IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 8689 of 2000 For Approval and Signature: Hon'ble MR.JUSTICE C.K.BUCH ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- N K INDUSTRIES LTD Versus STATE BANK OF INDIA -------------------------------------------------------------- Appearance: 1. Special Civil Application No. 8689 of 2000 NANAVATI ASSOCIATES for Petitioner MR PRANAV G DESAI for Respondent No. 1 NOTICE SERVED BY DS for Respondents No. 2,14,15 DR SONIA HURRA for Respondents No. 4, SINGHI & BUCH ASSO. for Respondents No. 13 MR BP BHATT for Respondents No. 14 -------------------------------------------------------------- CORAM : MR.JUSTICE C.K.BUCH Date of decision: 07/11/2001 CAV JUDGEMENT 1. The petitioner- M/s N.K.Industries Ltd. (hereinafter referred to as the "petitioner company", by invoking jurisdiction of this Court under Article 226 of the Constitution of India, has prayed for issuance of a writ of mandamus and/or appropriate writ, direction or order quashing and setting aside the impugned order dated 12.5.2000/23.5.2000 passed by the Appellate Authority for Industrial & Financial Reconstruction (hereinafter referred to as "AAIFR" or "Appellate Authority" ) allowing appeal No. 107/99 and reversing the order dated 9.7.1999 passed by the Board for Industrial & Financial Reconstruction (hereinafter referred to as "BIFR" or "Board"). Other consequential reliefs are also prayed by the petitioner company. 2. The matter was listed on admission board on 20.8.2000 and the Court was pleased to issue notice to the other side. All respondents are served. As the learned counsel appearing for other side have resisted this petition vehemently, with the consent of parties, matter is heard at length at the admission stage and is disposed of by this judgment. 3. It would be just and proper to narrate facts, in brief, leading to present controversy between the parties. The petitioner company was incorporated on 19.8.1987 as a Private Limited Company and was thereafter converted into Public Limited Company. It is engaged in the business of manufacturing Castor Oil and its derivatives. It has set-up world's biggest Castor Oil Complex with crushing capacity of 400 TPD and solvent capacity of 400 TPD as well as creating capacities in derivatives-HCO, 12-HSA & Glycerine. Paid-up capital of the company as on 31.3.1998 was Rs.600.99 lacs and free reserves of Rs. 944.32 lacs. It is, however, contended that due to reasons beyond control, the petitioner company accumulated loss of Rs. 4540.60 lacs. The net worth of the petitioner company as on 31.3.1998 was minus Rs. 2995.29 lacs. The petitioner company, therefore, made reference before BIFR in terms of sec.15(1) and 15(2) of the Sick Industrial Companies (Special Provisions) Act,1985 (hereinafter referred to as "SICA") which came to be registered as Case No.35/99. After appreciating the say of the petitioner and appreciating documentary evidence produced before BIFR and statement of accounts, balance-sheet etc., BIFR, vide order dated 9.7.1999, declared the petitioner company as "sick unit" under sec.3(1)(o) of SICA. BIFR appointed Bank of Baroda as Operating Agency and gave certain directions which are reflected in the above-referred order passed by the BIFR. Feeling aggrieved and dissatisfied with the order dated 9.7.1999 passed by the BIFR, one of the secured creditors namely State Bank of India filed an appeal before the AAIFR - Appellate Authority which came to be registered as Appeal No.107/99. AAIFR allowed the appeal and set aside the order of BIFR and dismissed the reference made by the petitioner company vide its order dated 12.5.2000/23.5.2000 ( Annex.D colly.), which is under challenge. 4. Grounds for challenge are mainly enumerated in paras 10 to 18 of the petition. Learned senior counsel Mr. KS Nanavati for Nanavati & Nanavati Associates for the petitioner has argued at length practically on all grounds pleaded in the petition and has submitted that the order under challenge is unjust, improper, contrary to the scheme of SICA and Regulations framed thereunder and, therefore, the court should exercise its jurisdiction under Articles 226 and 227 by quashing and setting aside the order under challenge. By reading various observations (conclusion) made by BIFR in its order dated 9.7.1999, it is argued that appellate authority has completely ignored the aspects and evidence which weighed the BIFR while passing the impugned order. Acceptance of appeal under under erroneous approach has resulted into total miscarriage of justice. According to Mr. Nanavati, SICA has been enacted with a view to secure timely detection of sick companies / industrial undertakings. Board of experts viz. BIFR is supposed to determine the preventive, ameliorative, remedial and