2010 (3) TMI 1292 - AT - Companies Law

Tribunal Overturns Winding-Up Order for SRPL, Citing Procedural Errors by BIFR; Case Remanded for Reassessment.

Shivam Rosins (P.) Ltd. Versus BIFR

The tribunal set aside the winding-up order against Shivam Rosins (P) Ltd. (SRPL) and remanded the case to the Board for Industrial and Financial ... - 1. ISSUES PRESENTED and CONSIDERED Whether the impugned order of winding up under section 20(1) of SICA was passed without affording the company a hearing, thereby violating the principles of natural justice. Whether the Board for Industrial and Financial Reconstruction (BIFR) and the Operating Agency (OA) complied with the mandatory procedural requirements under sections 17 and 18 of SICA before passing the winding-up order. Whether the company had submitted a viable draft rehabilitation scheme (DRS) and whether the OA and BIFR properly considered and evaluated the same. Whether the sequential approach mandated by SICA for revival of sick industrial companies was followed prior to ordering winding up. Whether subsequent positive developments, including settlement of dues with secured creditors and infusion of funds, warranted reconsideration of the winding-up order. Whether the possession of the unit by financial institutions under the Haryana Financial Corporation Act impacted the feasibility of revival and the BIFR's decision. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Violation of Principles of Natural Justice (Audi Alteram Partem) - Legal Framework: The principle of audi alteram partem mandates that no person should be condemned unheard. Fair hearing is a fundamental requirement before adverse orders are passed. - Court's Reasoning: The BIFR issued the winding-up order on 3.1.2006 despite the company not being present. The notice for hearing was sent to a wrong address, resulting in non-appearance. - Findings: The absence of the company at the hearing, combined with the failure to provide an opportunity for a subsequent hearing, constituted a breach of natural justice. - Application: The Tribunal held that the company should have been given at least one more opportunity to present its case before such a drastic order was passed. - Competing Arguments: Respondents argued delay and non-submission of acceptable rehabilitation proposals justified the order; however, the Tribunal found no evidence of deliberate delay by the company. - Conclusion: Principles of natural justice were violated; the winding-up order was not sustainable on this ground. Issue 2: Compliance with Procedural Requirements under Sections 17 and 18 of SICA - Legal Framework: Sections 17 and 18 of SICA prescribe the procedure for preparation and consideration of draft rehabilitation schemes by the OA and BIFR, respectively, before any winding-up order. - Court's Reasoning: The OA did not properly examine or comment on the rehabilitation schemes submitted by the company. BIFR proceeded to issue a winding-up order without ensuring that the prescribed sequential process was followed. - Findings: The OA's failure to inspect the unit or consider the DRS, and BIFR's acceptance of the OA's report without detailed reasons, violated the procedural mandate. - Application: The Tribunal emphasized that the BIFR should have first explored the possibility of revival through rehabilitation schemes or change of management before resorting to winding up. - Competing Arguments: Respondents contended that the company did not submit any acceptable scheme; however, the Tribunal found that the company did submit DRS and revised proposals which were not duly considered. - Conclusion: The mandatory sequential approach under SICA was not followed, rendering the winding-up order legally flawed. Issue 3: Consideration of Rehabilitation Proposals Submitted by the Company - Legal Framework: SICA encourages revival of sick companies through rehabilitation schemes prepared by the OA in consultation with the company and creditors. - Court's Reasoning: Despite multiple submissions of DRS and revised proposals by the company, the OA did not facilitate inspection or prepare a detailed report. BIFR relied on the OA's assertion that no proposals were submitted. - Findings: The company's efforts to submit rehabilitation schemes were ignored or inadequately addressed. - Application: The Tribunal held that proper consideration of the company's proposals was essential before concluding non-viability. - Competing Arguments: Respondents argued non-submission or non-acceptance of proposals; the Tribunal found this to be incorrect based on record. - Conclusion: The company's rehabilitation proposals were not given due consideration, undermining the basis for winding up. Issue 4: Sequential Approach to Revival under SICA - Legal Framework: SICA prescribes a stepwise procedure prioritizing revival through rehabilitation before winding up. - Court's Reasoning: The Tribunal noted that BIFR did not explore revival options such as change of management or detailed examination of rehabilitation schemes before ordering winding up. - Findings: The absence of a reasoned order rejecting revival alternatives indicated non-compliance with SICA's procedural safeguards. - Application: The Tribunal emphasized the necessity of following the sequential approach to protect the company's right to revival. - Competing Arguments: The respondents highlighted delay and failure to submit acceptable proposals; the Tribunal found no deliberate delay and procedural lapses on the part of BIFR and OA. - Conclusion: The sequential approach was not followed, invalidating the winding-up order. Issue 5: Impact of Subsequent Positive Developments on Revival Prospects - Legal Framework: Judicial precedents recognize that changed circumstances, including settlement of dues and infusion of funds, require reconsideration of winding-up orders. - Court's Reasoning: The company had fully settled dues with two secured creditors and entered into one-time settlement (OTS) with the third, with substantial payments already made and balance scheduled. - Findings: These developments materially improved the company's financial position and prospects for revival. - Application: The Tribunal relied on precedents emphasizing public interest and equitable considerations to give companies a chance to revive when positive changes occur. - Competing Arguments: Respondents pointed to prolonged possession of the unit by financial institutions and closure of the factory; the Tribunal acknowledged these difficulties but found that the company was entitled to the benefit of the revival process. - Conclusion: The changed financial circumstances warranted remand to BIFR for reconsideration of revival possibilities. Issue 6: Effect of Possession of Unit by Financial Institutions on Revival - Legal Framework: Possession of assets by financial institutions under relevant state laws may complicate revival but does not preclude the application of SICA's revival provisions. - Court's Reasoning: The unit was taken over in 1998 and remained closed; however, this fact alone was insufficient to justify bypassing the revival process. - Findings: Despite possession issues, the company had submitted rehabilitation proposals and settled dues, thus deserving a fair opportunity for revival. - Application: The Tribunal directed BIFR to consider all factors, including possession, in exploring revival but not to use it as a sole ground for winding up without due process. - Conclusion: Possession by financial institutions is a relevant factor but does not negate the company's entitlement to the revival process under SICA. Final Disposition - The appeal against the winding-up order was allowed. - The impugned order dated 3.1.2006 was set aside. - The case was remanded to BIFR with directions to reconsider the matter in light of the positive developments and any other relevant factors within three months. - BIFR was instructed to follow the prescribed sequential procedure under SICA, including detailed examination of rehabilitation proposals and exploration of revival options. - If revival was found impossible, BIFR was to issue a reasoned order explicitly stating the grounds. - Parties were directed to appear before BIFR for further hearing as scheduled.