Case: Real Value Appliances Limited Vs. Vardhaman Spinning & General Mills Limited

Dr. B.P. SARAF, J.This appeal is directed against the order of the learned Single Judge dated 18th October, 1996 on the company petition filed by the respondents for winding up of the appellant company, by which the learned Single Judge appointed the Official Liquidator as the provisional liquidator of the appellant company. When this appeal came up for admission on 4th November 1996, it was contended before us on behalf of the appellant company that its financial condition was quite sound and the interest of the unsecured creditors was fully secured. It was submitted that failure of the appellant company to pay its creditors in time was only because of temporary liquidity crunch and for no other reason. We were told that the appellant company was in a position to pay all its unsecured creditors. Time was sought till 2nd December 1996 to submit a scheme for paying the unsecured creditors. In view of these submissions of the appellant company, the hearing of this appeal for admission was adjourned till 9th December 1996 with a direction to the appellant company not to incur any fresh liability in the meantime. It was further adjourned to 18th December, 1996. Finally this appeal was taken up for admission on 20th December 1996. At that time also, the learned Counsel for the appellant company reiterated the submissions made earlier on 4th November 1996 about financial soundness of the appellant company and its capacity to pay its unsecured creditors and others. We were told that failure of the appellant company to pay its unsecured creditors was only because of "temporary liquidity crunch". It was urged before us that the learned Single Judge erred in arriving at a finding that the financial condition of the appellant company was commercially not sound and that with a view to protecting the interests of the unsecured creditors it was necessary to appoint the Official Liquidator as the provisional liquidator.2. We considered the above submissions of learned Counsel for the appellant company in the light of the affidavits filed in this Court by the Executive Director and the General Manager of the appellant company in support thereof from time to time. The first affidavit noticed by us was the affidavit dated 29th August 1996 of Mr. Vinod Pandya, Executive Director of the appellant company, in reply to the company application filed by the respondents seeking appointment of provisional liquidator. In para 2 of the said affidavit, it was stated :"At the outset, I submit that the above petition has been filed by the petitioners only to pressurise the company into making payment of the petitioners dues. As repeatedly explained to the petitioners in correspondence, copies of some of which are annexed to the petition, the company is going through a temporary liquidity shortage., However, the Company is sound having a paid-up capital of Rs. 12.4 Crores and reserves and surplus as on 30-6-1995 of about Rs. 64 crores."(Emphasis added).Denying the allegations that the appellant company had no resources to pay the debts of its creditors, it was stated :"I say that the financial crunch felt by the company is only temporary as the entire economy is in bad shape."In another affidavit filed by Mr. Pandya on 11th October 1996, purporting to place on record certain relevant facts and to clarify the financial position of the company over the last two years, it was stated, inter alia, :"......... the loss has been curtailed due to various measures adopted by the company in terms of massive reduction in overheads which started yielding results from the second quarter of the second half i.e. from April 1996 onwards. Thus, through these measures, the company is now in a situation of breaking even in terms of operations.The company is optimistic that from November 1996 onwards it can start repayment in instalments as may be decided with each party."(Emphasis supplied).In an affidavit dated 2nd December 1996, Mr. A.R. Srinivasan, General Manager (Operations) of the appellant-company, submitted a scheme of payment in respect of unsecured creditors and other parties and reiterated the contention of the company that the only problem of the appellant company was "temporary liquidity shortage".3. Relying upon the categorical statement of Mr. Pandya and Mr. Srinivasan, made on oath in the affidavits filed by them before this Court to the effect that the appellant company was in a sound financial condition and its failure to pay its creditors was merely on account of temporary liquidity crunch and the interest of the unsecured creditors and all others parties was fully secured, we admitted this appeal. At that stage, many of the creditors applied for being allowed to participate in the proceedings in this appeal as interveners. Their prayers were allowed and they were directed to be joined as interveners.4. The appellant company also prayed for stay of the operation of the order of the learned Single Judge appointing provisional liquidator. Relying upon the information furnished on oath by Mr. Pandya, the Executive Director of the Company and Mr. Srinivasan from time to time and the submissions in course of hearing for admission of the appeal on 22nd December 1996 to the effect that the appellant company was in a sound financial condition and