Andhra HC (Pre-Telangana)
Sponge Iron India Ltd. vs Neelima Steels Ltd. on 11 November, 1988
Equivalent citations: [1990]68COMPCAS201(AP)
JUDGMENT Upendralal Waghray, J.
During the pendency of several petitions for winding up of the respective companies on the ground that they are unable to pay its debts (in none of which any receiver or official liquidator is appointed), it has been brought to the notice of the court that a reference under Chapter III of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as "the Act"), has been registered in respect of each of the respondent companies under section 16(1) of the Act by the Board for Industrial and Financial Reconstruction ("the BIFR", in short), and the matters were adjourned on more than one occasions awaiting further steps, to be taken in view of section 22 of the Act. Counsel for the petitioners in some of the cases contended that the mere registrations of a reference under section 16(1) will not attract the applicability of 22 of the Act Counsel for the petitioners in some of the cases contended that the mere registration of a reference under section 16(1) will not attract the applicability of section 22 of the Act and and, therefor, the company petitions may be proceeded with.
As a common question as to the effect of section 22 of the Act is involved, I have heard several counsel for the petitioners and also counsel for the respondent companies who have appeared. They have also addressed arguments on the action to be taken by the court in the event section 22 is held applicable.
The points that arise for consideration are :
(a) Whether the mere proof of a reference being registered by the BIFR under section 16(1) of the Act attracts the provisions of section 22 ?
(b) If section 22 is held applicable, its effect on these company petitions ?
The Act has received the assent of the President on January 8, 1986, and some of its Provisions were enforced from January 12, 1987, and others from May 15, 1987. Its section 2 contains a declaration and it is for giving effect to the State towards securing the directive principles specified in article 39(b) and (c) of the Constitution. According to the Objects and Reasons :
"......A need has, therefor, been felt to enact in public interest a legislation to provide for 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."
Section 32 gives overriding to the Act on other laws as mentioned in it. Section 26 bars the jurisdiction of civil courts in respect of any matter which the Board for Industrial and Financial Reconstruction is empowered to decide under the Act, Section 31 saves certain proceedings mentioned in it. Section 36 confers power on the Central Government to make rules and in exercise of the said power, the 'Board for industrial and Financial Reconstruction (Secretary's powers and Duties) Rules, 1987, have been made. Section 27 of the Act empowers the Board to delegate certain statutory functions. The Board for Industrial and Financial Reconstruction Regulations, 1987, have been made, according to which some functions are assigned to the Secretary and Registrar. Section 3(o) of the Act defines a "sick industrial company".Chapter III which comprises sections 15 to 22 provides for references of cases to be dealt with under the Act, inquiry and the measures that may be taken by the Board for Industrial and Financial Reconstruction in respect of sick industrial companies. Section 15(1) casts an obligation on the management of an industrial company which has become a sick industrial undertaking to make a reference to the Board for appropriate action. Section 15(2) enables financial institutions, etc., make a similar reference. probably where the management of the company has itself not made it. Under section 16(1) of the Act, the Board may make such inquiry as it deems fit for determining whether any industrial company has become a sick industrial company. As mentioned in the said provision. such an inquiry may be taken up either on receipt of a reference under section 15 or upon information received with respect to such company or upon its own knowledge. Sections 17 to 21 provide for various measures the Board may adopt to revive, rehabilitate, reconstruct or take steps for winding up a sick industrial company in the circumstances mentioned in the said provisions. Section 22(1) provides for suspension of certain legal proceedings. Section 22(2) provides for some fetters on the rights of the shareholders of the sick company. Sub-section (3) enables the Board to pass certain orders which may suspend the operation of the contracts, etc., entered into by the company . Sub-section (4) gives overriding effect to the passed by the Board under subsection (3), and sub-section (5) provides for suspension of period of limitation for enforcement of any right or privilege during which its remedy for enforcement was suspended under this section. It is useful to extract some relevant statutory provisions, viz., "16. Inquiry into working of sick industrial companies. - (1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company -
(a) upon receipt of a reference with respect with to such company under section 15; or
(b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company.
