Securities Appellate Tribunal
Malanpur Steels Ltd. vs Adjudicating And Enquiry Officer And ... on 2 August, 2006
JUDGMENT
N.K. Sodhi, Presiding Officer
1. The appellant before us is a listed company. The Securities and Exchange Board of India (for short SEBI) received complaints against the company from its investors in the matter of refund orders, dividends, share certificates and debentures including non receipt of interest amount on debentures. These complaints were forwarded to the company for redressal. As on December 10, 2002, 918 complaints were still pending to be redressed. By letter dated December 31, 2002 SEBI called upon the company to redress the grievances of its investors within a period of 30 days from the date of receipt of the communication failing which appropriate action would be taken under Section 15C of the Securities and Exchange Board of India Act, 1992 (hereinafter called the Act). It may be mentioned that Section 15C of the Act interalia provides that if any listed company or any person registered as intermediary after having been called upon by SEBI fails to redress the grievances of its investors within the time specified by SEBI then such a company or intermediary shall be liable to a penalty of Rs. 1 lac for each day during which such failure continues or Rs. 1 crore whichever is less. The attention of the company was also drawn to the provisions of Section 24(2) of the Act which provides for prosecution on failure to pay any penalty imposed by an adjudication officer. On receipt of the aforesaid communication the company filed its reply dated 29.01.2003 informing SEBI that more than 90% of the complaints forwarded to it related to non payment of amount that became due to the investors on maturity of debentures and interest thereon which could not be paid due to erosion of entire net worth of the company. SEBI was also informed that a reference by the company had been made to the Board for Industrial and Financial Reconstruction (for short the Board) constituted under Section 4 of The Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called SICA). The company also informed SEBI that the said reference had been registered by the Board as case No. 158 of 2001 under Section 15(1) of SICA. The company pleaded that since a reference was pending with the Board it was entitled to the protection of Section 22(1) of SICA and that the amount due to the creditors/investors could not the paid as the company was unable to make payment till the rehabilitation package came from the Board. SEBI was further informed that whenever complaints were received by the company or its share transfer agent from the debenture holders or other investors a prompt reply was given to them with a copy to SEBI informing them that the company was before the Board and that the payments due to them could be made only in accordance with the scheme of rehabilitation when framed by the Board. SEBI was requested to treat the complaints relating to non receipt of redemption amount and interest thereon as resolved. It undertook to resolve the other complaints of the shareholders within a period of one month. The company also requested SEBI not to initiate any action as referred to in its letter dated 31.12.2002. It appears that overwhelming complaints against the company pertained to the non payment of the amount due on redemption of debentures and interest thereon and since these amounts had not been paid to the debenture holders SEBI took the view that the complaints had not been redressed and initiated proceedings for the imposition of penalty under Section 15C read with Section 15I of the Act and appointed an adjudicating officer. The adjudicating officer issued a show cause notice dated May 21, 2003 to the company alleging that it had not redressed the grievances of its investors when called upon to do so by SEBI and required the company to show cause why enquiry be not held against it in terms of Rule 4 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and why penalty be not imposed. The company submitted its reply and took the same stand which it had taken before SEBI that it was before the Board for its rehabilitation and therefore it could not be called upon to pay the amount due to the debenture holders in view of the provisions of Section 22(1) of SICA. The adjudicating officer by his order dated June 23, 2004 did not accept the contention of the company and came to the conclusion that it had failed to redress the grievances of the debenture holders and imposed a penalty of Rs. 25 lacs. It is against this order that the present appeal has been filed under Section 15T of the Act.
2. We have heard the learned Counsel for the parties and are of the view that the appeal deserves to succeed. There is no gainsaying the fact that more than 90% of the complaints received from the investors pertained to the non payment of debenture money which became due on maturity and also interest thereon and that a small number of complaints were in regard to the non transfer of shares which the company had undertaken to redress. It is also not in dispute that the company has not paid to the debenture holders the amount that became due to them on maturity as it was unable to pay those amounts due to erosion of its entire net worth. Since the amount due to the debenture holders has not been paid the company has failed to redress the grievances of its investors even though it was called upon to pay that amount by SEBI. Section 15C of the Act no doubt has been violated but Section 22(1) of SICA which reads as under comes to its aid.
