M/s. V.M. Confectionery Limited vs The Registrar Of Companies, Karnataka & Ors.

M/s. V.M. Confectionery Limited (hereinafter referred to as 'Corporate Applicant') filed the instant application under Section 74(3) of the I&B Code, 2016 seeking enforcement/ implementation of Clause IV (iii), (iv) & (vi) of the Sanctioned Scheme dated 21.06.2006 sanctioned by the Board for Industrial and Financial Reconstruction (BIFR) under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) read with the order dated 23.11.2011 passed by the BIFR and also the order dated 19.07.2012 passed by the BIFR inter alia directing Employees State Insurance Corporation (ESIC), Provident Fund (PF) and Registrar of Companies (ROC), Karnataka to comply with BIFR's order. Clause IV (iii), (iv) & (vi) of the Sanctioned Scheme dated 21.06.2006 reads as under:

It is stated that the revival scheme dated 21.06.2006 was sanctioned by the BIFR under Section 18(4) of the Sick Industrial Companies (Special Provision) Act, 1985 (hereinafter referred to as 'SICA'). On and from the date of the scheme coming into operation, the provisions of the Scheme was binding under Section 18(8) of SICA and the BIFR would periodically monitor the implementation of the said Scheme under Section 18(12) of SICA and was empowered to pass appropriate order(s) under Section 18(9) and 18(10) to remove difficulties in giving effect to the provisions of the Scheme as well as pass appropriate order for implementation of the said Scheme. Scheme 18(9), 18(10) and 18(12) of SICA reads as under:

It is stated that the BIFR appointed M/s. Canara Bank as the Monitoring Agency (MA) and the Corporate Applicant would submit its Audited Balance Sheet to the MA and also the progress report regarding implementation of the scheme on a regular basis. The relevant clause(s) of the revival scheme dated 21.06.2006 reads as under:

The Eighth Schedule of the I&B Code, 2016 reads as under:

It is further stated that the effect of the foregoing mentioned Section 4(b) of SICA Repeal Act, 2003 is that from the date notified by the Ministry, all proceeding pending before the BIFR and AAIFR shall abate and the corporate debtor may within 180 days of the commencement of the IB Code, 2016 make reference to the NCLT. The Ministry of Finance vide Notification No.SO 3594(E) DATED 30.11.2016 notified various provisions of the Code w.e.f. 01.12.2016. Although the revival scheme was saved under Section 5 of the SICA Repeal Act, 2003; there was no provision available in the I&B Code, 2016 or under the Eighth Schedule of the I&B Code, 2016 for implementation of the Scheme by all the agencies or for removal of difficulties in the said Scheme.

In view of the difficulties which have arisen regarding review or monitoring of the schemes mentioned under Section 18(4) of SICA, the Central Govt. in exercise of its powers under Section 242 of the I&B Code, 2016 by an order published in the Official Gazette vide Notification No.SO 1683(E) dated 24.05.2017 has inserted the following provisions after the second proviso to Section 4(b) of the SICA Repeal Act, 2003 to read as under:

In light of the foregoing, the revival Scheme dated 21.06.2006 sanctioned by the BIFR and orders dated 23.11.2011 and 19.07.2012 shall be deemed to be an approved resolution plan under sub-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016 and the same shall be dealt with, in accordance with the I&B Code, 2016. The Code provides for enforcement of the resolution plan under Section 74(3), which reads as under:

The Corporate Applicant is a Company incorporated on 30.03.1984 under the Companies Act, 1956 now the Companies Act, 2013. The registered office of the Corporate Applicant is at Bengaluru and is having CIN No.U15400KA1984PTC005991.

It is stated that the Ministry of Corporate Affairs, Government of India is primarily concerned with the administration of Companies Act and other allied Acts, rules and regulations framed there under for regulating the function for the corporate sector in accordance with law. The Ministry of Corporate Affairs, in exercise of its powers conferred under Section 242(1) of the Code, has issued the Order dated 24.05.2017 vide Notification No.SO 1683(E).