non-payment to the unsecured creditors was a temporary phenomenon due to liquidity crunch, the operation of the order of the learned Single Judge appointing provisional liquidator was stayed by this Court on 20th December 1996, subject, however, to the following conditions.a) The appellant Company shall not transfer or dispose of any of its assets, immovable or movable, nor create any third party interest therein.b) The appellant company shall not incur any fresh liability.c) The two Directors of the Company (i) Vinod Pandya and (ii) Pheroze Engineer have filed their affidavits giving particulars of their assets. The above two directors undertake not to transfer and/or deal with any assets mentioned in the statements given by them except the Bank balance. The undertakings of the above two Directors is accepted.d) The appellant company shall be at liberty to carry on day-to-day manufacturing and/or trading activities in the usual course of business. The appellant company shall maintain a separate Bank account from Monday, the 23rd December 1996 and shall carry out all financial transactions through the said account. The appellant shall furnish the number of the said account to this Court and shall submit summary of the transactions on 7th January 1997 carried on till then and again on 22nd January 1997 for the period from 8th January 1997 to 21st January 1997.e) It is made clear that by virtue of above, the appellant company shall not undertake any extraordinary activity in the guise of manufacturing and trading."5. It appears that the respondents were not satisfied about the veracity and bona fides of the statements made before this Court from time to time about financial soundness of the appellant company and its ability to pay the unsecured creditors. The respondents, therefore, moved the bench presided by the learned Chief Justice for fixing an early hearing of the appeal. This prayer of the respondents was granted and the appeal was directed to be placed before this Bench, on 22nd July 1997, high on board, for hearing.6. On 22nd July, 1997, when this appeal was called out for hearing, on behalf of the appellant company an affidavit of Mr. Vinod Pandya, the Executive Director of the appellant company, was tendered to this Court. The said affidavit was filed purportedly to place on record the progress achieved by the company in the last six months. Copies thereof were also supplied to the respondents. In the above affidavit, the progress made by the appellant company in various fields during the period of last six months was highlighted. The position was summed up as below :"To summarize, the company has been able to achieve growth and stability in the Cease Fire operations. The Cease Fire business potential is much higher which can be fully attained by enhancing the working capital availability. The company is confident of achieving higher levels of production in the coming months. The contribution from this division will contribute significantly in the revival plans of the company."It was stated in the said affidavit :"In the circumstances aforesaid the appellants submit that there is a good chance of recovery in the foreseeable future. Great efforts have been and are being made by the company to get out of its present predicament, but this will naturally take some time. The company petition has not yet been admitted. It is respectfully submitted that the balance of convenience is in favour of the appellants who can get out of their temporary difficulties with the results now beginning to show. By the order of this Honble Court admitting the appeal, the company was directed to open a separate bank account to carry out its day to day transactions. It was also ordered by the Honourable Court not to make any preferential payments to any of the creditors except in the normal course of business. This has helped the company to consolidate its limited resources and plough back the same towards funding the current assets. However, to some extent, it also acted as a restriction as for a company like us, to operate through a single account, without any credit facilities, slowed down the pace of revival."The position was again summarised in para 42 in the following words :"To summarize, the company has already evolved a concrete business plan to achieve revival and its various divisions and the early results have already started happening."It was submitted that from the above affidavit the respondents should be fully satisfied about the sound financial condition of the appellant company and its capacity to pay the amounts due to them.7. In view of the categorical assertion in the above affidavit about the progress of the company and its sound financial condition, we asked the Counsel for the respondents to peruse the affidavit and to tell us whether he was satisfied about the soundness of the financial condition of the appellant company as projected by it. For that purpose, the hearing of the appeal was adjourned to 29th July 1997. It appears that the respondents were not satisfied about the statements made before this Court about the financial soundness of the appellant company and wanted to verify the correctness of the same. We were told that the appellant company was not placing before this Court the correct factual position. The projection of its financial condition, according to the respondents, was