IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 12861 of 2006 Date of Decision: November 27, 2009 M/s Rama Petrochemical Limited and others …Petitioners Versus Punjab State Industrial Development Corporation Limited and others …Respondents CORAM: HON'BLE MR. JUSTICE M.M. KUMAR Present: Mr. Rahul Sharma, Advocate, for the petitioners. Mr. N.S. Boparai, Advocate, for the respondents. 1. To be referred to the Reporters or not? Yes 2. Whether the judgment should be reported in the Digest? Yes M.M. KUMAR, J. This petition filed under Article 226 of the Constitution challenges orders dated 15.2.2006 (P-11), passed by Specified Authority under Section 3 of the Punjab Public Moneys (Recovery of Dues) Act, 1983 (for brevity, ‘the 1983 Act’). The Specified Authority has rejected the prayer of the petitioners for staying recovery proceedings by invoking the bar contemplated by Sick Industrial Companies (Special Provisions) Act, 1985 (for brevity, ‘SICA’). Another order dated 31.5.2006 (P-9), passed by the same Specified Authority is under challenge whereby ‘Recovery CWP No. 12861 of 2006 Certificate’ for recovery of Rs. 441.96 lacs (as on 31.3.2005) along with further interest as per the terms of the agreement till the date of final settlement has been ordered to be issued. Also under challenge is the consequential recovery certificate along with letter dated 14.6.2006 (P-14) issued by the Punjab State Industrial Development Corporation Limited (for brevity, ‘PSIDC’) to the Collector, Mohali, for effecting recovery of its dues as arrears of land revenue. 2. Brief facts of the case are that PSIDC-respondent No. 1 is a public sector undertaking owned and controlled by the State of Punjab within the meaning of Section 617 of the Companies Act, 1956 (for brevity, ‘Companies Act’). It has been established on 31.1.1966 when it was registered as such with the Registrar of Companies. The whole amount invested in the PSIDC is received in the form of equity contribution from the State Government. A detailed chart disclosing the receipt of amount yearwise since 1966- 67 to 1990-91 has been furnished in the form of Annexure R-1 appended with its written statement. Therefore, it is evident that the PSIDC is fully government owned company within the meaning of Section 617 of the Companies Act. A perusal of Clause III-A of Memorandum and Articles of Association of PSIDC reveals the main objects for its establishment. Two of the objects which are closely associated with the controversy are reproduced hereunder:- “(1) To promote, improve, establish, execute, manage and administer industries, projects or enterprises for manufacture and production of plaint, machinery, tools, implements, materials, 2 CWP No. 12861 of 2006 substances, goods, or things of any description which in the opinion of the Company are likely to promote or advance the industrial development of Punjab. (2) to (5) xxx xxx xxx (6) To promote and operate Schemes of the industrial development of Punjab and for that purpose to prepare and get or cause to be prepared investigations and studies for feasibility reports; detailed project reports, market studies, statistics and other relevant information for the establishment of any industrial undertaking and to promote and establish companies, and associations for the execution of such industrial projects. To plan, formulate and execute projects, in particular for setting up industries in the lines of production which are important in the opinion of the Company for the industrial development of Punjab.” 3. The main object of PSIDC is to promote industry in a planned manner and to speed up industrialisation in the State of Punjab through various schemes. Other than providing terms loans to various companies, one of the object of the PSIDC is to promote industrial and infrastructure projects in Assisted and Joint Sector by entering into Financial Collaboration Agreements for setting up projects in the joint venture. In this manner, PSIDC invests in the 3 CWP No. 12861 of 2006 equity share capital of the company which is incorporated in joint sector. 