Arbitration Disputes and Financial Liability in Public Sector Enterprises: A Landmark Judgment

The case of UCO Bank v. National Textile Corporation Ltd. highlights a critical legal issue regarding arbitration proceedings between Public Sector Enterprises (PSEs) and government departments. The Supreme Court’s ruling in this matter clarifies whether liabilities arising before the nationalization of a company can be recovered through arbitration and whether such disputes should be settled through the Permanent Machinery of Arbitration (PMA) or other legal mechanisms.

The dispute arose when UCO Bank sought to recover outstanding dues from National Textile Corporation Ltd. (NTC) for liabilities related to Shree Sitaram Mills Ltd., a company that was nationalized under the Textile Undertakings (Nationalisation) Act, 1995. The core question before the Court was whether the arbitration proceedings initiated under PMA were valid, and whether NTC was responsible for liabilities incurred before the nationalization.

Background of the Case

Shree Sitaram Mills Ltd. was a private entity that availed credit facilities from UCO Bank. In 1983, the Government of India took over the management of the mills, and by 1995, the textile undertaking was officially nationalized. However, the liabilities of the original company remained unresolved.

UCO Bank had filed a recovery suit against Shree Sitaram Mills Ltd. for dues amounting to Rs. 3,19,09,000. The case was later transferred to the Debts Recovery Tribunal (DRT) and reclassified as O.A. No. 2526/1999. A recovery certificate was issued against Shree Sitaram Mills Ltd., but proceedings were stalled when the company was declared a sick industry.

UCO Bank, dissatisfied with the decision of the Commissioner of Payment (who allowed only a partial claim), pursued arbitration proceedings under the Permanent Machinery of Arbitration (PMA) to recover Rs. 103.76 crore. The arbitration panel directed the submission of claims, but NTC challenged the jurisdiction of the tribunal, leading to a legal battle that reached the Supreme Court.

Key Legal Issues

• Whether UCO Bank’s claim against NTC was valid given that the liabilities pertained to a period before nationalization.
• Whether arbitration proceedings under PMA were legally enforceable in this dispute.
• Whether the High Court was correct in restraining the arbitration tribunal from proceeding.
• Whether liabilities of a nationalized entity automatically transfer to the successor government-controlled corporation.

Arguments by the Petitioner (UCO Bank)

UCO Bank contended that:

• The PMA mechanism, established under the Office Memorandum dated January 22, 2004, was still valid and had not been quashed by the Supreme Court in Electronics Corporation of India Ltd. v. Union of India (2011).
• As a nationalized entity, NTC had assumed both the assets and liabilities of Shree Sitaram Mills Ltd. and was thus liable for the outstanding debt.
• The Commissioner of Payment had rejected UCO Bank’s full claim without justification, leaving them without a remedy.
• Preventing arbitration proceedings would deny the bank its legal right to recover its dues.

Arguments by the Respondents (NTC and Union of India)

NTC and the government argued that:

• Liabilities prior to April 1, 1994, remained the responsibility of Shree Sitaram Mills Ltd. and did not transfer to NTC.
• The PMA mechanism did not apply since the case was not a dispute between two PSEs but involved liabilities of a pre-nationalization entity.
• UCO Bank had already approached other legal forums, including the Debts Recovery Tribunal, and was engaging in forum shopping.
• The Supreme Court’s ruling in Electronics Corporation of India Ltd. had rendered the PMA mechanism ineffective for such cases.

Supreme Court’s Observations

The Supreme Court examined whether arbitration proceedings under PMA were legally tenable in this case. The Court ruled:

“The initiation of arbitration proceedings and the order passed by the Arbitrator triggered the present round of litigation since the respondent, claiming to be aggrieved by the same, preferred a writ petition. The Division Bench of the High Court set aside the order of the learned Single Judge and quashed the notice dated 17.10.2011 of the Arbitral Tribunal under PMA.”

The Supreme Court acknowledged that UCO Bank had genuine claims but agreed that PMA was not the appropriate forum. The Court emphasized that liabilities of a pre-nationalization company do not automatically transfer to a successor government corporation unless explicitly stated in the takeover provisions.

Final Judgment

The Supreme Court upheld the High Court’s decision to quash the arbitration proceedings, ruling:

“The conclusion reached by the Division Bench that the respondents are not liable for the amount claimed by the appellant is set aside. The question of liability and the manner of recovery is left open to be considered by the appropriate forum.”

The Court directed that UCO Bank’s recovery proceedings before the Debts Recovery Tribunal (DRT) be revived and permitted the bank to bring NTC on record as a judgment debtor in those proceedings.

Conclusion

This ruling reinforces the principle that disputes involving financial liabilities of nationalized entities must be addressed through appropriate legal forums rather than arbitration under PMA. It also clarifies that pre-nationalization liabilities do not automatically transfer to government-owned corporations unless specified by law.

By allowing UCO Bank to pursue recovery through the Debts Recovery Tribunal, the judgment ensures that creditors of nationalized entities still have legal remedies while preventing misuse of arbitration mechanisms for disputes outside their intended scope.

Petitioner Name: UCO Bank.
Respondent Name: National Textile Corporation Ltd..
Judgment By: Justice A.S. Bopanna, Justice R. Banumathi, Justice Hrishikesh Roy.
Place Of Incident: New Delhi, India.
Judgment Date: 05-03-2020.

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