W.P.(C). No. 13887/2009 Page No.1 of 22 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 08.02.2011 + W.P.(C) 13887/2009 M/S DWARIKADHISH SPINNERS LIMITED ..... Petitioner versus UCO BANK & ORS. ..... Respondents Advocates who appeared in this case: For the Petitioner : Mr Amit Sibal with Mr Saurabh Seth, Mr Jayant Bhatt & Mr Shravanth Shankar. For the Respondents : Mr Rajeev Nayyar, Sr. Advocate with Ms Sushmita Banerjee for R- 2,3 & 4. Mr Ajant Kumar, for R-5. CORAM:- HON’BLE MR JUSTICE BADAR DURREZ AHMED HON’BLE MR JUSTICE MANMOHAN SINGH 1. Whether 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 Digest ? Yes BADAR DURREZ AHMED, J (ORAL) 1. This writ petition is directed against the order passed by the Appellate Authority for Industrial & Financial Reconstruction (AAIFR) dated 16.09.2009 whereby the petitioner‟s appeal under Section 25 of the Sick Industrial Companies (Special Provision) Act, 1985 (hereinafter referred to as „SICA‟) was dismissed. The said appeal before the AAIFR was in turn directed against the order dated 04.09.2006 passed by the Board for W.P.(C). No. 13887/2009 Page No.2 of 22 Industrial and Financial Reconstruction (BIFR) whereby the reference made by the Board of the petitioner company under Section 15 of SICA was rejected as non maintainable on the grounds that the company (petitioner) did not approach the BIFR with clean hands and had failed to avail the opportunities given by the Board to present its case. 2. Mr Amit Sibal, the learned counsel appearing on behalf of the petitioner, mainly canvassed two points. The first point that was urged by him was that neither the BIFR nor the AAIFR have returned any finding as to whether the petitioner company is a sick industrial company or not. According to him, this determination is the duty of the BIFR as mandated by the provisions of SICA. He further submitted that once a company is determined to be sick under the provisions of SICA, then, that company can be dealt with only as provided under the said Act. The jurisdiction in respect of such determination, that is with regard to the sickness of the concerned company, is at the sole authority of the BIFR and there is a complete bar as provided under Section 26 of SICA for approaching any other Court including Civil Courts to enter into this domain. Mr Sibal further submitted that once the BIFR, or as the case may be, AAIFR comes to a determination that a company is a sick industrial company, the further question would have to be answered as to whether the said company can be revived or not. In either eventuality different consequences flow. If it is decided that the company is a potentially viable company then schemes can be framed as provided under Section 18 of SICA. However, if it is felt that the company is so sick that it cannot be revived or rehabilitated then consequences of winding up, as W.P.(C). No. 13887/2009 Page No.3 of 22 contemplated under Section 20, would flow. In this backdrop Mr Sibal submitted that it is, therefore, the duty cast upon the Board, as also the AAIFR, at the appellate stage, to return a conclusive finding as to whether the company in question is within the definition of a sick industrial company as defined in Section 3 (1)(o) of SICA or not. If the BIFR or AAIFR does not return any such finding then they could be regarded as having abdicated their primary or most important function. He submitted that in the present case this is exactly what has happened and, therefore, the impugned order passed by the AAIFR is liable to be set aside and the matter is liable to be remanded to the BIFR for conducting an inquiry in terms of Section 16 of SICA and for a clear determination as to whether the petitioner is a sick industrial company or not. 3. The second point urged by Mr Sibal, on behalf of the petitioner, is that BIFR, as also the AAIFR, has been unfair to the petitioner company, inasmuch as the case of the petitioner company has been dealt along with three other group companies, namely, M/s Shamken Spinners Limited (SSL), M/s Shamken Multifab Limited (SML) and Shamken Cotsyn Limited (SCL). He submitted that, as the facts would reveal, the other three companies of the group stood on a different footing from that of the petitioner company and the case of the petitioner company has been painted with the same brush as that of the other three companies. And, in doing so, both the BIFR and the AAIFR have committed a gross error. To substantiate this plea, Mr Sibal submitted that while the other three companies of the group had already filed references before the BIFR, the present company had filed its reference under W.P.