Madhumilan Syntex Limited vs Appellate Authority For ...
1999 Latest Caselaw 323 Del

JUDGMENT

Devinder Gupta, J.

1. Order passed on 12/14.8.1998 (Annexue-F) by respondent No. 1 (A.A.I.F.R.) allowing the appeals of State Bank of India and Syndicate Bank against the order passed on 12.1.1998 by (B.I.F.R.) and consequently dismissing the petitioner's reference under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985; (for short "SICA") is under challenge in this writ petition.

2. The relevant facts in brief are that on 21.4.1997 reference under Section 15(1) of SICA was made by the petitioner to respondent No. 2 on the ground that it satisfied the conditions of Section 3(1)(o) thereof. Reference was registered as Application No. 51/97. On 29.5.1997 respondent No. 2 after hearing submissions made on behalf of the parties appearing before it passed an order directing the Operating Agency, namely, Industrial Development Bank of India, (for short "I.D.B.I.") to appoint auditors of repute to look into the balance sheet of the petitioner for the financial year ending March, 1997 and to ascertain as to whether the same had been prepared, keeping in view the established accounting practice or not. The Auditor was to be advised by the Operating Agency to specifically look into the violation of accounting practices, alleged by the State Bank of India referred to in para 4 of the said order. The Operating Agency was further asked to seek the requisite report of the Auditor within two months. An appeal against this order was preferred, which was registered as Appeal No. 198/97. In the meanwhile, the requisite report became available and the Operating Agency submitted the same.

3. On 12.1.1998 respondent No. 2 (B.I.F.R.) examined the report and also went through the audited balance sheet along with the comments of the auditors and those of the Operating Agency that the petitioner did not comply with the disclosure norms but complied with the accounting norms in respect of the following items:-

"(a) Written off public issue worth Rs. 42 lakhs.

(b )Adjustment of deferred revenue expenditure of the order of Rs. 80 lakhs.

(c) Written off investment in POY project of the order of Rs. 556.95 lakhs.

(d) Sale of investment of Rs. 669 lakhs.. As regards the change in the method of depreciation, C.I.F.R. observed:-

"auditors have observed that the company has given correct accounting effect. In the opinion of IDBI charging of the entire depreciation in 96-97 is open to doubt. Similarly as regards surreptitious alienation of assets of the spinning division the IDBI has observed that intention for selling the spinning unit at book value when it was making profit is also questionable. The IDBI has suggested concurrent audit of the losses of Rs. 2566.82 lakhs in DOC. However from a perusal of the report submitted by the IDBI/auditors, we find that the net worth of the company was fully eroded as on 31.3.97. This has not been questioned either by the auditors or the IDBI. Moreover, the company has suffered further loss of Rs. 13.05 crores as per the audited accounts for the 6 months ended on 30,9.97. The auditors/lDBI have not suggested any item for exclusion from the audited balance sheet for determining net worth for the purpose of SICA. The company also satisfies other requirement of SICA i.e. number of workers and coverage under IDRA etc."

4. Consequently, B.I.F;R. passed an order declaring the petitioner company to be a sick industrial company within the meaning of 3(1)(o) of the SICA.

5. On the basis of the aforementioned order of B.I.F.R., the petitioner submitted a rehabilitation package to B.I.F.R. and simultaneously State Bank of India and Syndicate Bank preferred two separate appeals before respondent No. l, namely, appeals No. 61/98 and 72/98 against the order of B.I.F.R. On 2,3.1998 the earlier appeal No. 198/97 came up for hearing before respondent No. 1, which was dismissed. The , petitioner filed Civil Writ Petition No. 1983/98 in this Court against the said order, which was dismissed in limine on 5.3.1998. Still not satisfied, the petitioner filed Special Leave Petition against the order dated 5.3.1998, which is stated to be still pending in which on 27.3.1998 the Supreme Court stayed the operation of the order dated 2.3.1998 passed by respondent No. l.

