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Judgment
S.S. Subramani J.
I will first deal with W. P. No. 9843 of 1998, filed by the petitioner for issuance of writ of mandamus, directing the respondents to suspend all
the recovery or take over proceedings initiated by respondents Nos. 1. and 2 against the petitioner herein, in view of the provisions of the Sick
Industrial Companies (Special Provisions) Act, 1985, in pursuance of the application filed before the third respondent by the petitioner u/s 15 of
the Act, and pass such further or other orders as this court may deem fit and proper in the circumstances of the case.
In the affidavit filed in support of the writ petition, it is stated that the petitioner-company is a public limited company promoted by the deponent
and his brothers. It is involved in the processing of LPG. It also carries out importing, storing and distribution of LPG. In 1995, the Central
Government announced the liberalisation policy in the field of LPG. In order to satisfy the wide gap in demand and supply of LPG. the Central
Government invited the private sector to participate in the business of LPG. The scheme was called the ""Parallel Marketing of LPG"". The
Government offered a lot of benefits to the private sector. It was promised that the Government will lift the subsidy already utilised by the
Government oil companies and make the price at par within three years. The Government also assured that the infrastructure facilities established
by the Government can be utilised by the private parties until they establish their own infrastructure. Attracted by the offer of the Central
Government, the petitioner-company ventured into the field of parallel marketing of LPG and put up a factory at Vadamadurai Village,
Thiruvalluvar District with a total outlay of Rs. 12 crores. For the purpose of constructing the factory and putting up the plant and machinery, the
petitioner-company availed of a sum of Rs. 42.05 lakhs as term loan from the first respondent-institution, and also availed of a sum of Rs. 219
lakhs as hire purchase loan from the first respondent. For the normal working of the factory, a cash credit facility of Rs. 50 lakhs and letter of
credit arrangement for Rs. 100 lakhs was sanctioned by Dena Bank. However, the company availed only of a sum of Rs. 42 lakhs under the cash
credit facility and another sum of Rs. 55 lakhs under the L.C. arrangement, The petitioner-company made enormous marketing activities as a result
of which now more than a lakh of customers who have been waiting for a long period, are now enjoying the benefits of LPG connections. The
petitioner-company has been carrying on the business for the past five years. In the meanwhile, the company also made representations to the
Government to extend the subsidy to the private marketers or to remove the subsidy offered to the Government companies. While so, in 1996, the
international price for LPG per cylinder increased from Rs. 182 to Rs. 340. This unexpected price hike put the petitioner-company into a sudden
reverse situation and the company suffered a lot to maintain the price at the earlier rate. The company was unable to compete with the Government
companies. During these periods, the company was unable to make repayments to the first and second respondents as promised. So, arrears were
getting accumulated in the loan accounts. Inevitably, in 1997, the company had to increase the selling price of LPG to Rs. 210 per cyliner. In
meanwhile, the first respondent initiated take-over and recovery proceedings against the petitioner by notice dated October 16, 1997. The
petitioner made a request for re-scheduling of payment. But the first respondent did not give any reply, and at the same time it showed more
interest in crippling the business by enforcing recovery action. Therefore, the petitioner had to approach this court with W. P. No. 7209 of 1998,
and this court gave certain directions to pay specified amounts within stipulated dates. But the petitioner is not in a position to pay the same
because of the financial crunch and sickness of the company. The second respondent-bank also started recovery proceedings, for which notice has
been issued. In these circumstances, the petitioner submitted an application before the third respondent u/s 15 of the Sick Industrial Companies
(Special Provisions) Act, 1985. The third respondent has received the same. It has also endorsed therein that the reference is complete in all
respects. While narrating the facts, I have already said that the very same petitioner filed W. P. No. 7209 of 1998, and the same was moved
before me during midsummer vacation, 1998. I gave certain directions to the company. I directed the petitioner to pay a sum of Rs. 7.5 lakhs on
or before July 15, 1998, and, thereafter, every month on or before 15, an amount of Rs. 8 lakhs will be paid till March, 1999. Thereafter, the
instalment amount is increased, and the petitioner is directed to pay a sum of Rs. 10 lakhs each month (on or before 15th of every month) without
fail till the entire liability is discharged. I further said that in case payment of any one instalment is defaulted, and the payment is not made in time,
the respondent is entitled to take possession of the unit without further notice. The said order was passed on May 22, 1998, and as a follow-up
action, I treated the writ petition as part-heard, and I directed the office to post the same on July 17, 1998. It is during this interval, the petitioner
moved an application before the third respondent on July 7, 1998, and it was acknowledged by the third respondent on July 9, 1998, u/s 15 of the
Act. On July 15, 1998, W. P. No. 9843 of 1998 was filed and on July 16, 1998, a learned judge of this court ordered notice of motion and status
quo was directed to be maintained for a period of two weeks. The status quo was extended by another two weeks. Thereafter, both these writ
petitions came before me. I have not extended the interim order. But it was represented by the learned Additional Government Pleader that the
factory premises have been taken over by the respondent and two other items of immovable properties situated at Kanyakumari District were also
taken possession of by respondent after the status quo order was not extended.
