M.V. Damodaran vs Registrar of Co-operative Societies and Others

S.S. Subramani, J.—The petitioner seeks the issuance of a writ of mandamus directing respondents Nos. 1 to 3 to take necessary steps for

launching revenue recovery proceedings u/s 48(a) of the Tamil Nadu Co-operative Societies Act, 1983, for recovery of a sum of nearly Rs. 87

lakhs from the fourth respondent that is due to the fifth respondent by the fourth respondent, and to pass such further or other orders as this court

may deem fit and proper.

The petitioner is working in Dunlop India Limited, Ambattur, the fourth respondent herein, and he is a member and shareholder of Dun-lop

Employees'' Co-operative Thrift and Credit Society Ltd., the fifth respondent herein, and he enrolled himself as a shareholder on May 25, 1982. It

is said that as on date, there are 1,700 members and the society has got a share capital of Rs. 35 lakhs. The family welfare deposit lying to the

credit of the society amounts to Rs. 26 lakhs and thrift deposit at the credit of the society is Rs. 1.33 crores, and the loan granted by the society

would be Rs. 1.20 crores. As per arrangement between the employees of Dunlop India Limited who were also members of the fifth respondent-

society, the fourth respondent agreed to deduct from the wages and salaries of its employees, who are members of the fifth respondent and pay the

society its dues towards their loan amounts. This arrangement was going on without any problem, but, from 1993, the fourth respondent, even

though deducted the loan amount from the wages of the employees, defaulted in paying the same to the society. Even though the society made

repeated oral requests to the company to repay the same, the same was not done. It is further said that even the Deputy Registrar of Co-operative

Societies wrote a letter to the fourth respondent asking the company to pay the entire amount which was deducted, failing which it was informed

that recovery proceedings will be initiated. A lawyer''s notice also followed thereafter. The fifth respondent thereafter, on January 16, 1998,

wanted revenue recovery proceedings to be initiated against the fourth respondent for non-payment of the dues. Since a sum of nearly Rs. 87 lakhs

collected by the fourth respondent was not paid to the society, the employees are put to very great difficulties. Respondents Nos. 1 to 3, even

though they have informed the company that they intend to take revenue recovery proceedings, have failed to do so, and have failed to discharge

the statutory duties. It is further said that u/s 48 of the Tamil Nadu Co-operative Societies Act, 1983, a duty is cast on respondents Nos. 1 to 3 to

recover the amount due to the society by recourse to revenue recovery proceedings. The society has certified that as on date nearly Rs. 87 lakhs is

due to it from the fourth respondent which it has collected or deducted from the wages of the employees. Since statutory authorities have failed in

discharging their duties, the petitioners have come to this court for the reliefs stated above.

Counter-affidavit has been filed by respondents Nos. 1, 3, 4 and 5. Excepting the contentions of the fourth respondent, the contentions of all the

other respondents are the same. They admit that nearly Rs. 87 lakhs is due to the fourth respondent-company and the company has recovered the

same from the employees from their wages. Even though the employees have paid the amount to the employer, the corresponding duty of the

employer to the society is not discharged. It is also said that they have made various representations to the fourth respondent to pay the amount,

but it has failed to remit the same.

In the counter-affidavit of the fourth respondent sworn to by its deputy general manager, it is said that the petitioner has no locus standi to file

this writ petition. The petitioner is not authorised either by the fifth respondent-society or by other employees of the company. Even if the petitioner

is a shareholder of the fifth respondent-society, proceedings in a court of law can be initiated only by the secretary of the society or by person

authorised by the bye-laws. It is further said that the society is not incapacitated in filing a writ petition and when the amount is due to the society,

the petitioner cannot file this writ petition. An amount of Rs. 5,500 was due to the petitioner, and that amount has already been paid to him, and as

on date, the petitioner cannot say that he is a creditor.

The other legal ground taken by the fourth respondent is that it has already registered its name before the Sick Industrial Companies (Special

Provisions) Act, 1985, and proceedings have been initiated by authorities under that Act and enquiries are going on. Since their name has been

registered under the provisions of the said Act and enquiry is also ordered to be held u/s 16(2) of the said Act, revenue recovery proceedings also

cannot be initiated in view of the bar u/s 22 therein.

