1998 (5) TMI 334 - SC - Companies Law

Whether it could be said that the conduct of the appellant-Company before the High Court on account of the contrary pleas taken by it before the High Court and the BIFR and on account of the suppression of facts would render the reference under section 15 and the registration of the reference and the subsequent orders of the BIFR bad? Whether, once the BIFR had registered the reference dated 17-7-1997 on 24-7-1997 under section 15 of the Act read with the Regulations, it was permissible for the Division Bench of the High Court to pass orders on 8-8-1997 vacating the stay order dated 20-12-1996 and confirming the appointment of provisional liquidator on the company side and also whether it was permissible for another Division Bench of the High Court to appoint a receiver on 28-7-1997 in the proceedings arising out of the suit, in view of section 22? Held that - If any orders were obtained by the Company from the High Court by way of fraud it was certainly open to the respondent to ask the High Court to recall such orders. No such thing was done. We, therefore, cannot accept the conten- tion of the respondents that the reference under section 15 and the registration thereof by the BIFR became bad because of any conduct of the Company before the High Court. It follows that equally the subsequent orders passed by the BIFR on the reference cannot, on that account, be said to be invalid. This contention of the respondents is rejected. Point 1 is held against the respondents. No difficulty in holding that after the amendment to regulation 19 with effect from 24-3-1994, once the reference is registered and when once it is mandatory simultaneously to call for information/documents from the informant and such a direction is given, then inquiry under section 16(1) must - for the purposes of section 22 - be deemed to have commenced. Section 22 and the prohibitions contained in it shall immediately come into play. In that view of the matter, we need not go into the correctness of the view expressed by the Calcutta, Rajasthan and Bombay High Courts which relied upon the unamended regulation 19. Point 2 is decided accordingly. The impugned orders dated 28-7-1997 and 8-8-1997 of the High Court have been passed after the BIFR proceedings reached the stage of the second part of regulation 19(5) on 24-7-1997 that is to say, when proceedings as per the amended regulation 19(5) reached the stage of inquiry under section 16(1). It must, therefore, be deemed that the said orders are illegal and are in violation of the prohibition contained in section 22. Thus the order passed by the Division Bench on 28-7-1997 appointing receiver and the order passed by another Bench of the High Court on 8-8-1997 restoring the provisional liquidator, are set aside.

Summary

Issues Involved:
1. Validity of the reference under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (the Act) due to the appellant's conduct.
2. Applicability of Section 22 of the Act upon registration of the reference by the Board for Industrial and Financial Reconstruction (BIFR).

Detailed Analysis:

Issue 1: Validity of the Reference under Section 15
Background: The appellant-company, while seeking adjournments in the High Court, filed a reference before the BIFR on 17-7-1997, which was registered on 24-7-1997. The High Court criticized the appellant for not disclosing this fact and for taking contradictory pleas regarding its viability.

Judgment: The Supreme Court held that the appellant's conduct before the High Court, though unfair, did not invalidate the reference to the BIFR. The BIFR was informed about the proceedings in the High Court, and there was no suppression of facts before it. The Court stated, "We are at a loss to understand as to how any conduct of the appellant-company before the High Court of Bombay could make the registration of the reference before the BIFR bad." Therefore, the reference and subsequent orders by the BIFR were valid.

Issue 2: Applicability of Section 22
Background: The core legal issue was whether the registration of a reference under Section 15 of the Act automatically invoked the suspension of legal proceedings under Section 22. The High Court had vacated the stay and confirmed the appointment of a provisional liquidator after the reference was registered but before the BIFR issued any notices under Section 16.

Judgment: The Supreme Court examined the relevant provisions and regulations. It emphasized that the inquiry under Section 16 commences upon the registration of the reference, as per the amended Regulation 19(5) effective from 24-3-1994. The Court stated, "In our view, the High Court of Allahabad...are right in rejecting such a contention and in holding that the inquiry must be treated as having commenced as soon as the registration of the reference is completed after scrutiny."

Conclusion: The orders of the High Court dated 28-7-1997 and 8-8-1997 were passed after the inquiry under Section 16(1) had commenced, thus violating Section 22. The Supreme Court concluded, "It must, therefore, be deemed that the said orders are illegal and are in violation of the prohibition contained in section 22."

Final Orders:
The Supreme Court set aside the High Court's orders appointing a receiver and restoring the provisional liquidator. The civil appeals were allowed with no order as to costs. The respondents were permitted to approach the BIFR for further orders if necessary.