Suspension of legal proceedings, contracts, etc. (1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.
3. A reading of the aforesaid provision makes it clear that where an enquiry is pending under Section 16 before the Board or any scheme referred to in Section 17 is under preparation or consideration or a sanctioned scheme is under implementation relating to an industrial company then no proceedings would lie against it for its winding up or for execution, distress or the like against any of its properties except with the consent of the Board. SICA is a special Act which was enacted with a view of rehabilitate the sick companies by preparing schemes for their rehabilitation and it provides that till such time the matter is being enquired into by the Board or schemes for their rehabilitation are under preparation or consideration, such companies need to be protected from being proceeded against for the recovery of money due from them. It was enacted primarily to assist sick industrial companies which inter alia failed to meet their financial obligations. It has to be borne in mind that if the creditors or SEBI are permitted to resort to independent action in total disregard of the pending enquiry under Sections 15 to 19 of SICA, the entire exercise under the said provisions would be rendered nugatory by the time the Board is able to evolve a scheme of revival or rehabilitation of the sick company. A direction issued by SEBI calling upon the company to redress the grievances of its debenture holders to whom money had not been paid amounts to requiring the company to pay those amounts to the debenture holders. Non payment of those amounts makes the company liable for the imposition of penalty under Section 15C of the Act and non deposit of penalty amount would lead to prosecution. A direction from SEBI under Section 15C of the Act which has the effect of requiring a sick industrial company to pay its creditors is a proceeding initiated against it for the recovery of the amount due from it and would be covered by the words or the like appearing in Section 22(1) of SICA and, therefore, such a proceeding would not lie. The provisions of Section 22(1) override anything contained in the Companies Act or any other law which would include the Act as well. There is a non obstinate clause in Section 22(1) of SICA but there is none in Section 15C of the Act. It is, thus, clear that the provisions of Section 22(1) of SICA will prevail over the provisions of Section 15C of the Act. We may hasten to add that if a direction issued under Section 15C of the Act does not have the effect of requiring the sick company to pay to its creditors, then such a direction would not be covered by the embargo envisaged in Section 22(1) of SICA.
4. In Maharashtra Tubes Ltd. v State Industrial & Investment Corporation of Maharashtra Ltd. and Anr. (1993) 2 SCC 144, the State Financial Corporation initiated proceedings under Section 29 and/or under Section 31 of State Financial Corporation Act, 1951 against a sick industrial company and the question arose whether it could do so in view of the bar contained in Section 22 of SICA. Their Lordships of the Supreme Court examined the object and scope of SICA and also that of Section 22(1) thereof and observed as under:
On the other hand, the 1985 Act was enacted, as its preamble manifests, with a view to timely detection of sick or potentially sick companies owing industrial undertakings, the identification of the nature of sickness through experts in relevant fields with a view to devising suitable remedial measures through appropriate schemes and their expeditious implementation. Here the emphasis is to prevent sickness and in cases of sick undertakings to prepare schemes for their rehabilitation by providing financial assistances by way of loans, advances or guarantees or by providing reliefs, concessions, or sacrifices from Central of State Governments, scheduled banks, etc. The basic idea is to revive sick units, if necessary, by extending further financial assistance after a thorough examination of the units by experts and only when the unit is found to be no more capable of rehabilitation, that the option of winding up may be resorted to. It is for that reason that Section 22(1) provides that during the pendency of (i) an inquiry under Section 16 or (ii) preparation or consideration of a scheme under Section 17 of (iii) an appeal under Section 25, no proceedings for winding up of the concerned industrial company or for execution, distress or the like shall lie or be proceeded with in relation to the properties of that concern unless BIFR/appellate authority has consented thereto. The underlying idea is that every such action should be frozen unless expressly permitted by the specified authority until the investigation for the revival of the industrial undertaking is finally determined. It is thus crystal clear that the main thrust of this special legislation is at revival or rehabilitation of the sick industrial undertaking and it is only when it is realised that the same is not feasible that the option of winding up of the unit can be resorted to and their Lordships concluded as under:
We are, therefore, of the opinion that where an inquiry is pending under Section 16/17 or an appeal is pending under Section 25 of the 1985 Act there should be cessation of the coercive activities of the type mentioned in Section 22(1) to permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company.
