Delhi High Court
Industrial Credit & Investment Corpn. ... vs Parasrampuria Synthetics Ltd. on 15 January, 1998
Equivalent citations: 1998IIIAD(DELHI)585, [1998]92COMPCAS238(DELHI), 71(1998)DLT674, 1998(44)DRJ695
JUDGMENT Vijender Jain, J.
1. This suit has been brought by Industrial Credit and Investment Corporation of India Limited (hereinafter, referred to as 'ICICI'). Defendant No. 1 is M/s.. Parasrampuria Synthetics Limited (hereinafter referred to as 'PSL'. Defendant Nos. 2 to 4 are the Promoters and Directors of defendant No. l. Defendant Nos 5 to 8 are Nominee Directors of financial institutions on the Board of 'PSL'. Defendant Nos. 9 and 10 are Chairman and Director of defendant No. 1. Defendant Nos. 11 to 22 are various financial institutions and Banks, who have extended financial assistance to defendant No. 1 and defendant No. 23 is the Board for Industrial and Financial Reconstruction (hereinafter referred to as 'BIFR') constituted under Sick Industrial Companies (Special Provisions) Act (in short 'SICA').
2. By this suit the plaintiff wants a declaration declaring the provisions of the meeting of the Board of the defendant No. 1- 'PSL' held on 20.9.1997 as null and void. Another declaration sought for in the suit is for declaring the Profit and Loss Account and Balance Sheet of the defendant No. 1-'PSL' for 15 months period ended 30.6.1997 and Adoption thereof at the Board meeting held on 20.9.1997 to be bad in law and null and void. Yet another prayer is made for declaring that 'PSL' was not a Sick Industrial Company in the meaning of SICA. Next prayer of the Plaintiff is for perpetual injunction against defendant Nos. 1 to 4, 9 and 10 restraining them from making a reference to the BIFR on the basis of accounts for the period ending 30.6.1997 or on the basis of the resolution of the Board of 'PSL' dated 20.9.1997.
3. The suit was filed on 6.11.1997. Alongwith this suit an application (IA No. 10025/97) under Order 39, Rules 1 and 2 read with Section 151 of the Code of Civil Procedure was also filed with the prayer following prayers:
(a) pass an ex parte ad interim injunction order restraining the defendant, Nos. 1 to 4 and 9 and 10 through themselves or through their agents, servants, employees, etc. from acting in pursuance to the decisions taken and resolution passed in the Board meeting of the Parasrampuria Synthetics Limited held on 20.9.1997 till the pendency of accompanying suit;
(b) pass an ex parte ad interim injunction order restraining the defendant Nos. 1 to 4, 9 and 10 through themselves or through their agents, servants, employees, etc. from filing a reference under Section 15 of the SICA before the BIFR on the basis of the account of the 'PSL' held on 20.9.1997 for the period of 15 months ended 30.6.1997 adopted in the said Board meeting till the pendency of the accompanying suit and further restrain defendant No. 23. from entertaining the reference, if already filed;...........
4. On 6.11.1997 Counsel appearing for defendant Nos. 1 to 4 made a statement that defendant No. 1 - 'PSL' has filed an application under Section 15 of the SICA before BIFR on 6.11.1997 itself. That being so, the prayer of the plaintiff has become infructuous on that date. However, Mr. F.S. Nariman, learned Counsel appearing for the plaintiff, contended 'that the plaintiff is challenging the resolution of the Board of 'PSL' passed on 20.9.1997 as bad in law and null and void and, therefore, if this Court stays the resolution of the Board of 'PSL' passed on 20.9.1997 then no reference could be entertained by BIFR.
5. Present suit has been contested at this stage by defendant No. 1 and 2.
6. Prior to the institution of this suit, ICICI filed a suit bearing No. 3287/1997 on 12.9.1997 in the High Court of Bombay for recovery of Rs.107,22,31,407/- due as on 15.8.1997 from the defendant Nos.1 to 4. In the said suit, ICICI, inter alia, prayed ex parte ad interim relief including appointment of Receiver in respect of all the immovable and movable properties of defendant No. 1_ 'PSL'. On 17.9.1997 at the instance of the plaintiff, learned Single Judge of the Bombay High Court passed the following orders:
"1.......................
2. The learned Counsel for the defendants are seeking time on the ground that no sufficient notice was given to them. The learned Counsel for the plaintiffs insist that the learned Counsel for the defendant Nos. 1 to 4 make a statement that till the next date defendant No. 1 to 4 will not resort to BIFR under the SICA. The learned Counsel for defendant Nos. 1 to 4 gives necessary undertaking in that regard, the same is accepted..........
7. Thereafter on 29.9.1997 as the 'PSL' failed to extend the undertaking granted earlier the learned Single Judge of the Bombay High Court appointed Receiver in respect of three properties and granted ad interim injunction by which 'PSL' and defendant Nos.1 to 4 were directed not to make reference to BIFR till 7.10.1997. Plaintiff and defendant No. 1 filed separate appeals before the Division Bench against the order dated 29.9-1997. ICICI was aggrieved for nonappointment of Receiver for rest of the properties and 'PSL' was aggrieved by appointment of Receiver for their three properties. On. 7.10.1997 the appeal of ICICI was placed before the Division Bench of the Bombay High Court and the Bombay High Court made the following orders:
"By way of Adinterim Relief, despite strong objection by Shri Aney, the learned Counsel for the respondents, the respondent Nos.1 to 4 (original defendant Nos. 1 to 4) not to proceed under B.I.F.R. till 21st October, 1997.
2. Appeal, to be placed on board along with Appeal Lodging No. 953 of 1997 on 21st October, 1997, to be first on Board.
3. We are making it clear that we were constrained to pass this order inasmuch as the reasoned Order of the learned Single Judge is not available as yet and we think that for dealing with both these appeals, the same is absolutely necessary."
8. On 22.10.1997 learned Single Judge revoked the leave granted under Clause XII of the Letters Patent and directed the plaint to be returned to ICICI for presentation to the proper Court with the direction that if the plaint was presented in a competent Court at Delhi, the contesting defendants will not raise any objection regarding jurisdiction and ad interim orders were ordered to be continued for six weeks. ICICI filed an appeal against the said order. The Division Bench, however, continued the restraint order against the respondents from going to BIFR, which was vacated on 5.11.1997 and on the basis of the said vacation, Counsel for the defendant has vehemently argued before me that there was suppression of facts by the plaintiff as the plaintiff has not mentioned about the vacation of the stay order passed by the Division Bench of the Bombay High Court. Lengthy arguments were addressed by the learned Counsel appearing for both the parties on this aspect, which I will deal later.
9. At the outset, Mr. Nariman has contended that the notice of meeting of the Board for 20.9.1997 was too short. He has contended that notice dated 17.9.1997 was received by the Nominee Director of ICICI, Smt. Hema Chand, on 18.9.1997; by the Nominee Director of General Insurance Company (in short 'GIC'), Shri B.G. Vazirani at Bombay at approximately 3.30 p.m. on 19.9.1997; by Nominee Director of Industrial Development Bank of India (in short 'IDBI'), Shri P.G. Lele, on the evening of 18.9.1997; and the Nominee Director of Industrial Finance Corporation of India (in short 'IFCI'), Shri V.P. Sawhney, who was admitted in Hospital, was received by him after he returned from Hospital on 23.9.1997. Mr. Nariman has contended that Nominee Directors of ICICI, IDBI, and GIC informed the Company Director of 'PSL' on 19.9.1997 itself that time was too short for holding the Board meeting. Even a letter was written by Shri P G Lele, Nominee Director of IDBI on 21.9.1997, inter alia, bringing to the notice of the chairman the points of significance which were to be discussed at the meeting which required sufficient long notice and an application of mind. Mr. Nariman has contended that there is no hard and fast rule which governs a period of notice for such meeting but members of the Board are entitled to reasonable notice and in the facts of this case, notice for the meeting cannot be said to be reasonable on account of shortness of time. In support of his contentions, he has relied upon N.R. Murty v. Industrial Development Corporation of Orissa, 1977 Tax Law Report 2268 and on that ground has contended that meeting of the Board of 'PSL' dated 20.9.1997 and resolution adopted at the said meeting be declared to be null and void. He has further contended that taking into account the detailed proposal on 23.5.1997 and the proposal on 3.6.1997 would show that none of the issues as raised by ICICI in the plaint viz. noncapitalization of project expenses issue; of credit notes in respect of large debts outstanding to the 'PSL'; change in the method of depreciation calculation; issue of lease rentals were not elaborated, discussed or mentioned in the said two proposals.
