COMP/190/2003 1/69 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 190 of 2003 With COMPANY PETITION No. 287 of 2003 With COMPANY APPLICATION No. 448 of 2007 In COMPANY PETITION No. 190 of 2003 With COMPANY APPLICATION No. 500 of 2007 In COMPANY APPLICATION No. 448 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= B.I.F.R. - Petitioner(s) Versus CMD, APS STAR INDUSTRIES LTD. & 27 - Respondent(s) ========================================================= Appearance : COMPANY PETITION No. 190 of 2003 BOARD OPINION for Petitioner(s) : 1,MR AK CLERK for Petitioner(s) : 1, MRJANAK RSHAH for Salco Extrusions (P) Ltd. MR RD DAVE for Respondent(s) : 1, NANAVATI ASSOCIATES for Respondent(s) : 1, MR PAVAN S GODIAWALA for Respondent(s) : 1, None for Respondent(s) : 2 - 4,7 - 12,14 - 18,22 - 26, 28, MR AS VAKIL for Respondent(s) : 5, COMP/190/2003 2/69 JUDGMENT MR BHARAT JANI for Respondent(s) : 6, SINGHI & CO for Respondent(s) : 13, MR SUBRAMANIAM IYER for Respondent(s) : 19 - 20. MR RAJU K KOTHARI for Respondent(s) : 0.0.0 MR RAJESH P MANKAD for Respondent(s) : 0.0.0 COMPANY PETITION No. 287 of 2003 MR YF MEHTA for petitioner MS AMEE YAJNI for Respondent No.1 MR PAVAN S GODIAWALA for Respondent(s) : 2, COMPANY APPLICATION No. 448 of 2007 MR PAVAN S GODIAWALA for Petitioner : 1, MR AS VAKIL for Objector. COMPANY APPLICATION No. 500 of 2007 MR AK CLERK for Petitioner 1 MR PAVAN S GODIAWALA for Respondent(s) : 1, OFFICIAL LIQUIDATOR for Respondent No.2 ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 12/02/2008 ORAL JUDGMENT 1.Since all these petitions as well as Company Applications are in respect of the same Company, namely, APS Star Industries Ltd., they are heard together and are disposed of by this common judgment and order. 2. Company Petition No.190 of 2003 is registered on the basis of opinion forwarded by the Board for Industrial and Financial COMP/190/2003 3/69 JUDGMENT Reconstruction (BIFR) on 16.7.2003 to the Registrar of this Court under Section 20(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) stating that despite having allowed enough time and opportunity, it had not been possible to formulate any acceptable revival scheme for the company enabling it to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the Company as a result thereof was not likely to become viable in future and that it was just, equitable and in public interest that the Company should be wound up under Section 20(1) of the Act. 3. This Court has, vide its order dated 9.1.2006, after hearing all the parties, admitted this petition and appointed the Official Liquidator attached to this Court as the Provisional Liquidator of the Company and COMP/190/2003 4/69 JUDGMENT he was directed to take charge of all properties of all the Units of the Company and was further directed to issue public advertisement in two Newspapers, one in English newspaper and other one in vernacular language having wide circulation in the State of Gujarat, Maharashtra and Karnataka. The Official Liquidator was further directed to call for the details of all pending cases filed by or against the Company in different Courts and also the details of the properties which are in charge of the Court Receiver or other persons as per the directions and the orders passed by the Court. The Official Liquidator was further directed to collect the details with regard to disposal of the assets and distribution of the amount amongst the Secured creditors and/or workers pursuant to the order of BIFR or any other Court and was directed to place the said details before the Court at the time of final hearing of this petition. The final hearing of Company COMP/190/2003 5/69 JUDGMENT Petition No. 190 of 2003 was ordered to be fixed on 20.02.2006. 4. After admission and advertisement of the Company Petition No.190 of 2003 the same has come up for final hearing before this Court on 29.4.2006 and submission was made before the Court on behalf of the Company that the management of the Company has made an application before this Court for recall of the order of admission and advertisement. The Court, therefore, observed that it would be the responsibility of the respondent Company to obtain necessary orders from the very Court, which has passed the order of admission and advertisement. The Court has not entertained any such application for recalling of the order of admission and advertisement and hence the said order has become final. 