Upper India Couper Paper Mills Co. ... vs Appellate Authority For ...
1991 Latest Caselaw 776 Del

JUDGMENT

B.N. Kirpal, J.

1. The petitioner-company has challenged in this writ petition under article 226 of the Constitution the order of the appellate authority for Industrial and Financial Reconstruction (hereinafter referred to as "the appellate authority") whereby it has upheld the order of the Board for Industrial and Financial Reconstruction (hereinafter referred to as "the Board") which had decided, vide its order darted August 17, 1990, that proceedings should be taken before the High Court for winding up the petitioner-company.

2. Briefly stated, the facts are that the petitioner-company was stated to have been established over a 100 years ago and has its registered office at Lucknow. For various reasons, it started incurring losses. It is alleged that, in order to make the company viable, an application was filed with the appropriate authority in the State of Uttar Pradesh for permission to expand the unit on the existing site. This permission was not granted. In view of the accumulated loss and the acute financial condition, the board of directors of the company, on November 21, 1987, passed a resolution to the effect that a reference should be made to the Board under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as "the said Act").

3. After the case was registered, the Board passed an order on February 24, 1989. In this order, the petitioner was declared to be a sick industrial company within the meaning of that expression of occurring in section 3(1)(0) of the Act. The Board also appointed one director of the company. After taking other facts and circumstances into consideration, the Board further came to the conclusion by the said order that the petitioner-company could not make its net worth positive on its own within a reasonable time without special assistance. The Board then appointed I.C.I.C.I. (respondent No. 3) as the operating agency under section 17(3) of the Act. The said operating agency was required to submit a report after consultation with all concerned including the labour unions. According to respondent No. 3, no positive assistance was rendered by the petitioner so as to enable the said respondent No. 3 to prepare a report or a scheme as contemplated by the order which had been passed by the Board on February 24, 1989. The case of the petitioner is that it had appointed a firm of consultants who was to prepare the feasibility report which was to be submitted to respondent No. 3. The consultants did not carry out this project with the result that the petitioner was obliged to appoint another consultant. The newly appointed consultant gave the report and, according to the petitioner, this report was submitted to respondent No. 3 sometime in April, 1990. Be that as it may, the operating agency, respondent No. 3, still did not submit any scheme. It appears that, in the meantime, the case was being listed, from time to time, before the Board. The petitioner pleaded before the Board that the operating agency should be directed to complete the examination of the proposal which was submitted by the petitioner in April, 1990. The Board then passed an order on May 7, 1990, in which it took note of the contention of the operating agency to the effect that the petitioner had only submitted certain papers/information which contained a general outline of their plans/ideas, etc., but no definite, workable or acceptable proposals had been received by the operating agency so far. On behalf of the labour union, it was contended before the Board that there appeared to be a possibility of reviving the existing unit at Lucknow. We may here notice that the proposal which was sought to be mooted by the petitioner was that it should be allowed to sell its assets at Lucknow and a new industrial undertaking or unit should be set up at Kotdwar with the assistance from some financial institutions. With regard to this, it was held by the Board, vide its order of May 7, 1990, that this case of starting a new industrial unit at Kotdwar could not be dealt with within the scope of the Act "which visualises rehabilitation or sale of the unit, amalgamation or a winding up thereof." The Bench of the Board reserved orders and on August 17, 1990, final orders were pronounced by the Board.

4. In the order of August 17, 1990, it was observed that, during the course of the proceedings, the Board had formed a prima facie opinion that the company was not a viable unit and should have been would up. Notice to show cause why it should not be wound up had, accordingly, been issued on February 6, 1990. The order then referred to the proceedings of May 7, 1990, and it was observed that, after the operating proceedings of May 7, 1990, and it was observed that, after the operating agency had pointed out that the petitioner-company had not submitted any detailed workable proposal till that date, the Board would have straightaway passed orders as it was clear that the unit was not viable. The case was, however, adjourned at the request of the representatives of the labour. When no definite proposals were received, the Board, vide its order dated August 17, 1990, came to the conclusion that the unit was not viable and that it had to be wound up. This opinion of the Board was directed to be communicated to the High Court for necessary action under the company law. In coming to this conclusion, the Board took note of the fact that the company had made it clear that its intention was to sell the land and to get funds so that a new industrial undertaking could be started elsewhere. With regard to this contention, the Board held that the same was not within the jurisdiction of the Board.

