TaxTMI 
TaxTMI 
1998 (1) TMI 397
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....ies (Special Provisions) Act ('SICA'). By this suit the plaintiff wants a declaration declaring the provisions of the meeting of the Board of the defendant No. 1 -'PSL' held on 20-9-1997 as null and void. Another declaration sought for in the suit is declaring the profit and loss account and balance sheet of the defendant No. 1-'PSL' for 15 months' period ended 30-6-1997 and adoption thereof at the Board meeting held on 20-9-1997 to be bad in law and null and void. Yet another prayer is made for declaring that 'PSL' was not a sick industrial company in the meaning of SICA. Next prayer of the plaintiff is for perpetual injunction against defendant Nos. 1 to 4, 9 and 10 restraining them from making a reference to the BIFR on the basis of accounts for the period ending 30-6-1997 or on the basis of the resolution of the Board of 'PSL' dated 20-9-1997. The suit was filed on 6-11-1997. Along with this suit, an application (IA No. 10025 of 1997) under order 39 rules 1 and 2 read with section 151 of the Code of Civil Procedure was also filed with the prayer following prayers:- (a)pass an ex parte ad interim injunction order restraining the defen- dant Nos. 1 to 4 and 9 and 10 through th....
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....the same is accepted...." Thereafter on 29-9-1997 as the 'PSL' failed to extend the undertaking granted earlier, the learned single judge of the Bombay High Court appointed receiver in respect of three properties and granted ad interim injunction by which 'PSL' and defendant Nos. 1 to 4 were directed not to make reference to BIFR till 7-10-1997. Plaintiff and defendant No. 1 filed separate appeals before the Division Bench against the order dated 29-9-1997. ICICI was aggrieved for non-appointment of receiver for rest of the properties and 'PSL' was aggrieved by appointment of receiver for their three properties. On 7-10-1997 the appeal of ICICI was placed before the Division Bench of the Bombay High Court and the Bombay High Court made the following orders : "By way of ad-interim relief, despite strong objection by Shri Aney, the learned counsel for the Respondents, the respondent Nos. 1 to 4 (original defendant Nos. 1 to 4) not to proceed under BIFR till 21-10-1997. 2. Appeal to be placed on board along with appeal lodging No.953 of 1997 on 21st October, 1997 to be first on board. 3. We are making it clear that we were constrained to pass this order inasmuch as the reasoned or....
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....rd are entitled to reasonable notice and in the facts of this case, notice for the meeting cannot be said to be reasonable on account of shortness of time. In support of his contentions, he has relied upon N.R. Murty v. Industrial Develop-ment Corporation of Orissa 1977 Tax L R 2268 (Ori.) and on that ground has contended that meeting of the Board of 'PSL' dated 20-9-1997 and resolution adopted at the said meeting be declared to be null and void. He has further contended that taking into account the detailed proposal on 23-5-1997 and the proposal on 3-6-1997 would show that none of the issues as raised by ICICI in the plaint viz., non-capitalisation of project expenses; issues of credit notes in respect of large debts outstanding to the 'PSL'; change in the method of depreciation calculation; issue of lease rentals were not elaborated, discussed or mentioned in the said two proposals. Second ground on which Mr. Nariman has challenged to the validity of Board meeting held on 20-9-1997 is that there is no application of mind. Mr. Nariman has contended that section 15 provides for reference to BIFR. He says that in terms of section 15 of SICA, the Board of Directors of the company sh....
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....appears no application of mind whatsoever on these issues. Controverting the arguments advanced by the counsel for the defendants that in any event of the matter those who passed the Resolution on 20-9-1997 constituted a majority on the board and net result would have been the same even if meeting was adjourned, the learned counsel for the plaintiff has contended that the stipulation of a requisite period of notice whether specifically provided in the articles or as mandated by the common law is a procedural safeguard in the nature of and analogous to natural justice in the domain of public law and does not in any manner whatsoever depend on the final outcome of a result which it is supposed to precede. In support of his contentions, he has cited the case of S.L. Kapoor v. Jagmohan [1980] 4 SCC 379. He further contended that this Court has got the jurisdiction to entertain the suit and grant injunction as only this Court is acting as a Civil Court under section 9 of the Code of Civil Procedure to injunct any situation which attempts to create a stratagem, device or a fraud on the statutory power to achieve a result with an ulterior motives. The learned counsel for plaintiff has c....
