Delhi High Court
Upper India Couper Paper Mills Co. Ltd. vs Appellate Authority Industrial & ... on 27 May, 1994
Equivalent citations: 1994IIIAD(DELHI)588, 1994(30)DRJ213
Author: M.J. Rao
Bench: M.J. Rao
JUDGMENT Anil Dev Singh, J.
(1) Rule D.B. (2) This writ petition challenges the order of the Appellate Authority for Industrial & Financial Reconstruction (hereinafter refered to an ''the AAIFR") dated August 27,1993 whereby it declined to interfere with the order passed by the Board for Industrial & Financial Reconstruction (hereinafter referred to "BIFR") dated August 17,1990 holding that the petitioner company was not viable and should be wound up.
(3) The writ petition arises in the following circumstances: The petitioner company was registered in the State of U.P. in the year 1879 and has a factory at Lucknow which manufactured paper and pulp etc. It appears that the company fell on bad days and started accumulating losses. The petitioner company applied to the State of U.P. for permission to expand the unit at Lucknow but neither No objection Certificate was granted by the U.P. Pollution Control Board nor any permission was given by the Director General Technical Development for the same. Pursuant to Section 15(1) of the Sick Industrial Companies (Special Provisions) Act,1985 (hereinafter called "the SICA"), the Board of Directors of the petitioner company passed a resolution on November21,1987 for a reference to the Bier for determination of the measures which should be adopted with respect to the company as in their opinion the company had become sick industrial company. Accordingly a reference was made to the BIER. On February 24, 1989 the Bier declared the petitioner to be a sick Industrial company. It was also of the view that the company cannot make its net work positive within a reasonable time without substantial financial assistance. Therefore acting under Section 17(3) of the Sica it appointed Industrial Credit & Investment Corporation of India Ltd.(for short "ICICI") as the operating agency to prepare a report in consultation with all concerned. It also noted that the petitioner company had appointed Consultants who were making plans for its expansion and the likely cost of expansion would be around Rs.10 crores towards which the promoters were prepared to contribute at least 20%.
(4) The petitioner submited a report to Icici in April 1990 in which it proposed to sell its assets at Lucknow with a view to establishing a new plant at a new place with the assistance from financial institutions. By order dated August 17,1.990, the Bier held that the proposal for establishing a new industrial unit at a new place and selling the assets of the petitioner company for generating funds would not be within its jurisidiction. Consequently the Bier came to the conclusion that the unit should be wound up.On appeal by the petitioner,the order of the Bier was maintained by the adair by its order dated November 22, 1990 on the ground that the establishment of the entirely new plant at a far off place did not amount to rehabilitation and was not covered under the SICA. This order of adair. was successfully challenged by the petitioner company in Civil Writ Petition No.413 of 1991 filed before this court.
(5) The High Court while accepting the writ petition on December 6,1991 directed the adair to dispose of the appeal of the petitioner alresh. It may be pointed out that the High Court did not agree with the view of the Appellate Authority as well as the Bier that the petitioner company could not legitimately frame a scheme for establishing a new plant at a place other than the one where it was originally located. The Division Bench directed that the Appellate Authority will have to consider whether a workable scheme under Section 17(3) read with Section 18 can be formulated and if it comes to a conclusion that it is not possible for a workable scheme being found out, then only the company should be wound up.
(6) After the matter was-remitted to the adair, the Icici requested the Appellate Authority to ask the petitioner to state the sources from which finances would be forthcoming for the fresh scheme submitted by the petitioner on May 7, 1992 for setting up of a cement plant at Rai Bareilly. It was also pointed out that to implement the scheme a sum of Rs.188 lakhs was required. The Appellate Authority on September 21, 1992 directed the petitioner to intimate the operating agency the sources of money for the project within two weeks. Pursuant to this order, the petitioner by its letter dated October 1, 1992 pointed that the finance for the proposed scheme would come from the following sources : 1. Internal sources -Rs.38 lakhs. 2. Term loan from financial institution - Rs.150 lakhs. Total :Rs.188.00 lakhs.