The learned Additional Government Pleader who is appearing for the first respondent, submitted that the filing of the second writ petition was
not bona fide, and the details of my order have not been disclosed before the learned judge (V.S. Sirpurkar J.). The conduct of the petitioner is
such that the discretionary remedy under article 226 of the Constitution should be made available to it.
Learned counsel for the second respondent--Dena Bank--submitted that the present writ petition is clearly premature. The bank has not filed
any suit, and even if such an action is taken, the petitioner is entitled to the benefit of stay of proceedings. The same will have to be considered only
at that time, and the petitioner is not entitled to prevent the institution of a suit. Except for issuing a notice, it has not proceeded with any further
action. It is further said that the petitioner also cannot claim as a sick company. Learned counsel placed before me the balance-sheet of the
company for the period ending on March 31, 1996. That was running on profits. Nearly Rs. 35 lakhs is stated to be the profit for that year. If that
be so, under no circumstances, can it be said that it is a sick company so as to get the benefit of the provisions of that Act ? The argument is that
prima facie there is no material for suspending the recovery proceedings. Therefore, the respondents prayed for dismissal of the writ petitions.
After hearing heard learned counsel for all the parties, I feel that this is a case where the petitioner will be entitled to the relief asked for.
It is true that the petitioner has not come to the court with clean hands. A duty is cast on it to place the entire materials before the learned judge
when it filed W. P. No. 9843 of 1998. At least a duty is cast on the petitioner to submit before the learned judge that the earlier writ petition is
even now treated as part-heard. But that conduct should not disentitle the petitioner from getting the statutory benefit in view of a very recent
decision of the Hon''ble Supreme Court in Real Value Appliances Ltd. Vs. Canara Bank and Others, . That is also a case where the learned judge
deprecated the conduct of the petitioner therein and thereafter gave the benefit of stay u/s 22 of the Act. In that case, winding up proceedings were
initiated and a receiver was also appointed. The petitioner before the Honourable Supreme Court took various adjournments one after another,
and in the meanwhile approached the authorities under the BIFR and got its refer ence registered seeking declaration as a sick unit. Even after
getting its reference registered, the same was not informed to the High Court. But in spite of that, the Honourable Supreme Court held that the
conduct of the appellant was certainly very unfair to the High Court and, there was a clear attempt to keep the court in the dark. But when it was
clear from the application filed before the BIFR that the BIFR was informed about the proceedings taken against the company in the High Court
both on the company side and on the original side and so far as the BIFR was concerned, there was no suppression of facts before it the conduct
of the appellant-company before the High Court would not make the registration of the reference before the BIFR bad. Their Lordships further
went on and said that ""the reference u/s 15 of the Act and the registration thereof by the BIFR cannot therefore be said to have become bad
because of any conduct of the company before the High Court. It follows that equally the subsequent orders passed by the BIFR on the reference
cannot, on that account, be said to be invalid"".
Even though the conduct of the petitioner was unfair, once it has been brought to the notice of this court that the BIFR has registered the
reference, the court is bound to follow the statutory provisions.
