2008 (2) TMI 618 - HC - Companies Law

Company's revival scheme rejected, winding-up order issued under Sick Industrial Companies Act. Official Liquidator appointed.

BIFR. Versus CMD, APS Star Industries Ltd.

BIFR. Versus CMD, APS Star Industries Ltd. - [2008] 83 SCL 239 (GUJ.) ISSUES PRESENTED AND CONSIDERED 1. Whether the Court should direct convening of separate class meetings under sections 391-394 of the Companies Act to consider a scheme of revival/compromise proposed by a company against the background of (a) a BIFR opinion under SICA that the company is not likely to be viable and should be wound up, and (b) prolonged delay, asset deterioration and opposition by secured creditors and workmen. 2. Whether the Court may, in the exercise of its discretion at the stage of authorising meetings under sections 391-394, go beyond the 'leave to convene' norm and refuse direction where the scheme prima facie lacks bona fides or where convening meetings would unduly prejudice secured creditors and workmen. 3. Whether the BIFR's forwarded opinion under section 20(1) of SICA and the subsequent events (including non-challenge of orders, DRT/DRT-related decrees, and interim orders appointing receivers) justify a winding-up order and appointment of a liquidator by the Court. 4. Consequential interlocutory issues: refund of security deposit for seeking meetings; survival of joinder/application to be joined when parent application is refused; grant of stay of the order refusing meetings and directing winding up. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Authority to convene meetings under sections 391-394 where BIFR has opined for winding up and creditors/workmen oppose revival Legal framework: Sections 391-394 of the Companies Act permit a company to propose a compromise or arrangement and seek the Court's direction to convene meetings of creditors/shareholders; SICA (BIFR) under section 20(1) may opine for winding up of sick industrial companies and forward that opinion to the High Court. Precedent treatment: The Court noted prior decisions that ordinarily a Court does not examine merits at the convening stage (cases where meetings were permitted despite objections), but emphasised that such precedents do not prevent the Court from refusing convening directions in exceptional circumstances. Interpretation and reasoning: The Court balanced the general rule (leave to convene is usually granted and creditors decide) against the company's long track record before BIFR (since 1998), repeated opportunities given by BIFR, failure to produce an acceptable tied-up scheme for years, the BIFR's prima facie opinion (that revival was not possible), failure to challenge BIFR/AAIFR orders, active opposition from secured creditors and workers, deterioration of charged assets, DRT proceedings and receiver reports indicating large statutory liabilities, and evidence that the proposed scheme was an attempt to delay realization and frustrate creditors rather than to genuinely revive business. Ratio vs. Obiter: Ratio - The Court will refuse directions to convene meetings under sections 391-394 where the company's conduct and the factual matrix (prolonged delay, lack of funds, BIFR opinion, creditor/worker opposition, asset deterioration) prima facie demonstrate lack of bona fides and where convening would prejudice creditors/workmen. Obiter - Observations about the general propriety of inspection orders and procedural grievances are ancillary. Conclusions: The application to convene meetings was rejected. The Court held that, despite the general rule, exceptional circumstances justified refusal because the scheme lacked bona fides and convening meetings would serve only to delay realization and prejudice creditors and workers. Issue 2 - Extent of Court's discretionary power at the preliminary convening stage Legal framework: Courts have discretion whether to direct convening of meetings; normally not to investigate merits at that stage but to leave assessment to classes of creditors/shareholders - yet discretion is not circumscribed. Precedent treatment (followed/distinguished): The Court accepted precedents permitting convening where schemes may be considered (examples cited) but distinguished them on the facts: in those precedents, creditors were not overwhelmingly adverse and there was no comparable history of delay, asset deterioration and already-forwarded BIFR opinion recommending winding up. Interpretation and reasoning: The Court held that the power to refuse is inherent where the mover's intention and track record indicate abuse of process or mala fide attempt to frustrate enforcement by secured creditors/workmen. It emphasised protection of legitimate expectations of secured creditors and workers and the public interest in orderly and timely liquidation where revival is not practicable. Ratio vs. Obiter: Ratio - The Court may, at its discretion, withhold directions to convene meetings where there is prima facie evidence that the scheme is merely a device to delay realisation and prejudice creditors/workmen. Obiter - Emphasis that creditors still have opportunity to object at any substantive sanction stage. Conclusions: Court exercised discretion to refuse convening direction and returned deposit to applicant; the exercise was justified by the company's conduct and surrounding facts. Issue 3 - Whether the BIFR opinion and subsequent events warranted winding up and appointment of liquidator Legal framework: Under SICA and general insolvency law, a BIFR opinion that a company is not viable (section 20(1) forwarding to High Court) is a relevant foundation for winding up; the High Court has power to wind up where it is just and equitable to do so and to appoint a liquidator. Precedent treatment: Court relied on the principle that BIFR's considered opinion and its own orders, together with material showing non-viability and prejudice to creditors, carry decisive weight. Cases where revival attempts were refused by the Court for similar reasons were treated as persuasive. Interpretation and reasoning: The Court reviewed the long chronology before BIFR, BIFR's findings (final opportunities, directions to change management, requests for deposit of funds, advertisement for change of management, and ultimately prima facie opinion that company could not be revived), the absence of any effective, fully tied and funded revival scheme, DRT decrees and receiver reports revealing large liabilities, lack of challenge to the orders that rendered them final, and the Official Liquidator's report (no opposition to winding up in response to advertisements). On that matrix, the Court found winding up just, equitable and in public interest. Ratio vs. Obiter: Ratio - Where BIFR forms a prima facie opinion that a company is not viable and the company has had prolonged opportunities without producing a viable, funded scheme, the High Court may wind up the company and appoint a liquidator; such winding up protects creditor and worker interests and prevents misuse of judicial process. Obiter - Comments on the effect of inspection orders and withdrawal of contempt applications are ancillary. Conclusions: The winding-up petition was allowed; the Official Liquidator (already provisional liquidator) was appointed liquidator with full powers to realise assets and distribute proceeds. Issue 4 - Consequential interlocutory decisions (refund of deposit, joinder application, stay) Legal framework: Court's authority to dispose of incidental reliefs flowing from main orders. Interpretation and reasoning: Because the application seeking meetings was rejected, the deposit made by the applicant to secure consideration of the revival proposal was to be refunded. The joinder application (seeking to be joined in the now-rejected main application) ceased to have purpose and did not survive. A request for stay of the order refusing meetings and directing winding up was opposed by secured creditor and, since the subject-matter relief (permission to convene) was denied, stay was refused. Conclusions: Deposit ordered refunded; joinder application dismissed as not surviving; request for stay refused. Cross-references 1. The Court's refusal to convene meetings was directly linked to the reasoning supporting the winding-up order (see Issues 1-3 above): the same facts that demonstrated lack of bona fides in the revival proposal also supported finding non-viability and the need to protect secured creditors and workers. 2. Precedents permitting convening of meetings were considered but distinguished on the facts-leading to the Court's conclusion that those authorities did not dictate a different result in the present factual matrix.