6. The two appeals preferred by State Bank of India and Syndicate Bank (appeals No. 61/98 and 72/98) were heard by respondent No. l. By the impugned order passed on 12.8.1998 both the appeals were allowed. The order passed by B.I.F.R. on 12.1.1998 was set aside and resultantly the petitioner's reference to B.I.F.R. under Section 15(1) of the SICA was dismissed. Respondent No. l while disposing of the appeals came to the conclusion that the accounts of the petitioner do not represent a fair and true picture of the financial position of the petitioner's worth and that the accounts have been fabricated. There are several surreptitious and dishonest transactions without proper disclosures with the sole purpose of booking losses and showing a negative net worth and that the audited accounts for the years 1996-97 do not present a proper basis for concluding that the petitioner is a sick industrial company. In the opinion of respondent No. l, Management of petitioner No. l approached B.I.F.R. under Section 15(1) of SICA with unclean hands and fabricated accounts and as such the same was not maintainable. It is this order of A.A.I.F.R., which is under challenge in the instant petition.

7. The main ground, which was urged during the course of argument by learned counsel for the petitioner was that on 16.7.1998 when the appeals of the two banks came up for admission before AAIFR, after hearing parties, it was pleased to observe that since none of the parties had been heard before BIFR when it passed its order dated 12.1.1998, the appeals would be limited to hearing only on the issue as to whether the impugned order is illegal on the ground that no hearing had been given to the two banks before the B.I.F.R. passed the order on 12.1.1998. On this assumption the petitioner filed its reply affidavit specifically stating therein that the appeal is limited to the hearing held on 16.7.1998 only on the issue whether the impugned order of B.I.F.R. was illegal and was liable to be set aside on the ground that no hearing had been given to the banks. It was also stated that short reply affidavit was being filed only to meet this issue reserving right to file a detailed affidavit on all issues. Due to the paucity of time only annexures were enclosed. The petitioner wanted to rely upon more annexures but as the hearing was limited to the point of natural justice, those annexures were not filed. The AAIFR instead of deciding the issue that whether the order passed by B.I.F.R. on 12.1.1998 was liable to be set aside on the ground that no hearing had been afforded to the two banks proceeded to dispose of the appeals on merits. It was contended that in the appeals preferred by the two banks, the ground raised by them was that the order was bad in law in as much as no hearing had been afforded to them when B.I.F.R. passed the order and as such bonafide believing the said ground to be the only ground of challenge, the petitioner did not file a detailed rely.

8. Learned counsel for the respondents vehemently contended that the scope of appeals before A.A.I.F.R. was not limited on the question of natural justice. Neither expressly nor by necessary implication it was made limited, as alleged by the petitioner. The entire matter was before the Ist respondent, who rightly in consonance with the settled principles of law and on the basis of the material, which was before the B.I.F.R. disposed of the entire matter rightly holding that the petitioner had approached B.I.F.R. with unclean hands and fabricated accounts and the reference was not sustainable.

9. At the very outset, we may refer to the order, which was passed on 16.7.1998 by B.I.F.R. It no where in the said proceedings recorded or limited the scope of the appeals preferred by the two banks to the question of compliance of the principles of natural justice, as is contended on behalf of the petitioner. The order reads:-

"Heard the learned counsel for the appellants. Both the appeals are admitted.

Mr.Dalip Vasudevan, Advocate, takes notice for M/s. Madhumilan Syntex Ltd. (Respondent No. 1 in Appeal 61/98 and Respondent No. 2 in Appeal 72/98). Notice to all other respondents in both appeals. It is open to M/s.Madhumllan Syntex Ltd. to file counter affidavits to the appeals with advance copies to the appellants within two weeks."

