1 wp-6450-2010-group srk IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION CIVIL WRIT PETITION NO.6450 OF 2010 NRC Ltd. and anr. ...Petitioners Versus The Appellate Authority for Industrial & Financial Recontruction & ors. ...Respondents WITH CIVIL WRIT PETITION NO.6462 OF 2010 AND CIVIL APPLICATION NO.945 OF 2011 NRC Mazdoor Union & anr. ...Petitioners Versus The Appellate Authority for Industrial & Financial Recontruction & ors. ...Respondents 2 wp-6450-2010-group WITH CIVIL WRIT PETITION NO.6750 OF 2010 AND CIVIL APPLICATION NO.940 OF 2011 AND CIVIL APPLICATION NO.941OF 2011 NRC Employees’ Union and anr. ...Petitioners Versus The Appellate Authority for Industrial & Financial Recontruction & ors. ...Respondents WITH CIVIL WRIT PETITION NO.6813 OF 2010 AND CIVIL APPLICATION NO.943 OF 2011 Vasant Ellana Dhanekar and anr. ...Petitioners Versus The Appellate Authority for Industrial & Financial Recontruction & ors. ...Respondents Mr.Sudhir Talsania, Senior Advocate with Mr.R.V.Paranjape, Mr.Levi Rubens and Manisha Virkahre for Petitioners in WP 6450 of 2010 and for Resp.no.2 in WP 6462 of 2010 & 6750 of 2010 and for resp.no.1 in WP 6813 of 2010.. 3 wp-6450-2010-group Mr.V.A.Thorat, Senior Advocate with Mr.K.S.Bapat and Mr.Vaibhav Sugdhare i/b. Desai & Desai Associates for petitioners in WP 6462 of 2010, for resp. no.11 in WP No.6450 of 2010, for Resp.no.8 in WP 6750 of 2010 and for resp.no.2 in WP 6813 of 2010. Ms.N.D.Buch i/b. Mr.Ravindra Nair and Mr.Rahul Oak for petitioners in WP 6750 of 2010. Mrs.Gayatri Singh and Ms.Bhavana Mhatre for petitioners in W.P.No. 6813 of 2010. Mr.Kamal Khata, Mr.Hiren Mehta, Mr.Parishrit Desai i/b. S.N.Gupta & Co. for resp.nos.2 to 5 in WP No.6450/2010, for Resp.nos.3 to 6 in WP 6462 of 2010, for resp.nos.3 to 5 and 7 in WP No.6750 of 2010. Mr. Ravindra Nair, for resp.no.12 in WP No.6450 of 2010 and WP No. 6462 of 2010. Mr.Iqbal Chagla, Senior Advocate with Mr.Naval Agarwal, Mr.Darshan Zaveri i/b. Mr.B.R.Zaveri for resp.no.13 in WP Nos.6450 of 2010, 6462 of 2010 and for resp.no.9 in WP No.6750 of 2010. Mr.A.B.Vagyani, AGP for Resp.no.14 in WP No.6450, for resp.nos.9 & 14 in W.P. 6462 of 2010. Mr.Dhanesh Shah with Mr.Anand Singh for resp.no.15 in W.P.Nos.6450 and 6462 of 2010. Mr.N.M.Ganguli for intervener in CAW 945/2011 in WP 6462 of 2010, CAW 940/2011 in WP 6750 of 2010 and 943 of 2011 in WP 6813 of 2010. Mr.M.S.Singh i/b. Mr.A.K.Singh for applicant in CAW 941 of 2011 in WP 6750 of 2010. 4 wp-6450-2010-group CORAM: B. H. MARLAPALLE & U.D.SALVI, JJ. July 29, 2011. ORAL JUDGMENT (PER B.H.MARLAPALLE, J.) 1. Respondent no.1 is not a necessary party and it be deleted forthwith. 2. This group of petitions impugn the very same order passed by the Appellate Authority for Industrial and Financial Reconstruction in Appeal No.182 of 2009 and Appeal No.213 of 2009 on 28/5/2010 and hence they are being decided by this common judgment. 3. Rule. Respondents waive service. Petitions are finally heard by the consent of the parties. 4. The petitioner in the first petition is a company initially incorporated in the year 1946 in the name and style of “National Rayon Corporation Ltd.” and its name was subsequently changed to “NRC Ltd.” on 4/8/1994. It is engaged in the manufacture of viscos filament yarn 5 wp-6450-2010-group (rayon), nylon tyre, nylon tyre cord yarn (NTFC) and basic chemicals such as caustic soda, chlorine, sulphuric acid etc. and has a factory at Mohane, Kalyan, Dist. Thane. It was declared as a sick company in 1987 but its networth turned positive as on 31/3/1993 and, therefore, as per the order dated 10/1/1994 passed by the Board for Industrial and Financial Restructuring (BIFR) it was discharged from the purview of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short “SICA”). It claims to have undertaken expansion of its activities by pumping in about Rs.86 crores but in the financial year 2005-2006 onwards it started incurring losses as there was severe reduction in the customs duty on import of nylon, the margins of the company were affected adversely, and there was a gradual erosion of the working capital and consequent financial crunch faced by the company and a consortium of five nationalised banks comprising of Punjab National Bank, Dena Bank, Canara Bank, Indian Overseas Bank and Bank of Baroda had sanctioned a term loan as well as working capital loan secured by the current assets as well as the fixed assets including the land. The total outstanding of this loan amount as on 31/3/2006 was approximately Rs.147 crores. It claims to have intensified its efforts to dispose off the surplus land so as to bring in additional funds required for financial restructuring. It signed a 6 wp-6450-2010-group Memorandum of Understanding on 13/4/2006 with Respondent no.13 for the proposed sale of about 344 acres of land (at some places claimed to be about 350 acres), for a total consideration of Rs.166.40 Crores. After obtaining the NOCs from the lending banks it signed an agreement for sale on 1/3/2007 which was registered on the very same day and a supplementary agreement on 29/9/2007 with respondent no.13. On signing of the MOU it claims to have received Rs.25 crores from respondent no.13 and balance consideration of Rs.141.40 Crores was to be paid as per the following instalments: (A) Second instalment of Rs.20 Crores payable as and when required to be utilised only to remove the first charge on the saleable land. (B) Third instalment of Rs.48.90 Crores on receipt of Labour NOC, Kalyan Dombivli Municipal Corporation NOC, completion of fencing and the vacant possession of non colony land etc. and (C) Fourth instalment would be of Rs.72.50 Crores. 