4. On 18.3.1999, M/s Rama Petrochemical Limited- petitioner No. 1 and PSIDC entered into a Financial Collaboration Agreement for setting up a project for the manufacture of All Grade Gelatine (P-1). PSIDC had also agreed to make investment in the equity capital of Rama Petrochemical Limited on a proportionate matching basis only after the project has been financed by Central/State Financial Institutions and after the collaborator has contributed at least half of its share of equity. The equity capital of company was to be held as follows: (A) PSIDC Rs. 300.00 lacs (B) Collaborator Rs. 2010.00 lacs Total Equity Capital Rs. 2310.00 lacs 5. In clause 14 of the Financial Collaboration Agreement the number of Directors is mentioned. It has also been stated that as long as the Corporation holds not less than 25% of the paid up equity capital of the company, they shall have the right to nominate or have appointed one Director and three Directors respectively on the Board of Directors of the Company. Clause 22 of the Financial Collaboration Agreement (P-1) pertains to buy-back of equity share holding. As per sub-clause (a) of clause 22, the company was bound to buy back and purchase the equity shareholdings of the PSIDC in the company in two equal instalments before the expiry of third and fourth years after the commencement of commercial production. As per the methodology of purchase of shares, given in sub-clause (c) 4 CWP No. 12861 of 2006 and (d) of clause 22, other options were available with the corporation. The calculation of the price to be paid to the corporation was clearly spelled out and not speculative. Similarly, under sub- clause (j) of clause 22, an option was available with the corporation without prejudice to other options to invoke the 1983 Act for recovery of its arrears apart from other options available as per clause 22 and 32 to invoke the arbitration clause. Clause 22 of the Financial Collaboration Agreement being relevant reads thus: “22(a) The COLLABORATOR shall have the option to buy, at any time, after the commencement of commercial production, by the COMPANY, the equity share holding of the CORPORATION in the COMPANY. If the COMPANY has made a public issue of its shares, the COLLABORATOR only after the quotation for shares in question is available at Stock Exchange(s) where the shares of the COMPANY are listed. However, after the date of commencement production by the company as referred to clause 21 hereinabove, the COLLABORATOR shall be bound to purchase the said equity shareholdings of the CORPORATION in the COMPANY in two equal instalments before the expiry of 3rd & 4th years after commencement of commercial production. (b) The sale price of such shares shall be determined by adopting the following methods and the higher price arrived at by any one of these methods shall be taken as 5 CWP No. 12861 of 2006 the final sale price of the shares. i. an amount equivalent to the amount paid by the CORPORATION for the initial acquisition of the said shares together with interest at the rate charged by the CORPORATION on its term loans under its IDBI refinance scheme on the date of disbursement, compounded half yearly, calculated from the date of payment of the amount by the CORPORATION to the COMPANY till the date of option, less any amount of dividends received in the meantime by the CORPORATION. ii. if the shares are listed on any of the Stock Excanges in India, the highest price at which the shares were traded at any one of those stock exchanges, three months prior to the date of exercising the option or three months prior to the date on which the COLLABORATOR ought to purchase the shares whichever is higher. c. The COLLABORATOR while exercising the option shall deposit 10% of the offer amount along with the letter exercising the option and shall complete the buy-back within one month of the date of option and in the event of his defaulting in fulfilling his offer within the stipulated period, the deposit amount shall stand forfeited. 6 CWP No. 12861 of 2006 d. The CORPORATION shall be bound to sell its equity share-holdings in the COMPANY to the COLLABORATOR, as aforesaid. e. The sale and purchase of the shares, as aforesaid, payment of price therefore and delivery of share-scrips and transfer deeds relative thereto, shall be completed within one month of the exercise by the COLLABORATOR of its right to buy the said shares from the CORPORATION. However, in case the COLLABORATOR fails to pay the consideration within one month from the date of exercise of option to purchase the shares held by the CORPORATION in the COMPANY, then and in that case, the CORPORATION shall transfer the shares to the COLLABORATOR at the highest market price prevalent on the date of payment of the consideration or the price shares determined according to Clause 22(b) and interest thereon at the rate of 24% (Twenty four percent) per annum till the date of payment, whichever is higher. f. In the event the COLLABORATOR fails to purchase the equity shares of the CORPORATION in the COMPANY as provided in Clause 22(a) above, the Managing Director appointed by the COLLABORATOR shall automatically vacate the office within 30 days of the receipt of notice to this effect from the 7 CWP No. 12861 of 2006 CORPORATION and the CORPORATION shall have the option of recommending one of its nominees to be appointed as Managing Director by the Board of Directors of the COMPANY and the said nominee of the CORPORATION, after being appointed shall continue as