Statutory inquiry under sick company law is mandatory before rejecting a reference; audit reports cannot replace it.

A reference under the Sick Industrial Companies (Special Provisions) Act, 1985 triggers a mandatory inquiry under section 16 to determine whether the company is sick. The Board must conduct that inquiry itself or through an operating agency, and if it finds no case, it must record that conclusion before dropping the proceedings. A pre-existing investigative audit report cannot replace the statutory inquiry, and rejection cannot rest merely on alleged unreliability of accounts or non-response to that report. The appellate authority must also independently apply the statutory process. The reference rejection was therefore unsustainable, and the matter was remitted for a fresh inquiry on sickness in accordance with law.

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Issues: (i) Whether the Board for Industrial and Financial Reconstruction and the Appellate Authority could reject the reference without first conducting the statutory inquiry and determining whether the company was a sick industrial company.

Analysis: On the scheme of the Sick Industrial Companies (Special Provisions) Act, 1985, a reference under section 15 triggers a mandatory inquiry under section 16 to determine whether the company has become a sick industrial company. The Board must either conduct the inquiry itself or obtain a report through an operating agency, and if it concludes that no case exists, it must drop the proceedings after recording that conclusion. Reliance on a pre-existing investigative audit report could not substitute for the statutory inquiry required under section 16, and the Board could not reject the reference merely on the basis that the accounts were said to be unreliable or that the company had not responded to that report. The appellate authority also did not independently examine the petitioner company's report in the manner required by the statute.

Conclusion: The rejection of the reference, insofar as it concerned the petitioner company, was unsustainable and had to be set aside.

Final Conclusion: The matter was remitted to the Board for a fresh inquiry under section 16 of the Act to decide the question of sickness in accordance with law, without any opinion being expressed on merits.

Ratio Decidendi: A reference under the Sick Industrial Companies (Special Provisions) Act, 1985 cannot be rejected without the statutory inquiry and a reasoned finding on whether the company is a sick industrial company.

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