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.... than one-third of its net worth as on 31 -3-1996. He has contended that this method of changing was never placed before the Board at any time nor the consent of the Board to the said basic changes were obtained. He has contended that the settled method of accounting in respect of expenses incurred on a project before the project become operational was that such expenditure constitutes capital expenditure because it was a part of cost of the project and in this connection cited Challapali Sugar Co. v. CIT [1975] 3 SCC 572. Mr. Nariman further contended that all the four companies to which the funds were directed were the sister concerns of defendant No. 1-'PSL' and in this regard the Chartered Accountant of the defendants, S.B. Billimoria & Co. ('SBB'), who was appointed a concurrent auditors for reviewing the receipt and utilisation of the public issue proceeds and also of selected debtors account, gave its interim report in November 1996 and reported that the promoter's contributions had not been deposited in the designat- ed bank accounts for the public issue proceeds and approximately 86% of the total debtors outstanding were accounted for by the four related companies, i.e., ....
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.... 283 of the Companies Act and they were interested directors and could not have participated and nor could they have voted on the said resolution and the vote cast by the Parasrampuria group directors of Rs. 55 crores itself is illegal and bad in law and they stand disqualified under section 283. The learned counsel for the plaintiff repelling the contentions of Mr. Mukul Rohtagi, the learned counsel appearing for defendant No. 1, stated that there are exceptions to the rule laid down in Foss v. Harbottle. He argued while quoting Pennington's Company Law (6th Edition), defen-dant No. 1-'PSL' has not dealt with the exceptions which are relevant for the present case. He contended that fraud, manipulation, device and stratagem would clearly fall within the exception to the said rule and secondly, the breach of judiciary duties is another well-established excep-tion to the rule and lastly negligence is also well-established head of exception to the Foss v. Harbottle rule. Arguing that the decision of the promoter directors at the Board meeting were not actuated by mala fide or motivation in any event would be at the very minimum grossly negligent both in respect of non-disclosure, con....
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....alm of ouster clause and no ouster clause would bar the jurisdiction of Civil Court when allegation of manipulation, fraud, doctoring, deliberated mala fide, lack of notice, creation of devices and stratagem are involved or alleged. Mr. Mukul Rohtagi, the learned counsel appearing for defendant No. 1, has contended that the jurisdiction of this Court to entertain a suit at the instance of a creditor challenging the Board meeting on the ground of an essential procedural irregularity will not give a cause of action to such a creditor. At best creditor merely steps into the shoes of the shareholders as the plaintiff is neither the director nor the shareholder and in support of his arguments he has cited West Mercia Safety wear Ltd. v. Dodd 1988 BCLC 250. Relying upon the rule in Foss v. Harbottle, he has contended that in case of such an irregularity a creditor cannot bring a suit against the company. The rule in Foss v. Harbottle simply says that:- "the proper plaintiff in an action to redress an alleged wrong to a company on the part of anyone, whether a director, member or outsider, or to recovery money or damages alleged to be due to it, is prima facie the company and, where the....
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.... out to the fraud of the creditors and thereafter Central Government can order investiga- tion into the affairs of the company and errant directors can be prosecuted and the creditors interest protected. Alternatively, the creditor, who also happened to be shareholders, can requisition a general meeting of the shareholders and remove the directors who are not acting in interest of the company. Controverting the arguments of the plaintiff that a large sum of public money is involved in the present case, Mr. Rohtagi has contended that the interest of the present creditors have already been secured as they are secured creditors with the first change on the properties of the company, and secondly, by going to the BIFR, it is the interests not only of the company that will be protected but also the interest of the creditors as the company is likely to be rehabilitated. Taking substance from Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. [1993] 2 SCC 144, Mr. Rohtagi has contended that practice of treating banks and other financial institutions on a higher pedestal than other creditors should be deprecated. Mr. Rohtagi has further contended that the p....