very sketchy and many vital informations which might reveal the true picture, were missing. The appellant company was, therefore, asked to furnish all necessary information to the respondents and the hearing was again adjourned to enable the respondents to get a correct picture of the financial position of the appellant company. The appeal was finally placed on board for hearing on 8th August 1997. On that day, when it was called out for hearing, we asked the learned Counsel for the respondents whether the respondents were satisfied about the veracity of the statements made and information furnished to this Court by the appellant company about its financial condition. However, before the respondents could tell us anything, to our great surprise, we were told by the learned Counsel for the appellant company itself that the financial condition of the appellant company was precarious and it had made a reference to the Board for Industrial and Financial Reconstruction ("BIFR") under section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 ("Sick Industrial Companies Act") and in that view of the matter, proceedings in this appeal should be kept in abeyance. A copy of a letter dated 24th July 1997 from the Registrar of the BIFR, addressed to the Director of the appellant company, was furnished to us to show that the reference under section 15(1) of the Sick Industrial Companies Act filed on 17th July 1997, had been registered by the office of the BIFR and numbered as Case No. 97/97.8. We were shocked and surprised at this new stance of the appellant company. As is evident from letter of the Registrar of the BIFR, the appellant company had filed its application for reference under section 15(1) of the Sick Industrial Companies Act on 17th July 1977 itself, whereas in the affidavit of its Executive Director dated 22nd July 1977, there is not a whisper about it. It was obvious that the said affidavit had been filed merely with a view to getting the hearing of the appeal adjourned till the receipt of communication from the BIFR acknowledging the receipt of the application for reference under section 15(1) of the Sick Industrial Companies Act. Apparently, statements made in the said affidavit were misleading and untrue. We asked Mr. Kapadia, the learned Counsel for the appellant company, to tell the appellant company and its functionaries to stop this hide and seek game with the Court and to disclose all relevant facts truly and fully. In response thereto, an affidavit of Mr. Phiroze Engineer, Managing Director of the appellant company, was handed over to us. On perusal of the same, it was evident that this affidavit had been sworn in as back as on 2nd August, 1997. It was intended to be filed before us to inform us about the making of the reference to BIFR and to get the hearing of this appeal stayed on the basis thereof. A copy of the application for reference filed with the BIFR along with annexures has been annexed to the said affidavit. A perusal of the application for reference under section 15 of the Sick Industrial Companies Act and the annexures thereto makes it clear that there was a deliberate attempt on the part of the appellant company all throughout to conceal by all means its true state of affairs from this Court as also its creditors and shareholders. The modus operandi adopted by appellant company for that purpose was highly sophisticated, which would be evident from the following facts :The financial year of the appellant company was the year ended 30th June. During the financial year ended 30th June 1995, the appellant company declared a net profit after tax of Rs. 12.69 crores. According to the balance sheet for that period, its paid up capital was Rs. 12.4 crores and reserve and surplus about Rs. 64 crores. It appears that in the next financial year it suffered huge losses as a result whereof it was not in a position to pay its unsecured creditors. It was threatened by its creditors with winding-up proceedings and, in fact, petitions were filed for its winding up in this Court. The appellant company wanted to conceal its true financial condition not only from its creditors and share holders but also from this Court, and with that object in view, it changed its financial year from 12 months period ended on 30th June 1996 to a financial year of 18 months which would end on 31st December 1996. Having done so, the appellant company filed affidavit before this Court saying that it was in a sound financial position and that the winding up petitions was frivolous and on the basis thereof no adverse orders should be passed against it. The profit and loss account and balance sheet of the appellant company for the year ending 30th June 1995 was placed before the Court all throughout in support of the contention that it was financially sound. Even the profits and loss account for the financial year ending on 31st December 1996, which showed substantial losses, was never placed before this Court, nor the fact that it had suffered such losses was ever brought to the notice of this Court. On the other hand, this Court was told on oath all throughout that the appellant company was in a very good financial condition and its failure to pay its creditors was only due to temporary liquidity crunch. The next financial year which commenced on 1st January 1997 was to end on 31st December 1997. As the