(-1-) MGN IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.108 OF 2006 Ashok Organic Industries Ltd. ) A company incorporated under ) the Companies Act, 1956 having ) its registered office at 14, ) Sun Mill Compound,Sun Industrial) Premises Co-operative Housing ) Society Ltd., Lower Parel, ) Mumbai-400 013. )..PETITIONER And Asset Reconstruction Company (India) Limited (ARCIL) ..Intervener AND COMPANY PETITION NO.468 OF 2006 Precision Fasteners Ltd. ) A company incorporated under ) the Companies Act, 1956 having ) its registered office at New ) India Centre, 3rd Floor, 17, ) Cooperage Road, ) (-2-) Mumbai-400 013. )..PETITIONER And Asset Reconstruction Company (India) Limited (Arcil) ..Intervener Mr. Shyam Mehta with Mr. N.C. Parekh i/b. Mansukhlal Hiralal Shroff & Co., for petitioner in Company Petition No.108 of 2006. Mr. D.J. Khambatta, Senior Counsel with Mr. J.K. Bhatia for Respondent in Company Petition No.108 of 2006 Mr. C.J. Joy with Mrs. Bharati Mahant and Ms. Madhuri Gaikwad for Regional Director in both petitions. Mr. Viraj V. Tulzapurkar, Senior Counsel with Ms. Rita Rahimtoola, Mr. Faizal Sayed, Mr. D.Khanapurkar and Ms. Pooja Sood i/b. Manilal Kher Ambalal & Co., for Intervenor ARCIL in both petitions. Ms. Manorama Mohanty i/b. S.K. Srivastava & Co., for Intervenor in Company Petition No.108 of 2006. Mr. Janak Dwarkadas, Senior Counsel with Mr. N.Engineer and Mr. H. Toor i/b. Crowford Bayley & Co., for Petitioners in Company Petition No.468 of 2006. Mr. Anand Grover, Senior Counsel with Ms. Firdaus Moosa for workers in Company Petition No.468 of 2006. CORAM: CORAM: CORAM: F.I. REBELLO & F.I. REBELLO & F.I. REBELLO & S.J.VAZIFDAR, JJ. S.J.VAZIFDAR, JJ. S.J.VAZIFDAR, JJ. DATE : 25TH JANUARY, 2008. DATE : 25TH JANUARY, 2008. DATE : 25TH JANUARY, 2008. JUDGMENT (PER F.I. REBELLO, J.) JUDGMENT (PER F.I. REBELLO, J.) JUDGMENT (PER F.I. REBELLO, J.) . The Reference for our consideration is :- (-3-) "Whether an Industrial Company which has made a reference under Section 15 of Sick Industrial Companies Act, can during the pendency of such reference, apply to this Court for sanctioning a scheme of arrangement or compromise with its creditors and shareholders and whether this Court can take cognizance of such an application during the pendency of the reference and pass necessary orders thereon as are permissible in law.? 2. The Company, Ashok Organic Industries Limited made a reference to the Board of Industrial Finance and Reconstruction (BIFR) under the provisions of the Sick Industrial Companies (Special Provision) Act, 1985, hereinafter referred to as "SICA". They were informed by letter dated 15th May, 2002 that the case was registered under No.195/02. . During the pendency of these proceedings before BIFR, the Company resolved on 9th December, 2005 that subject to the sanction of the appropriate Court as may be required under law and subject to such permission of such Authority as may be necessary, a scheme of arrangement between Ashok (-4-) Organic Industries Ltd. and its shareholders and creditors and Mr. Pankaj Kadakia, Ashok Kadakia and Anil Kadakia in their dual capacity as promoters and guarantors be made on the broad basis as referred to in the scheme of arrangement. A petition under Section 391 and 394 of the Companies Act, 1956, hereinafter referred to as Companies Act was filed praying that the arrangement embodied in the Scheme be sanctioned with or without modification and to declare the same as binding on petitioner and its secured and unsecured creditors. The petition was presented on 9th January, 2006. On 20th October, 2005 in Company Application No.690 of 2005, directions were issued to convene a meeting of the equity shareholders, secured and unsecured creditors of the petitioner company for the purpose of considering the scheme. Pursuant to the meeting held on 12th December, 2005 the Chairman of the Committee submitted a report. The report indicated that the scheme was approved by the requisite majority in numbers of equity shareholders of the petitioner company representing more than 3/4th in value of equity shareholders present at the said meeting and voting. Similarly in so far as the secured creditors were concerned 80.05% of the total secured debtors voted in favour of the scheme of arrangement and one secured creditor voted against the scheme, who represented 19.95% of the secured (-5-) debtors. The scheme, therefore, was approved by the requisite majority in number of secured creditors of the petitioner company having more than 3/4th of value of the secured debtors. Similarly, in so