5. We will now consider the judgments relied upon by the learned Counsel for the respondent. He placed reliance on Deputy Commercial Tax Officer and Ors. v. Corromandal Pharmaceuticals and Ors. AIR 1997 SCC 2027, to contend that the company had to carry out the direction issued by SEBI and that it could not avoid its liability to pay the amount which has become due to the debenture holders. In this case a sanctioned scheme for rehabilitation of a sick company had been framed and while it was in operation the industrial company started collecting sales tax from its customers which legitimately belonged to the Revenue. It failed to deposit the sales tax arrears which it collected after the framing of the scheme and the question arose whether those could be recovered in view of Section 22 (1) of SICA. Their Lordship while holding that the said amount could be recovered observed as under:
So, we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22 (1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc, which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statute in a business sense, should be avoided.
6. This judgment does not in any way advance the case of the respondent herein. The learned Counsel then referred to BSI Ltd. v Gift Holdings Pvt. Ltd. In this case some companies and their directors were sought to be prosecuted under Section 138 of the Negotiable Instruments Act consequent to non payment of amounts covered by cheques issued by such companies. Subsequent to the filing of complaints against them, the companies approached the Board for their rehabilitation and contended that since proceedings were pending before the Board no prosecution could be maintained under the law. Their contentions were rejected and their Lordships concluded as under:
The conclusion which we have to draw is that if commission of the offence under Section 138 of the NI Act was completed before the commencement of proceedings under Section 22(1) of SICA there is no hurdle in any of the provisions of SICA against the maintainability and prosecution of a criminal complaint duly instituted under Section 142 of the NI Act.
7. Kailash Nath Agarwal and Ors. v. Pradeshiya Industrial and Investment Corporation of U.P. and Anr. AIR 2003 SC 1886 is of no help to the respondent because the question involved therein was the scope of the protection afforded to guarantors under Section 22(1) of SCIA. This is not the issue before us. In Indian Maize & Chemicals Ltd. v. State of U.P. and Ors. (1997) 9 SCC 462 a sick company was in arrears of its electricity dues and on a demand raised by the Electricity Board, it had agreed to make the payment in 12 monthly installments. After depositing one installment it committed default in the payment and anticipating that the electricity will be disconnected, it approached the High Court of Allahabad for a direction not to recover the amount putting forth the plea that it was a sick industry and its claim for rehabilitation was pending before the Board and therefore no action could be taken to recover the amount. The High Court refused to grant the relief and their Lordships while dismissing the special leave petition observed that merely because the company is a sick industry and proceedings before the Board were pending, it would not be entitled to invoke Section 22(1) of SICA for a direction for uninterrupted supply of electrical energy without the compliance of the corresponding obligation of payment under the regulations or the contract under the Indian Electricity (Supply) Act, 1948. Obviously, if a sick company wants electricity or other services it must pay for the same. That is not the situation before us. In Kusum Ingots & Alloys Ltd. v. Pennar Peterson securities Ltd and Ors. AIR 2000 SC 954 the directors of a sick company were sought to be prosecuted under Section 138 of the Negotiable Instruments Act on the cheques issued by them being dishonoured. The company and the directors took the plea that criminal prosecution could not continue in view of the provisions of Section 22(1) of SICA. This contention was rejected by their Lordships observing that Section 22(1) does not refer to any criminal proceedings. This case is again of no help to us. We have also gone through the Division Bench judgment of the Bombay High Court in Shree Vallabh Glass Works Ltd. and Anr. v. State of Maharashtra and Ors. AIR 1990 BOM 27 and find that this case also does not advance the case of the respondent.
No other point was raised.
8. For the reasons recorded above the impugned order is not sustainable and we hereby set aside the same. The appeal stands allowed with no order as to costs.