IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 20-2-2008 CORAM THE HON'BLE MR.JUSTICE N.PAUL VASANTHAKUMAR W.P.No.8846 of 2007 M.P.Nos.2 and 3 of 2007 Tamil Nadu Industrial Development Corporation Ltd., rep.by its Managing Director, 19-A, Rukmani Lakshmipathy Road, Egmore, Chennai - 600 008. ... Petitioner Vs. 1. Board for Industrial and Financial Reconstruction, 1, Tolstoy Marg, Jawahar Vyapar Bhawan, New Delhi - 110 001. 2. Appellate Authority for Industrial and Financial Reconstruction, 10th Floor, Jeevan Prakash, 26, Kasturba Gandhi Marg, New Delhi - 110 001. 3. M/s.Rama Qualitex Ltd., S.No.66/2 Mugalapalli Village, Hosur Taluk, Dharmapuri District - 635 105, Tamil Nadu. 4. M/s.Satidham Syntex Limited, Vajras 1445, 1st Floor, 28th Main, Jayanagar, 9th Block East, Bangalore - 560 069. ... Respondents Prayer: This writ petition is filed under Article 226 of Constitution of India, praying this Court to issue a writ of certiorarified mandamus calling for the records on the file of the first respondent's order dated 27.7.2005 in BIFR Case No.327 of 2000 and confirming the second respondent's order dated 12.10.2006 in Appeal No.107 of 2005 and quash the same and for further directions namely:- https://hcservices.ecourts.gov.in/hcservices/ i. For reduction of share capital from Rs.10/- per share to paise 10/- per share; ii. Conversion of face value (after writing down) of Re.0.10/- per share into Rs.10/- per share by accepting 1 (one) equity share of Rs.10/- each against every 100 shares of Rs.0.10 held in the company; iii. For stepping down from the Board of the company; and iv. For transferring the entire equity holding in the company to the new promoters; contained in the sanctioned scheme approved by the 1st respondent by its order dated 27.7.2005 made in BIFR Case No.327 of 2000, confirmed by the 2nd respondent by its order dated 12.10.2006 in Appeal No.107 of 2005 and for further direction to the BIFR to include in the sanctioned scheme a direction to M/s.Satidham Syntex Limited to execute a promoters agreement with the petitioner in terms similar to the agreement dated 31.12.1992 between the petitioner and Thiru K.Jagdeesh Reddy, the original promoter with modifications. For Petitioner : Mr.G.Masilamani, Advocate General, for M/s.King and Partridge For 3rd Respondent : Mr.R.Muthukumarasamy, Senior Counsel, for Mr.A.R.Ramanathan O R D E R By consent the writ petition itself was taken up for final disposal. 2. Prayer in the writ petition is to quash the order of the first respondent (BIFR) made in BIFR Case No.327 of 2000 dated 27.7.2005, confirmed by the second respondent (AIFR) in appeal No.107 of 2005, dated 12.10.2006 and for consequential directions. 3. The facts necessary for disposal of the writ petition are as follows: (a) The petitioner is a State Level Institution, fully owned by the Government of Tamil Nadu, incorporated on 21.5.1965 as a Company, under the Companies Act, 1956, with a purpose of development and growth https://hcservices.ecourts.gov.in/hcservices/ of the Industrial Undertakings in Tamil Nadu (hereinafter called as 'TIDCO'). (b) Petitioner on 31.12.1992, entered with an agreement to the promoter viz., K.Jagadeesh Reddy, for setting up 100% export oriented unit for the manufacture of 40.50 lakh metres per annum of Coarse Cotton gray fabric at Mugalapalli village, Hosur Taluk, as a result, the third respondent herein was incorporated in March, 1993, which commenced its operations in April, 1995. (c) In June, 1996, the third respondent Company undertook an expansion of its weaving capacity to 80.25 lakh metres per annum to manufacture gray heavy fabric like bull denim at an estimated cost of Rs.760 lakhs. The said project was completed in December, 1997, and it suffered a set back due to the recessionary trend in the overseas market and low sales realisation. By 31.3.2000, the worth of the third respondent Company was eroded by accumulated losses of Rs.1,537.00 lakh and it was referred to the BIFR, the first respondent herein. (d) Under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (Act 1 of 1986), the first respondent on 17.1.2001, declared that the third respondent is a sick industrial company in terms of Section 3(1)(o) of the Act 1 of 1986 and the Industrial Development Bank of India (IDBI) was appointed as the 'Operating Agency' under section 17(3) of the Act. (e) The Operating Agency was directed to examine the viability for rehabilitation of the third respondent Company and the cut-off date for rehabilitation was fixed as 30.6.2001. The third respondent/Promoters were directed to submit rehabilitation proposal. In the meeting held on 11.2.2004, the BIFR observed that there was no rehabilitation proposal submitted in spite of sufficient opportunity having been afforded and issued a show cause notice on 15.3.2004 for winding up