In regard to the amount due to the fifth respondent-society, the same is disputed. Even in June, 1998, an amount of Rs. 10.5 lakhs was paid. It

prayed for dismissal of the writ petition.

At the time of arguments, learned counsel for petitioner relied on Section 48 of the Tamil Nadu Co-operative Societies Act, 1983, and brought

to the notice of the court that when there is an agreement between the employee-society and the employer regarding reimbursement of the loan,

and consequent to the agreement, the employer deducts from the wages towards part payment of the loan, a duty is also cast on it to pay the same

to the society and in case it failed to do so, the authorities under the Co-operative Societies Act are bound to resort to revenue recovery

proceedings, and the authorities are expected to discharge their statutory duties, and in this case, except for issuing one or two notices, coercive

steps contemplated u/s 48(8) of the Act have not been complied with. Since respondents Nos. 1 to 3 have not acted in accordance with law, the

petitioner, as a shareholder, has come to this court for the benefit of all the employees of the company. It is further said that nobody can question

the locus standi of the petitioner when he happens to be a shareholder of the society and also an employee of the fourth respondent.

As against the said contention of learned counsel for the petitioner, the main argument that was put forward by learned counsel for the fourth

respondent is that in view of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, no recovery proceedings could be

initiated at this stage. It is said that an application has already been made by the company before the Board constituted under the Sick Industrial

Companies (Special Provisions) Act, 1985, and its name has been registered by the Board and enquiry has been ordered u/s 16 of the Act. Once

its name has been registered and enquiry ordered, there is a total bar u/s 22 of suspension of any legal proceedings including recovery of any

amount through coercive steps, and a writ of mandamus cannot be issued in view of the statutory provisions. Apart from the same, the locus standi

of the petitioner in filing the writ petition is also questioned.

In reply, learned counsel for the petitioner submitted that a mere registration of the fourth respondent-company by the Board will not bar the

court from directing coercive steps to be taken. It was further submitted that necessary orders may be issued by this court to protect the interest

and welfare of the employees of the company. According to the petitioner''s counsel, it is a serious case of misappropriation by the company in not

having remitted the amount which it has deducted from the wages of the employees, and it is a breach of trust.

From the records produced by the fourth respondent, it is seen that an application was filed by it on January 13, 1998, before the Board for

Industrial and Financial Reconstruction (BIFR) to have its name registered for the reason that it is a sick industrial company within the meaning of

Section 3(1)(o) of the Act, due to financial strains from the year 1995-96. It, therefore, requested that its name be registered under the provisions

of that Act. On receipt of the said request, the BIFR, on February 2, 1998, wanted some more documents and clarifications, which were also

complied with. Later, on March 31, 1998, proceedings were initiated in the presence of representatives of the various creditors including the State

Government, various banking institutions, etc., and the BIFR passed the following order :

Considering the facts on records and submissions made at today''s hearing the Bench appointed IDBI as the operating agency u/s 16(2) of the

Sick Industrial Companies (Special Provisions) Act, 1985, to look into the accounts of the company and submit its status report within four weeks

as from today in regard to the genuineness of the entries of Rs. 169.26 crores and contingent provisions of Rs. 55 crores as stated by UBI and

whether treatment of these entries reflect a true and fair position of the accounts of the company. The company was directed to furnish all

necessary data/information to the operating agency along with the audited accounts as on December 31, 1997, in the operating agency. The Bench

declared that on receipt of the status report from the operating agency, it will take an overall view in the matter and declare the company sick or

otherwise under the provisions of the Act.

It was not disputed that this enquiry was u/s 16(2) of the Act.

What is the consequence of such an order ?

In a very recent decision of the Honourable Supreme Court in Real Value Appliances Ltd. v. Canara Bank [1998] 93 Comp Cas 26 ; AIR

1998 SC 1924 (judgment dated May 5, 1998), this question came up for consideration. Their Lordships approved the decision of the Allahabad

High Court in Industrial Finance Corporation of India v. Maharashtra Steels Ltd. [1990] 67 Comp Cas 412, Sponge Iron India Ltd. Vs. Neelima

Steels Ltd., and Orissa Sponge Iron Ltd. v. Rishabh Ispaat Ltd. [1993] 78 Comp Cas 264 (HP) and held thus (page 35 of Comp Cas) :

For the purpose of understanding the above point, it is necessary to refer to Sub-sections (1) to (4) of Section 16 and Section 22(1) of the Act.