(7) It was further stated that Rs.38 lakhs will be raised from sale of company's assets at Lucknow. Besides it was indicated that in connection with the term loan, the matter had been taken up with the representative of the Irbi who was prepared to seriously consider the question of granting assistance only after the Rehabilitation Scheme was prepared. Accordingly the petitioner requested the "ICICI to consider and prepare the Rehabilitation Scheme". By its order dated July 23, 1993, the Appellate Authority also directed the operating agency to proceed with the scrutiny of the Scheme submitted by the petitioner. Besides it required the petitioner to furnish all the information to the ICICI as and when sought by it. The Appellate Authority also directed the petitioner to intimate in writing to the operating agency within three weeks whether any particular financer was willing to lend a sum of Rs.l50 lakhs to it. The matter was directed to be listed on August 27, 1993 on which date the petitioner was to cause the presence of a financer before the adair for giving an undertaking of its financial commitment. When the matter came up before the Appellate Authority on August 27, 1993, it was of the opinion that its order dated July 23, 1993 was not complied with by the petitioner and that there was no explanation for the same. The Appellate Authority also found that reference was filed before the Board in the year 1988 but the petitioner was not in a position to arrange for the money for its rehabilitation. It was noted that the petitioner was asked to deposit an amount of Rs.50 lakhs within one month in no lien account with the Uco bank, but the counsel for the petitioner submitted that the petitioner was not able to do so. The Appellate Authority being of the view that the petitioner was not in a position to muster resources for implementing the scheme it declined to interfere with the orders-passed by the Bier dated August 17, 1990. The petitioner feeling aggrieved by this order of the adair has filed the present writ petition.
(8) Learned counsel for the petitioner submitted that the order passed by the adair was not in keeping with the spirit of the Sica and the order of the Division Bench dated December 6, 1991 whereby the matter was remitted to the former for fresh consideration. Learned counsel contended that the proposal of the petitioner for rehabilitation was not considered by the Icici at all. He further contended that it was the duty of the operating agency under Section 18 read with section 17(3) of the Sica to prepare a Scheme for reconstruction, revival or rehabilitation of the company or for any of the matters indicated in Section 18 of the SICA.
(9) On the other hand learned counsel for the operating agency (respondent No.2 -ICICI) submitted that the petitioner from the very beginning was not extending its co-operation which fact was evident from its conduct in not submitting the proposal for a long time. Even the proposal submitted by the petitioner on April 24, 1990 was not a concrete proposal. Learned counsel further contended that the submission of a so called comprehensive revival scheme dated May 7,1992 also did not indicate the sources of finance for the project. According to the learned counsel, Irbi to which a reference was made by the petitioner for financial help did not respond positively and failed to give any commitment in regard to the term loan requirement. In these circumstances it was pleaded that the Appellate Authority was completely justified in upholding the order of the primary authority.
(10) We have considered the submissions of the learned counsel for the parties and in view of the following discussion we are of the opinion that the Appellate Authority was not justified in passing the impugned order.
(11) It is not disputed that the petitioner gave its proposal to the operating agency in April 1990. Thereafter pursuant to the order of the Appellate Authority dated February 13, 1992 it also submitted a comprehensive revival scheme on May 7,1992. The scheme was based upon the Techno-Economic. Feasibility Project Report dated January 28,1992 of Shri Arun K.Srivastav, Consultant, a partner of Kumar Swarup & Co., Chartered Accountans, Lucknow. Copy of the report which is on record of the writ petition outlines the details for setting up a cement plant at Rae Bareilly (Annexure F pages 56-147). The report deals with various aspects of the project including estimates of building and civil work and plant and machinery, cost of the project, means of financing etc. It appears from the order of the Appellate Authority dated September 21, 1992 that the second respondent (operating agency) had not examined in detail the scheme furnished by the petitioner. The order required the operating agency to undertake the following exercise: 1) To examine whether reliefs and concessions sought in the scheme submitted by the petitioner were within the parameters of Rbi instructions. 2) After examining the rehabilitation scheme, the operating agency was required to hold a joint meeting of all the parties concerned including the State Government, representatives of the Labour, Financial institutions and the banks and to submit its report a week before the next date of hearing viz. December 18,1992. The order also required the petitioner to intimate the operating agency about the sources of finance within two weeks.
(12) Pursuant to this order the petitioner by its letter dated October 1, 1992 pointed out to the operating agency that a sum of Rs. 38 lacs would be arranged from internal sources, while Rs. 150 lacs would be arranged from Financial Institutions. So far as the funds from the internal source was concerned, it was pointed out that the amount will be raised by the sale of company's assets at Lucknow. As regards the term loan it was pointed out that the petitioner company had taken up the matter with the Irbi who had advised them that the grant of financial assistance could be considered seriously only after the rehabilitation scheme was prepared. The petitioner has also placed on record a letter dated January 9, 1993 (Annexure 1) whereby the petitioner gave its replies to the various queries of the operating agency.
