2012 (7) TMI 534 - HC - Companies Law

Misuse of the machinery provided under the SICA - continuous and systematic abuse of process resorted to by respondent with the sole motive of delaying and defeating the rights of its creditors - Held that - It was felt that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable insolvent industrial company were both inadequate and time consuming and a comprehensive law was needed - Section 22 (1) provides that in case the inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration by BIFR or any appeal under Section 25 is pending then certain proceedings against the industrial company are to be suspended or presumed to be suspended and if it is intended by the concerned party that the proceedings are to be continued against the sick industrial company then prior consent or approval of BIFR should be taken. Once the enquiry under Section 16 is treated to be pending, the provisions of Section 22 are attracted and the company court cannot proceed further the matter. In present case it appears to be one where prima facie the provisions of Section 22 of the SICA are taken undue advantage of. Therefore, at least in those cases where the reference was rejected in previous years on merits by the BIFR, guidelines can be issued to ensure that fresh references in subsequent years should not be mechanically entertained - direction that BIFR should formulate necessary Practice Directions as where the references were rejected previously, the BIFR can pass appropriate directions refusing to extend the benefit of Section 22 of the SICA.

Summary

Issues Involved:
1. Repeated references by Usha India Limited to BIFR and AAIFR.
2. Alleged abuse of legal process by Usha India Limited.
3. The role of BIFR and AAIFR in scrutinizing references.
4. The impact of Section 22 of SICA on creditors' rights.
5. The need for judicial intervention and guidelines.

Detailed Analysis:

1. Repeated References by Usha India Limited to BIFR and AAIFR:
The petitioner contended that Usha India Limited had been making repeated references to the BIFR and appeals to the AAIFR despite previous rejections. The first reference in 2002 was rejected as BIFR found Usha's net worth to be positive by Rs. 800.73 crores. Subsequent references in 2003 and 2007 were also rejected, with BIFR and AAIFR noting manipulation of accounts and lack of new facts. The repeated filings were seen as attempts to delay creditors' claims.

2. Alleged Abuse of Legal Process by Usha India Limited:
The petitioner argued that Usha's repeated references constituted a systematic abuse of the legal process, aimed at delaying and defeating creditors' rights. The BIFR and AAIFR found that Usha had manipulated its accounts to falsely depict sickness, and even its auditors did not approve of its accounting practices. Despite rejections, Usha continued to file references based on disallowed losses, enjoying protection under SICA and preventing creditors from executing their decrees.

3. The Role of BIFR and AAIFR in Scrutinizing References:
The petitioner urged the court to direct BIFR to perform pre-registration scrutiny to ensure new and genuine grounds for references. The court noted that while the Registrar could not act as a quasi-judicial authority, BIFR should directly examine cases where previous references were rejected. The court suggested that BIFR could decide whether to admit new references and whether to allow the provisions of Section 22 of SICA to apply.

4. The Impact of Section 22 of SICA on Creditors' Rights:
Section 22 of SICA provides that proceedings against a sick industrial company are suspended during the pendency of BIFR inquiries, affecting creditors' ability to recover dues. The court highlighted the need to ensure that this provision is not misused, as it has been in Usha's case. The court suggested that BIFR could pass general orders allowing proceedings to continue with its consent, particularly in cases where previous references were rejected.

5. The Need for Judicial Intervention and Guidelines:
The petitioner called for judicial intervention to prevent perpetual malpractice by Usha. The court acknowledged the need for guidelines to prevent misuse of SICA provisions. It directed BIFR to formulate necessary practice directions within three months to ensure that fresh references are not mechanically entertained and that the protection under Section 22 is not misused.

Conclusion:
The court disposed of the writ petition by directing BIFR to issue practice directions to prevent the misuse of SICA provisions, particularly in cases where previous references were rejected. The court emphasized the need for a balance between protecting creditors' rights and allowing genuine rehabilitation of sick companies.