THE HONOURABLE SRI JUSTICE P.S.NARAYANA W.P.NO. 350 OF 2006 Date: 06-11-2007 Between : B.Subba Reddy, S/o:B.Krishna Reddy, Aged about 45 years, R/o: 1101, Srider Lane, Silver Spring, MD 20905, USA Rep. By its GPA Ch.Venkat Ram Reddy …Petitioner A N D 1. Appellate Authority for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985 and others …Respondents THE HONOURABLE SRI JUSTICE P.S.NARAYANA W.P.NO. 350 OF 2006 ORDER: 1. Sri B.Subba Reddy, represented by his General Power of Attorney Holder filed the present writ petition for writ of certiorari to quash the order of the first respondent-appellate authority for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985, New Delhi in an appeal No. 48 of 2005, dated 28-12-2005 and consequently allow the appeal of the petitioner as prayed for and to grant such other suitable relief. 2. Heard Sri Vedula Venkata Ramana learned counsel representing the petitioner and A. Raja Sekhar Reddy, learned Additional Solicitor General, Smt. M.Lakshmi Kumar, Shri P.Vikram representing Sri K.Kodanda Ram, Sri K.Gopalakrishna Murthy, Sri V.V.S.N.Raju, the learned counsel representing the respective respondents. 3. At the outset it can be stated that the serious contest appears to be between the petitioner Sri B. Subba Reddy and the 6th respondent Sri V.N.Sunanda Reddy, Managing Director, M/s S.S. Organics Limited, Aroor Village, Sadasivapet Mandal, Medak District 4. This Court issued Rule nisi on 6-1-2006. This Court also dismissed WPMP Nos. 427 of 2006 and 428 of 2006 on 2-3-2006 as the learned counsel for the petitioner has not pressed the said applications. However, in WPMP Nos. 1355 of 2006 and 1356 of 2006 on 2-3-2006 this Court made the following order: “There is no dispute that when a reference before Board for Industrial and Financial Reconstruction (BIFR) was pending, sixth respondent agreed, as part of modified rehabilitation scheme, to take twenty five lakhs (25,00,000) shares at Rs.10/- (Rupees ten only) each by converting unsecured loans brought in by him. The Board of Directors of the third respondent accordingly allotted said quantity to sixth respondent. However, on appeal by the petitioner before the Appellate Authority for Industrial and Financial Reconstruction ( AAIFR), an interim order was passed staying the conversion of unsecured loans into equity shares. The third respondent did not give effect to the allotment made in favour of the sixth respondent. However, after dismissal of the appeal by AAIFR on 28-5-2005, the third respondent addressed Bombay Stock Exchange (BSE) that they are giving effect to the decision of the Board of Directors, dated 28-3-2005 pursuant to the orders of BIFR for allotment of twenty five lakhs (25,00,000/-) shares to sixth respondent. It is now the case of the petitioner that if the sixth respondent transfers his shares to third parties in the present system of Demat holding, it would be very difficult to get back the shares in the event of Writ Petition being allowed by this Court. Therefore, the learned counsel prays for an interim order directing the third respondent not to trade, or create third party interest in respect of the shares already allotted to sixth respondent. Though initially learned counsel for respondents 3 and 6 opposed the said prayer, the learned counsel submits that during the pendency of the Writ Petition sixth respondent shall not transfer the shares to third parties. The same is recorded. The W.P.M.Ps. are accordingly disposed of. Post the Writ Petition for final hearing on 12-6-2006.”. 5. Sri Vedula Venkata Ramana, learned counsel representing the writ petitioner would maintain that though several grounds had been raised, the first respondent-appellate authority had not considered the said grounds in proper perspective, except making some modifications without considering the other important or essential aspects and negatived and hence the order impugned is not sustainable and at any rate the matter requires reconsideration at the hands of the appellate authority. Learned counsel while making elaborate submissions had taken this Court through the historical background of the litigation and drawn the attention of this Court to the respective pleadings of the parties and also the relevant material papers placed before this Court. Learned counsel would submit that certain civil suits have been filed and certain proceedings are pending before the Company Law Board. The counsel also while making elaborate submissions had pointed out to the proceeding before the Company Law Board. The modify scheme the way in which the matter has been dealt with. The counsel also would point out that the other litigations being irrelevant the appellate authority should also decided all the grounds raised before him and the matter would go to show that there is non-application of mind by the appellate