Case: Raheja Universal Limited Vs. Nrc Limited

C Limited is a company which was originally incorporated under the name and style of `National Rayon Corporation Limited in the year 1946. However, subsequently, by an appropriate resolution of the Board of Directors, its name was changed to `NRC Limited on 4th August, 1994 (hereinafter referred to as the `Respondent-Company). The Respondent-Company was engaged in the manufacture of viscos filament yarn, chemicals and allied products with its factory at Mohane, Kalyan, District Thane. As per the facts on record, the Respondent-Company was declared a `sick industrial company in the year 1987, but as its net worth turned positive, vide order dated 10th January, 1994 passed by the Board for Industrial and Financial Restructuring (for short, the `BIFR), it was discharged from the purview of the Act of 1985. The Respondent-Company had arranged finances and invested nearly Rs.86 crore in the financial year 2005-06 whereafter it started incurring losses because reduction in the customs duty seriously affected its business. Because of the financial crunch faced by the Respondent-Company, a consortium of five nationalized banks comprising of Punjab National Bank, Dena Bank, Canara Bank, Indian Overseas Bank and the Bank of Baroda had sanctioned a term loan as well as a working capital loan, secured by the current assets as well as the fixed assets of the Respondent-Company including the land in question. The total outstanding amount of loan, as on 31st March, 2006, was approximately Rs.147 crore. The Respondent-Company intensified its efforts to dispose of the surplus land so as to bring in additional funds required for financial restructuring. A Memorandum of Understanding was signed on 13th April, 2006 with `K. Raheja Universal Limited renamed as `Raheja Universal Limited (hereinafter referred to as the `Appellant-Company) for sale of about 344 acres of land for a total consideration of Rs.166.40 crore. After obtaining `No Objection Certificates from the lending banks, an agreement dated 1st March, 2007 was signed between the parties and a sum of Rs.25 crore was paid by the Appellant-Company to the Respondent-Company. The balance consideration of Rs.141.40 crore was to be paid as per the terms of the agreement. In terms of the said agreement, the Appellant-Company was to pay the second instalment of Rs.25 crore, as and when required, to be utilized only to remove the first charge on the saleable land, the third instalment of Rs.48.90 crore was to be paid on receipt of `No Objection Certificate from the labour, Kalyan Dombivli Municipal Corporation and, on completion of fencing and the vacant possession of non-colony land and the fourth and final instalment of Rs.72.50 crore was to be paid subsequent thereto.  3. The Agreement dated 1st March, 2007 had postulated payment of the sale consideration in instalments. The parties continued further negotiations in regard to payment of the balance sale consideration. The Respondent-Company had requested the Appellant-Company to advance the payment of instalments. Thereafter, the parties came to an understanding and, in furtherance to such understanding, a supplementary deed to the agreement was signed on 29th September, 2007. As already noticed, the Appellant-Company had declined to pay the third instalment of the consideration payable, causing impediment to payments towards labour costs and other expenses of the Respondent-Company. Then, the parties, by mutual agreement, signed a second supplementary agreement dated 17th August, 2010. This agreement referred to the principal agreement and besides advancing the payment of instalments, the possession of the property was also given to the Appellant-Company.  4. There is some dispute between the parties with regard to the manner and time in which these payments were or were not made. On failure to attain the object of restructuring, the Respondent-Company submitted a proposal to the consortium of banks for Corporate Debt Restructuring (CDR) and improving the performance and to achieve positive results during the year 2006-07. The CDR mechanism used the land sale proceeds. Upon making the proposal, the Respondent-Company discontinued its production activity in the nylon plant. The CDR Empowered Group approved the package for restructuring of debts on 21st January, 2008 but still it could not improve the financial business position of the Respondent-Company till the period ending on 30th June, 2008. On or about 24th September, 2008, the consortium banks released their interest over the property. An agreement with the recognized employees unions was also entered into on 5th September, 2008 but then it ran into problems, as