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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 ..... he 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 phased manner. Under the SS, IDBI is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opsy-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 allotment itself was ultra-vires as, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and Finance Ltd. (PTFL) 18.2.1985 Trading, Exports and Financing Nil 5. Duroflex Engineering Ltd. (DEL) 21.3.1985 Trading and Financing Nil 6. Pasupati Fincap Ltd. (PFCL) 30.12.1993 Financing Nil 11. It may be noted here itself that the companies mentioned above are the companies of Mr. Vijay Kumar Jain and in none of these companies, Mr. Raj Kumar Jain has any stakes. Submission of Mr. Vijay Kumar Jain was that the places where the companies promoted by/belonging to the promoters are provided, these companies do not include the companies held by Mr. Raj Kumar Jain and, Therefore, Mr. Raj Kumar Jain s companies were not the promoters and the names of the companies in which Mr. Raj Kumar Jain has the stakes are stated in a different column where the 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 Undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. As already pointed out above, the BIFR vide order dated 26th November, 2002 declared the company as sick industrial company and appointed IDBI as Operating Agency under Section 17(3) of SICA for preparation of the scheme. The DRS was formulated by IDBI for revival of the company which was circulated to all concerned parties for their suggestions/objections. In the DRS, information as on 31st March, 2003 about management and shareholding pattern was given in the following manner: Shareholding Pattern: (as on March 31,2003) Amt Total % Promoters 51.86 0.74 Promoters Associates 5572.57 78.82 Non Resident Indians 4.19 0.06 Mutual Funds 9.99 0.14 FIS bank Mutual Fund 903.62 12.78 General Public 527.20 7.46 Total 7069.43 100.00 16. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of the company of ₹ 2300 lakh in demat form only (after writing down of existing equity share capital by 35 %) in part settlement of overdue deferred/funded, simple, compound interest and liquidated damages, on the following conditions. Promoters to buy back the shares from their own sources in 5th year (Rs.575 lakh), 6th year (Rs.575 lakh) and 7th year (Rs.1150 lakh) at par or market value whichever is higher. IDBI would also have right to sale the shares in the market with promoters having first right of refusal. 19. SS also provides IDBI to accept 0.0001% redeemable preference shares of ₹ 244.65 lakhs in settlement of written down portion of existing equity holding of IDBI in the company. Balance liability was to be waived of. Waiver clause is in the following terms: To waive the entire balance deferred/founded, simpled, compound interest and liquidated damages amounting to about ₹ 997.87 lakh (i.e. in excess of ₹ 2300 lakh) as on cut off date. However, waivers would be given effect in the books of IDBI subject to company/promoters complying with all the conditions of the rehabilitation scheme. 20. Shares of the company he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be enhanced to enable the company to issue equity shares to IDBI and there is a procedure prescribed under the Act for reduction of the share capital which, inter alia, includes passing of necessary resolution by the shareholders and sanction to the reduction of the share capital by the High Court, the BIFR on the presumption that such a sanction is to be obtained from the CLB provided in the SS that the CLB to consider exempting the company from the provisions of Sections 81(1), 100, 101, 102 and 103 of the Act for its revival and implementation of terms of the revival package. 23. After sanctioning of the scheme the BIFR directed vide order dated 2nd April, 2004 that the SS be circulated for implementation by all concerned parties. The company on realizing that CLB is not the authority to grant permission about the reduction of share capital and, Therefore, it was not necessary to approach the CLB for seeking exemption, moved an application on 21st May, 2004 seeking modifications/rectification in the SS and pleaded for deletion of the clause which required the CLB to consider giving exemption with further prayer that a new clause be incorporated in the SS itself thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f) read with Section 32(1) of SICA and granted exemption to the company from seeking permission from the Department of Company Affairs or SEBI or other authorities and permitted it to proceed with the implementation of the clauses 8 (c) (i) and (ii) and all other provisions of the SS without seeking any further exemptions/permissions. Para 4 of this order reads as under: The Board, on consideration of the submissions made by the company and also the recommendations of the MA(IDBI) notes that the rehabilitation scheme sanctioned by the Board on 2.4.2004 aims to ensure long-term viability of the company. Keeping in view the provisions of Section 32(1) of SICA, the Board hereby orders that the provisions of SS 2004, including clauses 8 (c) (i) (ii) thereof will have the effect notwithstanding anything inconsistent therewith contained in any other law, except the provisions of FERA and Urban Land (Ceiling Regulation) Act,1976, for the time being in force or in the Memorandum or Article of Association of the industrial company or in any instrument having effect by virtue of any law other than this Act. The company is, accordingly, permitted to proceed with the implementation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same was/were considered in the mandatory hearing held on 5.2.2004. As no objection was received from the applicant, as stated in para-3 above, in respect of the said DRS within the stipulated time frame the Board hereby rejects the prayer of the applicant. 