far as unsecured creditors are concerned 99.91% of the unsecured creditors voted in favour of the scheme of arrangement. The Regional Director filed an affidavit setting out that the Scheme is not prejudicial to the interest of the shareholders and unsecured and secured/ creditors. . Dena bank a secured creditor filed an affidavit on 24th March, 2006 opposing the scheme and at the same time raised a preliminary objection to the maintainability of the petition contending that as the company had invoked the jurisdiction of B.I.F.R. and B.I.F.R. had ordered a special investigative audit and the proceedings were pending the petition filed under Sections 391 and 394 of the Companies Act, 1956 is not maintainable. 3. A learned Judge heard Counsel for the parties who appeared. The attention of the learned single Judge was invited to the Judgments of co-ordinate Benches of this Court in National National National Organic Chemical Industries Limited and Ors. vs. Organic Chemical Industries Limited and Ors. vs. Organic Chemical Industries Limited and Ors. vs. N.O.C.I.L. Employees Union 2005 (126) Companies N.O.C.I.L. Employees Union 2005 (126) Companies N.O.C.I.L. Employees Union 2005 (126) Companies Cases 922, Sharp Industries Limited, (2006) 131 Cases 922, Sharp Industries Limited, (2006) 131 Cases 922, Sharp Industries Limited, (2006) 131 (-6-) Company Cases, 535 (Bom.) and in Pharmaceutical Company Cases, 535 (Bom.) and in Pharmaceutical Company Cases, 535 (Bom.) and in Pharmaceutical Products of India Ltd. in re (2006) 131 Company Products of India Ltd. in re (2006) 131 Company Products of India Ltd. in re (2006) 131 Company Cases 747 Cases 747 Cases 747, where co-ordinate Benches have taken a view that the provisions of SICA and the Companies Act, in the matter of sanction of a scheme for re-arrangement of the companies business by way of amalgamation, demerger or compromise were not inconsistent and consequently the Company Court inspite of proceedings pending before the B.I.F.R. under Section 22 of the S.I.C.A. and inspite of Section 32 of S.I.C.A. would have jurisdiction to grant sanction of the scheme under Sections 391 and 394 of the Companies Act, 1956. To hold that the provisions of the two Acts were not inconsistent, and the Company Court would have jurisdiction, the learned Judge noted that the provisions of Sections 15 to 19 of SICA, pursuant to which a company which has become sick can register itself with B.I.F.R., which is vested with the power under the provisions of the SICA, to make enquiry and provide for a scheme for rehabilitation of the company or make the company viable so that the business of the company can continue. The Court also noted that the provisions of Sections 391 to 394 of the Companies Act, 1956, also similarly provide for rearrangement of the company’s business by way of amalgamation, demerger or compromise, which also has the very same purpose and object to revive and/or make the company (-7-) more viable and efficient. The Court observed that the provisions of the Act though provide for different methods of doing so, they are not inconsistent with each other. The Court noted that the provisions of SICA operate in a slightly different sphere i.e. in a case where the net worth of the company has become negative, whereas the provisions of Sections 391 to 394 of the Companies Act have no such requirement as condition precedent and this provision can even operate in cases where the companies are doing well and seek to rearrange their business for the efficient management or better business prospects and thus seek to amalgamate or demerge business operations of the Company. This view of the learned Single Judge was followed in Sharp Industries Limited (supra) and Pharmaceutical Products of India Ltd. (supra). . The Referral Judge, in his unreported judgment in Company Petition No.108 of 2006 with Company Application No.690 of 2006 from which order this Reference arises was of the opinion that it was not possible to accept the submissions of Counsel for the company that both the Company Court and B.I.F.R. exercise concurrent jurisdiction. The Court observed that if such construction is upheld, there will be chaos and confusion. A Company declared to be sick in terms of the provisions of (-8-) SICA, continues to be sick, unless it is directed to be wound up. Till the company remains a sick company having regard to the provisions of sub-section (4) of Section 20, BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a Company Court and as such the provisions of SICA would prevail. The learned Judge quoted with and relied on the judgment of the Supreme Court in NGEF Ltd. vs. Chandra Developers (P) Ltd. (2005) 8 S.C.C. 219, which according to the learned Judge has taken a view that the provisions of SICA would prevail over the provisions of the Companies Act and consequently disagreed with the views taken in National Organic Chemicals Limited (supra), Sharp Industries Limited (supra) and Pharmaceutical Products of India Ltd. (supra). Consequently the learned Chief Justice was pleased to refer this matter for consideration by this Bench. 