Managing Director so long as the default on the part of the COLLABORATOR continues. g. Immediately upon the completion of the payment by the COLLABORATOR of the full amount payable in respect of purchase of shares mentioned in Clause 22(a) hereinabove, this clause will cease to be operative and the management of the COMPANY will be carried on as before by the Managing Director who will be appointed by the Board of Directors in terms of Clause 16 of this Agreement. h. Without prejudice to the provisions of Clause 22(f) above, the CORPORATION shall also, in the event of the COLLABORATOR failing to purchase the equity shares of the CORPORATION in the COMPANY as provided in Clause 22 (a) to (d) above be entitled to sell its shares in the COMPANY at the risk and cost of the COLLABORATOR either by public auction or through recognized share brokers of the Stock Exchange where the shares are listed or by private negotiations and the COLLABORATOR will be liable to meet any loss or damage that may be suffered by the CORPORATION. 8 CWP No. 12861 of 2006 i. The CORPORATION reserves the right to accept the option(s) (Not exceeding two) of the COLLABORATOR for buy back of shares in installments. However, the COLLABORATOR cannot exercise its second option for buy back of the balance shares unless payment of consideration along with interest on delayed payment in respect of the first option has been completed. j. Without prejudice to the other rights of the CORPORATION under the agreement, the CORPORATION shall be entitled to recover the amount by the COLLABORATOR under this agreement as arrears of land revenue under The Punjab Public Moneys (Recovery of Dues) Act, 1983.” 6. In pursuance of the aforementioned agreement, a new company, namely, M/s Rama Industries Limited (for brevity, ‘Rama Company’) was set up in joint sector and both petitioner No. 1 and PSIDC invested in the equity of the said Company. In furtherance thereto another supplementary Collaboration Agreement was executed between the parties on 12.10.2000 (P-2). Petitioner No. 1 transferred a part of its equity share holding in Rama Company to M/s Blue Lagoon Investments Private Limited-petitioner No. 2 (for brevity, ‘BLIP’) and M/s Truebell Holdings & Impex Private Limited-petitioner No. 3 (for brevity, ‘THIP’). As per this supplementary agreement, all the three collaborator companies agreed 9 CWP No. 12861 of 2006 to buy back the equity share-holdings of PSIDC and in terms of clause 8 of the supplementary agreement they categorically held that the Collaborator Company (BLIP and THIP) would be jointly and severally responsible to buy back the equity shareholdings in the company along with the collaborator Rama Petrochemicals Limited- petitioner No. 1. 7. It has remained undisputed that commercial production by the company commenced on 1.7.2001. The first instalment had fallen due on 30.6.2004 when period of three years expired as per the terms of clause 22(a) of the Financial Collaboration Agreement. The second instalment became payable on 30.6.2005, as is evident from reading of clause 22(a) of the Financial Collaboration Agreement. It is worthwhile to notice that clause 22(a) specifically stipulates that after the date of commencement of production by the company, the collaborator i.e. petitioner No. 1 was bound to purchase the said equity share holdings of PSIDC in the company in two equal instalments before expiry of 3rd and 4th years. 8. On 25.5.2005, PSIDC filed an application before the competent authority under Section 3 of the 1983 Act for recovery of Rs. 441.96 lacs from the petitioners on the ground that it had invested an amount of Rs. 300 lacs in the equity of the Rama Company. It was further asserted in the said application that the date of commercial production was 1.7.2001. It was also averred that disinvestment was to be made in two installments and the first installment became due on 30.6.2004 and the second installment was due for 30.6.2005. The PSIDC further claimed that the petitioners were also liable to pay 10 CWP No. 12861 of 2006 interest at the rate chargeable under the IDBI Refinance Scheme on the date of disbursement, compounded half yearly and calculated from the date of payment of the amount by it. However, the petitioners failed to retrieve the amount invested by the PSIDC (P-3). 