31. Against this order also, Mr. Raj Kumar Jain has filed the appeal which is pending before the AAIFR. 32. Coming back to the company petition filed by Mr. Raj Kumar Jain and his associate companies under Sections 397/398 of the Act, it may be noted that certain interim orders were passed by the CLB in respect of EGM convened and exercising of voting rights by IDBI which was also modified but it is not necessary to have detailed account thereof. The petition was ultimately heard and culminated into passing of the impugned order dated 24th August, 2005, inter alia, holding that Mr. Vijay Kumar Jain has acted in oppressive manner against Mr. Raj Kumar Jain and his associate companies by denying that they are also the promoters of the company with a view to create a new majority with the right to buy back shares of the company from IDBI and also holding that allotment of shares to IDBI on 1st January, 2005 was ultra- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The Indian Companies Act was enacted in the year 1956 almost 30 years before SICA came to be enacted. Even this 1956 Act was not the first legislation on the subject. First Indian Companies Act was enacted in the year 1866 which was replaced by the Act of 1882 and thereafter by the Act of 1913. Thus incorporation of companies was given legislative sanction almost one and half century ago. Although what started as large scale partnerships by means of deed of settlement, the commercial need for general admission of joint stock enterprises became pressing, and it became clear that if the legislature did not act the future development of companies would be an evolution of the unincorporated company, with its cumbrous constitution, its confused legal status and the great disadvantage of merely contractual limitation of liability of members. With statutory enactment, incorporation of registration became compulsory and over a period of time the companies with limited liability became the accepted norm and given legislative sanction. A public limited company thus may comprise large scale of shareholders who subscribe to shares of different denominations and are called members of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a company. The reason is obvious. Sick industrial companies, when remain sick, result in blockage of sizeable national resources which may have cascading effect on all sectors of economic and social life of the nation. It may, in addition, put the creditors in a spot as it becomes difficult to recover their dues in such an eventuality. This was the reason which prompted the legislature to step in and enact the SICA. SICA operates and is sought to be implemented through a three-tier system, namely, (i) Operating Agency, (ii) the Board, and (iii) the Appellate Authority. The Operating Agency is essentially the hand-tool of the Board to carry out some investigations and legislation provisions. The scheme of the Act visualizes:- (a) the initiation of a reference and determination by the Board of the sickness of a company; (b) the enquiry, consideration and determination by the Board whether the sick industrial company can on its own within a reasonable time make its net worth positive , and if not, then the formulation of a scheme of revival in respect thereof; (c) the further determination by the Board are due consideration that the hopes of the company are belied and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... workers struggle for finding their true identity and dignity . Their dream is coming true with the enlightened and refreshing approach of the Central and State Governments, and the concerned nationalized banks, coupled with prompt, efficient and swift decision-making on the part of the Board for Industrial and Financial Reconstruction and the Industrial Development Bank of India. And with the consensus of all the parties (which is the most heartening feature) who have risen above narrow individual interests by not opposing the workers scheme in order to promote the larger national interest of reviving the industry, augmenting the national product and providing employment to hundreds of starving workers (three of whom had become martyrs to the cause of committing suicide. 