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....aining any person from instituting or prosecuting any proceeding in a Court of co-ordinate or superior jurisdiction. This change in language deliberately adopted by the Legislature after taking note of judicial vacillation has to be given full effect. ****** ...We find it very difficult to appreciate this approach of the Court because the Court has not rejected even at the stage of the consideration of prima facie case or on balance of convenience that the claim of the Corporation is frivolous or untenable or not prima facie substantiated. On the contrary the Court leaves open to the corporation to file a suit if it is so advised. The High Court only restrains the corporation from presenting a winging up petition. We again see no justification for this dichotomy introduced by the Court in respect of various proceedings which were open to the corporation to be taken against the Bank leaving some open and some restrained by injunction. Neither in statute law nor in equality. We find any justification for this dichotomy." (pp. 1276-1281) Next contention of Mr. Rohtagi was that there is a implied bar of jurisdiction and this Court has no jurisdiction to deal with the issues raised i....
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....t of recessionary market and pressure on margins, defendant No.1 company was made to carry additional burden by way of interest on loans deployed on the unproductive assets of the abandoned projects, which has precipitated the setting in of sickness in the company. He has further contended that ICICI's approach was not followed by other fellow institutions, i.e., IDBI and IFCI as they did not join ICICI in filing the civil suit at Bombay initially. He contended that company submitted three reconstructing proposal to the ICICI with the last being submitted on the 21-7-1997, however, ICICI without responding to any of these, chose to issue recall notice to the company on 16-7-1997. Mr. Jaitley vehemently contended that ICICI stratagem stemmed out of their only objective or recovering their dues when a major part of it was not even due, notwithstanding the fact that functioning assets of substantial value giving direct employment to more than 2,500 workers were available. He has also controverted that the intention of the nominee directors of the financial institutions was to somehow create conditions which can be exploited to divest the company from taking its legitimate protection u....
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....our companies, Mr. Jaitley has contended that 'SWL' is an independent listed corporate entity and was free to take investment and other corporate decisions subject to the concurrence of its shareholders through its independent Board of Direc- tors. It was not defendant's concern or interest to interfere in such matters of 'SWL'. He has further contended SWL has been dealing with defendant No.1 - 'PSL' since 1986-87 and was one of the main dealers and that is why the 'SWL' invested in the stock of defendant and such investment do not in any way establish any nexus. 'SWL's balance sheet was available to ICICI and ICICI was all along financing the company as well as had appraised/funded a massive expansion project of Rs. 535 crores as late as in November 1995. He has further contended that if the promoter director have given their personal guarantee for arranging subscription for long standing dealers to the defendant's right issue of CCPs in 1994 does not amount to 'SWL' becoming a group company of the defendant. He has argued that all the transactions were genuine business transactions, which are not unusual in the case of business relationship of long standing and substantive natur....
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....oard meeting dated 20-9-1997 which required disclosures under section 299 read with section 300 of the Companies Act by promoter directors. He has contended that 'SWL', 'ASP', 'RPL' were business associates of the defendants and they were dealing with the defendants right from its inception and defendant legitimately pursued them for subscription in the right issue of CCPs in August 1994 and for this purpose 'ASP' and 'SWL' required loans and accordingly they approached I-Sec. (a subsidiary of ICICI) and I-Sec. was fully aware that these companies were the long standing trusted dealers of defendant No. 1 'PSL' and accordingly the loans were sanctioned by them, however, in order to secure themselves, I-Sec. asked for the personal guarantees of promoter directors and in the interest of company the promoter directors acceded to the request of I-Sec, such arrangements are quite common in the course of funds mobilisation efforts by corporates. He has also contended that 'ASP' and 'SWL' are not group companies but were the business associates of defendant No.1-'PSL'. 'PIL' and 'RPL' were the companies connected to the defendant No. 1 and all the transactions of material regarding these t....
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....e industry as a whole. He has contended that SICA constitutes a high accomplished and informed Board of experts in the industrial and economic field and it empowers the Board to make and consider schemes for revival of sick industrial companies and the plaintiff is seeking to avoid said remedy by filing the present suit as the plaintiff is not interested in rehabilitation of the defendant company and the plaintiff is fighting shy of going before the BIFR, which may evolve a rehabilitation scheme. Mr. Jaitley has further contended that, as a matter of fact, the plaintiff will not suffer any injury if industrial sickness of the defendant company is examined by the BIFR as it is open for the plaintiff to argue before the BIFR that the defendant company has not become sick and accounts have been doctored or manipulated. He has also contended that proceedings under sections 15 and 16 are certainly proceedings meant to adjudicate the sickness or otherwise of the concerned company. Mr. Jaitley in the last has contended that application is devoid of any merit and be dismissed. Let me first deal with the arguments advanced by the counsel for the defendant Nos. 1 and 2 that in view of secti....