(13) It is not disputed that .on October 29,1992 the Irbi also informed the operating agency that unless scheme of rehabilitation was prepared it was not in a position to give any commitment. It was pointed out therein that on receipt of the detailed scheme, it would be in a position to comment upon sharing of term loan requirement with the operating agency. Despite this letter the operating agency seems to have insisted before the sponsoring authority on July 23, 1993 for the petitioner to intimate in writing to it regarding the particulars of the financier who would be willing to lend Rs.l50 lacs for the project. The Appellate Authority not only directed the petitioner to inform the operating agency in writing about the particulars of the financier who would lend Rs.l50 lakhs but also required the petitioner to secure his physical presence on the next date. viz. August 27,1993. After the afore said order, the Irbi by its letter dated July 26,1993 again invited the attention of the operating agency to its earlier letter dated October 29,1992.
(14) The question is whether the Appellate Authority was justified in upholding the order of the Board on the ground that the petitioner was not able to secure a firm commitment from Irbi in regard to the term loan of Rs.l50 lakhs for the proposed project and also failed to produce the financier in person before the Appellate Authority on August 27,1993. According to the order of the Division Bench dated December 6, 1991 the Appellate Authority was required to see whether a proper workable scheme under Section 17(3) read with Section 18 can be formulated. We find this has not been done so far. There is nothing to show that the proposal submitted by the petitioner on May 7,1992 had been seriously considered by the second respondent or any serious attention had been bestowed upon it by the adair. Learned counsel for the second respondent was not able to show that the Techno Economic Feasibility Project Report of Shri Arun K.Srivastav. Consultant submitted Along with the proposal of May 7,1992 was examined by the operating agency; or if examined with what result. The order of the Appellate Authority dated September 21, 1992 reveals that even up to time of passing that order the operating agency had not examined in detail the revival scheme submitted by the petitioner. By the same order the operating agency was required to examine whether reliefs and concessions sought in the scheme submitted by the petitioner was within the parameters of Rbi directions. Icici was also required to hold a joint meeting with all the parties concerned including State Government and the representatives of the labour, financial institution and banks in connection with the scheme outlined by the petitioner. The operating agency was required to submit a report in this regard as well. It appears that the operating agency did not carry out the work assigned to it by the Appellate Authority. There is also no report of the operating agency as required by the Appellate Authority.
(15) The operating agency as also the Appellate Authority did not consider the feasibility of the scheme on the ground that the financial institution had not given any firm commitment of its financial participation in reconstruction, revival and rehabilitation of the petitioner. The Appellate Authority also did not consider the question whether any prudent financier would give commitment for the grant of a term loan to the magnitude of Rs.l50 lacs without preparation of a scheme for reconstruction, revival and rehabilitation of a sick company by the operating agency. In the natural scheme of things first the operating agency needs to prepare a scheme and only thereafter it can expect any financial institution to make a commitment for extending financial assistance to a sick industrial cornpany. This was also the stand of the Irbi, which is reflected in its letter of October 29,1992 to the operating agency. We do not see any reason why a scheme could not be prepared by the operating agency before seeking a commitment from a financial institution. At this stage it will be necessary to undertake a study of a few provisions of the Sica to determine its scheme A reference to the objective of the legislation is brought out in its preamble which reads as under "PREAMBLE:An Act to make in public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto".
(16) From the above it is clear that the intent and purpose of the legislation, inter alia, is to detect the sickness in industrial undertakings and to determine and enforce measures to salvage them. This position also emerges from the Statement of Objects and 'Reasons of the Act. The statement of Objects and Reasons to the extent it is relevant, for the purposes of this case, is as follows: "THE ill effects of sickness in industrial companies such as loss of production,loss of employment, loss of revenue to the Central and State Governments and locking up of invesible funds of banks and financial institutions are of serious concern to the Government and the society at large. The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognised that in order to fully utilise the productive industrial assets,afford maximum protection of employment and optimize the use of the funds of the blinks and financial institutions. It would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative to salvage the productive assets and and realised the amounts due to the banks and financial institutions, to the extent possible, from the non viable sick industrial companies through liquidation of those companies."