4. It may be noted that Counsel has drawn our attention to the judgment of the learned Division Bench of the High Court of Himachal Pradesh in Gountermann Peipers (India) Ltd. vs. Union of Gountermann Peipers (India) Ltd. vs. Union of Gountermann Peipers (India) Ltd. vs. Union of India (UOI) & Ors., (2005) 126 Comp Cases 489 (HP) India (UOI) & Ors., (2005) 126 Comp Cases 489 (HP) India (UOI) & Ors., (2005) 126 Comp Cases 489 (HP) and of the Gujarat High Court Phlox Pharmaceuticals Phlox Pharmaceuticals Phlox Pharmaceuticals Ltd. vs. Respondent, (2005) 63 SCL 237 Ltd. vs. Respondent, (2005) 63 SCL 237 Ltd. vs. Respondent, (2005) 63 SCL 237 (Gujarat), (Gujarat), (Gujarat),both of which have taken a view that the (-9-) provisions of SICA and Sections 391 to 394 are not inconsistent and the Company Court would continue to have jurisdiction inspite of the proceedings pending before the BIFR. The Gujarat High Court relied on the judgment in National Organic Chemical Industries Ltd. (supra). Our attention was also invited to unreported judgment of the High Court of Judicature at Madras in Ponni Sugars & Chemicals Ltd. in Ponni Sugars & Chemicals Ltd. in Ponni Sugars & Chemicals Ltd. in Company Petition Nos. 110 and 119 of 2000 & Another Company Petition Nos. 110 and 119 of 2000 & Another Company Petition Nos. 110 and 119 of 2000 & Another where a contention was raised that though the company was before the B.I.F.R. nothing precludes the Court from sanctioning the scheme of arrangement. The scheme was sanctioned. The issue of inconsistency was neither raised nor answered. 5. On the other hand a learned single Judge of the High Court of Punjab and Haryana in Pasupati Pasupati Pasupati Spinning and Weaving Mills Ltd. vs. Industrial Spinning and Weaving Mills Ltd. vs. Industrial Spinning and Weaving Mills Ltd. vs. Industrial Finance Corporation of India & Ors., 2006 (134) Finance Corporation of India & Ors., 2006 (134) Finance Corporation of India & Ors., 2006 (134) Company Cases 600 ( P & H) Company Cases 600 ( P & H) Company Cases 600 ( P & H) placing reliance on the judgment of the Supreme Court in NGEF Ltd. (supra) noted that the Division Bench of the Karnataka High Court in BPL v. Inter Modal Transport Technology Systems (Karnataka) Ltd. (in Liquidation) 2001) 107 Company Cases 313, had considered the scope of the Company Court in the matter of sale of assets by B.I.F.R. under the provisions of the SICA and held that it is BIFR which will have absolute control of (-10-) the affairs of the Company until the order of winding up is made. The learned Judge noted that this judgment was approved in NGEF Ltd. (supra) On the facts before it the Court noted that BIFR had appointed an operating agency to prepare a scheme under Section 17(3) of the SICA and held that the Company Court would have no jurisdiction when the scheme of rehabilitation is under preparation by the operating agency in terms of the order passed by the B.I.F.R. . At this stage it may be noted that the learned Single Judge in National Organic Chemical Industries Limited (supra), had observed and rightly, that the provisions of SICA operate only in cases where the net worth of the company has become negative. In other words the provisions of SICA will apply to a class of companies whose net work has become negative. We are concerned with this class of cases and not to the other class of cases to whom the provisions of Sections 391 to 394 would continue to apply. It is in this context that the question referred for our consideration will have to be answered. 