5. However, it could not achieve its object of restructuring for improving the performance and to achieve positive results during the year 2006-2007 and, therefore, on 25/5/2007 it submitted a proposal to the consortium for Corporate Debt Restructuring (CDR) under the CDR 7 wp-6450-2010-group mechanism by using the land sale proceeds and the proposal was referred to the CDR Empowered Group of Punjab National Bank. In November 2007 it discontinued the production activities of nylon plant. On 21/1/2008 the CDR Empowerment Group approved the package for restructuring of the debts and even then it could not improve its financial business position for the financial year ending on 30th June 2008. It noticed that there was erosion in working capital due to galloping losses incurred and, therefore, production of rayon plant was also stopped. In its efforts to control further erosion it claims to have signed a settlement with the recognised union on 5/9/2008 and in September 2008 it declared an Early Retirement Scheme (ERS). It claimed that out of a total employment strength of 3725, about 577 employees opted for the said scheme. It started negotiations with Respondent No.13 in September 2008 for the payment of third installment of Rs.48 Crores but the recognised union raised the issue of payment of bonus in October 2008 and the labour unrest resulted in giving up the revival plans. It restarted the chemical plant. 6. However, on 3rd December 2008 the company submitted an 8 wp-6450-2010-group application under Section 15(1) of SICA for being declared as a sick company and the said application was registered as BIFR Case No.55 of 2008. In January 2009 respondent no.13 declined to release the third instalment of Rs.48 Crores and, therefore, the company could not pay the legal dues of all the 577 employees who opted for ERS. 7. The BIFR passed an order under Section 17 (3) of SICA on 16/7/2009, declared the applicant as a sick company and appointed the Punjab National Bank as the operating agency and fixed the cut off date as 30th July 2007 as indicated in the CDR Scheme. The BIFR issued the following directions by the said order:- (i) The Company shall submit a fully tied up DRS to the OA ( Punjab National Bank) (PNB) within a period of three months. The sale of 350 acres of land stated to be approved by the CDR Empowered Group (EG) and the secured creditors may form part of the DRS. The details of the land to be sold including survey numbers should be clearly specified. The company shall give similar details of the remaining land and confirm that it is adequate for the functioning and 9 wp-6450-2010-group viability of the company on long term basis. The OA (PNB) shall convene a joint meeting of all concerned and submit a fully tied up DRS, if it emerges, along with the minutes of the joint meeting within a further period of one month. (ii) Bank of Baroda (BOB) shall submit an authenticated copy of the CDR scheme approved by consortium of banks within a period of 15 days. (iii) PNB (OA) shall confirm to the Board within a period of 15 days under copy to the company that all the secured creditors who had charge over the land had approved sale of 350 acres of land belonging to the company at Kalyan, Thane Dist. to K. Raheja Universal Pvt. Ltd. For a sum of Rs.166.40 crore. The secured creditors who had charge over the land shall clearly indicate whether the company had obtained their approval before entering into MOU and agreement for sale of 350 acres of land with K. Raheja Universal Ltd. under copy to the company the OA (PNB) and the Board. Secured creditors shall also similarly submit copy of their approval for sale of 10 wp-6450-2010-group investments, giving details of the investments. OA shall also submit copies of the approvals given by the secured creditors for the sale of the said land along with the copies of valuation report and the details of the valuer and the procedure followed based on which the sale consideration of Rs.166.40 crores was arrived at. OA shall also submit copy of the approvals by secured creditors for sale of investment giving details of the investments. The company shall fully co-operate with the OA in furnishing the documents / details required by them. (iv) The company shall submit within 15 days under copy to the OA (PNB) copies of the No Objection Certificates for sale of land and release of charge issued by all the charge holder lenders and the State Government in respect of 350 acres of land for which MOU and agreement of sale are stated to be entered into in 2006 and 2007 respectively with K. Raheja Universal Pvt. Ltd. under copy to the PNB (OA). The company should also submit certified copies of the MOU respectively along with certified copies of the Board resolutions of the company authorizing these transactions to 11 wp-6450-2010-group the OA with a copy to the Board. The company shall similarly submit full details of the investments to be sold under the CDR scheme. It is reiterated that sale of assets including