Madras High Court
J.M. Malhotra And Others vs Union Of India And Others on 19 September, 1994
Equivalent citations: [1997]89COMPCAS600(MAD)
JUDGMENT K.A. Swami, C.J.
1. These appeals are preferred against the order dated July 25, 1994, passed by the learned single judge in Writ Petitions Nos. 2456 of 1994 and 4427 of 1994. There was another writ petition filed and all the writ petitions were taken up together for hearing and a common order was passed by the learned single judge. The petitioners in Writ Petitions Nos. 2456 of 1994 and 4427 of 1994 have come up in appeals.
2. In the writ petitions, the petitioners sought for declaring that section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as "the Act"), is ultra vires and unconstitutional. This relief was sought for on the ground that section 20 of the Act is violative of article 14 of the Constitution. The learned single judge has negatived the contention and rejected the writ petitions.
3. It is contended before us that section 20 of the Act imposes restriction on the exercise of jurisdiction by a High Court, that unbridled power is given to the Board and as such the Board can be arbitrary, and it can adopt different norms and different procedures in the matters coming up before the Board and as such, it is discriminatory.
4. Section 20 of the Act reads thus :
"20. Winding up of sick industrial company. - (1) Where the Board after making inquiry under section 16 and after consideration of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of opinion that it is just and equitable that the sick industrial company should be wound up, it may record and forward its opinion to the concerned High Court.
(2) The High Court shall on the basis of the opinion of the Board, order winding up of the sick industrial company and may proceed and cause to proceed with the winding up of sick industrial company in accordance with the provisions of the Companies Act, 1956 (1 of 1956).
(3) For the purpose of winding up of the sick industrial company, the High Court may appoint any officer of the operating agency if the operating agency gives its consent as the liquidator of the sick industrial company and the officer so appointed shall for the purposes of the winding up of the sick industrial company be deemed to be, and have all the powers of the official liquidator under the Companies Act, 1956 (1 of 1956).
(4) Notwithstanding anything contained in sub-section (2) or sub-section (3) the Board may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and forward the sale proceeds to the High Court for orders for distribution in accordance with the provisions of section 529A and other provisions of the Companies Act, 1956 (1 of 1956)."
5. Before considering the scope of section 20 of the Act, it is necessary to consider the object of the enactment and also the context in which section 20 appears in the Act. The object of the Act is 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. In the Statement of Objects and Reasons, it has been stated as to why it has become necessary to bring out legislation of the nature in question. It is relevant to advert to those objects and reasons also (see [1985] 58 Comp Cas (St.) 303) :
"STATEMENT OF OBJECTS AND REASONS (1) 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 investible 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, to afford maximum protection of employment and optimise the use of the funds of the banks 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 realise 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.
(2) It has been the experience that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time consuming. A multiplicity of laws and agencies makes the adoption of a co-ordinated approach for dealing with sick industrial companies difficult. A need has, therefore, been felt to enact, in public interest, a legislation to provide for the timely detection of sickness in industrial companies and for expeditious determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable despatch.
(3) The salient features of the Act are :
(i) application of the legislation to the industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, with the initial exception of the scheduled industry relating to ships and other vessels drawn by power, which may, however, be brought within the ambit of the legislation in due course;
(ii) identification of sickness in an industrial company, registered for not less than seven years, on the basis of the symptomatic indices of cash losses for two consecutive financial years and accumulated losses equalling or exceeding the net worth of the company as at the end of the second financial year;
(iii) the onus of reporting sickness and impending sickness at the stage of erosion of 50 per cent., or more of the net worth of an industrial company is being laid on the board of directors of such company; where the Central Government or the Reserve Bank is satisfied that an industrial company has become sick, it may make a reference to the Board; likewise if any State Government, scheduled bank or public financial institution, having an interest in an industrial company is satisfied that the industrial company has become sick, it may also make a reference to the Board;
(iv) establishment of a Board consisting of experts in various relevant fields with powers to enquire into and determine the incidence of sickness in industrial companies and devise suitable remedial measures through appropriate schemes or other proposals and for proper maintenance thereof;
(v) constitution of an Appellate Authority consisting of persons who are or have been Supreme Court judges, senior High Court judges and Secretaries to the Government of India, etc., for hearing appeals against the orders of the Board."