42. The Gujarat High Court in the case of Testeels Ltd. v. Radhaben Ranchhodlal Charitable Trust reported in 1989 (66) Comp Cas 555 echoed the same sentiments by highlighting that the purpose of the SICA was to safeguard the economy of the country, to protect viable sick units and revive or to rehabilitate them. Holding that when the reference was pending before the BIFR even proceedings for winding up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of revival of the company under SICA is not to protect the interest of the shareholders but it is the public interest which comes in forefront. The revival of a company is aimed with main intention to prevent loss of production, loss of employment, loss of revenue to the Central and State Governments and salvage the funds of banks and financial institutions, locked up in the company. Statement of Objects and Reasons does not even mention about the protection of interest of the members/shareholders. It is for this reason the Operating Agency, which is to prepare the scheme is normally a financial institution/investor which has invested the funds in the company. Interest of the shareholders is put to back burner and that of the creditors and workers in the forefront. 46. Section 18(1) of SICA lays down that a scheme to be prepared by the Operating Agency may provide for any one or following measures, namely: (a) the financial reconstruction of the sick industrial company;] (b) the proper management of the sick industrial company be change in, or take over of, management of the sick industrial company; (c) the amalgamation of- (i) the sick industrial company with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, creditors and guarantors and employees of the said companies. 48. Even if any modification is to be made in a sanctioned scheme or any provisions thereof is to be reviewed, the BIFR is given exclusive jurisdiction as per the provisions of Sub-Section (5) of Section 18 which is to the following effect: 18 (5): The Board may on the recommendations of the operating agency or otherwise, review any sanctioned scheme and make such modifications as it may deem fit or may be order in writing direct any operating agency specified in the order, having regard to such guidelines as may be specified in the order, to prepare a fresh scheme providing for such measures as the operating agency may consider necessary 49. Difficulty in the implementation of the scheme is also to be resolved by the BIFR alone. This power is conferred under Sub-Section (9) of Section 18 which reads as under: 18 (9): If any difficulty arises in giving effect to the provisions of the sanctioned scheme, the Board may, on the recommendation of the operating agency [or otherwise], by order do anything, not inconsistent with such provisions, which appears to it to be necessary or expedient for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the matter and Section 26 of SICA bars such jurisdiction. It reads: 26. Bar of jurisdiction- No order passed or proposal made under this Act shall be appealable except as provided therein and no civil court shall have jurisdiction in respect of any matter which the Appellate Authority or the Board is empowered by, or under, this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. 53. With the aforesaid backdrop and scheme of the SICA, let us note the provisions of Section 32 of SICA, subject matter of debate in these appeals. This Section contains the a non obstinate clause giving over-riding effect to the provisions of the SICA against any law except the provisions of Foreign Exchange Regulation Act, 1973 and Urban Land (Ceiling and Regulation) Act, 1976. This Section is in the following terms: 32. Effect of the Act on other laws.-(1) The provisions of this Act and of any rules or schemes made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 32 of the SICA. 56. Before embarking on this inquiry, I may point out that the following legal position was even conceded by the learned senior counsel appearing for Mr. Raj Kumar Jain: (a) The scheme sanctioned by the BIFR could not be challenged and was not challenged by Mr. Raj Kumar Jain. The respondent was proceeding on the basis that SS had to be implemented. (b) Since the SS stipulates allotment of shares worth ₹ 23 crores to IDBI, even this was not questioned by Mr. Raj Kumar Jain. However, the submission was that this allotment has to be as per the provisions of the Act and after following the procedures laid down therein. 57. Mr. C.A. Sundaram, learned senior counsel appearing for Mr. Raj Kumar Jain, however, submitted that the SS itself has provided for buy back of shares allotted to IDBI by the promoters. However, it has not specifically defined who the promoters are. Who is a promoter would be a question of fact and, Therefore, it becomes a civil dispute. Adjudication of this dispute would be outside the scope of implementation of the scheme. BIFR s jurisdiction was only to see as to whether the company was sick and could be revived. Once t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons engaged in procuring the formation of the company; 62. For the purpose of SEBI Regulations, promoter is given a very wide meaning as would be clear from Section 2(h) of the SEBI Act. It was argued that for the purpose of SICA promoter shall have yet another connotation and he would be a person responsible to carry out the scheme. It is for this reason Form A as well as draft scheme contained a column about the name of the promoter and the person who is making an application and assumes responsibility to co-operate for framing the scheme of rehabilitation would be the promoter. Therefore, the submission was that the expression promoter contained in the SS would have no relevance with the persons who were the promoters at the time of incorporation of the company and it was necessary to look into only the proceedings before BIFR to find