9911796707
TMI Blog2006 (11) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... 00013. The authorised share capital of the company is Rs. 15,00,00,000 divided into 1,50,000 equity shares of Rs. 10 each. The issued, subscribed and paid up capital of the company is Rs. 12,08,56,250 divided into 1,20,85,625 equity shares of Rs. 10 each fully paid up. The main objects of the company are set out in paras. 5 and 6 of the petition. The petitioner-company commenced its business in the year 1973, and has been carrying on the same since then. The petitioner-company has acquired several liabilities over the years resulting in the assets of the petitioner-company falling short of its liability requiring the petitioner-company to be referred to the BIFR. The petitioner-company had also by its letter dated February 4, 2002, lodged a reference before the BIFR. The BIFR had also by its letter dated May 15, 2002, acknowledged that its reference has been registered under case No. 195 of 2002. According to the petitioner-company, Mr. Pankaj Manilal Kadakia, Ashok Manilal Kadakia and Dr. Anil Manilal Kadakia in their dual capacity as promoters and guarantors (of the financial assistance by term lenders/working capital lenders) of the petitioner-company propounded a scheme to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereunder directions were issued to convene a meeting of the equity shareholders, secured and unsecured creditors of the petitioner-company. This was for the purpose of considering the scheme. It is pointed out that due compliance was made of its directions and on December 12, 2005, meetings were held. The chairman has submitted his report, a copy of which is at exhibit J. On perusal of the said report it is found that 56 equity shareholders holding 1,06,45,825 shares exercised voting by ballot. Ballot of one shareholder holding 9,21,700 shares was found invalid. Remaining 55 ballots for 97,24,125 shares were considered valid and all the 55 shareholders holding 97,24,125 shares constituting 80.46 per cent, of the total share capital voted in favour of the scheme and none voted against. Accordingly, the scheme was approved by the requisite majority in number of equity shareholders of the petitioner-company representing more than three-fourths in value of equity shareholders present at the said meeting and voted in favour of the said scheme of arrangement. So far as the meeting of the secured creditors is concerned, four secured creditors representing value of Rs. 2,41,51,82,427 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial and Financial Reconstruction (BIFR), the authority set up under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). It is contended that Ashok Organics Industries Ltd., has made a reference and upon this reference hearing took place on July 18, 2005. Based upon the submissions made by the Assets Reconstruction Company (India) Ltd., (ARCIL), a special investigative audit was directed to be conducted in the affairs of the company. Further proceedings are pending in Case No. 195 of 2002. In such circumstances and considering the overriding effect given to the enactment (SICA), vide section 32 thereof, the present petition is not maintainable and this issue raised be treated as a preliminary issue and be decided accordingly is the submission. On the merits it is pointed out that the company had not approached this court with clean hands. It has suppressed several material facts. My attention is invited to paras. 8 and 9 of this affidavit. Further, the objection of Dena Bank is that the scheme is unfair and totally one sided inasmuch as, as against an admitted liability of Rs. 48,19,12,447, the scheme proposes scaling down of the debt to a meagre sum of Rs. 4 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been filed. The same is pending. Court receiver has been appointed and the petitioner was appointed as an agent of the court receiver in respect of the machinery under the lease agreement. Monetary compensation was determined by the court receiver and there is default in payment of monthly compensation/royalty. It is in such circumstances and pointing out that no notice of the meeting convened pursuant to the orders passed by this court was given to M/s. Nu-Tech and such notice having not been given either to the creditors or the court receiver, it is urged that this court should proceed to reject the scheme. In para. 22 of the affidavit dated March 24, 2006, of M/s. Nu-Tech this is what is stated : "22. I say that as pointed out hereinabove the petitioner-company has advanced loans to its wholly owned subsidiary Kakadia Alkalies and Chemicals Ltd., as well as to its associate company Ashok Alcochem Ltd. I say that on making inquiry the creditor has learnt that both Kakadia Alkalies and Chemicals Ltd., and Ashok Alcochem Ltd., have filed reference under section 15(1) of the SICA before the BIFR and the reference filed by them have been registered as Case No. 157 of 2002 and Case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers of Board to make suitable orders on the completion of enquiry. Section 18 deals with preparation and sanction of schemes. Section 19 speaks of rehabilitation by giving financial assistance. Even existing operations can continue during enquiry and the Board can direct to do so vide section 19A. Section 20 deals with winding up of sick industrial company whereas what happens after operating agency completes inventory, etc., is provided in section 21. Section 22 deals with suspension of legal proceedings, contracts, etc., whereas by section 22A a direction can be issued not to dispose of assets of industrial company. He has invited my attention to Chapter IV which contains provisions in case of potentially sick industrial companies, misfeasance proceedings, appeals and other miscellaneous provisions. He invites my attention to the