If State's Financial Mismanagement Caused Hardship, It's Not A Ground For Interim Relief Against Union : Supreme Court In Kerala's Suit

While refusing interim relief allowing the State of Kerala to raise additional borrowing of Rs 10,722 crores for the financial year 2023-24, the Supreme Court observed that if financial hardships are created by a State's financial mismanagement, then it can't be a ground to seek interim relief.

“If the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against Union.”, the Bench Comprising Justices Surya Kant and KV Viswanathan said.

The Court stated that if such an application seeking interim relief to raise additional borrowings is allowed, then it might set a bad precedent enabling the states to borrow more than the circumscribed limits.

“There is an arguable point that if we were to issue interim mandatory injunction in such like cases, it might set a bad precedent in law that would enable the States to flout fiscal policies and still successfully claim additional borrowings.”, the court said.

The Court found that the triple tests for interim relief- prima facie case, the balance of convenience and irreparable injury, were in the Union's favour.

“Prima facie, we are inclined to accept the argument of the Union that where there is over-utilization of the borrowing limit in the previous year, to the extent of over-borrowing, deductions are permissible in the succeeding year, even beyond the award period of the 14th Finance Commission. This is, however, a matter which will have to be finally decided in the suit.”, the Court said.

"In fact, it has been admitted by the Plaintiff – State that there has been over-borrowing/over-utilization of the borrowing limit between the F.Ys. 2017-18 and 2019-20. It is not denied that if, as contended by the Union, such over-borrowings are adjustable in the succeeding years, then the State has already exhausted its borrowing limits for the F.Y. 2023-24.

We find, prima facie, that there is a difference in the mechanism which operates when there is under-utilization of borrowing and when there is over-utilization of borrowing. The Plaintiff – State has not been able to demonstrate at this stage that even after adjusting the over-borrowings of the previous year, there is fiscal space to borrow."

"If we grant the interim injunction and the suit is eventually dismissed, turning back the adverse effects on the entire nation at such a large scale would be nearly impossible. Au contraire, if the interim relief is declined at this stage and the Plaintiff - State succeeds subsequently in the final outcome of the suit, it can still pay the pending dues, may be with some added burden, which can be suitably passed on the judgment - debtor. The balance of convenience, thus, clearly lies in favour of the Defendant – Union of India," the Court added.

Recapitulating earlier hearings and negotiations between the parties, the Court noted that it had disapproved of a condition imposed by the Union that the State should withdraw the suit for getting consent for additional borrowing of Rs 13,608 crores. Moreover, in a meeting held on March 8, the Union had offered consent for Rs 5000 crores. Thereafter, on 19 March, the Union had afforded consent for Rs. 8742 crores and Rs 4866 crores, which came to a sum total of Rs. 13,608 crores.

Lack Of Authoritative Interpretation on State's Borrowing Power Under Article 293 

It was contended by Kerala that the Union can't regulate the borrowing powers of the state under Article 293 as the conditions can be imposed by the Union only on the loans sought from the Central Government but not otherwise.

Per contra, it was submitted by the Union that if Article 293 is read in such a manner, it would render this provision redundant as the Central Government has an inherent power as a lender to impose conditions on such loans even in the absence of any express constitutional provision.

Stating that there is a lack of authoritative interpretation of Article 293, the court thus deemed fit to refer the set of questions of constitutional importance to be authoritatively decided by a bench of 5 judges.

Based on the above premise, the court refused to permit the State of Kerala to raise additional borrowings to meet its fiscal requirements.

Case Title: State of Kerala v. Union of India | Original Suit No. 1 of 2024

Citation : 2024 LiveLaw (SC) 269

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