5. Against the said order of August 17, 1990, an appeal was filed before the appellate authority. It was submitted before the appellate authority, on behalf of the petitioner, that the scheme which had been submitted by it on April 24, 1990, was a scheme for rehabilitation of the sick industrial company and the finding of the Board that this scheme was not covered within the scope of the Act was erroneous. The appellate authority, on the contentions so raised, posed for its decision the following question :

"The question for determination is whether putting an absolutely new plant at a far away place comes within the scope of the Act."

6. The appellate authority then referred to the provisions of section 18(1)(a) which talks of reconstruction, revival or rehabilitation of sick industrial units and came to the conclusion that it agreed with the Board "that the establishment of an entirely new plant at a far off place does not amount to rehabilitation and is not covered under the Act. The appeal is, consequently, dismissed in liming."

7. It is the aforesaid decision of the appellate authority which is challenged in this writ petition. The main contention on behalf of the petitioner is that the said conclusion of the appellate authority is contrary to the provisions of the Act because, as a measure of rehabilitation, it may be necessary for a new plant to be established at a different place. It is contended by Mr. Dewan that what was to be seen by the appellate authority and the Board was the rehabilitation of the company and not the rehabilitation of the unit. On behalf of the respondents, it is contended that, when no concrete proposal had been received from the petitioner, the operating agency could not formulate and scheme and, therefore, the only order which could legitimately be passed in the present case was an order for winding up of the company.

8. In order to examine the rival contentions, it is necessary, in our opinion, to refer to the relevant provisions of the Act.

9. It is not in dispute that the petitioner is sick industrial company within the meaning of the expression under section 3(1)(o). Company is defined by section 3(1)(d) to mean a company as defined in section 3 of the Companies Act, 1956. Section 3(f) defines an industrial undertaking which, inter alia, means any undertaking pertaining to a scheduled industry carried on in one or more factories by any company. When a company becomes a sick industrial company, then section 15(1) makes it mandatory for the board of directors of the company to make a reference to the Board within the specified period. The reference which is made to the Boards is for determination of the measures which should be adopted with reference to such a sick industrial company. Section 16 requires the Board to make an enquiry for determining whether any industrial company has become a sick industrial company. Section 17 deals with the powers of the Board for making suitable orders for completion of the enquiry under section 16. Sub-sections (1) to (3) of the said section 17 read as follows :

"17(1). If after making an inquiry under section 16, the Board is satisfied that a company has become a sick industrial company, the Board shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be by order in writing, whether it is practicable for the company to make its net worth positive within a reasonable time.

(2) If the Board decides under sub-section (1) that it is practicable for a sick industrial company to make its net worth positive within a reasonable time, the Board, shall, by order in writing and subject to such restrictions or conditions as may be specifies in the order, give such time to the company as it may deem fit to make its net worth positive.

(3) If the Board decides under sub-section (1) that it is not practicable for a sick industrial company to make its net worth positive within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in section 18 in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company."

10. Section 18 relates to the preparation and sanction of the scheme and sub-sections (1)(a) and (d) of section 18, which are relevant are as follows :

"18(1)(a). The reconstruction, revival or rehabilitation of the sick industrial company;

(1)(d). The sale or lease of a part or whole of any industrial undertaking of the sick industrial company;"

11. The last provision of the Act which may be noticed is section 20 which provides for winding up of sick industrial companies. Sub-sections (1) and (2) of section 20 which are relevant read as follows :

"(1) Where the Board, after making inquiry under section 16 and after consideration of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of opinion that it is just and equitable that the sick industrial company should be wound up, it may record and forward its opinion to the concerned High Court.