10. Second ground on which Mr. Nariman has challenged to the validity of Board held on 20.9.1997 is that there is no application of mind. Mr. Nariman has contended that Section 15 of SICA provides for reference to BIFR. He says that in terms of Section 15 of SICA, the Board of Directors of the Company shall within 60 days from the date of finalisation of the duly audited accounts of the Company for the financial year at the end of which the Company has become a sick industrial Company, may make a reference to the BIFR for determination of the measures which shall be adopted with respect to the Company. According to the learned Counsel for the plaintiff the date of finalisation of duly audited account as defined in Section 3(d)(a) of SICA is the date on which the audited accounts of the company are adopted at the Annual General Meeting (in short 'AGM') of the Company. On the basis of this standard, he has contended that the inexorable rule of reference under Section 15(l) of SICA must be preceded by an application of mind to the audited accounts of the Company at an AGM and Section 171 of the Companies Act specifically provides for a minimum notice of 21 days for holding an AGM.
11. Mr. Nariman has further argued that specific mandate of Sections 15(1), 3(d)(a) and Section 3(2)(a) of SICA read with Section 171 of the Companies Act is the proviso to Section 15(1) which permits the Board to make a reference even prior to the finalisation of the accounts at an AGM but according to Mr. Nariman, that is only possible as the language of the proviso postulates "sufficient reasons" even before such finalisation to form the opinion that company had become a sick Industrial Company.
12 What has been contended by Mr. Nariman is that the provisos are in the nature of an exception and in derogation of the general rule and the very fact that the rule that an AGM may have to be given a go by is provided for in the proviso shows that it is to be applied only as an exception and not as a general rule and no reason was advanced by the defendants as to why and for what reasons the members of the Board present on 20.9.1997 were animated by an extreme urgency so as to warrant a departure from the normal rule of finalising account before the AGM, though on the agenda items for Board meeting also provide for a date to hold the AGM. Elaborating his arguments, Mr. Nariman has argued that "sufficient reasons" in the proviso of Section 15(1) of SICA would comprise of two parts, firstly it would necessarily presuppose, the application of mind to the existence or non existence of reasons and secondly and only thereafter would involve an examination into the sufficiency of those reasons and in the present case there appears no application of mind whatsoever on those issues.
13. Controverting the arguments advanced by the Counsel for the defendants that in any event of the matter those who passed the Resolution on 20.9.1997 constituted a majority on the Board and net result would have been the same even if meeting was adjourned, the learned Counsel for the plaintiff has contended that the stipulation of a requisite period of notice whether specifically provided in the Articles or as mandated by the common law is a procedural safeguard in the nature of and analogous to natural justice in the domain of public law and does not in any manner whatsoever depend on the final outcome of a result which it is supposed to precede. In support of his contentions, he has cited the case of S.L. Kapoor Vs. Jagmohan, .
14. He further contended that this Court has got the jurisdiction to entertain the suit and grant injunction as only this Court is acting as a Civil Court under Section 9 of the Code of Civil Procedure to injunct any situation which attempts to create a stratagem, a device or a fraud on the statutory power to achieve a result with an ulterior motives. Learned Counsel for plaintiff has contended that principle of intervention of Courts to injunct or stop the creation of devices and stratagem is no long res integra as Constitution Bench of Supreme Court in McDowells case, (1985) 3 SCC 230 held that even where a series of multiple transactions, each of them individually and separately being wholly legal, valid and innocent, comprise a holistic change in which the end result achieve a stratagem or a device to evade duty, Court would have power to intervene and to strike down such a stratagem. He has also cited another judgment of this Court in Shri J Alexander Vs. BIFR & Ors. in C.W.P. No. 4207 /96. He further cited Halsbury Law of England (H.L.E.) (4th Edition), XXIV, paras 1033-1039; Charles Forte Investments Ltd. Vs. Amanda (1963 2 ALL England Report 940); Brayanston Finance Ltd. Vs. De Varies (1976) 1 All England Report 25 and Circle Restaurant Castigilione Company Vs. Lavery (1881 CD 555).
15. Much emphasis was laid by Mr. Nariman on the fact that net worth of the company, which was Rs.244 crores as on 31.3.1996 became a negative figure by 30.6.1997 by making it little about Rs.19 crores and in order to achieve this result, defendant no. 1- 'PSL' had shown debits and losses of a staggering amount of about Rs.265 crores during the period of 15 months ended 30.6.1997. According to the plaintiff, same was done by adopting a change of method of accounting for depreciating and also for lease rentals resulting in an impact of debit/loss of Rs. 95-13 crores and this was contrary to accounting practice, secondly by treating the preoperative expenses incurred on a project which previously had been capitalised as revenue expenditure and debiting the same to profit and loss account which by itself had a debit impact of loss of Rs. 33 crores. He further contended that said account had a debit entry of an amount of about Rs. 55.60 crores which consisted of credit notes issued by 'PSL' to its customers viz. said four related concerns who accounted for almost 90% of the total amount of its debtors. Learned Counsel for the plaintiff contended that each of the above mentioned items is of an amount which was in excess of Rs. 20 crores and the total of these three debits came to about Rs. 185 crores and if this method of accounting would not have been changed the real operating loss of the 'PSL' during the period ended 30.6.1997 would only have been about Rs. 80 crores i.e. less than 1/3rd of its net worth as on 31.3.1996. He has contended that this method of changing was never placed before the Board at any time nor the consent of the Board to the said basic changes was obtained. He has contended that the settled method of accounting in respect of expenses incurred on a project before the project became operational was that such expenditure constitutes capital expenditure because it was a part of cost of the project and in this connection cited Challapali Sugar Company Vs. CIT, .
16. Mr. Nariman further contended that all the four companies to which the funds were directed were the sister concerns of defendant No. 1- 'PSL' and in this regard the Chartered Accountant of the defendants, M/s. S.B. Billimoria and Company (for short 'SBB'), who was appointed a concurrent auditor for reviewing the receipt and utilisation of the public issue proceeds and also of selected debtors account gave its interim report in November, 1996 and reported that the promoter's contributions had not been deposited in the designated bank accounts for the public issue proceeds and approximately 86% of the total debtors outstanding were accounted for by the four related companies, i.e. Rajasthan Polyster Limited (in short 'RPL'), Parasrampuria Industries Limited (in short 'PIL'), Snow White Intra Limited (in short 'SWL') and ASP Investments Limited (in short 'ASP') and inspite of the said M/s. S.B. Billimoria and Company requesting for detailed information concerning the shareholders and Directors of all the four companies, no information was provided in relation to two companies.
17. Mr. Nariman further contended that the cumulative effect of Section 299 read with Sections 300 and 283(1)(i) of the Companies Act would be that the proceedings and decision taken at the Board meeting on 20.9.1997 cannot be taken into consideration as the promoter directors incurred disqualification in terms of the aforesaid sections of the Companies Act. He has contended that interest of defendant No. 1- 'PSL' in Snow White Intra Limited and ASP Investments Limited were the same as four out of five Directors of Rajasthan Polyster Limited were the same or closely related to the two major Promoter Director and three other Directors including the Managing Director of defendant No. 1- 'PSL' and on account of this relationship between the Directors of these Companies, they clearly violate not only the letter but the spirit of Sections 299, 300 and 283(1)(i) of the Companies Act. What has been contended by Mr. Nariman is that they were interested directors and disqualify themselves to take part in the meeting of the Board dated 20.9.1997 and in support of his contentions he has cited Firestone Tyre and Rubber Co. Vs. Synthetics and Chemicals Ltd. & Ors. (1971) 41 Com cases 377; Venkatachalapat Vs. Guntur Mills 2 affirmed by the Privy Council in Guntur Mills Vs. Venkatchalapati ; Madras Tube Company Limited & Ors. Vs.Hari Kishon Somani & Ors., (1985) 1CLJ 195; Transvaal Lands Co. Vs. New Belgium (Transvaal Land & Development Co. Ltd. (1914-15) All England Report 987, which was approved by the Privy Council in TR Pratt Limited Vs. M.T. Limited and Public Prosecutor Vs. T.P. Khaitan, .