They read as follows :

''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 enquiry 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 deem 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 pubic interest.

22.(1) Suspension of legal proceedings, contracts, 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-section (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-section (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-section (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. The Explanation below Sub-section (3) explains

that for purposes of Sub-section (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 of any reference or information or upon its own knowledge reduced to writing by the Board. Under Sub-section (4), when

the Board deems it fit to make an inquiry under Sub-section (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 in that section

shows that the BIFR has power to reject a reference summarily without going into the 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 scrutiny, it is, in our view, mandatory for the BIFR to conduct an inquiry. If one

looks at the format of the reference as prescribed in the Regulations, it will be clear that it contains more than 50 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 a declaration that it is sick or some other

body seeks to have it declared 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, pr the company 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. Rishabh 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 that time, action against

the company''s assets must remain stayed as stated in Section 22 till final decisions are taken by the BIFR.

Thereafter, the Honourable Supreme Court has considered the divergent views taken by other High Courts regarding the scope of Section 22

and have held that once the name is registered, there is a mandatory duty on the part of the BIFR to order inquiry and once inquiry is ordered, all

proceedings will have to be stayed, and Section 22 of the Act will apply automatically. Paragraphs 26 to 29 of the said decision read thus (page

38 of 93 Comp Cas) ;

Now, regulation 19(4) which is concerned with Section 15, requires that upon receipt of a reference, an acknowledgment is to be issued stating

expressly that the reference has been received ''subject to verification that the reference is in order''. If on scrutiny, the reference is in order, then it

will be registered under regulation 19(5). Regulation 19(5) has been amended recently with effect from March 24, 1994, which is of a date very

much subsequent in point of time to the date of the judgment of the Calcutta High Court. The new regulation 19(5) as substituted with effect from

March 24, 1994, is in two parts and reads as follows :

''19.(5) If on scrutiny, the reference is found to be in order it shall be registered, assigned a serial number and submitted to the chairman for

assigning it to a Bench. Simultaneously, remaining information/documents required, if any, shall be called for from the informant.''

The first part says that the reference, if it is in order, will be registered. The second part says that simultaneously notice shall be issued calling for

information or document from the informant. The effect of the amended regulation 19(5) is that even before any Bench of the BIFR can think of

calling for information under regulation 20{1) or under regulation 21 read with Section 16, it is now mandatory after the amendment that as soon as

a reference is registered, information/documents shall be called for from the informant straightaway. The point is whether when such

information/documents are required to be simultaneously called for at the regulation 19(5) stage, can it be said that an ''inquiry'' u/s 16(1) has

commenced ?

The above question depends upon what is meant by the word ''inquiry'' used in Section 16(1) of the Act. According to the New Standard

Dictionary, the word ''inquiry'' includes ''investigation'' into facts, causes, effects and relations generally ; ''to inquire'' according to the same

dictionary means ''to exert oneself to discover something''. Chamber''s 20th Century Dictionary lays down .that the meaning of the term ''to inquire''

is ''to ask'', ''to seek'' and the meaning of the term ''inquiry'' is given as ''search for knowledge ; investigation : a question.''

Inasmuch as under the latter part of regulation 19(5) it is necessary that simultaneously with the registration of the reference, information/

documents are to be called for from the informant the ''inquiry'' must, in our opinion, be deemed to have commenced u/s 16 of the Act at that stage

itself, namely, at the stage of the second part of regulation 19(5) and it is no longer permissible to say that such a stage is reached only when the

BIFR issues notices and starts an inquiry under regulation 20 calling for additional information ''in relation to the inquiry'' or only when orders are

passed by the BIFR under regulation 21, read with Section 16(1). The result is that strictly speaking, after the amendment of regulation 19(5) on

March 24, 1994, the latter part of regulation 19(5), falls into Chapters III and IV of the Regulations which are referable to ''inquiries'' u/s 16 of the

Act rather than into Chapter II which deals with ''references'' u/s 15. The Chapter headings cannot, in our opinion, be treated as rigid

compartments.