authority. The learned counsel also would submit even BIFR had taken a decision without affording any opportunity to the petitioner and the present petitioner the appellant in the appeal before the appellate authority was not made him party before the BIFR. The Proceedings of the BIFR themselves are not in conformity with the procedure laid down by the Act in question. The Sick Industrial Company Special Provision Act, 1985 (herein after referred to in short as ‘the Act for the purpose of convenience). The learned counsel also drawn the attention of this Court to Section 18 of the said Act dealing with preparation and sanction of the schemes and in particular laid emphasis on Section 18(5) of the Act. The counsel also pointed out to Section 25 of the Act dealing with appeal. The learned counsel also while further elaborating his submission had drawn the attention of this Court to the relevant BIFR Reservations, 1987 (hereinafter referred in short as “the resolution” for the purpose of convenience) in particular Chapter VI the procedure for preparation and sanction of the scheme under Sectin18 of the Act, the Regulations 27 to 33 in particular. The learned counsel would submit that several of the factual controversy between the parties may not be effectively adjudicated by a Writ Court since the present writ petition is a writ of certiorari questioning the order of the first respondent-appellate authority made in Appeal NO. 48 of 2005 dated 28-12-2005. However, while elaborating his submission the learned counsel pointed out paras 10 to 15 of the impugned order and submits that at any rate this is the ground raised by the writ petitioner-appellant had not been considered in proper perspective. It is fit case where impugned order to be quashed and the matter to be remitted to the appellate authority to reconsider all the aspects. Learned counsel also further contended that when the rehabilitation scheme had been originally sanctioned on12-2-2002 which require commercial of Rs.200 lakhs worth unsecured loan into equity to the credit of promoters, their relatives and friends and when the said scheme was declared failed by order dated 19-6- 2003 steps taken and invented in the interregnum including the version of unsecured loans should fall to the ground, in view of the fact that when scheme had been declared as failed the shareholder pattern of the company shall reconstitute to the original condition as it is stood the sanction of the scheme on 12-2-2002. The learned counsel would also maintain that the 6th respondent though not founder Director of the company purposely by accepting rehabilitation scheme dated 12-2-2002 had manipulated share holding of the company, dated 27-2-2003 and board meeting dated 25-2-2003 and in fact fabricated some book entries unsecured loans to his advantage and subsequently thereto removed the petitioner from the Directorship of the company. The learned counsel also would pointed out that the petitioner made an attempt to agitate before the Company Law Board and also to the appellate authority about the misinterpretation given to illustrative scheme, dated 12-2-2002 and on 27-1-2005 and also about so called allotment as per extra ordinary general meeting dated 27-2-2003 and the Board Meeting dated 25-3-2003. But, it is unfortunate that the Company Law Board had taken a view and it is the appellate authority which has jurisdiction to decide the matter and by the present impugned order the first respondent found that it is for the company Law Board alone who has jurisdiction to decide the controversy. The learned counsel while elaborating his submission would maintain that the counsel is unable to understand though the first respondent appellate authority had concluded that it has no jurisdiction to go into correctness or otherwise, of failed schemed. Learned counsel also pointed out to the order relating to a conversion granted during the pendency of the appeal, the foul played which is being played by the sixth respondent which is being high lighted. Several factual aspects have been narrated by the learned counsel clearly pointing out several of the proceedings in this regard. The learned counsel would maintain that this is a fit case where certiorari jurisdiction to be exercised by this Court under Article 226 of the Constitution of India. Learned Counsel also placed reliance on certain decisions. 6. Learned counsel representing 4th respondent had taken to the contents of the counter affidavit and made certain submission in support of the impugned order. It appears Respondents NO. 3 and 6 had not filed affidavit in the main writ petition, but appears to have filed counter affidavit in WPMPs as specified supra. It may be pointed out that it would be always desirable if the parties filed specific counter affidavits in the writ petition. 