18. He has further contended that 90% of the total amount of the sundry debtors consisted of the said four Group companies and the write off of Rs.55 crores of the amount due by these four Companies in the final accounts constituted an item in which the four Parasrampuria Group Directors were directly and personally interested under Section 283 of the Companies Act and they were interested directors and could not have participated and nor could they have voted on the said resolution and the vote case by the Parasrampuria Group Directors of Rs. 55 crores itself is illegal and bad in law and they stand disqualified under Section 283 of the Companies Act.
19. Learned Counsel for the plaintiff repelling the contentions of Mr. Mukul Rohtagi, learned Counsel appearing for defendant No. 1, stated that there are exceptions to the rule laid down in Foss v. Harbottle. He argued while quoting Pennington's Company Law (6th Edition) defendant no. 1 - 'PSL' has not dealt with the exceptions which are relevant for the present case. He contended that fraud, manipulation, device and stratagem would clearly fall within the exception to the said rule and secondly, the breach of judiciary duties is another wellestablished exception to the rule and lastly, negligence is also wellestablished head of exception to the Foss v. Harbottle Rule. Arguing that the decision of the promoter directors at the Board meeting were not actuated by mala fide or motivation in any event would be at the very minimum grossly negligent both in respect of nondisclosure, conflict of duty and interest and an inordinately short notice of the Board meeting, he has further contended that a mechanical or automatic application of Foss v. Harbottle Rule to Indian situations, Indian conditions and Indian corporate realities would be both inapposite, improper and indeed misleading. Therefore, principle of Foss v. Harbottle would be unreal, unjust and impracticable in the Indian context as a general rule. In support of his contentions, he has referred to Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwala & Anr., and American Home Products Corporation Vs. MAX Laboratories Private Limited, and on the basis of aforesaid judgments, Mr. Nariman has contended that applying foreign situation and foreign precedents and foreign judgments should be done with extreme care and caution since they may represent the application of principles not germane to the Indian ground realities.
20. Mr. Nariman has further contended that Bombay Proceedings and orders passed by the learned Single Bench as well as of the Division Bench of the Bombay High Court are no bar to the maintainability of the present suit and grant of interim relief as same would not operate resjudicata under Sections 10 and 11 of the Code of Civil Procedure and, therefore, prayer for interim relief at this stage cannot be rejected by this Court. In support of his contentions, he has cited B.V. Sulunke Vs. Kadarappa, AIR 1974 Mysore 63 and Lakshmi Devi Vs. Rajendra Prasad Sao, .
21. Mr. Nariman has further contended that as the order of Division Bench of Bombay High Court dated 5.11.1997 was not available on 6.11.1997 and the plaintiff was not aware of the details, contents, language or nature of the order passed and, therefore, plaintiff did not plead that order in the pleadings and there was no deliberate attempt on the part of the plaintiff in suppressing the order as there was no intention or rational for doing so. Mr. Nariman has further contended that neither Section 16 nor Section 26 of the SICA are attracted in the present case as challenge is to the legality of Board meeting and nothing in suit seeks to adjudicate on issues which are under the jurisdiction and domain of SICA. He has further contended that the issues raise in the suit cannot be decided by BIFR. He has contended that Section 26 of the SICA falls in the realm of ouster clause and no ouster clause would bar the jurisdiction of Civil Court when allegation of manipulation, fraud, doctoring deliberated mala fide, lack of notice, creation of devices and stratagem are involved or alleged.
22. Mr. Mukul Rohtagi, learned Counsel appearing for defendant No. 1, has contended that the jurisdiction of this Court to entertain a suit at the instance of a creditor challenging the Board meeting on the ground of an essential procedural irregularity will not give a cause of action to such a creditor. At best, creditor merely steps into the shoes of the shareholders as the plaintiff is neither the Director nor the shareholder and in support of his arguments he has cited West Mercia Safetywear Limited Vs. Dodd, 1988 BCLC 250. Relying upon the rule in Foss Vs. Harbottle he has contended that in case of such an irregularity a creditor cannot bring a suit against the Company. The rule in Foss Vs. Harbottle simply says that:
"the proper plaintiff in an action to redress an alleged wrong to a Company on the part of anyone, whether a Director, Member or outsider, or to recovery money or damages alleged to be due to it, is prima facie the Company and, where the alleged wrong is an irregularity which might be made binding on the Company by a simple majority of members, no individual member can bring an action in respect of it."
On the basis of the aforesaid rule, defendant No. 1 has contended that suit is not maintainable at the instance of a creditor as an action of an alleged irregularity in Convening the meeting can be ratified by another meeting, either of the shareholders or even of just the Directors. Rebutting the arguments advanced by the Counsel for the plaintiff, defendant No. 1 has taken the stand that it is not open for a creditor to say that the concerned director was merely a nominee director and, therefore, the suit has not been brought by the proper plaintiff and has quoted from Pennington "If directors exercise their powers in a way which involves a breach of duty to the Company, creditors of the Company cannot complain."
23. Much stress was laid by Mr. Rohtagi that given the composition of the present Board of Directors, it is apparent that even if the four Nominee Directors of the various financial institutions did attend the Board meeting, the outcome of the meeting would have been no different as five out of nine Directors of the Company, who were present at the meeting held on 20.9.1997 voted in favour of the accounts being passed and even if this Court hold this meeting to be void, another meeting could be held and again the same resolution would be passed by giving proper notice and, therefore, whole action in this regard is futile. He has, in support of his contentions, also relied on S.L. Kapur v. Jagmohan (supra).
24. The next contention of learned Counsel for defendant No. 1 was that Section 286 of Companies Act does not give any indication as to what should be the time frame for the notice. He has contended that at best inadequate length of notice would entitle the Directors to come to Court only with the limited purpose of asking for an alternative meeting but not for holding the meeting to be bad.
25. The learned Counsel for the defendant No. 1 further argued that several remedies are open for the plaintiff under the Companies Act and this suit is misconceived. The plaintiff, who is creditor, could have availed the remedy of winding up under Section 433 of the Companies Act and could have moved under Section 234(7) of the Companies Act before the Registrar that business of the company is being carried out to the fraud of the creditors and thereafter Central Government can order investigation into the affairs of the company and errant directors can be prosecuted and the creditor's interest protected. Alternatively, the creditors, who also happened to be shareholders, can requisition a general meeting of the shareholders and remove the directors who are not acting in interest of the Company.
26. Controverting the arguments of the plaintiff that a large sum of public money is involved in the present case, Mr. Rohtagi has contended that the interest of the present creditors has already been secured as they are secured creditors with the first change on the properties of the Company and secondly, by going to the BIFR, it is the interests not only of the company that will be protected but also the interest of the creditors as the company is likely to be rehabilitated. Taking substance from Maharashtra Tubes Ltd. Vs. State Industrial and Investment Corporation of Maharashtra Ltd, , Mr. Rohtagi has contended that practice of treating banks and other financial institutions on a higher pedestal than other creditors should be deprecated. Mr. Rohtagi has further contended that the plaintiff has not come to this Court with clean hands, though the plaintiff placed before this. Court the orders of the Bombay High Court whereby defendants were injuncted from approaching the BIFR, yet the order passed on 5.11.1997 a day before the filing of the present suit when the interim injunction was vacated, has not been mentioned in the suit. He contended that it is a case of misconduct on the part, of the plaintiff and in support of his contentions has cited S.P. Cliengalvaraya Naidu (dead) by L.R Vs. lagannath (dead) by L.Rs. and Others, , M/s. Seemax Construction (P) Ltd. Vs.State Bank of India and Another AIR 1992 Del 197, Udai Chand Vs.Shankar Lat and Others, , G. Narayanaswamy Reddy (dead) by L.Rs. and Another Vs. Government of Karnataka and Another, , Anil Kumar Khurana Vs. MCD, and Prof. A.K. Sanyal Vs.Dr. Chitta Ranjan Basistha & Others, .
