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TMI Blog2001 (11) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 and the Court was pleased to issue notice to the other side. All respondents are served. As the learned counsel appearing for other side have resisted this petition vehemently, with the consent of parties, matter is heard at length at the admission stage and is disposed of by this judgment. 3. It would be just and proper to narrate facts in brief, leading to present controversy between the parties. The petitioner company was incorporated on 19-8-1987 as a Private Limited Company and was thereafter converted into Private Limited Company. It is engaged in the business of manufacturing Castor Oil and its derivatives. It has set up world s biggest Castor Oil Complex with crushing capacity of 400 TPD and solvent capacity of 400 TPD as well as creating capacities in derivatives-HCD, 12-HSA and Glycerine. Paid-up capital of the company as on 31-3-1998 was Rs. 600.99 lacs and free reserves of Rs. 944.32 lacs. It is, however, contended that due to reasons beyond control, the petitioner company accumulated loss of Rs. 4540.60 lacs. The net worth of the petitioner company as on 31-3-1998 was minus Rs. 2995.29 lacs. The petitioner company, therefore, made reference before BIFR in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the secured creditors, as Operating Agency. Ignoring the paramount object of SICA, the appellate authority dismissed the reference at the stage of admission/entertainment under a misconception of the entire scheme and under erroneous approach. BIFR, while dealing with the reference under section 15(1) of SICA duly registered under Regulation No. 19 of BIFR Regulations, 1987 (hereinafter referred to as the "Regulations"), had initiated inquiry under section 19 to ascertain the plea of the company and had concluded, in view of the provisions of section 3(1)( o ) of the Act, that the petitioner is the sick industrial company. At the time of reversing the order of BIFR, the appellate authority held that the promoters of the company resorted to dishonest and unfair practice for personal enrichment and sickness applied is not a genuine sickness. To appreciate the case of the petitioner, Mr. Nanavati has taken this Court through relevant paragraphs of the order under challenge and more particularly observations and averments made in paras 14( a ), 14( c ), 14( d ), para 24( b ), 29( a ), 29( d ), 31( c ), 31( e ) and 35 of the order under challenge. 5(i) Mr. Nanavati has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndable and an inquiry is necessary to determine whether the company is a sick industrial company or not. In case on hand, after inquiry, BIFR concluded in favour of the company and declared it as "sick industrial company". The petitioner company had never prayed for any protection and reference under section 16(1) is not an application asking a helping hand from BIFR. It is simply a report informing BIFR as to the nature and stage of sickness. Mr. Nanavati has taken me through prescribed form viz., Form Nos. A and AA provided under Regulations and has pointed out that signatory of the reference made is designated as an informant. He is neither a complainant nor applicant. BIFR may refuse to entertain reference filed by the company if it comes to a conclusion that accounts are not dependable or same are manipulated, but in the case on hand, body of the experts BIFR has accepted the reference and has appointed operating regulating agency from one of the secured creditors namely Bank of Baroda. Finding recorded by the appellate authority is total misconception of law as if SICA is beneficial piece of legislation and the same is enacted to help each sick industrial company with helpi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordance with the procedure prescribed in the regulations moment the Board is satisfied that the company has become sick. It is obligatory duty of the Board to come to the conclusion either positively or negatively and cannot refuse to determine the question as to the sickness or otherwise of the company. 5(vi) In the present case, the Board was satisfied and it was apparent on the face of the account, balance-sheet and, therefore, a reference was made before the BIFR. The appellate authority has not considered the most relevant part of section 22 which provides that protection is not available to a company before BIFR if the BIFR grants consent to proceed against the sick company. Such an order of consent or refusal is subject to an appeal under section 25 and can be challenged by a petition under Articles 226 and 227 of the Constitution. Mr. Nanavati has submitted that the judgments relied upon by the otherside are cited under misconception of law that SICA is a beneficial piece of legislation and its provisions cannot be invoked if the accounts are fabricated or manipulated by management. The findings of the BIFR were absolutely in accordance with law as on the date of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and improperly considered various objections some of which were not raised before the AAIFR, and therefore, the same has resulted in breach of principles of natural justice. By reading paras 30 and 31 of the judgment under challenge, Mr. Nanavati has submitted that AAIFR obviously has been influenced by the objections either not raised before the BIFR or even in the written submissions or in the petition of appeal before the AAIFR. This Court is supposed to take care in all cases where there is a failure of justice. 