(17) Thus one of the main aims of the the legislation is to revive to the extent possible viable sick industrial companies.
(18) Section 15 of Sica empowers the Board of Directors of a sick industrial company to make a reference to the Bier for determination of the measures which shall be adopted with respect.to the company. According to Section 16 the Bier on receipt of a reference may make such enquiry as it may deem fit for determining whether any industrial company has become a sick indsutrial company. The enquiry can also be initiated by the Bier on the basis of its own knowledge about the financial conditions of the company. Sub section (2) of Section 16 empowers the Bier to appoint any operating agency to enquire into and make a report with respect to such matters as may be specified in the order. Sub-section (3) of section 16 fixes the time within which the Bier or the operating agency shall complete its enquiry. Under sub-section (4) of Section 16, the Bier is empowered to appoint one or more persons as a special director or special directors of the company for safeguarding the financial and other interests of the company. Section 17 makes provision for the Board to make suitable orders on the completion of the enquiry envisaged by Section 16. According to sub- section (1) of Section 17 if after making an enquiry under Section 16 the Bier is satisfied that the company has become a sick industrial company, the Bier shall after consideration of the facts and circumstances of the case decide in writing whether it is practicable for the company to make its net worth positive within a reasonable time. Under sub section (2) of Section 17 the Bier is empowered to give time to the company to make its net worth positive. This order can be passed by the Bier only when it comes to the conclusion that it is practicable for the sick industrial company to make its net worth positive within a reasonable time. Such an order by the Bier can be passed subject to the restrictions or conditions as may be specified therein. Sub section (3) of Section 17 and sub section (1) of Section 18 of the Sica would require examination and therefore the 'same, to the extent relevant, are extracted below for facility of immediate reference: "17. Powers of Board to make suitable orders on the completion of inquiry : 3) If the Board decides under sub- section (1) that it is not practciable for a sick industrial company to make its net worth within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in Section 18 in relation to the said company it may,as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company". "18. Preparation and sanction of schemes: (1) Where an order is made under sub section (3) of Section 17 in relation to any sick industrial company, the operating agency specified in the order shall prepare, as expeditiously as possible and ordinarily within a period of ninety days from the date of such order, a scheme with respect to such company providing for any one or more of the following measures namely.-
(19) Thus it is clear that in case it is not practicable for the sick industrial company to make its net worth positive within a reasonable time and that it is necessary in public interest to adopt any of the measures specified in Section 18 in relation to the sick company, the Bier is empowered to pass an order in writing appointing an operating agency to prepare a scheme for the company in the light of such guidelines as may be specified in the order. When order under Section 17(3) of the Act in relation to any sick industrial company has been passed by the Bier, the operating agency is required to prepare a scheme as expeditiously as possible and ordinarily within a period of 90 days from the date of such order. Once an order has been passed under sub-section (3) of Section 17 in relation to the sick industrial company it is imperative for the operating agency to prepare a scheme. This has been indicated in Section 18(1) by the use of the word "shall".
(20) Sub section (3) of Section 18 envisages a scheme to be prepared by the Bier itself. On preparation of a draft scheme it is required to be sent to the sick industrial company and the operating agency etc. for suggestions and objections. Sub section 4 of Section 18 provides for sanction of the scheme by the Bier which will come into force on such date as it may specify in this behalf.Section 19 provides for rehabilitation of the sick company by making a provision for financial assistance in the scheme. Under this section the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, or State Government, any scheduled bank or any public financial institution or state level institution or any institution or other authority. Under sub section 2 of Section 19. every scheme referred to in sub section (1) of Section 19 is required to be circulated to every person required to provide financial assistance for his consent within a period of 60 days from the date of such circulation. When consent referred to in sub- section (2) of Section 19 is given by person or persons required by the scheme to provide financial assistance, the Bier may sanction the scheme under sub section 3 of Section 19 and the same shall be binding on all concerned. In case consent is not given by any person or persons required by the scheme to provide financial assistance, the Bier may proceed under sub section 4 of Section 19 to adopt such other measures, including winding up of the sick industrial company. Section 20 provides for winding up a sick industrial company if the Bier is of the opinion that it is just and equitable to wind up the same. This order can be passed only after making an enquiry under section 16 and after consideration of all relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties.
