W.P.(C) 9557/2007 Page 1 of 20 * IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) No. 9557/2007 % Reserved on: 12th November, 2010 Pronounced on: 22nd November, 2010 ASSET RECONSTRUCTION CO. INDIA P. LTD. ...... Petitioner Through: Mr. Rajiv Nayyar, Sr.Adv. with Anushree Tripathi, Adv. VERSUS SHAMKEN SPINNERS LTD. & ORS. ....Respondents Through: Ms. Divya Jain, Adv. for R- 1. Mr. A.S.Chandihoke, ASG with Mr. Sachin Datta, Adv. for R-2/UOI. Mr. Sandeep Agarwal, Adv. for R-9. CORAM: HON’BLE MR. JUSTICE SANJAY KISHAN KAUL HON’BLE MR. JUSTICE VALMIKI J.MEHTA 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes JUDGMENT VALMIKI J. MEHTA, J 1. The issue in the present case pertains to the interpretation to the 2nd proviso to Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In order to appreciate the issue, it would W.P.(C) 9557/2007 Page 2 of 20 be necessary to reproduce the entire sub-section 1 of Section 15 and the same reads as under:- “15. Reference to Board.-(1) When an industrial company has become a sick industrial company, the Board of Directors of the company, shall, within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company: Provided that if the Board of Directors had sufficient reasons even before such finalisation to form the opinion that the company had become a sick industrial company, the Board of Directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company: Provided further that no reference shall be made to the Board for Industrial and Financial Reconstruction after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where financial assets have been acquired by any securitisation company or reconstruction company under sub-section (1) of section 5 of that Act: Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act.” W.P.(C) 9557/2007 Page 3 of 20 2. A reading of the 2nd and 3rd provisos shows that there is a literal difference in the requirement of 2nd and 3rd provisos. Whereas in the 3rd proviso, there is a requirement of the will of 75% and above of the secured creditors to cause abatement of a reference under SICA, there is no such requirement of any minimum percentage of the debt to be purchased by a securitization company or an asset reconstruction company registered under the Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI Act). 3. By the impugned order, Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”) has held that in the 2nd proviso to Section 15, the requirement of 75% or more of the financial assets to be purchased by a securitization company or an asset reconstruction company is very much implicit, meaning thereby, unless and until an asset reconstruction company or a securitization company purchases 75% or more of the secured financial assets of a sick company, there does not arise the question of applicability of the second proviso to Section 15(1) of the SICA. The relevant observations of AAIFR are contained in paras 15 to 18 of the impugned order dated 29.11.2007 and the same read as under:- “15. We have examined the averments made by the companies and the counsels for ARCIL and Banks and Fls. The 2nd proviso envisages a context where the financial assets have been acquired by any securitisation/reconstruction company prior to the filing of W.P.(C) 9557/2007 Page 4 of 20 the reference. On the contrary, the 3rd proviso envisages instances where majority (not less than three-fourth) of the secured creditor (s) of a sick industrial company, whose reference is pending with the BIFR have taken an action under Section 13(4) of the said Act primarily with an object of realization of its outstanding dues. While the former is merely a method for acquisition of rights or interest in financial asset, the latter is the route for enforcement of security interest. 16. SICA has been enacted with the object of timely detection of sick and potentially sick companies owning industrial undertakings with a view to explore avenues for the speedy determination of the measures to ensure the expeditious revival of the company. It needs to be noted that the wordings of the second proviso are clear and it states that “where financial assets have been acquired” certain consequences will follow. Since the word “assets” has been used in the plural, then, by the same principles of judicial interpretation referred to above, it follows that the consequences will not occur if a single financial asset out of the many such assets possessed by the company is acquired by an asset reconstruction company. 17. The question that we are now required to answer is how the word “assets” is to be interpreted; whether the word “assets” in plural refers to all the assets of the company or to some of them. In our opinion there is an element of flexibility in the construction of the second proviso. Had it been the legislative intention to refer to all the assets of the company, the same would have been made specific in the proviso itself by stating “where all financial assets of the company” which is not the case here. There is no doubt that if all the financial assets of the company are acquired then the second proviso would automatically and immediately come into force. However, the question we ask ourselves is when all financial assets have not been acquired, how much acquisition must take place so that the second proviso is satisfied. For a guidance on this question we have relied upon the third proviso of Section 15(1) of SICA which refers to 75% of the value of outstanding debt. Given the aforestated context W.P.