it was contended by the Labour Unions that their dues should be cleared first and on transfer of land, Appellant-Company should provide 18 acres of land for a proposed employees colony. An early retirement scheme was also introduced and out of the total strength of 3725 employees, about 577 employees opted to take the benefit of this scheme. The Respondent-Company then negotiated with the Appellant-Company sometime in September 2008 for payment of the third instalment of Rs.48.90 crore. However, simultaneously, the Labour Unions raised the question of payment of bonus which adversely affected the revival plans. The chemical plant of the company was re-started. On 3rd December, 2008, the Respondent-Company moved an application before the BIFR in Case No. 55 of 2008 under Section 15(1) of the Act of 1985. The Appellant-Company refused to release the third instalment and resultantly, even the dues of 577 employees, who had taken the benefit of the early retirement scheme, could not be cleared. The BIFR, vide its order dated 16th July, 2009, fixed the cut-off date as 30th July, 2007. It directed that the sale of assets, including investments, will require prior approval of the BIFR. It also appointed the Punjab National Bank as the Operating Agency under Section 17(3) of the Act of 1985.  5. As per Section 18(8) of the Act of 1985, the cut-off date is the date of coming into operation of the sanctioned scheme, or any provisions thereof. In other words, all matters relating to the company would, after this date, be within the ambit and scope of the provisions of the Act of 1985 and, as already noticed, the BIFR had declared the cut-off date to be 30th July, 2007. Vide its order dated 16th July, 2009, which was passed under Section 17(3) of the Act of 1985, the following directions were given:"(i) The Company shall submit a fully tied up DRS to the OA (Punjab National Bank) (PNB) within a period of three months. The sale of 350 acres of land stated to be approved by the CDR Empowered Group (EG) and the secured creditors may form part of the DRS. The details of the land to be sold including survey numbers should be clearly specified. The company shall give similar details of the remaining land and conform that it is adequate for the functioning and viability of the company on long term basis. The OA (PNB) shall convene a joint meeting of all concerned and submit a fully tied up DRs, if it emerges, along with the minutes of the joint meeting within a further period of one month.  (ii) Bank of Baroda (BOB) shall submit an authenticated copy of the CDR scheme approved by consortium of banks within a period of 15 days.  (iii) PNB (OA) shall confirm to the Board within a period of 15 days under copy to the company that all the secured creditors who had charge over the land had approved sale of 350 acres of land belonging to the company at Kalyan, Thane Dist. To K. Raheja Universal Pvt. Ltd. For a sum of Rs. 166.40 crore. The secured creditors who had charge over the land shall clearly indicate whether the company had obtained their approval before entering into MOU and agreement for sale of 350 acres of land with K. Raheja Universal Ltd. under copy to the company the OA (PNB) and the Board. Secured creditors shall also similarly submit copy of their approval for sale of investments, giving details of the investments. OA shall also submit copies of the approvals given by the secured creditors for the sale of the said land along with the copies of valuation report and the details of the valuer and the procedure followed based on which the sale consideration of Rs.166.40 crores was arrived at. OA shall also submit a copy of the approvals by secured creditors for sale of investment giving details of the investments. The company shall fully co-operate with the OA in furnishing the documents/details required by them.  (iv) The company shall submit within 15 days under copy to the OA (PNB) copies of the No Objection Certificates for sale of land and release of charge issued by all the charge holder lenders and the State Government in respect of 350 acres of land for which MOU and agreement of sale are stated to be entered into in 2006 and 2007 respectively with K. Raheja Universal Pvt. Ltd. under copy to the PNB (OA). The company should also submit certified copies of the Board resolutions of the company authorizing these transactions to the OA with a copy to the Board. The company shall similarly submit full details of the investments to be sold under the CDR scheme. It is reiterated that sale of assets including investments will require the prior approval of BIFR as the company is now under the purview of SICA.  (v) The company shall submit a copy of the clearance stated to have been received from Honble High Court of Bombay for sale of 350 acres of land under copy to the OA (PNB).  (vi) The secured creditors are directed u/s 22(1) of SICA not to take any coercive action against the company without prior permission of BIFR."6. As is evident from the above-noted directions, the BIFR treated the land as an investment and has put certain restrictions thereupon, including that of sale of assets, which required the prior approval of BIFR as the Respondent-Company was under the purview of the Act of 1985. With reference to the land, it was directed that Capacity Valuation Report should be placed on record to show how the sale consideration of Rs.166.40 crore was arrived at. Aggrieved from this order, the Appellant-Company as well as the Respondent-Company, both have preferred an appeal before the Appellate Authority for Industrial and Financial Reconstruction (for short the `AAIFR) under Section 25 of the Act of 1985. The AAIFR made major variations in the order of the BIFR. Firstly, it held that BIFR should not have fixed 30th July, 2007 as the cut-off date and secondly, that the provisions of Section 22A would not apply to an agreement for sale which had already been entered into, registered, acted upon and was in the process of completion. While dealing with the order of the BIFR, AAIFR vide its order dated 28th May, 2010, set aside certain findings of the BIFR as well as passed certain other directions. It is useful to refer to some of the findings recorded by the AAIFR in its order which are as under:"22. ......... The BIFR has also not considered the impact of Section 22A or the transactions, contracts/agreements entered into between the company and third parties prior to the filing of reference when the company was not a sick entity. If the BIFR was of the view that the agreement for sale of land was not in the interest the company, it could have suspended the contract under Section 22(3) of SICA as it was a pre-existing contract. Despite arguments to the contrary, the BIFR has not given any reasons to justify how Section 22A of SICA applies to a pre-existing agreement for sale entered into between the company and a third party prior to filing of the reference. In fact, the agreement for sale is a clog on the absolute ownership of the property of the appellant company and the property cannot be said to be free from encumbrance unless the registered agreement for sale is cancelled. The property under agreement cannot be sold to others during the subsistence of agreement for sale.  XXX XXX XXX  24. In view of the aforesaid discussion and considering the various provisions of the MOU dated 13.4.06, agreement for sale dated 01.3.07 and supplementary agreement dated 21.9.07, we are of the view that the provisions of Section 22A will not apply to the agreement for sale already entered into, registered, and acted upon and in the process of completion. Had it been the intention of the legislature to cover the past transactions within the ambit of Section 22A, the provisions for suspension of existing contracts etc. would not have been provided under Sub-Section (3) of Section 2 of SICA under which the BIFR has not passed any order. Readiness and willingness of the parties to the sale agreement to honour the contract is also a paramount consideration."7. AAIFR summed up its conclusion in paragraphs 41 and 42 which read as under:"41. To sum up :  The sale-purchase agreement dated 30.6.2009 was signed after the reference was filed and 15 days before the BIFR passed the restraint order under section 22A;  There is no evidence to show whether various provisions of SEBI Take Over Code have been complied with;  The company has violated the amended terms and conditions of STL dated 29.6.2009 by not paying to PNB one instalment of Rs.2.78 crores before 30.6.2009;  Consequently, PNB ha not released the shares of AOL for re-pledge by ISG Traders Ltd.:  According to PNB, however, the company has shown the entire shares of AOL as sold:  There is no evidence to show that sale consideration has been paid; and  The ISG Traders Ltd. is neither a party before the BTR nor before this Authority.  In these circumstances, the BIFR was fully justified in seeking full details of the investments to be sold in the CDR scheme and to direct that the sale of investments will require the prior approval of the BIFR. We find no reasons to interfere with the aforesaid order of the BIFR regarding sale of investments.  