The R-1 i.e. Registrar of Companies (hereinafter referred to as ROC) defined under Section 2(74) of the Companies Act, 2013 having the duty of registering Companies and LLPs floated in respective states and discharging various functions under the Companies Act. The Central Govt. (Ministry of Corporate Affairs) exercises administrative control over the offices of ROC through respective Regional Directors.

The R-2 i.e. the Employees' State Insurance Corporation, the apex body set up under the Employees' State Insurance Act, 1948, as an elaborate machinery provided for the effective administration of the Act, which is a piece of social welfare legislation enacted primarily with the object of providing certain benefits to employees in case of sickness, maternity and employment injury and also to make provisions for certain other matters incidental thereto.

The R-3 is an authority designated under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 for the efficient administration of the Employees Provident Fund Scheme, the Pension Scheme and the Insurance Scheme.

It is stated that Canara Bank was one of the secured creditors of the Corporate Applicant, whose dues were settled and paid by the Corporate Applicant under One Time Settlement Scheme. Therefore, it has not been made a party to the proceedings. Canara Bank was appointed by BIFR as the Operating Agency under Section 17(3) of SICA for formulating a viable rehabilitation scheme for the Corporate Applicant and upon sanction of the revival scheme, Canara Bank was re-appointed as the Monitoring Agency in order to monitor the implementation of the various provisions of the sanctioned scheme.

The Corporate Applicant's net worth as on 31.03.1994 got eroded by accumulation of losses and the Applicant filed a reference under Section 15(1) of SICA, 1985 before the BIFR. The said reference was registered by BIFR as Case No.34/1995. The Corporate Applicant was declared as a sick industrial company by the BIFR under Section 3(1)(o) of SICA, 1985 vide its order dated 17.07.1995. Canara Bank was appointed as the Operating Agency (OA) under Section 17(3) of SICA to formulate a rehabilitation scheme under the BIFR's guidelines.

BIFR sanctioned a rehabilitation scheme for the Corporate Applicant vide order dated 16.02.1996. However, since the Corporate Applicant failed to implement the prescribed provisions of the sanctioned scheme dated 16.02.1996 and could not turn its net-worth positive, BIFR, in the review hearing held on 20.07.2000, declared the sanctioned Scheme dated 16.02.1996 as "failed".

A modified Scheme for revival of the Corporate Applicant was sanctioned by BIFR on 21.06.2016 under Section 18(4) of SICA, and Canara Bank was appointed as the Monitoring Agency.

The Clause IV (iii), (iv) & (vi) of the Sanctioned Scheme dated 21.06.2006 are already stated supra.

In the review hearing held on 23.11.2011 before BIFR, it was brought to the notice of the Hon’ble BIFR by the Corporate Applicant that the aforesaid concerned agencies have not implemented the prescribed provisions of the sanctioned Scheme dated 21.06.2006. The Hon’ble BIFR was pleased to pass the following orders:

In a subsequent review hearing conducted by BIFR on 19.07.2012, after considering the objections of ROC, Karnataka and the submissions made by the Canara Bank, Monitoring Agency, the BIFR passed the following orders:

It is stated that the Corporate Applicant had served copies of the aforesaid orders passed by the learned BIFR on all the concerned parties but none of them (ESIC, PF and ROC) have implemented the directions. This case was scheduled to be heard before BIFR on 16.09.2014 but due to non-availability of duly constituted Bench of BIFR, this hearing could not take place and case was never listed thereafter. Now that all proceedings before the BIFR stood abated w.e.f. 01.12.2016 by virtue of SICA Repeal Act, 2003 coming into force.