(C) 9557/2007 Page 5 of 20 we are of the opinion that we should interpret the 2nd and 3rd provision to section 15(1) of SICA harmoniously and hold that the second proviso can be invoked when at least 75% of value of the financial assets of a company has been acquired by an asset reconstruction company. This also implies that; (i) when for any reason a company has a single financial asset and the same is acquired, then the proviso will operate; and (ii) when a company owns more than one industrial unit and all the financial assets qua only one such unit is acquired then the proviso will not operate. 18. It needs to be remembered that the SICA is a beneficial legislation for ensuring the revival of a sick industrial company. A sick industrial company cannot be simply prevented from filing its reference merely because some of the financial assets of a sick industrial company have been acquired by an Asset Reconstruction Company. The percentage of the financial assets acquired has not been prescribed and as such, there is a requirement to harmonise the provisions entailed in the 2nd and 3rd proviso of SICA as also to interpret the true import of the provisions of SICA and SARFAESI as also the insertion of 2nd and 3rd provision to Section 15(1) of SICA. On examination of the provisions entailed in SICA, we are of the considered view that only if 75 per cent of the financial assets of a sick industrial company have been acquired by an ARC/Securitisation Company, the company becomes a non-suitor to file any further reference. We may, however, further clarify that SICA nowhere entails that pursuant to the acquisition of the financial assets, a company is not entitled to file any further reference. On the contrary, section 5(4) of the SARFAESI Act clearly stipulates that acquisition of the physical assets in terms of Section 5(1) of the SARFAESI Act does not result in the abatement of the pending proceedings. As such, even if 100% of the financial assets of a sick industrial company are acquired by any ARC/Securitisation company pursuant to the filing of the reference, the reference of the company shall not be abated/rejected as non- maintainable until the securitisation company takes an action under section 13(4) of the SARFAESI Act, thereby W.P.(C) 9557/2007 Page 6 of 20 causing the abatement of the reference. It also needs to be noted that an acquisition can take place at any stage in the life of a sick company. If an acquisition takes place when the reference is under consideration, then the asset reconstruction company merely replaces a bank(s) Fl(s) and it makes no difference to the reference and its prognosis (unless of course third proviso is invoked). It is also not unknown that sick companies have arrived at OTS with asset reconstruction companies during the pendency of a reference and revival schemes have been formulated on that basis.” 4. The basic contention on behalf of the petitioner is that there should be literal construction of the 2nd proviso i.e., since there is no requirement of any minimum percentage of the financial assets to be purchased by an asset reconstruction company or a securitization company, therefore, even if, any percentage of assets, whether secured or unsecured of a sick company are purchased by an asset reconstruction company or securitization company then, there cannot be reference under SICA. It is contended that there is no reason to depart from the golden rule of literal construction. The Union of India, who was impleaded as a party in the present case by an order of a Division Bench of this court dated 12.2.2009, has supported the stand of the writ petitioner. On the other hand, the stand of the respondent no.1/sick company is that although, there is no requirement of any percentage under the 2nd proviso in Section 15(1) of SICA on a literal interpretation, however, it is quite clear that the said proviso will only operate if 75% or more of the secured financial assets of a sick W.P.(C) 9557/2007 Page 7 of 20 company are purchased by an asset reconstruction company or securitization company. It has been argued on behalf of the respondent no.1 that when a literal construction leads to absurdity, such literal construction must be avoided. It has been further argued that the intention of the legislature that there is a requirement of an asset reconstruction company or a securitization company of having to purchase 75% or more of secured financial assets of a sick company before the second proviso of Section 15(1) of SICA operates becomes clear by the amendments proposed to the Companies Act, 1956 by the Bills of the years 2002 & 2004. 5. In our opinion, the interpretation given by us to the 3rd proviso to Section 15(1) of SICA in the case of Oman Industrial Bank S.A.O.G. Vs. Appellate Authority for Industrial and Financial Reconstruction 2010 (169) DLT 618: 2010 (5) AD (Del.) 566, would have a great bearing on the interpretation to the second proviso to Section 15(1). In the case of Oman Industrial Bank, we have held that a minority secured creditor i.e., a secured creditor having less than 75% of the secured asset of a sick company, cannot cause abatement of a pending reference before Board for Industrial and Financial Reconstruction (BIFR) by refusing to grant financial concessions to a sick company which the Board proposes to give in terms of a sanctioned scheme. Paras 9 and 11 of the said judgment are relevant and the same read as under: W.P.