5. Company Petition No.287 of 2006 is filed by COMP/190/2003 6/69 JUDGMENT Indian Seamless Metal Tubes Ltd., for winding up of the respondent Company. It appears that the order dated 9.1.2006 was passed by this Court in Company Petition No.190 of 2003 and other cognate matters. Company Petition No.287 of 2003 was not listed alongwith the said group as other Company Petitions, namely, Company Petition Nos. 73, 74, 124 of 1996, 23/97, 50/98 and 161/2000 were disposed of in view of the order passed by the Court on 9.1.2006. Since Company Petition No.287 of 2003 is also for winding up of the respondent Company and Court is seized with Company Petition No.190 of 2003 which is also for winding up of the respondent Company, the Company Petition No.287 of 2003 no longer survives and the same is disposed of accordingly. 6. During the pendency of Company Petition No.190 of 2003, the Company has moved an application being Company Application No.448 COMP/190/2003 7/69 JUDGMENT of 2007 seeking direction to conduct separate meetings of the (Group-A) consists of secured creditors, (Group-B) consists of employees of the Vadodara Unit, (Group-C) consists of employees of Nashik Unit, (Group-D) consists of employees of Dharwad Unit, (Group-E) consists of Unsecured Trade Creditors, (Group-F) consists of unsecured creditors who have given equipments on lease and (Group-G) equity shareholders for considering and if thought fit with or without modification and approval of the scheme of arrangement in the nature of revival and Compromise. 7. This Court has passed an order on 24.10.2007 observing that if the scheme for revival is entertained, the realisation of the property is bound to be delayed and it may be that if the revival of the Company itself is to take place, no useful purpose may be served for disposal of the property, but at the same time, the expenses already COMP/190/2003 8/69 JUDGMENT incurred by the OL for preservation of the property and the expenses which may be incurred by the OL for preservation of the property is an aspect, which is required to be considered. The Court further observed that the loss if any caused to the security of the secured assets of the company in liquidation on account of the delay in consideration of the proposal or sanction being granted by this Court is also the relevant aspect, which may be required to be considered. Taking into consideration these two aspects coupled with the objections, the Court found that the matter was required to be considered for putting condition upon the Directors or Ex-Directors of the Company who are moving the proposal of revival to deposit such amount even if the Court is of the view that the proposal of revival can be considered. The Court has, therefore, directed the OL to place on record the expenses already incurred for preservation of COMP/190/2003 9/69 JUDGMENT the property and the expenses to be incurred per month for preservation of the property and other expenses incidental. 8. The Court thereafter passed further order on 10.12.2007 directing the applicant of Company Application No.448 of 2007 to deposit the sum of Rs.10 lacs with the Registry of this Court on or before 17.12.2007, which amount has been deposited by the said applicant. 9. During the pendency of Company Petition No.190 of 2003 and Company Application No.448 of 2007, Star Industries & Textile Enterprise Employees Union has moved an application being Company Application No.500 of 2007, seeking permission of this Court to allow it to be joined as a party respondent in Company Application No.448 of 2007 in Company Petition No.190 of 2003. COMP/190/2003 10/69 JUDGMENT 10. An affidavit in support of this Judge's Summons was filed by one Girish R. Chitnis, Secretary of the Union wherein it is stated that the applicant Union is directly and vitally interested in the Company Application No.448 of 2007 in Company Petition No.190 of 2003 and that prayers made in the Company Application are affecting the applicant Union and its member employees. It is further stated that since the illegal closure of the Nashik Unit of the Company was made in or around 1997, the employees of Nashik Unit of the Company have not been paid anything by way of wages. Further affidavit was filed on 4.12.2007 wherein it is stated that in OJ Civil Application No.354 of 2007 this Court has directed the inspection of the properties of the Company situated at Nashik. Accordingly, the said inspection was carried out on 19.9.2007. It was found that there is only open plot and there is no plant and machinery or building at the site. The same COMP/190/2003 11/69 JUDGMENT position prevailed when it was inspected before 3 months as directed by this Court to the office of the OL. It is further stated in the said affidavit that the Company does not have any building or plant and machinery and there is only an open plot. It is, therefor, prayed that the workers have not been paid anything for the last 10 years and there is no possibility of Nashik Unit being revived as there is no building, plant and machinery and, therefore, the applicant Union is opposing to the proposed scheme of arrangement in the nature of revival and compromise under Section 391 of the Companies Act, 1956. It is further stated that the proceedings for winding up of the Company should expeditiously be proceeded further so that the assets of the Company can be sold and the workers may be paid their dues at the earliest. 