1994 (11) TMI 438 - SC - Companies Law

Supreme Court Upholds Corporation's Decision in Commercial Dispute

The Supreme Court allowed the appeal, setting aside the High Court's judgment. It concluded that the Corporation's decision to not proceed with the ... - Issues Involved:1. Default in repayment of loan installments by the Company.2. Rehabilitation Package and its implementation.3. Corporation's actions in issuing recovery notices and taking over the industrial establishment.4. Viability of the Company post-rehabilitation.5. High Court's intervention and directions.Issue-wise Detailed Analysis:1. Default in Repayment of Loan Installments by the Company:The appellant, a State Financial Corporation (the 'Corporation'), sanctioned a term loan of Rs. 30 lakhs to the respondent-Company (the 'Company') in 1975, payable in 17 half-yearly installments by August 1986. The Company persistently defaulted in repayment, leading to the issuance of a recovery certificate under Section 3 of the U.P. Public Moneys (Recovery of Dues) Act. The Company's mismanagement and manipulation of accounts further exacerbated the situation, necessitating a Company Petition under Sections 397 and 398 of the Companies Act for removal of the then management.2. Rehabilitation Package and Its Implementation:In March 1982, the State Government issued an Office Memorandum enunciating a scheme for the rehabilitation of sick units. The State Level Inter-institutional Committee suggested a Rehabilitation Package in October 1985, which included rescheduling of payments, arrangement of finances, and appointment of Directors nominated by the Corporation. Although the Corporation communicated the terms of the Rehabilitation Package to the Company, the Company failed to implement the package's conditions.3. Corporation's Actions in Issuing Recovery Notices and Taking Over the Industrial Establishment:Despite the pending rehabilitation process, the Corporation issued a recovery notice on May 30, 1986, demanding Rs. 90,31,102.13, and subsequently took over the industrial establishment under Section 29 of the Act on June 13, 1986. The High Court found this action arbitrary and directed the Corporation to restore possession to the Company. However, the Supreme Court granted a stay on the High Court's order, leading to further deterioration of the Company's assets.4. Viability of the Company Post-Rehabilitation:The Industrial Reconstruction Bank of India (IRBI) reported in January 1988 that the unit could be 'marginally viable' with an additional investment of about Rs. 1 crore and a rescheduling of loan installments. Despite the IRBI's favorable market study and the proposed reliefs and concessions, including waiver of penal and compound interests, the Corporation did not proceed with the rehabilitation plan. The Company's assets, valued at Rs. 96 lakhs in 1986, depreciated to Rs. 42 lakhs by the time of the Supreme Court's judgment due to prolonged closure and lack of maintenance.5. High Court's Intervention and Directions:The High Court directed the Corporation to restore possession to the Company and tasked the IRBI with preparing a rehabilitation package. However, the Supreme Court emphasized that the Corporation, as an autonomous statutory body, is entitled to make its own decisions based on its perspective and calculations. The Court held that the High Court should not have substituted its judgment for that of the Corporation, especially in commercial matters.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's judgment. It concluded that the Corporation's decision to not proceed with the rehabilitation was justified given the persistent defaults, mismanagement, and the significant depreciation of the Company's assets. The Corporation was deemed free to proceed according to law, highlighting the principle that courts should not interfere with the commercial judgments of statutory bodies unless there is evidence of malafide actions.