Operating agency appointment by a secured creditor is valid absent legal prohibition or demonstrated prejudice under sick company law.

The Board for Industrial and Financial Reconstruction could appoint an operating agency under section 16(2) to conduct inquiry and collect material on whether a company was sick, and section 27 did not bar appointment of a secured creditor for that role. Regulation 40 permitted assistance from institutions and professionals, so the creditor's status did not by itself create disqualification or bias. A special investigative audit by independent chartered accountants, selected through a controlled process with scope for objections and material submissions, provided adequate safeguards. No legal prohibition or demonstrated prejudice was shown against the operating agency appointment or the audit directions.

---

---

Issues: Whether the appointment of a secured creditor as the operating agency under the Sick Industrial Companies (Special Provisions) Act, 1985 was valid, and whether the directions relating to the special investigative audit and choice of chartered accountants suffered from legal infirmity or prejudice.

Analysis: Section 16(2) vested the Board for Industrial and Financial Reconstruction with power to appoint an operating agency to conduct the inquiry and collect material relevant to the question whether the company was a sick industrial company. Section 27 did not prohibit such appointment, and Regulation 40 only enabled the Board to seek assistance from financial institutions, banks, consultants, experts and other professionals. The fact that the appointed institution was also a secured creditor did not, by itself, create a disqualification or establish bias, especially where safeguards were built into the process. The special investigative audit was to be conducted by independent chartered accountants selected through a controlled process, and the parties were given opportunity to place materials and file objections to the report.

Conclusion: The appointment of the operating agency was valid and no legal prejudice or bias was shown; the challenge to the impugned order failed.

Ratio Decidendi: The Board may appoint a notified institution, including a secured creditor, as operating agency under section 16(2) of the Sick Industrial Companies (Special Provisions) Act, 1985, and may delegate ancillary fact-finding functions with safeguards, unless actual legal prohibition or demonstrated prejudice is shown.

---