(C). No. 13887/2009 Page No.4 of 22 Section 15 only on 12.07.2005. At that time, the BIFR was already seized of the references filed by the other three companies and certain orders had already been passed therein. On 19.12.2005, when the reference of SSL and the other two group companies were considered by the BIFR, the petitioner company (DSL) was not represented as its first hearing was conducted much later, on 23.02.2006. However, there is a direction in the order dated 19.12.2005 that in future the cases of the four group companies i.e. SSL, SML and SCL and the present petitioner (DSL) be listed for hearing on the same date as in the case of SSL. It is in this order, that it is recorded for the first time that IDBI had an investigative Audit (IA) conducted in respect of the group companies and that the audit report of M/s ANG and Associates revealed serious financial irregularities including furnishing of false and misleading information to the Banks/Institutions, multiple financing of projects, submission of forged Bank Statements and “fabricated auditor‟s certificates” for the purpose of availing disbursements, diversion of funds to group companies etc. In the said order itself it has been observed that the said IA report had not been served on the group companies and as such they had not been in a position to comment thereon. Consequently, the BIFR directed IDBI to immediately serve the IA report on the company (SSL), which was given at the hearing itself, and to all the secured creditors. SSL was allowed four weeks time to respond to the IA report with copies to the Banks/Financial Institutions and others concerned. 4. It is the contention of Mr Sibal, on behalf of the petitioner (DSL), that the IA report was given to the other group companies but not to DSL. W.P.(C). No. 13887/2009 Page No.5 of 22 This is also evident from the fact that the order dated 19.12.2005 itself records that the IA report was served on the companies at the hearing itself. Since DSL was not represented, because the first date of hearing of its reference was on 23.02.2006, there was no question of the IA report having been served on the said company at the hearing on 19.12.2005. In fact, Mr Sibal, on instructions, states that even till this date the petitioner does not have a copy of the IA report in respect of DSL. Of course, there was some controversy as to whether the IA report was a composite one in respect of the four group of companies or there were separate reports. That controversy has been resolved, inasmuch as we find that the report itself comprised of four separate independent parts. It is now an admitted position that the four parts of the report pertain to each of the four group companies separately and were also furnished by the said M/s ANG and Associates to IDBI under cover of separate letters on different dates. 5. In this background, it was submitted by Mr Sibal that it was for the first time that the petitioner‟s reference was taken up by the BIFR on 22.03.2006, thereafter the next date was 03.07.2006 when all the group companies were directed to file their replies to their respective IAs. The next and final date before the BIFR was 04.09.2006 when the representative appearing on behalf of the petitioner had sought an adjournment. However, that adjournment was not allowed and it was observed by the BIFR that ample time had been given in the last hearings but the company had not submitted its reply to the IA report which contained very serious allegations with regard to the financial aspects of the working of the company. The W.P.(C). No. 13887/2009 Page No.6 of 22 reference of the petitioner company was, therefore, rejected, inter alia, on the ground that it had failed to avail the opportunities given by BIFR to present its case. According to Mr Sibal, since the petitioner was not represented by advocates on that date i.e., on 04.09.2006 and the representative was merely requesting for an adjournment, the BIFR ought to have granted further time along with a peremptory direction that in case the reply is not given, the BIFR would proceed in the absence of such a reply. Consequently, it was submitted by Mr Sibal that a proper opportunity was not given to the petitioner to give its response to the IA report, even assuming that a copy of the IA report was available with the petitioner. In this context he further submitted that the IA report itself, as would be apparent from the proceedings before the AAIFR, was not sacrosanct and was not based on authenticated evidence but was based on unauthorized and unconfirmed information supplied by the banks to the said chartered accountants. 6. Mr Nayyar, the learned Senior Counsel appearing on behalf of the respondent nos. 2, 3 and 4, submitted that in so far as the denial of opportunity argument is concerned, the petitioner had no case. He submitted that if it were true that the petitioner company did not have a copy of the IA report, it could have made a request for the same before the BIFR on 22.03.2006 or even on 03.07.2006. In fact, even on 04.09.2006 the Authorized Representative could have said that he is seeking an adjournment because he did not have a copy of the IA report and, therefore, was unable to give a response thereto. Since this is admittedly not the case, according to W.P.(C). No. 13887/2009 Page No.7 of 22 Mr Nayyar, the petitioner cannot take the plea that he was denied opportunity of responding to the IA report. 