On or about 26.08.2017, the Corporate Applicant received Garnishee order under Section 45G of ESI Act, 1948 bearing No.KAR.CP/53-000-04352-000-0009 DATED 21.08.2018 and order bearing No.KAR.CP/53-000-04332-000-0009 dated 29.08.2018 from the Recovery Officer, ESI Corporation, Bangalore demanding to remit a sum of Rs.8,53,079/- being interest/damages. The Corporate Applicant vide its letter dated 07.09.2017 submitted the copy of the sanctioned scheme dated 21.06.2006 and the subsequent order dated 23.11.2011 passed by the learned BIFR as also the previous correspondence exchanged by the Corporate Applicant with ESIC and requested the ESIC to withdraw the Garnishee Orders.

It is also pertinent to bring it to the notice of this Adjudicating Authority than in the case of PF, the learned BIFR had directed to waive penalty and damages. Despite the fact that by a communication dated 10.10.2012, the Assistant PF Commissioner and Recovery Office, EPFO had confirmed that the proposal for waiver of damages was being sent to their head office for consideration as recommended by BIFR, the EPF Authorities have, in fact, already recovered Rs.75 lakhs (Rs.25 lakhs towards penal interest and Rs.45 lakhs towards penal damages), in violation of the BIFR orders.

Copies of various other correspondences exchanged by the Corporate Applicant with ESI Corporation, ROC, Bangalore and PF Authorities have been placed on record.

It is further stated that under the SICA Repeal Act, 2003, the order made by the BIFR for sanction of the Scheme; rights and privilege accrued in favour of the Applicant under the Repeal Act has been saved under Section 5 of the Act. Thus, the Sanctioned Scheme dated 21.06.2006 and the BIFR's orders dated 23.11.2011 and 19.07.2012 passed in favour of the Applicant are also saved under the SICA Repeal Act, 2003.

The Central Govt. in exercise of its powers under Section 242 of the I&B Code, 2016 by an order published in the Official Gazette Notification No.SO 1683(E) dated 24.05.2017 has amended/ inserted another proviso after the second proviso to Section 4(b) of the SICA Repeal Act, 2003. In terms of the said provision of law, the Scheme sanctioned by BIFR on 21.06.2006 under sub-section (4) or any scheme under implementation under sub-section (12) of Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall be deemed to be an Approved Resolution Plan under sub-section (1) of Section 31 of the Code and the same shall be dealt with in accordance with the provisions of the Code.

In the present case, difficulties have arisen due to non-compliance of the provisions of the sanctioned Scheme (i.e. para IV (iii) (iv) & (vi)) by ESIC, PF & ROC respectively. Therefore, the said non-compliance of the BIFR's Scheme which is deemed to be a 'resolution plan' under the Code is required to be enforced under the provisions of the Code.

Hence, the instant Application is filed seeking enforcement/ implementation of Clause IV (iii), (iv) & (vi) of the revival Scheme sanctioned by the BIFR which is akin to a 'resolution plan'.

It is stated that the application of the Applicant filed under third proviso to Section 4(b) of the Sick Industrial Companies (Special Provisions) Act, 2003 inserted in the Eighth Schedule of the Code w.e.f. 24.05.2017 vide Section 2 of the I&B Code (Removal of Difficulties) Order, 2017, is liable to be rejected in limini.

It is stated that the ESI contribution for the relevant period has been paid by the Applicant but it is belated as they have not paid the contribution within the stipulated time under the provisions of the ESIC Act, 1948. The period of contribution pertains to relevant period is for the period March 2003, September 2003, March 2004 and September 2004. But the said amount has been paid on 04.07.2006 as per the acknowledgement dated 04.07.2006 issued by the R-2.

It is stated that there are two Garnishee Orders, one is addressed to Syndicate Bank dated 29.08.2017 and another addressed to Vijaya Bank dated 21.07.2017/21.08.2017. The Garnishee order addressed to Vijaya Bank has been revoked by R-2 vide letter No.KAR.ESIC.CP.53-04352 dated 29.08.2017. So, the Garnishee Order referred by the Applicant in para 8.16 of their application regarding Garnishee Order bearing No.KAR.CP/53-000-04332-000-0009 dated 21.08.2017 stands revoked.

