9911796707
TMI Blog2005 (9) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company petition cannot be bifurcated from the oppressive act so as to exercise jurisdiction by the CLB, in view of the bar of jurisdiction as contemplated in Section 26 of Sick Industrial Companies Act, 1985. 2. Shri R. Murari, learned Counsel appearing for the applicants, submitted: The Company is engaged since July, 1995 in manufacture of life saving drugs. However, on account of various factors beyond control of the applicants, herein, the Company became a sick industrial company in the year 1997 and was consequently, referred to BIFR. The petitioner though claims to be a promoter, never evinced any interest in the process of rehabilitating and reviving the Company. Consequently, the second respondent, being the Managing Director formulated and submitted a rehabilitation proposal to the operative agency appointed by BIFR. The draft rehabilitation scheme was sanctioned on 12.02.2002 by BIFR. The scheme envisages conversion of rupees two hundred lakhs of unsecured loans brought in by the promoters viz. the applicants Nos. 2 to 6 alongwith their friends and relatives, into equity by issue and allotment of twenty lakhs equity shares of ₹ 10/- each at par in their f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme. The modified scheme stipulated conversion of further rupees two hundred and fifty lakhs of unsecured loans to be brought in during the financial years 2003-2004 and 2004-2005 by the promoters alongwith their friends and relatives into the equity by issue and allotment of twenty five lakhs equity shares of ₹ 10/- each at par. This is in addition to conversion of ₹ 200 Lakhs of unsecured loan as approved by the BIFR in February, 2002. Apart from further conversion of unsecured loans and allotment of 25 lakhs equity shares in favour of the promoters, a sum of ₹ 15 lakhs being unpaid interest to IDBI was converted into 1,50,000 equity shares of ₹ 10/-each. These steps have been taken in accordance with the sanctioned scheme and revised sanctioned scheme respectively. After allotment of 250 lakhs shares of ₹ 10/- each in favour of the promoters of the Company, pursuant to the revised sanctioned scheme, the loan amount due to IDBI was cleared. However, the petitioner preferred an appeal before Appellate Authority for Industrial and Financial Reconstruction ( AAIFR ) against the order of dated 27.01.2005 of BIFR sanctioning the modified scheme, by mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,00,000 shares pursuant to the scheme sanctioned on 12.02.2002. Section 26 does not provide for bifurcation of the subject matter of an action as in the case of Section 8 of the Arbitration and Conciliation Act, 1996 and, therefore, the grievances in regard to the acts of mismanagement and statutory violations raised in the company petition cannot be separated and dealt with separately by this Board. In this connection, Shri Murari, learned Counsel relied on Sukanya Holdings Private Limited v. Jayesh H. Pandya , wherein, the Supreme Court held that If bifurcation of the subject matter of a suit is contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed . This principle has been followed by this Board in Pinamaneni Subb Rao v. Semi Conductors Ltd. (2004) 53 SCL 58 and Altek Lammertz Needles Limited v. Lammertz Industrienadel GMBH in CP No. 3/2004 - order dated 31.03.2004. Therefore, the petition in the present form cannot be maintained, unless and until the petitioner seeks to amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the year 1995. The second respondent, his family members and associates did not have any substantial amounts by way of unsecured loans either as on the cut off date, viz., 31.03.2001 or on the date of the order dated 12.02.2002 of B1FR, but shares were allotted in their favour in gross violation of BIFR order. When the sanctioned scheme was under review from 26.12.2002 and when the Company failed to submit a draft modified scheme by 31.01.2003 and ultimately when the sanctioned scheme of February 2002 was declared as failed as on 19.06.2003, the impugned allotments were made on 25.04.2003 and, therefore, cannot take protection under the sanctioned scheme. The notice dated 27.01.2003 convening the extraordinary general meeting was issued under the guise of BIFR order. The order of BIFR dated 26.09.2003 clearly indicates that the Company failed to comply in full with the terms and conditions of the scheme approved in February 2002. At the same time, the Company had caused the notice dated 27.01.2003, convening the extraordinary general meeting, which would imply that the notice was issued independent of the approved scheme, but under Section 81(1A) of the Act. The said notice spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Securities (Contract and Regulation) Act, SEBI Act and Rules and Guidelines of SEBI. The cut-off date for the rehabilitation scheme under the modified revised scheme was 31.03.2003. The Company and its promoters would bring in unsecured loan of ₹ 250 lakhs, but not ₹ 200 lakhs sanctioned under the scheme sanctioned on 