5(ix) I have considered the examples, for the purpose pointed out by Mr. Nanavati which are reflected in Annexure-I with the written submissions. The grievance of Mr. Nanavati is that the AAIFR having heavily relied upon the Auditor s report of the audited balance-sheet for the year 1997-98, has failed to consider all the remarks relevant in determination of the net worth of the company. Remark ( vi ) pointed out by Mr. Nanavati reads as under: "( vi ) No provision is made for doubtful debts amounting to Rs. 3844 lacs and doubtful advances amounting to Rs. 646.56 lacs. Had the provision been made, the loss would have been increased that amount." The AAIFR ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for other respondents. 6(i) As the petitioner has submitted points of submissions in writing, the first respondent has also submitted his points of submissions in writing. Mr. Soparkar before arguing the matter on merits, raised preliminary objection and has submitted that this Court should not examine the decision of AAIFR unless it is found that the view taken by the lower authority is palpably unsustainable, totally unsupported by evidence or such that no reasonable man can every take, this Court should not upset the same. Writ jurisdiction of this Court is a supervisory jurisdiction and is not of an Appellate Court. The AAIFR has exercised its quasi-judicial powers and the functions. AAIFR is a judicial functionary in a specialised field which would require a technical expertise and consideration of the various economical factors. So, considering the limited scope of jurisdic-tion, this Court should refuse to invoke jurisdiction under Articles 226 and 227 of the Constitution. For this purpose, Mr. Soparkar has placed reliance on the decision of Division Bench of this court in Gujarat Trade Union Manch v. Gujarat State Textile Corpn. [2000] 99 Comp. Cas. 461 and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted by Mr. Soparkar, the said view is in furtherance of fairness and equity. Any other view may encourage psychology to commit fraud or may promote illegality and may tempt dishonest management. Mr. Soparkar has placed reliance on the observations of the Madhya Pradesh High Court s decision [1999] 4 Comp. LJ 190, in the case of Kedia Distilleries Ltd. v. AAIFR . In the cited judgment, the High Court has quoted the observations of the Apex Court from a case reported in Dy. CTO v. Corromondal Pharmaceuticals AIR 1997 SC 2027 where the Apex Court has interpreted the purpose and scheme of SICA. I would like to quote the same which reads as under: "We are sure that section 22 was not meant to bring dishonesty nor can it be so operated so as to encourage unfair practice." According to Mr. Soparkar the observation and the finding recorded by AAIFR if appreciated in light of this proposition and interpretation of relevant laws then it would be clear that this writ petition needs to be dismissed in limine. 7 (ii). Alternatively, Mr. Soparkar learned Senior Counsel for respondent No. 1 has replied all the main contentions. According to Mr. Soparkar, regulation 24 expressly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinising the accounts. It is not necessary for AAIFR to remand the matter back to BIFR for having appointing Special Investigative Auditor. According to Mr. Soparkar the order passed by BIFR in the present case is of cryptic nature and almost without any reason. It as possible for AAIFR, by sending the matter back to BIFR directing him to pass reasoned order being Appellate Authority. But in the present case, considering the nature of submissions advanced before it, has passed an exhaustive order dealing with all the issues raised before it and has added its own logic based on reasons and it has come to the conclusion that the reference of the petitioner was required to be rejected. The order under challenge is well within the power. Before AAIFR, reports of three firms of Chartered Accountants were available and on appreciation, the AAIFR came to the conclusion that the accounts are fabricated. Once AAIFR reached that conclusion and when it was possible for AAIFR in reaching to that conclusion then there was no need to appoint special investigative auditor or to remand the matter. 