investments will require the prior approval of BIFR as the company is now under the purview of SICA. (v) The company shall submit a copy of the clearance stated to have been received from Hon’ble High Court of Bombay for sale of 350 acres of land under coy to the OA (PNB). (vi) The secured creditors are directed u/s 22(1) of SICA not to take any coercive action against the company without prior permission of BIFR. 8. Being aggrieved by the said order passed by the BIFR, two appeals as noted earlier, one by the company and the other by the respondent no. 13, came to be filed before the AIFR under Section 25 of SICA and consequently the impugned order came to be passed. The impugned order modified the order passed by the BIFR and partly allowed the 12 wp-6450-2010-group appeals. The AIFR held that the BIFR could not have fixed 30/7/2007 as the cut off date. As per the AIFR, the BIFR failed to give any reasons to justify how it was in the public interest or in the interest of the company or its creditors / employees / shareholders to pass an order under Section 22-A of SICA that too when the company had already entered into an agreement for sale of land before the company became sick company and even prior to the filing of the reference. The BIFR did not consider the impact of Section 22-A on the transactions, contracts / agreements entered into between the company and the third parties prior to the filing of reference when the company was not a sick entity. The agreement for sale of land is a subsisting and a continuing contract of sale which is in the process of completion and even in the absence of conveyance and, therefore, it could not be held that the disputed land under sale is unencumbered. The provisions of Section 22-A would not apply to the agreement for sale already entered into, registered and acted upon and is in the process of completion. But the BIFR failed to consider the settlement entered between the Management and the recognised union under Section 18(3) of the Industrial Disputes Act, 1947 on 5/9/2008 and the fact that all these employees were bound by the said settlement. Hence if any order passed under Section 22A would apply on all other 13 wp-6450-2010-group assets of the company which are not part of the agreement for sale are absolutely and exclusively unencumbered assets of the company, the restriction imposed under Section 22A could apply to the remaining 103.15 acres and other assets of the company which were charged to the secured creditors and which are not subject matter of agreement for sale. The AIFR further held that prior to the filing of the reference under Section 15 of SICA, a debt restructuring scheme under the CDR mechanism on 12/12/2007 and 21/1/2008, the CDR package envisaged sale of surplus land as well as sale of investments of the appellant company. Any restraint order on the sale of land, under the agreements for sale, would not only complicate the matter but would hamper the revival process and would also lead to a prolonged litigation between the parties and this will not be in the interest of revival of the sick company. The provisions of Section 22A which are prospective in nature would not impact pre existing contract for sale entered into by the company before it filed reference under Section 15(1) of SICA and, therefore, the directions given under Section 22A will not apply to the agreement for sale dated 1/3/2007. The restraint order passed by the BIFR would apply to any subsequent proposals for disposal of assets of the company, if any. But these agreements will be subject to interim orders and final orders to be 14 wp-6450-2010-group passed by the High Court in the pending writ petition challenging the settlement dated 5/9/2008. For all these reasons, the AIFR held that the agreement for sale cannot be part of DRS under Section 18(d) of SICA as the same is under transfer and unencumbered and legally enforceable contract exists between the appellant company and respondent no.13. However, the AIFR held that the balance sale consideration in respect of the land to the tune of Rs.124.64 crores receivable by the company from respondent no.13 should form part of the means of finance in the DRS to be formulated by the BIFR for rehabilitation of the company. On payment of balance sale consideration by respondent no.13, the same shall be deposited with an interest bearing NLA with the operating agency for utilisation as per the rehabilitation scheme to be sanctioned by the BIFR. The said scheme was for workers dues including Rs.45 crores for ERS and appropriately crystalized amount for ex-employees dues as per the settlement dated 5/9/2008 with NRC Mazdoor Sangh. The AIFR further observed that if the BIFR considers it necessary to make payment to the workers as provided for in the agreement with the workers, before the sanction of the revival scheme, it could do so to alleviate the hardships of the workers. 