respondents were pressing hard for hearing of this appeal, the appellant company acted fast and decided to close its accounts on 30th June 1997 itself by again changing its financial year to a period of six months and acted accordingly. It is evident from perusal of its accounts for the six months period ending 30th June, 1997, that all possible efforts have been made by it to increase the figure of losses in the profit and loss account. For that purpose, the company went to the length of changing the method of depreciation of its assets from the straight-line method to the written down value method "with retrospective effect from the very inception of its business" which resulted in an additional depreciation of over Rs. 7 crores which was also provided in the profit and loss account for the six month financial year ending on 30th July 1997. All this was done only to see that the figure of accumulated losses as per its profit and loss account could reach a figure equal to or more than its net worth as defined in the Sick Industrial Companies Act so that it can make a reference under section 15(1) of the Sick Industrial Companies Act to the BIFR and get the hearing of this appeal and all other proceedings pending in the courts stayed by virtue of section 22 thereof. It is evident from the certificate of the Chartered Accountant of the appellant company, which was annexed to the application to the BIFR for reference under section 15, that when, despite doing every thing possible under the accounting practice, the accumulated losses could not exceed Rs. 35.19 crores as against the total net worth of Rs. 56.20 crores (comprising of paid-up capital of Rs. 12.40 crores and free reserve of Rs. 43.80 crores) unprovided interest of Rs. 29.47 crores was also treated as accumulated loss to match the figure of accumulated losses to its net worth. Be that as it may, it is clear from the above that the appellant company was in a hurry to make a reference to BIFR, obviously, to stall adverse orders from this Court in this appeal. This is evident from the following extracts of the resolution passed by the Board of Directors of the appellant company in its meeting held on 12th July 1997 much before the affidavit was filed by its Executive Director Mr. Vinod Pandya in this Court on 22nd July 1997 saying that the companys financial position was very sound :"The Chairman informed the Board that the provisional accounts of the company for the six months ending 30th June. 1977 have been prepared and the same are under audit. As per the said provisional accounts read with Notes to the Accounts and in particular Note No. 13 regarding non-provision of interest amounting to Rs. 2947.15 lacs, the accumulated losses of Rs. 6453.37 lacs exceeded the net worth of the company amounting to Rs. 5561.45 lacs, which has resulted in the total erosion of its net work. The audited accounts for the said period when ready will be placed in the Annual General Meeting of the Company for the approval of the Shareholders of the Company but in the meanwhile, the Chairman further informed the Board that pursuant to the provisions of section 15(1) of the Sick Industries (Special Provision) Act, 1985, the reference in the prescribed form A will have to be made with the Board for the Industrial and Financial Reconstruction (BIFR) within 60 days from the date on which the Board has formed an opinion that the prima facie the company has become a sick industrial company within the meaning of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. In view of this, the Chairman clarified that the Board will have to consider the said matter and the resolution will have to be passed by the Board of Directors of the Company for changing the financial year and for making reference to Honble BIFR based on the said provisional accounts. The Chairman, therefore, moved the following resolution and the Board considered the said matter and passed the following resolution which was carried unanimously."RESOLVED THAT the financial year of the company, which ends on 31st December 1997 beginning 1st January, 1997, be shortened to close on 30th June, 1977 this year and shall close on that date every subsequent year hereafter so that the balance sheet and profit & loss Account giving effect to such change in the financial year shall be complied for a period of six months for the financial year 1997"."RESOLVED FURTHER THAT the Board hereby forms an opinion that the company has prima facie become a sick industrial company within the meaning of section 3(1)(o) of The Sick Industrial Companies (Special Provisions) Act, 1985 based on the provisional accounts of the company for the financial year comprising six months ending 30th June 1977"."RESOLVED FURTHER THAT the reference be made to the Board for Industrial and Financial Reconstruction under section 15(1) of the Sick Industrial Companies (Special Provision) Act, 1985 by the Company as the accumulated losses exceeded the entire networth as per the provisional accounts for the period ending 30th June 1997 and company has become the Sick Industrial Company within the meaning of section (3)(1)(o) of the said Act."RESOLVED FURTHER THAT Shri A.R. Srinivasan, General Manager, Operations of the Company be and is hereby authorised to take necessary action pursuant to foregoing resolution.RESOLVED LASTLY THAT a copy of this