42. We observed that the BIFR has fixed the cutoff date as 30.07.2007 on the basis of the CDR scheme while passing the order under Section 17(3). The fixation of cut off date implies that the liabilities and the dues of the creditors will be determined as on that date and the repayment obligations will commence during the year following the cut oil date. If there is a substantial gap between the cut off date fixed and the date of sanction of the scheme, the scheme will become a non starter because the sick industrial company will be unable to fulfill its repayment obligations for the period between the cut off date as stipulated in the impugned order and date of sanction of the scheme, The issue can be resolved by determining a prospective cut off date. Section 17(4)(b) of SICA vests in the BIFR the necessary power to review and modify its orders under Section 17(3) of SICA. Therefore, in our view the cut off date fixed by the BIFR in the impugned order is required to be suitably modified by the BIFR."8. With the above findings, the AAIFR recorded that the scheme could be approved but subject to pre-payment of the entire remaining consideration of Rs.124.64 crores, as per its directions, for setting off labour dues. In other words, it permitted the land, though an asset of the company, to be sold. The correctness and legality of this order of the AAIFR was questioned by the Appellant-Company, the Respondent-Company and the NRC Mazdoor Sangh before the High Court. These Writ Petitions, along with other connected Writ Petitions, were disposed of by the High Court by a common judgment dated 29th July, 2011. The High Court, primarily, framed two questions for discussion: firstly, whether the land covered by the agreement of sale dated 1st March, 2007 and supplementary agreement signed on 29th September, 2007, was an existing asset of the Respondent-Company and secondly, what was the scope of the powers of the BIFR under Section 22(3) of the Act of 1985. The High Court quashed the order of the AAIFR and confirmed the order passed by the BIFR holding as under:"(8)..................The AIFR further held that prior to the filing of the reference under Section 15 of SICA, a debt restructuring scheme under the CDR mechanism on 12/12/2007 and 21/1/2008, the CDR package envisaged sale of surplus land as well as sale of investments of the appellant company. Any restraint order on the sale of land, under the agreements for sale, would not only complicate the matter but would hamper the revival process and would also lead to a prolonged litigation between the parties and this will not be in the interest of revival of the sick company.The provisions of Section 22A which are prospective in nature would not impact pre existing contract for sale entered into by the company before it filed reference under Section 15(1) of SICA and, therefore, the directions given under Section 22A will not apply to the agreement for sale deed 1/3/2007. The restraint order passed by the BIFR would apply to any subsequent proposals for disposal of assets of the company, if any. But these agreements will be subject to interim orders and final orders to be passed by the High Court in the pending writ petition challenging the settlement dated 5/9/2008. For all these reasons, the AIFR held that the agreement for sale cannot be part of DRS under Section 18(d) of SICA as the same is under transfer and unencumbered and legally enforceable contract exists between the appellant company and respondent no.13. However, the AIFR held that the balance sale consideration in respect of the land to the tune of Rs.124.64 crores receivable by the company from respondent no.13 should form part of the means of finance in the DRS to be formulated by the BIFR for rehabilitation of the company.One payment of balance sale consideration by respondent no.13, the same shall be deposited with an interest bearing NLA with the operating agency for utilisation as per the rehabilitation scheme to be sanctioned by the BIFR. The said scheme was for workers dues including Rs.45 crores for ERS and appropriately crystallized amount for ex- employees dues as per the settlement dated 5/9/2008 with NRC Mazdoor Sangh. The AIFR further observed that if the BIFR considers it necessary to make payment to the workers as provided for in the agreement with the workers, before the sanction of the revival scheme, it could do so to alleviate the hardships of the workers."9. After dealing with these two questions at length, the High Court was of the opinion that BIFR order dated 16th July, 2009 was within the scope of Section 22(3) of the Act of 1985. It held that the order of the AAIFR permitting the sale of the land in furtherance to the agreement between the parties was not sustainable as it was part of the scheme and sale had been permitted subject to the final orders of the BIFR. This judgment of the High Court is impugned by the Appellant-Company before us.