There can, therefore, be no difficulty in holding that after the amendment to regulation 19 with effect from March 24, 1994, once the reference is

registered and when once it is mandatory simultaneously to call for information/documents from the informant and such a direction is given, then

inquiry u/s 16(1) must--for the purposes of Section 22--be deemed to have commenced Section 22 and the prohibitions contained in it shall

immediately come into play. In that view of the matter, we need not go into the correctness of the view expressed by the Calcutta, Rajasthan and

Bombay High Courts which relied upon the unamended regulation 19. ...

Even though it may not be necessary to extract the decisions of the various High Courts, approved by the Honourable Supreme Court, it is

better to take into consideration the point that was decided in the various cases approved by the Honourable Supreme Court.

In Industrial Finance Corporation of India v. Maharashtra Steels Ltd. [1990] 67 Comp Cas 412 the Allahabad High Court has held thus (page

417) :

The word ''may'' only qualifies the words ''make such enquiry is mandatory''. In fact, Sub-section (2) of Section 16 of the Act lays down that the

enquiry may be made either by the Board or its agency or it may require any operating agency to enquire into and make a report.

Even if, in law, it could be argued that there is some gap between the actual holding of the enquiry and registration, it would not be proper for this

court on the facts and circumstances of this case to exercise its . powers specially keeping in view the object for which the aforesaid Sick Industrial

Companies (Special Provisions) Act has been enacted. The main object is to salvage a viable company by making available funds or other

assistance or by making alterations, etc., as contemplated under the said Aft.

It is significant u/s 22 of the Act. It further provides that :

''... 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 shall lie or be proceeded with further, except with the consent of the Board''.

In Sponge Iron India Ltd. v. Neelima Steels Ltd, [1990] 68 Comp Cas 201 (AP), it was decided thus (page 206) : '' .

Probably, the petitioners or other creditors 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

Therefore, the registration of a reference 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 Sections 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).

In Orissa Sponge Iron Ltd. v. Rishabh Ispaat Ltd. [1993] 78 Comp Cas 264 (HP) it was decided thus (page 268) :

Section 22 of the Act is peremptory in nature and it lays down that where in respect of an industrial company, inquiry u/s 16 is pending or any

scheme referred to u/s 17 is under preparation or consideration, no proceedings for winding up of the industrial unit or for execution, distress or the

like against any properties of the industrial company shall lie or be proceeded with further except with the consent of the Board. From the material

placed on record, including the affidavit of Mr. D.N. Jain, I have no hesitation in holding that on registration of the reference, the stage of

commencement of inquiry is reached and it would mean that an enquiry is pending before the Board. Consequently, the present proceedings,

because of the pendency of inquiry, deserve to be stayed, and hence the same cannot proceed further except with the consent of the Board.

In the light of the above legal position, I feel that the case of the fourth respondent is on a stronger ground and, therefore, no direction can be

issued as prayed for by the petitioner. If no coercive steps could be taken against the company in view of the bar u/s 22, a mandamus cannot be

issued. It is well settled that a writ of mandamus can be issued only in cases where the petitioner has a legally enforceable right.

Even though the above finding is sufficient to dismiss the writ petition, since the locus standi of the petitioner was also argued in detail, I am

bound to answer that point also.

The petitioner is a shareholder, but not a creditor, whatever amount was due to him, was paid, and he has also issued receipt evidencing the

same. Merely, because he happens to be a shareholder, is he entitled to file the writ petition ? Admittedly, no amount is due to him and the creditor

is the society. No allegation has been made against the society that it is incapable of resorting to legal remedy, or that it is colluding with the fourth

respondent and stalling the recovery proceedings. When the fifth respondent is not debarred or disqualified from initiating any legal proceedings, I

do not think that the petitioner will be entitled to seek remedy as now sought for. Apart from the same, none of the employees who also happen to

be shareholders of the society have also authorised the petitioner to initiate these proceedings. The petitioner cannot claim to be a representative of

the other employees to initiate these proceedings. The contention regarding locus standi of the petitioner to file the writ petition is also to be upheld.

Learned counsel for the fourth respondent also brought to my notice the decision in The Gram Panchayat and another Vs. Shree Vallabh Glass

Works Ltd. and others, , wherein their Lordships have said that if an inquiry u/s 16 is ordered, there will be an automatic suspension of all

proceedings against the company''s properties. I feel that the said decision is also helpful to the fourth respondent in this case.

Consequently, the writ petition is dismissed. No costs. W. M. P. No. 3591 of 1998 is also dismissed consequently.