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TMI Blog2005 (12) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 15(1) of SICA was filed before the BIFR in March, 2001. It was registered as BIFR Case No. 375/2001. The BIFR declared the company as a sick industrial company under Section 3(1)(o) of SICA. The Industrial Development Bank of India (IDBI), its main creditor, was appointed as the operative agency under Section 17(3) of SICA for the purposes of preparing a rehabilitation scheme. The Draft Rehabilitation Scheme (DRS) for the revival of the company was prepared; suggestions/objections were invited to the same; those suggestions and observations received from the concerned parties were considered by the BIFR and ultimately vide order dated 5th February, 2004 the rehabilitation scheme was sanctioned by the BIFR subject to certain modifications. 2. I shall advert to the main provisions of the Sanctioned Scheme (SS) at the appropriate stage. However, it may be pointed out here itself that the SS, inter alia, provides for arrangement with the secured creditors, including the IDBI and also lays down the manner in which they are to be paid. IDBI, like other creditors, had to forgo substantial part of its dues recoverable from the company and the reduced amount is to be paid in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire shareholding pattern would go topsy-turvy thereby reducing Mr. Raj Kumar Jain and his associate companies into minority shareholders. Mr. Vijay Kumar Jain contested this application, inter alia, on the ground that the CLB had no jurisdiction to entertain such a petition and determine such a question which fell within the exclusive domain of BIFR, having regard to the provisions of Section 32 of SICA. The CLB has by impugned order dated 24th August, 2005 held that it had the requisite jurisdiction to entertain this petition and the limited issue which the CLB was deciding was not covered by the provisions of SICA, and Therefore, provisions of Section 32 of SICA were not attracted. Therefore, the question of jurisdiction of the CLB to entertain the petition under Sections 397/398 of the Act, which was hotly contested, is another issue which requires determination. 5. It may also be noted at this stage that Mr. Raj Kumar Jain and his associate companies had challenged the allotment of shares to IDBI also, inter alia, on the ground that this allotment was made without following the procedure for increasing the authorised share capital of the company and, Therefore, the allotmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,88,00,700 equity shares of ₹ 10/- each for cash at par and out of the said issue 38,49,00,000 equity shares were reserved for firm allotment i.e. promoters, their friends, relatives and associates. Therefore, the public was offered 35,39,00,000 equity shares. Part-II of the prospectus giving capital structure provided the aforesaid information about the share capital. There were certain notes appended thereto. Note Nos. 2 5 and are as under: 2. Promoters' contribution and Lock in period would be as follows: No. of shares Date of allotment % of Total paid up Capital after the issue (H) Face Value (Rs.) Issue Price per share (Rs.) Lock in period (years) 70 27.11.91 10 10 Nil To be allotted 27.1 10 10 3 2,00,19,982 To be allotted 25 10 10 5 1,84,70,018 Total 52.1 3,84,90,070 5. Promoters will hold 52.10% of the post issue capital. 10. Part-V dealt with 'Company, Management and Project' and, inter alia, provided 'promoters' their background and group companies'. Underneath following description was given: PFL has been promoted by Shri Vijay Kumar Jain, along with his two brothers S/Shri Ramesh Kumar Jain and Mukesh Kumar Jain and their associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he information about the promoters association with these companies is given. 12. The prospectus provided additional information, in this behalf, in the following terms: Name of concern/Date of Incorporation Nature of Business/Activities Undertaken Details of Litigation/Labour Problems Etc. 1. Priyanka Overseas Ltd. (POL) 24.2.1984 Exports Nil 2. Dhanad Viniyog & Pratibuti (P) Ltd. (DVP) 23.11.1993 Exports & Financing Nil 3. Dhanad Financial Services (P) Ltd.(DFS) 22.11.1993 Exports & Financing Nil 4. Wave Inter Trade (P) Ltd. (WIT) 23.3.1987 Trading & Exporting Nil 5. Biswanath Industries Ltd. (BIL) 11.3.1960 Trading and Financing Nil 6. Tohee Trading & Agencies (P) Ltd. (TTA) 10.6.1982 Trading Nil 7. Pasupati New Tex Ltd. (PNTL) 20.8.1986 Manufacturing of Fabrics Nil 8. Pasupati Overseas Pvt. Ltd. (POPL) 13.10.1987 Trading & exporting Nil 13. These companies include certain companies of Mr. Raj Kumar Jain. 14. When the net worth of the company eroded and reference was made to the BIFR under Section 15(1) of SICA, Form A was filed with the BIFR as per the requirement contained in Regulation 19 of the Regulations framed under SICA. Srl. No. 1 of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors from promoters group and six independent professional directors including a nominee of IDBI. Shri Vijay Kumar Jain, the Chairman & Managing Director and Shri Ramesh Kumar Jain represents promoters group. The other six directors are Shri I.K. Singhal, a textile engineer, who is the Director (Operations), Ms Poonam Manshani, Shri J.S. Varshneya (Ex Chairman PNB, Shri S.S. Dhanoa (IRS Retd.), Dr Mithilesh Kumar Sinha (Former CMD of SBI) and Shri Deepak Gupta (Nominee of IDBI)." 