1995 (3) TMI 87 - SC - Companies Law

Whether the procedure adopted by the Board for Industrial and Financial Reconstruction is vitiated by any error of law? Whetehr Garware is an interested person in reviving Flowmore? Held that - It is seen that Garware and Assam Asbestos Ltd. had offered their schemes on a stand alone basis. All through S. R. F. had submitted its scheme of rehabilitation by merger of Flowmore with S. R. F. The narration of facts given earlier obviates the need to reiterate them. However, they make it obvious that despite notices and opportunities given to Garware, time and again, it did not choose to submit its revised scheme as directed by the Board for Industrial and Financial Reconstruction before the operating agency. Its consistent conduct in not appearing before the Board on different dates, does establish that, after rejection of its scheme initially submitted, Garware evinced no interest in the matter. On the other hand, it had entered with an agreement with Assam Asbestos Ltd. to extend its technical know-how assistance for revival of Flowmore for consideration even though at every stage, the proceedings were communicated to Garware. Therefore, Garware was put on notice of the steps taken and the orders passed by the Board. Yet Garware evinced no interest in the revival of Flowmore on a stand alone basis or any other alternative scheme. Thereby it is not a person interested. For its initial interest evinced by Garware, it had acquiesced by its conduct in the orders passed by the Board. It is true that in the order dated April 23, 1993, the Board declined to approve the merger scheme of S. R. F. on the premise that S. R. F. would gain undue advantage of the tax benefits under section 72A, etc., and the stand alone basis proposal was ordered to be published. But when the mistake it had committed in the matter was brought to its notice, the Board reviewed its order on November 19, 1993, no doubt without hearing any party and accepted the scheme for merger of Flowmore with S. R. F. and direction in that behalf was accordingly issued to the operating agency for publication of scheme as draft scheme. Since Garware had acquiesced in the order passed and had not evinced any interest, only two persons that remained in the field were Assam Asbestos Ltd. and S. R. F. Assam Asbestos Ltd. also did not challenge the order. S. R. F. unquestionably is a healthy company and its capacity to revise Flowmore was not in doubt. All through its scheme was for merger of Flowmore with S. R. F. Therefore, no fault can be found with the orders passed by the Board approving the scheme of the operating agency of the merger of Flowmore with S. R. F. for revival of Flowmore. The High Court was clearly in error in holding that though Garware stood by, it was not out and still an interested person and was entitled to be heard before accepting the scheme of S. R. F. for merger of Flowmore with S. R. F. Any minor benefits would be consequential to the offer of merger with the healthy company. In these appeals and before the High Court, they are impleaded as respondents and were heard through Sri Ahuja, learned senior counsel, who has stated that there would be no loss of revenue to the State and benefit under section 43B of the Income-tax Act is bound to be given to a company revived on either basis. In that view, the orders passed by the Board and approved by the Appellate Authority are not vitiated by any error of law warranting interference.The appeals are accordingly allowed. The orders of the High Court are set aside.

Issues Involved:
1. Whether Garware is an interested person in the revival of Flowmore.
2. Whether the Board for Industrial and Financial Reconstruction (BIFR) followed due process in approving the merger scheme.
3. Whether the Central Government and Central Board of Direct Taxes should have been notified.
4. The legitimacy of the appeal filed by the shareholder.

Detailed Analysis:

1. Whether Garware is an interested person in the revival of Flowmore:
The Supreme Court found that Garware was not an interested person in the revival of Flowmore. Despite being given multiple opportunities to submit a revised scheme for the revival of Flowmore, Garware did not do so. Instead, Garware entered into an agreement with Assam Asbestos Ltd. to provide technical assistance for the revival of Flowmore. The court noted that Garware's consistent conduct of not appearing before the BIFR and not submitting revised proposals indicated a lack of genuine interest in the revival of Flowmore. The court concluded that Garware was more interested in prolonging the revival process to keep its trade rival, Flowmore, out of competition.

2. Whether the Board for Industrial and Financial Reconstruction (BIFR) followed due process in approving the merger scheme:
The Supreme Court held that the BIFR followed due process in approving the merger scheme of Flowmore with S.R.F. The BIFR had repeatedly communicated with Garware, but Garware did not submit any revised proposals. The court observed that the BIFR had acted within its jurisdiction and followed the legislative intent of the Sick Industrial Companies (Special Provisions) Act, which aims for the timely detection and speedy revival of sick companies. The court emphasized that the proceedings before the BIFR should be completed expeditiously to avoid unnecessary delays that could harm the interests of the workmen and the state's revenue.

3. Whether the Central Government and Central Board of Direct Taxes should have been notified:
The Supreme Court acknowledged that the BIFR should have issued notices to the Central Government and the Central Board of Direct Taxes before finalizing the merger scheme, as the scheme involved tax concessions and potential revenue losses. However, the court noted that S.R.F. had expressly given up the benefits under section 72A of the Income-tax Act, and the merger scheme was to be effective from April 1, 1994, thereby marginalizing the benefits of set-off under sections 70, 71, and 72. Consequently, the court found that there would be no significant revenue loss to the state, and the omission of notice did not vitiate the orders passed by the BIFR and the Appellate Authority.

4. The legitimacy of the appeal filed by the shareholder:
The Supreme Court dismissed the appeal filed by the shareholder, finding it to be lacking in bona fides. The court observed that the shareholder had not challenged the BIFR's order declaring Flowmore a sick company and had only shown a facade of interest by filing an appeal as a pretext. The court concluded that the shareholder was acting as a stooge for Garware, intending to prevent the revival of Flowmore to maintain market monopoly. The court dismissed the appeal with exemplary costs of Rs. 25,000.

Conclusion:
The Supreme Court allowed the appeals, set aside the orders of the High Court, and confirmed the orders of the Appellate Authority and the BIFR. The court emphasized the need for expeditious proceedings in the revival of sick companies and dismissed the shareholder's appeal with costs.

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