. Model Mills, Nagpur, 1984 Suppl SCC 443.

4. A.L. Kalra v. Project and Equipment Corporation of India Ltd., (1984) 3 SCC 316.

5. Gujarat State Financial Corporation v. Lotus Hotel, AIR 1983 SC 848.

1.7. Keeping in abeyance for the time being the question of treating all public sector undertakings as being within the comprehension of Article 12 of the Constitution, their role as public sector undertakings must be emphasised by specifically contrasting them with private sector enterprises in contradistinction to which they were brought into existence.

The Industrial Policy Resolution aimed at reducing disparities in income and wealth which were then existent, to prevent private monopolies and concentration of economic power in different fields in the hands of small numbers of individuals. The State, therefore, resolved to assume a predominant and direct responsibility for setting up new industrial undertakings and other service facilities.

In certain commodities. State trading was to be accelerated; the adoption of the socialist pattern of society without the word 'socialist' being in the preamble was accepted as a national objective; the economic planning was to aim at rapid development; and, with this end in view, all industries of basic and strategic importance or in the nature of public utility services were to be in the public sector. High capital intensive industries, which the State alone can undertake without being influenced by the fact of a profit motive in short term, were also to be in the public sector.

1.8. The ground norms were laid for mixed economy. But over a period, the demarcating line between the public sector and private sector is becoming dim. If private sector were to imply that the capital for setting up industrial units will be provided by the entrepreneurs and where the State financed the project either wholly or substantially, the industrial undertaking would be treated as one in public sector, then this has become a euphemism.

A survey would show that the so-called private sector undertakings mobilise their financial resources from the public without the entrepreneur in any way becoming personally responsible about the liability to return the money. If Balance Sheet of any big private sector undertaking is analysed, it will appear at a glance that those in management, have mobilised all financial resources from the public, to wit, share capital, loans and deposits from public, bonds and debentures, borrowing from nationalised banks, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India and such public financing houses.

The family controlling the management hardly has one per cent. or less holding in the capital. On the other hand, a public sector undertaking is financed wholly by the State or by share capital, majority of which is held by the State. When the State finances an industrial undertaking, the resources are provided by the Government from the taxes levied by the State or borrowings from the market.

Thus, financing of both public and private sector undertakings is done by people at large directly or indirectly and yet the euphemism survives that a private sector undertaking is beyond the reach of constitutional writs and enjoys a power which can be used detrimental to the society.

Why? The public sector undertakings, on the development of law as set out hereinbefore, are amenable to the constitutional writs that may be issued by the courts; but not the private sector. To illustrate the point, it would be advantageous to recall sections 25-0 and 25R of the Industrial Disputes Act. 1947.

Briefly stated, section 25-0 imposed a liability on an employer who intends to close clown an industrial undertaking to serve a notice ninety days before the date on which the intended closure is to become effective on the appropriate Government, stating clearly the reasons for the intended closure of the undertaking. The sub-sections of section 25 set out the procedure on receipt of the notice and they are not relevant for the present discussion.

Section 25R provides for imposition of penalty for closure without complying with the provisions of sub-section (1) of section 25-0. Several employers, including one company Excel Wear, challenged the constitutional validity of section 25-O and 25R contending that they violate the fundamental freedom guaranteed by Article 19(1)(g) of the Constitution in as much as the fundamental right to practise any profession or to carry on any occupation trade or business inheres the negative right not to be compelled to carry on trade if the employer does not wish to carry on his trade. This contention found favour with the Court observing:

"It is wrong to say that an employer has no right to close down a business once he starts it. If he has such a right, as obviously he has, it cannot but be a fundamental right embedded in the right to carry on any business guaranteed under Article 19(1)(g) of the Constitution."1

The whole of section 25-O, which merely imposed a liability to give notice before intended closure, was struck down as violative of Article 19(1)(g). Shorn of verbiage, an employer may close down a business or an industrial undertaking rendering all workmen jobless for extraneous and irrelevant reasons and the workmen can seek no relief. The Government is powerless. No attempt was made to examine the financial structure of Excel Wear.

