Bombay High Court
J.K. Synthetics Ltd. vs The Industrial Credit & Investment ... on 22 February, 1999
Equivalent citations: AIR1999BOM329, 1999(2)BOMCR386, [2001]103COMPCAS42(BOM), 1999(2)MHLJ829, AIR 1999 BOMBAY 329, (1999) 3 ALLMR 145 (BOM), (1999) 2 MAH LJ 829, (2000) 1 BANKCAS 113, (2001) 103 COMCAS 42, (1999) 4 COMLJ 359, (1999) 35 CORLA 240, (1999) 2 BOM CR 386, 1999 (2) BOM LR 196
ORDER A.V. Savant, J.
1. By consent, these two appeals are taken up for hearing and disposal together. Heard both the learned Counsel; Mr. Doctor for the appellant original defendant No. 1 and Mr. Kadam for the contesting respondent No. 1 original plaintiff. We have also heard Mr. Kothari and Mr. Vasudeo for some of the other respondents-financing institutions.
2. Appeal No. 59 of 1999 is against the order dated 11th December 1998, passed by the learned Single Judge in Chamber Summons No. 1037 of 1998 in Suit No. 4411 of 1997. Under the impugned order, Chamber Summons taken out by the appellant-defendant challenging the order dated 3rd March, 1998 passed by the Court Receiver fixing the ad hoc royalty at Rs. 50,00,000/- per month (Rs. 25,00,000/- for each of the two immovable properties) has been dismissed. The Court Receiver, by his Order dated 3rd March, 1998 has fixed the adhoc royalty at Rs. 50,00,000/- per month in respect of the two immovable properties regarding which the Receiver was appointed on 7-1-1998. Counsel for the appellant had contended before the Court Receiver that the total adhoc royalty should be fixed at Rs. 4,00,000/- per month. However, having regard to the material placed before him, the Court Receiver has come to the prima facie conclusion that the adhoc royalty should be Rs. 50,00,000/-. The Court Receiver had further directed the appellant to execute the agency agreement on a stamp paper of Rs. 20/- on an adhoc basis and to file the requisite undertaking on affidavit as per the usual practice of this Court. Admittedly, the final fixation of the royalty in respect of the two immovable properties is a matter which is still pending before the Court Receiver.
3. In the other appeal, being Appeal No. 54 of 1999, what is challenged before us is the order dated 11th December 1998 passed by the learned Single Judge on the Report submitted by the Court Receiver on 19th August, 1998. In the said Report, the Court Receiver pointed out that the appellant had not deposited any amount towards the adhoc royalty fixed by the Court Receiver, which was payable from 7th January, 1998. Hence, the Court Receiver sought directions from the learned Single Judge as to the further steps to be taken against the appellant for its failure to deposit any amount from 7th January, 1998. Admittedly, nothing has been paid as yet. When this Report was considered by the learned Single Judge on the 11th December, 1998, having regard to the default committed by the appellant in its capacity as the agent of the Court Receiver under the Order dated 7th January, 1998, the learned Judge directed the Receiver to take possession of the two immovable properties from the appellant, if necessary, forcibly with the assistance of the police. The learned Judge has further clarified that this order was without prejudice in the rights and contentions of the parties, including those in Chamber Summons No. 350 of 1998, taken out by the first respondent plaintiff for enhancement of the amount of royalty which is yet to be finally fixed.
4. In Suit No. 4411 of 1997 filed on the 29th November, 1998, by the first respondent public financing institution viz the Industrial Credit Investment Corporation of India (for short I.C.I.C.I.), by an order dated 7th January, 1998 passed by the learned Single Judge, the Court Receiver, High Court, Bombay, was appointed Receiver of the properties, the suit filed by the first respondent is for recovery of an amount of approximately Rs. 101 crores from the appellant. After the Receiver was appointed and the appellant was appointed as the agent of the Receiver on 7th January, 1998, the appellant made a reference to the Board for Industrial and Financial Reconstruction (for short, Board) in accordance with the provisions of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, (S.I.C.A.). Pending this reference, Court Receiver took possession of the two immovable properties between January 20 and 22, 1998. There is no dispute before us that the claim of the appellant was registered with the Board as late as on the 10th February, 1998. Thus, on the date on which the order for appointment of Court Receiver was passed, admittedly, the bar contained in section 22 of the S.I.C.A. was not attracted since the reference was registered with the Board on 10th February, 1998. Since the Receiver had already obtained possession between 20th and 22nd January, 1998, he proceeded to fix the royalty and on the 3rd March, 1998 the same was fixed at Rs. 50 lacs per month.
