1998 (4) TMI 581 - HC - Companies Law

Appeal Allowed: Section 22 of Sick Industrial Companies Act Doesn't Cover Post-Sanction Transactions.

Vibgyar Ink Chem (Pvt.) Ltd. Versus Safe Pack Polymers Ltd.

The order of the learned single judge was set aside, and the appeal was allowed with no order as to costs. The Court determined that Section 22 of the ... - Issues Involved:1. Purpose and scope of the Sick Industrial Companies (Special Provisions) Act, 1985.2. Interpretation and application of Section 22 of the Act regarding suspension of legal proceedings.3. The factual context of the company's financial status and proceedings before the Board for Industrial and Financial Reconstruction (BIFR).4. The applicability of Section 22 to post-scheme transactions and claims.5. Legal precedents and their relevance to the case.Detailed Analysis:Purpose and Scope of the Sick Industrial Companies (Special Provisions) Act, 1985The judgment begins by highlighting the dismal industrial climate of the early eighties, which prompted the Central Government to enact the Sick Industrial Companies (Special Provisions) Act, 1985. The Act aimed to 'revive and rehabilitate potentially viable but sick industrial companies as quickly as possible' and to ensure 'full utilization of productive industrial assets and maximum protection of employment.' The Act's preamble emphasizes the need for 'timely detection of sick and potentially sick companies,' 'speedy determination by a Board of Experts,' and 'expeditious enforcement of measures.'Interpretation and Application of Section 22 of the ActSection 22 of the Act provides for the suspension of legal proceedings, contracts, etc., when an inquiry under Section 16 is pending, a scheme under Section 17 is under preparation or consideration, or a sanctioned scheme is under implementation. The section aims to prevent any proceedings for the winding up of the industrial company or for execution, distress, or the appointment of a receiver without the consent of the Board or Appellate Authority. The judgment clarifies that this creates a 'total ban as regards enforcement of any decree or even initiation of a civil suit for recovery of money or enforcement of any security' against the industrial undertaking.Factual Context of the Company's Financial Status and Proceedings Before BIFRThe company in question, M/s. Safe Pack Polymers Limited, was declared a sick industrial unit and referred to BIFR in December 1994. Due to the company's failure to present a revival proposal, IFCI was appointed as the operating agency to prepare a draft rehabilitation scheme. The company's accumulated losses as of 31-3-1995 were Rs. 934.49 lakhs, making its net worth negative. The draft rehabilitation scheme was approved and sanctioned in February 1996.Applicability of Section 22 to Post-Scheme Transactions and ClaimsThe petitioner supplied goods and materials to the company between February and May 1996, after the scheme was sanctioned. The judgment references the Supreme Court's decision in Dy. Commercial Tax Officer v. Corromandal Pharmaceuticals, which held that Section 22's embargo should not cover post-scheme transactions. The Court emphasized that the bar under Section 22 should be 'restrictive in nature' and apply only to the state of affairs up to the date of the scheme's presentation or its approval by BIFR. The Court noted that the petitioner's claims, arising from transactions after the scheme's sanction, were not considered by BIFR and thus should not fall under the purview of Section 22.Legal Precedents and Their RelevanceThe judgment also cites decisions from the Delhi High Court and Andhra Pradesh High Court. In Sirmor Sudburg Auto v. Kuldip Singh Lamba, the Delhi High Court held that mere pendency of an inquiry before BIFR does not suffice for a stay of legal proceedings under Section 22. Similarly, in Prahami Press v. Vinedale Distilleries Ltd., the Andhra Pradesh High Court allowed a company petition, stating that debts incurred after the scheme's framing do not require BIFR's permission for legal action. The judgment concurs with these precedents, asserting that Section 22 does not apply to the petitioner's post-scheme claims.ConclusionThe judgment concludes that the order of the learned single judge cannot be sustained. The appeal is allowed, and the order of the learned single judge is set aside, with no order as to costs. The Court reiterates that Section 22's provisions do not cover the petitioner's claims arising from transactions that occurred after the scheme's sanction, thus allowing legal proceedings to continue.