other measures expeditiously. Enforcement of measures so determined at the earliest is also one of the object of SICA. BIFR had considered all the relevant aspects while scrutinising the reference made by the petitioner and had appointed a Nationalised Bank viz. Bank of Baroda - one of the secured creditors, as Operating Agency. Ignoring the paramount object of SICA, the appellate authority dismissed the reference at the stage of admission/entertainment under a misconception of the entire scheme and under erroneous approach. BIFR, while dealing with the reference under sec.15(1) of SICA duly registered under Regulation No.19 of BIFR Regulations, 1987 (hereinafter referred to as the "Regulations"), had initiated inquiry under sec.19 to ascertain the plea of the company and had concluded, in view of the provisions of sec.3(1)(0) of the Act, that the petitioner is the sick industrial company. At the time of reversing the order of BIFR, the appellate authority held that the promoters of the company resorted to dishonest and unfair practice for personal enrichment and sickness applied is not a genuine sickness. To appreciate the case of the petitioner, Mr. Nanavati has taken this Court through relevant paragraphs of the order under challenge and more particularly observations and averments made in paras-14(a), 14(c), 14(d), 19(d), para-24(b), 29(a), 29(d), 31(c), 31(e) and 35 of the order under challenge. 5.(i) Mr. Nanavati has also taken this Court through the construction, objects and reasoning in the preamble and to various provisions of SICA. According to Mr. Nanavati, BIFR is conferred with statutory duty and function of investigating into the sickness of an industrial company and to take remedial measures for its revival provided that such an industrial company is held to be a "sick industrial company". Inquiry contemplated under sec.15 of the Act read with Regulations 21 to 25 of the Regulation is only for the purpose of determining the effect of sickness brought to the notice of BIFR under the Reference. Sec.16 to 18 of the Act provides for measures which BIFR has to take for revival and BIFR cannot refuse to perform its statutory duties and functions under the Act. The Board cannot refuse to act on the ground that either the management has been dishonest or has mismanaged affairs of the company or siphoned or misappropriated funds or has been guilty of making company sick or fabricating or falsifying the accounts. On receipt of Reference under sec.15(1) of the Act, sickness is required to be ascertained under an inquiry and the cause leading to such sickness is not relevant. BIFR must come to a positive conclusion whether or not the company in respect of which reference is registered, is a "sick industrial company" or not. 5.(ii) Mr. Nanavati has pointed out that company is legally bound to make reference otherwise the company and defaulting directors in making reference under sec.15(1) of the Act can be subjected to the criminal action by way of prosecution. It is pointed out that information as to sickness of industrial company has to be lodged before the BIFR by the Board of Directors of the Company by way of reference under sec.15 but scheme further provides that various bodies contemplated under sec.15(2) i.e. Central Government, Bank, Financial Institutions, Reserve Bank etc. also can make such reference. BIFR can also suo motu entertain reference in view of the provisions of Sec. 16(1). According to Mr. Nanavati, the word "may" used in sec.16(1) should not be interpreted as "must". 5.(iii) In fact, if BIFR is satisfied with the audited accounts no further inquiry would become necessary and the board can declare the company as "sick". The question of making inquiry would arise where the Board finds that audited accounts are not dependable and an inquiry is necessary to determine whether the company is a sick industrial company or not. In case on hand, after inquiry, BIFR concluded in favour of the company and declared it as "sick industrial company". The petitioner company had never prayed for any protection and reference under sec.16(1) is not an application asking a helping hand from BIFR. It is simply a report informing BIFR as to the nature and stage of sickness. Mr. Nanavati has taken me through prescribed form viz. Form No.A & AA provided under Regulations and has pointed out that signatory of the reference made is designated as an informant. He is neither a complainant nor applicant. BIFR may refuse to entertain reference filed by the company if it comes to a conclusion that accounts are not dependable or same are manipulated, but in the case on hand, body of the experts namely BIFR has accepted the reference and has appointed operating regulating agency from one of the secured creditors namely Bank of Baroda. Finding recorded by the appellate authority is total misconception of law as if SICA is beneficial piece of legislation and the same is enacted to help each sick industrial company with helping hand. 5.