AI Drafter 
TaxTMI 
TaxTMI 
2005 (12) TMI 581
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.... (BIFR) and thus a reference in terms of Section 15(1) of SICA was filed before the BIFR in March, 2001. It was registered as BIFR Case No. 375/2001. The BIFR declared the company as a sick industrial company under Section 3(1)(o) of SICA. The Industrial Development Bank of India (IDBI), its main creditor, was appointed as the operative agency under Section 17(3) of SICA for the purposes of preparing a rehabilitation scheme. The Draft Rehabilitation Scheme (DRS) for the revival of the company was prepared; suggestions/objections were invited to the same; those suggestions and observations received from the concerned parties were considered by the BIFR and ultimately vide order dated 5th February, 2004 the rehabilitation scheme was sanctioned by the BIFR subject to certain modifications. 2. I shall advert to the main provisions of the Sanctioned Scheme (SS) at the appropriate stage. However, it may be pointed out here itself that the SS, inter alia, provides for arrangement with the secured creditors, including the IDBI and also lays down the manner in which they are to be paid. IDBI, like other creditors, had to forgo substantial part of its dues recoverable from the company and....
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.... contended that with this buy back the entire shareholding pattern would go topsy-turvy thereby reducing Mr. Raj Kumar Jain and his associate companies into minority shareholders. Mr. Vijay Kumar Jain contested this application, inter alia, on the ground that the CLB had no jurisdiction to entertain such a petition and determine such a question which fell within the exclusive domain of BIFR, having regard to the provisions of Section 32 of SICA. The CLB has by impugned order dated 24th August, 2005 held that it had the requisite jurisdiction to entertain this petition and the limited issue which the CLB was deciding was not covered by the provisions of SICA, and Therefore, provisions of Section 32 of SICA were not attracted. Therefore, the question of jurisdiction of the CLB to entertain the petition under Sections 397/398 of the Act, which was hotly contested, is another issue which requires determination. 5. It may also be noted at this stage that Mr. Raj Kumar Jain and his associate companies had challenged the allotment of shares to IDBI also, inter alia, on the ground that this allotment was made without following the procedure for increasing the authorised share capital of....
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.... issue was for allotment of 73,88,00,700 equity shares of Rs. 10/- each for cash at par and out of the said issue 38,49,00,000 equity shares were reserved for firm allotment i.e. promoters, their friends, relatives and associates. Therefore, the public was offered 35,39,00,000 equity shares. Part-II of the prospectus giving capital structure provided the aforesaid information about the share capital. There were certain notes appended thereto. Note Nos. 2 5 and are as under: 2. Promoters' contribution and Lock in period would be as follows: No. of shares Date of allotment % of Total paid up Capital after the issue (H) Face Value (Rs.) Issue Price per share (Rs.) Lock in period (years) 70 27.11.91 10 10 Nil To be allotted 27.1 10 10 3 2,00,19,982 To be allotted 25 10 10 5 1,84,70,018 Total 52.1 3,84,90,070 5. Promoters will hold 52.10% of the post issue capital. 10. Part-V dealt with 'Company, Management and Project' and, inter alia, provided 'promoters' their background and group companies'. Under....
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....d by Mr. Raj Kumar Jain and, Therefore, Mr. Raj Kumar Jain's companies were not the 'promoters' and the names of the companies in which Mr. Raj Kumar Jain has the stakes are stated in a different column where the information about the promoters association with these companies is given. 12. The prospectus provided additional information, in this behalf, in the following terms: Name of concern/Date of Incorporation Nature of Business/Activities Undertaken Details of Litigation/Labour Problems Etc. 1. Priyanka Overseas Ltd. (POL) 24.2.1984 Exports Nil 2. Dhanad Viniyog & Pratibuti (P) Ltd. (DVP) 23.11.1993 Exports & Financing Nil 3. Dhanad Financial Services (P) Ltd.(DFS) 22.11.1993 Exports & Financing Nil 4. Wave Inter Trade (P) Ltd. (WIT) 23.3.1987 Trading & Exporting Nil 5. Biswanath Industries Ltd. (BIL) 11.3.1960 Trading and Financing Nil 6. Tohee Trading & Agencies (P) Ltd. (TTA) 10.6.1982 Trading Nil 7. Pasupati New Tex Ltd. (PNTL) 20.8.1986 Manufacturing of Fabrics Nil 8. Pasupati Overseas Pvt. Ltd. (POPL) 13.10.1987 Trading & exporting Nil 13. These companies include certain companies of M....