resolution be forwarded to BIFR for their information and necessary action in accordance with provisions of the said Act."9. It is clear from the above extract of the meeting of the Board of Directors held as early as on 12th July 1997 that the Board of Directors were of the opinion that the accumulated losses of the Company were more than the net worth of the company and the company had become a sick industrial company within the meaning of the Sick Industrial Companies Act. Decision was taken on that date itself to make a reference to the BIFR under section 15 of the Sick Industrial Companies Act. In view of the above, the affidavit dated 22nd July 1997 filed by Mr. Vinod Pandya, on the face of it, is false and misleading. So far as the filing of the misleading and false affidavit before this Court deliberately and wilfully to obtain favourable orders from this Court is concerned, we have already issued notices to Mr. Vinod Pandya and Mr. A.R. Srinivasan asking them to show cause why appropriate proceedings should not be initiated against them. So far as the present appeal is concerned, it is clear from the above resolution of the Board of Directors that as per the profit and loss account for the period ending 30th June 1997, the appellant companys accumulated losses amounted to Rs. 35.19 crores. Though as indicated earlier, this figure is exaggerated by providing for extra depreciation of about 9 crores by changing the method of depreciation from the very inception of its business and the accumulated losses are still lesser than the net worth of the company comprising of its paid-up capital and free reserves aggregating to Rs. 56.21 crores, it is clear that the appellant company is not in a sound financial condition and on that account, it is not in a position to pay its unsecured creditors. That being so, it is clear that the learned Single Judge was correct in his opinion that the appellant company was not in sound financial condition and with a view to protecting the interest of the unsecured creditors, it was necessary to appoint a provisional liquidator of the appellant company. This appeal, therefore, is totally devoid of any merit and the same is liable to be dismissed with costs.10. However, before we pass such an order, it is necessary to deal with the contention of Mr. Kapadia, learned Counsel for the appellant, that in view of the filing of the reference by the appellant company before the BIFR, it is not open to this Court to proceed with the hearing of this appeal and to pass any order thereon. According to Mr. Kapadia, on filing of an application for reference under section 15 of the Sick Industrial Companies Act and registration of the same by the BIFR, section 22 of the said Act would come into operation. The contention, in other words, is that inquiry under section 16 commences as soon as a reference under section 15 is registered and remains pending till it is concluded. Reliance is placed in support of this contention on the decision of the Allahabad High Court in (Industrial Finance Corporation of India v. Maharashtra Steels Ltd.)1, 1990(67) Comp. Cas. 412, Andhra Pradesh High Court in (Sponge Iron India Ltd. v. Neelima Steels Ltd.)2, 1991 Bank.J. 204 (A.P.) : 1990(68) Comp. Cas. 201, Himachal Pradesh High Court in (Orissa Sponge Iron Ltd. v. Rishabh Ispaat Ltd.)3, 1993(78) Comp. Cas. 264. Reliance was also placed on the explanation appended to sub-section (3) of section 16 of the Act wherein it is stated that for the purposes of that sub-section, an inquiry shall be deemed to have commenced upon receipt by the Board of any reference. According to the learned Counsel, the deeming provision contained in this explanation cannot be confined to sub-section (3) of section 16 but, taken to its logical end, should be held to be applicable for the purposes of the Act. Mr. Rahimtoola, learned Counsel for the respondents, on the other hand, submits that no inquiry under the Sick Industrial Companies Act can be said to have commenced for the purpose of section 22 of that Act till some action is taken by the Board under section 16 of the Act. According to him, the two expressions, "reference" and "inquiry" are not interchangeable. Our attention was drawn to the fact that there were two independent sections in the Act to deal with reference and enquiry. Section 15 deals with reference to the Board whereas section 16 deals with inquiry. Our attention was also drawn to Chapter II of the Board for Industrial and Financial Reconstruction Regulations, 1987 ("BIFR Regulations"), in particular Chapter III thereof, which lays down general provision regarding inquiry. It was submitted that once a reference is found to be in order and is registered, it has to be placed before the Chairman of the Board for assigning it to a bench and it is only when the bench takes up the matter, applies its mind and takes a decision that an inquiry is necessary, it can be said that inquiry has commenced. Till that stage, section 22 of the Sick Industrial Companies Act has no application. In other words, according to Mr. Rahimtoola, mere lodging of a reference and registration of the same by the BIFR does not amount to commencement of inquiry under section 16 of the Act. Reliance was placed in support of this contention on the decision of the Calcutta High Court in (Bengal Lamps Ltd. v. Furmanite Nicco Ltd.)3, 