Case: Realvalue Appliances Ltd Vs. Canara Bank

2. Civil Appeal arising out of SLP (C) No. 14327/1997 is filed by Real Value Appliances Ltd. against the order of the High Court of Bombay dated 28.7.1997 passed by a Division Bench in an interlocutory appeal, appointing a Receiver to take formal possession of the mortgaged properties which are subject matter of suit No. 82 of 1997 pending before a learned Single Judge of the said High Court on the Original Side. The respondent-Canara Bank, which is the plaintiff in the suit is claiming in consortium with Union Bank of India a sum of Rs. 23.67 crores (approximately) and due to it as on 24.12.1996. Earlier the Single Judge of the Bombay High Court in his order dated 10.1.1997 had disallowed the application for appointment of Receiver in view of the stay of appointment of provisional Liquidator granted by a Division Bench of the Bombay High Court in winding up proceedings on 20.12.19963. Civil Appeal (arising out of SLP (C) No. 14750 of 1997) is filed by the appellant Company against the order passed by another Division Bench of the Bombay High Court dated 8.8.1997 in Appeal No. 1193 of 1996 by which the order of the learned Single Judge on Company Side appointing a provisional Liquidator on 18.10.1996 was affirmed. Thereby an earlier order of stay dated 20.12.1996 (granted by the Division Bench in respect of the Company Judges order dated 18.10.1996) stood vacated. The respondents are Vardhman Spinning & General Mills Ltd., the creditors, who filed the winding up petition 415/1996 on 6.8.1996 against the appellant in the High Court of Bombay4. Civil Appeal (arising out of SLP (C) No. 15736/1997) is filed by the workmen (Engineering Kamgar Sangh) against the order dated 8.8.1997 passed by the Division Bench in winding up proceedings confirming the order of the Single Judge appointing provisional Liquidator. They are supporting the appellant company5. That is how these three appeals have arisen and have come before us. The appellant company had, after taking some adjournments before the Division Bench in the Company Appeal - which was filed against the order of the learned Single Judge appointing provisional Liquidator - submitted a reference before the Board for Industrial and Financial Reconstruction (hereinafter called the `BIFR) on 17.7.1997 under the Sick Industrial Companies (Special Provision) Act, 1985 (hereinafter called the `Act). The said reference was registered on 24.7.1997 as Case No. 97 of 1997. The point raised in these appeals is that once the reference was registered by the BIFR on 24.7.1997, the Division Bench of the High Court ought not to have passed order on 8.8.1997 vacating the interim stay granted by it on 24.12.1996 and ought not to have confirmed the order of the learned Company Judge dated 18.10.1996 appointing provisional Liquidator, in view of the mandate of section 22 of the Act. Likewise, it is argued that the order of another Division Bench dated 28.7.1997 appointing a Receiver in the interlocutory appeal arising out of the Civil Suit is also bad in view of section 22 of the Act6. We may state that the order of the High Court in proceedings arising out of suit - appointing Receiver on 28.7.1997 was stayed by this Court on 5.8.1997 in SLP 14327/1997. Similarly the order of the High Court, in proceedings arising out of winding up proceedings, dated 8.8.1997 vacating the stay and confirming the Company Judgess order appointing provisional Liquidator was stayed on 12.8.1997 in SLP 14750/1997 and it was further ordered that the provisional Liquidator shall not take any further steps7. One other important fact to be noted is that on 10.11.1997 in SLP 14327/1997, this Court passed an order, after hearing both sides, adjourning the SLPs `to enable the BIFR to come to a decision. This Court, however, directed the appellant Company not to dispose of or alienate or create any third party interests in any of the assets of the Company except with the previous approval of the BIFR and that before passing any orders, the BIFR will give hearing to the Canara Bank. This Court also recorded an assertion by the Bank that the Receiver had taken formal possession of the properties. This assertion was no doubt denied by the Company. This Court also noticed that the High Court of Bombay had, in its order dated 8.8.1997 accepted as true the serious allegations made by the Canara Bank against the appellant Company8. At this stage, it is necessary to refer to the conduct of the Company, already adverted to, which came up for severe criticism by the High Court of Bombay in its order dated 8.8.1997. What happened was that