Liability of and Control over Public Corporations

Liability for breach of fundamental rights

This is where the classification question becomes decisive, and it is the heart of the chapter.

Is the corporation the State under Article 12

Article 12 defines the State, for the purposes of Part III, as including the Government and Parliament of India, the Government and legislature of each State, and all local or other authorities within the territory of India or under the control of the Government of India. If a corporation is an "other authority", three consequences follow at once: the fundamental rights bind it, a writ lies against it under Article 226, and its employees may complain of arbitrary treatment under Article 14.

Facts. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, concerned admissions to the Jammu and Kashmir Regional Engineering College, Srinagar, which was run by a society registered under the Jammu and Kashmir Registration of Societies Act 1898. The preliminary question was whether that society was a State within Article 12.

Held. The writ petitions were dismissed on the merits, but the college was held to be a State within Article 12. Having regard to the memorandum of association and the rules of the society: its composition was dominated by representatives appointed by the Central Government and the Governments of Jammu and Kashmir, Punjab, Rajasthan and Uttar Pradesh with the approval of the Central Government; the money required to run the college was provided entirely by the Central Government and the Government of Jammu and Kashmir, and any other money could be received only with the approval of those Governments; the rules to be made by the society required the prior approval of the State and Central Governments; the accounts of the society had to be submitted to both Governments for their scrutiny and satisfaction; and the society had to comply with all such directions as might be issued by the State Government with the approval of the Central Government.

Why it matters. It supplies the working test. The question is not the legal form of the body but whether it is, in substance, an instrumentality or agency of the Government, and the indicators used are the ones the Court relied on: who controls the composition, who provides the funds, whose approval the rules require, to whom the accounts go, and whose directions bind it. A body that answers "the Government" to most of those is the State whatever it is called.

The later decisions refining this test, including the one which restated it and overruled an earlier decision on a research institute, are identified in authorities/cases.json and have not been read in a session, so they are named there and are not worked here.

Control

Four kinds, and an answer should give all four with their weaknesses.

1. Parliamentary or legislative control

• The annual report and audited accounts are laid before the legislature.
• Questions may be asked of the minister concerned, subject to the convention that a minister does not answer for the day to day working of an autonomous body.
• Debates on the working of public undertakings.
• The Committee on Public Undertakings, which examines the reports and accounts of public undertakings and the reports of the Comptroller and Auditor General on them, and reports to the House. It is treated with the other committees in [Congressional and Parliamentary Committees].

Weakness. The whole difficulty of the public corporation is here: the more the legislature scrutinises daily working, the less autonomous the corporation is, and autonomy was the reason for creating it.

2. Governmental control

• Appointment and removal of the chairman and members of the board.
• Directions on questions of policy, which most constituting Acts permit, with the Government usually being the sole judge of what is a question of policy.
• Approval of programmes, budgets, capital expenditure and important appointments.
• Rule making power vested in the Government under the Act.

Weakness. Policy direction shades easily into direction on particulars, and the boundary is rarely enforced.

3. Financial control and audit

The Comptroller and Auditor General, appointed under Article 148, audits the accounts of most public corporations, either directly or by having his comments incorporated, and his reports are laid before the legislature under Article 151 and examined by the Committee on Public Undertakings. This is the strongest continuous control that exists over public undertakings.

4. Judicial control

• Writ jurisdiction under Article 226, and Article 32 where a fundamental right is involved, if the corporation is an authority within Article 12: Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487.
• Ultra vires: an act beyond the corporation's statutory objects and powers is void.
• Natural justice where the corporation decides a matter affecting an identified person, such as terminating a dealership or debarring a contractor.
• Article 14, so that its contracts, appointments and allotments may not be arbitrary.
• Ordinary civil proceedings for contract and tort.

Weakness. The court reviews legality, not commercial wisdom: Asif Hameed v. State of Jammu and Kashmir, AIR 1989 SC 1899, holds that in judicial review the court is not an appellate authority and may not direct or advise on matters of policy.

The autonomy and accountability dilemma

Worth a paragraph, because it is the standard essay question.

The public corporation was created to be free of departmental control, so that it could act commercially. Every mechanism of accountability listed above reduces that freedom. Complete autonomy produces an unaccountable body spending public money; complete accountability produces a department in another name and defeats the purpose. The compromise now generally accepted is: accountability for results and for legality, autonomy in day to day management. That is why the accepted instruments are the annual report, the audit, the committee and the courts, all of which operate after the event on the record, rather than prior approval of individual decisions.

A worked example

The Maharashtra State Road Transport Corporation, established by statute, does the following. Advise on liability and control.

1. Its bus, negligently driven, injures a pedestrian. Liable in tort in its own name on ordinary vicarious liability principles. Article 300 does not apply, and the sovereign function defence is not available for a transport service.
2. It fails to pay a supplier for tyres delivered under a contract signed by its General Manager. Ordinary contractual liability. Article 299 has no application, because the contract is the corporation's and not the Government's. The only formal question is whether the General Manager had authority under the corporation's regulations.
3. It terminates a bus stand canteen licence without hearing the licensee. If it is an authority within Article 12, this is reviewable under Article 226 for breach of natural justice and for arbitrariness under Article 14.
4. It awards a fuel contract to a higher bidder without reasons. Same analysis: arbitrariness under Article 14, challengeable at the pre-contract stage.
5. It decides to close a loss making route. A commercial decision. A court will not substitute its judgment on whether the route should run.
6. It enters into a contract to run a hotel, which is not among the objects in its Act. Ultra vires and void, because a statutory corporation has only the powers its Act confers.
7. Its accounts show large unexplained losses. Audit by the Comptroller and Auditor General, report laid before the legislature, examination by the Committee on Public Undertakings.