of the third respondent Company. (f) On 21.5.2004, the third respondent submitted a proposal envisaging the taking over of the management by the 4th respondent and for one time settlement of the dues of the IDBI and the Industrial Financial Corporation of India Limited (IFCI). Thereafter, BIFR kept the show cause notice dated 15.3.2004 in abeyance during the meeting held on 26.5.2004 and granted 45 days time to the third respondent and the secured creditors to finalise the one time settlement proposal and other pending issues. (g) The Operating Agency submitted a report with the scheme for rehabilitation by letter dated 23.11.2004. BIFR, taking the cut-off date as 31.3.2004, framed a draft revival scheme and directed the circulation of the scheme for information seeking suggestions and objections of the shareholders including the petitioner, which according to the petitioner is under section 19(2) read with 19(1) of the Act. All the parties were directed to submit their objection/suggestions in writing within 60 days. (h) In the draft rehabilitation scheme, the following suggestions were made insofar as the equity share holders: "(i) To agree to the proposed change of management in favour https://hcservices.ecourts.gov.in/hcservices/ of M/s.Satidham Syntex Limited as also terms of OTS offered to institutions for revival of the company. (ii) To agree to write down the present equity shareholding in the company by 99%. The face value of each equity share would be brought down from existing Rs.10/- per share to Re.0.10/- per share. (iii)To agree for conversion of face value (after writing down) of Re.0.10/- per share into Rs.10/- per share by accepting 1 (one) equity share of Rs.10/- each against every 100 shares of Re.0.10 share held in the company. (iv) Shareholding pattern post scheme- Existing Post Scheme Amount Percentage (Rs.in Lakh) Amount Percentage (Rs.in Lakh) Promoters & Associates 448.60 43.96 804.49 88.39 TIDCO (Joint Sector Promoter) 266.00 26.06 2.66 0.29 Financial Institutions IDBI IFCI Limited 206.00 20.18 100.00 9.80 91.29 10.03 11.77 1.29 General Public NIL NIL NIL NIL TOTAL 1020.60 100.00 910.21 100.00 Post scheme holding arrived after writing down of existing equity by 99% and fresh issue of shares of Rs.900 lakh to incoming promoters and institutions." (i) On 16.6.2005, petitioner submitted its objection as the scheme would adversely affect the rights of the petitioner since equity shareholding of the petitioner was for a sum of Rs.266.00 lakhs constituting 26.06% of the equity shares in the third respondent Company. Petitioner requested that the rivival scheme be sanctioned without reduction of existing share capital. (j) Petitioner further states that it is a Trustee of public funds for investment and it cannot agree to the writing away of public funds https://hcservices.ecourts.gov.in/hcservices/ in a manner adverse to the public interest. It prayed for deletion of the following paragraphs from the draft rehabilitation scheme: (i) For reduction of share capital from Rs.10/- per share to paid 10/- per shareholding; (ii) Conversion of face value (after writing down) of Re.0.10/- per share into Rs.10/- per share by accepting 1(one) equity share of Rs.10/- each against every 100 shares of Rs.0.10 held in the company; (iii) For stepping down from the Board of the company; and (iv) For transferring the entire equity holding in the company at reduced value from Rs.10 per share to 10 paise per share to the new promoters. (k) However, the BIFR by the impugned order dated 27.7.2005, recorded that the petitioner had given its consent to all the concessions and reliefs sought in the draft rehabilitation scheme and passed an order under section 18(4) read with 19(3) of the Act and sanctioned the rehabilitation scheme. The said order of the BIFR was challenged by filing an appeal before the AIFR, the second respondent herein in Appeal No.107 of 2005 which was also dismissed by the second respondent by order dated 12.10.2006. (l) The above said orders are challenged in this writ petition on the ground that consent of the petitioner, which is a State Level Financial Institution, is mandatory for sanction of the rehabilitation scheme in accordance with section 19(2) of the Act and reduction of share capital value is without any basis. The revival of the scheme can be implemented without reduction of capital and without affecting the control of the new promoters. According to the petitioner, the respondents 1 and 2 have failed to protect the interest of the petitioner, which is a State Level Financial Institution. 