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....on. The Court will not hesitate if it finds that the resolution of the Board was an attempt to create a stratagem, a device or a fraud to achieve some ulterior motives. Lengthy arguments were addressed by the counsel for both the parties in order to show whether the impugned resolution passed was activated by fraud or to achieve some ulterior motive or was passed in the normal course of business by the defendants. At the outset, it would shock any reasonable person that net worth of the company from Rs. 244 crores on 31 -3-1996 it came to a negative figure by 30-6-1997 to minus Rs. 19 crores. Therefore, in my opinion, applying the principles of Mcdowell's case (supra) this Court has jurisdiction in cases where Court is of prima facie opinion that fraud or mischief has been played by the defendant to grant injunction. Another arguments, which was advanced before me by the plaintiff was that the cumulative effect of section 299 read with sections 300 and 283(1)(i) of the Companies Act would make the decision taken at the Board meeting on 20-9-1997 void as the promoter directors incurred disqualifi-cation in terms of the aforesaid sections. Although the rationale and purpose of these....
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....r directors of the defendant company. It was stated at the bar by Mr. Jaitley that transaction regarding these two companies, 'PIL' and 'RPL', were reported to the Board of Directors from time to time and in all the business transactions, no interested directors voted for the resolution and also proper disclosures were made at the beginning of each year in terms of section 299. If a disclosure at the beginning of each financial year in terms of section 299 of the Companies Act has been made, that is deemed to be sufficient disclosure in terms of the section 299. According to the defen-dant, out of said Rs. 55 crores, Rs. 46 crores credit note pertained to the year before 31-3-1997 and Rs. 9 crores before 30-6-1997.1 find some force in the arguments of the counsel for the defendant that as the debit notes worth Rs. 94 crores were issued for the last four years by charging interest at the rate of 31 percent per annum and on account of market conditions at the time when realisation of the debt was negotiated with the debtors, it was mutually agreed to charge a lower rate of interest of 15 per cent per annum that is how these credit notes were issued. This kind of arrangement is normal....
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.... supported funding structure at all stage by receiving substantial funding up to 80% or more from financial institutions which are entirely state controlled or represent substantial state interest and, thus, their shareholding may be small but it is these financial institutions which provide entire funds for the continuous existence and corporate activities. If we apply mechanically the Foss v. Harbottle rule, it would amount to giving weightage to that majority of the shareholding having notionally holding more percentage of shares and the financial institutions which may own a small percentage of shares though contributed 80 per cent or more in terms of the finances to such companies. It is these financial institutions which have really provided the finance for the company's existence and, therefore, to exclude them or to render them voiceless on an application of the principles of Foss v. Harbottle would be unjust and impracticable. In American Home Products Corpn. 's case (supra), it has been held by the Apex Court:- "...As pointed out by this Court in Forasol v. Oil and Natural Gas Commission [1984] 1 SCR 526, in the absence of any binding authority of an Indian Court on a pa....
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....ecall on 16-7-1997. Even the proposal dated 21-7-1997 was submitted for restructuring the defendant company to the plaintiff-ICICI. There is force in the arguments of defendants that from the letters dated 28-5-1997, 3-6-1997, 9-1-1997, 27-12-1996 and 4-12-1996 it would be clear that constant interaction on the sickness of company was exchanged with the plaintiff. Therefore, this shows application of mind and same was suffi-cient and no further 'sufficient reasons' were required to be gone into for reference to BIFR. After consideration of the audited accounts of the defendant company dated 30-6-1997, the Board of Directors of the defendant company had sufficient reasons to conclude that the process of erosion of net worth could not be reversed until and unless a duly considered rehabilitation package takes place. The argument of the plaintiff could be of greater force, had the letter dated 21-7-1997 was not addressed to the plaintiff. In the said proposal it had already been indicated that the defendant had incurred loss of Rs. 212 crores till 31-7-1997 and erosion of net worth on 30-6-1997 was not a surprise. Conscious of this fact the plaintiff chose to file suit for recovery of....