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....s, 120 shuttless looms and facilities to process 140 lakh meters of fabric per year) at Nagla Hasanpur, District Mathura in Uttar Pradesh." 17. Management and shareholding pattern was provided in para 2 of the SS. Shareholding pattern was same as given in the DRS. About management, it was stated: "Management: The Board of PFL comprises of 8 directors with two directors from promoters group and six independent professional directors including a nominee of IDBI. Shri Vijay Kumar Jain, the Chairman & Managing Director and Shri Ramesh Kumar Jain represents promoters group. The other six directors are Shri I.K. Singhal, a textile engineer, who is the Director (Operations), Ms Poonam Manshani, Shri J.S. Varshneya (Ex Chairman PNB, Shri S.S. Dhanoa (IRS Retd.), Dr Mithilesh Kumar Sinha (Former CMD of SBI) and Shri Deepak Gupta (Nominee of IDBI)." 18. The cut off date for the purposes of reliefs and concessions has been fixed as 31st May, 2003. Liability of IDBI, as on that date, was Rs. 7632.41 lakh plus interest. However, as per the SS, the BIFR directed IDBI to accept the entire principal outstanding of Rs. 7632.41 lacs as follows: (a) down payment of Rs. 763.24 lakhs (10....
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.... that the principal amount to be accepted by SBI in the Installments provided therein, interest on the settlement amount which the SBI is to receive. SBI is also to accept zero coupon debentures of Rs. 17 lacs in part settlement. As far as waiver of the balance amount and pledging of shares of the company held by the investment companies of Mr. Vijay Kumar Jain is concerned, identical clauses as in the case of IDBI and reproduced above are provided in the case of SBI also. The SS also makes provision for the settlement of dues of other creditors which had given working capital, namely, UCO Bank and State Bank of Bikaner & Jaipur. Thereafter, the SS deals with promoters/company stipulating various obligations on their part. We may take note of only those provisions which are relevant for our purposes: Promoters/Company (i) Commencing from April 2015 Promoters to agree to bring Rs. 1000 lakh from their own sources in the form of equity share capital/interest free unsecured loans within first three years i.e. Rs. 125 lakh in April 2004, Rs. 437.50 lakh in April 2005 and Rs. 437.50 lakh in April 2006. Unsecured Loans brought in by promoters shall not be withdrawn during the....
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....s to be confirmed by the High Court and not the CLB. Thereafter, even IDBI apprised the BIFR on 17th August, 2004 that it had approached the CLB for this purpose but CLB did not entertain the application on the ground that it does not have power to do so. In this communication, IDBI again requested the BIFR to modify the SS by itself granting necessary exemption. 25. While these requests of the company and IDBI were pending before the BIFR, the company held its 12th Annual General Meeting on 29th November, 2004 in compliance with the terms of the SS and passed the resolution regarding: (i) increase/reclassification of authorised share capital from Rs. 90,00,00,000/- divided into 9,00,00,000 equity shares of Rs. 10/- each to Rs. 1,00,00,00,000/- divided into 7,50,00,000 equity shares of Rs. 10/- each and 2,50,00,000 0.0001% redeemable preference shares of Rs. 10/- each. (ii) Reduction of equity share capital by 35% and issue of 0.0001% redeemable preference shares in lieu thereof and (iii) Issuance of 2,30,00,000 equity shares for the face value of Rs. 23,00,00,000/- to IDBI on preferential basis. 26. Pursuant thereto, Form No. 5 was also filed with ....