27. The next contention of the learned Counsel for the defendant no. 1 was that the present suit which seeks an injunction restraining the defendants from going to Courts not subordinate to this Court is contrary to Section 41(b) of the Specific Relief Act, 1963. Drawing the analogy that the BIFR is a Court as has been held in the case of Company Law Board in Canara Bank Vs. Nuclear Power Corporation of India Ltd. & Others, 1995 Supp (3) SCC 81 and, therefore, this Court has no jurisdiction to restrain the defendants from approaching the BIFR and has cited Cotton Corporation of India Ltd. Vs. United Industrial Bank Ltd. and Others . The Apex Court in Cotton Corporation of India Ltd. Vs. United Industrial Bank Ltd. and Others (Supra) held:
". .............. The Legislature manifestly expressed its mind by enacting Section 41(b) in such clear and unambiguous language that an injunction cannot be granted to restrain any person, the language takes care of injunction acting in personum, from instituting or prosecuting any proceeding in a Court not subordinate to that from which injunction is sought. Section 41(b) denies to the Court the jurisdiction to grant an injunction restraining person from instituting or prosecuting any proceeding in a Court which is not subordinate to the Court from which the injunction is sought. In other words, the Court can still grant an injunction restraining a person from instituting or prosecuting any proceeding in a Court which is subordinate to the Court from which the injunction is sought. As a necessary corollary, it would follow that the Court is precluded from granting an injunction restraining any person from instituting or prosecuting any proceeding in a Court of coordinate or superior jurisdiction. This change in language deliberately adopted by the Legislature after taking note of judicial vacillation has to be given full effect."
"................... We find it very difficult to appreciate this approach of the Court because the court has not rejected even at the stage of the consideration of prima facie case or on balance of convenience that the claim of the Corporation is frivolous or untenable or not prima facie substantiated. On the contrary the court leaves open to the Corporation to file a suit if it is so advised. The High Court only restrains the Corporation from presenting a winging up petition. We again see no justification for this dichotomy introduced by the court in respect of various proceedings which were open to the Corporation to be taken against the Bank leaving some open and some restrained by injunction. Neither in statute law nor in equality do we find any justification for this dichotomy."
Next contention of Mr. Rohtagi was that there is a implied bar of jurisdiction and this Court has no jurisdiction to deal with the issues raised in the present case. The provisions of SICA create an implied as well as express bar on the Civil Courts. Mr. Rohtagi has contended that it is a settled proposition of law that where an Act creates a Special Court or Forum to adjudicate upon issues and further directs that the orders passed by the same shall be final, it impliedly bars the jurisdiction of the Civil Courts to deal with the same and has cited Anwar Vs.Ist Additional District judge, Bulandshahr & Others, (1986) 2 UJ (SC) 718. He has further contended that no injunction can be granted when the effect of the same is to render the act illegal and contrary to law. He has also contended that as a matter of fact the plaintiff is guilty of contempt of this Court as they have played a game by resorting to acts of judicial adventurism and having failed to gain favourable orders from the High Court at Bombay, the plaintiff has approached this Court and, therefore, they are guilty of contempts and has cited in support his contentions the Advocate General, State of Bihar Vs. M/s. Madhya Pradesh Khair Industries and Another, .
28. Mr. Arun Jaitley, learned Counsel for appearing for defendant No. 2, has contended that the validity and propriety of the Board meeting held on 20.9.1997 is beyond question as prior notice was duly issued and was admittedly received. Replying to the arguments of Mr. Nariman, Mr. Jaitley has contended that the events leading up to the meeting were significant but it did not begin on 12.9.1997 when ICICI filed a suit in Bombay High Court but even prior to that when ICICI along with other financial institutions caused sickness to a healthy company by withdrawing/ diluting their commitments to the public/Right issues leading to the failure of the issues and thus collapsing of a large expansion/diversification project of Rs. 535 crores in which nearly half the amount was spent by that time. It has been contended by him that in reversionary Polyester market conditions as well as depressed primary market, ICICI and IFCI jeopardised the efforts to mobilize funds through the public issues by withdrawing/diluting their commitments in anticipation of the problems for the company in future and it was a callous approach to a crucial component of the financial structure, which caused the whole problem and this action of ICICI of abandonment of the projects in which nearly Rs. 250 crores had been invested and on account of reversionary market and pressure on margins, defendant No. 1 company was made to carry additional burden by way of interest on loans deployed on the unproductive assets of the abandoned projects, which has precipitated the setting in of sickness in the company. He has further contended that ICICI's approach was not followed by other fellow institutions, i.e. IDBI and IFCI as they did not join ICICI in filing the civil suit at Bombay initially. He contended that company submitted three reconstructing proposal to the ICICI with the last being submitted on the 21.7.1997. However, ICICI, without responding to any of these, chose to issue recall notice to the Company on 16.7.1997 Mr. Jaitley vehemendy contended that ICICI stratagem stemmed out of their only objective of recovering their dues when a major part of it was not even due, notwithstanding the fact that functioning assets of substantial value giving direct employment to more than 2500 workers were available. He has also controverted that the intention of the Nominee Directors of the financial institutions was to somehow create conditions which can be exploited to divest the company from taking its legitimate protection under SICA.
29. Controverting the arguments of Mr. Nariman that total money involved of the financial institutions and banks as on 15.8.1997 was approximately Rs.650 crores, Mr. Jaitley has contended that the total amount of the financial institutions was approximately Rs. 400 crores but the financial institutions have done nothing to save their stake in time through constructive and positive approach and have watched indifferently the steady decay of the assets which ought to have been their first concern. He has contended that through reconstructing proposal dated 21.7.1997 the Company had already indicated a loss of Rs.212 crores till 31.7.1997. As such, eventual position of the company which emerged on 30.6.1997 was not in any way a total surprise for which the nominee directors had to have a longer notice. It is in this background. Mr. Jaitley has contended that Board of Directors of the defendant Company had no other option but to comply with the statutory requirements of SICA for making a reference to BIFR. In terms of SICA in the interest of Company and its stake holders it was essential and sufficiently reasonable for the Board to make a reference to BIFR to ensure the feasibility of reviving the Company which ICICI failed to do for more than one year. He has also contended that the Company with an asset of Rs.750 crores employing 2500 workers having operating plants need to be saved and ICICI miserably failed to revive the company, which had been paying to the National Exchequer in terms of various dues a sum of Rs.800 crores, the whole approach of the ICICI was negative and destructive, though the defendant had paid to the employees its wages amounting to Rs. 42 crores between September, 1996 to August, 1997.
30. Repelling the contention of Mr. Nariman that in this case Court has to intervene to stop, creation of devices and stratagems on the basis of Mcdowell's case (supra), Mr. Jaitley has contended that, as a matter of fact, it is the ICICI which has been guilty of callous indifference in complying with their duty to save the interest of the company and its shareholders/other stake holders and the ratio of Mcdouvll's case (supra) does not apply to the present case at all and, as a matter of fact, ICICI as a premier financial institution should have full confidence in the working and competence of BIFR.
31. Regarding the relationship with aforesaid four Companies, Mr. Jaitley has contended that 'SWL' is an independent listed corporate entity and was free to take investment and other corporate decisions, subject to the concurrence of its shareholders, through its independent Board of Directors. It was not defendant's concern or interest to interfere in such matters of 'SWL'. He has further contended that SWL has been dealing with defendant No. 1 -'TSL' since 1986-87 and was one of the main dealers and that is why the 'SWL' invested in the stock of defendant and such investments do not in any way establish any nexus. 'SWL's balance sheet was available to ICICI and ICICI was all along financing the Company as well as had appraised/funded a massive expansion project of Rs. 535 crores as late as in November 1995. He has further contended that if the Promoter Directors have given their personal guarantee for arranging subscription for long standing dealers to the defendants Right issue of CCPs in 1994 does not amount to 'SWL' becoming a group company of the defendant. He has argued that all the transactions were genuine business transactions, which are not unusual in the case of business relationship of long standing and substantive nature.