7. The counsel representing Respondents No.1 to 3 and 5 also made certain submissions in support of the impugned order. 8. Sri P. Vikram representing Sri M.Kodanda Ram representing 6th respondent with all emphasis would submit that in the light of the facts and circumstances and also in the light of the scope and ambit and also the jurisdiction of the company Law Board, Additional Principal Bench at Chennai , the order impugned cannot be found fault. Learned counsel also pointed out to the historical background of the litigation and also how in the interest of the company the steps had been taken. The counsel also pointed out to the scheme by BIFR and two schemes for the revival and modify the scheme and how the scheme became a debt free company. The counsel also would maintain that there is no individual share holder the BIFR perfectly followed the procedure, the petitioner having slept over his rights may be out of personal animosity in view of the relationship between the parties has been unnecessarily agitating. The counsel pointed out the grounds raised before the AAIFR and would maintain that except certain factual controversy no procedural irregularities as such had been raised even in the writ petition. The learned counsel pointed out to Section 18(5) to (9) of the Act and also regulations referred to the supra and explained different proceedings and also further explained that the powers of AAIFR being limited while dealing with appeals the appellate authority is well justified in making the said order and absolutely, there is no legal infirmities. The learned counsel also explained under what circumstances such interim order had been made on consortium made by the counsel and would conclude that the stand taken by the writ petitioner not being bona fide, even otherwise, in view of the limitations imposed in exercising certiorari jurisdiction this is not a fit case to be interfered with. Learned counsel placed strong reliance on certain decisions in support of his submissions. 9. Heard learned counsels. 10. Before taking up further discussion, it may be appropriate to have a glance at the relevant findings recorded by the first respondent at paras 10 to 15 which are as follows: “10. The appellant has also filed a petition u/s 111A, 163, 196,237(b),397,398, 402, 403, 406,408 and Schedule XI of the Companies Act, 1956 before the Company Law Board. Addl. Principal Bench, Chennai. In this petition the appellant had sought several relieves namely a) set aside the allotment of 20 lakh shares allotted on 25-4-2003 in pursuance of SS (02) ; (b) freeze the voting rights in respect of 20 lakhs shares allotted on 25-4-2003 in favour of respondent Shri V.N. Sunanda Reddy and associates;(c) restrain the respondent, MR. V.N. Sunanda Reddy and his associates from transferring/encumbering/ pledging/ creating third party interesting respect of 20 lakh shares; (d) to appoint an independent Chartered Accountant to verify the documents, minute books etc., relating to allotment of 20 lakh shares and (d) issue of a direction to the respondent Mr. V.N. Sunanda Reddy and his associates not to alienate in any manner any of the movable and immovable properties of SSOL and not to create any further encumbrances on the property. 11. The appellant is before this Authority with regard to allotment of Rs. 250 lakh worth of shares made on 28-3- 2005 in pursuance of SS (05) in favour of the respondent and his associates. The issue of Rs.200 lakh worth of shares made on 25-4-2003 in pursuance of SS 02 is under adjudication by the Company Law Board, which has already heard arguments on the maintainability of the petition. 12. It is seen that during the course of implementation of the earlier scheme i.e. SS-02 which was subsequently declared failed mid-way as well as in terms of SS-05, the respondent Shri V.N. Sunanda Reddy has acquired nearly 80% of the shares of the company and is more or less in total control. We also find on going through the records that the dues of the secured creditors have been fully settled. Having regard to these set off acts continuation of the obligation of Shri B. Subba Reddy, in our view, does not appear either necessary or fair. We thus allow the appellant’s prayer qua clause 6.3.(v) and in terms of section 25 of SICA and direct that clause (f) and (g) therein should be deleted. We also direct that clause (j) therein may read as follows:- The company/respondent who is a majority shareholder and also the Managing Director agreed to pay any contingent liability arising hereafter on account of statutory dues/pressing creditors/disputed dues either out of internal accruals or own contribution. 13. In the event of the appellant in this case getting a decision in his favour from the Company Law Board (Principal Bench, Chennai) or any higher court qua the allocation of shares under SS-02 or SS-05, he shall have the liberty to approach the BIFR for a suitable/appropriate amendment in the sanctioned scheme. 