(C) 9557/2007 Page 8 of 20 “9. There is yet another reason why we cannot accept the arguments as urged on behalf of the petitioner that a single creditor can prevent BIFR in bringing about a scheme which envisages reduction in the dues payable by the sick company to its secured creditors. This additional reason is the amendment which has been brought about to SICA by Section 41 and schedule of the Act 54 of 2002 which amended Section 15 of SICA after promulgation of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a result of this amendment, a third proviso has been brought about in sub Section (1) of Section 15 that the secured creditors who represent not less than 3/4th in the value of the amount outstanding against financial assistance disbursed to the sick company can bring about an abatement of proceedings pending before BIFR. This proviso reads as under: “Provided also that on or after the commencement of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debut under sub-section(4) of section 13 of that Act.” A plain reading of this proviso added by the Act 54 of 2002 shows that the consent of at least 3/4th of the secured creditors is necessary for the proceedings before BIFR to abate. This proviso further brings into focus the legislative intent that a minority creditor cannot frustrate the proceedings before BIFR for rehabilitation and revival of the sick industrial company. The Legislature has thought it fit that at least 75% of the secured creditors must join hands to bring about an abatement to the proceedings before BIFR. If that be so, it cannot be understood as to how one secured creditor can in fact bring about an abatement of the proceedings before BIFR because giving of financial concessions by reducing the dues payable by a sick industrial company is always the heart and basic structure of any scheme for revival and rehabilitation of a sick industrial company. After all, if no financial concession in the form of reduction of dues payable by a sick company to its creditors is given, then, what will be the use of other measures under Section 18 such as change of management W.P.(C) 9557/2007 Page 9 of 20 or sale/lease of assets of a sick company and so on. None of these other measures would in themselves help in rehabilitation and revival of the sick industrial company and which measures could have been adopted by the sick company without being a sick company governed by SICA. It is for this reason that the Legislature has advisedly and intentionally used the expression “one or more” as found in Section 18, and which aspect we have already adverted to above that the Board may take one or more measures i.e. it is not confined only to one measure of refusing financial assistance by means of concession to a sick industrial company. Revival of a sick industrial company is a complex process involving discussions with secured creditors, other creditors, labour and other personnel employed with the company, dues of the revenue authorities and so on. If such complex procedure can be frustrated and set at naught by a single secured creditor, then, what is the purpose and use of enactment of SICA. 11. There are two other aspects which we must note in support of the interpretation which we seek to give to Section 19(4) of the Act. The first aspect is that even when a company is not sick and proceedings are resorted to by the company under Section 391 to Section 394 of the Companies Act, 1956 to bring about a composition and settlement with its creditors, it is the majority of the secured creditors who do prevail, meaning thereby minority secured creditors cannot frustrate a scheme which is propounded by the majority of the secured creditors. If a minority secured creditor cannot frustrate a scheme of composition under Section 391 to Section 394 of the Companies Act, 1956, there is no reason why a minority shareholder should be able to frustrate the revival and rehabilitation of a sick industrial company by refusing to accept a reduced amount and a statutory settlement which is brought about by approval of a rehabilitation scheme by BIFR as per the proposal of the operating agency and arrived at after duly considering the suggestions and objections of all the concerned stake holders including the creditors under Section 18(3)(b) of the SICA. SICA after all is for imposition of a valid statutory settlement which forms part of a sanctioned scheme. The second aspect is that by virtue of Section 529-A of the Companies Act, the dues of the workers are to be treated as equal to the dues payable to a secured creditor. Therefore, dues of even one of the workers can be in a manner of speaking be said to be the dues claimed by a secured creditor, but can it be W.P.(C) 9557/2007 Page 10 of 20 contended that one worker can frustrate a rehabilitation and revival scheme as proposed by BIFR after duly taking into consideration the views, suggestions, objections and contentions of the majority of the workmen? Surely not. Therefore, in our opinion, a minority creditor or any minority group cannot frustrate the majority by putting a spoke in the wheel by objecting to the sanction of a rehabilitation and revival scheme of a sick industrial company so as to cause the frustration in the object of revival of a sick company.” 