2011 (3) TMI 1467 - HC - Companies Law

Net worth had become positive - Whether the discharge of the reference by the BIFR, on the sick industrial company s net worth becoming positive, would entitle the Department to withdraw the concessions which form part of a sanctioned scheme Held that - Department cannot resile from the concessions made at the stage when the scheme was formulated and sanctioned merely because the net worth of the company at whose behest the scheme was sanctioned has become positive. That part of the sanctioned scheme which remains to be implemented will have to be implemented. no ground made out to exercise jurisdiction under article 226 of the Constitution of India, since the department seems to be aggrieved by only that part of the impugned orders which tend to bind the department to the sanctioned scheme even after the BIFR has discharged the reference. As observed whether or not the BIFR implements the sanctioned scheme, it continues to bind the Department. writ petitions are dismissed

Summary

Issues Involved:
1. Whether the discharge of the reference by the BIFR, on the sick industrial company's net worth becoming positive, entitles the Department to withdraw the concessions which form part of a sanctioned scheme.

Detailed Analysis:

Issue 1: Discharge of Reference by BIFR and Withdrawal of Concessions
Background:
The Income-tax Department challenged various orders passed by the Board for Industrial & Financial Reconstruction (BIFR) under Article 226 of the Constitution of India. The Department argued that once the net worth of a sick industrial company becomes positive and BIFR discharges the reference, the protective provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) or the sanctioned scheme should automatically stand withdrawn.

Legislative Scheme of SICA:
- Objective: The SICA was enacted to address the adverse effects of industrial sickness, including loss of production, employment, and revenue, and to salvage the locked investible funds of banks and financial institutions.
- Definition of Sick Industrial Company: A company is considered sick if it owns industrial undertakings, pertains to a scheduled industry, operates one or more factories, and its accumulated losses equal or exceed its net worth.
- Mandatory Reporting: Companies must report potential sickness when 50% or more of their peak net worth during the preceding four financial years is eroded.
- Reference Filing: Companies with eroded net worth must file a reference with BIFR, triggering the provisions of SICA.

Process and Implementation of Sanctioned Scheme:
- Inquiry by BIFR: BIFR conducts an inquiry to determine if the company is sick and if it can revive itself or needs an operating agency to formulate a revival scheme.
- Sanction of Scheme: The scheme, once sanctioned, binds the sick industrial company, transferee company, shareholders, creditors, guarantors, and employees.
- Override of Other Laws: Section 32(1) of SICA states that the provisions of the Act and any schemes made under it override all other laws, except the Foreign Exchange Regulation Act, 1973, and the Urban Land (Ceiling & Regulations) Act, 1976.

Court's Analysis:
- Binding Nature of Sanctioned Scheme: Once a scheme is sanctioned, it has the force of law and binds all concerned parties, including the Department. The Department cannot argue that the provisions of the scheme are not binding on it.
- Purpose of Sanctioned Scheme: The scheme aims to rehabilitate the company, and its benefits should not be withdrawn prematurely. The continued health of the company depends on the full implementation of the sanctioned scheme.
- Monitoring by BIFR: BIFR can continue to monitor the implementation of the sanctioned scheme even after the company's net worth becomes positive. The discharge of reference by BIFR does not automatically negate the binding nature of the sanctioned scheme.
- Case Reference: The court referred to the Division Bench judgment in Synergy Steels Ltd., which emphasized that a sanctioned scheme must be fully implemented, and mere positive net worth does not provide an automatic exit from BIFR's purview.

Conclusion:
The court concluded that the Department cannot withdraw from the concessions made during the formulation and sanction of the scheme merely because the company's net worth has become positive. The Department must adhere to the sanctioned scheme, and any grievances regarding non-implementation can be addressed through appropriate legal action.

Judgment:
The court dismissed the writ petitions, stating that no grounds were made out to exercise jurisdiction under Article 226 of the Constitution of India. The Department is bound by the sanctioned scheme even after the BIFR has discharged the reference.