7. In so far as the plea that the BIFR had not performed its duty in returning a finding as to whether the petitioner was a sick industrial company or not, Mr Nayyar submitted that the BIFR was empowered under Section 16(1)(b) to take in any information as also under Regulation 40 to rely upon any information for the purposes of coming to the conclusion as to whether the petitioner was a sick industrial company or not. Therefore, according to Mr Nayyar, the BIFR and also the AAIFR cannot be faulted for placing reliance on the IA report of M/s ANG and Associates which was uncontroverted inasmuch as the petitioner company had not filed its response thereto. The fact that the BIFR as also the AAFIR did not proceed any further with the reference implied that the petitioner company was not a sick industrial company and, therefore, on this ground also there can be no grievance on the part of the petitioner. Mr Nayyar also submitted that while the BIFR order dated 04.09.2006 did not discuss the IA report as such the same had been discussed in detail by the AAFIR and since the BIFR order merges with the AAFIR order, whatever defect was there in the order of the BIFR stands cured by the AAFIR order dated 16.09.2006. 8. He referred to the conclusions which were arrived at by the AAFIR which are in the following terms :- “36. To sum up, we find that the irregularities pointed out in the SIA reports were very serious in nature and the concerned companies did not clearly and convincingly rebut the specific allegations contained therein which seriously impaired the W.P.(C). No. 13887/2009 Page No.8 of 22 accuracy and the credibility of the accounts. In the absence of credible accounts, any exercise aimed at determining sickness and deciding subsequent measures to deal with it were bound to be vitiated. We also find that by not granting adjournment on 4/9/2006, BIFR did not violate any principle of natural justice, equity or fairplay as the companies had participated in the hearing all along. Inability to make use of given opportunities is not denial of opportunities; such inability, especially, in matters crucial to the appellant companies is unacceptable. In the case of DSP we find that non-availability of the SIA report and the consequent inability of the company to furnish replies are not supportable arguments. 37. In view of what we have said above, we feel that the impugned orders of BIFR of 4.9.2006 do not suffer from any legal infirmity and they are just and fair. We do not see any reason to interfere with these orders. We dismiss the appeals accordingly.” (underlining added) 9. We have considered the arguments advanced by the counsel for the parties as well as the material on record and the statutory provisions. We find that as per the statement of objects and reasons of SICA, it has been designed to take care of not only those sick industrial companies which are potentially viable and can be revived and rehabilitated but also of the non- viable sick industrial companies. The potentially viable sick industrial companies are sought to be revived and rehabilitated under SICA whereas the non-viable sick industrial companies are to be dealt with under Section 20 of SICA in order to salvage the productive assets and realize the amounts due to the banks and financial institutions through liquidation of such companies. Before either eventuality is undertaken, the BIFR has been given the duty under the Act to determine whether an industrial company has become a sick W.P.(C). No. 13887/2009 Page No.9 of 22 industrial company or not. The expression sick industrial company is defined in Section 3(1)(o) as under: “sick industrial company” means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.” It is apparent from the above definition that an industrial company, which has, at the end of any financial year, accumulated losses equal to or exceeding the entire net worth of the company would be termed as a sick industrial company. When an industrial company becomes sick, a duty is cast upon the Board of Directors of that company under Section 15(1) to, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which the company has become sick industrial company, make a reference to BIFR for determination of the measures which are to be adopted in respect of the said company. We find that by virtue of Section 15(2), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, without prejudice to the requirement of the Board of Directors of an industrial company which has become sick to make a reference to the BIFR within Section 15(1), can also make a reference in respect of a company in respect of which there are sufficient reasons to believe that it has become a sick industrial company. Thus, it is clear that a reference to BIFR can be made either by the Board of Directors of the company itself or by the Central Government, RBI etc. under Section 15(2). W.P.(C). No. 13887/2009 Page No.10 of 22 10. Section 16 is of material significance and, as such, it would be appropriate to set out the same:- “16. INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES. (1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company - (a) upon receipt of a reference with respect to such company under section 15; or (b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company. (2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matter as may be specified in the order. (3) The Board or, as the case may be the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry. Explanation:— For the purposes of this sub section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board. (4) Where the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1) or, as the case may be, under sub-section (2), it may appoint one or more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company or in the public interest. W.P.