Reasoning: The BIFR vide its order dated 16th July, 2009, after declaring the Respondent-Company as a sick company and appointing the Punjab National Bank as the Operating Agency, had fixed the cut off date as 30th July, 2007, as indicated in the CDR Scheme. The CDR scheme had been approved, after taking into consideration the agreement to sell and the sale proceeds likely to be received therefrom. The BIFR had passed certain directions/declarations in the order passed under Section 17(3) of the Act of 1985 requiring the company to state clearly the details of the land to be sold including survey numbers as well as the remaining land with the company and confirming if the remaining land was adequate for functioning and viability of the company on long term basis. The BIFR raised the query whether all the secured creditors who had charge over the land, had approved the sale of 350 acres of land belonging to the respondent-company at Kalyan, Thane for a sum of Rs.166.40 crore and for entering into memorandum of understanding with the appellant company in that behalf. Besides issuing a directive that assets including investments will require prior approval of the BIFR as the company was under the purview of SICA, it also issued a clear prohibitory order requiring the secured creditors not to take any coercive steps against the company without prior permission of the BIFR. This order of the BIFR was therefore passed clearly at the stage of the consideration of the revival scheme which had been approved by the CDR Group as well as the secured creditors. The scheme for revival of the company on long term basis, thus, was primarily dependent upon the sale proceeds of the land in question on the one hand and the utility of the remaining land for revival of the company on the other. To put it simply, the land was the paramount asset of the company for its revival and successful implementation of the scheme in accordance with law. The asset was duly taken into consideration in formulation of the scheme as contemplated under Sections 17 and 18 of the Act of 1985 and appropriate directions, prohibitory orders were issued within the ambit and scope of Sections 22(1), 22(3) and 22A of the Act of 1985. In view of the clear statement of law, as afore-recorded, and facts of the present case, we are unable to find any merit in the submission of the Respondent-Company that the BIFR had no jurisdiction to pass such directives50. AAIFR had disturbed the above order and held that the contract between the parties could not be suspended under Section 22(3) and it was not in the interest of the Respondent-Company. In other words, it had permitted the sale to be completed without any restriction. This order was set aside and the order of the BIFR was restored by the High Court. We find no jurisdictional or other error in the order of the High Court in restoring the order of the BIFR. The land being the primary asset of the Respondent-Company, could not be permitted to be dissolved by sale or otherwise without the consent and approval of the BIFR. The BIFR is the authority proprio vigore and required to oversee the entire affairs of a sick industrial company and to ensure that the same are within the framework of the scheme formulated and approved by the Board for revival of the company in accordance with the provisions of the Act of 1985. On facts as well, neither the BIFR nor the High Court had exceeded its jurisdiction in passing the impugned orders. It is not that the Respondent-Company has been divested of its right by the BIFR. All that has been done is to suspend the final transfer of the property in its favour in accordance with the provisions of the Act and the limitations imposed therein. Once the scheme is implemented or the period specified under the provisions of Sections 22(3) and 22(4) expires, the declaration would cease to exist and the appellant would be entitled to enforce its rights in accordance with law as if no such declaration or restriction ever existed51. The principle of law that emerges from the afore-referred discussion, which consistently has judicial benediction, is that a scheme for rehabilitation or restructuring of a sick industrial company undertaken by a specialized body like the BIFR/AAIFR should, as far as legally permissible, remain obstruction free and the events should take place as pre-ordained, during consideration and successful implementation of the formulated scheme. Wide jurisdiction is vested in BIFR/AAIFR to issue directives, declarations and prohibitory orders within the rationalized scope and limitations prescribed under Section 22(1), 22(3) and 22A of the Act of 198552. An objection to the maintainability of a composite petition, taken before the High Court, has been reiterated before this Court, of course, half-heartedly. Argument is that Article 227 vests the High Court with supervisory powers while Article 226 is the reservoir of extra-ordinary jurisdiction of the High Courts to issue prerogative writs and orders and, as such, a joint petition under both these Articles could not be maintainable