18. The cut off date for the purposes of reliefs and concessions has been fixed as 31st May, 2003. Liability of IDBI, as on that date, was ₹ 7632.41 lakh plus interest. However, as per the SS, the BIFR directed IDBI to accept the entire principal outstanding of ₹ 7632.41 lacs as follows: (a) down payment of ₹ 763.24 lakhs (10% of principal outstanding) within a period of six months as provided therein and (b) balance principal outstanding of ₹ 6869.17 lakhs in 40 quarterly Installments. (c) After giving of down payment of 10%, interest on settlement amount is to be paid to IDBI at the rate of 11% per annum in the manner provided therein. The SS also makes a provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Vijay Kumar Jain is concerned, identical clauses as in the case of IDBI and reproduced above are provided in the case of SBI also. The SS also makes provision for the settlement of dues of other creditors which had given working capital, namely, UCO Bank and State Bank of Bikaner & Jaipur. Thereafter, the SS deals with promoters/company stipulating various obligations on their part. We may take note of only those provisions which are relevant for our purposes: Promoters/Company (i) Commencing from April 2015 Promoters to agree to bring ₹ 1000 lakh from their own sources in the form of equity share capital/interest free unsecured loans within first three years i.e. ₹ 125 lakh in April 2004, ₹ 437.50 lakh in April 2005 and ₹ 437.50 lakh in April 2006. Unsecured Loans brought in by promoters shall not be withdrawn during the rehabilitation period till the payments to IDBI and SBI is made in full. (ii) Promoters to agree to pledge their entire shareholding in the company with voting rights to IDBI and SBI on sanction of the scheme. (iii) Promoters to agree to pledge the shares of the company held by investment companies controlled by Shri Vijay Kumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption. 25. While these requests of the company and IDBI were pending before the BIFR, the company held its 12th Annual General Meeting on 29th November, 2004 in compliance with the terms of the SS and passed the resolution regarding: (i) increase/reclassification of authorised share capital from ₹ 90,00,00,000/- divided into 9,00,00,000 equity shares of ₹ 10/- each to ₹ 1,00,00,00,000/- divided into 7,50,00,000 equity shares of ₹ 10/- each and 2,50,00,000 0.0001% redeemable preference shares of ₹ 10/- each. (ii) Reduction of equity share capital by 35% and issue of 0.0001% redeemable preference shares in lieu thereof and (iii) Issuance of 2,30,00,000 equity shares for the face value of ₹ 23,00,00,000/- to IDBI on preferential basis. 26. Pursuant thereto, Form No. 5 was also filed with the Registrar of Companies (ROC) on 24th December, 2004 relating to the increase in the share capital. The Board of Directors of the company also passed a resolution on 1st January, 2005 for allotting shares worth ₹ 23,00,00,000/- in favor of the IDBI. 27. As no response was received from the BIFR in respect of grant of exemption to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 2005. Immediately thereafter, Mr. Raj Kumar Jain and his associate companies filed the petition under Sections 397/398 of the Act before the CLB alleging certain acts of oppression and mismanagement by Mr. Vijay Kumar Jain, Chairman & Managing Director of the company. The respondent No. 2 also filed appeal against the order dated 28th January, 2005 by which the BIFR had granted exemption to the company from seeking permissions, before AAIFR on 11th May, 2005. This appeal is pending before the AAIFR. 