32. Repelling the contentions of the plaintiff that net worth of the defendant company came down from Rs.244 crores as on 31.3.1996 became a negative figure by 30.5.1997 by about Rs. 19 crores, Mr. Jaitley has contended that the accounting policy changes are legitimate recourses permissible to Corporate under the laws of the land and as such cannot be questioned. The accounts incorporating these changes have already been gone into details by the statutory auditors and have been approved and in any case the changes in account policy can be gone into in relevant details by BIFR. He has contended that change of accounting policy on depreciation is allowed under the Companies Act and on account of recent changes in the provisions of Sections 115-J and 155-JA introduced during 1996-97 the Company has changed its method of depreciation. Regarding the change in the lease rentals, he has contended that same is permissible by law as the same method of lease was accounted till 1992-93. However, in 1993 there was change in the lease accounting policy to match the requirements of international accounting standards as the defendant Company was preparing for the GDR issue but did not come up with GDR issue and the Board decided to change to the earlier method as most of the Indian Companies are following this method and this is more realistic in Indian law environment.
33. Dealing with the preoperative expenses as revenue expenses, Mr. Jaitley has contended that as per the accepted account policy and guide lines of Institute of Chartered Accountants of India vide its Accounting Standard-7, expenses during the construction period of the project should be capitalised but these accounting policies are applicable only when the projects are ongoing but in the present case when project is abandoned there is no sense of capitalising the expenditure and the same is also permissible under Incometax Act and has cited Telco Dyeing & Printing Works Vs. CIT, 34 ITR 265 (Bombay), CIT Vs. Alembic Glass Industries Ltd., 103 ITR 715 (Gujarat), CIT Vs. Produce Exchange Corporation Ltd., 77 ITR 39 (S.C.) and CIT Vs. Prithivi Insurance, 63 ITR 632 (S.C.). He further contended that change of method of accounting does not require approval of Board of Directors.
34. Regarding the issue of interested Directors, Mr. Jaitley has contended that there was no business/transaction in the Board meeting dated 20.9.1997 which required disclosures under Section 299 read with Section 300 of the Companies Act by Promoter Directors. He has contended that 'SWL', 'ASP', 'RPL' were business associates of the defendants and they were dealing with the defendants right from its inception and defendant legitimately pursued them for subscription in the Right issue of CCPs in August, 1994 and for this purpose 'ASP' and 'SWL' required loans and accordingly they approached I-Sec. (a subsidiary of ICICI) and I-Sec. was fully aware that these Companies were the long standing trusted dealers of defendant No. 1-'PSL' and accordingly the loans were sanctioned by them. However, in order to secure themselves, I-Sec. asked for the personal guarantees of Promoter Directors and in the interest of company the Promoter Directors acceded to the request of I-Sec., such arrangements are quite common in the course of funds mobilisation efforts by Corporate. He has also contended that 'ASP' and 'SWL' are not group companies but were the business associates of defendant No. 1-'PSL'. 'PSL' and 'RPL' were the companies connected to the defendant No. 1 and all the transactions of material regarding these two companies have been reported to the Board of Directors from time to time as per the requirements of the Companies Act and in all those business transactions no interested directors voted for the resolution and also the proper disclosures by the interested directors were made at the beginning of each financial year in terms of Section 299(3) of the Companies Act and, therefore, no violation of Sections 299, 300, 301 and 283(1)(I) has been committed by the defendant No. 1 Company. It was also contended by Mr. Jaitley that the relationships of friendliness with Directors are not hit by Section 299 of the Companies Act and has cited, in support of his contentions, Needle Industries (India) Ltd. Vs. Needle Industries Newey (India) Holding Ltd., (1981) 51 Company Cases 743. Therefore, he has contended that the business association with 'ASP' and 'SWL' are not covered under the indirect relation in the purview of Section 299 and consequently, there is no violation of Sections 299, 300 and 283(1)(I). He has further contended that there was no interest of Directors in the resolution for adoption of accounts and, therefore, there was no question of disinterested quorum and whatever business has been transacted by the Board of Directors was good in law and had proper quorum. Mr. Jaitley has further contended that discretionary relief of injunction on account of its conduct where the plaintiff has tried its luck at Bombay to secures the same relief and upon its failure has filed a suit in this Court shows complete mala fide on the part of the plaintiff to invoke the jurisdiction of this Court. As a matter of fact, the present suit is barred by principles of res judicata since the same issues pertaining to interim injunction in respect of defendant's right to file a reference before BIFR have been litigated before the Bombay High Court in the suit as well as the appellate stage. He has contended that principles of resjudicata also applies for interlocutory application and has cited Satyadhyan Ghazis and Others Vs.Smt. Dorajin Debi and Another, , Smt. Sukhrani (dead) by L.Rs. and Others Vs. Hari Shanker and Others, , The United Provinces Electric Supply Co. Ltd Vs. T.N. Chatterjee and Others, , and Arjun Singh v. Mohindra Kumar and Others, . Mr. Jaitley has also contended that the plaintiff is only concerned with its own financial interests and is having no concern for the future of the defendant No. 1 company- 'PSL' and the industry as a whole. He has contended that SICA constitutes a highly accomplished and informed Board of experts in the industrial and economic field and it empowers the Board to make and consider schemes for revival of sick industrial companies and the plaintiff is seeking to avoid said remedy by filing the present suit as the plaintiff is not interested in rehabilitation of the defendant company and the plaintiff is fighting shy of going before the BIFR, which may evolve a rehabilitation scheme. Mr. Jaitley has further contended that, as a matter of fact, the plaintiff will not suffer any injury if industrial sickness of the defendant Company is examined by the BIFR as it is open for the plaintiff to argue before the BIFR that the defendant company has not become sick and accounts have been doctored or manipulated. He has also contended that proceedings under section 15 and 16 of SICA are certainly proceedings meant to adjudicate the sickness or otherwise of the concerned company. Mr. Jaitley in the last has contended that application is devoid of any merit and be dismissed.
35. Let me first deal with the arguments advanced by the Counsel for the defendant Nos. 1 and 2 that in view of Section 26 of SICA, this Court has no jurisdiction to grant the injuction prayed for by the plaintiff/applicant. Section 26 of SICA is reproduced below:
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 jurisdiction 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.
36. From the plain reading of the aforesaid section what is specifically barred for Civil Court to exercise its jurisdiction in respect of any matter which the Appellate Authority or Board is empowered. The section further postulates that no injuction shall be granted by any Court in respect of any action taken by the authorities under SICA under the said Act. First question is whether seeking declaration of resolution passed by the defendant Company on 20.9.1997 is a subject matter on which the provisions of SICA would have applicability? The answer is in the negative. If in given facts and circumstances of case the resolution is bad in law then certainly this Court has jurisdiction to grant injuction, in such an eventuality it is the inherent jurisdiction of this Court to entertain such suit and grant jurisdiction while acting as a Civil Court under Section 9 of the Code of Civil Procedure. In such a case, it is perhaps worth recalling the warning given, albeit in another context by Lord Atkin, who himself dissented in the Duke of Westminster case, in United Australia Ltd. Vs. Barclays Bank Ltd., (1940) 4 All England Report 20:
"When these ghosts of the past stand in the path of justice, clanking their medieval chains, the proper course for the judge is to pass through them undeterred."
If the Court to a prima facie opinion in a case with the allegation that reference or invocation of provisions of SICA is to frustrate realisation of public money then judicial attitude towards avoidance of a Civil Court will not provide escape on account of Section 26 of SICA. The Courts are now concerning themselves not merely with the genuineness of a transaction but with the intended effect of it for fiscal purpose and no one can get away with the Civil Court with the mere statement that the Court has no jurisdiction. The Court will not hesitate if it finds that the resolution of the Board was an attempt to create a stratagem, a device or a fraud to achieve some ulterior motives. Lengthy arguments were addressed by the Counsel for both the parties in order to show whether the impugned resolution passed was activated by fraud or to achieve some ulterior motive or was passed in the normal cause of business by the defendants. At the outset, it would shock any reasonable person that net worth of the company from Rs. 244 crores on 31.3.1996 it came to a negative figure by 30.6.1997 to minus Rs. 19 crores. Therefore, in my opinion, applying the principles of Mcdowell's case (supra), this Court has jurisdiction in cases where Court is of prima facie opinion that fraud or mischief has been played by the defendant to grant injuction.