6. Chapter I of the Act deals with the preliminaries such as title, extent, commencement and application of the Act and the definition clauses.
7. Chapter II deals with the Board and Appellate Authority for Industrial and Financial Reconstruction. As per section 4 of the Act, the Central Government may by notification appoint a Board to be known as the Board for Industrial and Financial Reconstruction to exercise the jurisdiction and powers and discharge the functions and duties conferred or imposed on the Board under the Act. The Board consists of a chairman and not less than two and not more than fourteen members to be appointed by the Central Government. The chairman of the Board shall have to be the person who has been or is qualified to be a judge of the High Court and also a person of ability and integrity and standing with special knowledge and professional experience of not less than 15 years. The other provisions relate to the conditions of service of the chairman and members of the Board and also the staff of the Board and the Appellate Authority. The proceedings of the Board are deemed to be judicial proceedings as provided under section 14 of the Act. Section 13 of the Act lays down the procedure for conducting proceedings before the Board and the Appellate Authority. It satisfies all the requirements of a judicial proceeding. Chapter III relates to references, inquiries and the schemes relating to sick industries. Section 20 falls under Chapter III of the Act. It comes after the provision relating to rehabilitation of a sick industry by giving financial assistance. Section 21 relates to operating agency to prepare, complete inventory, etc. Sections 22 and 22A also fall in Chapter III. Chapter IV relates to proceedings in case of potentially sick industrial companies, misfeasance proceedings, appeal and miscellaneous matters. Section 22 falls in Chapter III, but it relates to suspension of legal proceedings, contracts, etc., against a sick industry in respect of which an inquired under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending. It also further provides that in such a situation notwithstanding anything contained in any other law or any other instruments having effect under the said Act or other law, no proceeding for 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 shall lie or be proceeded with further except with the consent of the Board or, as the case may be, of the Appellate Authority.
8. Thus, the context in which section 20 of the Act occurs is to enable the Board, after making inquiry under section 16 of the Act and after consideration of all the relevant facts and circumstances and after hearing all the concerned parties, if it is of the opinion that no scheme can be of any use to the sick industrial company and that the company cannot at all be rehabilitated and it is just and equitable to wind up the company, to report and recommend for winding up of the sick industrial company. So, the report is submitted to the High Court by the Board under section 20 of the Act as a last resort in the matter, when the Board comes to the conclusion that nothing else can be done to revive the sick industrial company and as such, it is just and equitable to wind up. The Board, as already pointed out, consists of persons who are experts in the field. It is presided over by a person who has been or is qualified to be a judge of the High Court. It has to record its opinion with reasons after considering all the relevant facts and circumstances and after hearing all the concerned parties. Thus, the Board, while acting under section 20, acts as a judicial body consisting of experts in the field. No doubt, section 433 of the Companies Act specifies the grounds on which the court may order winding up of a company. One of the grounds is that if the court is of the opinion that it is just and equitable that the company should be wound up, it can order winding up of the company. Under the Companies Act, if a winding up proceeding has to be initiated under Chapter II of Part VIII, persons seeking winding up of a company have to satisfy certain conditions as prescribed under sections 439 or 440, as the case may be, of the Companies Act to maintain the proceedings. When once the report is submitted by the Board, no such requirements of section 439 or 440, as the case may be, of the Companies Act need be looked into. In this case, we are not concerned with Chapters III and IV of Part VIII relating to "voluntary winding up" and "winding up subject to supervision of court". The report of the Board would become the basis for a proceeding to be continued against the sick industrial company for winding up in accordance with the provisions of the Companies Act. Sub-section (2) of section 20, which is already reproduced, specifically states that the High Court shall, on the basis of the opinion of the Board, order winding up of a sick industrial company and may proceed or cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act. Therefore, it is clear that the opinion furnished by the Board will only form a basis for the proceedings to be continued against the sick industrial company for the