Swadeshi Cotton Mills v. Union of India

Supreme Court of India, 13 January 1981, 3 judges, 1981 AIR 818; 1981 SCR (2) 533; 1981 SCC (1) 664

Section 18AA of the IDR Act does not universally exclude a pre-decisional hearing before a takeover; since none was given though one was practicable, the Court, on the Government's undertaking, directed a full post-decisional hearing instead of quashing the order.

Facts

Swadeshi Cotton Mills Co. Ltd. owned six textile undertakings, each registered under the Industries (Development and Regulation) Act, 1951. By an order of 13 April 1978 under Section 18AA(1)(a), the Central Government, stating that the persons in charge had created encumbrances on the assets which affected and were likely to affect production and that immediate action was necessary, authorised the National Textile Corporation to take over management of all six units for five years. No hearing was given to the Company. In its writ petition, a Full Bench of the Delhi High Court held by majority that Section 18AA excludes a prior hearing and that Section 18F provides a post-decisional hearing; the challenge to the order failed, though the Company's assets outside the undertakings were protected. The Company, the Union of India and the Corporation appealed on certificates.

Questions before the Court

Must the rules of natural justice be observed before an order of takeover is made under Section 18AA of the IDR Act?
Do Section 18AA or Section 18F exclude a pre-decisional hearing, expressly or by necessary implication?
What is the consequence of failing to give such a hearing?

What the Court held

Natural justice supplements but cannot supplant the law. Whether a statute excludes it depends on its language, scheme, the nature and purpose of the power and its effect. Where a statute is silent, the decision has grave civil consequences and no full review on merits is provided, courts will be very reluctant to find a pre-decisional hearing excluded.
Cases where urgency prevents a prior hearing and action is soon followed by a full post-decisional hearing are not true exceptions; the rule is adapted to the situation. The words 'immediate action' in Section 18AA(1)(a) mean only action without prior investigation under Section 15, and do not exclude a short-measure hearing.
Urgency is a matter of degree. The Kanpur unit had been closed for over three months and production in the others was not falling, and six weeks passed between the official report and the order, so a minimal hearing was practicable. The Government's satisfaction as to immediacy is not wholly immune from judicial review.
Section 18F allows only prospective cancellation and is not an adequate substitute for a prior hearing. Non-observance of natural justice is itself prejudice; the argument that a hearing would have made no difference was rejected.
An administrative decision in breach of the audi alteram partem rule, where it is an implied requirement, is void. On the Solicitor General's undertaking, the Court did not quash the order but directed the Government to give the Company a full, fair and effective hearing, preferably within three months, and take a fresh decision.

Why it matters

The majority judgment sets out when a statute impliedly excludes a pre-decisional hearing. It holds that urgency usually modifies rather than excludes the audi alteram partem rule, that a statutory post-decisional hearing generally displaces the prior hearing only where it amounts to a full review on the merits, and that denial of natural justice is itself prejudice. The dissent of Chinnappa Reddy, J. would have treated the presumption of natural justice as weak where only property rights and urgent public interest are involved.

In the Court's words

Copied from the official judgment; each passage links to its page.

“In short, the general principle-as distinguished from an absolute rule of uniform application-seems to be that where a statute does not in terms, exclude this rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage.”

Sarkaria, J.Page 24 of the judgment

“The audi alteram partem rule, as already pointed out, is a very flexible, malleable and adaptable concept of natural justice. To adjust and harmonise the need for speed and obligation to act fairly, it can be modified and the measure of its application cut short in reasonable proportion to the exigencies of the situation.”

Sarkaria, J.Page 40 of the judgment

“In sum, for all the reasons aforesaid, we are of the view that it is not reasonably possible to construe Section 18AA(1) as universally excluding, either expressly or by inevitable intendment, the application of the audi alteram partem rule of natural justice at the pre-takeover stage, regardless of the facts and circumstances of the particular case.”

Sarkaria, J.Page 43 of the judgment

“such cases where owing to the compulsion of the fact situation or the necessity of taking speedy action, no pre-decisional hearing is given but the action is followed soon by a full post decisional hearing to the person affected, do not, in reality, constitute an 'exception' to the audi alteram partem rule.”

Sarkaria, J.Page 24 of the judgment

Provisions interpreted

Section 18AA, Industries (Development and Regulation) Act, 1951
Section 18F, Industries (Development and Regulation) Act, 1951

Related judgments

Follows A.K. Kraipak v. Union of India (1969)“They can supplement the law but cannot supplant it (Per Hegde, J. in A. K. Kraipak, ibid).” (page 20)
Follows Maneka Gandhi v. Union of India (1978)“In Maneka Gandhi, it was laid down that where in an emergent situation, requiring immediate action, it is not practicable to give prior notice or opportunity to be heard, the preliminary action should be soon followed by a full remedial hearing.” (page 23)
Follows Mohinder Singh Gill v. Chief Election Commissioner (1977)“As pointed out in Mohinder Singh Gill v. Chief Election Commissioner and in Maneka Gandhi v. Union of India ibid,” (page 24)

Case and bench

Parties: Swadeshi Cotton Mills v. Union of India
Case: Civil Appeal Nos. 1629, 1857 & 2087 of 1979
Decided: 13 January 1981
Bench: Reddy, O. Chinnappa, Sarkaria, Ranjit Singh, Desai, D.A.
Opinions: Majority 2:1. The judgment of Sarkaria and Desai, JJ. was delivered by Sarkaria, J.; O. Chinnappa Reddy, J. dissented, holding that natural justice is not attracted to action under Section 18AA.

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