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....capital enclosing therewith copies of BIFR's orders dated 5th February and 2nd April, 2004. 29. The allotment of shares to IDBI was challenged by DHNAD Viniyog & Pratibuti Pvt.Ltd.(respondent No. 2), a company of Mr. Raj Kumar Jain by filing petition under Section 111A of the Act before the CLB. This petition was, however, subsequently withdrawn on 28th April, 2005. Immediately thereafter, Mr. Raj Kumar Jain and his associate companies filed the petition under Sections 397/398 of the Act before the CLB alleging certain acts of oppression and mismanagement by Mr. Vijay Kumar Jain, Chairman & Managing Director of the company. The respondent No. 2 also filed appeal against the order dated 28th January, 2005 by which the BIFR had granted exemption to the company from seeking permissions, before AAIFR on 11th May, 2005. This appeal is pending before the AAIFR. 30. Mr. Raj Kumar Jain and his associate companies also filed an application before the BIFR on 6th July, 2005 seeking clarification in the order sanctioning the scheme by pointing out that they are also the promoters of the company and, Therefore, the IDBI be restrained from transferring the shares allotted to it in terms o....
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....CA as well. It was their submission that by passing the impugned order, the CLB had in fact put at naught the entire scheme sanctioned by the BIFR which could not be allowed. 35. The contention of the respondents, on the other hand, was that particular exercise undertaken by the CLB was either covered by the scheme or hit by the provisions of Section 32 of SICA. The respondents did not challenge the jurisdiction of the BIFR in formulating the scheme and also in ensuring the implementation of that scheme. The submission was that the scheme itself provided that IDBI shall sell the shares back to the 'promoters'. However, who exactly are the promoters is not stipulated in the scheme. Therefore, when a dispute arises as to who are the promoters, it would be a civil dispute and, Therefore, provisions of Section 32 of SICA would not be applicable. According to the respondents, Therefore, neither there was an attempt to challenge the SS nor to puncture the said SS. On the contrary, the respondents were enforcing their rights under the SS itself. When the attempt on the part of the appellants was to act contrary to the SS and Mr. Vijay Kumar Jain wanted to buy the shares held by IDBI wh....
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....y is inherently recognized in the scheme of the Act. Even before the Indian Companies Act, 1956 was enacted, in England, recognition of this rule is founded in the celebrated judgment of Foss v. Harbottle, (1843) 67 E.R.189. The exception carved out in the Act, is when minority shareholders are to be protected and it is provided in Chapter VI dealing with the prevention of oppression and mismanagement (Sections 397-409). The recognized exceptions are: when the act of majority is ultra vires, fraud of minority, acts requiring special majority, wrongdoers in control etc. But for these exceptions, majority rule prevails. Thus a company which is having a successful run, it is the majority shareholders who have a say in the management. 39. However, all the companies may not do business profitably and remain financially robust for all times. They may become sick and acquiring of the sickness may be due to various factors. It may be because of bad governance. It may also be because of other market forces or economic compulsion not within the control of the company. When a company goes sick, i.e. when the liabilities are more than the assets and net worth is eroded, it does not affect t....
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....cise is gone through, the jurisdiction and parallel proceedings under all other Acts (to the extent provided in Sections 22 and 23) cannot lie or be proceeded with." 40. The Supreme Court has lucidly outlined the objects of this legislation in the case of Navnit R. Kamani v. R.R. Kamani reported in (1989) I LLJ 47 SC in the following manner: "The Statement of Objects and Reasons reveals the purpose underlying the benevolent legislation as also the anxiety of the legislature to provide for preventive, ameliorative and remedial measures essential for reviving sick or potentially sick companies and for ensuring expeditious enforcement of the measures devised by the competent authority under the Act. The Statement of objects and reasons discloses the anxiety of the legislature at the alarming increase in the incidence of sickness of industrial companies and it also reveals that the legislation has been enacted with the end in view to: 1. afford maximum protection of employment: 2. optimise the use of funds of the companies etc.: 3. salvaging the production assets; 4. Realizing the amounts due to the banks etc.; and 5. to replace ....