(2) The High Court shall, on the basis of the opinion of the Board, order winding up of the sick industrial company and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act, 1956 (1 of 1956)."

12. What we have to examine in this case is really the power of the Board when dealing with a case of a sick industrial company. The scheme of the Act seems to indicate that, when a company has become a sick industrial company within the meaning of section 3(1)(o), then within the stipulated period, a resolution by the board of directors has to be passed under section 15(1) of the Act. By this resolution, a reference is made to the Board which, thereafter, conducts an enquiry under section 16 of the Act. After the enquiry has been completed, there are two types of orders which can be passed by the Board under section 17. Firstly, it may come to the conclusion that it is practicable for the company to make its net worth positive within a reasonable time. In this connection, it may pass orders under sub-section (2) imposing restrictions or conditions and giving time to the company to make its net worth positive. The second type of order which can be passed is under sub-section (3) of section 17. The jurisdiction to pass an order under section 17(3) arises only after the Board has come to the conclusion that, under sub-section (1), it is not practicable for the sick industrial company to make its net worth positive within a reasonable time. The order which is passed under section 17(3) is to appoint an operating agency in order to prepare a scheme. Section 18 has to be read along with section 17(3). The opening words of section 18 make it clear that it is only when an order under section 17(3) has been passed that a scheme can be prepared in respect of the sick industrial company providing for any one or more of the measures stipulated in the said section. Two of the measures mentioned therein are for reconstruction, revival or rehabilitation of the sick industrial company and, secondly, the sale or lease of the whole or a part of the industrial undertaking of a sick industrial company. Sub-section (2) of section 18 further provides that the scheme may make a provision for a number of things including a change in the board of directors, transfer to the transferee-industrial company of the business, etc., of the sick industrial company and so on and so forth.

13. What happens if the conditions under section 17(1) are not satisfied or a scheme under section 17(3) cannot be prepared. The answer lies in section 20 which, inter alia, provides that, if the Board is of the opinion that it is just and equitable that the sick industrial company should be wound up, then it should refer and forward its opinion to the concerned High Court. In other words, when a reference is made under section 15(1) and the Board comes to the conclusion that the company is a sick industrial company, then an effort has to be made under section 17 to revive the company. Under section 17(1), it is for the company itself to satisfy the Board that it will be in a position to make its net worth positive within a reasonable time. If such satisfaction is not arrived at, then the Board may think it necessary or expedient in public interest to adopt all or any of the provisions of section 18 and direct the appointment of an operating agency which has been done in the present case. If the Board does not or cannot act under section 17(3), then the only action which the Board can take, to our mind, is to form an opinion of the type contemplated by section 20 of the Act and recommend the winding up of the company.

14. Coming to the facts of the present case, we find that, in the first order February 24, 1989, the Board had come to the conclusion that the company was unable to make its net worth positive within a reasonable time. Having held that the provisions of section 17(1) could not be invoked in the present case, the Board was of the opinion that it was necessary or expedient in public interest to try to rehabilitate the company and, in this connection, it passed an order under section 17(3) and appointed respondent No. 3 as the operating agency. According to the operating agency, it did not receive any tangible proposal from the petitioner on the basis of which any valid or reasonable scheme for rehabilitation or revival, as contemplated by section 18, could be framed. This submission was made even though the petitioner had forwarded some proposal in April, 1990, and the petitioner had desired the Board to direct the operating agency to furnish a scheme. Reading the two orders dated May 7, 1990, and August 17, 1990, of the Board, it is clear that it came to the conclusion that the operating agency was not in a position to prepare a scheme as contemplated by section 18 of the Act. Having already determined, vide order dated February 24, 1989, that the provisions of section 17(1) were not applicable and thereafter having come to the conclusion that no scheme under section 17(3) read with section 18 could be prepared, the Board then came to the conclusion that, under section 20 of the said Act, a report should be submitted to the High Court for the winding up of the company.