powers conferred on the AAIFR to entertain the appeal (section 25), bar of jurisdiction contained in section 26 and section 32 which deals with effect of the SICA on other laws. He has contended that section 390( a ) of the Companies Act will have to be seen in the backdrop of section 22(1) of the SICA. In other words, a company is not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter V of the Companies Act is entitled as arbitration, compromise, arrangement and reconstructions. The term arrangement is defined in section 390(b). However, the term "compromise" is not defined and will have to be given its plain and ordinary meaning. Section 391 of the Companies Act reads thus : "391. (1) Where a compromise or arrangement is proposed ( a )between a company and its creditors or any class of them; or ( b )between a company and its members or any class of them ; the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs. (2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the company and the like. The provisions pertaining to reconstruction and amalgamation need not be referred to in details. The Sick Industrial Companies (Special Provisions) Act is, as rightly contended by Mr. Khambatta, enacted in public interest and contains special provisions. Its statement of objects and reasons reads thus : "The ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central Government and locking up of investible funds of banks and financial institutions are of serious concern to the Government and the society at large. The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognised that in order to fully utilise the productive industrial assets, afford maximum protection of employment and optimise the use of the funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative to salvage the productive assets and realise the amounts due to the banks and financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an appellate authority consisting of persons who are or have been Supreme Court judges, Senior High Court judges and Secretaries to the Government of India, etc., for hearing appeals against the order of the Board." Chapter III contains section 15 which reads thus : "15. Reference to Board. (1) When an industrial company has become a sick industrial company, the board of directors of the company, shall, within sixty days from the date of finalisation of the duty audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect of the company ; Provided that if the board of directors had sufficient reasons even before such finalisation to form the opinion that the company had become a sick industrial company, the board of directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company : Provided further that no reference shall be made to the Board for Industrial and Financial Reconstructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads thus : "16. Inquiry into working of sick industrial companies . (1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company ( a )upon receipt of a reference with respect to such company under section 15 ; or ( b )upon information received with respect to such company or upon its own knowledge as to the financial condition of the company. (2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matters as may be specified in the order. (3) The Board or, as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry. Explanation. For the purposes of this sub-section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board. (4) Where the Board deems it fit to make an inquiry or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge as to financial condition of the company. The Board has been given ample powers as is clear from sub-sections (4), (4A) and (5) of section 16. Upon conclusion of the enquiry, if the Board is satisfied that the company has become a sick industrial company, the Board shall after considering all relevant facts and circumstances of the case, decide as soon as may be, by order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses within reasonable time. Section 17 provides for such powers, and it reads thus : "17. Powers of Board to make suitable order on the completion of inquiry. (1) If after making an inquiry under section 16, the Board is satisfied that a company has become a sick industrial company, the Board shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be by order in writing, whether it is practicable for the company to (make its net worth exceed the accumulated losses) within a reasonable time. (2) If the Board decides under sub-section (1) that it is practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to a sick industrial company, provisions for which are contained in sections 15 to 22A in Chapter HI, and in respect of a potentially sick industrial company for which provisions are contained in sections 23, 23A and 23B in Chapter IV. In respect of a sick industrial company the Board has been assigned a more active role in the sense that on receipt of a reference under section 15 or upon information received with respect to such a company or upon its own knowledge about the condition of the company, the Board is required to make such inquiry as it may deem fit for determining whether an industrial company has become a sick industrial company and under sections 16 and 17 the Board makes a suitable order after completion of the inquiry and a scheme may be prepared and sanctioned in relation to a sick industrial company under section 18. There is provision for rehabilitation by way of financial assistance in section 19 and express provision has been made in section 22A empowering the Board to direct a sick industrial company not to dispose of any of its assets except with the consent of the Board during the period mentioned therein. In respect of potentially sick industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial assistance, etc., by Government, banks or other institutions, are contemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices by Government, banks, public financial institutions and other authorities. In order to see that the scheme is successfully implemented and no impediment is caused for the successful carrying out of the scheme, the Board is enabled to have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the relevant time, acts under the guidance/control or supervision of the Board (BIFR). Any step for execution, distress or the like against the properties of the industrial company or other similar steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed under section 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l institutions or scheduled banks. Section 16 refers to 'inquiry into the working of sick industrial companies' and to the declaration of the unit as a sick industry, after inquiry. Section 17 deals with 'powers of Board' to make suitable orders on the completion of inquiry to the company so as to make its net worth exceed its accumulated losses within a reasonable time or to direct the operating agency to prepare a scheme in the manner provided in section 18. Section 19 deals with 'rehabilitation by giving financial assistance'. Section 20 refers to the winding up of the industrial unit if it is not likely that the company will be able to make its net worth exceed its accumulated losses. Section 22 of the Act with which we are concerned here, deals with 'suspension of legal proceedings, contracts, etc., where, an inquiry under section 16 is pending or any scheme under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 before the appellate authority, (AAIFR) is pending. 19. The point which has, in this context, been raised in several High Courts is that the mere registration of a reference by the BIF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 16, it may (the word 'shall' has been omitted by the Act 12 of 1994) appoint one or more directors, etc. 23. Relying on the use of the word 'may' in section 16(1) of the Act it has been contended in some High Courts that the word 'may' in that section shows that the BIFR has power to reject a reference summarily without going into merits and that it is only when the BIFR takes up the reference for consideration on merits under section 16(1) that it can be said that the 'inquiry' as contemplated by section has commenced. It is argued that if the reference before the BIFR is only at the stage of registration under section 15, then section 22 is not attracted. This contention, in our opinion, has no merit. In our view, when section 16(1) says that the BIFR can conduct the inquiry 'in such manner as it may deem fit, the said words are intended only to convey that a wide discretion is vested in the BIFR in regard to the procedure it may follow for conducting an inquiry under section 16(1) and nothing more. In fact, once the reference is registered after scrutiny, it is, in our view, mandatory for the BIFR to conduct an enquiry. If one looks at the format of the reference as pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has already approached the authorities under the SICA is the real question. There is substance in the contention that atleast in so far as such companies are concerned, the general provisions in the Companies Act, 1956, would not apply. However, for completely answering this argument one has to consider whether the SICA is complete code or not and that it is so, is clearly held by the hon'ble Supreme Court recently. It is pertinent to note that the decision of the Supreme Court relied upon by Mr. Khambatta is rendered on September 29, 2005. Atleast before the learned single judge (A.M. Khanwilkar, J) who decided Company Petition No. 460 of 2005, in Company Application No. 338 of 2004, this judgment of the Supreme Court could have been cited. However, it was admittedly not brought to the notice of the learned single judge. The learned single judge decided the above company petition on November 17, 2005. The learned single judge agreed with the other learned single judge (S.U. Kamdar J., as he then was) and held thus (page 550 of 131 Comp Cas): "Reverting to the first objection taken on behalf of the intervenors that pendency of the BIFR proceedings would constitute bar for enterta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SICA the said provisions will have an overriding effect and shall prevail notwithstanding anything inconsistent under the provisions of sections 391 to 394 of the Companies Act. In my opinion the answer to this question lies in the fact whether there is any inconsistency between the said provisions of section 32 and the provisions of sections 391 to 394 of the Act which are the relevant provision of the Act. . . .'. Again in paragraph 8 of the said judgment, the court observed thus (page 931) (page 551 of 131 Comp Cas) : 'Mr. Chagla, learned counsel for the petitioner has contended that there is no inconsistency between the aforesaid two provisions. He has drawn my attention to the Statement of Objects and Reasons of the SICA to indicate that the whole idea to introduce the provisions of the SICA is to make the company financially viable and independent. He has contended that the provisions providing for merger and demerger of the companies under sections 391 to 394 of the Companies Act also similarly has the same object of making the company viable and more efficient. Thus, he has contended that the provisions of both the statues are supplemental to each other and not incons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industrial and Financial Reconstruction [1996] 87 Comp Cas 22 (AP), wherein, it is observed that as soon as the reference under section 15 is made to the BIFR, the BIFR is seized of the matter and in that case by virtue of section 32 of the SICA, the provisions