30. Mr. Raj Kumar Jain and his associate companies also filed an application before the BIFR on 6th July, 2005 seeking clarification in the order sanctioning the scheme by pointing out that they are also the promoters of the company and, Therefore, the IDBI be restrained from transferring the shares allotted to it in terms of SS to Mr. Vijay Kumar Jain. This application was dismissed on 6th July, 2005 on the ground of delay, latches and acquiescence. The operative portion of this order reads as under: "The Board, on consideration of the facts, merits of the case and materials on record notes that, prior to sanction of the scheme by the board on 2.4.04, the draft revival sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondents did not challenge the jurisdiction of the BIFR in formulating the scheme and also in ensuring the implementation of that scheme. The submission was that the scheme itself provided that IDBI shall sell the shares back to the 'promoters'. However, who exactly are the promoters is not stipulated in the scheme. Therefore, when a dispute arises as to who are the promoters, it would be a civil dispute and, Therefore, provisions of Section 32 of SICA would not be applicable. According to the respondents, Therefore, neither there was an attempt to challenge the SS nor to puncture the said SS. On the contrary, the respondents were enforcing their rights under the SS itself. When the attempt on the part of the appellants was to act contrary to the SS and Mr. Vijay Kumar Jain wanted to buy the shares held by IDBI which had the effect of changing the shareholding pattern and making him majority shareholder, such an act was an act of oppression and mismanagement on the part of Mr. Vijay Kumar Jain and, Therefore, the CLB had the power to go into this aspect. 36. In order to appreciate these submissions in their proper perspective, it would be necessary to deal with the legal posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppression and mismanagement (Sections 397-409). The recognized exceptions are: when the act of majority is ultra vires, fraud of minority, acts requiring special majority, wrongdoers in control etc. But for these exceptions, majority rule prevails. Thus a company which is having a successful run, it is the majority shareholders who have a say in the management. 39. However, all the companies may not do business profitably and remain financially robust for all times. They may become sick and acquiring of the sickness may be due to various factors. It may be because of bad governance. It may also be because of other market forces or economic compulsion not within the control of the company. When a company goes sick, i.e. when the liabilities are more than the assets and net worth is eroded, it does not affect the members only. The ill effects of sickness, particularly in industrial companies, are loss of production, loss of employment, loss of revenue to the Central and State Governments and lock in up of investible funds of banks and financial institutions. Therefore, apart from the shareholders/members who had contributed the capital for functioning of a company, the sickness of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls the purpose underlying the benevolent legislation as also the anxiety of the legislature to provide for preventive, ameliorative and remedial measures essential for reviving sick or potentially sick companies and for ensuring expeditious enforcement of the measures devised by the competent authority under the Act. The Statement of objects and reasons discloses the anxiety of the legislature at the alarming increase in the incidence of sickness of industrial companies and it also reveals that the legislation has been enacted with the end in view to: 1. afford maximum protection of employment: 2. optimise the use of funds of the companies etc.: 3. salvaging the production assets; 4. Realizing the amounts due to the banks etc.; and 5. to replace the existing time-consuming and inadequate machinery by efficient machinery for expeditious determination by a body of experts." 41. The social and economic implications of revival of the sick companies through this legislation were brought out through the following emotional para in this judgment: "More than a thousand brimming eyes are waiting to replace the tears of despair by tears of relief. No less than 500 thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (4) of the Act is enacted." 43. Thus it is clear that with the enactment, precedence was given to the right of the company to make an attempt to get itself revived and in the process creditors right to make recovery was to be put on hold. 44. Once a company goes sick and it makes reference to the BIFR under Section 15 of SICA, which is a mandatory requirement, the BIFR assumes major role thereafter. Its first task is to enquire into the working of such a sick industrial company. Whether it has become a sick industrial company as laid down under Section 16 of SICA? If after such an enquiry the Board is satisfied that the company has become a sick industrial company, the next step is to consider and decide whether it is practicable for such a company to make its net worth exceed the accumulated losses within a reasonable time. If this decision is in the affirmative, it would give such time to the company, as it may deem fit, to make its net worth exceed the accumulated losses. On the other hand, if the decision is that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time, but at the same, it is necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. If necessary, it may provide for amalgamation