15. The appellate authority, to our mind, did not really appreciate the real controversy which was there before it. The appellate authority purported to interpret the provisions of section 18(1)(a) and came to the conclusion that the establishment of a new plant at a far off place does not amount to rehabilitation and is not covered under the Act. The appellate authority overlooked the fact that the provisions of section 18 did not, in the present case, come into play. The provisions of section 18 would have been relevant only if a proposal had been submitted by the operating agency appointed under section 17(3) of the Act. No proposal having been submitted, the interpretation of the scope and effect of section 18 could not arise.

16. The real grievance of the petitioner before the Board was that the operating agency had not promulgated a scheme. According to the petitioner, it had supplied to the operating agency relevant material in April, 1990. The contention of the operating agency was to the contrary. The submission was that no definite proposal had been promulgated or forwarded by the petitioner for the operating agency to consider. The Board accepted the contention of the operating agency and thereupon decided that the proper course, in the present case, was that the petitioner-company should be wound up. Under these circumstances, the only contention, which could legitimately be raised before the appellate authority was whether the Board should or should not have accepted the submission of the operating agency and whether it should not have directed the operating agency to formulate a scheme under section 18. A perusal of the order of the appellate authority seems to indicate that the contention, in this form, was possibly not raised before it by counsel for the petitioner-company and that is why the appellate authority did not apply its mind to this aspect of the matter. It was open to the petitioner to contend that a scheme could have been formulated by the operating agency but if the appellate authority came to the conclusion that the decision of the Board, viz., that it was not feasible to have a scheme formulated under section 18 by the operating agency was correct, then the decision of the Board would have to be upheld. As the appellate authority has not applied its mind to this aspect of the case, we have no alternative but to set aside the order and remand the case to the appellate authority.

17. Before concluding, we would, however, like to observe that the interpretation sought to be put on section 18(1)(a) by the appellate authority is not quite correct. Section 18 itself provides for reconstruction, revival or rehabilitation of the sick industrial company and, in addition thereto, it also provides for sale, lease of the whole or a part of the industrial undertaking of the sick industrial company. There is clearly a distinction between the industrial undertaking and a sick industrial company. The words "company" and "undertaking" are not synonymous. A sick industrial company may; have one or more industrial undertakings. In an effort to rehabilitate or revive the company, it may be necessary to sell off its assets and to start a fresh industrial undertaking at a different place. If there are more than one unit, the Board may come to the conclusion that only one unit may need to be closed down or shifted. Be that as it may, what is important to note is that a scheme to be framed under section 18 can legitimately provide for establishment of an entirely new plant at a different place. This may be in addition to the existing undertaking or by closing down one or more of the existing undertakings. What is sought to be revived is the company and not the undertaking.

18. Before concluding, we would like to note the contention on behalf of respondent No. 3 to the effect that the petitioner has not given any valid proposal on which a scheme of rehabilitation could be formulated. According to learned counsel, the outline of the proposal submitted by the petitioner envisages loans to the extent of over Rs. 14 crores to be obtained from financial institutions. It is submitted by learned counsel that the proposal does not indicate as to which financial institutions will give loans nor is it possible for the Board to give any direction to any financial institution to give the loans. On the facts of the present case, it was submitted by learned counsel that it was not possible for the operating agency to formulate any workable scheme. It is not necessary for us to go into the correctness of the contention because this is precisely the contention which will have to be examined by the appellate authority. The appellate authority will have to see whether a proper workable scheme under section 17(3) read with section 18 can be formulated but, if it comes to the conclusion that it is not possible for a workable scheme being found out, then the only alternative left is to uphold the finding of the Board that the company should be wound up.

19. For the aforesaid reasons, this writ petition is allowed. The order dated November 22, 1990, passed by the appellate authority is quashed and the appeal filed by the petitioner before the said appellate authority is restored. The appellate authority should dispose of the said appeal, as expeditiously as possible, after notice to all the parties and in accordance with law.

20. There will be no order as to costs.