12.02.2002. Thus, only unsecured loans to the tune of ₹ 250 lakhs must be converted into equity shares of ₹ 10/- each. BIFR has not granted any exemption under Section 81(1A) of the Act and, therefore, the Company was bound to comply with the requirements of Section 81(1A), while allotting ₹ 250 lakhs pursuant to the modified approved scheme. While the petitioner is challenging the impugned allotment before the CLB, the allotment of 250,00,000 shares made under the modified revised scheme is challenged before AAIFR. The balance sheet for the year ended 31.03.2001 discloses unsecured loans only to the tune of ₹ 352 lakhs and the balance sheet for the year ended 30.09.2003 shows unsecured loan to the tune of ₹ 222 lakhs. Thus, when the impugned allotment for ₹ 200 lakhs was made on 25.04.2003 and the allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se acts of oppression and mismanagement must be adjudicated by this Bench. The cause of action cannot be bifurcated and, therefore, the company petition is maintainable. The decision in Sukanya Holdings (P) Ltd., cited by Shri Murari, having arisen in relation to the provisions of Section 8 of Arbitration and Conciliation Act, has no application to the facts of the present company petition. The other decisions, viz. Pinamaneni Subb Rao v. Semi Conductors Ltd. and Altek Lammertz Needles Limited v. Lammertz Industrienadel GmbH (supra) cannot go to the aid of the respondents. Section 34(2)(iv) of the Arbitration and Conciliation Act provides for bifurcation of the issues, which, however, cannot be applied to the CLB proceedings. The CLB in Prinyanka Overseas Pvt. Ltd. v. Pasupathi Fabrics Ltd. order dated 25.08.2005 in CP No. 38/2005 held that there is no provision either in SICA or in the rules or in the scheme anything inconsistent with the provisions of Sections 397 and 398 to contend that once a company is registered with BIFR, shareholders cannot initiate proceedings under Sections 397 398. The Supreme Court in Deputy Commercial Tax Officer v. Corromandal Pharmaceuticals (1997) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no requirement of any resolution under Section 81(1A) for the modified sanctioned scheme. The modified sanctioned scheme stipulates that SEBI and Stock Exchanges will exempt the Company, its promoters, friends and associates for the issue of equity shares on conversion of unsecured loans of ₹ 250 lakhs and issue of 1,50,000 equity shares in favour of IDBI from the procedural provisions of Securities (Contract and Regulation) Act, SEBI Act and Rules and Guidelines of SEBI. BIFR exempted the applicability of the provisions contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulations) Act, 1976. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 do not apply to the allotment made in pursuance of the scheme framed under the SICA as envisaged in Regulation 3(1)(j)(i). Similarly SEBI (Disclosure and Investor Protection) Guidelines, 2000 do not apply in the case of allotment of shares to a person/group of persons in accordance with the provisions of rehabilitation package approved by BIFR in terms of Clause 13.7.1 of the guidelines. SEBI never prosecuted the applicants for allott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the subject matter of the company petition is permissible? In other words, whether the acts of mismanagement and various other statutory violations complained of can be separated from the purported illegal allotment of shares so as to exercise jurisdiction by the CLB, with a view to bringing to an end such grievances? ISSUE No. 1: While the petitioner complains that under the guise of the sanctioned scheme dated 12.02.2002, the second respondent, not being a promoter got allotted 20 lakhs shares to himself and his associates on the pretext that they had inducted loans to the tune of ₹ 200 lakhs, without actual infusion of funds and in exclusion of the petitioner, despite the fact that the unsecured loans were also brought in by him, it is contended by the respondents that the petitioner now claiming to be a promoter, at the relevant point of time, disassociated himself from the Company and was not interested in either infusing funds or in further acquiring shares in the Company. In this context, the scheme sanctioned by BIFR on 12.02.2002 assumes relevance, essentials of which are as under: Payment of instalments to IDBI and State Bank of India as per the schedule. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Shares and Takeovers) Regulations, 1997; and (b) SEBI (Disclosure and Investor Protection) Guidelines, 2000 in the matter of issue and allotment of equity shares. The explanatory statement for the increase in authorized capital discloses that the increase is for converting the unsecured loans of directors only, when the explanatory statement for the special resolution under Section 81(1A) speaks about the allotment of shares to promoters, directors and their associates. The latter statement in the explanatory statement is not in accordance with the stipulation of BIFR. The explanatory statement discloses that the allotment of 20 lakhs shares would not result in any change in control of the Company, but the impugned allotment resulted in change in the shareholding pattern and control of the Company in gross violation of the sanctioned scheme dated 12.02.2002. The explanatory statement indicates that 5 lakhs shares would be allotted to the petitioner and his associates and 15 lakhs shares would be allotted to the second respondent and his associates. However, the second respondent got the entire 20 lakhs shares allotted to himself, family members and associates wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the modified sanctioned scheme by BIFR directing the promoters to bring in further unsecured loans of ₹ 250 lakhs and convert the promoters' unsecured loans to the extent of ₹ 250 lakhs into equity, which shall result in further dilution of the shareholding of the petitioner and the change in the equity structure of the Company. The promoters were required to convert ₹ 200 lakhs of unsecured loans into the equity share capital of the company in terms of the scheme sanctioned by BIFR on 12.02.02. BTFR did not envision the change in the equity structure of the company. However, under the garb of the sanctioned scheme, the second respondent got allotted almost all the shares (20 Lakh shares) to his family and friends and associates on 25.4.2003 by representing that they have infused loans to the extent of ₹ 200 lacs, without actual infusion of funds. With this improper, illegal and unethical act, he acquired direct/indirect control over the company to nearly 27% whereas the shareholding of the petitioner got reduced from 23.78% to 18.14%. The impugned allotments were made through books entries to those persons who had not given unsecured loans and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the scheme has to be agitated before BIFR in terms of the provisions of SICA, as categorically held by this Board in Priyanka Overseas Private Limited v. Pasupati Fabrics Limited (supra). Taking into consideration the grounds of appeal in totality, AAIFR is expected to give its finding on the issues whether the allotment of 20 lakhs of shares in favour of the second respondent group was made through book entries, without infusion of any funds by the second respondent and his associates and whether the said allotment is improper, illegal and unethical act . These are the acts of oppression pleaded before the CLB against the respondents. The remedy, if the petitioner establishes his case before AAIFR as well as CLB, would be the same, but under the different statutory provisions. The petitioner seeks the intervention of AAIFR for declaration that the earlier sanctioned scheme failed. As a result of such declaration, all actions taken pursuant to the scheme sanctioned on 12.02.2002 would become null and void, including the allotment of 20 lakhs shares made on 25.04.2003 in favour of the respondent group, which is one of the main prayers in the company petition. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to Shri R. Murari, learned Counsel, Section 26 of SICA does not provide for bifurcation of the subject matter and, therefore, the grievances of the petitioner in regard to the acts of mismanagement and statutory violations cannot be separately dealt by this Board, it is vehemently contended by Shri Arvind Pandian, learned Counsel that the bar of jurisdiction, as contemplated in Section 26, is not applicable to the CLB. Thus, Section 26 of SICA assumes relevance to determine this contentious issue. Section 26 reads as under:- 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. A perusal of Section 26 reveals that no order of BIFR or AAIFR or proposal made under SICA would be appealable in civil courts. No civil court shall have jurisdiction in respect of any matter which AAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri R. Murari, learned Counsel that Section 26 does not provide for bifurcation of the subject matter of an action as in the case of proviso to Section 34(2)(a)(iv) of the Arbitration Conciliation Act, 1996 providing for bifurcation of the subject matter does not merit any consideration. The principles laid down by the Apex Court in Sukanya Holdings Private Limited v. Jayesh H. Pandya (supra), having arisen in the context of the provisions of Section 8 of the Arbitration Conciliation Act, in my considered view, have no application to the case on hand. 1, therefore, do not hesitate to conclude that the acts of mismanagement and statutory violations set out in the company petition could be bifurcated and dealt with separately and accordingly jurisdiction could be exercised by the Bench to adjudicate the disputed issues in regard to the alleged acts of mismanagement and statutory violations. Towards this end, the respondents will file counter to the main petition by 07.11.2005 and rejoinder, if any, by 30.11.2005. The Company petition will be heard on the alleged acts of mismanagement and statutory violations in the affairs of the Company on 07.12.2005 at 2.30 p.m. The parties are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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