Case: Realvalue Appliances Ltd Vs. Canara Bank

registration of the Reference under section 15 of the Act read with Regulation 19 (in Chapter II of the Regulations which refers only to section 15), there can be no question of commencement of any `inquiry referable to section 16 of the Act. Such an inquiry can be treated as having commenced only at the stage of section 16 read with Regulation 21 (in Chapter IV of the Regulations which refers to section 16). On that reasoning it held that there can be stay as contemplated by section 22 only when section 16(1) stage of inquiry has arrived and not at the stage of section 15 dealing with registration of the reference. It further held that it is only when the BIFR, i.e. the Bench of the BIFR issues notices under section 16(1) for inquiry or asks the operating agency to inquire, that the `inquiry can be said to have commenced. This line of reasoning has been applied by the Rajasthan High Court also and by the Bombay High Court in the judgment under appeal. Question is whether this view is correct ? 27. Now, Regulation 19(4) which is concerned with section 15 requires that upon receipt of a reference, an acknowledgement is to be issued stating expressly that the reference has been received `subject to verification that the reference is in order. If on scrutiny, the reference is in order, then it will be registered under Regulation 19(5). Regulation 19(5) has been amended recently with effect from 24.3.1994 which is of a date very much subsequent, in point of time, to the date of the Judgment of the Calcutta High Court. The new Regulation 19(5) as substituted w.e.f. 24.3.1994 is in two parts and reads as follows: Reg. 19(5) : If on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the Chairman or assigning it to a Bench. Simultaneously, remaining information, documents required, if any, shall be called for from the informant. The first part says that the reference, if it is in order, will be registered. The second part says that simultaneously notice shall be issued calling for information or documents from the informant. The effect of the amended Regulation 19(5) is that even before any bench of the BIFR can think of calling for information under Regulation 20(1) or under Regulation 21 read with section 16, it is now mandatory after the amendment that as soon as a reference is registered, information/documents shall be called for from the informant straightaway. The point is whether when such information/documents are required to be simultaneously called for at Regulation 19(5) stage, can it be said that an `inquiry under section 16(1) has commenced ? 28. The above question depends upon what is meant by the word `inquiry used in section 16(1) of the Act. According to the New Standard Dictionary, the word `inquiry includes `investigation into facts, causes, effects and relations generally; `to inquire, according to the same dictionary means `to exert oneself to discover something. Chambers 20th Century Dictionary lays down that the meaning of the term `to inquire is to ask, to seek and the meaning of the term `inquiry is given as: search for knowledge; investigation: a question. 29. Inasmuch as under the latter part of Regulation 19(5) it is necessary that simultaneously with the registration of the reference, information/documents are to be called for from the informant the `inquiry must, in our opinion, be deemed to have commenced under section 16 of the Act at that stage itself, namely, at stage of the second part of Regulation 19(5) and it is no longer permissible to say that such a stage is reached only when the BIFR issues notices and starts an inquiry under Regulation 20 calling for additional information in relation to inquiry or only when orders are passed by the BIFR under Regulation 21, read with section 16(1). The result is that, strictly speaking, after the amendment of Regulation 19(5) on 24.3.1994 the latter part of Regulation 19(5) falls into Chapters III and IV of the Regulations which are referable to `Inquiries under section 16 of the Act, rather than into Chapter II which deals with `References under section 15. The Chapter headings cannot, in our opinion, be treated as rigid compartments. 30. There can, therefore, be no difficulty in holding that after the amendment to Regulation 19 w.e.f. 24.3.1994, once the reference is registered and when once it is mandatory simultaneously to call for information/documents from the informant and such a direction is given, then inquiry under section 16(1) must for the purposes of section 22 be deemed to have commenced. Section 22 and the prohibitions contained in it shall immediately come into play. In that view of the matter, we need not go into the correctness of the view expressed by the Calcutta, Rajasthan and Bombay HIgh Courts which relied upon the unamended Regulation 19. Point 2 is decided accordingly. 