4. The third respondent filed counter affidavit by stating that the writ petitioner TIDCO, even though is a State Level institution, had not provided any financial assistance to come within the purview of section 19(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, but only invested the shares and as such it is a equity shareholder and therefore no consent as claimed by the petitioner need be obtained for approving the rehabilitation scheme. It is further stated that the IDBI and IFCI were the lending institutions and they agreed for approval of the rehabilitation scheme. The scheme is also implemented by spending about Rs.10 crores for about 20 months towards settlement to lenders and for operational purposes. Petitioner, who is only a shareholder in the third respondent Company, has no locus standi to object the scheme, which is approved by the BIFR in accordance with Section 18 of the SICA and approved by the AIFR. The shareholding of the petitioner was 26.06% and the share value became 0% and therefore the third respondent industry was declared as sick industrial company. Petitioner being the shareholder, invested its shares in the third https://hcservices.ecourts.gov.in/hcservices/ respondent company with an intention to earn profits in its capacity as owner of the shares, cannot be treated as Creditor. Section 19 would come into operation only if there is any financial assistance provided by a State level Institution and the petitioner has not provided any financial assistance, either prior to the financial sickness or after that. The IDBI and IFCI, which are financial institutions have lent a sum of Rs.15.97 crores and 92.19 crores respectively, and they are the parties who are covered within the purview of section 19 of SICA and they had consented to the scheme. The revival of the third respondent Company could not be taken place without the reduction of the existing share capital. The 4th respondent who is the new promoter, has agreed to infuse a huge amount of Rs.17.68 crores. If the revival proposal is not implemented, the Company would be left with no other option except to wind up under section 20 of the Act, which would cause not only loss to the petitioner, but also to the creditors and the employees. The scheme having been approved on 27.7.2005 and being in operation for more than 20 months, the same cannot be stalled at the instance of the petitioner, who is only a shareholder and as per section 18(8) of the Act, once the sanctioned scheme comes into operation it is binding on the Sick Company's shareholders, creditors, guarantors and employees of the said company. BIFR and AIFR being expert bodies, created under the statute for speedy determination and take remedial and other measures, and they having exercised their statutory duty, the petitioner is not entitled to challenge the said order by way of this writ petition before this Court. Stating all these things, third respondent prayed for dismissal of the writ petition. 5. The learned Advocate General appearing for the petitioner submitted that the petitioner TIDCO being a State owned Company and having invested huge amount for promoting the third respondent Company, is to be treated to be a person rendered financial assistance and in terms of section 19(2) of the Sick Industrial Companies (Special Provisions) Act, 1985, consent is necessarily required to be obtained by the operating agency for revival of the company. Petitioner submitted objections for the revival proposal on 16.6.2005 and the BIFR without considering the said objection in its order stated that consent was given by the TIDCO, which is apparently wrong. The appellate authority also treated the petitioner only as shareholder and not as a financial institution and dismissed the appeal. The learned Advocate General further submitted that due to the mistake committed by the Directors of the third respondent Company, it went sick and the same cannot be taken advantage of to reduce the capital value of the shares owned by the petitioner. It is further contended that even though the rehabilitation is mandatory, the petitioner company being a Government owned company, having invested the public money in the third respondent Company through shares, is entitled to object the scheme offered for revival and the petitioner need protection to its share capital value without any reduction. https://hcservices.ecourts.gov.in/hcservices/ 6. The learned Senior Counsel appearing for the third respondent on the other hand submitted that the petitioner is only an equity shareholder even according to the agreement entered into with the promoter and it will have only the shareholder's right under the Companies Act, 1956, though it is styled as a State owned Financial Corporation. Except the share capital no financial assistance was advanced through loan by the petitioner company and only IDBI and IFCI provided loan to the company for its establishment and towards working capital and consent from the said two lenders/secured creditors having been obtained, BIFR is justified in rejecting the objection raised by