State Must Establish Robust Internal Mechanisms For Regular Monitoring Of Pending Litigation: Supreme Court

The Supreme Court has emphasised that the State must establish and maintain robust internal mechanisms for regular monitoring and effective follow-up of pending litigation, ensuring it is pursued to its logical conclusion.

The Court emphasised thus in a Civil Appeal filed by Odisha State Financial Corporation (OSFC) against the Judgment of the Uttarakhand High Court, which dismissed its Writ Petition challenging the civil proceedings regarding the computation of interest on the decretal amount and the consequential execution proceedings.

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan observed, “In the present case, several crores of rupees belonging to a State Financial Corporation are at stake. Courts are duty bound to ensure that public resources are not unjustly depleted due to judicial oversight or misapplication of law. This responsibility extends equally to Government counsel and officials involved in litigation. It is incumbent upon them to ensure that all material facts are disclosed, all legal defences are properly pleaded, and all relevant documents are placed on record. Government counsel, as officers of the Court, bear a dual responsibility: to protect the interest of the State, and to assist the Court in achieving outcomes that are just, lawful and equitable. It is also imperative for the State to establish and maintain robust internal mechanisms for regular monitoring and effective follow-up of pending litigation, ensuring it is pursued to its logical conclusion.”

The Bench reiterated that while the State and its instrumentalities enjoy all rights available to any litigant, they must exercise these rights in a manner consistent with public interest and the ends of justice.

Senior Advocate Ravi Prakash Mehrotra appeared on behalf of the Appellant while Senior Advocate Gopal Sankaranarayanan appeared on behalf of the Respondents.

Brief Facts

The Appellant (OSFC), a State Financial Corporation along with Industrial Promotion & Investment Corporation of Odisha (IPICOL), jointly financed an industrial unit namely M/s. Manorama Chemicals Works Ltd., for setting up a bleaching powder unit in Odisha. The Respondent namely M/s. Vigyan Chemical Industries Limited, supplied raw materials worth Rs. 66,454.65 to Manorama in 1985. Since it defaulted in repaying the financial assistance received from the Appellant and IPICOL, possession of its industry was taken over by the Appellant in 1987 under Section 29 of the State Financial Corporation Act, 1951 (SFC Act). Thereafter, the Respondent filed a recovery suit and the Appellant was sought to be impleaded in the same. This was allowed by the Trial Court and the Appellant was added as a Defendant, to which it objected by filing a Miscellaneous Appeal and a Writ Petition, both of which ended in dismissal. The Trial Court was directed to adjudicate the suit expeditiously within one year.

During the pendency of the suit, the Appellant opened a bank guarantee for a sum of Rs. 6,36,243/- with Union Bank of India, undertaking to pay the said amount to the Trial Court, on demand. Similarly, another bank guarantee was opened for a sum of Rs. 3,50,000/-. The Respondent’s suit was partly decreed and challenging the same, the Appellant filed a Civil Appeal, which was dismissed. Consequently, the cross-objection of the Respondent was allowed and the suit was decreed in its entirety by the Fast Track Court in 2006. The Appellant then filed a Second Appeal before the High Court, which stayed the decree subject to the Appellant depositing the decretal amount within 45 days. Thereafter, the same was dismissed, holding that the suit was not barred by limitation. The Supreme Court also upheld the High Court’s Judgment and then the Respondent filed an execution case. The Execution Court attached the Appellant’s deposits amounting to approximately Rs. 22 Crores. As the High Court dismissed the Appellant’s Writ Petition, it was before the Apex Court.

Court’s Observations

The Supreme Court in view of the above facts, noted, “… it is settled legal position, applying the doctrine of sub silentio, that a decision is not an authority on a point that has not been argued or decided. In the instant case, the trial Court had not framed any issues regarding the maintainability of the suit filed by Respondent No. 1 against the appellant, for the alleged default committed by Respondent No. 2, despite a plea in the written statement. Without any issue having been framed on maintainability, the matter reached up to this Court, and the decision was rendered solely on the issue of limitation. Therefore, the issues that remained undecided, but go to the root of jurisdiction and maintainability, can still be raised at the stage of execution under Section 47 CPC.”

The Court reiterated that a Court executing a decree cannot go behind the decree passed between the parties or their representatives, unless the decree is a nullity.

