Madras High Court
M/S.Lakshmi Machine Works Limited vs Union Of India on 6 February, 2023
Author: S.S.Sundar
Bench: S.S.Sundar
W.P.No.20002 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated : 06.02.2023
CORAM:
THE HONOURABLE MR.JUSTICE S.S.SUNDAR
W.P.No.20002 of 2010 and M.P No.2 of 2010
M/s.Lakshmi Machine Works Limited
A company registered under Companies
Act, 1956, having its registered office
at Perianaickenpalayam
Coimbatore-641 020. ...Petitioner
Vs
1.Union of India, represented by
The Director General,
Employees State Insurance Corporation
ESIC Building, Kotla Road
Behind Foreign Post Office
New Delhi.
2.The Joint Director
Sub Regional Office
Employees State Insurance Corporation
1897, Trichy Road, Panchdeep Complex
Ramanathapuram
Coimbatore-641 045.
3.The Recovery Officer
Sub Regional Office
Employees State Insurance Corporation
1897, Trichy Road, Panchdeep Complex
Ramanathapuram
Coimbatore-641 045. ...Respondents
Page 1 of 15
https://www.mhc.tn.gov.in/judis
W.P.No.20002 of 2010
Prayer: Writ petition filed under Article 226 of the Constitution of
India, seeking to issue a Writ of Certiorari, calling for the impugned
records of the third respondent issued in Letter No.56/34184-57,
56/62423-66, 56-62358-54/RRC dated 27.08.2010 and quash the
same.
For Petitioner : Mr.N.Sridhar
For Respondents : Mr.S.P.Srinivasan
ORDER
This writ petition has been filed by a company known as M/s.Lakshmi Machine Works Limited, the petitioner herein, aggrieved by the impugned order of the third respondent vide his Letter No.56/34184-57, 56/62423-66, 56-62358-54/RRC dated 27.08.2010, initiating recovery proceedings requiring the petitioner's Bankers to pay a sum of Rs.19,03,339/- towards the ESI dues of another company M/s.Jeetstex Engineering Limited.
3. The brief facts necessary for the disposal of the writ petition are as follows:
Page 2 of 15https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 A company called "Jeetstex Engineering Limited" became a Sick Industry. It is admitted that the said company was liable to pay a sum of Rs.25.54 lakhs to the respondents towards ESI contribution. There was a demand for a sum of Rs.29,64,917/- towards contribution, interest and damages. The said company was declared a Sick Industry by the Industrial and Financial Reconstruction (hereinafter referred to as BIFR), and a draft scheme was framed. The respondents were duly informed regarding waiver of interest and damages as per the draft scheme. Since there was no reply and response from the respondents, the BIFR proceeded further in finalising the same. As part of rehabilitation, the company known as "Jeetstex Engineering Limited"
was merged with the petitioner. It is stated that with the contribution of the petitioner more than the net worth of the company namely "Jeetstex Engineering Limited", the draft scheme was approved. After the sick company was taken over by the petitioner, pursuant to the rehabilitation scheme which was put in operation under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985, the respondents came up with the demand towards liability of the former company "M/s.Jeetstex Engineering Limited" towards ESI amount. In the above Page 3 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 background, the order of the third respondent is challenged before this Court by way of this writ petition.
4. The learned counsel appearing for the petitioner has produced before this Court the materials which would indicate the following facts, dates and events:
DATE EVENT
Feb,1980 M/s.Jeetstex Engineering Ltd (JEL) had four divisions viz.,
machinery, Foundry, machine and Windmill.
M/s.JEL was engaged in manufacturing / supply of machineries to small and medium sized spinning mills. M/s.JEL availed the following credit facilities.
a) from IDBI, ICICI and IREDA for its expansion and created first charge over its assets.
b) working capital facilities from State Bank of India and Vijaya Bank and created second charge over its assets.
30.09.1999 M/s.JEL become sick in view of textile recession which commenced during the years 1996-1997. In view of this, the net worth of JEL got eroded during the financial year 1998-1999.
12.11.1999 Board of Directors of M/s.JEL formed the opinion that M/s.JEL had become sick and reference was made to BIFR for revival of M/s.JEL and the case is taken on file as BIFR case No.378/1999.
17.02.2000 BIFR declared M/s.JEL as a sick industrial company and appointed IDBI as the Operating Agency (OA) 31.03.2005 Operating Agency prepared the details of the value of the entire assets and liabilities of M/s.JEL by taking complete inventory of all assets and liabilities of whatever nature of Page 4 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 DATE EVENT M/s.JEL as required under Section 21 of the SICA. As per the valuation given by the valuer the total value of the assets of M/s.JEL was Rs.25.74 crores.
As per the inventory conducted by the OA the loan together with interest payable as on 31.03.2005 to IDBI, ICICI, IREDA (First charge holders amounting to Rs.3533 lakhs), SBI & Vijaya Bank (second charge holders amounting to Rs.1512 lakhs) plus interest of Rs.4437 lakhs totally comes to Rs.9482 lakhs and these institutions were agitating for SARFAESI action.