Learned counsel for the petitioner relied on a decision of the Honourable Supreme Court in Maharashtra Tubes Ltd. Vs. State Industrial and
Investment Corporation of Maharashtra Ltd. and Another, , where the scope of the Act was elaborately considered, In paragraph 6 of that
judgment, their Lordships held thus (page 813 of 78 Comp Cas) :
On the other hand the 1985 Act was enacted, as its preamble manifests, with a view to timely detection of sick or potentially sick companies
owning industrial undertakings, the identification of the nature of sickness through experts in the relevant fields with a view to devising suitable
remedial measures through appropriate schemes and their expeditious implementation. Here the emphasis is to prevent sickness and in cases of
sick undertakings to prepare schemes for their rehabilitation by providing financial assistance by way of loans, advances or guarantees or by
providing reliefs, concessions or sacrifices from the Central or State Governments, scheduled banks, etc. The basic idea is to revive the sick units,
if necessary, by extending further financial assistance after a thorough examination of the units by experts and it is only when the unit is found to be
no more capable of rehabilitation, that the option of winding up may be resorted to. It is for that reason that Section 22(1) provides that during the
pendency of (i) an inquiry u/s 16, or (ii) preparation or consideration of a scheme u/s 17, or (iii) an appeal u/s 25, no proceedings for winding up of
the concerned industrial company or for execution, distress or the like shall lie or be proceeded with in relation to the properties of that concern
unless the BIFR/ appellate authority has consented thereto. The underlying idea is that every such actidn should be frozen unless expressly
permitted by the specified authority until the investigation for the revival of the industrial undertaking is finally determined. It is thus crystal clear that
the main thrust of this special legislation is on revival or rehabilitation of the sick industrial undertaking and it is only when it is realised that the same
is not feasible that the option of winding up of the unit can.be resorted to,
The largeness of amounts due to financial institutions should not be a concern, if the Act applies, and this also has been considered by the
Honourable Supreme Court in the very same decision in paragraph 14, which reads thus (page 821 of 78 Comp Cas) :
Now, we come to the impugned decision. The High Court was considerably influenced by the fact that the appellant-company owed crores of
rupees to banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect
failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which, inter alia, failed to meet their financial
obligations. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be banks or
State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large
industries are generally financed by banks and statutory corporations created specially for that purpose and if they are permitted to resort to
independent action in total disregafd of the pending inquiry under Sections 15 to 19 of the 1985 Act, the entire exercise under the said provisions
would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of the sick industrial concern by the simple
device of the Financial Corporation resorting to Section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending u/s
16/17 or an appeal is pending u/s 25 of the 1985 Act, there should be cessation of the coercive activities of the type mentioned in Section 22(1) to
permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company. The expression proceedings'' in
Section 22(1), therefore, cannot be confined to legal proceedings understood in the narrow sense of proceedings in a court of law or a legal
Tribunal for attachment and sale of the debtor''s property.
The scope of the Act also came for consideration in the decision in Deputy Commercial Tax Officer and Others Vs. Corromandal
Pharmaceuticals and Others, , wherein their Lordships followed the earlier decision of the same court in The Gram Panchayat and another Vs.
Shree Vallabh Glass Works Ltd. and others, . In paragraph 13 of that judgment, their Lordships considered as to what is the purpose of the Act
and held that only in respect of those debts which are included in the scheme, recovery and coercive steps could be stayed, and those debts which
are outside the scheme will not be covered by the Act. While considering the same, it was held as follows (in para. 13) (page 10) :
On a fair reading of the provisions contained in Chapter III of Act 1 of 1986 and in particular Sections 15 to 22, we are of the opinion that the
plea put forward by the Revenue is reasonable and fair in all the circumstances of the case. Under the statute, the BIFR is to consider in what way
various preventive or remedial measures should be afforded to a sick industrial company. In that behalf, the BIFR is enabled to frame an
appropriate scheme. To enable the BIFR to do so, certain preliminaries are required to be followed. It starts with the reference to be made by the
board of directors of the sick company. The BIFR is directed to make appropriate inquiry as provided in Sections 16 and 17 of the Act. At the
conclusion of the inquiry, after notice and opportunity afforded to various persons including the creditors, the BIFR is to prepare a scheme which
shall come into force on such date, as it may specify in that behalf. It is in implementation of the scheme wherein various preventive, remedial or
other measures are designed for the sick industrial company, steps by way of giving financial assistance, etc., by Government, banks or other
institutions, are contemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans,
advances or guarantees or reliefs or concessions or sacrifices by Government, banks, public financial institutions and other authorities. In order to
see that the scheme is successfully implemented and no impediment is caused to the successful carrying out of the scheme, the Board is enabled to
have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the
relevant time, acts under the guidance/control or supervision of the Board (BIFR). Any step for execution, distress or the like against the properties
of the industrial company or other similar steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned
scheme. In order to safeguard such state of affairs, an embargo or bar is placed u/s 22 of the Act against any step for execution, distress or the like
or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority. The language of
Section 22 of the Act is certainly wide. But, in the totality of the circumstances the safeguard is only against the impediment, that is likely to be
caused in the implementation of the scheme. If that be so, only the liability or amounts covered by the scheme will be taken in, by Section 22 of the
Act. So. we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the
moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal u/s 25 of the Act, it will be reasonable to hold
that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned
scheme.