of the sick company with any other company. A sick company can even be sold or leased out partly or wholly. There can be total revamp of managerial personnel, supervisory staff and workmen. When a company is functioning normally and has not gone sick decisions on all these aspects, as per the provisions of the Act, has to be by the shareholders. This rule in a sick company has been given go-bye. It is the Operating Agency which is now preparing a scheme and providing the measures on the aforesaid aspects. It is the BIFR which is now deciding on these measures after having opinion of the creditors and workers and without any role of the shareholders. In the process, the BIFR may completely change the Board of Directors and appoint new Board of Directors and even alter or amend the Memorandum and Articles of Association. It may even reduce the interest or rights which the shareholders have in the sick industrial company. It is the BIFR which is the sole authority to deliberate on such issues. If the scheme is sanctioned, the binding nature thereof is provided under Sub-Section (8) of Section 18 which reads as under: "18 (8): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders and allotment of shares of such a company to some other persons, particularly the creditors. For providing such measures in the sanctioned scheme, procedural requirements contained in the Act, which are to be generally followed when the company is not sick, are not to be gone into. It is manifest from Sub-Section (7) of Section 18 which makes this declaration specifically as would be clear from reading of this provisions which is as under: "18 (7): The sanction accorded by the Board under sub-section (5) shall be conclusive evidence that all the requirements of this scheme relating to the reconstruction or amalgamation, or any other measure specified therein have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the Board to be a true copy thereof, shall, in all legal proceedings (whether in appeal or otherwise) be admitted as evidence." 52. In order to ensure that the scheme is properly implemented by all those on whom the obligation is cast, Section 33, inter alia, provides that whoever violates the provisions of such a scheme, can be punished with simple imprisonment for a term which may extend to three years an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking with another company." 54. Once the legal position and scope of the two Acts is understood in the manner explained above, the irresistible conclusion would be that for all matters relating to the SS, it is the BIFR alone which shall have the jurisdiction. Notwithstanding, attempt is made by learned senior counsel for Mr. Raj Kumar Jain to contend that issues raised could be dealt with by the CLB. The grievance of Mr. Raj Kumar Jain in petition filed under Sections 397/398 of the Act before the CLB was two-fold: (a) The allotment of shares to IDBI has to be only after increasing the authorised capital in the Memorandum and Articles of Association and decreasing the share capital of the existing shares after following the procedures contained in the Act. According to him, as this procedure was not followed and there was no sufficient authorised capital on the date of allotment of shares to IDBI, the act of allotment was ultra vires. (b) As the SS provided for buying back the shares allotted to IDBI by the promoters, his group companies were the 'promoters' and, Therefore, entitled to buy back those shares along with other promoters in the ratio in which all these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme and only BIFR could decide this issue. 59. As the maintainability of the petition under Sections 397/398 of the Act before the CLB depends on determination as to whether it is the BIFR who had the exclusive jurisdiction to deal with the matter or CLB could carve out a niche for itself and decide the issue raised before if. Re: Promoters 60. I am of the view that when in a SS there 'promoter' is mentioned and if the dispute arises as to who is the 'promoter' and implementation of the scheme depends on this determination, it would be for the BIFR to clarify and decide the same. 61. I have already pointed out, in the earlier parts of the judgment, various documents where the expression "promoter (s)" has occurred. Against the column relating to 'promoter' only name of Mr. Vijay Kumar Jain is mentioned. It was the submission of learned senior counsel for Mr. Vijay Kumar Jain that the expression 'promoter' shall have different connotation in different legislation. For incorporation of the company, 'promoter' may have one meaning. The word 'promoter' was not defined in the Act and Section 62(6) gives a very restrictive definition and reads as under: "62 (6) F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision, as noted above, is contained in SICA itself. 