2006 (9) TMI 282 - HC - Companies Law

Summary

Issues Involved:
1. Maintainability of the petition under Sections 391 to 394 of the Companies Act, 1956.
2. Jurisdiction of the High Court versus the BIFR under the SICA.
3. Inconsistency between the provisions of the Companies Act, 1956, and the SICA.

Issue-wise Detailed Analysis:

1. Maintainability of the petition under Sections 391 to 394 of the Companies Act, 1956:

The petitioner, a company incorporated under the Companies Act, 1956, filed a reference under Section 15(1) of the SICA due to continuous losses, leading to its net worth eroding. The BIFR declared the company as a sick industrial company and appointed Bank of Baroda as the operating agency to prepare a rehabilitation scheme. The petitioner sought permission to convene a meeting of the first charge holders to consider and approve a scheme of arrangement. The principal amount due to the first charge holders was Rs. 9,847.76 lakhs, with 76% of the holders having settled their claims. The petitioner proposed a scheme for the remaining creditors. The issue was whether the petition to convene a meeting was maintainable before the High Court, given the BIFR's involvement.

2. Jurisdiction of the High Court versus the BIFR under the SICA:

The petitioner argued that the High Court had jurisdiction to convene the meeting of first charge holders, relying on precedents from the Bombay High Court. However, the judgment highlighted that the BIFR retains absolute control over the affairs of the company from the commencement of an inquiry under Section 15 of the SICA until an order of winding up by the High Court under Section 20(2) of the SICA. The Supreme Court, in NGEF Ltd. v. Chandra Developers P. Ltd., emphasized that the BIFR alone has jurisdiction over the sale of assets and other measures until an order of winding up is passed. The provisions of the SICA, being enacted subsequent to the Companies Act, prevail over the latter in case of inconsistency.

3. Inconsistency between the provisions of the Companies Act, 1956, and the SICA:

The judgment referred to Section 32 of the SICA, which contains a non obstante clause, stating that the provisions of the SICA prevail over any other law in case of inconsistency. The SICA's provisions regarding the preparation and sanction of rehabilitation schemes (Sections 17, 18, and 19) were found to be inconsistent with Section 391 of the Companies Act. The latter allows a scheme to be binding if approved by a three-fourths majority of creditors, whereas the SICA requires consent from all persons providing financial assistance, failing which the BIFR may adopt other measures, including winding up. Given this inconsistency, the High Court held that it was premature to convene the meeting of first charge holders while the BIFR was still considering the rehabilitation scheme.

Conclusion:

The High Court dismissed the petition, stating that it could not convene the meeting of first charge holders until the BIFR and the operating agency completed their consideration of the rehabilitation scheme under the SICA. The provisions of the SICA, being specific to sick industrial companies and enacted later, took precedence over the general provisions of the Companies Act, 1956.