In the decision which I have already referred to, viz., Real Value Appliances Ltd. v. Canara Bank [1998] 93 Comp Cas 26 ; [1998] AIR
SCW 1924at what stage, stay of proceedings will have to be taken was considered. Whether an order by the BIFR is necessary, or when an
application is registered, the proceedings will have to be stayed, was the matter in issue before the Honourable Supreme Court. Paragraphs 20 to
23 of the reports completely cover the point in issue wherein their Lordships have held thus (page 35) :
For the purpose of understanding the above point, it is necessary to refer to Sub-clauses (1) to (4) of Section 16 and Section 22(1) of the Act.
They read as follows :
Section 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 to such company u/s 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 enquire 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 sixty days from the commencement of the inquiry.
Explanation.--For the purposes of this sub-section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference
or information or upon its own knowledge reduced to writing by the Board.
(4) Where the Board deems it fit to make 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 may appoint one or more persons to be a special director or special directors of the company for
safeguarding the financial and other interests of the company or in the public interest.
S. 22(1).--Suspension of legal proceedings, contractors, etc.--Where in respect of an industrial company, an inquiry u/s 16 is pending or any
scheme referred to u/s 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal u/s 25 relating
to an 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.
It is to be noticed that according to Section 22, in case an ""inquiry u/s 16"" is pending then, notwithstanding anything in the Companies Act or
any other instrument, etc., no proceedings for the winding up of the company or for execution or distress or the like against the property of the
company or for the appointment of a receiver and no suit for recovery of money or enforcement of any security or of any guarantee--shall lie or be
proceeded with further, except with the consent of the Board or, as the case may be, by the Appellate Authority. Section 22A permits the Board
to pass certain conditional orders.
It is also to be noticed that Sub-clause (1) of Section 16 says that the Board ""may"" make such inquiry as it may deem fit for determining
whether any industrial company has become a sick industrial unit-(a) upon receipt of a reference u/s 15 or (b) upon information received by it or
upon its own knowledge as to the financial condition of the company. Under Sub-clause (2) of Section 16, the Board ""may"" if it deems it necessary
or expedient, require any operating agency to inquire and report to it. Under Sub-clause (3), the Board or the operating agency is to endeavour to
complete the inquiry within 60 days from the date of commencement of the inquiry. Explanation below Sub-clause (3) explains that for purposes of
Sub-clause (3), that is to say, for computing the period of 60 days, an inquiry shall be deemed to have commenced upon the receipt by the Board
or any reference or upon its own knowledge reduced to writing by the Board. Under Sub-clause (4), when the Board deems it fit to make an
inquiry under Sub-clause (1) or (2) of Section 16, it may (the word ""shall"" has been omitted by Act 12 of 1994) appoint one or more directors,
etc.
Relying on the use of the word ""may"" in Section 16(1) of the Act, it has been contended in some High Courts that the word ""may"" in that
Section shows that the BIFR has power to reject a reference summarily without going into merits and that it is only when the BIFR takes up the
reference for consideration on the merits u/s 16(1) that it can be said that the ""inquiry"" as contemplated by the section has commenced. It is argued
that if the reference before the BIFR is only at the stage of registration u/s 15, then Section 22 is not attracted. This contention, in our opinion, has
no merit. In our view, when Section 16(1) says that the BIFR can conduct the inquiry ""in such manner as it may deem fit"", the said words are
intended only to convey that a wide discretion is vested in the BIFR in regard to the procedure it may follow for conducting an inquiry u/s 16(1)
and nothing more. In fact, once the reference is registered after security (scrutiny) it is. in our view, mandatory for the BIFR to conduct an inquiry.