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....y, which can be had under section 19 of the Act will feel shy to advance any amount when the winding up proceedings are pending. The whole object of the proceedings for winding up is to destroy its corporate existence and the continuance of a pending proceeding for winding up, if allowed by the court in exercise of its discretion, would clearly conflict with the permanent object for which section 16(4) of the Act is enacted." 43. Thus it is clear that with the enactment, precedence was given to the right of the company to make an attempt to get itself revived and in the process creditors right to make recovery was to be put on hold. 44. Once a company goes sick and it makes reference to the BIFR under Section 15 of SICA, which is a mandatory requirement, the BIFR assumes major role thereafter. Its first task is to enquire into the working of such a sick industrial company. Whether it has become a sick industrial company as laid down under Section 16 of SICA? If after such an enquiry the Board is satisfied that the company has become a sick industrial company, the next step is to consider and decide whether it is practicable for such a company to make its net worth exceed the ....
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.... law;] (e) such other preventive, ameliorative and remedial measures as may be appropriate; (f) such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified in clauses (a) to (e). 47. Thus apart from providing financial reconstruction of the sick company, the scheme may provide for proper management and even taking over of the management of a sick company. If necessary, it may provide for amalgamation of the sick company with any other company. A sick company can even be sold or leased out partly or wholly. There can be total revamp of managerial personnel, supervisory staff and workmen. When a company is functioning normally and has not gone sick decisions on all these aspects, as per the provisions of the Act, has to be by the shareholders. This rule in a sick company has been given go-bye. It is the Operating Agency which is now preparing a scheme and providing the measures on the aforesaid aspects. It is the BIFR which is now deciding on these measures after having opinion of the creditors and workers and without any role of the shareholders. In the process, the BIF....
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....tated and sanction the scheme, which would be a package deal, for operation of the functioning of such a company. The company has to thereafter function as per the provisions of the scheme sanctioned. As noted above, these provisions may provide for the complete take over by the new management, new Board of Directors, new constitution of the company with altered Memorandum and Articles of Association and even reduction of the interest or rights of the existing shareholders and allotment of shares of such a company to some other persons, particularly the creditors. For providing such measures in the sanctioned scheme, procedural requirements contained in the Act, which are to be generally followed when the company is not sick, are not to be gone into. It is manifest from Sub-Section (7) of Section 18 which makes this declaration specifically as would be clear from reading of this provisions which is as under: "18 (7): The sanction accorded by the Board under sub-section (5) shall be conclusive evidence that all the requirements of this scheme relating to the reconstruction or amalgamation, or any other measure specified therein have been complied with and a copy of the sanc....
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....isions of Section 72A of the Income Tax Act, 1961 (43 of 1961) shall, subject to the modifications that the power of the Central Government under that section may be exercised by the Board without the Central Government under that Section may be exercised by the Board without any recommendation by the specified authority referred to in that section, apply in relation to such amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company." 54. Once the legal position and scope of the two Acts is understood in the manner explained above, the irresistible conclusion would be that for all matters relating to the SS, it is the BIFR alone which shall have the jurisdiction. Notwithstanding, attempt is made by learned senior counsel for Mr. Raj Kumar Jain to contend that issues raised could be dealt with by the CLB. The grievance of Mr. Raj Kumar Jain in petition filed under Sections 397/398 of the Act before the CLB was two-fold: (a) The allotment of shares to IDBI has to be only after increasing the authorised capital in the Memorandum and Articles of Association and decreasing the share capital of the existing sh....
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....ellants, on the other hand, submitted that the expression 'promoter' was clearly defined in the scheme and as per the scheme it was only Mr. Vijay Kumar Jain who was treated as the promoter; reading of the entire scheme would make it clear that IDBI was to sell the shares to Mr. Vijay Kumar Jain and in any case, as the scheme provided buying back of shares from IDBI to the promoters and if there was any dispute regarding the entitlement to buy back those shares, it related to implementation of the scheme and only BIFR could decide this issue. 59. As the maintainability of the petition under Sections 397/398 of the Act before the CLB depends on determination as to whether it is the BIFR who had the exclusive jurisdiction to deal with the matter or CLB could carve out a niche for itself and decide the issue raised before if. Re: Promoters 60. I am of the view that when in a SS there 'promoter' is mentioned and if the dispute arises as to who is the 'promoter' and implementation of the scheme depends on this determination, it would be for the BIFR to clarify and decide the same. 61. I have already pointed out, in the earlier parts of the judgment, various documents where t....