(2) The board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to inquire into and make a report with respect to such matters as may be specified in the order.
(3) The Board or, as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within days from the commencement of the inquiry.
(4) Where the Board deems it fit to make an inquiry or to cause an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1) or, as the case may be, under sub-section (2), it shall appoint one of more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company...."
"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 an industrial company pending, then, notwithstanding anything contained in the companies Act, 1956 or any other law or the memorandum and articles of association of the industrial company or any other instruments having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for the execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in receiver in respect there of shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority."
"31. Saving of pending proceedings. - Where a receiver or an official liquidator has been appointed in any proceeding pending immediately before the commencement of this Act, in any High Court for winding up of an industrial company, such proceeding shall not abate but continue in the that High Court."
Regulation 19 of the Board for Industrial and Financial Reconstruction Regulations, 1987, empowers the Secretary or Registry to take necessary steps under section 16(1) where a reference is received by the Board under section 15(1) or 15(2). In case any of these officers decline to register the reference, the final decision is of the Chairman on appeal. However, if there is a controversy as to whether the industrial company has become sick within the meaning of section 3(o). the Board may conduct an inquiry on that aspect keeping in view the provisions of other subsections of section 16. The Board consists of a chairman and members who are persons of ability, integrity and experience in these fields. The main objects of an inquiry under section 16 is to determine whether the provisions of section 3(o) apply and, therefore, it is a sick company with a view to take measures under section 16 is to determine whether the provisions of section 3(o) apply and, therefore, it is a sick company with a view to take measures under sections 17 to 20.
Point (a) : The commencement of an inquiry under section 16(1)(a) will be either consequent on a reference made by the sick industrial company itself or a financial institution named in section 15(2). In a reference under section 15(1), the company does not dispute that it is sick, and in a reference under section 15(2), the necessary material is furnished by the financial institution institution about its being a sick company. The question whether an industrial company is sick company or not has to be determined with reference to the criteria laid down in the definition under section 3(o) which is to be generally on the basis of documents available with the Register of companies, financial institutions or the company itself. Apparently, in a reference under section 15(1) and (2), there is no dispute about the applicability of section 3(o) and, therefore, the secretary or the Registrar has been given the authority to take action for registration under section 16(1)(a). In cases of refusal to register, probably due to some formal or technical defect, an appeal against it will be decided by the chairman. However, in cases where the company itself disputes the applicability of section 3(o) to it and Board, on the basis of information, has reason to believe that it is applicable, an inquiry into that aspect become necessary as contemplated by section 16(1)(b) and certain provisions to help a speedy. effective and fair inquiry have been made in the other sub-sections of sections 16. after the inquiry, if it is found that section 3(o) applies, the Board has to take one of the alternative measures contemplated by sections 17 to 20.
Sri V. Rajagopala, Reddy learned counsel appearing for one of the petitioners contended that the mere registration of a reference under section 16(1) will not make section 22 applicable or be a ground for stopping the winding up proceedings in this court. According to him, the action of the Secretary in registering a reference is a ministerial act and it does not indicate that there has been an inquiry or any inquires pending before the Board. It is contended that, unless an inquiry contemplated by any the sub-sections (2) to (4) has commenced, section 22 does not become applicable. He has fairly started that there is only one reported decision in Industrial Finance Corporation of India v. Maharashtra Steels Ltd., AIR 1988 All 178; [1990] 67 Comp Cas 412 (All), which is, prima facie, against him, according to him, has not directly dealt with this question.
