Raj HC grants relief to Sanganer textile units, questions sweeping recovery orders in CETP dispute

Jaipur: In a significant relief to the State Government, Sanganer textile units and members of the dyeing and printing industry, the Rajasthan High Court has stepped in to examine and curb sweeping recovery directions issued by a Commercial Court in connection with the Sanganer CETP dispute.

The Court, while dealing with a batch of writ petitions led by the State of Rajasthan, has questioned the legality of an execution order that had extended liability far beyond the original award, bringing within its ambit textile unit owners, association members and even government officials.

The High Court observed that the controversy revolves around whether an execution court can travel beyond the decree or arbitral award and impose fresh liabilities on persons who were not even parties to the original proceedings.

The dispute arises from the Common Effluent Treatment Plant (CETP) project in Sanganer, an industrial cluster known for textile dyeing and printing. The project was set up to address environmental concerns caused by untreated industrial waste, with financial contributions from the Central and State Governments, banks and local textile units.

A private company engaged for execution of the project later secured an arbitral award of over ₹52 crore through the MSME Facilitation Council. When the award was taken for execution before the Commercial Court in Jaipur, the proceedings took a controversial turn.

By its order dated February 14, 2025, the Commercial Court issued a series of far-reaching directions that triggered widespread concern across Sanganer. The court not only allowed recovery from the SPV that was directly liable under the award, but also went on to lift the corporate veil and hold directors, shareholders and even association members personally liable.

The order further permitted attachment and seizure of textile units’ premises and machinery, and even opened the possibility of auctioning such properties if dues were not cleared within a stipulated time. In an unusual move, the court also invoked the “polluter pays” principle and extended potential liability to other textile units operating in the region, even if they were not part of the original dispute.

Perhaps the most contentious aspect was the inclusion of the State Government in the recovery framework. The Collector, Jaipur—acting in his capacity connected with the project—was made jointly liable under a “pay and recover” mechanism, with directions that went as far as restraining salary withdrawal until the award amount was satisfied.

Challenging these directions, the State and several affected parties approached the High Court, arguing that the execution court had clearly overstepped its jurisdiction. They contended that execution proceedings are meant only to enforce an existing decree or award, and cannot be used to create new liabilities or drag in third parties.

The petitioners argued that neither the State, nor the textile units, nor the association members were parties before the MSME Council when the arbitral award was passed. In such circumstances, fastening liability upon them during execution was contrary to settled principles of law.

The High Court took note of these submissions and observed that the impugned order raised serious legal concerns, particularly because it appeared to go beyond the scope of execution and had potentially “disastrous consequences” for a large number of stakeholders in the Sanganer industrial cluster.

The Court also examined the broader background of the project, noting that the CETP had been conceived as a public-purpose initiative aimed at pollution control. Land had been allotted at concessional rates and the project was structured under a government-supported scheme, involving multiple stakeholders and funding sources.

However, the Court indicated that even in matters involving environmental concerns, legal principles governing execution cannot be ignored. The use of doctrines such as “polluter pays” or lifting of the corporate veil must be within the bounds of jurisdiction and supported by proper pleadings and adjudication.

Earlier, a Division Bench had already granted interim protection by staying the operation of the directions that lifted the corporate veil and imposed liability on directors and members.