What it does NOT mean

It does not mean Article 299 applies to a corporation's contracts. It does not; the corporation is a separate legal person.

It does not mean every public corporation is the State. It is a question of the degree of government control, decided on the Ajay Hasia indicators.

It does not mean the courts supervise commercial decisions. They review legality and fairness, not commercial judgment.

It does not mean autonomy and accountability can both be complete. The whole subject is a compromise between them.

Quick revision

1. Liability: contract, tort and crime in its own name. Article 299 does not apply to its contracts, and Article 300 does not apply to its torts.
2. An act beyond the objects and powers in its Act is ultra vires and void.
3. The sovereign function defence is not ordinarily available to it.
4. Article 12 decides whether the fundamental rights bind it and whether a writ lies.
5. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487: a registered society was the State because government nominees dominated its composition, government provided all its funds and had to approve any other receipts, its rules needed prior government approval, its accounts went to government for scrutiny, and it was bound by government directions. Form is not decisive.
6. Four controls: legislative, through the report, accounts, questions and the Committee on Public Undertakings; governmental, through appointment, policy directions and approvals; financial, through audit by the Comptroller and Auditor General under Articles 148 and 151; and judicial, through writs, ultra vires, natural justice and Article 14.
7. The dilemma: accountability reduces autonomy, and autonomy was the reason for the form. The compromise is accountability for results and legality, autonomy in daily management.

Test yourself

1. How is a public corporation liable in contract and in tort? In contract, it contracts in its own name and is liable on ordinary principles, its contracts being governed by the general law and by its own statute and regulations. Article 299 does not apply, because that Article governs contracts made in the exercise of the executive power of the Union or a State, and a statutory corporation is a distinct legal person whose contracts are its own. A contract beyond the objects and powers conferred by its Act is nevertheless ultra vires and void. In tort, it is liable vicariously for the wrongs of its servants committed in the course of employment; Article 300 does not apply, since it concerns suits against the Government, and the sovereign function defence is not ordinarily available, because the activities of a commercial corporation fall outside the primary and inalienable functions to which N. Nagendra Rao and Co. v. State of Andhra Pradesh, AIR 1994 SC 2663, confines immunity.

2. When is a public corporation the State within Article 12? When, in substance, it is an instrumentality or agency of the Government, whatever its legal form. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, held a society running a Regional Engineering College to be the State, relying on the facts that its composition was dominated by representatives appointed by the Central and State Governments, that the funds to run the college came entirely from those Governments and any other receipts required their approval, that the rules made by the society required prior government approval, that its accounts had to be submitted to both Governments for scrutiny, and that it was bound to comply with directions issued by the State Government with Central Government approval. The consequences of being the State are that the fundamental rights bind the body, that a writ lies against it under Article 226, and that its decisions must satisfy Article 14.

3. Describe the controls over public corporations. Four. Legislative control operates through the laying of the annual report and audited accounts, questions to the minister subject to the convention that he does not answer for daily working, debates, and above all the Committee on Public Undertakings, which examines the accounts and the reports of the Comptroller and Auditor General. Governmental control operates through the appointment and removal of the board, directions on questions of policy, and approval of programmes, budgets and major appointments. Financial control operates through audit by the Comptroller and Auditor General under Article 148, with reports laid before the legislature under Article 151. Judicial control operates through the writ jurisdiction where the corporation is the State, through the doctrine of ultra vires, through the requirements of natural justice where an identified person is affected, and through Article 14.

4. "Autonomy and accountability cannot both be complete." Discuss with reference to public corporations. The public corporation was devised precisely to escape departmental control, so that it could act with commercial speed and take commercial risks. Every accountability mechanism reduces that freedom: questions in the legislature about daily working, prior approval of decisions by the Government, and detailed scrutiny of individual transactions each move the corporation back towards being a department in another name. Yet an entirely autonomous body spending public money is unacceptable. The compromise generally accepted is accountability for results and for legality with autonomy in day to day management, which is why the recognised instruments are the annual report, the audit by the Comptroller and Auditor General, the Committee on Public Undertakings and judicial review, all of which operate after the event on the record, rather than prior approval of particular decisions.

5. Does Article 299 apply to contracts made by a statutory corporation? No. Article 299 governs contracts made in the exercise of the executive power of the Union or of a State, requiring them to be expressed to be made by the President or the Governor and to be executed on his behalf by an authorised person. A statutory corporation has a legal personality separate from the Government, and its contracts are made in the exercise of its own statutory powers rather than of executive power, so the formal requirements of Article 299 have no application and a contract is not void for failing them. What does limit the corporation is its own Act: a contract beyond its objects or powers is ultra vires and void, and where the corporation is the State within Article 12 its contracting must also satisfy Article 14.