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....e was the only inevitable outcome of ICICI's actions and all these were known to the Board of Directors of the defendant company and these developments were also reported at the Board meeting held on 25-3-1997 and the nominee directors of the financial institutions were also present at the meeting of the Board of Directors of the defendant company. It has also been contended that at the Board meeting held on 25-3-1997 a decision was taken for the sale of units of the defendant company and the said decision was taken as the projects were abandoned. In relation to treating the pre-operative expenses as revenue expenses, the learned counsel for the defendant has cited Calico Dyeing & Printing Works' case (supra) , Alembic Glass Industries Ltd's ( supra), Produce Exchange Corpn. Ltd's case (supra) and Prithvi Insurance's case ( supra). Nothing has been shown by the plaintiff that change in the accounting policy has to be ratified by a resolution of the general body or by the Board of Directors. In India on account of changes in the fiscal policy and on account of deductions permitted on account of such changes, the companies take recourse to such changes. In any event of the matter a c....
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....fen- dants from invoking the jurisdiction of BIFR would not amount to res judicata in the present proceedings. Dealing with the other contention of the learned counsel for the plaintiff that there was no reasonable notice of the meeting of the Board of Directors. Reasonableness of time will depend on the facts and circum-stances of each case, in the present case, notice dated 17-9-1997 was received by the Nominee Director of plaintiff-ICICI, Smt. Hema Chand, on 18-9-1997. Even though the defendant has taken the objection that if the notice was inadequate, cause of action, lies to Smt. Hema Chand and not to ICICI. It has also been contended before me by the defendants that, as a matter of fact, plaintiff-ICICI has no locus standi to file the present suit as 'ICICI' is neither a shareholder nor a Director in the defendant company. As I have discussed in detail in the preceding paragraphs that in India unlike United Kingdom and United States of America, where vast majority of shareholders have got stakes in the company by virtue of their shareholding and investments, in India it is often seen that 80 per cent or more financial capital is provided by financial institutions and banks a....
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....7, therefore, it cannot be said that the meeting of the board was a surprise and she had no notice of the happening in the defendant in view of the correspondence placed on record by the parties. Having discussed in detail various submissions in the present proceedings, prima facie the plaintiff/applicant has not been in a position to make out a case for grant of injunction, whether the apprehension of the plaintiff that if the defendants are not restrained from invoking the jurisdiction of SIC A they will suffer an irreparable injury is merely a presumption on the part of the plaintiff or there is some substance in it? Section 16 in particular sub-section (4) of section 16 makes it manifestly clear that in the event of Board deeming if fit to enquire in relation to the industrial company one or more persons can be appointed as special directors for safeguarding the financial and other interests of the company and by virtue of amendment of 1994 even in the public interest one or more persons can be appointed as special directors. Therefore, the argument of the plaintiff that in the event of company going to the BIFR the assets of the company may not be safeguarded is without any f....
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....ion to prepare a complete plan of restructuring in a manner that protects the full interest of Financial Institutions, Banks and Shareholders. We, therefore, would like to appoint a professional consultant who could prepare a detailed restructuring plan and help the Company in presenting it to the Financial Institutions. We would also be grateful if you could provide some assistance in this regard." Then again even prior to the said letter, another letter was written by the defendant on 3-2-1997 to the plaintiff stating some of the proposals they had in view of the deteriorating financial health of the defendant. The last paragraph of the letter reads as under :- "We are submitting the enclosed application for the consideration of ICICI, for their broad concurrence to our plan of action in which we have consciously strived not to increase the institutions/Banks exposure beyond their presently committed levels. Subject to their approval, we shall submit a detailed application for their consideration subsequently." In view of the correspondence placed on record, it cannot be said that the resolution which was passed by the Board on 20-9-1997 was a surprise to the plaintiff. It see....
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....pose and object of this provision is clearly to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick industrial company. The words 'or the like' which follow the words 'execution' and 'distress' are clearly intended to convey that the properties of the sick industrial company shall not be made the subject-matter of coercive action of similar quality and characteristic till the BIFR finally dispose of the reference made under section 15 of the said enactment. The Legislature has advisedly used an omnibus expression 'the like' as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking....." "Now we come to the impugned decision. The High Court was considerably influenced by the fact that the appellant-company owed crores of rupees to banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which, inter alia, failed to meet their financial obligation. It is, therefore, difficult to accept the view of the High Cour....