(iv) According to Mr. Nanavati, there is a clear distinction between the company and its management and SICA provides for measures for change of management or transfer of the productive assets as a part of the scheme for revival of the company. He has hammered that section 24 provides for misfeasance proceedings. Under this, while implementing any scheme or proposals actions can be taken against any past or present director, manager, officer, employee or any person. While forming scheme for management of sick company, recovery can be ordered from such persons of the company's money or property. According to Mr. Nanavati, provisions of sec.24 are much wider than sec.542 and 543 of the Companies Act. So, considering all these aspects, BIFR has accepted the reference, registered it and appointed Operating Agency Bank of Baroda. There was no need to reverse the finding on assumptions, presumptions or surmises. The allegations which were made during the course of arguments before the appellate authority by the learned counsel appearing for the appellant Bank seems to have succeeded only because they were able to prejudice the appellate authority as to the alleged misconduct on the part of management. 5.(v) The petitioner company is a public limited company and sickness of the company is more relevant in such cases and the alleged cause does not require to be magnified on extraneous consideration and the same should be left to BIFR during the proceedings under sections 16 & 17 onwards. According to Mr. Nanavati, patent error of law has been committed by the appellate authority. All the beneficial provisions meant for protecting the company from the effects of consequences of mismanagement of its affairs by its Board of Directors, for saving the productive assets from being vested, for saving the labour force of unemployment, and the funds of the financial institutions is being unrecoverable would be rendered wholly nugatory if it is held that BIFR or AAIFR can reject a reference without determining whether the company is a sick industrial company or not, only on the ground that the accounts of the company have been fabricated or manipulated by the Board of Directors or are not dependable. Relying on the scheme of Regulations 21 to 25 and partly on Regulations 24 and 25, it is submitted that Board is bound to hold further proceedings in accordance with the procedure prescribed in the regulations moment the Board is satisfied that the company has become sick. It is obligatory duty of the Board to come to the conclusion either positively or negatively and cannot refuse to determine the question as to the sickness or otherwise of the company. 5.(vi) In the present case, the Board was satisfied and it was apparent on the face of the account, balance-sheet and, therefore, a reference was made before the BIFR. The appellate authority has not considered the most relevant part of section 22 which provides that protection is not available to a company before BIFR if the BIFR grants consent to proceed against the sick company. Such an order of consent or refusal is subject to an appeal under sec. 25 and can be challenged by a petition under Articles 226 and 227 of Constitution. Mr. Nanavaty has submitted that the judgments relied upon by the otherside are cited under misconception of law that SICA is a beneficial piece of legislation and its provisions cannot be invoked if the accounts are fabricated or manipulated by management. The findings of the BIFR were absolutely in accordance with law as on the date of the reference, the petitioner company had reported its sickness to the Board and at first hand satisfaction, the BIFR registered the reference and initiated actions further. The SICA is a self contained code with provisions for identification of a sick or potentially sick company and it is to be determined whether the company in respect of which information is received under sec. 15 is sick or not. 5.