7(iv). According to Mr. Soparkar there is no breach of principles of natural justice. In the whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect in the books of account may still claim sickness. I have appreciated three hypothetical balance-sheets with a view to appreciate the oral submissions advanced by respondents. Mr. Soparkar has hammered that this Court in its writ jurisdiction should not take a view which would encourage dishonesty, perpetuate fraud or pamper illegality. Mr. Soparkar has pointed out many illegalities and irregularities appreciated by the AAIFR i.e., ( i ) disappearance of goods worth Rs. 37.18 crores; ( ii ) decline in yield from 43% to 33% (from oil seeds); ( iii ) having consequences of suppression of profit of more than Rs. 12 crores; ( iv ) suppression of income which is detected by the Income-tax Department (reflected in the notice under section 143(2) of the Income-tax Act, 1961 dated 27-6-2000); ( v ) siphoning away of funds for the benefits of sister concerns etc. For short, it is submitted by respondent that present proceedings are taken out by the petitioner with an obvious purpose to get protection of section 22 of the Act in view of the fact that large number of suits for crores of rupees are filed against the petitioner by the secured creditor including first respondent-State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation despite directions. However, BOB subsequently had submitted their submissions while no information was received from NPPL. Even in the case of BOB though they indicated in their letter that one of their officers will further clarify details, nobody presented himself before the Bench to clarify any further issues as was indicated. After carefully considering the further submissions made as indicated above the Bench came to the following conclusion ." (Para-2 onwards are findings and directions). 9. I am in agreement with the submissions of Mr. Soparkar that this order cannot be said to be a reasoned order, in view of the relevant provisions of the Act and regulations framed thereunder, and is a cryptic one. At the time of final hearing of the appeal, it was possible for AAIFR to remand the matter before BIFR directing the Board to pass reasoned order after appreciating the details of accounts. It was open for AAIFR to offer an opportunity to the respondent of the appeal i.e., present petitioner-company and to decide whether the order of registration of reference and decision to declare the petitioner-company as sick industrial unit is legal and otherwise sustainab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the decision of a quasi-judicial authority under judicial review. Before doing so this Court is obliged to consider with utmost care, the finding and conclusions recorded by such forum. I would like to quote some of the findings which are square reply to the question raised by the applicant and conclusions recorded by BIFR in paras 2.1 to 2.6 of its order. AAIFR in its analysis and conclusion says: "Diversion of working capital finance for acquisition of capital assets or as loans and advances for purposes other than a company s operations, for which working capital finance has been made available by the banks, has certain inevitable consequences; liquidity crunch; depletion in the security of banks; borrowings from third parties at high rates of interest in order to meet the most urgent working capital needs; increasing irregularity in cash credit accounts with banks; consequent freezing of accounts by the banks; mounting interest charges; reduction in turn-over without corresponding reduction in fixed costs. These consequences inevitably lead to decline in profits or increase in the losses. . . . . . . . Thus funds were diverted for purposes other than NKIL s operational r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of their intention to incorporate the income and expenses and the assets and liabilities of KVP into the accounts of NKIL. Between 14-10-1998 and 6-11-1998 (the date of balance-sheet for FY 98), without the consent of and without any previous notice to the creditor banks, NKIL made changes in its accounts books by incorporating the assets and liabilities of KVP into NKIL s accounts effective from 1-4-1997. Thereby, the debt of Rs. 19.15 Cr. owned by KVP became the unsecured debtors of NKIL. The takeover was patently mala fide . . . . [Para 24] . . . . "No satisfactory explanation is forthcoming regarding fall in yield of castor oil from 42% during last year to 33% during the current year". . . . . . . . In its reply the memorandum of appeal, NKIL has stated "The quality of the castor seeds was poor due to rain and the yield was less. The fact is pointed out in the auditor s report. The yield has come down from 42% to 33% as there was a flood in Mehsana district during the year and therefore castor seeds and castor cakes were damaged badly. . . . " . . . . In the Director s Report, there is no mention of damage to castor seeds. . . . In any case, the rain/flood on 26-27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and siphoning away their valuable assets and funds. NKIL s balance sheet is a fabricated one and does not reflect its true and fair financial position. The balance sheet for FY 98 and any subsequent balance sheet derived from it cannot be relied upon for entertaining a reference under SICA. NKIL claimed sickness by manipulating its accounts after diversion and siphoning away of funds. No useful purpose would be severed by continuing the proceedings under SICA by way of SIA and action under section 24 of SICA. Parties are free to approach the competent civil/criminal Courts for redressal of their grievances. The appeal is allowed. The impugned order is set aside. The reference made by NKIL under section 15 of SICA stands dismissed." 