5. It may be mentioned that the first respondent has already taken out a separate Chamber Summons No. 350 of 1998 contending that the amount of royalty should be enhanced. That Chamber Summons is pending. As against this, Chamber Summons No. 359 taken out by the present appellant for reduction of the amount of Rs. 50 lacs per month as adhoc royalty, has been withdrawn by the appellant on 3rd September, 1998.
6. Be that as it may, the short controversy raised before us is whether the provisions of section 22(1) of the S.I.C.A. are attracted and if the appellant, in its capacity as the agent of the Court Receiver, does not even pay the amount of adhoc royalty, is the Court Receiver precluded from terminating the agency of his agent and appoint a third party as an agent. The learned Single Judge has come to the conclusion that there is nothing in the provisions of section 22 of the S.I.C.A which can prevent the Court Receiver from terminating the agency of his agent, as a result of the agent's failure to comply with the terms of agency. Hence, these two appeals.
7. Since the question is of interpretation of the provisions of section 22 of the S.I.C.A. we find it convenient to reproduce the said section:-
"22. Suspension of legal proceedings, contracts, etc. (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the Industrial company or for the appointment of a Receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.
(2) Where the management of the sick industrial company is taken over or changed in pursuance of any scheme sanctioned under section 18 notwithstanding anything contained in the Companies Act, 1956(1 of 1956) or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law-
(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a Director of the company.
(b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board:
(3) Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period of consideration of any scheme under section 18 or where any such scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders, other instruments in force, to which such industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board.
Provided that such declaration shall not be made for period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate.
(4) Any declaration made under sub-section (3) with respect to a sick industrial company shall have effect notwithstanding anything contained in the Companies Act, 1956, (1 of 1956) or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a Court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly:-
(a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any Court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and
(b) on the declaration ceasing to have effect-
(i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and
(ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.
(5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded".
8. Relying upon the provisions of sub-section (1) of section 22, what is contended by Mr. Doctor is that, even the action taken by the Court Receiver for terminating the agency of his agent for failure to comply with the terms of agency, would be in the teeth of the bar contained in sub-section (1) of section 22. The argument proceeds on the footing that if under the orders passed by the Court Receiver and confirmed by the learned Single Judge, the agency was terminated, it would amount to taking proceedings against the Sick Industrial Company for execution, distress or the like against any of the properties of the Industrial Company.
9. We may at this stage refer to the provisions of sub-sections (3) and (4) of section 22. Under sub-section (3) of section 22, when an inquiry under section 16 is pending or any Scheme under section 17 or 18 is under preparation or consideration, the Board may, by an order, declare that the operation of all or any of the contracts assurances of property, agreements, settlements, awards etc. to which such Industrial Company is a party, shall remain suspended or that rights, privileges, obligations and liabilities accruing or arising thereunder shall remain suspended. Sub-section (4) of section 22 makes it clear that during the period an order under sub-section (3) of section 22 is in operation, the remedy for the enforcement of any right, privilege, obligation or liability suspended by virtue of an order under sub-section (3) shall remain stayed. This is clear from section 22(4)(a). However, section 22(4)(b) makes it clear that when the order under sub-section (3) of section 22 ceases to have effect, the right, privilege, obligation or liability, which was hither to suspended, shall be revived and become enforceable from the stage at which it had been stayed.
10. Thus, reading the provisions of section 22 as a whole, it is clear to us that the proceedings of certain nature against the properties of the Sick Industrial Company cannot be proceeded with, except with the consent of the Board, or, as the case may be, the appellate authority. This is the limited mandate of sub-section (1) of section 22. If the appellant company wanted to protect itself against the enforcement of any rights, privileges, liabilities or obligations, it could have approached the Board and obtained an order under sub-section (3) of section 22. Admittedly, no such application is made by the appellant company and there is no order under sub-section (3) of section 22 in force. Either in respect of the principal contract regarding the loan transaction between the appellant and the first respondent plaintiff or in respect of the contract of agency between the appellant and the Court Receiver, the appellant could have obtained an order of suspension of the contract, in which case, the enforcement of any rights, privileges, liabilities or obligations arising under the said contracts could have been suspended.
11. That apart, under the order dated 11th December, 1998, which is impugned in Appeal No. 54 of 1999 all that has been done is that the agency of the appellant has been terminated as a result of its failure to adhere to the terms of agency. The rights of the appellant in respect of ownership of its properties are not being proceeded against either by way of execution, distress or the like. The property being custodia legis, even a third party could have been appointed as an agent of the Receiver. All that was done while appointing the agent of the Receiver was that preference was given to the appellant. The appellant was permitted to retain the use of suit properties as the agent of the Receiver and not in its capacity as the absolute owner thereof. What is prohibited by section 22(1) of the S.I.C.A is that "no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a Receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority".