the petitioner Company while approving the revival scheme. The learned Senior Counsel further submitted that the petitioner being only the shareholder, its consent is not necessary under section 19(2) of the SICA. Based on the revival scheme approved by the BIFR and confirmed by the AIFR, the revival has already been implemented by spending huge amount and if at this stage the same is set at naught, the interest of the party, who revived the industry will be affected and if the revival proposal was not approved and acted upon, the third respondent Company is liable for winding up and in that event the writ petitioner Company will not get anything since the secured loan is more than the assets of the third respondent Company. The Company having been revived, the writ petitioner is also benefited to certain extend and the same was the consideration made by BIFR and AIFR, who are the expert bodies in the field, approved the scheme and the same is just and proper. 7. I have considered the rival submissions made by the learned Advocate General appearing for the petitioner as well as the learned Senior Counsel appearing for the third respondent. 8. Petitioner has entered into an agreement with the promoters of the third respondent Company on 31.12.1992. The agreement states that the third respondent Company is permitted to be promoted by the parties with authorised capital of Rs.50 lakhs, divided into 5,00,000 equity shares of Rs.10/- each. Petitioner, who was the first party in the said agreement, agreed to arrange for subscription for equity shares of the company within the limits of 26%. Petitioner as well as the promoter further agreed that they will not transfer, sell or encumber any part of the shareholding of the Company, without the prior consent of the other party in writing. In clause 10 of the agreement it is stated that no guarantee or counter guarantee will be furnished by the first party viz., the petitioner to any bank/financial institution for term loan, bridge finance, etc., granted to the company by the banks or institutions. In clause 14 it is stated that out of the Directors nominated or designated by the parties, each party shall have the right to appoint equal number of non-retiring Directors subject to the limit prescribed under section 255 of the Companies Act, 1956. Insofar as the project implementation is concerned, Clause 28 of the agreement contemplates the promoter (second party) shall also be responsible to negotiate and obtain all necessary finance on behalf of the company for https://hcservices.ecourts.gov.in/hcservices/ the timely and effective implementation of the project and its efficient working. The first party (petitioner) shall provid all assistance possible in the procurement of sanctions, approvals, etc. If the first party dis-invest its entire shareholding in the Company progressively over a period of three years, it shall make an offer to the second party pursuant to clause 34(b) for purchase of shares and the same shall be subject to requisite approval of the Government of India and the financial institutions/banks, who have granted loan to the Company and subject to the provisions of Companies Act, 1956 and other Acts. Clause 41 clearly states that the agreement is exclusive to the parties and neither of them shall assign its rights or benefits thereunder, except as otherwise agreed to. Clause 46 contains an arbitration clause, which reads as under: "46. If any dispute and/or difference shall at any time arise between the parties hereto touching or concerning or arising out of these presents or the interpretation of any clause hereof or the respective rights, claims or liabilities hereunder or otherwise however in relation to or arising out of or concerning this Agreement such dispute and/or difference shall be referred to arbitration by two arbitrators, one to be appointed by each party with the provisions for an umpire to be appointed by the said two arbitrators before commencement of the arbitration. The Arbitration Act, 1940, as amended from time to time shall apply." The agreement shall remain valid until either party withdraw its shareholding in the Company by way of transfer or sale in terms of Clause 34 and 35 of the agreement. On behalf of the petitioner, Chairman and Managing Director signed the said agreement. 9. The argument of the learned Advocate General is that the petitioner being the State owned Corporation, fully financed by the State of Tamil Nadu, is to be treated as an institution, which gave financial assistance to the third respondent Company and therefore its consent is required to be obtained under section 19(2) of the SICA, 1985. 