after securing a stay order from the Division Bench on 20.12.1996 - in respect of the order of the learned Single Judge appointing a provisional Liquidator, - the Company obtained adjournments before the Division Bench on 4.11.1996, 2.12.1996, 9.12.1996, 18.12.1996, 20.12.1996. On 20.12.1996 the case was adjourned to 22.7.1997 when an affidavit was filed - without disclosing that the Company had approached the BIFR on 17.7.1997 - and the matter was got adjourned to 29.7.1997 and again to 8.8.1997. The factum of registration of the reference by the BIFR on 24.7.1997 was not disclosed to the High Court till 8.8.1997The Bench, therefore, rightly criticized the conduct of the appellant for not disclosing these facts to the High Court before 8.8.1997. Further, in the High Court the Company was opposing the appointment of provisional Liquidator on the plea that it was viable unit but when it approached the BIFR, it was claiming that it was a sick industry. These contradictory pleas also came up for adverse comment by the High Court. The Bench referred to section 22 and section 16 of the Act and felt that the mere registration of the reference under section 15 did not amount to pendency of any inquiry under section 16 and that, therefore, section 22 was not attracted and, therefore, the Bench was well within its powers in vacating the stay and confirming the appointment of provisional Liquidator or in appointing a Receiver. In that context, the Bombay High Court followed a decision of a Division Bench of the Calcutta High Court in Bengal Lamps Ltd. v. Furmanite Nicco Limited, 1991(72) Comp. Cases 146 (Cal.) in preference to the Judgments of other High Courts which had taken a contrary view. The Bench then gave several findings to the effect that the Company had indulged in various irregularities or misconduct in its accounting procedures etc. with a view to show that it was a viable unit and to show that it was not liable to be wound up. Having enumerated the alleged financial irregularities as pointed by the Bank and the suppression of facts, the High Court in its order dated 8.8.1997 vacated the stay order dated 20.12.1996 and confirmed the appointment of provisional Liquidator. It also issued a contempt notice to the officers of the Company:9. It is necessary to refer to certain subsequent events which have since taken place after the orders under appeal were passed by the High Court. These events relate mainly to three orders passed by the BIFR :(i) On 9.9.1997, the BIFR passed orders, after hearing the representatives of the appellant-Company and Canara Bank and the IDBI (which was also to get around Rs. 38 crores from the Company), directing the IDBI under Section 16(2) of the Act to examine and analayse the audited balance sheets of the Company upto 30.6.1997 and submit a status report. The Bank was also directed to submit its reaction or comments to the IDBI. The contentions raised by the Bank representatives were elaborately set out(ii) On 24.11.1997 the BIFR passed order recording that the IDBI had submitted a report and that on that basis and on the basis of the submission made, `the Company was to be declared as a sick industry under section 16 read with section 3(o) of the Act. It then said that it is necessary in the public interest to adopt the measures specified in Sections 18 and 19 of the Act in relation to the Company. It accordingly appointed IDBI as the Operating Agency under Section 16(2) of the Act and directed it under section 17(3) to prepare a rehabilitation Report. The Company was directed under Section 22-A, not to alienate any of its assets(iii) A notice was issued by BIFR fixing 15.12.1997 as the date on which the allegations of the Canara Bank against the Company would be heard. On 15.12.1997, the BIFR passed further orders after hearing the Bank representatives observing that the allegations made by the Bank against the Company had been considered by the IDBI and that the IDBI had prepared a status report and that the BIFR was satisfied that the allegations of the bank against the company - in regard to the change in the accounting year and provision for depreciation and interest and in regard to the preparation of the balance sheet - could not be accepted inasmuch as these actions were permissible under the various provisions ofthe Companies Act, 1956 and as such these were valid under lawThe matter was adjourned to enable the Company to submit its revival/rehabilitation proposals. These are the three orders passed by the BIFR subsequent to the impugned orders of the Bombay High Court.

Reasoning: 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.