(vii) Relying upon the provisions of section 16 read with regulation 21 to 25 Mr. Nanavati has submitted that the finding of AAIFR should be held illegal and arbitrary and beyond reasonable interpretation. Mr. Nanavati has hammered that even when as to the reliability or trustworthiness of the management or account is raised (and are raised) and when it is agitated that management is guilty of misappropriation or diversion of fund or manipulating accounts, the BIFR and AAIFR must determine the question whether in fact, the company is sick or not by going behind the allegations and the acts by adopting various measures provided under the Act. It is argued that in an appeal under sec. 25 the AAIFR can itself undertake an enquiry or can remand the matter back to BIFR with a direction for further enquiry in the back ground of basic objects of the Act. It is also open for AAIFR to consider the objections and can ignore certain disputable entries recorded and can record that the net-worth of the company on the date of reference was still negative. In this case, AAIFR ought to have directed a special investigative audit as represented by the company or made an enquiry itself in respect of each objections raised by the otherside and after considering the special audit report or on the finding recorded at the end of enquiry, the AAIFR ought to have determined whether the net-worth of the company on the date of the reference made was negative. Rejection of reference on the ground that the accounts are not dependable and the management is guilty of misappropriation or diversion of funds or manipulation of accounts, is absolutely arbitrary and the same has given rise to the cause of the petition. Failure to exercise jurisdiction vested in it under sec. 25 read with other relevant provisions of the Act and the Regulations framed there under, is an independent ground to challenge the findings of AAIFR. 5(viii) It is also submitted that the AAIFR has injudiciously and improperly considered various objections some of which were not raised before the AAIFR, and therefore, the same has resulted in breach of principles of natural justice. By reading para-30 and 31 of the judgment under challenge, Mr. Nanavati has submitted that AAIFR obviously has been influenced by the objections either not raised before the BIFR or even in the written submissions or in the petition of appeal before the AAIFR. This Court is supposed to take care in all cases where there is a failure of justice. 5.(ix) I have considered the examples, for the purpose pointed out by Mr. Nanavati which are reflected in Annexure-I with the written submissions. The grievance of Mr. Nanavati is that the AAIFR having heavily relied upon the Auditor's report of the audited balance-sheet for the year 1997-98, has failed to consider all the remarks relevant in determination of the net-worth of the company. Remark (vi) pointed out by Mr. Nanavati reads as under: "(vi) No provision is made for doubtful debts amounting to Rs. 3844 lacs and doubtful advances amounting to Rs. 646.56 lacs. Had the provision made, the loss would have been increased by that amount." The AAIFR ought to have reconstructed the balance-sheet after giving effect to various remarks of the Auditor to ascertain whether the net-worth was negative. The finding of the AAIFR is apparently not based on any material of rationally probative value but the same is based on conjectures and surmises. In such cases, this Court should exercise its discretionary jurisdiction. At one stage of submission, Mr. Nanavati has submitted that in any case for the various illegalities, the failure or manipulation alleged to have been committed by the management of the company, a public limited company cannot be punished and the court should exercise its jurisdiction. Mr. Nanavati has placed reliance on the decision of the Apex Court reported in AIR 1984 SC p. 1182 in the case of I.T. Commissioner, Bombay vs. Mahendra & Mahendra Ltd. The Apex Court says: "By now, the parameters of the Court's power of judicial review of administrative or executive action or decision and the grounds on which the Court can interfere with the same are well settled and it would be redundant to recapitulate the whole catena of decisions of this Court commencing from Barium Chemicals, 1966 Supp SCR 311 : (AIR 1967 SC 295) case on the point. Indisputably, it is a settled position that if the action or decision is perverse or is such that no reasonable body of persons, property informed, could come to, or has been arrived at by the authority misdirecting itself by adopting a wrong approach, or has been influenced by irrelevant or extraneous matters the Court would be justified in interfering with the same. This Court in one of its later decisions in Smt. Shalini Soni vs. Union of India, (1981) 1 SCR 962: (AIR 1981 SC 431), has observed thus: "It is an unwritten rule of the law, constitutional and administrative, that whenever a decision-making function is entrusted to the subjective satisfaction of a statutory functionary, there is an implicit obligation to apply his mind to pertinent and proximate matters only, eschewing the irrelevant and the remote." He has also placed reliance on the decision in the case of Oudh Sugar Mills Ltd. vs. Union of India, reported in 1978 ELT (J 172). 