12. Mr. Doctor invited our attention to the decision of the Apex Court in Real Value Appliances Limited v. Canara Bank and others, 1998(4) Bom.C.R. 606 : 1999 Bank.J. (S.C.)290 : 1998(93) Com.Cas. page 26. The facts of that case would show that a provisional liquidator of the company was appointed on 18-10-1996. That order was stayed on 20th December, 1996. The company, of which winding up was sought, made a reference to the Board on 17th July, 1997. The reference was registered on 24th July, 1997, and it was thereafter, on 28th July, 1997, that the Court Receiver was appointed. Reversing the decision of this Court, the Apex Court took the view that if the reference was registered with the Board on the 24th July, 1997, the bar of section 22 would become applicable from that date and hence, the order for appointment of a Court Receiver could not have been passed on the 28th July, 1997. In the present case, the appointment of Court Receiver is on 7th January, 1998; the reference to the Board was on 10th January, 1998, and the same was registered on 10th February, 1998. By that date, not only was the Court Receiver appointed, but he had also taken possession of the properties between 20th and 22nd January, 1998. The Apex Court, in the case of Real Value Appliances (supra) was not dealing with a situation where the Court Receiver was appointed prior to the making of the reference to the Board. In the case before us, the Court Receiver had already obtained possession of both the immovable properties between 20th and 22nd January, 1998, and it is after this that the reference made by the appellant under section 15 of the S.I.C.A was registered on 10th February, 1998.
13. Under the order dated 3rd March, 1998, which is the subject matter of Appeal No. 59 of 1999, all that has been done by the Court Receiver is the routine act of fixing the royalty to be paid by the agent already appointed. As indicated earlier, it was on the 7th January, 1998, in Notice of Motion No. 3 of 1997, taken out by the first respondent-plaintiff that the Court Receiver was appointed and he was directed to continue the appellant as the agent of the Court Receiver. Since the appellant was in possession of properties which were its running concerns, the learned Single Judge thought it fit to direct the Receiver to continue the appellant as the agent of the Receiver. All that remained was fixation of royalty which has been done on the 3rd March, 1998. In view of these facts, with respect, we do not think that the ratio of the decision of the Apex Court in the case of Real Value Appliances Ltd., (supra) has any application to the facts of the present case.
14. We have referred to the scheme of the provisions of section 22 above. On a plain reading of sub-section (1) of section 22, we are of the view that the action on the part of the Court Receiver in passing the order of fixing the adhoc royalty at Rs. 50,00,000/- per month does not amount to taking any proceedings for the winding up of an Industrial Company or for execution, distress or the like against any of the properties of the Industrial Company or for the appointment of a Receiver in respect thereof. It is only these proceedings which are specifically prevented from being proceeded with further by virtue of sub-section (1) of section 22 of the Act. Let us consider a case where the agent appointed by the Court Receiver was not the appellant, but was a third party. Such an agent appointed by the Court Receiver, pursuant to the order passed by this Court before registration of the reference by the Board under the S.I.C.A, commits a default in complying with the terms of the agency. Nothing is paid towards royalty by such an agent. (We may hasten to add that out of the royalty fixed at Rs. 50,00,000/- per month on adhoc basis under the order dated 3rd March, 1998, admittedly, nothing has been paid by the appellant as yet). It the third party who was an agent of the Court Receiver were to commit a default in complying with the terms of agency, could it be suggested that by virtue of sub-section (1) of section 22 the Receiver could not take any action against such an agent for his failure to comply with the terms of agency. In the present case, we are concerned with an order fixing the adhoc royalty and the order terminating the agency of the appellant for breach of the terms of agency. In our view, both the orders dated 11th December, 1998, have not been passed in proceedings "for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a Receiver in respect thereof. The possession of the appellant in respect of the suit properties was that of an agent of the Court Receiver and not as an owner. The conduct of the appellant which is complained of is in its capacity as the agent of the Court Receiver and not the owner of the properties. Hence, there is no action taken against the properties of the Sick Industrial Company in its capacity as the owner of the said properties. We, therefore, do not think that sub-section (1) of section 22 bars the passing of the impugned orders by the Court Receiver or by the learned Single Judge.