37. Another argument, which was advanced before me by the plaintiff, was that the cumulative effect of Section 299 read with Sections 300 and 283(1)(I) of the Companies Act would make the decision taken at the Board meeting on 20.9.1997 void as the Promoter Directors incurred disqualification in terms of the aforesaid sections. Although the rationale and purpose of these provisions is to prohibit direct or indirect interest so it should not conflict the duties and arrangements between the Directors of one Company and other Companies. Therefore, the Directors should not have any direct or indirect interest. I have to examine whether any business/transaction in the Board meeting on 20.9.1997 required disclosure under Section 299 read with Section 300 of the Companies Act. From the bare perusal of the minutes of the Board meeting dated 20.9.1997, I am inclined to hold that there was no such item on the Agenda, which required disclosure under Sections 299 and 300 of the Companies Act by Promoter Directors. The items on the Agenda were 'Leave of Absence', 'Confirmation of Minutes', 'Confirmation of Share Transfer', Register of Contracts', 'Approval of Annual Accounts as at 30.6.1997', 'Holding of Annual General Meeting', ' Authority' to Operate Bank Account', Reference to BIFR', 'Appointment of Cost Auditor', 'Authority to Shri Rajeev Mahajan', 'Opening of Bank Account' and 'Statutory Compliance'. Although Mr. Nariman has contended that under the head' Approval of Annual Accounts as at 30.6.1997' the explanation of the management that the loss was mainly on account of change in depreciation policy (Rs.83.87 crores), lease rental policy (Rs.11.27 crores) and write off of preoperative expenses (Rs.33.01 crores) has not shown Rs.55 crores worth' credit note issued to the customers with whom the accounts have been reconciled during the year relating to rate difference, claims, incidental and carrying charges and brokerages against sales pertaining to earlier years on account of the fact that Managing Director of the defendant Company, Mr. Ratan Lal Parasrampuria, was Chairman of 'RPL' and other four out of five Directors of 'RPL' were the Directors of 'PSL' and they were the Directors in both the Companies. It has to be born in mind that the stand of the defendant has been that they were the business associates of the defendant No. l- 'PSL' and they were having dealings with these Companies since their inception and it was the defendant who pursued them for subscribing the Right Issues of CCPs in August, 1994 and in this regard 'ASP' and 'SWL' required loans and they approached I-Sec (a financial Company of the plaintiff) and I-Sec sanctioned loans and in order to secure its loans I-sec wanted to hay the personal guarantees of the Promoter Directors of the defendant Company. It was stated at the Bar by Mr. Jaitley that transaction regarding these two Companies, 'PIL' and 'RPL', were reported to the Board of Directors from time to time and in all the business transactions, no interested Directors voted for the resolution and also proper disclosures were made at the beginning of each year in terms of Section 299 of the Companies Act. 'If a disclosure at the beginning of each financial year in terms of Section 299 of the Companies Act has been made, that is deemed to be sufficient disclosure in terms of the Section 299 of the Act. According to the defendant, out of said Rs.55 crores, Rs.46 crores credit note pertained to the year before 31.3.1997 and Rs.9 crores before 30.6.1997, I find some force in the arguments of the Counsel for the defendant that as the debit notes worth Rs.94 crores were issued for the last four years by charging interest at the rate of 31% p.a. and on account of market conditions at the time when realisation of the debt was negotiated with the debtors, it was mutually agreed to charge a lower rate of interest of 15% p.a. that show these credit notes were issued. This kind of arrangement is normally done in the mode day business to save the money by reducing the rate of interest. In view of the material placed on record, I do not find much substance that the directors of the defendant Company suffered disqualification in terms of Sections 299 and 300 of the Companies Act. Supreme Court in the case of Needle Industries (India) Ltd. Vs.Needle Industries Newey (India) Holding Ltd. (supra) has held that:
"The concern or interest of a Director which has to be disclosed at the Board Meetings must be in relation to the contract or arrangement, entered into or to be entered into, by or on behalf of the Company. The interest or concern of a Director spoken of by Secs. 299(1) and 300(1) cannot be merely a sentimental interest or ideological concern. Therefore, a relationship of friendliness with the Directors who are interested in the contract or arrangement or even the mere fact of a lawyerclient relationship with such Directors will not disqualify a person from acting as a Director on the ground of his being under sec. 300(1) an "interested" Director."
For the purpose of adoption of accounts, prima facie I do not see that Directors were disqualified on account of disinterested quorum.
38. I would now deal with the arguments advanced by the defendant that the issues challenged by the plaintiff fall within the domain of internal management, rule of the Company and disentitle the plaintiff ICICI from claiming the relief on the basis of Foss v. Harbottle Rule. I need not go into the exceptions to these rules, which include fraud, manipulation, stratagem and device which would fall within the exceptions to the rule, breach of fiduciary duties is another wellestablished exception to the rule apart from negligence which is also wellestablished head of exception to the Rule. A mechanical and automatic application of Foss v. Harbottle Rule to the Indian situations, Indian conditions and Indian corporate realities would be improper and isleading. The principle, in the countries of its origin, owes its genesis to the established factual foundation of shareholder power and majority shareholder power centering around private individual enterprise and involving a large number of small shareholder, is vastly different from the ground realities in our country. Here the modern Indian corporate entity is not the multiple contribution of small individual investors but a predominantly and indeed overwhelmingly state supported funding structure at all stage by receiving substantial funding up to 80% or more from financial institutions which are entirely State controlled or represent substantial State interest and, thus, their shareholding may be small but it is these financial institutions which provide entire funds for the continuous existence and corporate activities. If we apply mechanically the Foss v. Harbottle Rule, it would amount to giving weightage to that majority of the shareholding having notionally holding more percentage of shares and the financial institutions which may own a small percentage of shares though contributed 80% or more in terms of the finances to such companies. It is these financial institutions which have really provided the finance for the Company's existence and, therefore, to exclude them or to render them voiceless on an application of the principles of Foss v. Harbottle would be unjust and impracticable. In American Home Products Corporation Vs. MAX Labouratories Pvt. Ltd. & Anr. (supra), it has been held by the Apex Court:
"....... As pointed out by this Court in Forasol Vs. Oil and Natural Gas Commission, , in the absence of any binding authority of an Indian court on a particular point of law, English decisions in which judgements were delivered by Judges held in high repute can be referred to as they are decisions of courts of a country from which Indian jurisprudence and a large part of our law is delivered, for they are authorities of high persuasive value to which the Court may legitimately turn for assistance; but whether the rule laid down in any of these cases can be applied by our courts must, however, be judged in the context of our own laws and legal procedure and the practical realities of litigation in our country."
Therefore, the principle of Foss Vs. Harbottle cannot be applied mechanically taking into consideration the ground realities of the corporate sector in India.