65. Matter can be looked into from another angle as well. The BIFR has made provision for allotment of shares to IDBI and for sale of those shares by IDBI to promoters in future. Thus allotment of shares in the first instance to IDBI and buy back of those shares from IDBI is part of the scheme. While implementing the scheme, if any difficulty arises, it is for the BIFR to remove that difficulty and for this reason also the appropriate authority would be BIFR. 66. There is yet another aspect of this issue. Even if the BIFR is of the opinion that in its contemplation 'promoter' was the one whose name is disclosed in Form A as well as in sanctioned scheme viz. Mr. Vijay Kumar Jain, and the other group wants a change, still it is the BIFR only which has the power to modify or amend the scheme. It is the BIFR which can treat Mr. Raj Kumar Jain and his associate companies also as promoters once the BIFR is convinced that Mr. Vijay Kumar Jain is trying to take undue advantage by purchasing the entire shareholding from IDBI and thereby trying to gain control over the company. Thus relief, even in that eventuality, can be granted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 391-394 of the Act deal with scheme of reconstruction, rehabilitation etc. The Bombay High Court was of of the view that Sections 15 to 19 of the SICA provided for a scheme where a company which had become sick can register itself with the BIFR and the BIFR could provide for a package for rehabilitation of the company and/or make the company viable. Similarly, Sections 391-394 of the Act provide for rearrangement of the company's business by way of granting amalgamation, demerger and/or sanctioning of the scheme of compromise. Therefore, observed the court, that provisions of SICA as well as Sections 391-394 of the Act cover the same subject, namely, revival of the company though they provide different methods of doing so and, Therefore, they were not inconsistent with each other. However, the CLB is wrong in holding that this principle shall be applicable even to a proceeding under Sections 397/398. No reasons for jumping to this conclusion are given and I fail to understand how the CLB could arrive at such a conclusion. Sections 397/398 deal with mismanagement and oppression, namely, section of the shareholder which is aggrieved by oppressive act of the other group of sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be allotted to IDBI, it is not open either for the BIFR or shareholders to deny the said allotment. However, his argument was that it should be done only after following the procedure contained in the Act. His submission was that without increasing the authority share capital shares could not be allotted and, Therefore, this act is ultra virus the Memorandum and Articles of Association. Likewise, for reduction of share capital of the members as mandated by the BIFR, proper procedure contained in Sections 100-103 of the Act should have been followed. The CLB has accepted this plea. 73. However, what is to be noted is that the CLB had, on applications made by the company as well as IDBI, passed order dated 28th January, 2005 exempting the company from the applicability of the provisions of Sections 81(1), 100-103 and other provisions of the Act/SEBI guidelines. The effect of exemption of these provisions would be that no such procedure is to be followed. Learned senior counsel for the appellants herein had argued that once the scheme had directed reduction of share capital as well as allotment of shares to IDBI, such mandate had to be followed and in order to ensure that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by not agreeing thereto. There is no scope of any discretion in the matter. 76. However, while sanctioning the scheme, the BIFR observed that in so far as provisions of Sections 81(1) and 100-103 are concerned, the CLB may consider exempting the company from these provisions. This observation in the scheme was superfluous inasmuch as admittedly the CLB has no jurisdiction in the matter. Such an exemption, if at all, can be granted by the High Court under the provisions of the Act. The question is as to whether the BIFR can itself grant such an exemption? Answer has to be in the affirmative if this step is necessitated for proper implementation of the scheme. It is stated at the cost of repetition that the scheme in no uncertain terms directed exiting equity shareholders to write down the present equity share holding in the company; mandated IDBI to accept equity shares worth ₹ 2300 lacs and for this purpose to enhance authorised share capital by amending the Memorandum and Articles of Association. It is also accepted position that it may not be permissible for existing shareholders not to write down their equity share holding in the company or not to increase the authorise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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