If one looks at the form of the reference as prescribed by the Regulations, it will be clear that it contains more than fifty columns, regarding
extensive financial details of the company''s assets, liabilities, etc. Indeed, it will be practically impossible for the BIFR to reject a reference outright
without calling for information/documents or without hearing the company or other parties. Further, the Act is intended to revive and rehabilitate
sick industries before they can be wound up under the Companies Act, 1956. Whether the company seeks declaration that it is sick or some other
body seeks to have it declared as a sick company, it is, in our opinion, necessary that the company be heard before any final decision is taken
under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the
BIFR for in case the company''s assets are sold, or the company is wound up it may indeed become difficult later to restore the status quo ante.
Therefore, in our view, the High Court of Allahabad in Industrial Finance Corporation of India v. Maharashtra Steels Ltd. [1990] 67 Comp Cas
412 the High Court of Andhra Pradesh in Sponge Iron India Ltd. v. Neelima Steels Ltd, [1990] 68 Comp Cas 201 the High Court of Himachal
Pradesh in Orissa Sponge Iron Ltd. v. Rishab Ispaat Ltd. [1993] 78 Comp Cas 264 are right in rejecting such a contention and in holding that the
inquiry must be treated as having commenced as soon as the registration of the reference is completed after scrutiny and that from time to time,
action against the company''s assets must remain stayed as stated in Section 22 till final decisions are taken by the BIFR.
In view of the above settled legal position, I feel that the petitioners herein must be given the benefit of Section 22 of that Act.
At this stage, the learned Government Pleader placed before me the decision of the Honourable Supreme Court in M.P. Mittal Vs. State of
Haryana and Others, . He relied on the following portion in paragraph 5 of the reports :
The appeal arises out of a writ petition, and it is well settled that when a petitioner invokes the jurisdiction of the High Court under article 226 of
the Constitution, it is open to the High Court to consider whether, in the exercise of its undoubted discretionary jurisdiction, it should decline relief
to such petitioner if the grant of relief would defeat the interests of justice, The court always has power to refuse relief where the petitioner seeks to
invoke its writ jurisdiction in order to secure a dishonest advantage or perpetuate an unjust gain. This is a case where the High Court was fully
justified in refusing relief. On that ground alone, the appeal must fail.
I have already considered this point. According to me, only because the conduct of the petitioner was unfair, it should not be refused the
statutory benefit. If the relief is refused, it is not only the petitioner who is denied the benefit, but also the creditors and the public at large.
The second respondent has a case that the petitioner is not a sick company at all, and for that purpose, reliance was placed on the balance-
sheet. Learned counsel also brought to my notice the definition of ""sick company"" under the Act. I do not think that contention could be considered
by me. At the time of enquiry by the BIFR, this matter will be considered and it is for them to decide whether the petitioner is entitled to the
benefits of the Act. The authorities under that Act have got exclusive jurisdiction to decide the same.
Even though I have stayed the proceedings, it is only proper on my part to give necessary direction to the third respondent also. I direct the
third respondent to take immediate action on the registration of reference. I direct it to make necessary enquiry and pass final orders on the same
within a period of three months from today with notice to respondents Nos. 1 and 2 in this case. Undoubtedly, the petitioner also will be given
notice for that proceedings. While passing orders, the third respondent is also directed to consider whether it can permit respondents Nos. 1 and 2
to realise the amount due to them, and whether permission should be granted for the said purpose, Respondents Nos. 1 and 2 are also directed to
move the authorities for the same by placing the necessary materials before it.
In the result, W. P. No. 9843 of 1998 is allowed as indicated above. No costs.
W. P. No. 7209 of 1998 :
Since I have allowed W. P. No. 9843 of 1998, no further orders could be passed in W. F. No. 7209 of 1998 and the same stands adjourned
by three months, In view of the provisions of the Act, from the date of registration, proceedings will have to be stayed. The first respondent has
taken possession of the assets of the company long thereafter. Naturally, the same will have to be returned to the petitioner-company. The first
respondent is directed to hand over the same to the petitioner-company, after preparing a mahazar. The petitioner is prohibited from alienating the
properties or otherwise encumber all its assets including collateral security in any manner, whether plant or machinery or other movables. No third
party interest also will be created. There will be no order as to costs in both the writ petitions. Connected W. M. Ps. are closed.