11. On behalf of the Company, a reply was filed COMP/190/2003 12/69 JUDGMENT on 11.12.2007 wherein it is stated that the applicant Union has concealed the fact that on the earlier occasion the application came to be preferred being Company Application No.336 of 2006. The said application was dismissed for non-prosecution. It is further stated that in case of the Company went into liquidation the staff personnel / managerial persons are not entitled to any amount under Section 529A of the Companies Act, 1956, while in the case of revival the interest of all the employees including workman and staff persons are taken into consideration and hence the objection raised by the application Union is not tenable. 12. In the above background of the matter, all these petitions as well as applications are heard together since the winding up petition was pending for final hearing, even after the order of admission and advertisement was passed long before, the workers as well as COMP/190/2003 13/69 JUDGMENT secured creditors are pressurising for final hearing of winding up petition. The order could not have been passed till this date only because of pendency of Company Application No.448 of 2007 which is moved by the Management of the Company for revival of the Company. It is, therefore, necessary to decide this application first. 13. Mr. A.L.Shah, learned advocate appears with Mr. Pavan S. Godiawala, learned advocate for the applicant. An affidavit is filed by one Prabhakar Takalkar, Director and Shareholders of the applicant Company. Mr.Shah has submitted that the applicant Company was having units at Vadodara and Dharwad (in State of Karnataka), Dombivli ( in the State of Maharashtra), Nashik (in State of Maharashtra) and corporate offices at Dhanraj Mahal, Mumbai. The applicant was engaged in the business of Prevision and Proprietary Textile Bearing Components. The COMP/190/2003 14/69 JUDGMENT applicant was cash rich Company before the scheme of amalgamation was sanctioned by the BIFR for amalgamating Star Industrial and Textile Enterprises Ltd (SITEL) with APS. The applicant was having a market share of over 70% as of 1987 to 1995 March and a net-worth of over Rs.39 crores on 31.3.1993 and a market valuation exceeding Rs.285 crores. The applicant had its main unity at Vadodara and at Dharwad. The SITEL which was before BIFR as of 1992, had its unit at Dombivli and Nashik in the State of Maharashtra. Due to severe financial losses and market good-will suffered by SITEL, the Operating Agency i.e. IDBI alongwith the Financial Institutions of SITEL proposed merger of SITEL with APS. The BIFR vide order dated 10.3.1995 sanctioned DRS finalised by IDBI as the OA of SITEL for amalgamation of SITEL with APS and the said order dated 10.3.1995was to have retrospective effect as on 1.3.1994. Subsequently due to non-release of the need- COMP/190/2003 15/69 JUDGMENT based working capital as directed and sanctioned in the BIFR sanctioned scheme, several orders of exports could not be executed and Dombivli Unit closed down in 1996 and Nashik Unit in early 1998. The closure of these units had the obvious cascading effect on the turnover of Vadodara and Dharwad units. 14. Mr.Shah has further submitted that Bank of India which was the consortium leader of the consortium consisting of itself and the United Bank of India, which were the bankers of the erstwhile Associated Precision Spindles (APS) for the reasons best known to it, had stopped all banking cooperation with the applicant company and other consortium banker of SITEL. The said Bank of India, though had consented to the said amalgamation, failed in sharing the charge of the securities of Vadodara and Dharwad Units and had not given even the second charge to COMP/190/2003 16/69 JUDGMENT the other consortium Bankers. Further, they had also appropriated Rs.50 lacs of margin money against an expired Bank guarantee without even informing the applicant Company and when the said guarantee remained uninvoked, whereby the applicant company's account was wrongfully designated as a NPA. Further, no preshipment finance for export orders against Letters of Credits-LCs and Demand Drafts was provided, resulting in the applicant Company's credibility being affected and export and domestic contracts of almost Rs.100 crores getting frustrated. These are certain instances among various others which have led to the precipitous fall of the Company, inspite of all Banks concerned had desired the amalgamation of SITEL with the cash rich APS and had become substantive shareholders by converting SITEL's irregularities to them into freely convertible debentures, which thereafter were converted into their equity as provided in COMP/190/2003 17/69 JUDGMENT the sanctioned scheme. 