39. Let me now deal with submissions of the learned Counsel for the parties with regard to content, meaning and effect of proviso to Section 15(1) of SICA, which permits the Board to make a reference even prior to finalisation of the accounts at an AGM. Mr. Nariman, learned Counsel for the plaintiff, has contended that this proviso deals with situation where Board has found that sufficient reasons exist even before such finalisation of duly audited accounts of the company and the Company has become a sick Industrial Company, the Company can make a reference under Section 15 of SICA. Mr. Nariman took great pain in arguing that the very fact that the AGM may be given a go by as provided in the proviso, shows that, is to be applied only as an exception and not as a general rule. According to the learned Counsel for the plaintiff, phrase " sufficient reasons' in the proviso of Section 15(1) would comprise of two parts, firstly, it would necessarily presuppose the application of mind to the existence or nonexistence of reasons and secondly, and only thereafter would involve an examination into the sufficiency of those reasons. According to him, there was no application of mind whatsoever and, therefore, reference under Section 15(1) of SICA would ex facie be bad. Fact remains that plaintiff itself had informations regarding the impending sickness of the defendant Company that is why plaintiff filed a suit in the Court at Bombay for recovery of its money. What was happening in the defendant Company was in the knowledge of the plaintiff and other financial institutions as they were represented in the Board through their officers. Plaintiff has also issued a letter of recall on 16th July, 1997. Even the proposal dated 21.7.1997 was submitted for restructuring the defendant Company to the plaintiff ICICI. There is force in the arguments of defendants that from the letters dated 28.5.1997, 3.6.1997, 9.1.1997, 27.12.1996 and 4.12.1996 it would be clear the at constant interaction on the sickness of Company was exchanged with the plaintiff. Therefore, this shows application of mind and same was sufficient and no further 'sufficient reasons' were required to eb gone into for reference to BIFR. After consideration of the audited accounts of the defendant Company dated 30.6.1997, the Board of Directors of the defendant Company had sufficient reasons to conclude that the process of erosion of net worth could not be reversed until and unless a duly considered rehabilitation package takes place. The argument of the plaintiff could be of greater force, had the letter dated 21st July, 1997 not been addressed to the plaintiff. In the said proposal it had already been indicated that the defendant had incurred loss of Rs.212 crores till 31st July, 1997 and erosion of net worth on 30.6.1997 was not a surprise. Conscious of this fact the plaintiff chose to file suit for recovery of its dues in the High Court of Bombay . Now, plaintiff cannot turn around and says that the Resolution passed at the Board meeting on 20.9.1997 was without sufficient reasons. Therefore, the argument of plaintiff that sufficient reasons were not here for the defendant for adopting the resolution of 20th September, 1997 lacks credence. As a matter of fact, the plaintiff has ignored the aspect of rehabilitation of at the defendant Company and has been concerned about the recovery of money lend by the plaintiff to the defendant company. There is some force in the arguments of the learned Counsel for the defendants that the reference to BIFR was in order to save the assets by legitimate means by having interest and other outstanding to be lowered and by going for rehabilitation and restructuring process through the agency of BIFR.
40. Next argument, which was canvassed before me, was that net worth of Rs. 244 crores as on 31.3.1996 became a negative figure by 30.6.1997 by about Rs. 19 crores and in order to achieve this result, defendant No. 1- 'PSL' had to show debits and losses of a staggering amount of about Rs. 265 crores during the period of 15 months ended 30.6.1997 and this was achieved by changing method of accounting for depreciation and also for lease rentals resulting in an impact of debit/loss of Rs. 95.13 crores and this was contrary to the accounting practice and secondly, by treating the preoperative expenses incurred on a project of about Rs. 33 crores, which previously had been capitalised as revenue expenditure, and debiting the same to the profit and loss account which by itself a debit impact of loss of Rs. 33 crores and lastly, had the said account also had a debit entry of an amount of about Rs. 55.60 crores which consisted of credit notes issued by 'PSL' to its customers. Accounting policy changes were legitimate recourse permissible to Corporate under the laws of land. It has also been contended before me that change of method of accounting does not require approval of the Board of Directors and it is well within the power of the Managing Director. It has further been argued as the plaintiff had stopped disbursal of term loan after January, 1996 and also caused failure of the public issue meant for the expansion projects, there was no way that the defendant company could have carried on with the implementation of the projects and abandoning these was the only inevitable outcome of ICICI's actions and all these were known to the Board of Directors of the defendant company and these developments were also reported at the Board meeting held on 25.3.1997 and the nominee directors of the financial institutions were also present at the meeting of the Board of Directors of the defendant Company. It has also been contended that at the Board meeting held on 25.3.1997 a decision was taken for the sale of units of the defendant Company and the said decision was taken as the projects were abandoned. In relation to treating the preoperative expenses as revenue expenses, learned Counsel for the defendant has cited Telco Dyeing & Printing Works Vs. CIT (supra), CIT Vs. Alembic Glass Industries Ltd.(supra), CIT Vs. Produce Exchange Corporation Ltd.(supra) and CIT Vs. Prithvi Insurance (supra). Nothing has been shown by the plaintiff that change in the accounting policy has to be ratified by a resolution of the General Body or by the Board of Directors. In India on account of changes in the fiscal policy and on account of deductions permitted on account of such changes, the Companies take recourse to such changes. In any event of the matter a change in the accounting policy whether has generated the sickness of the Company or has been beneficial to the financial structure of the Company would not be the subject matter which could be gone into this court at this stage.
41. Dealing with the arguments of the defendant that present suit is barred as the plaintiff could have and ought to have raised all such allegations, as are raised in the present suit, in the Bombay suit by amending the plaint and the present suit is barred under Order 2, Rule 2 of the Code of Civil Procedure. Alternatively defendants have also contended that as no challenge to the Board meeting of 20.9.1997 was made by the plaintiff ICICI in the Bombay suit, although they repeatedly sought relief of injunction against the defendant to restrain the defendant from making a reference to BIFR on the same set of allegations, which have been made in the present suit. The suit, which was filed at Bombay for recovery of money on 12.9.1997, was filed before the Board meeting of defendant Company dated 20.9.1997, therefore, the said Board meeting could not have been challenged by the plaintiff at Bombay. As a matter of fact, the stay granted against the defendants from going to BIFR, may be, was on account of interim application for appointment of a Receiver, which was moved by the plaintiff. Therefore, I do not think that filing of the suit at Bombay and order of the Bombay High Court restraining the defendants from going to BIFR would amount to res judicata as the meeting of the Board of Directors of the defendant Company was distinct and different than the suit for recovery of money. Both are distinct and separate causes of actions. The principles of res judicata are based on the need of giving finality to judicial decision when a matter, whether on a question of fact or question of law, has been decided between the two parties and the decision is final, neither party will be allowed in a future suit or proceedings between the same parties to canvass the matter again. In my opinion, the issue whether the Board meeting of 20.9.1997 was legal and valid and pursuant there to defendant could be restrained from invoking the jurisdiction of BIFR was not an issue before the Courts at Bombay. Therefore, prima facie I am of the view that the filing of the suit at Bombay High Court and order for appointment of Receiver and order restraining the defendants from invoking the jurisdiction of BIFR would not amount to res judicata in the present proceedings.
42. Dealing with the other contention of the learned Counsel for the plaintiff that there was no reasonable notice of the meeting of the Board of Directors. Reasonableness of time will depend on the facts and circumstances of each case. In the present case, notice dated 17.9.1997 was received by the Nominee Director of plaintiff ICICI, Smt. Hema Chand, on 18.9.1997. Even though the defendant has taken the objection that if the notice was inadequate, cause of action lies to Smt. Hema Chand and not to ICICI. It has also been contended before me by the defendants that, as a matter of fact, plaintiff ICICI has no locus standi to file the present suit as 'ICICI' is neither a shareholder nor a Director in the defendant company. As I have discussed in detail in the preceding paragraphs that in India unlike United Kingdom and United States of America, where vast majority of shareholders have got stakes in the Company by virtue of their shareholding and investments, in India it is often seen that 80% or more financial capital is provided by financial institutions and Banks and hardly 5 to 10% equity by the promoters of the Company and rest, may be, by the general public. Given this scenario, the management still remains in the hands of promoters, who have only contributed 5 to 10% of the equity and taking into consideration these ground realities, can we say that financial institutions, which have provided 80% or more of finances to sustain the financial structure of the Company should have no say in the matter? The answer is in the negative. Therefore, I hold that 'ICICI' can legitimately bring an action on the ground that the action of the defendant company in passing the impugned resolution is detrimental to the interests of the financial institutions.
43. Adverting back to the arguments advanced by the plaintiff that the notice was not sufficient, I have stated earlier, Smt. Hema Chand, the Nominee Director of the plaintiff 'ICICI', who was in Delhi on 20.9.1997 having received the notice dated 17.9.1997on 18.9.1997, she did not participate in the meeting, therefore, at her instance the meeting of the Board, which held on 20.9.1997, cannot be held to be without reasonable notice. The best course for her would have been to attend the meeting and raise her objection regarding the reasonableness of the notice. Even otherwise, on account of net worth of the Company became eroded, proposal for restructuring the Company, the plaintiff Company had the notice of the same since 1996, to say that the notice for the Board's meeting was not reasonable or sufficient, is devoid of any force. More particular in view of the letter which was sent by Smt. Hema Chand dated 4.12.1996 to the defendant in which certain objections were taken for issuance of cheques of the value of Rs. 37 crores to 'ASP', 'SWL' and 'TIL' and the letter of defendant dated 27.12.1996 in which it was mentioned :
"at times there are on account payments and receipts but since the Company has very long association with these companies. Normally, every year these transactions would be appearing, but since August 1996 onwards we have stopped such transactions and there is no further on account payment to these companies."