16.12.2005 M/s.JEL wrote letter to ESI to furnish the details of the ESI dues payable under the heads contribution, interest and damages.
19.12.2005 ESI under reply informed that a sum of Rs.29,64,917/- is due by way of contribution, Rs.1,96,879/- by way of interest and Rs.1,12,025/- by way of damages.
20.12.2005 M/s.JEL issued a cheque to ESI for Rs.29,64,917/- i.e the entire amount due to ESI by way of contribution.
M/s.JEL was heading towards the logical conclusion of winding up, since OA could not locate any alternate bidder for M/s.JEL.
Finally Operating Agency was able to locate LMW as a resourceful party and LMW after lot of persuasion finally agreed to take over the assets and liabilities of M/s.JEL for a consideration of Rs.35 crores despite the value of assets was Rs.25.74 crores.
20.02.2006 Operating Agency submitted a draft rehabilitation scheme to the BIFR on the basis of the proposal given by LMW. 23.03.2006 Based on the rehabilitation scheme submitted by Operating Agency, the draft rehabilitation scheme (DRS) prepared by the board taking cut off date as 31.03.2005 and ordered circulation of the DRS to all the concerned for consent as required under Section 19(2) read with Section 19(1)of SICA and fixed the hearing to hear objections/suggestions on 25.05.2006 and directed the Central/State Government Page 5 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 DATE EVENT Departments/Authorities etc to communicate their consent/objections within 60 days from the date of receipt of the order.
DRS suggested the following reliefs and concessions,
a) 1st charge holders - 60% of principal dues
b) 2nd charge holders- 28.44% of principal dues
c) unsecured creditors- 10% of their outstanding as per the books of M/s.JEL
d) PF - 43.81 lakhs
e) ESI - 25.54 lakhs
f) TNGST & GST - 84.64 lakhs
g) Central Excise - 0.44 lakhs
h) Electricity - 1.14 lakhs
i) Property Tax - 14.98 lakhs
j) Pollution control board - 1.45 lakhs
k) Income Tax - Principal Income Tax due + 18.22 lakhs towards TDS 25.05.2006 BIFR heard the objections/suggestions to the DRS, which was circulated as contemplated under section 19(2) of SICA and approved the sanction scheme by ordering merger of M/s.JEL with M/s.Lakshmi Machine Works Ltd., As per the sanctioned scheme/ merger scheme the consideration of Rs.3500 lakhs was agreed to be set apart to discharge the dues in the following manner:
1) Secured creditors (1st charge holder) 2120 lakhs
2) Secured creditors (2nd charge holder) 430 lakhs
3) India Cements capital finance 5.76 lakhs
4) PF 43.81 lakhs
5) ESI 25.54 lakhs
6) Sales tax 84.64 lakhs
7) Electricity 1.14 lakhs
8) Property tax 14.98 lakhs
9) Pollution control board 1.45 Page 6 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 DATE EVENT lakhs 10) Workers 300 lakhs
11) Income tax 18.22 lakhs 12) unsecured creditors 104 lakhs 13) share holders @ of Rs.1 per share 32 lakhs
14) contingencies 317.86 lakhs In the merger/sanction scheme the aforesaid details are mentioned under the heading III - salient features and rationale for merger.
In the merger/sanction scheme under the heading IV - the relief and concession are mentioned. Under this heading vide clause No. 4.2 the following is mentioned Statutory dues Amount PF 43.81 lakhs ESI 25.54 lakhs TNGST & CST 84.64 lakhs Central Excise 0.44 lakhs Electricity 1.14 lakhs Property tax 14.98 lakhs Pollution control board 1.45 lakhs These departments shall waive interest, penal interest, damages, liquidated damages and penalty for late payments if any.
13.06.2006 The Registrar of Companies, Coimbatore issued a Certificate Page 7 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 DATE EVENT of Registration of order of amalgamation dated 25.05.2006 passed by the BIFR for the amalgamation of M/s.JEL with LMW.
24.09.2007 Appeal Nos.233/2006, 201/2007, 247/2006 and 248/2006 were filed by Vijaya Bank, ARCIL, ATE Enterprise and Income Tax before the Appellate Authority for industrial and financial reconstruction, New Delhi questioning the order sanctioning the scheme on 25.06.2007. All the appeals were dismissed.
5. On 23.03.2006, based on the rehabilitation scheme submitted by the Operating Agency, a Draft Rehabilitation Scheme (DRS) was prepared by the Board and directed the circulation of the draft rehabilitation scheme to all the stakeholders concerned for consent as required under Section 19(2) read with 19(1) of the Sick Industrial Companies (Special Provisions) Act 1985 (hereinafter referred to as SICA) and fixed the hearing for objections and suggestions to 25.05.2006. Despite all the State and Central Government authorities were directed to communicate their consents and objections within 60 days from the date of receipt of the order, the respondents have not raised any objection or given any consent. It is true that the respondents have not given their consent. Later, it is admitted that the Page 8 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 petitioner has invested money on the basis of the Sanctioned Scheme which was approved by an order of merger of "M/s.Jeetstex Engineering Limited" with the petitioner on 25.05.2006.