15. Mr.Shah has further submitted that during this period the Company's Promoter CMD Suresh Metha was forced to resign because of totally unforeseen personal circumstances. The BIFR thereafter gave ample time of more than a year from 2002 to mid 2003 to the new Management of Mr.Rohit Mehta, as the Special Director of the Promoter shareholders with powers of Management under the applicant Company's Articles, and control of the Board at Bombay and Mr. Bharat K. Patel, who as President of applicant company at Vadodara, was given powers of management, his continuance however being subject to the BIFR approval. The BIFR, which had earlier castigated Mr.Bharat K. Patel for his previous record that had come to light, however outright rejected the scheme put up by Mr.Bharat Patel though duly endorsed by IDBI and ultimately by its order dated COMP/190/2003 18/69 JUDGMENT 26.6.2003, gave its opinion that the applicant Company be wound up. He has further submitted that the previous hearing of 26.3.2003, the BIFR Bench had nothing but scathing remarks on the omission and commission of Banks and financial institutions and gave the applicant company one last chance of 3 months to submit a viable scheme, which however was not even proposed. 16. Mr.Shah has, therefore, submitted that all this has happened only because under the compelling circumstances, the former CMD has withdrawn himself from the debentures of the Company and BIFR has forwarded opined for winding up of the Company. This Court has in turn passed the order of admission and advertisement. The Review preferred was also rejected by this Court. 17. Mr.Shah has further submitted that the COMP/190/2003 19/69 JUDGMENT applicant company to enable itself to float the revival scheme, preferred Company Application No.236 of 2006 for prayers to direct the OL to permit the applicant and its authorised representatives, including its technical consultants to take joint inventory and inspection and assess all machineries and equipments of the Company's factory premises at Vadodara, Dharwad, Dombivli and Nashik and further sought direction to have trial run of the said machineries and permit to have inspection and take copies of all records in the factory units and at corporate offices at Mumbai. These prayers were granted by this Court on 4.5.2006. The OL has remained silent even after regular correspondence to implement the order. The applicant has also paid the inspection fees of Rs.10,000/- but the OL has not acted upon the order dated 4.5.2006. The applicant thereafter preferred Contempt Application against the OL. The same was withdrawn later on. Thus, the OL COMP/190/2003 20/69 JUDGMENT assured to comply with the order. Bank of India, thereafter, preferred Review Application alongwith delay application. This Court upon considering the facts and circumstances, rejected the delay condonation application with reasoned order and directed that, even if the delay is condoned then also there is no merit in the case. Mr.Shah has invited the Court's attention to the order dated 8.3.2007. Bank of India, thereafter, moved an application before this Court seeking permission for sale of hypothecated assets of the applicant company. The said application being Company Application No.289 of 2006 was allowed. The applicant Company preferred leave to file appeal and appeal with stay application. The Division Bench of this Court directed the OL to give inspection to the applicant for Vadodara Unit and Nasik and made it returnable on 21.9.2007. Before that the applicant company had sought permission of this Court for convening and COMP/190/2003 21/69 JUDGMENT holding the meeting of respective class of creditors and equity shareholders for considering and if thought fit with or without modification, the scheme. The Company Application No.94 of 2007 was withdrawn with a view to present fresh scheme. Upon taking minute inspection of Vadodara unit, the applicant has come out with the fresh scheme much improvised one than the earlier one. He has, therefore, submitted that the Company's bonafide, potential and credential be considered by the Court and the prayers made in the application for convening the meeting are required to be granted. 