of that Act would prevail notwithstanding anything contained in the Companies Act, 1956. In my opinion, this decision is of no avail to the intervenors. In the first place, the limited question that was considered by the Andhra Pradesh High Court in exercise of writ jurisdiction was : whether the BIFR has the power to restrain the company from effecting any change in the composition of the board of directors, including top managerial personnel pending decision on the question of rehabilitation of the company. The statement of law occurring at page 31 placitum (H) of the said decision as referred to above will, therefore, have to be considered in that limited perspective. In any case, I would prefer to agree with the view expressed by Justice S.U. Kamdar which is the correct statement of law. Viewed in this perspective, the objection that this court has no jurisdiction to entertain the present proceedings in view of the pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. A company declared to be sick in terms of the provisions of the SICA, continues to be sick unless it is directed to be wound up. Till the company remains a sick company having regard to the provisions of sub-section (4) of section 20, BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a company court. 42. Apart from the fact that sub-section (4) of section 20 contains a non-obstante clause and, thus, it shall prevail over the provisions contained in sub-section (2), the said Act is also a latter statute. 43. The provisions of the SICA would prevail over the provisions of the Companies Act. Section 20 of the SICA relates to winding up of the sick industrial company. Before the BIFR or AAIFR, as the case may be, makes a recommendation for winding up of the company, an enquiry is made in terms of section 16 thereof wherefor all relevant facts and circumstances are required to be taken into consideration. Before an opinion is arrived at in that behalf, the parties are given an opportunity of hearing. The satisfaction arrived at by the BIFR that the company is not likely to become viable in future and it is just and equitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with section 32 of the Act, it leaves no manner of doubt that the provisions of the SICA shall prevail over the provisions of the Companies Act. For the aforementioned purpose, it was not necessary for Parliament to mention specifically the provisions of sub-section (4) of section 20 that the same shall prevail over section 536 of the Companies Act, as was suggested by learned counsel appearing for the first respondent. The construction of the provisions of both the Acts, as suggested by learned counsel, that both the provisions of sub-section (4) of section 20 and section 536 should be read conjointly so as to enable an applicant to obtain a sanction of both the BIFR and the company court, thus, do not appeal to us." Thus, the hon'ble Supreme Court observes that the SICA is a special statute and a complete code by itself. It prevails over the Companies Act, 1956. Hence, atleast in so far as sick companies who have approached the BIFR, which is case before me, the provisions in sections 391 to 394 of the Companies Act, 1956 would not apply in the light of the conclusions of the Supreme Court. With respect, therefore, it is difficult to agree with the learned single judges ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be revived. At the same time, the Supreme Court has rejected the contention that both the company court and the BIFR exercise concurrent jurisdiction. It may be true that such observations have been made while considering an issue regarding seeking leave of company court while disposing of assets of a sick company by the BIFR, yet, the observations of the Supreme Court cannot be read in the manner suggested by Mr. Mehta. This aspect is absolutely clear from para. 43 of the judgment. Therein a reference is also made to section 22 of the SICA. The Supreme Court has observed that the SICA is enacted subsequent to the Companies Act. Therefore, it is not possible to accept the contention of Mr. Mehta that this judgment must be restricted to the ambit and scope of section 20 and would not be of assistance while considering the preliminary objection raised before me. That apart, the observations in the earlier decisions of the Supreme Court have also not been referred to by this court in the judgments rendered by the learned single judges. I am of the view that the very foundation of the conclusion of the learned single judges of this court is that the company court and the BIFR exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controversy. In the light of the broad and wide conclusions of the Supreme Court, as reproduced above, the judgments of this court require reconsideration. I do not wish to conclude that the judgments of single judges of this court and the observations therein are no longer good law in the light of the judgment of the Supreme Court reported in NGEF Ltd. v. Chandra Developers P. Ltd. [2005] 127 Comp Cas 822 ; [2005] 8 SCC 219. The above judgment is followed in a later decision of the Supreme Court reported in Jay Engineering Works Ltd. v. Industry Facilitation Council [2006] 133 Comp Cas 670 ; AIR 2006 SCW 4783 wherein the Supreme Court was considering the effect of section 32 of the SICA along with section 22(1) thereof. In para. 21 of this decision, the Supreme Court after quoting section 32 of the SICA has observed thus (page 676) : "21. The 1985 Act was enacted in public interest. It contains special provisions. The said special provisions had been made with a view to secure the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a board of experts for preventive, ameliorative, remedial and other measures ..... X X X X Extracts X X X X X X X X Extracts X X X X
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