14. The legality of the allotment of shares qua SS(02) is now under adjudication before the Company Law Board, Additional Principal Bench, Chennai. However, the fact remains that a sum of Rs. 200lacs qua SS (02) and Rs.250 lacs qua SS (05) sanctioned by the impugned order dated 27-1-2005 has been brought in by the respondent Mr. V.N. Sunanda Reddy as unsecured loan. The legality or otherwise in the allotment of 20lac shares and 25 lac shares made on 25-4-2003 and 28-3-2005 respectively in terms of the provisions contained in the Companies Act, 1956 is a matter which has to be decided by the Company Law Board and not by this Authority. As far as the challenge to para 6.3.v) clauses (f) & (g) are concerned, which requires the appellant to execute personal guarantee in favour of IDBI, it may be mentioned that this is no longer the relevant issue as the dues of IDI and SBI, the two secured creditors of SSOL, have been already cleared. 15. Under these circumstances we find that there is no justification for us to interfere with the impugned order dated 2-1-2005 in so far as clauses (a) and (b) of para 6.3 (v) is concerned. Appeal is, accordingly, dismissed subject to the modification at para 12. “. 11. A further glance of the impugned order the first respondent-appellate authority had taken note of the challeng made to para 6(3) clause 5 ( a to h) on the ground that the scheme adversely affected the interest of the writ petitioner-appellant and also referred to the other clauses and further analyzed the fact at para 6 and recorded the contentions and then proceeded to decide. The affidavit filed in support of the writ petition was sworn by the General Power of Attorney Holder Sri Subba Reddy- the writ petitioner it is averred in para 2 of the affidavit filed in support of the petition that the third respondent company was initially incorporated as a Private Limited Company in the month of November, 1990 and it was subsequently converted into a public Limited Company in the year 1993. It is further averred that the manufacturing plant and registered office of the 3rd respondent company is situated at Aroor village. Sadasivapet Mandal Medak District with its Corporate Office at Hyderabad. The promoters of the 3rd respondent company include the petitioner Dr. Sadasiv Reddy, V.V. Kotte Rao and Dr. Sai Sudhakar. Thus, there were four persons who are promoters of the 3rd respondent company and except the petitioner. The other promoters are not evincing interest in the management and administration of the affairs of the company. The 3rd respondent company was established for manufacture of life saving drugs and various other intermediates and thus it is a bulk drug manufacturing company. The petitioner being a non-resident Indian has appointed the 6th respondent a close relative of the petitioner as an alternate Director of the company in the year 1993 with an expectation that the 6th respondent would contribute his best to the affairs of the company. In fact, the 6th respondent was appointed as Executive Director and later as Managing Director with effect from 01-01-1997. At that time, the shareholding pattern of the 6th respondent was only 0.54% whereas the shareholding of the petitioner was about 23.78%. In fact the petitioner along with the other promoters have infused funds into the company through friends and relatives to the tune of Rs.1.68 crores by way of unsecured loans. It is further averred that the petitioner has provided continuous financial assistance to the company in the form of unsecured loans from time to time by pledging his shares and arranging loans from M/s Wipro to the tune of Rs. 60 lahs in the year 1995 and also contributed about Rs. 30 lakhs has unsecured loans for revival of the company. I submit that the 6th respondent was never appointed as the nominee of the petitioner. He was only a specific power of attorney holder concerning shareholding of the petitioner. Since the petitioner is a non-resident Indian, most of the time he was out of India and this has facilitated the 6th respondent to commence maneuvering the affairs of the company to the detriment of the petitioner. 