The article seems clear enough to me; Sugar stocks held by the mills were used as collateral for loans totalling Rs3,000crore (crore is 10,000,000, so this is 30 billion rupees, or about US$490million) from the State Bank of India.
The sugar mills owed money to cane growers whose crops they had been supplied but had not yet paid for, and the growers petitioned the Allahabad high court to force the mills to pay them what they were owed, even if they had to sell the sugar stocks to do this, and the court granted that petition.
The State Bank then petitioned the supreme court to overturn that ruling, on the grounds that the stocks of sugar were collateral for the loans, and therefore belonged not to the mills, but to the bank. The Supreme court ruled that the right of the bank to control of these assets was outweighed by the humanitarian need to ensure that the farmers were paid for their crops. In accordance with Section 17(5) of the Uttarakhand Sugarcane (Regulation of Supply and Purchase) Act, 1953, the mill owners are not permitted to use the entirety of their stock as collateral for loans, and must set aside some portion for the sole purpose of paying canegrowers (or canegrowing cooperatives) for the cane supplied to the mills. The mills acted illegally in using more than the permitted proportion of their sugar stock as loan collateral.
The bank still has a right to collect the loans; The farmers and their families get to eat; and the mills still owe lots of money. If the mills go bankrupt, the bank may lose some or all of the money it loaned; but nobody will die. Had the court ruled in favour of the bank, and the mills then gone bankrupt, then the bank would have lost little or nothing, and many farmers and their families would have been left with nothing. Many may have died as a result.
The bank will need to review its assessment of the risks of lending; and might need to charge higher interest rates in future to cover the additional risk inherent in not being assured of being the preferred creditor. The law was clear (and has been since 1953), so the bank were evidently either incompetent in their original risk assessment, or were unlawfully misled by the mill owners who declared their entire holdings as available for collateral in contravention of the law, or deliberately misled the market by providing a lower risk estimate than the risk they knowingly took on with these assets.
The court ruled that it is not acceptable to place the rights of banks over the rights of other creditors where to do so could result in loss of life. I am struggling to see how this was a poor decision; It was certainly the morally right thing to do, and if an amoral law leads to immoral outcomes, then it is a good thing to have a court system in place with the power to redress that failing of the system. In this case, however, the law is explicit:
"Without prejudice to the provisions of the foregoing sub-sections, where the owner or any other person having control over the affairs of the factory or any other person competent in that behalf enters into an agreement with a bank under which the bank agrees to give advance to him on the security of sugar produced or to be produced in the factory, the said owner or other person shall provide in such agreement that a [percentage determined by such authority and in such manner as may be prescribed] of the total amount of advance shall be set apart and be available only for re-payment to cane-growers or their co-operative societies on account of the price of sugarcane purchased or to be purchased for the factory during the current crushing season from those cane-growers or from or through those societies, and interest thereon and, such societies, commission in respect thereof."
Source (pdf).
The act also requires that the growers be paid immediately upon supply of the cane, and that if they are not paid within 15 days, the mills must pay interest of 7.5% per annum from the delivery date, unless given special dispensation by the Cane Commissioner. (Section 17(2 and 3)).
The bank want to throw their weight around, and have 3,000 crore reasons to do so; but the court has rightly ruled that their money is less important than cane-grower's lives, both as a matter of law, and of moral right.