Smt. Hema Chand wrote another letter dated 9.1.1997 commenting on the concurrent audit report dated 28.11.1996. Even the letter recalling loan dated 16.7.1996 for bank guarantee was also written by Smt. Hema Chand dated 13.8.1997. Therefore, it cannot be said that the meeting of the Board was a surprise and she had no notice of the happening in the defendant in view of the correspondence placed on record by the parties.
44. Having discussed in detail various submissions in the present proceedings, prima facie the plaintiff/applicant has not been in a position to make out a case for grant of injunction, whether the apprehension of the plaintiff that if the defendants are not restrained from invoking the jurisdiction of SICA they will suffer an irreparable injury is merely a presumption on the part of the plaintiff or there is some substance in it? Sec. 16 of SICA, in particular Subsec. (4) of Sec. 16, makes it manifestly clear that in the event of Board deeming it fit to enquire in relation to the Industrial Company one or more persons can be appointed as Special Directors for safeguarding the financial and other interests of the Company and by virtue of amendment of 1994 even in the public interest one or more persons can be appointed as Special Directors. Therefore, the argument of the plaintiff that in the event of Company going to the BIFR the assets of the Company may not be safeguarded is without any force. The Receiver who has been appointed by the Bombay High Court in the event of BIFR forming an opinion that Company is sick pursuant to a reference under Sec.15 may take appropriate steps under Subsec.(4) of Sec.16 of SICA to safeguard the assets of the Company and may issue necessary orders in this regard. Even otherwise, if orders are not made by the BIFR the plaintiff has got a remedy to file an appeal before the Appellate Authority of BIFR and thereafter can approach High Court by way of a writ petition against the order of AIFR. Therefore, to say that BIFR is without any power in an appropriate case where the case is made out that certain orders are required to safeguard the assets of the company is not tenable. Keeping in view the serious contentions and apprehension of the plaintiff, BIFR may pass appropriate orders in this regard. The apprehension of the plaintiff is misconceived.
45. That brings me to the last question as to whether in the present case the defendants be restrained from invoking the jurisdiction of the BIFR on the basis of the resolution of the Board of Directors passed on 20.9.1997. I am of the considered opinion that in cases where the resolution of the Board is a result of fraud, stratagem or mala fide, that is to achieve some ulterior objects, Court will not hesitate in granting injuction, but can in the present case it be said that the resolution dated 20.9.1997 is a resolution resulting from a fraud or has been passed with ulterior motives? The answer is in negative on account of the fact that correspondences were exchanged between Smt. Hema Chand and defendants dated 4.12.1996, 27.12.1996, 28.5.1997, 3.6.1997 and restructuring proposal dated 21.7.1997, which have been placed on record by the parties. The letter placed on record is at page-335 of the documents. A letter was written by the defendant dated 28.5.1997 addressed to Mrs. Lalitha Gupte, Deputy Managing Director of the plaintiff. Even in the said letter it was inter alia mentioned by the defendant that they still make presentation on restructing proposal. Paragraph-2 of the said letter reads:
"We had also assured you to make a presentation on restructing proposal. We have initially prepared a proposal and we are enclosing a draft of the same for your kind persual. However, we do realise that we do not have adequate skills within the orginasation to prepare a complete Plan of restructuring in a manner that protects the full interest of Financial Institutions, Banks and shareholders. We, therefore, would like to appoint a professional Consultant who could prepare a detailed restructuring plan and help the Company in presenting it to the Financial Institutions. We would also be grateful if you could provide some assistance in this regard."
Then again even prior to the said letter, another letter was written by the defendant on 3.2.1997 to the plaintiff stating some of the proposals they had in view of the deteriorating financial health of the defendant. The last paragraph of the letter reads as under:
"We are submitting the enclosed application for the consideration of ICICI, for their broad concurrence to our plan of action in which we have consciously strived not to increase the institutions/Banks exposure beyond their presently committed levels. Subject to their approval, we shall submit a detailed application for their consideration subsequently."
In view of the correspondence placed on record, it cannot be said that the resolution which was passed by the Board on 20.9.1997 was a surprise to the plaintiff. It seems as a financial institution the plaintiff was kept informed about the impending sickness of the defendant. It is too late in the day for the plaintiff to claim otherwise. As a matter of fact, instead of rushing to realise the loan amount, the plaintiff forgot that the creation of plaintiff was to generate industrial growth so as to make India industrially and economically a strong nation. It was all the more important to realise that the money of the plaintiff was more safe by having the defendant Company rehabilitated by restructing the financial structure of the defendant Company. Therefore, prima facie I am of the view that the resolution dated 20.9.1997 was not an act of fraud or creating stratagem to enable this Court to exercise its jurisdiction and grant injuction. In any event of the matter the financial health of the Company, its sickness and the reasons for the sickness, whether the sickness is doctored or on account of change in accounting policy and whether the net worth of the Company has come down on account of giving certain concessions to the sister concerns of the plaintiffall these questions can be agitated before the BIFR.
46. From the plain reading of Section 16 of SICA it is clear that after the reference has been made to the Board by a sick Company it is the Board who will make enquiry and determine whether the Company has become a sick Industrial Company and for that purpose under Subsection (2) of Section 16 the BIFR may also appoint any operating agency including the plaintiff to enquire into and make a report in relation to such sickness. Therefore, the questions which have been raised before this Court in relation to doctoring of accounts, changing of accounting policy etc. all can be gone into in detail by the BIFR. One has not to lose sight that the SICA has been enacted taking into consideration the contemporary industrial climate of this country. Industries are financed by financial institutions, which are specifically created for providing assistance for industrial growth and whole idea of enactment of SICA is to save the country from impending industrial sickness by devising methods of rehabilitation by evolving scheme of revival and rehabilitation and that is why BIFR is to consider remedial measures to rehabilitate such industry. This is what the Apex Court held in Maharashtra Tubes Ltd. Vs. State Industrial and Investment Corporation of Maharashtra Ltd. (Sipra) that:
"..............The purpose and object of this provision is clearly to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick Industrial Company. The words 'or the like' which follow the words 'execution' and 'distress' are clearly intended to convey that the properties of the sick Industrial Company shall not be made the subjectmatter of coercive action of similar quality and characteristic till the BIFR finally dispose of the reference made under Section 15 of the said enactment. The Legislature has advisedly used an omnibus expression 'the like' as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking.............." "Now we come to the impugned decision. The High Court was considerably influenced by the fact that the appellant Company owed crores of rupees to Banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which inter alia failed to meet their financial obligation. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be Banks or State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large industries are generally financed by banks and statutory corporations created specially for that purpose and if they are permitted to resort to independent action in total disregard of the pending inquiry under Sections 15 to 19 of the 1985 Act the entire exercise under the said provisions would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of the sick industrial concern by the simple device of the Financial Corporation resorting to Section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending under sections 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. The expression 'proceedings' in Section 22(1), therefore, cannot be confined to legal proceedings understood in the narrow sense of proceedings in a Court of Law or a Legal Tribunal for attachment and sale of the debtor's property."
Prima facie the plaintiff has not been in a position to show on the basis of the documents filed on record that any fraud has been perpetrated by the defendants in passing the resolution dated 20th September, 1997. In the case before me, prima facie, I do not find any merit in the submissions of the plaintiff that any fraud or a device to achieve a result with some ulterior motive has been practised by the defendants on the plaintiff. I am of the considered view that BIFR will be the right forum where the industrial sickness of the defendant Company is to be determined, I decline to grant injunction as prayed for by the plaintiff. Even the balance of convenience is also in not granting the injunction. The defendant has got a statutory right to file a reference under Section 15 of SICA. Defendant has already filed a reference on 6.11.1997 before BIFR under Section 15 of SICA. It is for BIFR to determine under Section 16 of SICA the factum of industrial sickness of the defendant Company.
Nothing said earlier would be an expression of opinion on the merits of this case.
For the reasons, stated above I dismiss the application of the plaintiff with no orders as to costs.
Suit No. 2332 of 1997Suit is adjourned sine die with liberty to the parties to move this Court for revival of the suit, if so advised.
Application dismissed.