2014 (2) TMI 1318 - HC - Companies Law

Sanctioned Scheme for rehabilitation sanctioned by the BIFR - appeal of the Union of India, through the Railway Ministry, ( Railways ) against an order of the Board for Industrial and Financial Reconstruction ( BIFR ) concerning certain concessions to be provided by the Railways to Cimmco Birla Ltd. ( CBL ) - Held that - It is undisputed that the DRS was circulated to the Railways, for the purpose of obtaining consent and inviting suggestions/objections. No objections were filed by the Railways. It states today - for the first time since the scheme was sanctioned by the BIFR on 11.3.2010 - that the scheme was circulated to the Secretary, Ministry of Railways and then redirected to the Stores Directorate of the Ministry later (which is the concerned department, it is claimed), by which stage hardly any time was left for filing of objection . The Railways raises this plea after almost three years of the presentation of the claim by CBL to the BIFR. No such stand was taken before, and in any event, no request for extension of time, let alone an objection taken at any stage of these proceedings before the BIRF, AAIFR, this Court or the Supreme Court in the various rounds of litigation witnessed in this matter. Thus, in terms of Section 19(2), deemed consent of the Railways to Clause 11.6 of the Sanctioned Scheme was taken, and it is accordingly binding on it. The object and purpose of Section 19 is to enable and garner support - in the form of wide-ranging concessions - by entities with which the sick company conducts business, in this case the Railways, as CBL is a wagon producer and a captive industry that supplies exclusively to the Railways. The argument that Section 19, thus, does not allow for relaxation of tender requirements in incorrect, especially in a case such as the present one, where the concession is narrowly tailored to ensure that the past performance requirement is not prejudicial to CBL only for the period of its closure. Rather than putting CBL at an unfair advantage, Clause 11.6 only requires that the period of closure be excluded from consideration, and the bids be examined competitively in all other respects, for the time. Given conclusions within the Railways‟ own ranks that Clause 11.6 does not vitiate the tender conditions, and no reasons have been provided to indicate that these concurring legal opinions are incorrect, the Court finds no reason to interfere with the application of Clause 11.6. In any case, Section 32 of the SICA prescribes that the SICA overrides any contrary provisions in any other law, except for the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976, let alone contractual tender conditions or policy guidelines prescribed by the Railways.

Summary

Issues Involved:
1. Whether the BIFR may bind entities referred to in Section 18(8) of the SICA.
2. Whether Clause 11.6 binds the Railways under Section 19 of the SICA.
3. Whether Clause 11.6 is binding or merely recommendatory.
4. Whether CBL can benefit from Clause 11.6 despite having a positive net worth.
5. Whether Clause 11.6 deviates from the 2005 GFR Rules and renders it void.

Detailed Analysis:

1. Binding Nature of BIFR on Entities under Section 18(8):
The Court noted that Sections 18 and 19 of the SICA are complementary but address different spheres. Section 18(8) states that a sanctioned scheme will be binding on the sick company, its creditors, employees, guarantors, etc. These are the only entities the BIFR can unilaterally bind. However, Section 19 deals with financial assistance from entities like the Central Government, State Government, and other financial institutions. These entities are not bound by the BIFR's orders unless they consent to the provisions in the Draft Rehabilitation Scheme (DRS). The scheme must be circulated for consent, and if no objections are raised within the stipulated period, consent is deemed to have been given, making the provision binding.

2. Binding Nature of Clause 11.6 under Section 19:
The AAIFR noted that the DRS was circulated to the Railways for consent, and no objections were filed. The Railways' claim of late receipt of the scheme was raised almost three years later, without any prior request for an extension or objection. Therefore, under Section 19(2), the deemed consent of the Railways to Clause 11.6 was established, making it binding.

3. Binding or Recommendatory Nature of Clause 11.6:
Clause 11.6 uses the words "to consider," but this does not render it merely recommendatory. The clause requires the Railways to evaluate bids, including CBL's, without considering the period of closure. The purpose of circulating the DRS, which includes binding clauses, would be redundant if Clause 11.6 were not binding. Given CBL's role as a captive producer for the Railways, a non-binding interpretation would undermine the Sanctioned Scheme's purpose.

4. Benefit from Clause 11.6 Despite Positive Net Worth:
The Court held that a positive net worth alone is not grounds to set aside the Sanctioned Scheme. The scheme must operate for its entire period, and objections should be addressed through the BIFR, not unilaterally by the parties. The Division Bench of this Court in DGIT (Admn) and Anr. v. BIFR and Ors. emphasized that the scheme's benefits should continue even if the sick company's net worth becomes positive, as the scheme's full implementation is crucial for sustained rehabilitation.

5. Deviation from 2005 GFR Rules:
The Railways' own legal opinions concluded that compliance with Clause 11.6 would not violate tender conditions. The Department of Legal Affairs also opined that the BIFR order was a guidance on applying tender clauses, not a modification. Section 32 of the SICA overrides any contrary provisions in other laws, including tender conditions or policy guidelines. The Supreme Court in Raheja Universal Limited v. NRC Limited and Ors. reinforced that the SICA's provisions take precedence to ensure smooth execution of the revival scheme.

Conclusion:
The writ petition was dismissed as the Sanctioned Scheme, including Clause 11.6, was binding on the Railways, and compliance with it did not violate any laws or tender conditions.