9. The petitioners filed their reply to the aforementioned application raising various objections (P-4). They took the plea that the application was not maintainable as no loan, advance or grant was given to them as envisaged under Section 3 of the 1983 Act. According to the petitioners the Competent Authority under Section 3 of the 1983 Act has no jurisdiction to entertain the application because under the provisions of the 1983 Act only certain dues advanced under the ‘State-sponsored Scheme’ could be recovered. The petitioners also submitted that Clause 22 of the Financial Collaboration Agreement was illegal because it was contrary to the provisions of the Security Contracts (Regulation) Act, 1956 (for brevity, ‘the 1956 Act’) as well as the notification issued under Section 13 and 16 of that Act. According to them, since the Financial Collaboration Agreement was executed between petitioner No. 1 and PSIDC, therefore, both of them were equally liable for the losses suffered in making the investment in Rama Company. 10. A reference under Section 15(1) of SICA was filed by the petitioners before the Board for Industrial and Financial Reconstruction (for brevity, ‘BIFR’), which stands registered as Case No. 322/2001. The BIFR declared Rama Company as sick company, vide its order dated 18.6.2002 (P-5). BIFR directed the company to submit the rehabilitation package under Section 17(2) with the 11 CWP No. 12861 of 2006 consent of the secured creditors from whom consent under Section 19 is required so that the same could be taken on record. BIFR considered three years to be reasonable period to make its network positive while meeting all its financial objections. 11. On 13.9.2005, the petitioners also filed an application under Section 22 of SICA before the Competent Authority- respondent No. 2 for suspension/staying the proceedings initiated under the 1983 Act (P-6). Reply to the said application was filed by PSIDC on 28.10.2005 (P-6). It has been submitted by the petitioners that the Competent Authority-respondent No. 2 took up the matter on 15.2.2006 and arguments were heard. The hearing was adjourned to 8.3.2006 for arguments in the main case. However, no order rejecting the application (P-6) was dictated in the Court nor the same was conveyed at any stage. The application filed by the PSIDC (P-3) was contested by the petitioners. They also furnished their written arguments (P-8). On 31.5.2006, the Competent Authority- respondent No. 2 passed an order whereby Recovery Certificate has been issued for an amount of Rs. 441.96 lacs (as on 31.3.2005) along with further interest as per the terms of the agreement till the date of final settlement (P-9). 12. The petitioner has alleged that he had applied for a copy of the Recovery Certificate, however, PSIDC-respondent No. 1 refused to supply the same, vide letter dated 29.6.2006 (P-10). Thereafter, the petitioners filed CWP No. 10111 of 2006 in this Court. After issuance of notice of motion, PSIDC filed their written statement along with an order dated 15.2.2006 passed by the 12 CWP No. 12861 of 2006 Competent Authority-respondent No. 2 rejecting the application under Section 22 of SICA, which was filed by the petitioners (P-11). On 3.8.2006, the aforementioned writ petition was dismissed as withdrawn with liberty to challenge order dated 15.2.2006 (P-12). 13. The petition has been opposed by PSIDC and a detailed written statement has been filed. It has been asserted that the recovery of public dues under the 1983 Act is a valid mode which is supported by various judicial pronouncements. The PSIDC has also claimed that it is a fully State owned governmental financial institution within the meaning of Section 617 of the Companies Act and the finances are infused by the State Government which are recouped by the State exchequer to the Corporation as per its aims and objects which have been enshrined in the Memorandum and Articles of Association. The loans are advanced and equity to collaborator companies is forwarded with the object of industrialisation of the State. The moneys recovered by the mode provided by the 1983 Act are recycled for promotion of new industry. In that regard reference has been made to Section 2(c), 2(d), 2(e) and 2(h) of the 1983 Act to point out that PSIDC is covered by the expression ‘Corporation’ under Section 2(c) as also under Section 2 (d) if it renders financial assistance for establishing, expanding, modernisation, renovating or running any industrial undertaking. The expression ‘State-sponsored scheme’ under Section 2(h) of the 1983 Act has been used to mean a scheme sponsored by way of financial assistance by the State Government under which the finances are advanced to a corporation or Government company or Government 13 CWP No. 12861 of 2006 guarantees or agrees to guarantee repayment of loan advanced. 