out as to who were the promoters mentioned therein. Attempt was also made to show that Mr. Raj Kumar Jain and his associate companies were not even promoters at the time of incorporation of the company. It was argued that Mr. Vijay Kumar Jain was disclosed as a promoter was within the knowledge of Mr. Raj Kumar Jain and his associate compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the impugned order was passed by CLB and present petition was filed. It is the proper course, in the facts of this case and in my opinion the CLB had no jurisdiction to deal with this issue inasmuch as issue to be determined is the one arising out of the SS over which the BIFR has the exclusive jurisdiction. Provisions of Section 32 of SICA would, Therefore, clearly become applicable. I do not agree with the respondents that the issue as to who are the promoters can be detached from SS and, Therefore, is a civil dispute and can be decided by the CLB. This is an ingenuous plea raised by learned senior counsel for the respondents and goes contrary to what is observed above. 68. The CLB while holding that the petition filed by the respondents herein under Sections 397/398 of the Act was maintainable quoted certain passages from the judgment of Mewar Sugar Mills Ltd. v. Chairman, Central Board of Direct Taxes and Anr. reported as 1998 VI AD (Del) 309 and also relied upon Union of India v. Krishna Mills Ltd. 81 CC 50 Rajasthan as well as National Organic Chemical Industries Ltd. v. Nocil Employees Union 2005 67 CLA 145. Relying upon these judgments, the CLB observed that it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to approach the BIFR as in essence what is complained is that the scheme is not properly implemented. 69. Similarly, the CLB was wrong in rejecting the contention of the appellants herein that merely because the BIFR had rejected the application of the respondents for clarification on the ground of delay and latches and not on merits, the CLB could go into that question. It is a curious way of assuming jurisdiction. Once it is held that it is the BIFR which could issue such a clarification and application was also filed before the BIFR, if the grievance is that the said application is wrongly dismissed on the ground of delay and latches, the appropriate remedy is to challenge the order. This step, in fact, has been taken by the respondents herein and appeal has been filed. 70. As I am of the opinion that this particular aspect can be considered by the BIFR, it may not be proper for me to decide as to whether Mr. Raj Kumar Jain and his associate companies can be treated as promoters. These are the appeals against the order passed by the CLB. If the CLB had no jurisdiction to examine this aspect as held by him, further enquiry as to whether Mr. Raj Kumar Jain and his assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Association and allotment to IDBI, negate the very scheme sanctioned by the BIFR. Again, since the respondents herein had filed an appeal against the order dated 28th January, 2005 granting the aforesaid exemptions and vide order dated 7th September, 2005 the said appeal has been allowed on the ground that the respondents herein should also have been heard before granting such an exemption. The case is accordingly remanded back to the BIFR for passing an order in accordance with the provisions of the SICA and after serving notice and giving opportunity of hearing to all necessary and proper parties before the Appellate Authority. It would be appropriate that this matter is also decided by the BIFR. 74. It may, however, be pointed out that the CLB passed the order keeping in view that there was such an exemption given by the BIFR to the aforesaid provisions. Notwithstanding these exemptions, the CLB concluded that the allotment of shares to IDBI is ultra virus the Memorandum and Articles of Association. In the face of such an exemption, this finding of the CLB is unsustainable. While sanctioning the scheme vide order dated 2nd April, 2005, the BIFR, in respect of IDBI, inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to give effect to these provisions the BIFR could adopt one of the following modes: (a) requiring the company and its shareholders to undertake the steps for relocation for the aforesaid purpose which means convening of meeting of the shareholders approving writing down the share capital and increasing authorised share capital by amending Memorandum and Articles of Association, meeting of the Board of Directors taking such a decision and applying to the High Court for reduction of the share capital. Or (b) since the aforesaid steps would be mere formality, in order to give effect to the scheme exempt the company from these provisions once pointed by the company as well as IDBI that provision in the sanctioned scheme asking CLB to consider exempting the company from provisions of Sections 81(1), 100, 101, 102 and 103 of the Act was not needed and the BIFR realised it, there is nothing to prevent BIFR from passing such an order. 77. In fact principle No. (3) laid down by the Division Bench of this court in Mewar Sugar Mills Ltd. (supra) confirms this legal position. 78. However, as pointed out above, although there is a power but whether such a power should hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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