“The validity of a decree can be challenged in execution proceedings on the ground that the Court which passed the decree, was lacking in inherent jurisdiction in the sense that it could not have seized of the case because the subject-matter was wholly foreign to its jurisdiction, or that the defendant was dead at the time the suit was instituted or the decree was passed, or on some such other ground which would have the effect of rendering the court entirely lacking in jurisdiction over the subject-matter of the suit or over the parties to it”, it said.

The Court clarified that at the stage of execution proceedings, objections regarding the maintainability of the suit as well as the jurisdiction of the Trial Court can be raised for consideration, and the Executing Court is well within its powers to deal with such objections in accordance with law, if such objections, from the face of the records, do not require adjudication by trial.

Section 80 CPC

The Court further observed, “This Court has consistently held that the requirement of notice under Section 80 is mandatory and must be strictly complied with. Failure to do so renders the suit liable to be dismissed at the threshold. The absence of such notice is treated as a formal defect, and the Court is duty bound to reject the plaint under Order VII Rule 11(d) CPC, if it discloses non-compliance with Section 80 CPC.”

Applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993

The Court was of the view that the Trial Court committed a serious error in applying the provisions of the repealed Act, 1993, to this case, where the supply was effected in 1985, and more particularly, a grave error in fastening liability for interest and compound interest on the appellant, which was not even a buyer in the transaction.

“Accordingly, the judgment of the trial Court, to the extent of applying the repealed Act, 1993 and imposing liability on the appellant, is patently without authority and is a nullity on that count. The High Court, in exercise of its supervisory jurisdiction, also failed to examine and address these vital aspects”, it added.

Privity of Contract

The Court also explained, “In the absence of any privity of contract, the liability of the appellant is limited strictly to the extent contemplated under Section 29 of the S.F.C. Act, 1951. The appellant therefore, cannot be saddled with the entire liability arising from a transaction to which it was not a party.”

The Court remarked that not only the maintainability of the suit against the Appellant, the imposition and recovery of compound interest is also without any legal authority.

“… the order of the Executing Court attaching the fixed deposits and flexi accounts of the appellant with Axis Bank, Union Bank of India and Odisha State Co operative Bank, is without jurisdiction and legal authority”, it held.

Furthermore, the Court enunciated that once it is held that compound interest cannot be levied under the repealed Act, 1993, the natural sequitur is that the calculation of interest and the consequential recovery are improper.

Conclusion

The Court was of the opinion that the suit itself was not maintainable against the Appellant and the provisions of the repealed Act, 1993 were inapplicable to the case.

“Consequently, the execution proceedings to realize the principal with exorbitant interest calculated under the repealed Act, 1993 are unsustainable, and the decree cannot be enforced against the appellant. The trial Court, having already passed the decree, could not have entertained an application under Section 21 of the Limitation Act, 1963, and the post-decree application filed by Respondent No.1 was, therefore, not maintainable. Nearly four decades have elapsed in protracted litigation, and we are inclined to bring the matter to a quietus”, it added.

The Court, therefore, held that the Appellant (OSFC) is not liable to pay any amount to the Respondent for the alleged default committed by Manorama, under the decree.

“Public Institutions particularly those entrusted with the stewardship of public funds – are expected to conduct themselves in legal proceedings with the highest standards of diligence, responsibility, and accountability. The failure to raise appropriate legal objections at the appropriate stages, coupled with the absence of timely and effective representation, has not only burdened the judicial system but has also exposed the corporation to unwarranted and protracted liability. The present case is a stark example of how a State-owned corporation has been unjustly and unsustainably saddled with financial liability”, it concluded.

Accordingly, the Apex Court allowed the Appeal.

Cause Title- Odisha State Financial Corporation v. Vigyan Chemical Industries and Others (Neutral Citation: 2025 INSC 928)

Appearance:

Appellant: Senior Advocate Ravi Prakash Mehrotra, AOR Jogy Scaria, Advocates Aparna Mehrotra, and Apoorv Srivastava.

Respondents: Senior Advocate Gopal Sankaranarayanan, AORs Varun Punia, Shubhranshu Padhi, Advocates Jasbir Singh Malik, Rhythm Bharadwaj, Shourya Das Gupta, Aditi Gupta, Jay Nirupama, D. Grish Kumar, Pranav Giri, and Ekansh Sisodia.

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