10. Bare reading of the order would falsify the stand taken by the petitioner that in the hearing dated 16.7.1998 scope of the appeals preferred by the two banks was limited only on the issue as to whether the order of B.I.F.R. dated 12.1.1998 was illegal because of non-compliance of the principles of natural justice. No doubt that in the reply affidavit filed on behalf of the petitioner, it was stated that the reply was being limited only on the aforementioned question but the record do suggest that during the course of arguments learned counsel for the petitioner appearing before the Ist respondent argued the matter on merits as well. After considering the respective pleas of the learned counsel for the parties on the issue of natural justice A.A.I.F.R. observed that for several reasons it was not adverting to the elaborate arguments on the question of natural justice. The reasons, which are assigned by A.A.I.F.R. are as under:-

"We are not adverting to the detailed arguments of the counsel for SBI and the senior counsel for MSL on the issue of natural justice for several reasons: BIFR passed the impugned order after considering the relevant record, copies of which have been placed before us: both have argued the appeal on merits; neither of them has challenged the facts and findings and observations of the special audit report and IDBPs comments thereon; this makes it easier for us to take a view on merit after an examination of the record and the contentions raised by the counsel for SBI and the senior counsel for MSL."

11. It has not been disputed on behalf of the petitioner before us also that during the course of hearing on its behalf arguments were also addressed on merits as well. The appellate authority (A.A.I.F.R.) being an authority vested with the similar powers as those of B.I.F.R. for the purposes of inquiry by virtue of Section 13(3) of the S.I.C.A. could go into the questions of fact as well as on merits and also on those questions, which had not been decided by B.I.R.F. The entire record was before A.A.I.F.R. when arguments were heard on both sides. No irregularity can be said to have been . committed by it in case it proceeded to dispose of the appeals on merits as well without going into the question of natural justice alone, which had been raised by and on behalf of the two banks that B.I.F.R. while passing order dated 12.1.1998 had not heard them. For this reason alone, we are not inclined to set aside the impugned order passed by A.A.I.F.R. In its order. A.A.I.F.R. rightly opined that on behalf of the parties no challenge was made to the findings and observations of the Special Audited Report and on the Operating Agency's comments thereon. A.A.I.F.R. observed that there is nothing in the Act to hold that protection provided under the Act and its beneficial provisions should be extended to industrial companies and management, which indulge in shady and dishonest deals causing serious prejudice to the interests of the companies as well as their creditors and manipulate accounts with the sole purpose of showing a negative net worth. It rightly observed that in such cases it was permissible to lift the veil and probe for the truth and if it was found that any industrial company had come with unclean hands after deliberate surreptitious and dishonest deals and fabrication of accounts, then the doors of SICA cannot be made available to them. It then proceeded to examine the audited report as well and observed that in case the manipulated losses are reversed, the net worth of the petitioner would be positive at the end of financial year 1996-97. A.A.I.F.R. observed:-

"The erosion of net worth of MSL as on 31.3.97 has been recorded by the special audit report and IDBI by way of reproduction of the results shown in the audited balance sheet of MSL for FY 97- 98; the special audit report has specifically observed that but for the loss incurred on account of sale of dollied cakes, the MSL would have had a positive net worth; special audit report has further concluded that the net worth would have been different had the MSL sold the spinning unit at market value; IDBI has specifically commented that in view of inadequate disclosures, the accounts as presented to the shareholders are incomplete and hence passing of accounts by them without being aware of a true and fair picture does not automatically imply their concurrence to the Annual Accounts; moreover, if the manipulated losses are reversed, as observed by us earlier in this order, the net worth of MSL would be positive at the end of FY 96-97."

12. The order of B.I.F.R. had also taken note of further losses of 13 crores for the six months period of April to September, 1997. The Ist respondent observed that it was irrelevant in as much as reference was made on the basis of Annual Accounts for the financial year 1996-97 only. But during this six months period, the stocks valued at Rs. 58.96 lakhs at the end of financial year 1996-97 were sold for Rs. 27.70 lakhs with nil stocks on 30.9.1997. Expenditure of Rs. 359.51 lakhs was booked towards technical fees, Rs. 36.54 lakhs towards manufacturing expenses and Rs. 81.21 lakhs towards administrative and selling expenses even though manufacturing activities had ceased. By this illustration also the A.A.I.F.R. opined that apparently there was continuous manipulation of accounts by the petitioner.

13. There being nothing wrong in the decision making process, we do not find any ground having been made out to interfere with the impugned order (annexure-F) of A.A.I.F.R., which in our opinion has been passed by it considering the merits of the cases of the parties and on the basis of the material, which formed part of the record of B.I.F.R. Dismissed.