In view of the various provisions noticed above, the inquiry contemplated by section 16 will commence either on the receipt of a reference under section 15(1) or (2) or, on the basis of any other information received by the Board for Industrial and Financial Reconstruction.These two situations are reflect in section 16(1)(a) and 16(b). In the case of references,the secretary is empowered to hold a preliminary inquiry and register it and, thereafter, the Board will make such inquiry as it considers necessary in with the alternative measures to be adopted under sections 17 to 20.
Where there is no reference and the Board chooses to commence an inquiry, naturally there will be a contest by the company itself and in such cases, the Board will conduct an inquiry keeping in view the provisions of the other sub-section 16. If the Board comes to the conclusion that section 3(o) applies to the company in respect of which the inquiry is being held, it will then consider one of the alternative measures under sections 17 to 20. According to the scheme of the Act, after an inquiry under section 16 has commenced and it is determined that it is a sick company within the meaning of section 3(o), the proceeding will terminate only after one of the alternative measures under sections 17 to 20 are taken, In several of the cases, large amounts (the liability for which is not disputed by the respective companies) have not been paid by the companies and the respective petitioner are suffering hardship, Probably, the petitioner or other creditor can intervene at the stage of inquiry before determination of the question of applicability of section 3(o) if they dispute it and have material to show that the industrial sickness is a device to defeat the claims and pray that some transactions of the company have to be invalidated. But this is a matter which can be examined and decided only by the Board. In view of the scheme of the Act, the jurisdiction of the court under the Companies Act is excluded by implication. The jurisdiction of the civil court is, however, excluded by section 26. Therefore, the registration of a referenced by the Board for Industrial and Financial Reconstruction (may be by the Secretary under the powers conferred on him) is, prima facie, proof that the inquiry before the Board is pending and the Board has to take further steps for taking one of the alternative measures under section 17 to 20. Once it is shown that a reference is registered under the Act. Section 22 becomes applicable and this is how I would answer point No. (a).
Point No. (b) : The next point for consideration is the effect of section 22 on these company petitions for winding up. It was contended by several counsel for the petitioners that the matters should be adjourned from time to time awaiting the further progress before the Board for Industrial and Financial Reconstruction. It is contended that this is necessary as the petitioners were not parties before the Board for Industrial and Financial Reconstruction and are not like to lose the advantage of taking benefits of the extension of the period of limitation for enforcement of some of their rights in view of sections 441 to 458A of the Companies Act, etc. Section 22(1) affects only a limited class actions like winding up petitions. After it is determined that section 3(o) applies to a company, broadly, three alternatives are possible under sections 17 to 20, viz., (a) measures to revive a company where its net worth can be increased; (b) framing a scheme; and (c) taking steps for winding up. The Boards is given wide powers and the petitioners can be certainly approach the Board for relief during this stage. At the same time, the hardship caused to the petitioners when the companies have become sick is apparent. Till the Board passes an order under section 22(3), there is no restraint against the companies in alienating their properties and, probably, the petitioners may be able to move the Board, if considered necessary. The language of section 22(1) and that of section 31 indicates that such winding up proceeding shall not be proceeded with further. The question whether they stand abated or not was not canvassed and I do not consider it appropriate to go into it a this stage in view of the order which I propose to pass. Apart form the difference in language of section 22(1) and section 31, it is also open to the petitioners to seek and get consent of the Board to continue any winding up petitions. The implication of the provisions of this new legislation pay require further examination. I, therefore, consider it appropriate to pass the following order :
(a) The management of respondent (i) shall, once in every six months, viz, on first January and first July of every calendar year, inform the respective petitioners and their counsel at the address shown in the company petition or to any other changed address which may be intimated, the progress of the case before the Board for Industrial and Financial Reconstruction by registered post; (ii) shall not alienate the assets without leave of the Board for Industrial and Financial Reconstruction for a period of six months;
(b) The winding up petitions are closed with liberty to the petitioners to make an application for reviving them in the event it becomes permissible by virtue of any subsequent of the Board for Industrial and Financial Reconstruction.
(5) The company petitions are, accordingly, closed. No orders as to costs.