6. The grievance of the petitioner is that as per the Sanctioned Scheme, the contribution towards ESI as on the date of merger got nullified and all the departments including ESI shall waive interest, penal interest, damages, liquidated damages and penalty for late payments, if any. It is stated by the petitioner that the Registrar of Companies, Coimbatore issued a Certificate of Registration of order of amalgamation dated 25.05.2006 (passed by BIFR) on 13.06.2006. It is seen that some of the financial institutions have also challenged the order of BIFR before the AIFR in appeals. The order passed by the AIFR dated 24.09.2007 is produced before this Court, which shows that the approved scheme has been confirmed by the AIFR.
7. By the impugned order, the respondents have demanded from the petitioner a sum of Rs.19,03,339/- towards dues to "M/s.Jeetstex Engineering Limited". Referring to the provisions of Section 19(2) and Page 9 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 other relevant provisions, the learned counsel appearing for the petitioner submitted that the Sanctioned Scheme is binding on the respondents and the demand is illegal and cannot be sustained. The learned counsel further submitted that the provisions of SICA, overwrites every earlier Act and therefore, the statutory dues even if they are admitted cannot be recovered from the petitioner, which has taken over the sick company, by virtue of an approved scheme under the provisions of SICA. The learned counsel refers to Section 19(2) of the Act which reads as follows:
"Every scheme referred to in sub-section (1) shall be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days from the date of such circulation [or within such further period, not exceeding sixty days, as may be allowed by the Board, and if no consent is received within such period or further period, it shall be deemed that consent has been given.
8. The learned counsel for the respondents submitted that there is no provision under the Employees State Insurance Act for waiver of Page 10 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 interest or damages, merely because there is an approved scheme only towards interest. The aforesaid submission cannot be countenanced in view of the specific provisions of the SICA, particularly Section 19-3A of the Act which is extracted hereunder:
On the sanction of the scheme under sub- section (3), the financial institutions and the banks required to provide financial assistance shall designate by mutual agreement a financial institution and a bank from amongst themselves which shall be responsible to disburse financial assistance by way of loans or advances or guarantees or reliefs or concessions or sacrifices agreed to be provided or granted under the scheme on behalf of all financial institutions and banks concerned.
9. The learned counsel appearing for the petitioner relied upon a judgment of a Division Bench of Delhi High Court in Director General of Income Tax Vs. BIFR dated 23.03.2011 which is held as follows:
"10. In the context of the above discussion we would like to reproduce specifically the provisions of Page 11 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 Section 32(1) of SICA. Section 32(1) of the SICA reads as follows:
32. EFFECT OF THE ACT ON OTHER LAWS:
(1) The provisions of this Act and of any rules or schemes made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973(46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act.
11. In view of the aforesaid provision there can hardly be any doubt that once a scheme is formulated after a reference is gone through the process of Sections 17 & 18 of the SICA, the said scheme would have the force of law notwithstanding anything inconsistent therewith contained in any other law. Thus, neither the party making any concessions at the time of the formulation of the scheme nor the company at whose behest the scheme is formulated and sanctioned can get out of the scheme. As noticed Page 12 of 15 https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 above, a draft scheme is sanctioned under the provisions of Sub-section (4) of Section 18 of the SICA. Once a draft scheme is sanctioned it is binding on those concerned as is reflected in Sub-section (8) of Section 18 and Section 19(3) of SICA. Thus, once a sanctioned scheme or any of its provisions is made operable it binds the sick industrial company, and the entities referred to in Section 18(8) and 19(3) of SICA. In these circumstances, the Department cannot surely be head to argue that the provisions of the scheme are not binding on it".
10. The above judgment is directly on the issue. By virtue of Section 19 (2) of SICA, the consent can be inferred. Therefore, it is not open to the ESI Corporation to revive the liability of a sick company by operation of statutory discharge.
11. In the result, this Writ Petition is allowed and the impugned order passed by the third respondent vide his Letter No.56/34184-57, 56/62423-66, 56-62358-54/RRC dated 27.08.2010 is quashed.
Consequently, connected Miscellaneous Petition is closed.
Page 13 of 15https://www.mhc.tn.gov.in/judis W.P.No.20002 of 2010 06.02.2023 Index:Yes/No Internet:Yes/No uma To
1. The Director General Union of India Employees State Insurance Corporation ESIC Building, Kotla Road Behind Foreign Post Office New Delhi.
2.The Joint Director Sub Regional Office Employees State Insurance Corporation 1897, Trichy Road, Panchdeep Complex Ramanathapuram Coimbatore-641 045.
S.S.SUNDAR, J.
uma
3.The Recovery Officer Sub Regional Office Employees State Insurance Corporation 1897, Trichy Road, Panchdeep Complex Ramanathapuram Coimbatore-641 045.
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