1991(72) Comp. Cas. 146, and two Single-Judge Bench decisions of this Court, one dated 21st March 1997 in Suit No. 25 of 1996 (Omen International Bank S.A.O.G. v. Madalsa International Ltd. and others)5, dated 11th April 1997 in Suit No. 278 of 1995, (Central Bank of India v. Madalasa International Ltd.)6.11. We have carefully considered the rival submissions. Section 22 of the Sick Industrial Companies Act provides for suspension of certain legal proceedings, contracts etc. against the industrial company in the situations set out therein. Sub-section (1) of section 22, which is relevant for the present purpose, provides :"Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority."It is clear from a plain reading of the above provision that it would apply only if -(i) an enquiry under section 16 is pending, or(ii) any scheme referred to under section 17 is under preparation, or(iii) a sanctioned scheme is under implementation, or(iv) where an appeal under section 25 relating to an industrial company is pending.Existence of one of the above four situations is thus a condition precedent for the applicability of section 22(1) of the Act.12. In the instant case, the appellant company seeks suspension of legal proceedings against it under section 22 of the Act as, according to it, an inquiry under section 16 is pending. This claim of the appellant company is the subject-matter of controversy before us. There is no dispute about the fact that the appellant company has made a reference to the BIFR under section 15 of the Act which has been registered by the Registrar of the BIFR. So far, the BIFR (also referred to as the "Board") has not initiated any inquiry under section 16 of the Act. That being so, according to the respondents, it cannot be said that an inquiry under section 16 of the Sick Industrial Companies Act is pending which might have the effect of suspension of legal proceedings by virtue of section 22 of the Act. The question that requires our consideration, therefore, is whether making of a reference under section 15 or registration thereof by the Registrar or Secretary of the BIFR would tantamount to pendency of an inquiry.13. For that purpose, it is expedient to peruse some of the provisions of Chapter III of the Sick Industrial Companies Act which deals with reference, inquiry etc. Section 15 deals with reference to the Board. It provides for making of a reference to the Board where an industrial company has become sick industrial company. "Sick industrial company" has been defined in Clause (o) of section 3 to mean 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. "Net worth" has been defined in Clause (ga) of section 3 to mean the sum total of the paid-up capital and free reserves. For the purpose of this definition, free reserve does not include reserves credited out of the re-evaluation of assets, write back of depreciation provisions and amalgamation. Section 15 of the Sick Industrial Companies Act, which provides for making of a reference to the BIFR, reads :"15. Reference to Board:---(1) Whether 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:Provided that if the Board of Directors had sufficient reasons even before such finalisation to form the opinion that the company had become a sick industrial company, the Board of Directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company.(2) Without prejudice to the provisions of sub-section (1), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference in respect of such company to the Board for determination of the measures which may be adopted with respect to such company:Provided that a reference shall not be made under this sub-section in respect of any industrial company by---(a) the government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State;(b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to, such company, an interest in such company."Section 16 deals with inquiry into the working of sick industrial companies. It empowers the Board to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Such inquiry may be made (i) upon receipt of a reference with respect to such company under section 15, or (ii) upon information received in respect of such company, or (iii) upon its own knowledge as to the financial condition of the company. Under sub-section (2) of section 16, the Board has the power to require by order any operating agency to inquire into and make a report if it deems necessary or expedient to do so. Section 16, so far as relevant, reads :"16. Inquiry into working of sick industrial companies:---(1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company-(a) upon receipt of a reference with respect to such company under section 15; or(b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company.(2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matter as may be specified in the order.(3) The Board or, as the case may be the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry.Explanation:---For the purposes of this sub-section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board.(4) Where the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1) or, as the case may be, under sub-section (2), it may appoint one or more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company or in the public interest.