6. In view of Oman Industrial Bank, since a minority secured creditor cannot frustrate the revival of a sick company, it would in our opinion be necessary that the requirement must similarly exist for an asset reconstruction company or a securitization company for taking the benefit of the 2nd proviso to Section 15(1) to purchase at least 75% or more of the secured assets of a sick company. If a minority secured creditor having secured assets even just less than 75% of financial assets cannot frustrate revival of a sick company (even if he holds upto 74% of the secured assets) then how can any and every secured/unsecured creditor having much much less than 74% of the secured assets frustrate the revival of a sick company by preventing a reference being filed. Any other interpretation will lead to a gross absurdity. For example, a securitisation company or an asset reconstruction company may purchase a debt of Re.1 or Rs.100 or Rs.1,000 or 0.1% or 0.01% or 0.001% of the debt, whether secured or unsescured, of a company and then claim that there cannot be reference made by a sick company under SICA. Be it noted that a debt which is purchased by a securitization company or an asset W.P.(C) 9557/2007 Page 11 of 20 reconstruction company of an amount of Re.1 etc., in fact need not even be a secured debt but it can be an unsecured debt if a literal construction is adapted of the 2nd proviso to Section 15(1) i.e., asset reconstruction company or a securitization company if it purchases an unsecured debt of even Re.1 of a sick company, then, it can on a literal interpretation of the 2nd proviso seek to claim the benefit of the said proviso to Section 15(1) and prevent revival and rehabilitation of a sick industrial company. Surely, that cannot be the intention of the Legislature. In fact, the intention of the Legislature is just opposite because in the Companies Act which is proposed to be amended to bring about an amalgam between the functions of BIFR, Company Law Board and the Civil Court dealing with winding up proceedings under the Companies Act, it has been specifically provided that there cannot be prevented a reference to BIFR unless 75% or more of the secured creditors of a sick company propose to take action under Section 13(4) of the SARFAESI Act. The provisions similar to the provisos of Section 15(1) of the present SICA are to be found in the provisos to proposed Section 424A in the proposed amended Companies Act, 1956 and the said provisos read as under: “Provided also that in case any reference had been made before the Tribunal and a scheme for revival and rehabilitation submitted before the commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Ordinance, 2004, such reference shall abate if the secured creditors representing three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower have taken measures to recover W.P.(C) 9557/2007 Page 12 of 20 their secured debt under sub-section (4) of section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002): Provided also that no reference shall be made under this section if the secured creditors representing three-fourths in value of amount outstanding against financial assistance disbursed to the borrower have taken measures to recover their secured debts under sub-section (4) of section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.” (Inserted by Act 30 of 2004) 7. That when a literal construction leads to absurdity, the Courts must avoid such interpretational absurdity as held by the Supreme Court in its judgments reported as Hameedia Hardware Stores Vs. B. Mohan Lal Sowcar AIR 1988 SC 1060 and Entertainment Network (India) Ltd. Vs. Super Cassettes Industries Limited (2008) 13 SCC 30. Surely, the objects of enacting statute and the intention of the Legislature are most relevant. It is, therefore, sometimes said that the golden rule is that there is no golden rule. The intention while enacting the Act is therefore ordinarily to be taken as superseding various other factors. The intention of the Legislature of course has to be seen from various facts and circumstances such as Parliamentary debates, statements of objects and reasons, report of the Law Commission of India, the amending provisions and the related provisions and so on. W.P.(C) 9557/2007 Page 13 of 20 The observations of the Supreme Court in the case of Kehar Singh & others Vs. State (Delhi Administration) 1988 (3) SCC 609 in this regard are apposite and which read as under:- “231. During the last several years, the „golden rule‟ has been given a go-by. We now look for the „intention‟ of the legislature or the „purpose‟ of the statute. First, we examine the words of the statute. If the words are precise and cover the situation in hand, we do not go further. We expound those words in the natural and ordinary sense of the words. But, if the words are ambiguous, uncertain or any doubt arises as to the terms employed, we deem it as our paramount duty to put upon the language of the legislature rational meaning. We then examine every word, every section and every provision. We examine the Act as a whole. We examine the necessity which gave rise to the Act. We look at the mischiefs which the legislature intended to redress. We look at the whole situation and not just one-to-one relation. We will not consider any provision out of the framework of the statute. We will not view the provisions as abstract principles separated from the motive force behind. We will consider the provisions in the circumstances to which they owe their origin. We will consider the provisions to