14. The PSIDC has also made reference to Section 3 of the 1983 Act which provides for recovery of the amount from a defaulter and elaborate procedure provided therein. In respect of the assertion of the petitioners that the Managing Director of PSIDC cannot be nominated as a competent authority under Section 3 of the 1983 Act, it has been urged that there is no legal bar to his appointment and the doctrine of bias would not apply till it is shown that the competent authority had a personal interest in the matter. The PSIDC has placed specific reliance on sub-clause (j) of clause 22 of the Financial Collaboration Agreement to assert that the Financial Collaboration Agreement was signed in the year 1999 with the express provision of invoking the 1983 Act in case of default. The agreement has been duly signed by the parties and it is a concluded contract. It has been urged that the petitioners are estopped by their own act and conduct from raising the objection regarding recovery under the 1983 Act at such a belated stage when the event of default has occurred by non- payment of the liabilities. 15. Mr. Rahul Sharma, learned counsel for the petitioners has made the following submissions to attack the order dated 31.5.2006 (P-9) and the consequential recovery certificate (P-14) sent by the PSIDC to the Collector, SAS Nagar, Mohali, to make recovery as per the provisions of Section 3 of the 1983 Act. 16. Mr. Sharma has firstly submitted that the claim made by PSIDC does not fall within the purview of 1983 Act as no loan or grant has been sanctioned by it in favour of the petitioner under State- 14 CWP No. 12861 of 2006 sponsored Scheme. According to the learned counsel it is only the loan advanced from State-sponsored Scheme which are covered by the 1983 Act and recovery of only such loan amount could be effected by adopting the mode provided by 1983 Act. In support of his submission learned counsel has placed reliance on a judgment of Hon’ble the Supreme Court rendered in the case of Iqbal Naseer Usmani v. Central Bank of India, (2006) 2 SCC 241 and argued that in absence of evidence to suggest that the loan was advanced under a State-sponsored Scheme as required by Section 3, the 1983 Act would not apply and the proceedings initiated therein are wholly without jurisdiction. Mr. Sharma has also placed reliance on a Full Bench judgment of Allahabad High Court in the case of Smt. Sharda Devi v. State of U.P., AIR 2002 All 1 (F.B.), and argued that the U.P. Public Moneys (Recovery of Dues) Act, 1972 (for brevity, ‘the U.P. Act’) is pari materia to that of 1983 Act. The question by the Full Bench of Allahabad High Court was decided which support the claim of the petitioner and it was held that the loan advanced by a banking company to a borrower under State-sponsored Scheme alone could be recovered by taking recourse to Section 3 and not otherwise. 17. The second submission of Mr. Sharma is that clause 22 of the Financial Collaboration Agreement (P-1), which is the basis of the claim made by PSIDC is illegal, void and, therefore, the same cannot be enforced in law. According to the learned counsel, clause 22 of the Financial Collaboration Agreement is not a spot delivery contract and it violates Section 16 of the Securities Contracts 15 CWP No. 12861 of 2006 (Regulation) Act, 1956. According to the learned counsel clause 22 of the Financial Collaboration Agreement contemplates the purchase of security at a future date and, therefore, it is speculative in nature. In support of his submission, learned counsel has placed reliance on a judgment of Hon’ble the Supreme Court rendered in the case of B.O.I. Finance Ltd. v. The Custodian, AIR 1997 SC 1952, and argued that a circular issued by the Reserve Bank of India under Section 36(1) prohibits the banking company from entering into buyback transactions which are not made public. They were required not to enter into buyback contracts which were not according to the circular. He has then placed reliance on a judgment of Calcutta High Court in the case of B.K. Holdings (P) Ltd. v. Prem Chand Jute Mills, [1983] 53 Company Cases 367, and argued that the un-quoted shares of public limited company are also marketable securities as there is express prohibition by the 1956 Act. Another ground of attack raised by Mr. Sharma is that no consideration had flown from PSIDC to the petitioners. The Financial Collaboration Agreement (P- 1) itself is void as per provisions of Section 25 of the Contract Act, 1872 (for brevity, ‘the Contract Act’). In that regard he has placed reliance on the judgment of Hon’ble the Supreme Court in the case of B.O.I. Finance Ltd. (supra). 18. The third ground of challenge to demolish order dated 31.5.2006 is that the Managing Director of PSIDC could not act as a competent authority as it would result into ‘judging ones own cause’. Once the Managing Director of PSIDC has been appointed as the 16 CWP No. 12861 of 2006 competent authority then the elementary principle of law that ‘nobody can be judge of his own cause’ stands flagrantly violated. Elaborating his argument, Mr. Sharma has submitted that the legislature can be deemed to have authorised the Managing Director of PSIDC to entertain an application under Section 3 of the