(C). No. 13887/2009 Page No.11 of 22 (4A) The Board may issue such directions to a special director appointed under sub-section (4) as it may deem necessary or expedient for proper discharge of his duties. (5) The appointment of a special director referred to in sub-section (4) shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956) or in any other law for the time being in force or in the memorandum and articles of association or any other instrument relating to the industrial company, and any provision regarding share qualification, age limit, number of directorships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director appointed by the Board. (6) Any special director appointed under sub- section (4) shall - (a) hold office during, the pleasure of the Board and may be removed or substituted by any person by order in writing by the Board; (b) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto; (c) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement; (d) not be liable to be prosecuted under any law for anything, done or omitted to be done in good faith in the discharge of his duties in relation to the sick industrial company.” 11. A plain reading of Section 16(1) of SICA would indicate that the prime duty of the BIFR in making an inquiry is for the purpose of determining W.P.(C). No. 13887/2009 Page No.12 of 22 whether an industrial company has become a sick industrial company or not. Of course, sub-section (1) of Section 16 has two parts. Clause (a) of Section 16(1) refers to a situation where the Board embarks upon an inquiry upon receipt of a reference under Section 15 of SICA. We may recall that the reference under Section 15 may be made either at the instance of the Board of Directors of the company which purports to be a sick industrial company or under Section 15(2) at the instance of the Central Government, Reserve Bank etc. where such institution has sufficient reasons to believe that an industrial company has become a sick industrial company. Clause (b) of Section 16(1) contemplates an inquiry in a situation where the BIFR undertakes such inquiry upon information received with respect to a company or upon its own knowledge as to the financial condition of such a company. In either eventuality, that is, either upon receipt of a reference or upon information, the BIFR has to make an inquiry for determining whether the industrial company in question has become a sick industrial company or not. Of course, the type and kind of inquiry that the BIFR has to make has been left to the BIFR, inasmuch as the expression used is :- “the Board may make such inquiry as it may deem fit”. 12. By virtue of sub-section (2) of Section 16 of SICA, in cases where the BIFR deems it necessary or expedient so to do for the expeditious disposal of an inquiry under Section 16(1), the BIFR may require an operating agency to inquire into and make a report with respect to such matters as may be specified in the orders passed by the BIFR in this regard. At this juncture W.P.(C). No. 13887/2009 Page No.13 of 22 we would like to point out that the definition of “operating agency” given in Section 3(1)(i) is as follows: “(i) "operating agency" means any public financial institution, State level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board;” In other words, the operating agency has to be appointed by the BIFR by a general or a special order as its agent for the purposes of making a report. We may also mention that by virtue of Section 16(3), it is apparent that all endeavours are to be made to complete the inquiry as expeditiously as possible and within a period of sixty days from the commencement of the inquiry. The explanation to Section 16(3) makes it clear that an inquiry is deemed to commence upon the receipt by the Board of a reference or upon its own knowledge reduced to writing by the Board. 13. In the present case since a reference has been made by the Board of Directors of the petitioner company under Section 15(1), the inquiry would be deemed to have commenced on the date on which the reference was received, that is, on 12.07.2005. Consequently, if we were to strictly comply with the provisions of Section 16(3) of SICA, the BIFR should have endeavoured to complete the inquiry within sixty days thereof, but unfortunately that did not happen and even the first date on which the petitioner‟s reference was taken up by the Board was much later, on 22.03.2006. Anyhow, that is another aspect of the matter with which we are not concerned in this writ petition. W.P.(C). No. 13887/2009 Page No.14 of 22 14. It is clear from the above resume with regard to the provisions of Section 16 of SICA that it is incumbent upon the BIFR to conduct an inquiry for the purpose of determining whether the industrial company has become a sick industrial company or not. Such inquiry has to be conducted upon receipt of a reference under Section 15 or upon information received by the BIFR. The inquiry has to be conducted by the BIFR itself, but as provided under Section 16(2), where it is necessary for expeditious disposal of an inquiry and where the BIFR deems it expedient to do so, the BIFR may appoint an operating agency and require it to inquire into and make a report with respect to the matters which may be specified in the order. In any event, whether the inquiry is conducted by the Board itself or through an operating agency, it is