(4A) The Board may issue such directions to a special director appointed under sub-section (4) as it may deem necessary or expedient for proper discharge of his duties......................................................................................................................."Section 17 deals with the powers of the Board to make suitable order on the completion of inquiry under section 16.14. It is clear from a perusal of the above provisions of section 15 & 16 that there is a material difference between reference and inquiry. When a reference under sub-section (1) of section 15 is made to the BIFR and it is found to be in order, it is registered. This is done by the Secretary or the Registrar of the BIFR. After registration, it has to be placed before the Chairman of the BIFR for assigning it to a Bench. Thereafter only the question of inquiry can arise, because power to conduct inquiry under section 16 is vested in the Board and not in the Secretary or Registrar of the BIFR. The expression used in section 22 is "an inquiry under section 16 is pending". The power to commence and conduct an inquiry under section 16 is vested only in the Board, which means the Board for Industrial and Financial Reconstruction established under section 4, comprising of the Chairman and the members. Registrar or the Secretary of the BIFR is not "Board". It is when only the Bench of not less than 2 members, to which the reference is assigned by the Chairman of the Board, takes up the matter and decides to make such inquiry as it may deem fit, that inquiry can be said to have commenced. It is thus clear that inquiry under section 16 commences only when the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1), which naturally can be only after application of mind by the Board to the facts and circumstances of the case and in case of a reference by the industrial company, on consideration thereof. Inquiry under section 16 cannot commence merely on filing of a reference or registration of the same by the Registrar or the Secretary.15. This view of ours also gets support from the proviso to sub-section (3) of section 16 which enacts a legal fiction for the purpose of that sub-section that an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board. This legal fiction has been created for the purpose of sub-section (3) only and it cannot be expanded beyond that. By specifically providing that it was only for the purposes of sub-section (3) of section 16, the legislature has made its intention abundantly clear. Hence, for the purposes of the Act (except sub-section (3) of section (16) something more is necessary to commence an inquiry and that something is the opinion of the Board, formed on an application of mind to the reference or the information, that the case is a fit one to make an inquiry. This is also clear from Chapters II and III of the BIFR Regulations. Regulation 19 deals with reference under section 15. It provides for filing of the reference, scrutiny of same by the Secretary or the Registrar, registration of the same by them if found to be in order and refusal to register the same if it is not found to be in order. It is made clear that a reference declined to be registered shall be deemed not to have been made. Appeal is also provided against the order declining to register a reference. Chapter III contains general provisions regarding inquiry. Chapter IV deals with the manner of inquiry.Regulation 21 is important. It reads :"21. Upon a reference with respect to an industrial company under section 15 or upon information received with respect to such company, or upon its own knowledge as to the financial condition of the company, the Board may --(a) itself make such inquiry, as it may deem fit, for determining whether the industrial company has become a sick industrial company; or(b) if it deems necessary or expedient so to do, for the expeditious disposal of inquiry mentioned at (a) above, direct by an order, an operating agency, to be specified in the order, to enquire into and make a report with respect to such matters, as may be specified in the order :Provided that reasonable opportunity for making submissions shall be given by the Board to the informant, and to the concerned industrial company, if it is not the informant, before deciding whether the said company has become a sick industrial company or not."It is clear from Regulation 21 that after registration of the reference under section 15, the first step, is to determine or decide whether to make inquiry or to direct the operating agency to do the same. That being so, an inquiry under section 16 can be said to have commenced only when the Bench of the BIFR, to which the reference is assigned by the Chairman after its registration, deems it fit to make an inquiry or to cause an inquiry to be made by the operating agency. Till that stage, it is merely a reference registered by the office of the Board. It cannot be said that an inquiry has commenced and is pending.16. We are strengthened in our above conclusion by Clause 4 of the 1992 Guidelines of the BIFR, which deals with "Procedure in BIFR" where it is categorically stated :"4.2.1 The inquiry is made under section 16 of the Act.4.2.2 The inquiry commences with the hearing of the parties invited by the Bench as per notice issued."