2002 (4) TMI 795 - HC - Companies Law

Issues Involved:
1. Setting aside impugned orders dated 20-12-1999, 6-6-2000, and 13-6-2000.
2. Determination of whether the company was 'sick' under SICA.
3. Compliance with principles of natural justice.
4. Validity of accounting practices and financial manipulations.
5. Right to file subsequent references under SICA.

Issue-Wise Detailed Analysis:

1. Setting aside impugned orders dated 20-12-1999, 6-6-2000, and 13-6-2000:
The petitioners sought to set aside the impugned orders passed by BIFR and AAIFR, claiming violations of natural justice and improper consideration of the company's financial status. The High Court examined the findings of both BIFR and AAIFR, concluding that the orders were based on substantial evidence and proper legal procedures.

2. Determination of whether the company was 'sick' under SICA:
The company, incorporated in 1970, faced severe financial difficulties due to market conditions and other factors, leading to its classification as 'sick' under SICA. BIFR, after an inquiry, found that the company had manipulated its accounts and did not genuinely seek revival, dismissing the reference under section 15(1) of SICA. AAIFR upheld this decision, noting significant financial manipulations and diversion of funds by the promoters.

3. Compliance with principles of natural justice:
The petitioners argued that the orders were passed without proper hearings and without considering subsequent financial losses. The High Court noted that both BIFR and AAIFR provided ample opportunities for the petitioners to present their case. The AAIFR's decision to not allow further replies to sur-rejoinders was deemed justified, as the process cannot continue indefinitely.

4. Validity of accounting practices and financial manipulations:
BIFR and AAIFR found several discrepancies in the company's accounting practices, including:
- Manipulation of depreciation and accounting policies.
- Improper capitalization and subsequent write-off of interest.
- Conversion of fixed assets to stock-in-trade without justification.
- Unexplained prior period adjustments and extraordinary items.
- Diversion of funds to group companies and subsequent write-offs.

These findings led to the conclusion that the company's accounts were unreliable, and the promoters had engaged in dishonest practices.

5. Right to file subsequent references under SICA:
The petitioners contended that AAIFR's order barred them from filing references for subsequent years. The High Court clarified that the AAIFR's order did not permanently bar future references but emphasized that any new references must correct the anomalies identified. The court cited the Division Bench's decision in Madhumilan Syntex Ltd., stating that future references should be considered based on corrected accounts and relevant aspects.

Conclusion:
The High Court upheld the findings of BIFR and AAIFR, dismissing the writ petition. It emphasized that the petitioners must correct the identified accounting malpractices before filing any future references under SICA. The court also noted that the conduct of the company's directors, involving account manipulations and lack of probity, disqualified them from seeking discretionary relief under Article 226. The petitioners were ordered to pay costs of Rs. 10,000 to the Delhi State Legal Aid Authority.

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