31. On the facts of this case, the impugned orders dated 28.7.1997 and 8.8.1997 of the High Court have been passed after the BIFR proceedings reached the stage of the second part of Regulation 19(5) on 24.7.1997 that is to say, when proceedings, as per the amended Regulation 19(5) reached the stage of inquiry under section 16(1). It must, therefore, be deemed that the said orders are illegal and are in violation of the prohibition contained in section 22 of the Act. 32. For the aforesaid reasons, the order passed by the Division Bench on 28.7.97 appointing Receiver and the order passed by another Bench of the High Court on 8.8.97 restoring the provisional Liquidator, are set aside. The Civil appeals are accordingly allowed. There will be no order as to costs. The respondents are free, if need be, to approach the BIFR under section 22 and section 22A of the Act for further orders, if any, in addition to the orders already passed by the BIFR in this behalf. 33.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]13. It is true that in the winding up proceedings and in the civil suit, the appellant Company contended that it was a viable unit and that neither a Receiver nor a provisional Liquidator could be appointed. The appellant was, on the one hand seeking adjournments before the Division Bench while on the other hand it had approached the BIFR on 17.7.97 and got its reference registered on 24.7.97 seeking to be declared a sick company. It is also true that in the affidavit filed on its behalf in the High Court on 22.7.97 seeking an adjournment, it had not disclosed to the Division Bench that it had moved the BIFR on 17.7.97. The Company sought an adjournment to 29.7.97 and then again to 8.8.97. Neither on 22.7.97 nor on 29.7.97 was the High Court informed about the application filed before the BIFR nor about its registration. A disclosure of these facts was made only on 8.8.9714. This conduct of the appellant, in our view, was certainly very unfair to the High Court and, therefore, the High Court had rightly deprecated the same. In our view, there was a clear attempt to keep the Court in the dark15. But the question is whether, on that account, the reference application to the BIFR would become bad. It is clear from the application filed before the BIFR that the BIFR was informed about the proceedings taken against the Company in the High Court both on the Company side and on the original side. So far as the BIFR was concerned, there was no suppression of facts before it. We are at a loss to understand as to how any conduct of the appellant Company before the High Court of Bombay could make the registration of the reference before the BIFR bad. If any orders were obtained by the Company from the High Court by way of fraud it was certainly open to the respondent to ask the High Court to recall such orders. No such thing was done. We, therefore, cannot accept the contention of the respondents that the reference under section 15 of the Act and the registration thereof by the BIFR became bad because of any conduct of the Company before the High Court. It follows that equally the subsequent orders passed by the BIFR on the reference cannot, on that account, be said to be invalid. This contention of the respondents is rejected. Point 1 is held against the respondents19. The point which has, in this context, been raised in several High Courts is that the mere registration of a reference by the BIFR under the Act, would not result in the automatic cessation of all proceedings which are pending either in civil courts or in the Company Court etc. as against its assets. It is argued that in order that section 22 of the Act can come into operation, the BIFR must - subsequent to the registration of the reference under section 15 - apply its mind and consider it necessary under section 16 to make an inquiry and issue notices on the reference to the affected parties who are required to be heard, and that only then it can be said that an `inquiry is pending. Unless an inquiry is pending there cannot be a statutory stay of proceedings etc. as contemplated by section 22 of the Act21. It is to be noticed that according to the section 22, in case an inquiry under section 16 is pending, then, notwithstanding anything in the Companies Act or any other instrument etc., no proceedings for the winding up of the company or for execution or distress or the like against the property of the company or for the appointment of a receiver and no suit for recovery of money or enforcement of any security or of any guarantee - shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, by the appellate authority. Section 22A permits the Board to pass certain conditional orders22. It is also to be noticed that sub-clause (1) of section 16 says that the Board `may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial unit - (a) upon receipt of a reference under section 15, or (b) upon information received by it or upon its own knowledge as to the financial condition of the company. Under sub-clause (2) of section 16, the Board `may, if it deems it necessary or expedient, require any operating agency to inquire and report to it. Under sub-clause (3), the Board or the operating agency is to endeavour to complete the inquiry within 60 days from the date of commencement of the inquiry. Explanation below sub-clause (3) explains that for purposes of sub-clause (3), that is to say, for computing the period of 60 days, 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. Under sub-clause (4), when the Board deems it fit to make an inquiry under sub-clause (1) or (2) of section 16, it may (the word `shall has been omitted by Act 12 of 1994) appoint one or more directors etc23. Relying on the use of the word `may in section 16(1) of the Act it has been contended in some High Courts that the word `may in that section shows that the BIFR has power to reject a reference summarily without going into merits and that it is only when the BIFR takes up the reference for consideration on merits under section 16(1) that it can be said that the `inquiry as contemplated by section has commenced. It is argued that if the reference before the BIFR is only at the stage of registration under section 15, then section 22 is not attracted. This contention, in our opinion, has no merit. In our view, when section 16(1) says that the BIFR can conduct the inquiry in such manner as it may deem fit, the said words are intended only to convey that a wide discretion is vested in the BIFR in regard to the procedure it may follow for conducting an inquiry under section 16(1) and nothing more. In fact, once the reference is registered after scrutiny, it is, in our view, mandatory for the BIFR to conduct an inquiry. If one looks at the format of the reference a prescribed in the Regulations, it will be clear that it contains more than fifty columns regarding extensive financial details of the Companys assets, liabilities, etc. Indeed it will be practically impossible for the BIFR to reject a reference outright without calling for information/documents or without hearing the Company or other parties. Further, the Act is intended to revive and rehabilitate sick industries before they can be wound up underthe Companies Act, 1956. Whether the Company seeks a declaration that it is sick or some other body seeks to have it declared as a sick Company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceeding against the assets are taken before any such decision is given by the BIFR for in case the Companys assets are sold, or the company wound up it may indeed become difficult later to restore the status quo ante. Therefore, in our view, the High Court of Allahabad in Industrial Fiance Corporation v. Maharashtra Steels Ltd., 1990(67) Comp. Cases 412 (All.), the High Court of Andhra Pradesh in Sponge Iron India Ltd. v. Neelima Steels Ltd., 1990(68) Comp. Cases 201 (A.P.), the High Court of Himachal Pradesh in Orissa Sponge Iron Ltd. v. Rishab Ispat Ltd., 1993(78) Comp. Cases 264 are right in rejecting such a contention and in holding that the inquiry must be treated as having commenced as soon as the registration of the reference is completed after scrutiny and that from that time, action against the Companys assets must remain stayed as stated in section 22 till final decisions are taken by the BIFR24. The other view that mere registration does not amount to commencement of inquiry under section 16(1) for purposes of section 22(1) has been taken by the Calcutta High Court in Bengal Lamps Case (supra), and by the Rajasthan High Court in Maruti Udyog Ltd. v. Instrumentation Ltd., 1995(82) Comp. Cases 485 (Raj). This view is mainly based upon the provisions of the Regulations made under the Act31. On the facts of this case, the impugned orders dated 28.7.1997 and 8.8.1997 of the High Court have been passed after the BIFR proceedings reached the stage of the second part of Regulation 19(5) on 24.7.1997 that is to say, when proceedings, as per the amended Regulation 19(5) reached the stage of inquiry under section 16(1). It must, therefore, be deemed that the said orders are illegal and are in violation of the prohibition contained in section 22 of the Act32. For the aforesaid reasons, the order passed by the Division Bench on 28.7.97 appointing Receiver and the order passed by another Bench of the High Court on 8.8.97 restoring the provisional Liquidator, are set aside. The Civil appeals are accordingly allowed. There will be no order as to costs. The respondents are free, if need be, to approach the BIFR under section 22 and section 22A of the Act for further orders, if any, in addition to the orders already passed by the BIFR in this behalf.