(Emphasis supplied)17. From the foregoing discussion, it is clear that inquiry under section 16 can be said to have commenced only when an inquiry is ordered by the Board and at that stage only legal proceedings set out in sub-section (1) of section 22 of the Sick Industrial Companies Act would be suspended. We are supported in our above conclusion by the following observations of the Supreme Court in (Gram Panchayat v. Shree Vallabh Glass Works Ltd.)7, 1990(3) Bom.C.R. 109 :1990 Bank.J. 595 (S.C.) : 1991(71) Comp. Cas. 169."As soon as the inquiry under section 16 is ordered by the Board, the various proceedings set out under sub-section (1) of section 22 would be deemed to have been suspended."18. We are also supported in our above conclusion by the decision of the Calcutta High Court in Bengal Lamps Ltd. v. Furmanite Nico Ltd. (supra), wherein the Division Bench of the Calcutta High Court held that inquiry under section 16 of the Sick Industrial Companies Act cannot be said to be pending merely because reference is filed. In the above case, the Calcutta High Court was of the opinion that inquiry under section 16 commences only on the Board taking a decision under sub-section (1) of section 16 to hold a cause an inquiry to be held.19. We have also perused the two Single-Judge decisions of this Court in Oman International Bank S.A.O.G. v. M/s. Madalsa International Ltd. (supra) and Central Bank of India v. Madalasa International Ltd. (supra) where, following the Calcutta High Court decision in Bengal Lamps Ltd. v. Furmanite Nico Ltd. (supra), it has been held that by mere filing of a reference under section 15 or registration of the same, it cannot be said that inquiry has commenced and is pending. We are in agreement with the above conclusion.20. In view of the foregoing discussion, we are of the clear opinion that in the facts and circumstances of the present case, section 22 of the Sick Industrial Companies Act had no application.

Decision reasoning: 0[ds]18. We are also supported in our above conclusion by the decision of the Calcutta High Court in Bengal Lamps Ltd. v. Furmanite Nico Ltd. (supra), wherein the Division Bench of the Calcutta High Court held that inquiry under section 16 of the Sick Industrial Companies Act cannot be said to be pending merely because reference is filed. In the above case, the Calcutta High Court was of the opinion that inquiry under section 16 commences only on the Board taking a decision under(1) of section 16 to hold a cause an inquiry to be held.19. We have also perused the twodecisions of this Court in Oman International Bank S.A.O.G. v. M/s. Madalsa International Ltd. (supra) and Central Bank of India v. Madalasa International Ltd. (supra) where, following the Calcutta High Court decision in Bengal Lamps Ltd. v. Furmanite Nico Ltd. (supra), it has been held that by mere filing of a reference under section 15 or registration of the same, it cannot be said that inquiry has commenced and is pending. We are in agreement with the above conclusion.From the foregoing discussion, it is clear that inquiry under section 16 can be said to have commenced only when an inquiry is ordered by the Board and at that stage only legal proceedings set out in(1) of section 22 of the Sick Industrial Companies Act would be suspended. We are supported in our above conclusion by the following observations of the Supreme Court in (Gram Panchayat v. Shree Vallabh Glass Works Ltd.)7, 1990(3) Bom.C.R. 109 :1990 Bank.J. 595 (S.C.) : 1991(71) Comp. Cas. 169."As soon as the inquiry under section 16 is ordered by the Board, the various proceedings set out under(1) of section 22 would be deemed to have been suspended.It is clear from a perusal of the above provisions of section 1516 that there is a material difference between reference and inquiry. When a reference under(1) of section 15 is made to the BIFR and it is found to be in order, it is registered. This is done by the Secretary or the Registrar of the BIFR. After registration, it has to be placed before the Chairman of the BIFR for assigning it to a Bench. Thereafter only the question of inquiry can arise, because power to conduct inquiry under section 16 is vested in the Board and not in the Secretary or Registrar of the BIFR. The expression used in section 22 is "an inquiry under section 16 is pending". The power to commence and conduct an inquiry under section 16 is vested only in the Board, which means the Board for Industrial and Financial Reconstruction established under section 4, comprising of the Chairman and the members. Registrar or the Secretary of the BIFR is not "Board". It is when only the Bench of not less than 2 members, to which the reference is assigned by the Chairman of the Board, takes up the matter and decides to make such inquiry as it may deem fit, that inquiry can be said to have commenced. It is thus clear that inquiry under section 16 commences only when the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under(1), which naturally can be only after application of mind by the Board to the facts and circumstances of the case and in case of a reference by the industrial company, on consideration thereof. Inquiry under section 16 cannot commence merely on filing of a reference or registration of the same by the Registrar or the Secretary.15. This view of ours also gets support from the proviso to(3) of section 16 which enacts a legal fiction for the purpose of thatthat an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board.