15. Turning to sub-section (3) of section 22, it is conceivable that when an inquiry under section 16 is pending or a scheme under section 17 is under preparation or such a scheme is under consideration under section 18, an application may be made by the Sick Industrial Company for the suspension of contract, assurances of properties, agreements, settlements, awards and if an order of suspension under sub-section (3) of section 22 was passed, the rights, privileges, obligations and liabilities accruing or arising thereunder would remain suspended. This aspect has been considered by a Division Bench of this Court in Shree Vallabh Glass Works Ltd. and another v. State of Maharashtra and others, . On a consideration of sub-section (3) of section 22, this Court took the view that even when there are settlements or awards, the Board has been given power to suspend the same so that the amounts payable under the settlements or awards do not become due. It is relevant to note that under sub-section (4) of section 22 on the order under sub-section (3) ceasing to have effect, the right, privilege, obligation or liability, which was hitherto suspended becomes revived, enforceable and has to be proceeded with from the same stage where the proceedings had earlier been stayed. Admittedly, the appellant has not obtained any order from the Board for the suspension of either the principal contract of loan transaction with the first respondent or the contract of agency entered into with the Court Receiver pursuant to the appellant being appointed as the agent of the Receiver. In our view, therefore, the rights, privileges, obligations and liabilities arising under both the contracts are fully enforceable and are not at all suspended by virtue of any order under sub-section (3) of section 22 of the S.I.C.A.
16. We, therefore, hold that on the appointment of Court Receiver on the 7th January, 1998, the properties became custodia legis through the duly appointed Receiver. The appellant was only permitted to retain and use the said properties as the agent of the Receiver and not in its absolute rights as the owner thereof. If as a result of the appellant's failure to adhere to the terms of agency, the agency stood terminated, the appellant had become disentitled to retain the use of the said properties. Accordingly, the agency has been terminated on 11th December, 1998. The appointment of Receiver, as well as the Receiver taking possession from the appellant was prior to the registration of the reference under the provisions of section 16 of the S.I.C.A. Since the appellant had no independent possession of the properties in its own right as lawful owner, section 22 of S.I.C.A cannot apply. We accordingly hold that the continuance of the Receiver is not contrary to the scheme of the said S.I.C.A.
17. We may mention here that similar view was taken by a learned Single Judge of this Court in the case of Industrial Development Bank of India v. Nira Pulp and Paper Mills Ltd. and others, , which has found favour with the learned Single Judge, who has passed the impugned orders dated 11th December, 1998. There is no doubt in our mind that the possession of the appellant after the 7th of January, 1998, was not in its capacity as the owner of the property, but in its capacity as the agent of the Court Receiver. If that be the true legal position, we do not think that the Receiver is precluded from taking proceeding for fixation of royalty or for the breach of the terms of agency. In our view, such steps taken by the Court Receiver do not amount to taking proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a Receiver in respect thereof.
18. As indicated above, when this Court appointed a Receiver on the 7th January, 1998, even a third party could have been appointed as the agent of the Court Receiver. If such a third party were to commit a breach of the terms of agency agreement, in our view, nothing in section 22(1) of the S.I.C.A could have prevented the Court Receiver from taking the consequential action against the agent of the Court Receiver, merely because such an agent had got a reference registered under the S.I.C.A. In our view, the Court Receiver taking action against his agent for breach of the terms of agency does not amount to taking proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of Receiver in respect thereof within the meaning of section 22(1) of the S.I.C.A.
19. In this view of the matter, we find no merit in the appeals. There is no error in the impugned orders. The appeals are accordingly dismissed.
20. At this stage, Mr. Doctor prays for a stay viz., a direction to the Court Receiver not to take possession of the two immovable properties for a period of eight weeks from today. Mr. Tulzapurkar opposes the prayer on the ground that nothing has been paid from January, 1998, though the appellant's own estimate of the adhoc royalty was Rs. 4,00,000/- per month. This is clear from the order passed by the Court Receiver on 3rd March, 1998, when the adhoc royally was fixed at Rs. 50,00,000/= per month for the two properties. We must also remember that the claim of the first respondent I.C.I.C.I in the suit is over Rs. 101/- crores. We are told that the claim of all the public financial institutions against the appellant is over Rs. 900/- crores.
21. In the above circumstances, if the appellant wants indulgence of any stay, the least that is expected from it is to pay a sum of Rs. 4,00,000/- per month, which was its own estimate of the adhoc royalty, which it wanted the Court Receiver to fix. We have no doubt in our mind that the estimate of the appellant was on a much lower side. Accordingly, we direct the appellant to deposit a sum of Rs. 50,00,000/- (Rs. Fifty lacs) with the Court Receiver within a period of three weeks from today on account towards the arrears of royalty payable since January, 1998.
22. In the event of the deposit of Rs. 50,00,000/- (Rs. Fifty Lacs) being made the Court Receiver is directed to invest the same in fixed deposit with any nationalised Bank for a period of one year, subject to further order that is to be passed when the final royalty is fixed.
23. In the event of the appellant depositing an amount of Rs. 50,00,000/-(Rs. Fifty, lacs) with the Court Receiver within three weeks from today, the Court Receiver will not take possession of the two immovable properties for a period of six weeks from today.
24. In the event of the appellant's failure to make the deposit of Rs. 50,00,000/= (Rs. Fifty Lacs) as above, the Receiver is free to proceed in accordance with law.
25. Issuance of certified copy expedited.