6. The respondent no. 1- State Bank of India and respondents no. 4,6,7,9, 13 and 14 have strongly resisted this petition. The oral submissions made by learned Senior Counsel Mr. SN Soparkar is adopted by the learned counsel appearing for other respondents. 6.(i) As the petitioner has submitted points of submissions in writing, the first respondent has also submitted his points of submissions in writing. Mr. Soparkar before arguing the matter on merits, raised preliminary objection and has submitted that this Court should not examine the decision of AAIFR unless it is found that the view taken by the lower authority is palpably unsustainable, totally unsupported by evidence or such that no reasonable man can ever take, this court should not upset the same. Writ jurisdiction of this Court is a supervisory jurisdiction and is not of an appellate court. The AAIFR has exercised its quasi judicial powers and the functions. AAIFR is a judicial functionary in a specialised field which would require a technical expertise and consideration of the various economical factors. So, considering the limited scope of jurisdiction, this Court should refuse to invoke jurisdiction under Articles 226 and 227 of the Constitution. For this purpose, Mr. Soparkar has placed reliance on the decision of Division Bench of this Court in Special Civil Application No. 6912 of 1996 (Date:8.11.1996) and other decisions delivered while dealing with the Company Petition No. 328 of 1997 dated 11.9.1998. When this matter was placed for further hearing after reopening of the vacation, the decision of this Court in Special Civil Application No. 5125 of 2000 (Group) dated 10.1.2001 is also cited. He mainly relies on para 14 to 18 of the Judgment (Coram: K.R. Vyas, J.). Mr. Soparkar has drawn the attention of this Court to a decision reported in AIR 1964, page 477 in the case of Syed Yakoob vs. K.S. Radhakrishnan & Ors. which clearly brings out the limited scope of jurisdiction of High Court while dealing with the decisions of a quasi-judicial functionary. While enlarging this argument, it is submitted by Mr. Soparkar that the issue brought before this Court by the petitioner should be examined from a very narrow angle if this Court finds that the lower authority i.e. AAIFR is wholly wrong and if the view taken by the AAIFR is neither unsustainable nor perverse, the petition should be dismissed. If this Court finds, on such scrutiny, that two views could be possible on the matter or where there is scope to take some other view than the finding of quasi-judicial authority should not be disturbed. Mr. Soparkar and Mr. Nanavati both the learned senior counsel for the parties have taken me through both the decisions of BIFR and AAIFR. 7.(i) The SICA is enacted in the public interest for timely detection sick and/or patently sick company in Industrial undertakings. While interpreting the provisions or regulations framed thereunder, the Court should ensure that the same are not interpreted in the manner which may promote any illegality , mal- practice, fraud or dishonesty. Determining of sickness and causes of sickness is within the scheme of SICA. Relying on the report of Committee appointed by the Reserve Bank of India, under the Chairmanship of one Shri P. Tiwari, Mr. Soparkar has pointed out various causes of sickness enumerated by the Committee. According to Mr. Soparkar this Court should take similar view which has been taken by the Delhi High Court in two different cases. Mr. Soparkar has placed reliance on the decision of the Delhi High Court reported in 1998(5) Company Law Journal, page 108 and in the case of Madhumilan Sintex Ltd. vs. AAIFR & Ors. (Civil) Writ No. 4702/1998 dated 21.4.1999. These judgments have strong persuasive value and it should be accepted by this Court because, as submitted by Mr. Soparkar, the said view is in furtherance of fairness and equity. Any other view may encourage psychology to commit fraud or may promote illegality and may tempt dishonest management. Mr. Soparkar has placed reliance on the observations of the Madhya Pradesh High Court's decision reported in 1999(4) Company Law Journal page 190 in the case of Kedia Distilleries Ltd. In the cited judgment, the High Court has quoted the observations of the Apex Court from a case reported in 1997 SCC 649 where the Apex Court has interpreted the purpose and scheme of SICA. I would like to quote the same which reads as under: "We are sure that section 22 was not meant to bring dishonesty nor can it be so operated so as to encourage unfair practice." According to Mr. Soparkar the observation and the finding recorded by AAIFR if appreciated in light of this proposition and interpretation of relevant laws, than it would be clear that this writ petition needs to be dismissed in limine. 7.(ii) Alternatively, Mr. Soparkar learned Senior Counsel for respondent no.