If it was done and if it was found that the employer who claims an absolute and unconditional right to close down the undertaking had an investment which can only be said to be illustory in relation to the total investment in the project, his right to play with the lives of thousands of workmen because the undertaking is in private sector and beyond the reach of the court can be negatived in larger public interest. In fact, there is a recent movement by public sector undertakings to be freed from the yoke of the Constitution.

At any rate, the object, purpose and underlying philosophy towards setting up public sector undertakings must mould its approach towards its employees, the consumers of its product and even other public sector undertakings. At any rate, it cannot afford to develop a litigious culture exhibited by private sector employers. And yet numerous cases can be quoted where the public sector undertakings not only brought entirely frivolous disputes right up to the Supreme Court but delayed the resolution of disputes by raising absolutely unsustainable, frivolous, preliminary objections.2

"The Indian economic methodology for abolition of mass poverty and building up of economic self-reliance is through the strategy of the public sector corporations. Inevitably, a crop of profound juristic issues claims our attention and demands our solutions if, as a nation, we are not to halt and hesitate and be bogged down by protracted litigation exercises."3 It is, therefore, inevitable that not only the public sector undertaking has to eschew litigation but avoid litigious culture which is the bane of private sector undertakings.4

1. Excel Wear v. Union of India, (1978) 4 SCC 224 (242).

2. S.K. Verma v. Mahesh Chandra, (1983) 4 SCC 214; Goa Sampling Employees' Association v. General Superintendence Co. of India, (1985) 1 SCC 206; Shambu Nath Goyal v. Bank of Baroda, (1978) 2 SCC 353; D.P. Maheshwari v. Delhi Administration, (1983) 4 SCC 293; Workmen Employed by Hindustan Lever Ltd. v. Hindustan Lever Ltd., (1984) 4 SCC 392.

3. Justice V. R. Krishna Iyer Law Versus Justice, p. 139.

4. D.P. Maheshwari v. Delhi Administration, (1983) 4 SCC 293.

1.9. The present Law Commission charged with a duty to recommend basic reforms in legal justice system was requested by its terms of reference to devise 'the desirability of formulation of the norms which the Government and public sector undertakings should follow in the settlement of disputes including a review of the present system for conduct of litigation on behalf of the Government and such undertakings'. The very term of reference equates public sector with Government in the matter of litigation and seeks to distinguish both from individuals and private sector undertakings who indulge in litigation times without number.

This subsumes that the Government and public sector undertakings must have their own litigation policy and strategies and they must be devised with a view to encouraging avoidance of litigation and settlement of disputes by alternative methods. Litigation is generally believed to be an unproductive investment both in time and money.

Public sector undertakings and the Government have to conserve the resources, determine priorities of expenditure by a judicious approach so that unproductive litigation does not eat away a large chunk of the scarce resources, smothering socially beneficial schemes for want of financial assistance. This cannot be done unless litigation policies and strategies, both by public sector undertakings and Government, are worked out keeping in view the end that litigation has to be avoided at all costs.

More the litigation, more the courts and, apart from the litigation costs which the State and public sector undertakings bear, the State has also to bear the expenses on setting up courts, providing personnel for manning judicial posts and other incidental expenses on staff, books, buildings, libraries, et. al. Avoid litigation or reduce it at any cost which would bring down the load on the court system, inevitably resulting in reduction of expenses on judicial set up.

1.10. The purpose of this report is to lay down broad guidelines on litigation policies and strategies of the public sector undertakings and the Government with a view to reducing litigation, saving avoidable costs on unproductive litigation, releasing the energies of officers held up in court work, reducing load on court system and thus realise the promise of Article 39A of the Constitution.

Government and Public Sector Undertaking - Litigation Policy and Strategies Back

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