6. Before answering the issues we may consider the object of the SICA Act. As the Preamble indicates, it is an Act to make, in the public (-11-) interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. The statement of objects and reasons set out, that the ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of Banks and financial institutions are of serious concern to the Government and the society at large. It then observes that it has been the experience that the existing institutional arrangements and procedures of revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time consuming. A multiplicity of laws and agencies makes the adoption of coordinated approach for dealing with sick industrial companies difficulty. A need has, therefore, been felt to enact in public interest a legislation to provide for timely determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for (-12-) enforcement of the measures considered appropriate with utmost practicable despatch. . The Act has been amended from time to time to deal with the issues which have arisen consequent to interpretation of different provisions of the Act and the manner in which these provisions had facilitated a rehabilitation or winding up of sick industrial companies. One of the existing legislation was the Companies Act. The object and reason clause was noted by the Supreme Court in in in Navnit Kamani & Ors. vs. R.R. Kamani (1988) 4 SCC Navnit Kamani & Ors. vs. R.R. Kamani (1988) 4 SCC Navnit Kamani & Ors. vs. R.R. Kamani (1988) 4 SCC 387, Maharashtra Tubes Ltd. vs. State Industrial & 387, Maharashtra Tubes Ltd. vs. State Industrial & 387, Maharashtra Tubes Ltd. vs. State Industrial & Investment Corporation of Maharashtra Ltd. & Anr. Investment Corporation of Maharashtra Ltd. & Anr. Investment Corporation of Maharashtra Ltd. & Anr. (1993) 3 SCC 144 (1993) 3 SCC 144 (1993) 3 SCC 144. The Supreme Court observed that the object of SICA was to prevent sickness and in cases of sick undertakings to prepare schemes for their rehabilitation by providing financial assistance by way of loans, advances or guarantees or by providing reliefs, concessions or sacrifices from Central or State Governments, scheduled banks, etc. The basic idea was to revive sick units, if necessary, by extending further financial assistance after a thorough examination of the units by experts and only when the unit is found to be no more capable of rehabilitation, that the option of winding up may be resorted to. On a construction of the provisions of SICA and the State Financial (-13-) Corporation Act 1951 the Court was pleased to hold that both the Acts are special statutes dealing with different situations and the 1985 Act being a subsequent enactment, the non obstanate clause therein would ordinarily prevail over the 1951 Act in case of sick industrial companies. . In Jay Engineering Works Ltd. vs. Industry Jay Engineering Works Ltd. vs. Industry Jay Engineering Works Ltd. vs. Industry Facilitation Council & Anr., (2006) 8 SCC 677 Facilitation Council & Anr., (2006) 8 SCC 677 Facilitation Council & Anr., (2006) 8 SCC 677 what was under consideration were the provisions of SICA and the Impact of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. Dealing with SICA the Court observed as under:- "The 1985 Act was enacted in public interest. It contains special provisions. The said special provisions had been made with a view to secure the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts for preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto." (-14-) In Bombay Dyeing & Manufacturing Co. Ltd. vs. Bombay Dyeing & Manufacturing Co. Ltd. vs. Bombay Dyeing & Manufacturing Co. Ltd. vs. Bombay Environmental Action Group & Ors., 2006 (3) Bombay Environmental Action Group & Ors., 2006 (3) Bombay Environmental Action Group & Ors., 2006 (3) Bom. C.R. 260 Bom. C.R. 260 Bom. C.R. 260 considering the SICA as a Special Statute the Court observed as under:- "......SICA was enacted for giving effect to the policy of the State towards securing the principles specified in Clauses (b) and (c) of Article 39 of the Constitution of India. It would prevail over other statutes including MRTP and the Regulations framed thereunder." In Morgan Securities and Credit Pvt. Ltd. vs. Morgan Securities and Credit Pvt. Ltd. vs. Morgan Securities and Credit Pvt. Ltd. vs. Modi Rubber Ltd., 2007 AIR SCW 350, Modi Rubber Ltd., 2007 AIR SCW 350, Modi Rubber Ltd., 2007 AIR SCW 350, the issue before the Supreme Court was whether the provisions of Arbitration & Conciliation Act 1996 would prevail over the provisions of SICA. The Company was before the BIFR wherein an application has been made to dispose of the shares. That was rejected. That order was challenged before the Delhi High Court. The petition was allowed. The shares were sold and the sale proceeds deposited with the Board. Analysing the statutory provisions and considering the Scheme of SICA and the non obstinate clause, it was held that the provisions of SICA would prevail as they contemplated a larger public interest to (-15-) seek and achieve a higher goal. The observations in N.G.E.F. Ltd. (supra) were referred to. The Counsel for the petitioner company has drawn our attention also to the following observations in the judgment of Balasubramanyan, J. "Occasions are not infrequent when not so scrupulous debtors approach B.I.F.R. to stall the proceedings and to keep their creditors at bay. The delay before the B.I.F.R. is sought to be taken advantage of. The Parliament has apparently taken note of this and has repealed SICA by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. But, so far, the provisions of the Amending Act and the Companies Act introduced, have not been brought into force. It appears to be time to consider whether these enactments should not be notified." Considering these judgments and the provisions of the two enactments we will have to consider the issue referred for our consideration. 7. It will be appropriate at this stage to consider what has been held by the Supreme Court in NGEF Ltd. (supra). In that case, in proceedings (-16-) before it, BIFR decided to recommend the winding up of the company and send the same to the High Court. A request was made by the Company for sale of its assets. An observation was made by BIFR that the Company would have to seek appropriate direction from the High Court concerned. During the pendency of the proceedings before the Board the Company with the permission of B.I.FR. and its secured creditors had been selling some of its surplus lands. One such bidder at a global tender was Chandra Developers (P) Ltd. Chandra Developers (P) Ltd., prayed for a direction that the Company be directed to execute a sale deed in its favour. The Application was allowed. The learned Company Judge, however, in another case rejected the application by another Company holding that the Company Court had no jurisdiction. Before the Supreme Court it was contended that the B.I.F.R. retains the control over the assets of the company in terms of sub-section (4) of Section 20 of SICA and it was BIFR alone which could have issued directions as regards the sanction of the sale of the assets of the company. The Company Judge had no jurisdiction at any rate to issue a direction to the company to execute a sale deed. On behalf of the respondent company it was submitted that the power of the company as also B.I.F.R. being concurrent the latter could ask the company to approach the High (-17-) Court for a direction as regards the sale of its surplus land. It was further submitted that the provisions of both the Statutes must be read together and so read it will be manifest that on winding up proceedings being initiated under the recommendations of the B.I.F.R. in terms of Section 20(1) the power of the Company Court to order approval of scheme prior to passing of winding up order would not in any manner be affected by the provisions of SICA. It is in the context of these contentions that the Supreme Court was considering the relevant provisions of the Companies Act and SICA Act. On a consideration of the provisions of the two enactments the relevant paragraphs of the judgment of the Supreme Court which are relevant for our purpose are reproduced hereinafter:- "41. It is difficult to accept the submission of the learned Counsel appearing on behalf of the respondents that both the Company Court and BIFR exercise concurrent jurisdiction. If such a construction is upheld, there shall be chaos and confusion. A company declared to be sick in terms of the provisions of SICA, continues to be sick unless it is directed to be wound up. Till the company remains a sick company having regard to the provisions of sub-section (4) (-18-) of Section 20, BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a Company Court. 42. The provisions of SICA would prevail over the provisions of the Companies Act. Section 20 of SICA relates to winding up of the sick industrial company. Before BIFR or AAIFR, as the case may be, makes a recommendation for winding up of the company, an enquiry is made in terms of Section 16 thereof wherefor all relevant facts and circumstances are required to be taken into consideration. Before an opinion is arrived at in that behalf, the parties are given an opportunity of hearing. The satisfaction arrived at by BIFR that the Company is not likely to become viable in future and it is just and equitable that the Company should be wound up must be based on objective criteria. The High Court indisputably on receipt of such recommendation of BIFR would initiate a proceeding for winding up in terms of Section 433 of the