18. In support of his submission Mr.Shah has relied on the decision of this Court rendered in Company Application No.1 of 2005 on 24.2.2005 in the case of Shree Rama Multitech Ltd., wherein despite several objections raised by the secured creditors, this Court COMP/190/2003 22/69 JUDGMENT has granted permission to convene the meeting for considering the scheme of arrangement and necessary directions were issued to convene the meeting. 19. He has also relied on the decision of this Court rendered in the case of Essar Oil Ltd.,rendered in Company Application Nos.217 and 224 of 2005 decided on 30.6.2005 wherein this Court has taken the view that it is not just and proper for this Court to reject the application at the threshold filed by the Company seeking direction for convening the meeting of the Scheme Lenders to consider the scheme of compromise and arrangement between the Company and scheme lenders on the ground that it is malafide moved and it is fraud on the Debenture holders holding more than 2000 debentures of the Company who are reduced to minorities in the present Scheme because of fraudulent classification and placing them in the same class, with Term COMP/190/2003 23/69 JUDGMENT Lenders and Working Capital Lenders and hence, the present Scheme is illegal and null and void, as alleged by the objectors. The Court has further observed that this fact by itself is not enough to outrightly reject the Scheme especially when such minority will have an opportunity to discuss and deliberate at the Scheme and even if the Scheme is approved at the meeting by requisite statutory majority, despite their valid and strong objections, they will again have an opportunity to raise their grievance before the Court when substantive petition is filed by the Company for confirmation of the Scheme. Mr.Shah therefore submitted that prayer made by the applicant for convening the meeting deserves to be granted. 20. Mr. A.S.Vakil, learned advocate appearing for Bank of India, one of the secured creditors strongly objected to this application seeking direction for convening COMP/190/2003 24/69 JUDGMENT the meeting. He submitted that before considering this application, the conduct of the applicant Company is required to be seen. Ever since the Company was registered with the BIFR in the year 1998 the conduct of the Company clearly demonstrates that the company is far from serious to rehabilitate itself. In fact, the Company is also not resourceful enough to mobilize funds, much less sufficient funds. In the guise of wanting to settle with secured creditors, etc., and on the pretext of wanting to present a scheme under Section 391 of the Act, the company has, since 1998, completely stalled the process of recovery of the legitimate dues of crores of rupees. On the one hand, since 1998 the company has not paid any amount and stalled the process of recovery, while on the other hand the securities have substantially diminished in value. He has submitted that the present application is required to be rejected on the following COMP/190/2003 25/69 JUDGMENT facts/events/orders. “(i) 1998: The Company – APS Star Industries Ltd., filed before the BIFR, Reference Case No.28/1998 (for short “Ref.Case”) under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) (ii)31.7.1998: The BIFR at the hearing of the said Reference Case passed an order dated 31.7.1998 (Paragraphs 5,6 and 7 thereof are as follows: “5. On being asked about the future action plan of the Company, Shri Mehta submitted that on account of their consistent follow up, the foreign collaborator had come around for negotiations. They were hopeful of arriving at a settlement within next three months. The amount of claim when received by the Company would be used for its revival. On being questioned he submitted that they would be in a position to give a revival proposal within eight weeks' time. Regarding the sources of funds for revival, he submitted that they are trying to tie up with a co-promoter. The Bench mentioned that whatever proposal the company made had to be properly tied up so that subsequent delays are avoided. 6. Further on the basis of submissions made and the material on record, the Bench was satisfied that a package under Section COMP/190/2003 26/69 JUDGMENT 17(2) was not possible in this case and as such it was necessary in public interest to take measures specified under Section 18 of the Act in relation to the company. Accordingly, in exercise of the powers conferred under Section 17(3) of the Act, the Bench appointed IDBI as the Operating Agency (OA) to examine the viability and prepare a viability study report keeping in view the provisions of Section 18 of the Act and the 'Measures and Guidelines' enclosed 7. The Bench further enquired about the company's response regarding High Court order for repayment of the dues of workers. The CMD of the Company, Shri Mehta, submitted that they had already