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....e promoters in its contemplation when the scheme was sanctioned. Whether the BIFR proceeded on the basis that the expression 'promoter' used in the proceedings before it and in the SS has reference to those persons who were the promoters at the time of sanction of the scheme or the BIFR was referring to the person who disclosed himself as promoter in Form A and draft scheme. Obviously, since this clarification is required, it is for the BIFR to give such a clarification more so when specific provision, as noted above, is contained in SICA itself. 65. Matter can be looked into from another angle as well. The BIFR has made provision for allotment of shares to IDBI and for sale of those shares by IDBI to promoters in future. Thus allotment of shares in the first instance to IDBI and buy back of those shares from IDBI is part of the scheme. While implementing the scheme, if any difficulty arises, it is for the BIFR to remove that difficulty and for this reason also the appropriate authority would be BIFR. 66. There is yet another aspect of this issue. Even if the BIFR is of the opinion that in its contemplation 'promoter' was the one whose name is disclosed in Form A as well as i....
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.... proposition. However, what is to be seen is as to whether the question to be determined is the one covered by the provisions of SICA and falls within the exclusive domain of BIFR. If that be so, the non-obstante clause contained in Section 32(1) of SICA would become applicable. Reliance on National Organic Chemical Industries (supra) by the CLB was totally out of context. Admittedly, in that judgment the Bombay High Court was considering Section 32 of SICA vis-a-vis Sections 391-394 of the Act. Sections 391-394 of the Act deal with scheme of reconstruction, rehabilitation etc. The Bombay High Court was of of the view that Sections 15 to 19 of the SICA provided for a scheme where a company which had become sick can register itself with the BIFR and the BIFR could provide for a package for rehabilitation of the company and/or make the company viable. Similarly, Sections 391-394 of the Act provide for rearrangement of the company's business by way of granting amalgamation, demerger and/or sanctioning of the scheme of compromise. Therefore, observed the court, that provisions of SICA as well as Sections 391-394 of the Act cover the same subject, namely, revival of the company though t....
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....this issue before the Appellate Authority and contend that the BIFR should not have dismissed the application on delay and latches but decided the same on merits. Re: Allotment of shares to IDBI 72. The CLB had decided that allotment of shares to IDBI is ultra virus its Memorandum and Articles of Association. Indubitably, share allotment to IDBI is in pursuance to the scheme. Mr. Sundaram, learned senior counsel appearing for the respondents conceded that once such a scheme is sanctioned as per which shares are to be allotted to IDBI, it is not open either for the BIFR or shareholders to deny the said allotment. However, his argument was that it should be done only after following the procedure contained in the Act. His submission was that without increasing the authority share capital shares could not be allotted and, Therefore, this act is ultra virus the Memorandum and Articles of Association. Likewise, for reduction of share capital of the members as mandated by the BIFR, proper procedure contained in Sections 100-103 of the Act should have been followed. The CLB has accepted this plea. 73. However, what is to be noted is that the CLB had, on applications made by the c....
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.... 75. It is clear from the above that the expression 'to accept' is in mandatory form and amounts to a direction given by the BIFR in the scheme. Same terminology is used for dealing with other secured creditor, namely, State Bank of India. Needless to mention what is approved by the BIFR is the sanctioned scheme of rehabilitation. Different provisions are made as to how this scheme is to be implemented. Action to be taken for implementation thereof would be in the nature of direction. Otherwise, the scheme can be punctured by any of these parties by not agreeing thereto. There is no scope of any discretion in the matter. 76. However, while sanctioning the scheme, the BIFR observed that in so far as provisions of Sections 81(1) and 100-103 are concerned, the CLB may consider exempting the company from these provisions. This observation in the scheme was superfluous inasmuch as admittedly the CLB has no jurisdiction in the matter. Such an exemption, if at all, can be granted by the High Court under the provisions of the Act. The question is as to whether the BIFR can itself grant such an exemption? Answer has to be in the affirmative if this step is necessitated for proper impleme....