(21) On reading of the above provisions the following legal position emerges: 1) The Board of Directors of a sick company or any of the authorities specified in Section 15 of the Sica can make a reference to the Bier for determination of measures which may be adopted with respect to such a company. 2) The Bier under Section 16 of the Sica is empowered to make such enquiry as it may deem fit for determining whether an industrial company has become a sick industrial company. For this purpose the Bier can appoint an operating agency to enquire into and make a report with respect to such matters as may be specified in the order. 3) The Bier under Section 17 of the Sica after making enquiry under Section 16 can ask the sick company to make its net worth positive within a reasonable time subject to such restrictions or conditions as may be specified in the order. 4) On failure of the sick industrial company to make its net worth positive within a reasonable time, the Bier under section 17(3) of the Sica in public interest may appoint any operating agency to prepare a scheme in the light of the guidelines as may be specified in the order and to adopt any of the measures specified in Section 18 of the Act including the reconstruction, revival and rehabilitation of the sick industrial company. 5A) After an order under Section 17(3) is passed by the Bier the operating agency shall prepare a scheme within the time specified under Section 18(1). Draft scheme can also be prepared by the Bier under Section 18(3). If a scheme is prepared by the Bier, the same is required to be circulated in draft to the sick industrial company and the operating agency etc. On receipt of the suggestions and objections, if any, the Bier may make such modifications, if any, into draft scheme as it may consider necessary. 5B) Under Section 18(4) a scheme comes into operation only on being sanctioned by the Bier from a specified date. 6) Where the scheme provides for financial aid by way of loans, it shall be circulated to the financial institution or any person or authority required by the scheme to provide financial assistance for its/his consent.lf such consent is given the Bier may sanction the scheme. In case consent is not given, it is open to the Bier to adopt such measures, including winding up of the sick industrial company as it deems fit.(See Section 19 of the SICA). 7) Where the sick industrial company cannot be nursed back to health the Bier is empowered under Section 20 of the Sica to pass an order of winding up. But this order can be passed only after making enquiry under Section 16 and after taking into consideration all the relevant facts and circumstances and after giving an opportunity of being heard to the concerned parties.
(22) It seems to us that the thrust of the legislation is for making all possible endeavors to explore all the possibilities of reviving the sick industrial company.
(23) While passing an order under Section 17(3) of the Sica, the Bier takes a conscious decision with regard to the question of expediency and public interest for preparation of a scheme by the operating agency. The fact that the Bier did not direct winding up of the petitioner company immediately after making an enquiry under Section 16 shows that there was a reasonable ground for the Bier to proceed under Section 17 instead of outright winding up of the company under Section 20. Once an order under Section 17(3) was p.issed by the Bier it was incumbent upon the operating agency to prepare a scheme with respect to the petitioner company in the light of Section 18 of the Act. It is not disputed that the operating Agency did not prepare the scheme. It also seems that it did not seriously consider the Techno Economic Feasibility project Report submitted by the petitioner. The operating Agency also failed to carry out the order of the Appellate Authority dated September 21, 1992 and as a consequence did not give its report as envisaged by the said order. Once an order under Section 17(3) of the Act was passed the operating agency had no option but to frame a scheme. In case it was not feasible to frame a scheme the operating agency could have filed an application for review of the order passed by the Bier under Section 17(3) of the Act.
(24) While considering the question of reconstruction, revival and rehabilitation of the sick industrial company or its closing down, several factors arc required to be taken into consideration including the interests of the workers, financial institutions, loss of production of material goods etc. (25) The only thing which, seems to have gone against the petitioner is that Irbi had taken a stand that unless a scheme of rehabilitation was prepared they would not be in a position to make any financial commitment.In view of this stand of the Irbi it was all the more necessary that a scheme should have been prepared by the operating agency so as to enable Irbi to consider whether it was possible for it to grant the term loan. The scheme could provide fur financial assistance and if after circulation to the Irbi or other persons, the consent as provided by Section 19(2) of the Act was not forthcoming within the specified time, the Bier could adopt such measures including the winding up of the company.
(26) In view of the above discussion, the writ petition succeeds and the order dated August 27, 1993 of the Appellate Authority for Industrial & Financial Reconstruction is set aside. The Appellate Authority for Industrial & Financial Reconstruction will decide the matter afresh in the light of the observations made hercinabove. It will be open to the Appellate Authority for Industrial & Financial Reconstruction to consider the question of framing of the scheme of reconstruction, revival and rehabilitation and in case it considers appropriate it may remit the matter to the Board for preparation of the scheme and circulation to the financial institutions.