13. Above discussion and finding shows proper application of mind with an expert eye. It is not a matter of dispute that the AAIFR was assisted, during the course of hearing, by able counsel appearing for the Financial Institutions and Banks, and it would not be legal even to infer that the Appellate body was influenced by the objections whether not raised before BIFR or even in written submissions or in the petition of appeal before AAIFR. I have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh any operating agency. It is even open for the BIFR to have the assistance of experts. In the present case, as AAIFR had found that these inquiries were not made at the stage of registration and before appointing operating agency for the purpose of preparation of scheme of revival, the order of registration has been challenged. So, at the time of appreciating the say of the appellant, the AAIFR had tried to scan the case of the petitioner as well as the resisting Banks and the Financial Institutions within the frame work of the regulations and the scheme of the Act. The conclusion which could have been recorded by the BIFR in view of the regulation 24 that no case exists for coming to the conclusion that the industrial company has become sick industrial company, on appreciation of facts available on record the appellate authority has recorded that finding. It would not be legal to say that it was not open for the appellate authority to record such finding and it is a privilege of the BIFR only. It would also not be proper or legal to say that when a statutory authority namely BIFR had recorded the conclusion accepting the reference made by the petitioner-company, the appellate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough this matter was argued for several days, the certificate which was with petitioner on 5-9-2000 was not placed on record. The conclusion of AAIFR that the accounts are fabrica ted or the totality of facts show that it would be difficult to reach to a specific conclusion that the company is sick then this court cannot reverse the finding on the strength of a certificate dated 6-9-2000. Unless this Court finds that the conclusion recorded by AAIFR that the accounts were fabricated is perverse or apparently incorrect findings or the same is devoid of authority or jurisdiction, the order under challenge should not be interfered with. The wide powers of this Court under Article 226 of the Constitution should be sparingly exercised when a reasoned order of a statutory quasi-judicial Tribunal is brought before this Court for review. It was open for the petitioner to plead the case of his sickness before the appellate authority. The AAIFR in that case would have dealt with the same in accordance with the facts and law. On stray documents acqui- red by the petitioner at any later stage of the decision of the AAIFR this Court should not turn down the order under challenge. Such approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Financial Reconstruction take a long time to conclude and all the while the protective umbrella of section 22 is held over the company which has reported sick. We have come across cases where unfair advantage is sought to be taken of the provisions of section 22 by certain industrial companies and the wide language employed in the section is providing them a cover. We are sure section 22 was not meant to breed dishonesty nor can it be so operated as to encourage unfair practices. The ultimate prejudice to public monies should not be overlooked in the process of promoting industrial progress. We are quite sure that the Government is fully alive to the situation and are equally certain that they must be thinking of necessary modifications in the Act. " 17. In the case of Vijay Agarwal v. BIFR [2000] 2 Comp. LJ. 156 the AAIFR has observed that the protection and beneficial provisions of SICA cannot be extended to industrial companies and managements which indulge in shady and dishonest deals, causing serious prejudice to interests of companies as well as their creditors with the sole purpose of showing negative net worth. This finding was recorded on examination of facts. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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