It is further stated that the Garnishee Order referred by the applicant in para 8.16 of their application i.e. the Garnishee Order No.KAR.CP/53-000-04332-000-0009 dated 29.08.2017 is still holds good since the Applicant is liable to pay the amount of Rs.8,86,895/- (after deduction of 50% of total damages of Rs.67,632/- which is worked out against principal outstanding due of Rs.99,353/- for which Scheme was sanctioned by BIFR on 21.06.2006 and there is no provision for waiver of interest in ESI Act, 1948) claimed for the period 10/2002 to 08/2004.

It is stated that the Petition of the Corporate Applicant is not sustainable in law and on the facts of the case.

M/s. VM Confectionery Ltd., (Unit I & II) situated at No.135 & 135/C, Kavalbyrasandra, Bangalore-560032 (hereinafter called 'the establishment') engaged in the manufacture of confectioneries were brought under the purview of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 under Code No.KN/11623 (Unit-I) and KN/11364 (Unit-II). Shri V.M. Barkathulla, Shri V.M. Siddique and Shri V.M. Rahmathulla were the Directors of the Company. The establishment had defaulted in payment of statutory dues to the tune of Rs.1,14,09,556/- for the period from 1993-94 to 2004-05 were assessed u/s 7A, 14B and 7Q of the Employees' Provident Funds & Miscellaneous Provisions Act, 1952 (hereinafter called 'the Act') by the Assessing Officer after affording sufficient opportunities of personal hearing. Since the defaulters did not comply with the orders passed u/s 7A, 14B and 7Q of the Act, the Assessing Officer forwarded the following Recovery Certificates to the Recovery Officer for recovery of the above statutory dues by invoking the provisions contained under Section 8B to 8G of the Act.

It is stated that the Recovery Officer initiated recovery proceedings against the defaulting establishment as soon as the Recovery Certificates were received from the Assessing Officer. Demand Notices dated 20.02.2006 and 06.03.2006 in Form No. EPF CP-1 issued to the establishment met with resistance from the establishment on the ground that the establishment had been declared as a sick unit under Sick Industrial Companies Act, 1985 by BIFR and a Rehabilitation Scheme was being drafted.

It is stated that the Recovery Officer clarified on 16.03.2006 that the proceedings before the BIFR were not binding in so far as recovery of statutory dues was concerned and cited the Case No.374/2000 of M/s. Galada Power & Telecommunication Ltd., vs. APFC & Recovery Officer, wherein the BIFR themselves have held that the Recovery Officer cannot be restrained from taking recovery actions even if the Company had been declared as sick unit by BIFR. The Recovery Officer categorically informed the defaulting establishment that the recovery actions would go on till the entire dues were recovered.

It is also stated that the Recovery Officer once again clarified on 12.04.2006 that the protection of Section 22(1) of SICA was not available as far as statutory dues were concerned and therefore informed the Directors that they were jointly and severally responsible to liquidate the outstanding statutory dues. When the Recovery Officer proceeded to serve the Show Cause Notice to the Directors as to why warrant of arrest should not be issue, the establishment produced a copy of the Summary Record of Proceedings of Review held by BIFR on 21.06.2006 and a copy of the Sanctioned Scheme.

The Company had made a reference in 1995 to BIFR u/s 15(1) of SICA, 1985. The Company was declared as a sick unit in terms of Section 3(1)(O) of the Act and the Hon'ble BIFR appointed Canara Bank as the Operating Agency, vide BIFR order dated 16.02.1996 to examine the viability and prepare a Rehabilitation Scheme for the Company. Though the Scheme submitted by the Operating Agency was approved by the BIFR, the Sanctioned Scheme failed due to mismanagement, financial indiscipline and in fights in the family of the Directors. The Company could not achieve the projected net worth by 31.03.1999 and it suffered a huge loss. The Bench directed the Operating Agency to explore change of management. It did not materialize as there was no response to the advertisement issued by the Operating Agency. Finally, the Bench directed the Operating Agency on 09.09.2005 to prepare a Modified Rehabilitation Scheme.