10. The learned senior Counsel for the third respondent on the other hand submitted that even though it is a State owned Company, it has not given any financial assistance as secured credit and the amount invested by the petitioner Company is only by way of equity shares viz., 26% and the petitioner being an equity shareholder of the Sick Industrial Company, for rehabilitation, no consent is required to be obtained from the petitioner, who is an equity shareholder. 11. Section 19(1) and 19(2) of the Sick Industrial Companies (Special Provisions) Act, 1985, reads as follows: https://hcservices.ecourts.gov.in/hcservices/ "19.Rehabilitation by giving financial assistance.-(1) Where the scheme relates to preventive, ameliorative, remedial and other measures with respect to any sick industrial company, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a State Government, any scheduled bank or other bank, a public financial institution or State level institution or any institution or other authority (any Government, bank, institution or other authority required by a scheme to provide for such financial assistance being hereafter in this section referred to as the person required by the scheme to provide financial assistance) to the sick industrial company. (2) Every scheme referred to in sub-section (1) shall be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days from the date of such circulation or within such further period, not exceeding sixty days, as may be allowed by the Board, and if no consent is received within such period or further period, it shall be deemed that consent has been given." From the perusal of the above provision it is evident that rehabilitation scheme prepared under section 19(1) is to be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days or not exceeding sixty days as may be allowed by the Board. If no consent is obtained within such period, it shall be deemed that consent has been given. 12. Here, in this case, the rehabilitation scheme has been circulated to the petitioner and it offered its remarks/objection on 16.6.2005. The petitioner being an equity shareholder and not extended any financial assistance by way of loan, it is to be treated as shareholder only and its consent is not required for approving the rehabilitation scheme. 13. Admittedly, the third respondent Company became sick and declared as a sick company on 17.1.2001 on the basis of the application submitted on 21.9.2000 as per the resolution passed in the Board of Directors meeting held on 20.9.2000 and operating agency was appointed and rehabilitation scheme was called for. Once the Company/Unit is declared as sick unit, every efforts should be taken to revive the unit to the extend possible as per the object of the Act 1 of 1986, i.e., an Act to make, in the public interest, special provisions with a view to https://hcservices.ecourts.gov.in/hcservices/ 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 respective to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. 14. The term 'sick industrial company' has been defined under section 3(o) of the Act, which reads thus, " "sick industrial company" means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth." The Company having been declared as sick, the share value of the Company also become 0% as the liability is more than its assets. Hence definitely there will be a loss to the shareholders while taking steps to rehabilitate the sick company. The IDBI and IFCI, who advanced loans, have given their consent for rehabilitation scheme and based on their consent, the BIFR by order dated 27.7.2005, approved the rehabilitation scheme. The BIFR being the statutory authority, established under Section 4 of the Act, to approve the rehabilitation scheme, considered the objections filed by the petitioner as a shareholder and also the consent given by the secured creditors and reduced the shareholding amount from 26.06 to 2.66 i.e, by 0.29% of the petitioner Company. 15. The petitioner challenged the said approval granted by the BIFR by filing appeal before AIFR, constituted under Section 5 of the Act, in Appeal No.107 of 2005. The grievance of the petitioner with regard to Clause 9(7)(2) pertaining to the reduction of its share capital in the third respondent Company and the direction to accept one equity share against every 100 shares was considered. In the AIFR's order it is stated that the objections of the petitioner were considered by the BIFR in the hearing held on 27.7.2005 and the objections were found to be untenable. The petitioner raised the following four contentions in the appeal, (1) even though TIDCO was 26% shareholder, its objections were not considered by the BIFR; (2) the consent of the TIDCO for reduction of share capital was not considered by the BIFR even though it was party under section 19(1) of SICA; (3) the BIFR ordered reduction of share capital without following the procedure laid down under the Companies Act, 1956; and finally, https://hcservices.ecourts.gov.in/hcservices/