12. It is further stated that in the month of June, 2003 , the petitioner was informed that it was required to infuse certain funds for survival of the company and being a promoter Director holding 23.78 of the total shareholding and having invested huge funds to the extent of Rs. 1.32 crores into equity of the company, the petitioner has contributed a further amount of Rs. 16.69 lakhs on 15-01-2003. Despite the contribution made by the petitioner, the 6th respondent was not disclosing the true profile of the 3rd respondent company and the petitioner, on enquiry came to know that the 6th respondent has obtained a rehabilitation scheme dated 12-2-2002 for the revival of the 3rd respondent company which has provided for conversion of unsecured loans by the promoters, friends and relatives into equity. It is further stated that the 6th respondent has removed two of the promoter Directors viz. Dr. Sai Sudhakar and Dr.D. Sadasiv Reddy and in view of the conversion of unsecured loans into equity, the 6th respondent has mischievously obtained majority in the shareholding pattern of the 3rd respondent company and became holder of 30% of the shareholding while the shareholding of the petitioner was reduced from 23.78 to 18.14% . The change of shareholding pattern has occurred due to exploitation of the rehabilitation scheme dated 12-2-2002 for the exclusive benefit of the 6th respondent since by showing book entries as unsecured loans. The 6th respondent has got converted the unsecured loans worth Rs. 200 lakhs into equity shareholding. As per the order of the BIFR dated12-2-2002, the conversion of unsecured loans into equity is applicable only in respect of those unsecured loans which are raised by the promoters, relatives and friends and, therefore, the 6th respondent was not eligible to have his equity shareholding increased in the company since he was never a promoter Director of the company. The modus operandi adopted by the 6th respondent, by exploitation of the order of the BIFR dated 12-2-2002 is by calling an extraordinary general body meeting on 27-1-2003 and getting the resolution passed on 25-4-2003 wherein the unsecured loans were converted into equity. Though the BIFR has announced a rehabilitation scheme on 12-2- 2002 by a subsequent order dated 19-6-200, it has declared that the scheme has failed and, therefore, directed winding up of the company u/s 20of the Act. Since the rehabilitation scheme dated 12-2-2002 was declared as failed by order dated 19-6-2003, the allotment of shares dated 25-4-2003 should not have any legal validity. Perhaps sensing the same, the 6th respondent has again moved the BIFR and got a rehabilitation scheme issued on 1-2- 2005 wherein it was observed that the promoters shall bring further unsecured loan of Rs. 250 lakhs during the financial years 2003-04 and 2004-05 and shall agree for conversion of the unsecured loans of Rs. 250 lakhs into equity shares of Rs.10/ each and they shall also guarantee obligation of the promoter Director for repayment of dues to IDBI and the petitioner shall execute a personal guarantee in favour of IDBI. 13. It is also stated that the above said observations which are part of Clause 6.3 (v)(a),(b),(f),(g) and (i) the petitioner has filed an appeal u/s 25 of the Sick Industrial Companies (Special Provisions) Act. 1985 contending that the said clauses are objectionable since they are without notice to the petitioner and also on the ground that the impugned clauses would benefit the 6th respondent to further enhance his share holding pattern in the company. It is also relevant to submit here that the petitioner has filed an Original Petition before the company Law Board, Chennai in O.P.No.22 of 2005 complaining oppression, mismanagement, fraudulent allotment of shares etc., One of the reliefs claimed before the Company Law Board is about the invalidation of the shares that were allotted in the extraordinary general body meeting dated 27- 2-2003 and the consequential board meeting dated 25-4-2003. Thus, the reliefs claimed before the 1st respondent-appellate authority in Appeal No. 48 of 2005 and CP No.22 of 2005 are substantially different. However, to the misfortune of the petitioner, on a preliminary objection raised before the Company Law Board, it has held that the validity of the allotment of shares dated 25-4-2003 cannot be gone into by a conversion is build up to gain majority in the shareholding of the 3rd respondent company. Even if the infirmities about the extraordinary general body meeting and the board meeting are kept aside, when the scheme SS-02 was declared failed on 19-6- 2003, no legal validity would stand attached to the changed shareholding pattern as per the minutes of the board meeting dated 25-4-2003. Further, the allotment dated 25-4-2003 was not disclosed upto April, 2004, which itself creates any amount of doubt about the very allotment of shares by way of conversion. Further, the 6th respondent has not shown the so called allotment before the 3rd respondent upto September, 2003. Further, even as per the balance sheet for the period ending September, 2003, the share capital is shown as 555 only. All these circumstances would clearly disclose that the so called allotment is sham and intended only to gain control to eliminate the petitioner from the control of the company. 14. Further it is averred that the appellate authority 1st respondent herein has all the jurisdiction to find fault with the scheme formulated by the 2nd