15 wp-6450-2010-group 9. Thus the last part of the AIFR’s order directing to deposit the amount of Rs.124.64 crores in interest bearing NLA with the operating agency is under challenge in this petition filed by the company. Whereas in Writ Petition No.6813 of 2010 filed by some employees who were heard by the AIFR, challenge the impugned order for taking the land under the agreement for sale, out of the purview of Section 22A of SICA and the petitioners pray for restoration of the BIFR order in its entirety. Writ Petition No.6462 of 2010 has been filed by NRC Mazdoor Sangh which is a recognised union and Writ Petition No. 6750 of 2010 has been filed by the NRC Employees Union which mainly represents the office staff. Both these unions submitted before us that the efforts put in by this Court for bringing about an amicable settlement had crystalised in terms of an MOU signed with the company and the company had also agreed to earmark 18 acres of land for the proposed employees colony from the total land of 344/350 acres covered by the agreements for sale entered with respondent no.13. As per both these unions, if this MOU is acted upon they would support the management in its challenge to the impugned order in Writ Petition No.6450 of 2010. However, on failing to put in effect the said MOU, they would support 16 wp-6450-2010-group the BIFR order directing the entire land covered by the agreement for sale to respondent under the purview of Section 22A of SICA. 10. The preamble of the SICA makes it clear that it is an Act enacted by the Parliament to make, in the public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. In the statement of Objects and Reasons it was stated, “It has been recognised that in order to fully utilise the productive industrial assets, afford maximum protection of employment and optimize the use of the funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative to salvage the productive assets and realise the amounts due to the banks and financial institutions, to the extent possible, from the non-viable sick industrial companies through liquidation of those companies”. 17 wp-6450-2010-group 11. The SICA was amended by Act 57 of 1991 and thereafter by Act 12 of 1994 on 1/2/1994. By the second amendment Section 22-A has been incorporated in SICA. As per Section 15(1) of SICA where an industrial company has become a sick industrial company, the Board of Directors of the company shall, within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company. As per Section 16, the Board on receipt of such application may make such enquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. The Board may appoint an operating agency which shall complete the enquiry expeditiously. As per Section 17(1) of SICA, if after making an enquiry under Section 16, the Board is satisfied that a company has become a sick industrial company, it shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be, by order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. As per Section 17(3), if the Board decides under sub-section (1) 18 wp-6450-2010-group that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in section 18 in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company. Section 18 of SICA provides for preparation and sanction of the scheme in terms of the order made under Section 17(3) ordinarily within a period of ninety days from the date of such order and for any one or more of the following measures viz. (a) the financial reconstruction of the sick industrial company; (b) the proper management of the sick industrial company; (c) the amalgamation of - (i) the sick industrial company with any other company; or (ii) any other company with the sick industrial company; (d) the sale or lease of a part or whole of any industrial undertaking of the sick industrial company; 19 wp-6450-2010-group (da) the rationalisation of managerial personnel, supervisory staff and workmen in accordance with law; (e) such other preventive, ameliorative and remedial measures as may be appropriate; (f) such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified in clauses (a) to (e). 12. As per Section 18(8) of SICA on and from the date of coming into operation of the sanctioned scheme or any provision thereof, the scheme or such provision shall be binding on the sick industrial company and the transferee company or, as the case may be, the other company and also on the shareholders, creditors and guarantors and employees of the said company. Under Section 18(12) the Board may monitor periodically the implementation of the sanctioned scheme. Under Section 21 of SICA the Board may for the proper discharge of its functions under the Act, through any operating agency, cause to be prepared with respect to a company, a complete inventory of all assets and liabilities of whatever 20 wp-6450-2010-group nature as well as a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of part or whole of the industrial undertaking of the company or for fixation of the lease rent or share exchange ratio. Under Section 22 of SICA the Board or as the case may be the Appellate Authority is empowered to suspend the legal proceedings, contracts etc. Under sub-section (3) of Section 22 where an inquiry under Section 16 is pending or any scheme referred to in Section 17 is under preparation or during the period of consideration of any scheme under Section 18 or where any such scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board. 21 wp-6450-2010-group 13. Section 22A has been inserted in the Act by an amendment brought into force from 1/2/1994. It states that the Board may, if it is of opinion that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order in writing, direct the sick industrial company not