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F.C.I v. M/s V. K Traders and Ors., Etc.Etc.

Civil Appeal · 2020 INSC 286Decided 6 Mar 2020
Civil Appeal No. 2070 of 2020
Chief Justice S.A. Bobde · Justice B.R. Gavai · Justice Surya Kant

Background

Following a CBI investigation into defective rice supplied to the Food Corporation of India (FCI) during a state procurement season, around 182 rice mills in Punjab were blacklisted and barred from receiving paddy allocations for custom milling for periods of three to five years. To get around the ban, several blacklisted mill owners leased out their mills, through unregistered lease deeds, to newly formed firms, which then applied to FCI for fresh paddy allocations, claiming they were legally distinct entities untainted by the original default. The Punjab and Haryana High Court sided with the new lessee-firms, holding they could not be held responsible for their lessors' defaults, and FCI appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that the lease deeds relied upon by the new entities were legally defective because they did not meet the registration requirements of Section 17(1)(d) of the Registration Act, 1908, and therefore could not be treated as valid evidence of a genuine transfer of possession. The Court found the FCI's argument persuasive that these leases were arranged specifically to help the original defaulters escape their liabilities, and held that even where a new entity genuinely took over a defaulting mill, it could not claim fresh paddy allocation unless the mill's outstanding liabilities to FCI were first cleared. The High Court's rulings in favour of the new lessees were set aside, though the Court allowed the lessees to pay off the original millers' dues with interest and then reapply, so the door wasn't closed permanently.

Lesson Learnt

A business cannot escape a regulatory ban or blacklisting simply by transferring operations to a newly created entity through an informal or improperly registered arrangement, outstanding liabilities travel with the underlying business/asset, and must be cleared before fresh benefits can be claimed.

Official source (sci.gov.in)View Judgment (PDF)

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