purpose of winding up and the further proceedings are to be conducted in accordance with the provisions contained in the Companies Act for winding up of the company. Thus, what sub-sections (1) and (2) of section 20 dispense with is only the requirement of section 439 or 440, as the case may be, of the Companies Act for the purpose of initiating a proceeding for winding up of the company under Part VIII, Chapter II and also the enquiry into the question as to whether it is just and equitable to order winding up of a company. The rest of the proceeding for winding up shall have to be conducted in accordance with the provisions of the Companies Act. Sub-section (2) of section 20 of the Act is not happily worded. Though it opens with the words "High Court shall, on the basis of the opinion of the Board, order winding up of the sick industrial company", but nevertheless, it further says that "and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act, 1956". Therefore, it appears to us that even though the opinion submitted by the Board forms the basis for ordering winding up of the sick industrial company by the High Court, it is nevertheless open to the High Court to go into the correctness of the opinion so submitted by the Board and decide as to whether it should proceed and cause to proceed with the winding up of the sick industrial company, in accordance with the provisions of the Companies Act. This is clear by the use of the words, "and may proceed and cause to proceed" in sub-section (2) of section 20 of the Act. Therefore, it is not possible to hold that even though the opinion submitted by the Board forms the basis for directing the winding up of the sick industrial company by the High Court, the High Court is precluded from examining the correctness of such opinion. Therefore, it cannot be held that it is obligatory on the High Court to order winding up of the sick industrial company once it receives an opinion from the Board in this regard without examining the correctness of such opinion, on hearing the concerned parties. However, normally, such opinion being one tendered by the Board consisting of experts acting judicially will have a greater weight in deciding the question as to proceeding with the winding up of the sick industrial company. Such opinion of the Board cannot lightly be brushed aside. Even otherwise, it is a jurisdiction conferred upon the High Courts under the Companies Act. Any jurisdiction conferred on the High Courts under a statute has to be exercised, subject to the limitations prescribed under that statute, and such jurisdiction can also be taken away or modified by appropriate amendment to the very statute, or by any other law passed by the competent legislative body. In the instant case, even if it were to be held that section 20 of the Act, to a certain extent, mutilates the jurisdiction of the High Court, it cannot be held to be unconstitutional on that ground. Because both the enactments are passed by Parliament, therefore, it is open to Parliament to modify the powers conferred on the High Courts under the Companies Act. However, one thing is clear on a reading of sections 20 and 22 of the Act that in the case of the sick industrial company to which section 22 of the Act is attracted, proceedings for winding up of such sick industrial company cannot be initiated in the High Court, except with the consent of the Board, or, as the case may be, of the Appellate Authority. Therefore, Parliament very advisedly made the provisions contained in section 20 of the Act to further the objects of the Act and to effectively implement them as, otherwise, it would have affected the very functioning of the Board and the rehabilitation of sick industrial companies and defeated the very objects of the Act, if winding up petitions were to be entertained by the High Court in the case of sick industrial companies to which sections 20 and 22 are attracted. The contention is accordingly rejected.
9. It is also not possible to hold that section 20 of the Act is in any way opposed to article 14 of the Constitution. We have already referred to the procedure to be followed by the Board before forwarding its opinion to the High Court recommending winding up. The Board acts as a judicial body. There is no scope for the Board to act arbitrarily and adopt different procedures and apply different modes or norms. The contention is without any basis. Whether in the case of a particular sick industrial company, an opinion for winding up should be submitted to the High Court or not, depends upon the particular facts and circumstances of that company. There is no question of any comparison of one company with another, because proceedings against each company will have to be decided in accordance with the particular facts and circumstances of each case. Further, the Board can recommend winding up only when it is not possible to revive the sick industrial company and it is just and equitable to wind up the company. Therefore, we see no merit in the contention that section 20 of the Act is violative of article 14 of the Constitution.
10. For the reasons stated above, these writ appeals are dismissed.