The said Scheme submitted by the Operating Agency was approved by BIFR. As per the new Sanctioned Scheme, the Company envisaged its net worth to turn positive by 2010-11. As far as payment of PF dues was concerned, the Sanctioned Scheme provided the total principal and interest u/s 7Q was envisaged to be paid over a period of 5 years commencing from 2006-07 with 12% interest u/s 7Q charged per annum; and to consider waiver of Penalty/Damages on the said amount.

On a subsequent date, Canara Bank has also paid back the money which it invested in rehabilitation, after Hon'ble High Court adjudication.

It is also stated that the whole matter was reported to the Head Office vide letter dated 01.08.2006 and they directed this office to go ahead with the recovery action. Before initiating the recovery action, the Recovery Officer issued letters to the Directors of the establishment to take immediate steps to liquidate the dues, for which no response was received.

From December 2006 onwards, persistent efforts were made to recover the dues in following manner:

Order of Attachment of Bank account in Form No.EPF CP-4 dated 01.12.2006, 04.08.2016 and 21.10.2016 were issued and several bank accounts of the Establishment/its Directors were attached. The establishment filed WP No.17746/2006 (L-EPF) before the Hon'ble High Court of Karnataka against CP-4 dated 01.12.2006 and got the interim stay orders dated 11.12.2006, 24.01.2007, 06.03.2007 and 13.04.2007 on Bank attachment four times for a total period of 18 weeks upon extension of stay. But again not paid the dues and hence committing contempt of Hon'ble Court.

The establishment in fear of losing the Writ Petition stated that they would submit application before the Recovery Officer for grant of instalment facility and withdrew the WP No.17746/2006. The Hon'ble High Court granted the leave and directed the Asst. PF Commissioner and Recovery Officer to consider the instalment application, if any was made by the establishment.

A letter dated 04.03.2009 from the office of Central PF Commissioner, EPFO revealed the Competent Authority approved the instalment facility to the establishment directing it to pay the principal dues and interest under Section 7Q outstanding by 15.03.2011. But the same also was never complied by the Establishment.

It is further stated that Show Cause notices dated 27.05.2014 and 15.06.2015 were issued to the establishment and its Directors. Observing the failure of all other mode, the then Recovery Officer in May 2014 issued CP-25 Show Cause for warrant of arrest to the Establishment/Employers and in response to that in June 2014, the Establishment has requested time to clear the dues but the same was never paid.

Subsequently, various Summons under Rule 83 of II Schedule of Income Tax Act, 1961 inter alia accepted by EPF & MP Act, 1952 were issued to all the Directors i.e. V.M. Barkathulla, V.M. Rahmathulla & V.M. Siddique stating that there shall be consequences of non-payment of obligatory PF dues despite the lapse of more than a decade and every time it was assured that dues shall be made good. But only around Rs.10 lakhs were paid despite the repeated persuasion by the then Recovery Officer.

It is stated that Order of Attachment of Debtors in Form No.EPF CP3 dated 29.06.2015 and 13.07.2015 were issued to the agencies M/s. Sri Nakoda Construction Limited, M/s.Nakoda Construction and M/s. Krishna Development Corporation which, office came to know, may have property dealings with the defaulter establishment. Also order of Attachment of Immovable Property in Form No.EPF CP-16 dated 20.11.2015 was issued and attached the immovable property of the establishment. Further the Director, Shri Rahmathulla and his wife Smt.Sabira Begum have filed W.P. No.3738/2016 and 3739-40/2016 in the Hon'ble High Court of Karnataka against the Summons issued to the Director and Prohibitory Order issued against his wife. Interim appeal in this case filed by the Petitioner has already been rejected.

It is evident from the above that establishment has dishonoured repeatedly the Authority of every institution. Therefore, the Respondent, being left with no other option, has decided to attach the property of Shri V.M. Barkathulla, Director in the case of KN/11364 and 11623, M/s. V.M. Confectionery Ltd.